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Good day, and welcome to the Euronav Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. Before I start, I would like to say a few words. The information discussed on this call is based on information as of today, Thursday, the February 2, 2023 and may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events, performance, underlying assumptions and other statements, which are not statements of historical facts. All forward-looking statements attributable to the company or to persons acting on its behalf are expressly qualified in their entirety by reference to the risks, uncertainties and other factors discussed in the company's filings with the SEC, which are available free of charge on SEC's website at www.sec.gov and on our own company's website at www.euronav.com. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of that particular statement, and the company undertakes no obligation to publicly update or revise any forward-looking statements. Actual results may differ materially from these forward-looking statements. Please take a moment to read our safe harbor statement on Page 2 of the slide presentation. With that, I will now pass over to Chief Executive, Hugo De Stoop to start with the conference slide on Slide 3. Hugo? Thank you, Brian, and good morning or afternoon to wherever you are, and welcome to our call. I will run through the Q4 highlights before passing on to Lieve Logghe, our CFO, who will then highlight key factors over the quarter and important work the finance team have done in increasing, again, our liquidity through sustainable financing. After that, Brian will run you through some current market trends before I return to summarize our strategy and where we believe we are in the current cycle and outlook. Q4 was the breakthrough quarter we've been pointing at in our last 2 calls. The strong demand for tankers reflected in higher freight rates was created by 3 factors: seasonal pattern into the Northern Hemisphere winter, a sustainable supply of oil from OPEC and non-OPEC. And then finally, a repositioning of the world fleet ahead of the embargo on crude from Russia that was enacted on December 5. TCE rates actually squeezed materially higher into November. And even though they have reset since they remain at very profitable levels and well above the medium-term averages. Euronav benefited from this upswing and from the fleet rejuvenation we have done in the last 18 months in taking our new tonnage and reducing our older fleet of higher-consuming ships. Given our current corporate situation in full respect to the combination agreement with Frontline, we are unable at this stage to release dividends beyond the trees and minimum outlined in that agreement. However, to give some guidance and reassurance to our investors, we are indicating what level of returns could have been and this in line with our past commitments. Future developments will determine if, how and when this can be returned to our shareholders. Thanks, Hugo. Q4 2022 was indeed a very busy quarter in terms of the financials. Our leverage has improved positively to 45%, boosted on one hand by incoming cash from the higher freight markets, and on the other hand, from sales proceeds of some older vessels. The operational leverage is clear in our business during such period with net profit of nearly $235 million generated in just 1 quarter. This figure was clearly boosted by $62.6 million of asset sales, reflecting our continued fleet renewal program. Such capital gains are, in our view, correctly retained within the capital structure of our business and not for distribution. It is important, this capital is recycled into new and more energy-efficient fleet, which we have done and we'll continue to see with these 7 vessels currently under construction. I will now turn to an exciting and growing part of our funding sustainable financing on Slide 8. We or less is on a journey and we made another significant step with some dedicated hard work from our finance team and our partners during Q4. Over half our financing now comes from sustainability-linked sources, making Euronav the leader in the sector and among shipping companies globally. The new facility we agreed, totaling $377 million comes with some challenging ESG objectives, including social targets for the first time, but also with a higher incentive of candid when hitting such targets. This change in the incentive structure, we believe, has further to run as this gives motivation to increase the scale and penetration of our sustainable funding. With that, I will now pass it back over to Brian Gallagher to give some thoughts on the current market cycle. Thank you, Lieve. I start with the slide from the last sector we gave in Q3, illustrating the very real step change that we've seen in the oil on the water and in transit. And the positive follow-through is had on freight rates, especially over the last -- second half of 2022. Historically, as one would expect, there's been a very positive correlation between time 28 and volumes of cargoes on the water, but the Russian mid-dislocation started last March and subsequent increase in ton miles across the tanker sector has given a structural boost to our markets. This provides a strong base going forward for the sector, along with the age of the world fleet, which is at a 22-year high, and the fact that order books were a 40-year low, giving a very, very strong vessel supply signal. The other key factor short term for investors is also to look at China, which we now look to analyze on Slide 9. The tanker market recovery we've seen over the last 6 to 9 months has all been delivered with very little input from China. COVID restrictions have continued to remain very severe and have restricted economic activity consequently. This does look to be starting to change though. The cargo accounts for February and March, in particular in the VLCC sector, have been very, very encouraging and positive as China opens up an activity returns. Slide 11 shows an illustrative pathway of the recovery as we see it. And as I mentioned, we are starting to see the early signs of this. This we believe will further underpin freight markets well into the second half of 2023 as China only expected the level of consumption loss prepandemic. We turn now to the other side of the short-term factors that investors are looking at and Russia related activity on Slide 12. Much speculation centered in recent months for the positive factors that the Russian situation and dislocation brought would soon evaporate anticipate in the tanker market space. Whilst there was a lot of noise and clearly, there was a lot of dislocation itself within Russia with refinery shutdowns, production shutdowns and maintenance programs, volumes are now back to levels that we saw pre December 5 and the Unaoil. Production levels were also back to November run rate and also the nature of the crude and sport trade is changing with more evidence of more ship-to-ship transfers occurring across Europe and in the Mediterranean on to larger vessels in particular, VLCCs, with Siedmand-Apramax [ph] now are doing more shuttle-type runs between those low tensions rather than the entire journey themselves to the prior is. So in summary, our short-term market views continue to remain very, very positive and our current trend is very supportive as we move into Q2. We do expect to see a sustained and strong winter period over the next few weeks and months. I'll now pass over to our Chief Executive to give some more medium-term thoughts about the cycle and concluding with our current traffic right outlook. Thank you, Brian. The recent firming in freight rates have been driven by shorter-term factors, and this will now give way to very solid longer-term drivers. The global fleet is all by historical standards, and yet the order book is at 40 year lows, but no one is ordering because of the high price regulations and time to delivery as shipyards are not able to deliver tankers until 2025, 2026. New operational regulation will also bring curves on all the tonnage. So the vessel supply situation appears to be locked in. On the demand side, we see China returning to normal levels of demand, a global economy bringing back even modest levels of demand growth, and all of that oil needed to be transported further distance than in the past. These factors should drive a sustained period of profitable freight rates. We at Euronav will continue to reward shareholders and invest in the energy transition. Indeed, Euronav delivered on its promise to be an energy transition leader in the past 5 years and accelerated that in the past 12 months, and we'll continue to do so. Now on to the traffic lines, Slide 15. This will surprise no one. We are again upgrading one of our traffic lines to green. This time, demand is driven mainly by the prospects from China reopening. The sharp eye that Manu will notice most of the lines are now green or greenish. That is true, but there still remains some upside in investment supplies and also in demand in our view. There is more oil in the tank. With that, I would now like to pass it back to the operator, but with a final word. You will appreciate the sensitivity of our corporate situation. We have made public that the arbitration process will provide an initial decision next Tuesday. Given the sensitivities and regulations around that process, we will not be in a position to take questions on that. Good afternoon, Hugo. First off, I can commend you, you and the team for being able to continue really executing on the business here, given all the distractions. I can't imagine it's that easy to focus on the business while dealing with all the noise. I appreciate the comments you made, Hugo, just before we started the Q&A session, especially regarding arbitration ruling. And I just maybe will float out this question. I know the February 7 is the expected ruling. It seems a little sooner than I guess I would have assumed. But maybe just -- are you able to give us maybe a sense of what the different outcomes could be when a ruling is made? Is there a certain series of parameters that's being evaluated? Or any color you can give there? Or is it you prefer not to? No, I think it's a very good question. It's difficult to clarify in writing. I mean, summary proceedings are dealing with aspects that require urgency in a judgment. So I may take an example, which is, unfortunately, a couple of divorce, husband has the title on the house -- he doesn't know what the judge will decide whether it's why I can stay in the house, have the house or whatever. And if he sells the house, then there is nothing left, say, in the estate, maybe the money body can spend it. So an emergency judgment will say, you cannot sell the house until we have decided the outcome of the divorce and who gets what. And that's what we are trying to have here. So it's not on the merits, it's not on whether or not -- there were some damages created, whether or not there was the right terminate, et cetera, et cetera. It's really to see what should be sort of frozen until -- or for a certain period of time and probably until there is a judgment on the fundamental state, which are called the merit. I hope this is helpful. Thanks. I appreciate that. That lays it out nicely. And then maybe just as a follow-up. I know there's a lot of sensitivities with what's happening. And I just wanted to maybe check with you if there's been any discussions that you've had with CMB and you're regarding kind of the -- have they tipped their hat to you about the strategy that they're looking to take moving forward if they were to be successful with the Board? I can really not comment on that. And I think that it is for them to express what they would do if the outcome is favorable to them, I can only repeat what we have said in the press release, which is that we at or continue to be constructive and try to find solutions to all the problems. And obviously, there are 3 parties around the table. And so our attitude is continues to be very constructive. We're not the type of people who say, well, we are all enemies, and let's go to war. I think that we always have to look forward into the future. And I think that every problem has a solution. And as long as the 3 parties have the same attitude, I'm sure that we will find a very positive outcome that will be beneficial for all the shareholders, which also means that probably nobody will have the perfect solution that they want for themselves, but it will be a compromise and we very much hope that that will be the case. When I don't know, how I don't know. You first need to have that attitude. Yes. Well, thank you. Obviously, a very complicated situation, but one that can be resolved. So I appreciate the time you go, and I'll pass it over. Yes, thank you. I'll skip all the question on the arbitrage and go to the market. You mentioned both in the report and now in the presentation. On China, I guess you're seeing less U.S. crude exports to Asia being one of the main reasons for the -- in the VLCC rates. Maybe you could expand on that argument? And maybe what you're looking for in order for this to change for the better. It's -- well, the facts are correct. Everything that you said is correct. The question is how will that be developed going forward? And that's always very difficult because it depends on the levels of the volume that people want to export. Let's not forget that when we are talking the U.S., it's very important for ton-mile, but in fact, we're talking about the West Coast of the Atlantic Basin. So it's the U.S., but it's also Brazil in the next -- well, starting now, but in the next 2 or 3 years, it's also going to be Guyana. So there's a lot of expansion in the production of oil coming from what we call long distance, very positive tone light. The second aspect is that there was a lot of export from the U.S., but they were mostly going to Europe. And we see now that some of those cargoes are going to China. So -- in fact, if you say 2 cargoes going to -- or 3 cargoes going to Europe, is the equivalent ton mile and on cargo going to China. So it is complex, and we are a little bit -- we have the same visibility that the new guys have. And as I said, I mean, it depends on how many barrels, how many cargoes are being released from different places and that has always been difficult in all markets to forecast that. Overall, we see that there are more restrictions than in the past due to the Russian situation. And overall, we see that these cargoes at least have to complete much further distance than in the past, and that's positive. About China, in particular. Obviously, China is no reopening. I think that the government has made it very clear that they want to reboost the economy. The first step is reopening. The second step is to cope with COVID. Let's not forget that we have had our waves, but they are having their first real wave now. And so you need to cope with that for a couple of months. And once that is over, we are very optimistic about the fact that the economy will grow massively compared to the previous quarter, which was -- which were hampered by this situation. Where are the cargo coming from? Well, we will see. But chances are we will definitely need more cargo coming from the Atlantic. Thank you. I think the illustrative example in the press release of the capital allocation policy is very helpful. A lot of uncertainty on your ability to distribute capital maybe to the same extent as the prior cycle. So super quick 2-parter to my first question. First, I just want to be clear, in the last cycle, it was an 80% payout ratio. And of course, mixed with dividends and buybacks, and that's what you're ideally hoping for in this cycle. And the second part of that is, I do understand that February 7 is only 5 days away. But from your divorce example, it sounds like that's only making a determination on whether the house can be sold or not. When is the second arbitration roughly completed, so we can start to think about distribution of the proceeds from the house sale? Yes. So on the first part, you're absolutely right. We will continue to have a balanced strategy between dividends and share buyback when it comes to return to shareholders. And obviously, the share price will be a very important factor that we take into account as much as the outlook and to a certain extent, capital allocation, but that's no different than what we did in the past. On the second part -- it's -- well, it's very complicated. But I -- we certainly do not believe that we will need to wait until a judgment on the merits to be able to distribute capital. I mean that's -- there are many intermediary steps that can be taken. And what will happen next week will be very important in terms of which closes of the combination agreement needs to remain in place for that duration. So until next Tuesday, it's difficult to give you an exact or precise date, especially because even on the merits, we don't know how long it will be, but quite frankly, we're all business plan. So -- we focus on the business first. I mean, this is a very important transaction, as you can imagine, but not being able to return any capital to shareholders for launch period of time would not be ideal for the business. So again, that is a problem, we will find a solution. All right. That's very helpful. My second one kind of goes along the lines of how you defended that answer, focusing on the business, but being businessmen. I understand the sensitivities here again, but I'm just trying to understand like what's the ideal outcome here for you? -- to 25% shareholders, if the arbitration goes 100% in your favor, I would think the next step would be a shareholder vote, but a shareholder vote would be the merger, we have 2 25% shareholders who apparently don't want it. So it seems like it's almost impossible. So to the extent that you can say, in your ideal world, once a solution is arrived at, how do you move forward from there? I'm not going to be able to answer that because it's too sensitive I appreciate that there is a lot of systems and we're all very [indiscernible]. It's only a couple of days away, and I really don't want to risk anything by commenting on something that would be great. So I'm not going to be as well to ask [ph]. Yes, thank you. The first question is, operationally, I've seen that your reported breakeven, the breakeven for the P&L has gone quite a lot. Can you maybe explain what can be expected there looking at 2023, also given the strong rise in inflation and in wages. And the second question, yes, is on corporate governance -- have you agreed with the future marriage with frontline and now certainly your husband-wife, no longer wants to marry without giving any reason at all and really stepping you and your team in the back. why would you, as you're now managing board supervisory board still seek a manage if the partner has proven so unreliable? And how is it possible you in the preliminary agreement did not have a clause defining a penalty payment for breaking the agreement for this kind of events. And then maybe finally, what kind of financial compensation should we be looking for? Is it purely legal costs? Or can we assume a more financial compensation to come in? That's a great question. So you're very far because you're allowed to ask one question, one sentence, you asked 3 or 4. Congratulations for that. I think the first one, I'm going to give the word to leave about OpEx inflation, if I understand well, knowing that it has come down year after year, certainly, in the last 4, 5 years, and that was due to an exercise in trying to use economies of scale, and that does take time. But it is, as you've seen, paying off very, very well. And we are very proud of the work that we have done. Obviously, now we are inflationary. So, I give the word to Lieve. Yes, indeed it is. So indeed, we have to take into consideration, and we have budgeted for an inflation increase between 4% and 5%. And the main topics there are indeed crewing costs. because there, indeed, we still can optimize it because as Hugo mentioned, we did a step down over the 2 or 3 last years. But now this -- because of inflation everywhere popping up, it's a topic which will hit negatively but to a smaller amount of our OpEx. And then combined with the fact that also for technical and fuel loop oils, we will have a bit of a negative impact or inflation kicking in also in the environment of 4% to 5%. So globally, looking to our budget, we are speaking here for 4% to 5%. Good. The second part of your question, it's a complex one, and I'm not sure the appropriate forum, but maybe I can explain in theory. So in some contracts, you have termination close and then each party has a termination that can be well, financially compensated or nothing here. The termination clause is pretty clear, but Tuesday, we will see whether there was any right to even it or not. And let's wait until Tuesday to see indeed is the reason for which frontline is terminated, we are valid or not, I'm not a judge, so I could not help you there. On the financial side, I think that we first need to see what comes out on Tuesday, even though that's not on the merits and the medics is very much and leading to the financial part, but that's also a relatively complicated calculation that is being done as we speak. And I think that will agree with me in this kind of transaction where you're not simply buying something that is valued in the market, but where you're exchanging shares and the calculation becomes a little bit more complicated and each side will have to make its own. And then again, someone else called an arbitrator that will decide what is the right or wrong financial compensation. The fundamental question that you've asked is a very interesting one. And it's almost a philosophical one. If the person that you want to marry certainly doesn't want to marry -- does that mean that you should start a trade relationship? Does that mean that you should dislike or even profoundly this like this person -- and I've seen in many occasions where a marriage wedding is canceled. And 3 months later, people get very anyhow. Maybe there was a misunderstanding. Maybe there was something that they were not ready for. And again, we are always talking about there is a problem, let's identify the problem and let's see if we can find a solution that problem. Maybe the solution is that we don't marry, maybe the solution is that we marry, maybe we change the place of the way. Maybe we change the orchestra -- maybe we don't invite the model in load. But this idea that because you no longer want to marry at a certain point in time, it's forever and that this person that you were in love with becomes an enemy is something that is not part of our philosophy. Yes. Maybe one short follow-up. Let's say, looking at trading within your shares by your Nordic region shareholders? Is there also any reason to investigate there whether there's any reason to look at market manipulation or something like that from a legal standpoint? Well, that's not our job [indiscernible] crude oil. I think that there is enough authorities and regulators and many people looking at that. And honestly, I only have 24 hours in a day. So I'm not even going to opine on it. I have so many better things to focus on. Thanks, everyone. This is Chris Robertson on for Amit. So given the structurally higher rate environment that we kind of expect here, given the regulatory uncertainty around future fuel technologies, et cetera, it seems like owners will have a pretty big incentive to hang on to older tonnage for as long as possible over the next few years. So this seems to me like it will create a real need for fleet renewal as we get further along towards 2030, not only in the tanker segment, but also other segments as well. So if you could think about what do you think the response by the shipbuilding industry might be to absorb a large number of orders as we get further along here, is there enough space at the yards to take on what looks to be a real renewal need? That's a very good question. I like it because you're looking at the long term of this industry. And often, we are focused on the short term -- as you know, there are different technologies, which fuels basically greenfields that are being investigated. Some people believe that LNG is already better and will be transforming to a green fuel when it can be produced synthetically. Some people believe that methanol is a very good view as long as you can obviously produce the hydrogen in a green way and capture the CO2. And then some people believe that ammonia will be better because there is no CO2 emission, but this technology does not exist today. It's being worked on. And we have the promise from the shipyards and the engine manufacturer that it will be done before the end of the decade. Obviously, starting with smaller engine and because of the size of our ships, we have the biggest engine, and we have been told that this would be developed at a later stage. On the shipyard themselves, I think that it's true that there is some sort of a set capacity at the moment, which is spread between 3 countries. We can identify it relatively precisely. There are some efficiency, sorry, gains that can be done simply going from 2 shift to 3 shifts, which they used to do within the same space could increase marginally the capacities, but marginally in every yard means a few more ships. When you say everybody, in the shipping industry will have the same at the same time. I tend to slightly disagree if you allow me with you because we have seen that the guy carrying gas, but obviously, they are using gas as a fuel, and they will probably bet that green metal, sorry, green methane will be produced. When you look at the container guys, I think at the more we see -- we've seen a lot of orders also dual fuel LNG. So they are making the same bet. But now, more recently, we're seeing a lot of people betting on methanol. So that's certainly a fuel that has now a future because you have seen in enough orders so that the infrastructure will be developed. And then maybe in the future, there will be also orders on ammonia and we're certainly a party that is interested in that development. So part of the industry, the gas carrier, the container guys, even some dry bulkers and some tankers have met already on some technologies and those technology will exist. The only problem is to produce the green fuels. So I'm not sure there's going to be a huge rush at some point. As far as our industry is concerned, the reason why we have such a thin order book is because we didn't have the market allowing people to go to the shipyards with the cash that they had earned in the market. Now the picture is a little bit different, but the yards have been populated with many orders coming from many segments. And therefore, we see that for the next 2, 3 years, the capacity is constrained. So overall, I think that as I want to say, as always, I think that the industry, in general, the shipyard industry compared to the owners will find a way to produce enough ships when they are required. But it is true that what we are thinking of at Euronav is whether or not there is an advantage to be a leader, i.e., a first-time owner of a particular type of ships in our category. I mean, it could be a methanol dual fuel. You know that the last order that we placed for Suezmax, they are both methanol and ammonia ready, and we are continuously working with the yard, and we have a joint development program with HHI in particular, to add on to those ships as much technology as we can upon their delivery. So they're not completely dual fuel ready, but converting them is very likely in the future. But I think that's very prudent. And at this point, we don't want to make a bet on a specific field because if you look at the last 18 months, well, 12 months ago, everybody was saying it's LNG is not going to be anything else. Then suddenly, the wind shift a bit and now you see more order and do a few methanol. And I bet with you that in the future, maybe 2 or 3 years down the road, it's going to be able to do a few et don't feel ammonia so. So putting all your eggs in the same basket is not very prudent. And that's exactly what we're not doing at that [ph]. Yes. Thanks for that really thorough and thoughtful response to go. As a follow-up, I just wanted to focus on a few of the new building vessels that you have taken delivery of. Can you talk about the fuel efficiency compared to maybe the first gen of the ECO vessels and kind of what rate premiums you'd expect to see on the recent new builds versus maybe a 2015 or 2016 vessel? Yes. Depending on where you build your vessels, It's, I would say, a minimum of 5 tons up to 12 ton improvement. And obviously, because in our industry, we talk about TCE and the TC takes into account the consumption the improvement in the TCE is just a multiplier of the number of tons that you save per day times the price of the fuel at that time. So at the moment, I would say 5 tons, it's -- we're probably 600, I suppose, $600. So it's $3,000. If it's 10 tons and obviously, it's a lot more if it's 12 to then you make the math yourself. Then there is -- in addition to that, on the modern versus, certainly, the model vessels that we'll take at Euronav, we have also invested quite a lot on the digitalization platform that allows us to improve the voyage, I would say, the bone optimization, which takes into account a number of big data, such as the weather, the current, the temperature of the sea. I mean, all those little aspects have an impact on the consumption. And in the past, we could not take all of them into account because we didn't have the technology. Now we have it and we continue to develop it. So that's an addition. The good news is when it works on the super modern chips, then we can also apply that same technology on the older ships, so we can also improve the consumption of all the ships, thanks to that and maybe other hardware equipment that we are constantly testing. Good afternoon. Thank you for sharing the analogy about American wetting, it was very helpful. I just wanted to make sure I fully understood it. With regards to the Feb arbitration, that's the solely on Frontline's ability to terminate this combination agreement, is that the marriage that you're using as an analogy? I don't know if it's that. I think that you look at the contract and you look at what close should continue to exist for the time being, as I've said, until there is a judgment on the fundamental right or wrong of terminating the contract and the damages that come with them. So it's really, as I said, the guy cannot sell the house because if the judge would award the house to the wife a year later, the house is no longer there, there is a new owner in it. So, it's very -- so he says don't sell the house until you have that outcome. All right. Just moving on past the arbitration. On your traffic light, I was just -- kind of a win the question that was previously asked, but on your vessel supply, like what would it take for the UI to turn from green a shallow to fully green? Well, the supply is the new buildings, but also the recycling. And in order to turn it green, we would see a lot more recycling because when you look at the age profile, we should have seen a lot more recycling. Now we all know why that is -- that did not happen. First of all, the rate environment has improved. So obviously, now maybe less than last year. Should we expect it? Secondly, and that was a reason pointed out earlier in this call, if everybody watch the order book and see that very few orders will be placed for the reasons that we already explained. And it's likely that the ship will stay longer in operation. Otherwise, you're really going to have a squeeze -- and last but not least, there was for a pretty -- well, a long period of time, there was a little bit of a cash squeeze into the cash buyers who are the recyclers of those vessels. And obviously, when you have a VLCC, I mean, it's a lot of money that you need to pay sort of in advance of recycling it and selling the scrap metal. So there was an additional barrier that we have seen. But the traffic line will continue to be green amber as long as we don't see more recycling. It's Chris Wetherbee. Hugo, I think you've been really helpful kind of laying out your view here. I guess maybe what I don't know that we've heard this morning, though, is sort of earnouts management's view on what the future of the business should be. I understand we have the ruling coming up next week about damages and how things might ultimately play out. I don't know that that necessarily -- I guess maybe the question is, what do you guys want to do with the business sort of thinking bigger picture, maybe taking a step back from this potential ruling and thinking about the direction of Euronav from an M&A perspective. Is that still something that is attractive to you, understanding that maybe the deal that we've been talking about maybe can't get done. I just want to get a better sense of sort of where the heads are from management as opposed to some of the technicalities about rulings and various things about this past transaction, our pending transaction. That question is extremely refreshing, Chris. Thank you very much for asking. At Euronav, we -- well, first of all, we continue to operate the business. I'm very, very thankful for the remark that was done in the first question that when you look at the performance, we didn't forget to manage the business. And as a matter of fact, we have split a little bit the management team and some people are entirely focused on the business because that's what matters. And we want to continue to deliver as good results as we can. So yes, continue to be focused on the current operation. Do we believe in consolidation Absolutely. We believe in growth Absolutely. We do believe that going forward, the market deserves to be consolidated, can be consolidated. There's a number of advantage to consolidate the market. And to a certain extent, we've been successful there. I mean, not only because of what we have done in the past, but also more recently because the pool has grown in numbers. And it's probably something that you guys do not monitor in much detail. But when you look at the evolution of the pool, we have had many owners with many vessels and those same owners has the capacity to add even more vessels. So there is definitely a mandate for the pool to go out and get those fleets or even ships on outside to put them into a pool because we believe that that's fundamental for the business. And then as far as Euronav is concerned, we definitely continue to believe that bigger is better. We do believe that there are economies here that can come with it. We do believe that the way we can service our clients who themselves are becoming bigger and bigger, will be better. if one day, you can have a one-stop shop for your needs of our transportation that would be best and that's a little bit what we're trying to do together with the pool, continuing to be a big member there. So yes, in short, if you were to ask the management of this company and the current board because let's not forget that the Board is setting the strategy together with management. The ideas continue to grow, find alternative. This one cannot -- if you cannot marry this beautiful lady that let's find someone else, and let's make it a happy family. Yes. Coming back and let's say, maybe in a repeat, but I also want to thank for a great execution in Q4, of course. And it really is busy, you cannot distribute more dividends right now. Coming back on your statements on the arbitration from Euronav perspective, I would say the main focus is on getting the assets within frontline frozen for you? Or is the main focus in getting in frozen on your dividend payments? Or is basically a combination of the 2? It's a combination of many things, has to be honest. And that's why we cannot hear on this call in a public platform say much more about it. And I apologize for it because I wish I could answer. We need to be a little bit patient. It seems that some people are looking at this age like Netflix. And from time to time, you need to wait until the next step is all this produced to be able to watch it. Now fully agree, but you started to mention the merge, et cetera. And the only cases where I know that the husband and the white came together again when they certainly found out that there already was baby created -- so then the next question is, well, has there already been -- maybe being created, but probably not. I don't know what you mean by in we will stop short with those analysis. Otherwise, people would get lost in translation. I was trying to use a simple example. I understand that maybe it was not such a good idea. This concludes our question-and-answer session. I would like to turn the conference back over to Hugo De Stoop for any closing remarks. Well, I just wanted to thank everyone for attending our earnings call. And yes, hopefully, we will speak soon together. And certainly, next few days, an important day. So stay tuned. Thank you very much.
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Hello, and welcome to the ICE Fourth Quarter 2022 Earnings Conference Call and Webcast. My name is Alex and I'll be coordinating the call today. [Operator Instructions] Good morning. ICE's fourth quarter 2022 earnings release and presentation can be found in the Investors section of the ice.com. These items will be archived and our call will be available for replay. Today's call may contain forward-looking statements. These statements which we undertake no obligation to update, represent our current judgment and are subject to risks, assumptions and uncertainties. For a description of the risks that could cause our results to differ materially from those described in forward-looking statements, please refer to our 2022 Form 10-K, and other filings with the SEC. In addition, as we announced last year, ICE has agreed to acquire Black Knight. The transaction is pending customary regulatory approval and we expect to close in the first half of this year. In connection with the proposed transaction, ICE has filed with the SEC a registration statement on Form S-4 to register the shares of ICE common stock to be issued in connection with the transaction. The registration statement includes a proxy statement of Black Knight that also constitutes a prospectus of ICE. Please see the Form S-4 filing for additional information regarding the transaction. In our earnings supplement, we refer to certain non-GAAP measures. We believe our non-GAAP measures are more reflective of our cash operations and core business performance. You'll find a reconciliation to the equivalent GAAP terms in the earnings materials. When used on this call, net revenue refers to revenue net of transaction-based expenses and adjusted earnings refers to adjusted diluted earnings per share. Throughout this presentation, unless otherwise indicated, references to revenue growth are on a constant currency basis. Please see the explanatory notes on the second page of our earnings supplement for additional details regarding the definition of certain items. With us on the call today are Jeff Sprecher, Chair and CEO; Warren Gardiner, Chief Financial Officer; Ben Jackson, President; and Lynn Martin, President of the NYSE. Thanks, Katya. Good morning, everyone. And thank you for joining us today. I'll begin on Slide four with some of the key highlights from our fourth quarter results. Net revenues of $1.8 billion were driven by transaction revenues of $828 million and recurring revenues of $940 million, up 4% year-over-year. For the full year revenues totaled $7.3 billion, also up 4% versus last year. Fourth quarter adjusted operating expenses totaled $740 million, and we're within our guidance range, including approximately $5 million of additional severance. This strong performance helped to drive fourth quarter adjusted earnings per share $1.25 and full year adjusted EPS of $5.30, an increase of 5% versus 2021. 2022, free cash flow totaled a record $2.9 billion, which enabled us to return nearly $1.5 billion to shareholders while also continuing to make strategic investments across our business. In addition, we have received Board authorization to increase our quarterly dividend by 11% to $0.42 per share, beginning in the first quarter of 2023, extending our 10-year track record of double digit dividend growth. Fourth quarter net revenues totaled $982 million. Transaction revenues of over $600 million were driven in part by 11% growth in agricultural commodities, and 13% growth in our equity derivatives business. Importantly, open interest trends remain strong across our futures and options in January, including 14% growth in global natural gas and 24% growth in LIBOR. Recurring revenues, which include our exchange data services, and our NYSC listings business increased by 5% year-over-year in the fourth quarter. Customer growth, particularly within our energy exchange data was partially offset by slower growth in our listings business. While industry wide capital markets activity was relatively muted. It's worth noting that despite a slower year for IPOs, across the globe, we had a record year for listing transfers was 34, including more operating companies in the last three years combined. For the full year exchange segment, revenues increased by 8%, including a 33% increase in our interest rate business, a 20% increase in equity derivatives, and an 8% increase in our global natural gas revenues. Fourth quarter revenues totaled a record $537 million up 13% versus a year ago. Transaction revenues increased by 89%, including 182% growth in ICE bonds, and 66% growth in our CDS Clearing business. Similar to last quarter, this strong growth was driven by market volatility, higher interest rates and our continued efforts to build institutional connectivity to our bond platforms. Recurring revenue growth of 3% was driven by demand for additional capacity on ICE global network, as well as strong growth across our desktop, feeds and analytics offerings. We're beginning to see a return on the investments we've made in both enhance content and functionality. This performance is a key driver of our other data and network services business which increased by 8% in the fourth quarter, and 10%, excluding the impact of the Euronext migration. Somewhat offsetting with slower growth in our end-of-day pricing business, we're experiencing a slower sales cycle and pressure from asset base revenues in our index business, which declined double digits year-over-year, as investors shifted out of higher fee risk assets, such as equities and corporate bonds, and communities and treasury ETFs. For the full year, total segment, revenues totaled a record $2.1 billion up 13%. While adjusted operating margins expanded by 500 basis points, as anticipated recurring revenue grew 4% for the year and it was up 5% after adjusting for Euronext. Let's go next to Slide seven, where Iâll discuss our Mortgage Technology Segment. Fourth quarter Mortgage Technology revenues totaled $249 million. Recurring revenues which accounted for two-thirds of segment revenues totaled $164 million and grew 10% year-over-year. These strong recurring revenues continue to drive out performance versus an industry that experienced a nearly 60% decline in origination volumes. Importantly, they've now less revenues increased by over 30% year-over-year. For the full year, Mortgage Technology revenues totaled $1.1 billion, including a 16% increase in our recurring revenues, and a 24% increase in our data analytics revenues. And while industry volumes were actually below those seen three years ago in 2020 -- in 2019, pro forma 2022 Mortgage Technology revenues are higher by nearly 50%, representing a CAGR of roughly 14%. Recurring revenues in 2023 were once again be led by our Mortgage Technology segment, where we are expecting mid to high single digit growth, a testament to the continued adoption of automation across the mortgage workflow. In our fixed income and data services segment, we expect recurring revenue growth, excluding headwinds of approximately $15 million related to FX and the Euronext data center migration to once again be in the mid-single digits. And lastly, in our Exchange segment, we expect recurring revenue growth excluding a $20 million headwind from the cessation of LIBOR to be in the low single digits. As continued growth in our energy exchange data services is offset by fewer IPOs and the tapering of 2021 initial listing fees. Moving to expenses, we expect 2023 adjusted operating expenses to be in the range of $3.04 to $3.09 billion. Consistent with prior years, we will reward our employees for their contributions to our strong results, and therefore expect cash compensation expense to increase by approximately $20 to $40 million. Strategic investments in technology operations and revenue related initiatives are expected to increase by $40 to $50 million, driven by higher licensees as well as investments across all three of our segments. In addition, we expect roughly $45 million to $55 million of incremental noncash expense, including $25 million of D&A related to the rebuild of Ellie Mae CapEx. And lastly, we expect an FX benefit to our adjusted expenses by approximately $5 million to $15 million when compared to 2022. In summary, we delivered another record year of revenues, operating income, free cash flow and earnings per share. Across our business, we made strategic investments in future growth and as we enter 2023, we are well positioned to meet the evolving needs of our customers, once again, deliver profitable growth and create value for our shareholders. Thank you, Warren, and thank you all for joining us this morning. Please turn to Slide 9. 2022 was a year marked by rising inflation, rising interest rates and continued geopolitical and macroeconomic uncertainty. Amidst this dynamic macroeconomic environment, we once again grew revenues, operating income and earnings per share, record results that are a testament to the resiliency and durability of our strategically diversified business model. In our financial futures markets, rising inflation and central bank activity across the globe presented an interest rate environment that has not been seen in generation, helping us drive 20% volume growth in our interest rate complex and 15% growth in our equity derivatives business. Across our global energy markets, the events unfolding across North America, Europe, Russia and Asia have triggered a reshaping of the global energy supply chain, creating new risks and uncertainties for market participants to navigate. In our global natural gas markets, an evolving energy supply chain in Europe has led to increased demand for global liquefied natural gas, or LNG, and has helped us drive a 17% increase in global gas volumes in 2022. This includes 24% growth in our North American gas business, which has benefited not only from increased commercial engagement with our Henry Hub contract but also our North American basis markets. These trends have continued into January with global natural gas open interest up 14% year-over-year, including 21% growth in North America. Although our European carbon markets experienced headwinds in 2022 due to the aforementioned factors, the secular trend towards cleaner energy continues and is a growth trend we are uniquely positioned to capture, as evidenced by the record year in our North American environmental markets with volumes up 5% year-over-year in 2022. As we look out over the longer term, corporates and market participants remain committed to environmental policy to reduce carbon emissions. This is an evolution that we've long envisioned and is one of the largest providers of environmental products, including renewable fuel contracts, carbon allowances, nature-based solutions, renewable energy certificates as well as the wealth of climate data and related into season analytics. We are excited about the many future growth opportunities that lie ahead. Moving to our Fixed Income and Data Services business. Our comprehensive platform continues to generate compounding revenue growth and delivered another year of record revenues in 2022. This strong growth was underpinned by both recurring and transaction revenue growth, again a testament to the strategic diversification of our business and our ability to deliver growth through an array of macroeconomic environments. Rising market uncertainty and interest rates are driving an increase in demand for credit protection, and we have seen this lead to increasing trading activity in our bonds business. These factors, coupled with our continued efforts to build institutional connectivity to our bonds platforms, continued to record full year revenues -- to record revenues in our ICE Bonds business in 2022 up nearly 100% year-over-year. Turning now to our Mortgage business, increased workflow efficiency through continued electronification is a secular trend we believe will continue through a variety of mortgage origination environments. Our ability to capture this secular trend is evidenced by the strength and resiliency of our recurring revenues, which increased 16% in 2022. This continued strength is a result of executing against our strategy of leveraging our mission-critical technology and data expertise to accelerate this analog to digital conversion. As mortgage origination volumes have normalized, customer conversations have increasingly centered on efficiencies and automation. In the fourth quarter, we had our strongest quarter of last year in terms of sales to new customers of our loan origination system with wins across each major segment we service. In addition, there continues to be increased interest in our data and analytics products, which increased 31% in the quarter and 24% for the full year in 2022. Through our AIQ solution and analyzer tools customers can save thousands of dollars per loan by leveraging our data and analytics tools to drive automation in the loan manufacturing process. We are pleased that the value of our offerings continues to resonate with lenders, and we remain optimistic about the long-term opportunity to accelerate the analog to digital conversion. Thank you, Ben. Good morning, everyone, and thank you for joining us. Please turn to Slide 10. I want to begin by touching on our pending acquisition of Black Knight. As communicated, when making the announcement, we continued to believe that this transaction will close during the first half of this year. Our respect for the Federal Trade Commission's work on this matter, and as we cooperate with them to gain regulatory approval, we do not intend to comment further on the transaction. But importantly, we remain excited about the efficiencies that the combined entities will bring to the end consumer and to other stakeholders across the mortgage ecosystem. In that vein, and shifting to what was yet another successful year, 2022 marked our 17th consecutive year of record revenues, record operating income and record adjusted earnings per share. This track record of growth reflects on the quality of our strategy and, more importantly, on the execution of that strategy. We've intentionally diversified across asset classes and geographies, so that we're not tied to any one cyclical trend or macroeconomic environment. We've deliberately positioned the company to have a mix of transaction and compounding subscription revenues to provide upside exposure while hedging our downside risk. We've placed the company at the center of some of the largest markets undergoing an analog to digital conversion. The combination of these factors is what has made ICE an all-weather name and a business model that provides upside to volatility with less downside risk and, importantly, a business model that generates growth on top of growth. For example, in 2022, inflationary concerns and market speculation of central bank activity benefited our European and U.K. interest rate business, driving a 33% increase in revenues for the full year. These conditions also contributed to record full year revenues in our credit default swap clearing business, up 61% year-over-year, as rate volatility drove increased demand for risk management and credit protection. Across our mortgage business, even against this backdrop of rising interest rates, our business outperformed the broader market driven by strong recurring revenue growth, up 16% for the full year. Again, this is a reflection of the all-weather nature of our business model. As we look to 2023 and beyond, we're positioned to capitalize on the secular and cyclical trends occurring across asset classes, and we remain focused on executing on the many growth opportunities that are in front of us, extending our track record of growth. I'd like to conclude by thanking our customers for their business and for their trust in 2022, and I want to thank my colleagues for their contributions to the best year in our company's history. And with that, I'll turn the call back over to our operator, Alex, who will conduct a question-and-answer session until 9:30 Eastern Time. [Operator Instructions] Our first question for today comes from Rich Repetto from Piper Sandler. Rich, your line is now open. Please go ahead. Yes, good morning, Jeff and Ben and Warren. I wanted to ask about energy and more specifically natural gas. Ben, you made a lot of comments about how strong the U.S. natural gas markets are. You can see it in the volumes. But one issue it seems coming up is in the European natural gas and the TTF contract want to put in the right perspective, it's only 15%, I think, of the natural gas volumes but this whole deal with price caps that have been implemented and what you're going to do about it. And I guess it ties into the bigger question of politics and regulation impacting the markets, Jeff, as well. But anyway, the question on natural gas and sort of this broader intervention of government or regulation. Rich, it's Ben. Great question. To start, you got to remember that gas used to be a commodity that was highly dependent upon wellheads and pipeline infrastructure. So supply chains used to be a natural gas, very attached to that type of infrastructure. And whenever there was a disruption to that type of infrastructure, it's very difficult to adjust to rebalance those supply chains is all very localized, not really a global energy product. Fast forward to today, natural gas is very much a global energy product. It's a global energy supply chain, especially with the advent of LNG. And today, LNG can be freely flowed pretty much anywhere around the world as long as there's regasification capacity to do this. We saw this many years ago, and we've been investing in a global natural gas business that provides benchmarks around the world, has LNG contracts around the world that continue to expand as well as LNG freight contracts. So if you look at last year in GTF specifically, you had the unfortunate event where Russia invades Ukraine, and we saw significant energy supply disruptions where Russia was a significant supplier of oil, gas oil and natural gas, in particular, to Europe. And those supplies were effectively cut off. It created a very difficult trading situation for many of our market participants. At the same time, we saw market data subscriptions continue to grow in that part of our business. We saw more and more high balls and more of our community was growing around this. Fast forward to 2023, those supply chains have readjusted because natural gas is now a global commodity. And you have a significant amount of U.S. LNG and Middle Eastern LNG flowing now to Europe, backfilling a lot of those lost Russian gas supplies. So this market clarity has helped bolster confidence in trading products like ETF, and you see it already year open interest is up 10%. Volumes are up roughly 4% off of a comp of last year, which was actually pretty strong for TTF at the beginning of the year. Now for gas specifically, you have all kinds of macroeconomic environments that people need to manage risk around right now, but it's important to point out these are tradable events. Things like regasification coming online in Europe, so there's more and more gas that can come into Europe more efficiently. You've got storage -- gas storage facilities across Europe that have been filled. Weather so far hasn't been an issue this year in Europe. European demand is down. So you have a potential for a recession that's looming. Chinese demand last year in '22 was down with the economy, for all intents and purposes, closed, and now it's reopening. And for the first time last year in '22, it's the first time that natural gas and LNG physical supplies into China is likely to reduce since the early '80s. So now with the reopening, what is that going to mean? And then you also have a move towards a cleaner environment, where natural gas being the cleanest of the fossil fuels continues to be in high demand. These are all macroeconomic environments that can be tradable. They are all things that people can forecast around. And we feel great about the position that we have with the business that we've built to help traders manage around that, and we continue to invest in new contracts in the LNG space, few basis contracts in Europe around that. Now on price caps, I have mentioned on the last call, I went through a whole bunch of different issues that price caps can introduce around the difficulty you can create for people to manage and trade risk. ESMA has even come out recently with a comment that the unfortunate consequences of a price cap can be making it difficult for people to manage risk. Now for the aforementioned factors that I mentioned, the price of TTF has come way down. And the price cap right now is set at north of 3 times where TTF is trading. But that said, these can create issues for our market participants. So what we've decided to do is we're launching a new TTF contract in the U.K., it's a look-alike to the one we have in the Netherlands now, to provide customers a choice. It's important to point out that, that TTF contract is going to trade alongside another TTF contract that we already have in the U.K. called the TTF frontline. It's a U.S. dollar-denominated contract that's oftentimes used as a basis contract to trade LNG cargoes because those are also U.S. dollar-denominated. And all those contracts cleared in the U.K. already. So we already have a community of traders that are attached to us in the U.K. for that. And it's a hedge. If they decide to use it, great. At a minimum for us, it provides us a free market price discovery mechanism to manage risk in our clearing house and to settle contracts. Thanks, good morning. I wanted to follow up on the fixed income and data outlook as you think about '23, the mid-single-digit growth. Can you talk about the inputs that you're assuming for 2023, whether that's pricing and where the growth is? And I know you've cited some headwinds in '22. And maybe elaborate a little bit on that and maybe how you're thinking about changes within those headwinds going forward. Dan, it's Warren. Good question. So there's not really much change in terms of our expectations and our targets as we head into next year. A couple of years ago, we outlined the growth algorithm for the data business, and that's been pretty consistent for the last couple of years. So there'll be a little bit of price we talked about in prior years, that being around a third of the growth. There will certainly be contributions from new customers, contributions from current customers purchasing more. And so I think it's a pretty similar algorithm if you're thinking about this year versus past years. I think when we're thinking about 2023 specifically, look, the macro, those factors are a little bit difficult to predict. I mean, AUM fees, particularly the last two quarters, those have been something that have weighed on us a little bit. I don't know exactly where those are going to go next year. It does feel like certainly in areas like fixed income, we could see some stabilization. And frankly, fixed income could very quickly become a very attractive asset class. So look, we're having some really good conversations with customers. We are a data superstore, if you will, We're indices, we're end-of-day pricing. We have analytics. We have got desktops. We've got fees. It's a really diverse business. And so it's an opportunity for us to have conversations with customers in this kind of environment than we are to maybe find ways to save but spend more with us. And that's something I think you've heard us talk about the last couple of years. So there's nothing really different about our target. But again, we're certainly cognizant that it's a somewhat challenging environment for a lot of our customers at the moment. Hi, Dan, this is Lynn. I'm just going to jump in with a bit more color on what Warren said. I think this segment, in particular, really illustrates the all-weather nature of the ICE name. And the ability for this segment to grow 13% in spite of some of the challenges Warren has highlighted really underpin that. If you look at the execution side of the business, volatility has certainly been a tailwind, but importantly, new products and new customer acquisition has also been driver of our growth, new products in the CDS clearing side of the business, including our CDS options. In terms of ICE bonds, we've actually been able to grow our institutional market share. Institutional business in the muni asset class, in particular, is up 205% in Q4 alone, 175% for the full year. And we've been able to gain in muni about 650 basis points of share in 2022, really driven by the work we've done with the institutions to plug into their workflows. Now obviously, some of the macro forces have impacted the fixed income and data and analytics line, as Warren highlighted, slightly slower sales cycle in our pricing business. AUM trends driving out of our higher capture products into our lower fee capture products. But I would be remiss if I didn't talk about the outsized performance of our other data services line, where we haven't seen a slowdown in the sales cycle. And this was really fueled by demand for capacity, which was up 18% in the quarter, double-digit growth in our desktop and derivatives analytics businesses as well as strong growth in our fees business. So I think when you take a step back and look at the segment overall, we couldn't be more optimistic about the ability for that segment, in particular, to grow, compounding in a variety of macroeconomic positions because of the all-weather nature of the name. Good morning. Thanks for taking the question. Maybe to follow up on Rich's question, but with a focus on oil I wanted to dig a bit deeper into some of the changes that are being made there. You mentioned on the last call that you were taking Russian molecules out of the benchmark and highlighted the reconstitution maybe adding to activity levels in Brent. Given that Russian oil continues to flow pretty actively in Europe, is the reconstitution helping or hurting like you thought? And then secondly, I think Midland WTI has been added to Brent. To what extent do you see this inclusion making Brent an even more relevant benchmark? And as we think about Brent as a competing product to WTI, might this shift further drive share to ICE and Brent in oil? Thanks, Ken. It's Ben. Great question. And yes, you're right. You had the same dynamic that I highlighted before on TTF with oil as well as downstream products like gas oil as well, to some degree, getting cut off from Europe. But we have seen a similar dynamic that I mentioned in the natural gas markets where you have U.S., Norway and Middle Eastern oil now flowing in to help address some of that supply that has been lost based on Russia effectively cutting that off. So what we have seen -- since we announced in the second half of last year, that Russian molecules were no longer deliverable into the gas oil contract as an example. One of the things that we saw develop underneath the covers is that open interest in gas oil from October 1 to the end of last year grew 100% in deliveries starting in January of this year. And then since the end of the year, it's grown another 14%. So all that is showing the underlying health of the return and bolstering of market confidence coming back to products like gas oil, once that specificity was created. That said, you have a whole -- so we're seeing market confidence come back. Brent's up as well since the beginning of the year. So we feel good about that contract. Our Brent options contract has also done very well. But all of these supply chain changes around the world is why we've been making the investments we've had in a whole bunch of different areas around oil over the last few years. Two years ago, we've announced and launched ICE Futures Abu Dhabi and the Murban contract. And the interesting development we've seen with Murban is that Murban historically priced Middle Eastern barrels going out to Asia. And now, as I mentioned, Middle Eastern oil is also backfilling, to some degree, some of the supply cuts happen from Russia on oil supplies. And we're seeing Murban now being used to price Middle Eastern barrels that are going into Europe. That's one of the things that's feeding north of a 50% growth in Murban year-to-date this year. So we're off to a great start there. The Midland WTI contract that you highlighted, we launched that contract a year ago. And that contract is off to a great start. Tons of physical traders in it, prices, Midland TI that goes to Houston and hits the water and a lot of that oil is going over to Europe, it's a perfect product for people to use to hedge cargoes that are going into Europe. And again, with that supply chain dynamic of U.S. oil, backfilling a lot of the Russian oil that was cut off, we were very well positioned there. And then at the midpoint of this year, that Midland contract is perfectly positioned to be traded in parallel to Brent with those Midland TI barrels coming into the Brent index. So we feel very well positioned with all of the investments we've been making in and around oil in anticipation of potential supply chain changes, and we think we're well positioned there for growth. Good morning, everyone. I wanted to ask about Mortgage Tech recurring revenue outlook. You noted some bright spots in your comments just in terms of some of the sales you're seeing, the conversations you're having with customers, but we're seeing this continue to somewhat -- to decline in terms of the pace of growth, albeit still at healthy levels. And coming into the mortgage slowdown, you kind of noted that the mortgage industry was have been very busy during the single upturn. Now that the downturn occurred, there was an opportunity set to improve efficiency there that it's almost going to an acceleration of recurring revenue growth. So maybe you could kind of frame out the decline in the Mortgage Tech revenue growth outlook. What's being driven just in terms of the overall dampening of the industry right now? What's kind of the opportunity set in terms of further customer penetration going forward? Thank you. Thank you for the question. Great question. And I always highlight, and it's important to point out, that we're looking to build this business and build some fundamental building blocks that enable this business to grow 8% to 10% over a long period of time. And you're right. So we've made a very concerted effort. One of the big cornerstones of that strategy is a concerted move to move transaction revenue more and more towards subscription to make the business model much more predictable underneath that. And we feel good about the fact that we've been able to grow subscription revenue in the fourth quarter of 9% given the backdrop of an environment where volumes were down 60% and sequentially, they were down 20% approximately. So in that environment, we're still able to grow it. And I'll be the first to highlight, the mortgage industry didn't expect the downturn to happen as fast as it did or as rapidly and as deep as it did. So we have seen with some of our clients that are coming up for renewal. We've seen some clients consolidate, gone through M&A on true business. And so we've seen some cancellations due to those factors. That has created some headwinds into the business. But offsetting that, we've had a number of different items that have enabled us to grow and give us confidence in the ability to grow the business going forward. The first thing is that of the renewals we had last quarter, north of 60% of them renewed at higher subscription rates than they did at the beginning of the quarter due to our strategy to intentionally shift more transaction revenue towards subscription and also success in cross-selling more clients -- more products to our clients. The second is we had a very strong quarter and encompassed sales. In fact, the strongest quarter that we had of all of 2022 was in the fourth quarter. And we've seen that in a couple of different areas. So we saw it across all the different segments that we cover. So I think of banks, non-bank originators, brokers, credit unions. But we also saw a lot of new start-up companies coming to us. So with the unfortunate backdrop of people getting downsized in this mortgage environment, several of those impacted employees are becoming entrepreneurs, starting up their own mortgage shops. And we're very well positioned to win that business, albeit it may be at a lower subscription fee to start, but we have the ability to grow with them as this mortgage market will snap back at some point in time. We also see, just looking out into the future that there's a lot of large banks, large -- a lot of large home lending banks that have legacy infrastructure in-house systems that they've been running for years that are looking to upgrade and replace that. We think our funnel reflects that, and we feel really good about the prospects that those companies are looking to continue to make investments here in 2023, which will lead to growth factors for us going into the future. So that's a little bit of color of what happened in the fourth quarter as well as why we feel good about our prospects going forward. And I think if you step back -- this is Jeff. If you step back, what we're talking to the industry about is a fundamental shift in the way they assemble and manufacture mortgages to take costs out of the system, to move the industry to more of a SaaS model, subscription-based model instead of a model where every single mortgage is put together a la carte with services and the cost of a first-time homebuyers mortgage versus the cost of a $1 million mortgage are essentially the same in the current system. And it just makes sense to us that if we can give the industry a more predictable way of operating their businesses, they can be more responsive to their customers and allocate costs proportionately across their business, which is the way business is done in most other digital markets or markets that have moved from analog to digital. Good morning, everyone. Just wanted to ask about pricing holistically across the business. When you look at the data services space, some of your peers, maybe some of them in the desktop space that you're not in, but we're seeing price increases because of inflation. Your primary peer in the futures trading side also seems to have been taken a bigger price increase than usual this year. So when you put this all together and you look at your business, it seems like you're leaving some money on the table and you're a little bit afraid to kind of like turn that lever a little bit more. So just wondering if you're thinking, is it all evolving given the higher inflationary environment that's obviously driving your cost higher as well? Alex, this is Warren. It's a good question. We've certainly seen some of the peers out there and what they've done on the pricing front. It's always been our philosophy that, when we're going to increase price, it will come with value added to the particular product that we're increasing that price on. And that hasn't changed, and that's not going to change this year. I think from our perspective, the better long-term strategy is to operate that way, and that's what we're going to be doing this year. And we mentioned a little bit earlier on the Fixed Income and Data Services side, there really wasn't much difference in terms of how we're approaching that this year. We do have a small amount of contracts, it's pretty immaterial at the end of the day, that are benchmarked to inflation. But I don't think you'd really notice that at the end of the day, depending on how much that will fluctuate. So on that front, I would say it's pretty consistent. On the futures side, we're always looking at that as an option. But again, it's something we haven't really pulled lever on up until this point, and there certainly have been instances in the past where we've done it. But something we are thinking about and always thinking about, frankly. So I wouldn't necessary that's much of a change. But yes, that's something that's out there and certainly on what some of the others have been doing. And this is Jeff. I would just mention that we spend a tremendous amount of time focused on our own costs and the cost of delivering these products and continue to make prudent investments but underneath allocate to personnel and resources. We've been -- you may notice, of all the major exchange groups, we've been the most cautious, if you will, of moving business to the cloud because those are areas where we've seen the largest cost increases and the most unpredictable rises in cost. So we have continued to be conservative in delivering our products the way our customers want to see them but trying to do it in a way that is very, very cost efficient. Hi, everybody good morning. Thanks for the question. I just want to go back to some of the energy dynamics in the space. And I was hoping you guys could talk about the environmentals for a bit. Itâs great to see the TTF complex kind of coming back to life here in January. What would it take to get, I guess, the environmental products going again? And kind of what are some of the dynamics in that market for '23? Thanks, Alex. It's Ben. And we feel really, really great about the position we have in the environmental marketplace. As you know, we were here very, very early. Almost 13 years ago is when we acquired the Climate Exchange, and that was really the foundational piece to it. And we've been building and investing around this the entire time since we've owned that and now have the most global complete suite of solutions there that are helping our clients price carbon, offset their carbon risks, trade renewable energy credits, et cetera. And one of the other strengths that we have to our environmental business is that there's a symbiotic relationship that we see with energy. A lot of people that are producing energy or consuming energy need to care about the price of carbon. So we see a symbiotic relationship there. For our business, if you look under the covers of what was going on last year in 2022, we did see some headwinds, as I mentioned in my prepared remarks, on the European Union allowance markets. And a lot of that was associated to time, capital and attention being paid towards the energy markets. That said, we continue to see market data subscriptions, in particular, environmentals, are growing nicely over the years. So we continue to have people added into our community between our market data, between our ICE instant messaging platform and chat platform. We continue to grow visibility and interest into our markets there. I'd also point out that the European Union late last year reaffirmed the trading scheme and continue to signal that things like free allowance thresholds, so the amount of carbon that you're allowed to emit before you have to buy allowance, all those are going to start coming down, which means that more carbon is going to need to be priced and more sectors of the economy are going to be captured. So from a long term looking out over the horizon perspective, that's a tailwind of growth. We launched our U.K. allowance platform. That was up nicely last year, up 16% and North America, as I had mentioned, had a record last year of almost 3.7 million lots traded with a record number of market participants in there. Our regi contracts, which is regional greenhouse gas emissions California carbon allowances, renewable fuels all had a great year. We continue to invest here by launching new contracts. We launched tech wind solar contracts last year, and we also launched a few tranches of nature-based offsets. One of the things that we announced at the end of last year that may have flown under the radar for people is when you look at the offset market in the carbon and environmental credit markets, those markets tend to be called voluntary, and they are very nascent. Those are markets that no one has really been able to effectively develop yet, and they're all in very, very early stages. One of the key problems we think that there is from our experience in developing other markets is that there's a fundamental -- fundamentally very difficult for somebody to understand what is the offset that one would want to trade. What is the underlying reference data associated to it? What are the components that make up that offset or that environmental credit? What's the quality of that credit? Basic supply information like how much was issued when it was originally issued, how much has been retired and how much still exists. So we launched, at the end of the year, a reference data service where our community of over 100,000 instant messaging and chat clients that are traders that are utilizing that all day long, they're energy traders, they're environmental market traders can instantly look up any offset, any environmental credit, be able to get all of the reference data associated to that credit; how much was issued when it was issued;, how much has been expired, how much is still available to trade, this is all basic fundamental supply data that people need to be able to price -- fundamentally price the contract. So we pulled all that together, so you can gather all that information on a near real-time basis. We pulled it together from a variety of different sources to make what was hours worth of work, if not days, can be done instantaneously. And obviously, with that information, it can help with price formation and eventually interaction with our community to help identify people that would want to trade. So we feel great about our positioning there. We're investing there, and that's just one significant example of a nascent market that we think we have some foundational elements that we're so excited about. Thanks for taking my question. I just wanted to cycle back to the mortgage business. And specifically looking at the transaction revenues, I was just wanting -- as you're increasingly looking to shift your revenue streams towards the recurring revenue line over time, should we look at that as do start to rebound? And then secondly, is there -- should we assume that the sort of level of outgrowth versus -- of the transaction revenues versus those mortgage industry volumes should narrow and to zero because we're effectively shifting all of your business to recurring revenue streams? Just trying to understand the dynamic that's going on between the recurring revenues and transaction revenues right at this point. Sure. Simon, it's Ben. So there's a couple of different pieces to that question that I'll cover. So on transaction revenue, we have said we are willing to give up some transaction revenue that we have today. So take, for example, a "success" fee. When a loan is codified, there's a transactional fee associated to that, that where -- if we lower that to some degree for our clients but shift more of that towards recurring revenue and more predictable revenue to us, we'll do that. So there is some short-term impact to our transaction -- to existing transaction revenues. At the same time, we have a whole suite of other services that we're cross-selling to our stable of 3,000 Encompass customers, for example, around the world, some of which are recurring, some of which are transaction that, as those continue to mature because they're very early stages but are showing some great signs of success, our ability to cross-sell those, things like our data and analytics offerings, which we -- were transactions that we've tilted much more towards subscription. But then we also have services in our closing line item that we're continuing to invest in and we're continuing to add on that will be incremental transaction revenues. So there's a mix underneath the covers there. But we believe that having a more predictable business model for the longer term will enable us to continue to grow the business at 8% to 10% a year for a long period of time. Good morning, everyone. I wanted to come back to Ben's commentary that 4Q is the strongest Mortgage Tech sales quarter since last year. What products drove the increase in 4Q versus the prior quarters? And also given several announcements of exits and downsizes in the residential mortgage world, and I'm thinking Wells Fargo is probably the biggest, which products are you seeing under the most pressure on the sales front in 4Q? Thanks for the question, Craig. So a lot of what we saw in terms of sales strength, so I'll just -- I'll talk about 2022 first, then I'll go in the fourth quarter. So for 2022 as a whole, our AIQ, that -- the automation service that's lowering the cost of manufacturing a loan to our clients was very strong throughout the entire year and each quarter. We had a good quarter in selling new clients onto that platform. Again, that's hopefully lowering their cost of manufacturing along a lot of the comments that Jeff made before. And hopefully, those cost savings get passed on to the end consumer. In the fourth quarter, it was an interesting dynamic. It was actually our -- the core Encompass product that drove that sales strength that we had in the fourth quarter. So what we're seeing is that, while you do have customers that are consolidating, you have some M&A, you have some downsizing that's happening with that client mix. The two things that we see in parallel are that, one, a lot of the banks credit unions, non-bank originators, they're using this time to invest in infrastructure. So if they have in-house systems, for example, which is often what we're unseating, they're looking to invest in their infrastructure to be ready for when this market snaps back. Looking at our funnel going forward, we know that a lot of the big banks are looking at that, that infrastructure that they have and looking at making investments to position them well when the market snaps back. And then the other thing that we're seeing is, as I mentioned, as employees are impacted by these downsizings. We're seeing a lot of them start new shops. And as entrepreneurs, they're starting new shops, and we're well positioned to win that business as well. So we're very well positioned across the entire spectrum. And people are taking -- we see people taking advantage of the opportunity right now where there is a strain in the system to invest and be ready for when the market comes back. Great. Thanks, good morning folks. Thanks for taking my question. I wanted to turn back to fixed income trading. It's been on such a strong growth trajectory. And when you described good traction in the muni business and data, maybe if you can talk a little bit more about the mix of revenues within that business. I know the market share gains have been really good. Is it mostly munis? And just thinking about the sustainability of this, munis has been growing more than doubling on a year-over-year basis, reaching a $100 million annual revenue business in the second quarter and if it can continues to grow like sequentially, it will be a $200 million annual business within a couple of quarters. So just trying to get a sense of the drivers behind that and if you think this momentum can continue? Yes. Thanks for the question. As I mentioned, volatility certainly did help out this business, but a lot of the share gains we've achieved in the institutional side of the business has really been what's driving the growth. 26% in Q4 of our muni activity came from institutional accounts. So that's up from 13% in 2020 when we started to acquire all of these different platforms. So we've really been able to increased institutional footprint. We do see opportunities also in treasuries and CDs. Those two asset classes within the execution segment have outperformed a lot of that volatility-driven. But the toughest thing to do is to get the plumbing into the institutional accounts. And I think the deliberate decisions we took a couple of years ago to be workflow-agnostic, to work with a variety of providers to plumb our platforms into a variety of workflow solutions have really beared fruit in 2022. So when volatility came into the market, it wasn't just about your traditional retail trader that was executing the munis and corporates. It's now about the institutional trader that sees us as a diversified platform across multiple asset classes in fixed income. Great. Thanks. I wanted to circle back on Mortgage Technology. With the recurring revenues up about 16% mid-teens in 2022, I was hoping you might be able to help unpack what portion of that recurring revenue growth was from unit growth, from existing -- excuse me, unit growth from new customers versus wallet share gains from existing customers where you're expanding the services they are offering to them versus what portion of the growth is coming from current versions from transactional to the recurring revenue side. And then when you look ahead to '23 with your mid- to high single-digit growth there on the recurring revenue sides and Mortgage Tech, how do you see that mix evolving in your outlook into '23? Thank you. Thank you, Michael. It's Ben. And it's a mix on it. You hit on some of the elements in the way you asked the question. So our view has been that when you have this significant stable of customers, the 3,000 lenders that are on our platform and utilizing our services, there's a tremendous opportunity to cross-sell. And one of the things that's really driving that recurring revenue growth is the success we have in continuing to sell our AIQ platform into that customer base. We have a long way to go in being able to penetrate those 3,000 lenders and be able to provide them the efficiency that they need now more than ever. So we feel good about our ability to cross-sell and how we've executed on it to date since we acquired, the former Ellie Mae business and looking forward ahead into the future. The other thing is new sales. So we continue to have great success adding new customers. Customers can come on and utilize that AIQ, offering those analysis to other third-party providers. So we continue to have success there. And we also continue to add new customers on to Encompass. And I just answered a question on that. A couple of questions that go here. So we continue to have great success in the Encompass for all the different segments that we sell through. Whether it's a start-up company, whether it's an established non-bank originator, whether it's a bank or a credit union, we're a broker across the entire spectrum, we believe the investments we've made in our platform is very well positioned to meet those clients' needs. And as we see a lot of the major home lenders in the U.S. looking to replace in-house legacy infrastructure, we think we're also very well placed to win that business as well. So those are the key drivers -- as well as it's having very relatively low attrition. We are a core platform for operating these businesses. So unless they're going out of business or there's M&A that's happening, we're not losing business. Thank you. We have no further questions for today. So I will hand back to Jeff Sprecher for any further remarks. Well, thank you, Alex. Thank you all for joining us here this morning. We are continuing to innovate for our customers and build an all-weather business model and delivery growth. And so with that, I hope you'll have a great day and appreciate your being with us.
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Good morning, and welcome to the SITE Centers Reports Fourth Quarter 2022 Operating 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 that this event is being recorded today. Thank you, operator. Good morning, and welcome to SITE Centers' fourth quarter 2022 earnings conference call. Joining me today are Chief Executive Officer, David Lukes; and Chief Financial Officer, Conor Fennerty. In addition to the press release distributed this morning, we have posted our quarterly financial supplement and slide presentation on our website at www.sitecenters.com, which are intended to support our prepared remarks during today's call. Please be aware that certain of our statements today may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information may be found in our earnings press release and in our filings with the SEC, including our most recent report on Form 10-K and 10-Q. In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, operating FFO and same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's quarterly financial supplement. Good morning and thank you for joining our fourth quarter earnings call. The fourth quarter concluded a very productive year for SITE Centers with results ahead of budget, another quarter of elevated leasing volume despite having less available space, the opportunistic sale of three wholly-owned properties with pricing well inside of where we repurchased stock, and a balance sheet that remains in great shape with full availability on our line of credit, minimal near-term maturities and debt to EBITDA in the low 5s, which remains well ahead of the peer group and the sector overall. I'll start with detailed comments on leasing and then move to transaction activity before handing it over to Conor to give more details around the quarter and 2023 guidance. In the fall of 2020, we saw the early signs of an acceleration of demand from national retailers following a six-month COVID pause. The junior anchors were the first to accelerate followed by small shop and midsized users. The common theme behind their expansion plans and new concept growth was the desire for well-capitalized retailers to get into or closer to the wealthiest suburban communities in the country to take advantage of population growth, pandemic-induced work-from-home trends and the benefits of a store fleet that could be used for in-person, click and collect, or ship from store. The unusual strength and speed at which leasing demand accelerated led us to quickly expand our leasing department and regionalize our leasing leadership to ensure that we were in front of our best relationships at the time when they needed space. John Thirkell was named Senior Vice President of Leasing at this time, and his team of five veteran regional vice presidents have used their relationships to our advantage to produce exceptional results for our company. Ultimately, SITE Centers signed over 2 million square feet of new leases in 2021 and 2022 at a 20% spread, including 73 anchor boxes signed since the start of the pandemic, and increased our lease rate by almost 400 basis points. I can't thank the leasing team enough for their dedication and hard work. This congratulations also extends to our legal leasing department, led by Aaron Fair, who have also used their deep relationships to quickly respond to tenant demand and complete a very high volume of new leases in a short period of time. Going forward, the trends and factors that allowed us to achieve these high leasing volumes are still firmly in place. Supply in our submarkets is extremely low and demand remains very strong from national retailers looking to expand their footprints in the wealthiest suburban markets where we operate. Our execution of new leases to satisfy these retail tenant expansions, combined with high tenant retention, resulted in a 40 basis point sequential increase in our portfolio leased rate to over 95%, which achieved the target that we laid out over a year ago. The one change we have seen more recently is the return of post-holiday bankruptcy filings following a two-year hiatus. Specifically, as it relates to tenants, including Party City, and the widely publicized potential filing of Bed Bath & Beyond, I'll spend some time on our strategy for both of these tenants. For Party City, SITE had 12 wholly owned locations at year-end, excluding JVs and the franchise location with total exposure of about 90 basis points of base rent. Given the high sales productivity in our portfolio and the demand from other credit tenants for that space, we were not surprised that none of our locations were on the initial rejection list as part of the bankruptcy process. Tenants looking for space in this unit size include pOpshelf, Ulta, Five Below, Sephora, J. Crew and a variety of medical users, among others. As a reminder, the Party City unit size is similar to Pier 1, which liquidated early in COVID, and none of those units are available to lease in our portfolio today. During any bankruptcy process, there are times when a landlord works with a weak tenant to restructure leases. This is not one of those times. We expect to pursue an aggressive recapture of space so that we have more inventory to satisfy demand from other high credit national tenants. Shifting to Bed Bath & Beyond, which has been widely publicized, may file for bankruptcy. Given the possibility that we might eventually recapture all of their locations, our asset management team began working with our leasing team in the fall of last year to identify a strategy for each unit, along with potential backfill candidates and we feel very well prepared for a focused marketing cycle. To date, we've recaptured one location at natural expirations, and that store has already been re-leased to Planet Fitness with a 2023 expected rent commencement date. Of the remaining 18 stores, which represent 1.9% of base rent, we are confident that there are single user backfill options for 17 of those locations. The last remaining space is slated for demolition to prepare for an asset sale for a multifamily redevelopment project in Washington, D.C., which we completed the requirement for rezoning almost two years ago. As a result of these activities, I would expect that the majority of our stores will have executed leases this year should the company file, with rent commencements by year-end 2024. Moving to the overall portfolio leasing for the quarter. As noted, demand and activity remained very high in the fourth quarter with over 800,000 square feet signed. In terms of new leasing, we had another quarter of almost 200,000 square feet of new deals with strength again from national shops as a standout. Our shop lease rate was up 120 basis points sequentially and 530 basis points from the fourth quarter last year. Quite a bit of this leasing was again in our tactical redevelopment pipeline with a specialty grocer signed post year-end at our Tanasbourne project in Portland, bringing the pipeline to over 85% leased. The projects broken out in our supplement started to deliver last year with the majority stabilizing by year-end 2023. Importantly, each of these projects are expected to be immediately accretive to earnings. Looking forward, we have another 250,000 square feet at share in current lease negotiations, which excludes any of the activity on Bed Bath or Party City locations that I just outlined, with blended spreads above our trailing 12-month average. We expect this pipeline to be completed over the next two quarters, concentrated in the mix of national publicly traded tenants. That said, the absolute level of activity in the first quarter will moderate as we simply have less space to lease until we can take possession of some of the bankrupt tenant square footage outlined earlier. Shifting to transaction activity. We had another very active quarter recycling capital, highlighted by the sale of three wholly-owned properties with total dispositions in the quarter of $158 million at share. Two of the three properties were sold, not marketed, but were the result of a 1031 investor that approached our team looking to reinvest proceeds at pricing, which we felt was attractive for our stakeholders. Net proceeds were used to pay down debt, repurchase stock at roughly a 150 basis point spread to the cap rate on the deals and reinvest in convenience assets in the Mid-Atlantic and Denver. Specifically, we acquired two properties in Denver for almost $17 million and one property outside of D.C. for $15 million. There will be a lag until we are able to reinvest all of the proceeds but we have an additional $75 million of convenience assets under contract or awarded as of today, which we would expect to close by the end of June. The assets acquired or under contract are in our core markets, including Denver, Atlanta, Phoenix and Washington, D.C. and have attributes similar to those assets bought in the third quarter and to date, including strong submarket demographics with top quartile incomes, a tenant lineup made up of services, financial services, quick-service restaurants and a majority with a drive-through unit. Underwritten five-year NOI CAGRs are roughly 3% with minimal CapEx, which is consistent with our existing convenience portfolio and one of the key attributes of our thesis. In summary, we are extremely pleased with our portfolio positioning and future leasing prospects, our investments to date, which have increased our long-term growth profile and shifted our portfolio to the top submarkets in the country, and future investment prospects, which we believe will create stakeholder value while prudently managing our balance sheet. A special thank you to the entire SITE Centers team for another incredibly productive quarter and year. Thanks, David. Iâll comment first on quarterly results, discuss our 2023 guidance and some of the moving pieces embedded in guidance and then conclude with the balance sheet. Fourth quarter results were ahead of plan, as David mentioned, due to a number of operational factors, including earlier rent commencements and higher occupancy and higher overage and ancillary income. These operational factors totaled about $0.01 per share relative to budget. The quarter also included $300,000 of unbudgeted straight-line rent from the conversion of cash basis tenants and $800,000 from payments and settlements related to prior periods. For the full year, we generated $1.18 per share, which compares to $1.17 in 2021 despite a $10 million headwind from prior period reversals and a $16 million headwind from lower RVI fees. This roughly $0.12 per share headwind in aggregate was offset by higher NOI as we transition the company to one with lower fees as a percentage of EBITDA and a higher quality property income stream. In terms of operating metrics, trailing 12-month leasing spreads accelerated for both new leases and renewals with blended spreads for the year just under 9%. We continue to see strong leasing economics for the pipeline though quarter-over-quarter volumes and spreads will remain volatile given our denominator. The lease rate also had positive momentum and was up 40 basis points sequentially and 270 basis points year-over-year with our lease rate now at 95.4%, well above the companyâs pre-COVID high watermark of 94.3% set back in 2017. Highlighting our leasing volume and backlog, we had over 290,000 square feet of new leases commenced in the fourth quarter, representing over $6.4 million of annualized base rent. Despite that, the SNO pipeline was down only $3 million sequentially to $19 million as new leases partially offset the impact of commencements. These signed leases represent just under 5% of annualized fourth quarter base rent or over 5% if you also include leases in negotiation in our pipeline. We provided an updated schedule on the expected ramp-up of the pipeline on Page 6 of our earnings slides. Same-store NOI grew 1.8% in the fourth quarter with the uncollectible revenue line item, a 110 basis point headwind to year-over-year growth. For the full year, same-store NOI was up 80 basis points or 4.6% after adjusting for 2021 uncollectable revenue with same property NOI for the portfolio for properties owned for the last four years, well above 2019 or pre-COVID levels. Moving on to our outlook, we are introducing 2023 OFFO guidance with a range of $1.10 to $1.16 per share. Rent commencements, investment activity and potential tenant bankruptcies are the largest swing factors expected to impact where we end up in the full year range. Iâll start by breaking down the components of 2023, including tenants in or widely reported to be close to bankruptcy and then talk about the transition to the first quarter from fourth quarter results. Starting with same-store NOI. We expect growth of 75 basis points at the midpoint of the range with prior period reversals of $3.4 million in 2022, a roughly 100 basis point headwind to growth. Included in same-store is a 250 basis point credit loss estimate at the midpoint that includes our annual bad debt reserve along with specific bankruptcy assumptions related to tenants that have filed for bankruptcy to date, along with other tenants with well-publicized liquidity concerns. We have three national tenants as of today, either in bankruptcy or widely publicized to be close to bankruptcy, and that includes Cineworld, Party City and Bed Bath & Beyond. For Cineworld, we have three locations with total annualized base rent of $2.9 million as of December 31. None of the leases have been rejected to date. But based on initial conversations, we expect to execute short-term agreements at two locations, which allow us to maintain some income, but more importantly, control at potential multifamily locations in Washington, D.C. and Atlanta. The net result of these agreements is a $1.3 million impact to 2022 revenue â excuse me, from 2022 revenue. For Party City and Bed Bath, outside of the three locations that were included on Bed Bathâs recently posted store closing list, there have been no rejections or closures to date. That said, as David mentioned, we intend to make sure we are maximizing the long-term value of our real estate, which means there are likely several locations where we will recapture to re-tenant with a more productive user at better economics. Specific to Bed Bath & Beyond, there is quite a bit of new news in the last 48 hours. The midpoint of guidance for both same-store and OFFO assumes that we recapture all of their Bed Bath stores in the second quarter. The top end of guidance assumes that they are in place for the entirety of the year. In terms of 2023 fee guidance, we expect JV and RVI fees to total $5 million to $7 million with minimal contribution from RVI. This assumption reflects additional expected JV asset sales. G&A is expected to total about $48 million. And finally on transactions, we expect $100 million of net investments at the midpoint of the range, with the assets completed â asset sales completed in December, roughly $0.01 dilutive in year one given the reinvestment gap that David mentioned. Moving to the first quarter of 2023. There are a few moving pieces to consider from the fourth quarter. First, as I previously mentioned, we had $300,000 of non-recurring straight-line rent and $800,000 of non-recurring uncollectible revenue in the fourth quarter. Second, the assets sold in December generated $1.6 million of NOI at share and $250,000 in JV fees in the fourth quarter, which implies total JVCs of about $1.7 million for the first quarter. A summary of these factors is on Page 11 of our earnings slides. Finally, ending with the balance sheet. At year-end leverage was 5.1x, fixed charge remained over 4x and our unsecured debt yield was over 20%. In the fourth quarter, we repaid two maturing mortgages along with the balance outstanding on the line of credit with proceeds from asset sales improving upon our already sector-leading leverage levels. As a result, the company has just $87 million of debt maturing through year-end, full availability on the $950 million recast line of credit and 2% variable rate exposure. To put this all in context, even at the low end of the guidance range, we expect debt to EBITDA to remain below 6x, the AFFO payout ratio to remain below 75% and to generate $35 million of retained cash flow. Additionally, this leverage profile and liquidity provides substantial investment capacity and optionality to fund the companyâs business plan and take advantage of potential opportunities as they arise. Hi. Thanks. Good morning. I guess, first question, David, the leasing environment has been fairly favorable here for landlords. You discussed that and talked about your leasing activity in the quarter. And you talked about Bed Bath and Party City and loosely outlined some of the demand that youâre seeing there, but you have out signed leases and cannot, I guess, until you really recapture space to the extent that you do. Do you see risk that the market loosens up a little bit from Bed Bath closures and maybe some space thatâs being recaptured a little bit more broadly with vacancy having an impact on rents? Or do you still anticipate favorable leasing environment and demand remaining strong as you kind of work through some of these, sort of, challenges during the months ahead or quarters ahead? Yes. Itâs a really good question, Todd. I mean, first of all, I would say the leasing environment today is significantly better than favorable. Itâs extremely robust. So the time to have space back is right now. Whether that continues, thatâs a really good question. I mean we have not seen a decline in demand. Youâre right that weâre not formally marketing spaces from tenants that have a legal right to be in that space, and they havenât filed yet. But that doesnât mean that tenants canât send us LOIs in anticipation of that. And the activity that weâre receiving from tenants on the Bed Bath and Party City spaces is for virtually all of those locations. So I feel very good about the demand right now, which is why if we get space back, Iâd rather have it now, because we donât know where the economy is going. We donât know where tenant demand can go. And as you and I both know, when retailer demand stops, it stops fast. And right now, itâs still â the green light is on. So I prefer to have the space back sooner rather than later. Okay. And you mentioned the Planet Fitness lease that you signed for one Bed Bath location that you recaptured. You mentioned that thereâs â you think that there are 17 single-user backfills. Can you just â you talked about some of the Party City backfill opportunities that youâre seeing. Can you discuss the tenants that you would expect to take the Bed Bath space and maybe also talk about the replacement rents that you might be anticipating relative to Bed Bathâs and place rents today? Sure. Well, Party City, I mean, let me start with that for a second, Party City, having some similarities to Pier 1, meaning some of them are in-line stores, some of them are outparcel pad stores. And so Party City has more to do with whatâs the highest and best use. Is it a single tenant backfill? Is it a split into shops? How much rent can we drive from that? I would expect that the rent spreads on the Party City portfolio can range anywhere from 5% to 30%, depending on whether itâs an as backfill or a subdivision for shops. And the shop demands are so strong right now that weâre likely to tilt higher to that value creation. On Bed Bath & Beyond, if you look back in the last two years of the anchor tenants weâve been signing, itâs virtually the same as that inventory of prospective tenants. Itâs any of the TJX concepts, the ROS concept, Dickâs Sporting Goods, all the cosmetics, any of the discount chains. So I think that those tenants that have been active for the last two years are still the ones that are active today in seeking out a Bed Bath location. And the one thing Iâll point out is if you rewind back to 2017, you think of the inventory that we got back, specifically from Toys âRâ Us and Babies âRâ Us, the average unit size was a lot larger than our average unit size with Bed Bath. So the Bed Bath size fits a lot of concepts right now, which is why our confidence is pretty high that single-tenant backfills will be likely for the vast majority of them. Okay. And then, Conor, I appreciate all the detail around the 2023 guidance. I just want to make sure I heard you correctly. So the high end of the guidance range assumes that all Party City, all Bed Bath & Beyond locations are in place and continue to pay rent. And the only adjustment that youâve made in guidance is the $1.3 million expected impact from the two Cineworld locations. Is that correct? No. The midpoint of guidance assumes that Bed Bath, we recapture all the Bed Bath locations in the second quarter. And the high end assumes that Bed Bath is in for the entire year. Party City, we made an explicit assumption around each individual space where we expect to potentially recapture as we have conversations with them post-bankruptcy filing. So I isolated my comments to Bed Bath just given the fluid situation, for lack of a better phrase, in the last 48 hours. But obviously, thereâs a multitude of other factors. The budget or the midpoint also impacts or incorporates the Cineworld comments you mentioned as well. So again, weâre just trying to isolate Bed Bath for the top and the midpoint of the range. Hey guys. Good morning. Just following up on maybe just specifically, 250 basis points of credit loss in same-store. Kind of what does that translate to for FFO purposes? And could you break that out into maybe how much of thatâs already on a cash basis accounting versus accrual? Craig, Iâm struggling with the first part of the question, how that translates to FFO. I mean the simple way, if you took 250 basis points of our same-store run rate, I mean, the vast majority of our NOI is included in same-store. Youâll probably get a decent dollar amount. My guess is, just thinking about this off the top of my head, itâs probably $8 million to $10 million at the midpoint, somewhere around there in terms of total dollars. And then the second part of your question, Iâm sorry, I donât follow that one as well, the cash basis accrual question. Are all the tenants on your watch list or Bed Bath, Party City, are they already being accounted for on a cash basis? Or are they â is there going to be a straight line that needs to be written off? Iâm just trying to get a sense of the FFO impact if we see Bed Bath file from straight line versus just cash rents disappearing. And how â maybe what percent of your tenant base is on cash basis accounting today versus accrual? Yes. So we donât specifically identify which tenants are not on a cash basis until â or if they have filed for bankruptcy. What I would just say to you, Craig, is every tenant I mentioned in my script, thereâs no ARR on the balance sheet at year-end. So if any of the tenants that I mentioned file or continue on with their bankruptcy process, thereâs no impact to us from straight line whatever it might be ARR on the balance sheet. So thatâs the easy one. In terms of percentage of cash basis, I canât recall off the top of my head, the number of tenants is lower from the end of the year. As I mentioned in my prepared remarks, we had a $300,000 good guy in terms of the reversal from taking cash to tenants off cash basis, but I canât recall off the top of my head with the percentage, but itâs lower by count from the end of the year. Okay. Then I think in the presentation, you guys have said Party City didnât pay rent for January. Is that â is that just a stub period following the bankruptcy announcement? And then that should â because they havenât rejected any leases kind of that should come back on in February and beyond? Yes. So for Party City, they didnât pay the majority of their locations rent in January. There were a couple of paid. Itâs not rare to see that in a bankruptcy process, where some rents get paid as part of kind of some confusion ahead of the process. So the majority of rents were not paid. We obviously, to your point, called that out in our slides. They have paid February rent. And to your point, as long as they are in occupancy, theyâre required to pay rent as well. Bed Bath has not paid us February rent. They have not filed for bankruptcies. So that rent is required. So you should expect us to pursue that collection as prior leases or contracts. So again, itâs a fluid situation. But that is something to keep in mind. Itâs a really good point to bring up, Craig, the kind of prolonged period of rent payments as part of the bankruptcy process. To your point, typically, thereâs some rent unpaid the months or the months that the tenant is filing for bankruptcy. But then theyâre obligated to pay for the remainder of â until they reject the lease. If you recall back in 2020, Pier 1 actually occupied our space for as much as nine months for some locations. So the impact of 2022 might not â 2023, excuse me, might not be as significant for some tenants, depending on when they file when they reject leases. But obviously, weâll â as that process unfolds, weâll update folks over the course of the year. Okay. Thatâs helpful. Then just one last one. As we think about kind of CapEx here with all these moving parts about maybe recapturing stores and the commencement timing maybe in 2024, how should we think about kind of CapEx spend here for 2023 and 2024 versus sort of a normalized run rate? Yes, itâs a good question. So 2023 versus 2022 should be very similar in terms of total dollars, Craig. And I mentioned in my remarks, even at the low end of the range, including that CapEx budget, you still have $35 million plus of retained cash flow. For 2024 and 2025, weâll see how the Party City bankruptcy process plays out. Weâll see how the Bed Bath news over the last 48 hours plays out. But obviously, if we get fewer spaces back, I would expect a dramatic decline in CapEx. And if we get more spaces back, then I think that youâll see kind of a steady state. The other piece to keep in mind is, as David mentioned in his prepared remarks, we are buying more convenience assets, and convenience as a percentage of the portfolio is increasing. One of the key kind of pieces or tenants behind why we like that property type so much is the lack of CapEx. So I would imagine for the entire portfolio, CapEx as percentage of NOI will continue to decline just as convenience increase as a percentage of the overall portfolio market share. But again, the big dollars will depend over the next two years, really on what happens with a couple of tenants that we mentioned in our prepared remarks. Hey, good morning. So I wanted to ask about capital allocation. I think you outlined $100 million of net investments as part of the guide. So Iâm curious how youâre thinking about prioritizing that today. Youâve been actively buying back stock. Youâre doing more convenience deals as you outlined. And you still have the outstanding preferred at 6 and 3, I believe. So I guess can you give us a sense of how youâre considering these various options on the menu? Thank you. Sure, Haendel. I mean I think our strategy going forward at this point is similar to what youâve seen in the last year or two, which is that all options are on the table. Weâre actively in the market trying to find more convenience assets from sellers that are willing to sell at a price that we want. And weâre also keeping a pretty close eye on our share price. I mean those are the two activities that I think weâre most focused on. But I think that we can make a decision as we get through the year. Fair enough. I think the follow-up I would have is regarding just transactions. I guess Iâm curious what youâre seeing out there in the marketplace. Youâve been active buyer, seller, bid-ask spread. What do you think cap rates are for the type of centers youâre interested in? And then maybe some color on the cap rates for the assets you have under contract. Thanks. Well, my â as you can imagine, we figured this would be an important topic for all of the management teams in the cycles, where cap rates and whatâs happening. I think all of us that see debt costs rising had assumed that cap rates would follow. And I think at this point, the lack of volume of deals that are actually closing means that thereâs still a pretty wide bid-ask spread. So, on my summary simply that the sellers want to see pricing from six months ago, and the buyers want to see pricing for six months from now. And therefore, very few transactions are actually taking place. And we were able to sell three fairly sizable properties in the fourth quarter. But the buyers of those properties tended to be something unique. It was a local person that always wanted it, it was a 1031 buyer that needed to shield proceeds. And on the buy side, weâve made a number of offers to the buy assets that have been rejected. Weâve also made a number of assets that have been accepted. So I think the bid-ask spread is at least 100 basis points. And I would look to see that close a little bit tighter through the end of the year. Thatâs about all I can come up with, honestly, Haendel. Fair enough. And I understand the market is pretty solid out there. Last one, if I could, just curious on the comments on the convenience assets you guys have been buying more of. Is there a thought here on the sizing of perhaps how large that could be as a part of the portfolio? Just curious how youâre initially thinking about the opportunity here in relation to your portfolio? Thanks. Well, I think weâre very convinced about the thesis. Weâve seen good results from what we bought to date. And so as much as youâve seen us recycling in the last year, I think weâll continue to do so. As long as we see opportunity, thatâs one of the key areas where weâd like to place capital. Good morning, everybody. I guess, David, on Bed Bath, you meant that there is a liquidation here. I mean how long do you think it would take to sort of backfill that space, given that even these days, it takes long to get permits, et cetera? Iâm just trying to understand sort of the timing to get some of that rent back in due time. Yes, Samir, itâs â if you look back at the last â the whole last cycle, the last 10 years, normally, you would expect 18 to 24 months of downtime before rent commences for larger box spaces. I think whatâs different today is that the demand is so strong and the demand is primarily from single-tenant backfills. And the single tenant backfill significantly reduces the permit time and the construction time required to deliver that space. So in my prepared remarks, one of the things that I mentioned that you could reference is that I would expect that almost all of the Bed Bath spaces if we get them back soon will be leased by the end of the year, which means that we would expect rent commencements to be sometime towards the end of next year. So maybe a little shorter than a traditional cycle, but in some cases, you canât really shorten it tremendously. Okay, got it. And then I guess my second question is, on the convenience in the unanchored centers as it relates to those. I mean, whatâs the risk to these tenants in a downturn? Just trying to understand that a little bit more. I think the risk in â I mean, any small shop is at risk of a recession just like a large tenant is. And that's why credit becomes extremely important. So we tend to focus on convenience assets that don't require some other anchor to draw traffic. They tend to be right up on the curve line. They tend to have high traffic counts and the credit, if you look at our tenant roster, it's pretty much national chains. There's always going to be some local shops. And in any recession, I would expect that we would lose some local shops. The difference really is what's the cost to replace that shop when the economy turns? And the reason the convenience assets are really intriguing to us is that the sheer volume of tenants that want to be in small shop space is up along the curb, don't really take as much capital to replace as a larger tenant does, and they don't change their square footage very frequently. So yes, I would still expect in a recession that the convenience assets would see a decline in occupancy. But I think the cost to bring that occupancy back up and the changing in the direction of the economy would be much less than it is in traditional anchored centers. And Samir, to David's point, we have disclosure in our slides on the tenant roster, which you can see at Starbucks, Total Wine, JPMorgan, FedEx, et cetera. So each of the assets we've purchased to-date have had the vast majority of NOI from national tenants, which is consistent with the rest of the portfolio. So if you look at our â I know you're focused on this, national local percentage of ABR, it really hasn't moved much despite the fact that 10% of the portfolio is now in convenience. So the reason why, obviously, is because the vast majority of these are national anchored. So again, that helps mitigate some of the risk to David's point, but obviously, not all the risk. Hi, thanks guys. This convenience center thing, which, I guess, maybe, David, you've been spending some time with Jeff Edison as well because, he's telling some of the benefits of the small shop and the resiliency. That it's very intriguing as you guys know, I've spent some time with you guys to understand it a little bit better as well. But I do think that it's still such a small part of your portfolio. At what point do you think we can call you a convenience center owner? And will you break down? Because I would imagine that your metrics for that portfolio are significantly better than your legacy portfolio in terms of same-store NOI growth and net effective rental growth and obviously, lower leasing costs as well. When can we expect to see that portion of the portfolio broken down in some more granular detail just to get people more convinced that this is a viable and intriguing aspect of the shopping center space? Yes. Floris, there's a lot to unpack there, and I'll start with a couple of points. Look, it's 10% of the portfolio. We're still a $5 billion enterprise and it's a small percentage relative. So we're a long ways from, I would say, called segment reporting or providing additional detail. What I will tell you, though to your point, it actually is dilutive to same-store for the first couple of years. And the reason why is the vast majority of these assets are very heavily leased and so I have to call it 2% to 3% NOI CAGRs, but that's coming just from fixed bumps, renewals, et cetera. The larger kind of anchored properties, whether that's our grocery portfolio, which is also a fairly significant wealth to enterprise, or our power center assets have significant occupancy upside. That's what's in the sign not open, the leased not occupied gap. So it's funny. And actually, the first couple of years in the model, it's dilutive to same-store. But you're right on other metrics, they're net effective rents, whatever it might be, you do have better metrics. So again, it's 10% of the portfolio. We really like the thesis. We're investing in it, but we're a ways off from providing additional disclosure around economics regardless of property type. Dave, I don't know, if you'd add anything to it. And then maybe my follow-up, the cap rate on the $158 million of asset sales that occurred in the fourth quarter? Hey, good morning. Two questions. First off, Conor. On the guidance, if I hear correctly, has been asked a lot several times, the midpoint assumes you get all the Bed Bath back in the second quarter. It already assumes the initial hit from Cineworld. You're also including 250 bps of bad debt. So it seems like the midpoint is baking in a lot of, call it, damage, if you will. So what would get you to the low end? Is the low end just a buffer in case bankruptcies or credit explodes? Because otherwise, it really seems like you guys have put a lot of stuff into the bucket to get to the midpoint, which then seems the low end is pretty draconian. I just wanted to understand if that's the correct way to think about it. Yes, it's a good question, Alex. So I'll unpack it in a couple different ways. So the midpoint of guidance assumes that a specific assumption around Cineworld and Party City, i.e., recapture some locations, and we have the rent agreements with Cineworld. The 250 basis points includes the impact from Bed Bath over the course of the year. We don't know exactly if or when we'll recapture them. But it's fair to assume the midpoint is essentially â we recapture all the stores in the second quarter. What gets us to the bottom of the range is if there's bankruptcies on top of the 250, so the reserve is not great enough. Also, look, investment volume and rent commencements for the other two factors I mentioned. So if we aren't able to deploy capital at the returns that David mentioned that we're targeting, and/or rent commencements flipped for whatever reason, we haven't had that happen. But it certainly is a risk given in all the moving pieces and permitting things that Samir mentioned and others have called out as well. So the bottom of the range is there for a reason. It's if bankruptcies are greater than we budgeted and then if we can't deploy capital or rent timing slip. But there's nothing else I could say about it. It feels prudent in light of all the kind of ongoing conditions to date. And then the second question is, David, you mentioned right now the demand is hot, you want to strike, recapture space and take advantage of all the tenants who basically spoke or have spoken for all the potential available space that could come back. What would cause you â or what signs would you have to see to have tenants cooling? And the reason I say that is â we've already endured significant inflation. We've endured the consumer dipping into their savings, gas prices. I mean, carton of eggs go down the list. And if none of that has this weighted tenants from remaining voracious for leasing, what do you think would cause them, the tenants, to deviate from their current trajectory to take space? I mean from a â purely from a landlord's perspective, the thing you always used to worry about is supply. But there is no new supply under construction. And so that really leaves the demand side. And the tenants today are so â have such an appetite for wealthy suburban communities because of all the things you mentioned. And you're right, they've endured a lot and they're still expanding and growing. I think, Alex, if I had to put a name on it, I would just say sentiment. Because just like any other business, retailers, when they sign 10-year commitments to open stores, a lot of that is based on their confidence as a business. If sentiment changes somehow, leasing will slow down fast. It always starts with a trickle and it ends very quickly. So I don't see anything right now that's stopping the tenant demand. We just had a long leasing call yesterday and went through all of our assets in all of our regions. And the demand is still very robust. I mean we're getting LOIs from tenants on spaces that we don't even control yet. We have tenants asking for 2024 and 2025 openings. So it feels to me like the demand is really strong. I agree with you that I don't see anything today that's going to slow that down. But sentiment is the one thing that can change quickly in retail. Yes. The only thing I'd add, Alex, remember, we own 101 wholly owned properties. We are this tiny little subset in the grand scheme of the national retail landscape. And so our comments are reflective of the assets we own, right. It might be a different story if you're asking some with a larger footprint and it's more of a kind of national proxy. But to David's point, for our submarkets where we can very closely track supply, it feels like a very different conversation. Hey, just two quick ones. Just going back to the convenience center. Trying to get a better sense of just the secret sauce and how you're thinking about it, because it seems like everybody could sort of figure out where the high demographics are on the demos. That's clearly important. But is there sort of anything else that you guys look at or do differently? Or is the thought that you just have sort of a pretty good cost of capital and you could be opportunistic when things pop up? Yes. The big change is mobile phone data. I mean four years ago, I don't think convenience was really considered an asset class. When you bought small shops, you bought them based on the assumption that consumers are coming to an anchor. You can measure how the anchor is doing, and therefore, you can deduce how well the shops are going to do. What's really changed is the mobile phone data, which allows you to figure out where your customers are coming from, are they indeed crossing over to the anchors? Is the anchor really drawing that customer traffic? And so we've been using that data to focus on assets that are purely based on convenience. It's the traffic counts nearby. It's the demographics, it's the time of day, it's a direction of travel. The easiest way to put it is if you're buying a Starbucks with a drive-through, you want to be on the going to work side of the road. If you're maybe a convenience restaurant, it's the QSR, you might want to be on the going home side of the road. But those are anecdotes pre data. Now the data is so robust, I think we can use it in a variety of ways to feel confident that we can buy assets from local owners that are not using that information, and it can help us when we re-lease space at higher rents. So that, I would say, is a lot of what we're using to define our growth. Yes, I would expand on that and say it's a lot more than just our cost of capital. And we've got now five years of experience buying these assets. There's a lot that we've learned. So I'd say our transactions team has a huge competitive advantage there. Obviously, David mentioned our Regional Vice President. So having boots on the ground and teams locally that we can source deals either from them or have them help and underwrite is a huge advantage as well. And then as Samir mentioned, that from a tenant perspective, these are tenants that we have across our assets with the grocery or [ power ] as well. So having those existing relationships where we can call, ask about performance, ask about sales and make sure that they're seeing what we own as well as another advantage. So I would say it's a multitude of factors well in excess of just the cost of capital that allows us to really focus on this and expand it. Great. And then my second one was just on the occupancy question. Just I'm looking at sort of â I think this is a small shop lease rate at sort of a 90, 90.3. Just trying to get a sense of demand is pretty robust, as you mentioned earlier. In your mind, how does that go from here? Yes, I'll start with occupancy just for this year. I mean, based off our budget, we are expecting occupancy to decline in the first half of the year. Whether it's from bankruptcies or just the return of seasonality, you think back the last two years, the commence rate has increased from the fourth quarter to the first quarter, that is atypical. And so to David's point, we were more aggressive in the fourth quarter and the first quarter for tenants that came to us and either wanted a flat rent or rent reduction, moving on and finding a better tenant. So occupancy in general, will decline in the first half of the year. Obviously, bankruptcies will have the biggest impact of that. But you'll just see a return of seasonality, Ron. We haven't put out a target number for small shop lease rate. We're over 90%. It's a high watermark for the portfolio. We feel really good about it. It's fair to assume we're going to try to push that even higher. But at some point, you're going to run into a kind of structural or frictional vacancy, and we're probably only a couple of hundred basis points away from that. Hi, good morning. Just to clarify, the 250 basis point credit loss, is that only related to Bed Bath & Beyond, Party and Regal? Or are there other tenants factored in? No. So Party City and Regal are part of our budget. They're not included in the 250 basis point. The 250 basis point accounts for our bad debt assumption for the course of the year that typically relates to shops. And then on top of that, as a bankruptcy assumption. Tenants that have not filed for bankruptcy, including Bed Bath & Beyond, would be included in there. But it is important, Linda, to think through the timing and the impact over the course of the year. Meaning if someone filed today, they wouldn't be out for two to three months and they're required to pay rent over that time period. So the 250 includes tenants that have not filed to date. And so that would include potentially Bed Bath and others. But Party City and Cineworld are part of our budget and not included in that 250 basis point reserve. Got it. And then did you see rent commencements slip in 2022 in the context of just a slower pace in terms of getting new tenants signed and open? No, I think it's been a source of upside for us every single quarter over the course of the year, and been a pleasant surprise given all the difficulties. So kudos to our operational team to making sure it's a tailwind and not a headwind for us. And then just broadly, what does the rent upside look like on the boxes that you might get back for Bed Bath and Party City? And maybe you could just talk about the new lease spread strength in 4Q. Linda, it's David. If you look back at the 73 boxes we've leased in the last couple of years, which is a very high number, I think we've got very good data on the market spread. So I think from a Bed Bath & Beyond perspective, I would expect the market spreads to be about 20% plus. On Party City, I think it's a much wider range, as I mentioned earlier. It's probably between 5% and 30% depending on where the box is. Is it in line? Is it on an outparcel? Should it be subdivided? Is the demand for rents higher from shops than it is a 10,000 square foot user? So for Bed Bath 20% plus, for Party City somewhere between 5% and 30% depending on whether we split it or do single-tenant backfills. Hi, two quick ones here. First of all, David, when you were talking about convenience being 10% of the portfolio, what metric is that based on? Is that investment count, ABR, et cetera? And then maybe going back to occupancy. I know they're obviously moving parts with Bed Bath and Party City and things like that. But if we're looking at your 92.5% occupied rate, what's embedded in guidance where that trends to by year-end? Is it simple as, I guess, going to Page 6 in your slide deck and tracking the ABR coming online there? Mike, it's Conor. So the metric I mentioned, 10%, is on ABR. It's â I think it's like 9.4%, 9.5%. Just under 10% for our share of ABR is the convenience portfolio. And in terms of occupancy, to my earlier comments, I would expect a return to seasonality. So a modest decline just on kind of natural expirations in the first quarter. And then depending on what happens with Party City and other tenants we mentioned, it could even move lower. Over the course of the year, to your point on Page 6, with rent commencements, I would expect it to come back up. And so the year-end number I would expect would end up pretty close to where we started, maybe marginally higher. And the net result is obviously putting us in the guidance range of same-store, call it, 75 basis points at the midpoint. So I don't know if that helps, but I'm happy to expand on that offline. [Operator Instructions] Our next question is from Sunny Ali, pardon me. That will conclude our question-and-answer session. I'd like to turn the conference back over to David Lukes for any closing remarks.
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EarningCall_703
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Good day, and welcome to the Mondelez International Fourth Quarter 2022 and Full-Year Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Mondelez management and the question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Mr. Shep Dunlap, Vice President, Investor Relations for Mondelez. Sir, please go ahead. Good afternoon, and thank you for joining us. With me today are Dirk Van de Put, our Chairman and CEO; and Luca Zaramella, our CFO. Earlier today, we sent out our press release and presentation slides, which are available on our website. During this call, we'll make forward-looking statements about the Company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K, 10-Q and 8-K filings for more details on our forward-looking statements. As we discuss our results today, unless noted as reported, we'll be referencing our non-GAAP financial measures, which adjust for certain items included in our GAAP results. In addition, we provide our year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. Today, Dirk will provide a business and strategy update, followed by review of our financial results and outlook by Luca. We will close with Q&A. Thanks, Shep, and thanks to everyone for joining the call today. I will start on Slide 4. I am pleased to share that we delivered another record year, not only in size of the company, but also in profit dollar growth. Our strong topline performance was driven by excellent pricing execution and continued volume strength as consumers all over the world remain loyal to our iconic snacking brands. We delivered strong topline performance in both emerging and developed markets while continuing to exercise cost discipline. In keeping with our strategy of achieving global snacking leadership, we continue investing in our brands and capabilities while strengthening our portfolio with important bolt-on acquisitions that increase our exposure to attractive and growing categories and profit pools. We executed well against our long-term algorithm, returning $4 billion in capital to shareholders. Perhaps most importantly, we continue to invest in our people, building a deep and diverse team whose local routes and global insights enable us to stay a step ahead of rapidly changing customer and consumer tastes. We are confident that the strength of our brands, our proven strategy, our continued investments, and especially our great people position us well to achieve our long-term financial targets in 2023 and beyond. Along with our financial performance, I'm pleased to share that we made significant progress towards our environmental, social and governance agenda. You recall from our investor update last spring that we have elevated sustainability as the fourth pillar of our growth acceleration strategy. That's because we firmly believe that helping to drive positive change at scale is an integral part of our value creation with positive returns for all our stakeholders. Let me share a few highlights on Slide 5. First, we continued to advance our leadership in more sustainably sourcing cocoa and wheat, our two most critical ingredients. We launched the next chapter of Cocoa Life, our signature cocoa sourcing program with another $600 million commitment, bringing our total investment to $1 billion. Cocoa Life is working to lift up the people and restore landscapes where cocoa grows. Similarly, we will launch in the first quarter of 2023, an updated vision for our Harmony Wheat program focused on more sustainably sourcing wheat across the European Union. We continued advancing our Light and Right packaging strategy. For example, our Cadbury Dairy Milk chocolate in the United Kingdom, Australia and New Zealand now are wrapped in packaging with more than 30% recycled content. We also continue to make progress on tackling climate change. We expanded our use of renewable energy to reduce our Scope 1 and 2 greenhouse emissions, and in about 80% of farms in our Cocoa Life program in West Africa, we achieved near to no deforestation, reducing Scope 3 emissions. Since 2018, we have reduced our CO2 emissions by more than 20%. We also remain focused on advancing diversity, equity, and inclusion because we firmly believe that diverse perspectives and viewpoints make our company stronger while helping us stay closer to our customers and consumers. As an example, we increase the gender and racial diversity of our Board of Directors with the appointment of industry leading experts. We are proud of team Mondelez continued success in making important impacts on these critical environmental, social and [governments] issues, while creating value for our shareholders and other key stakeholders. Turning to Slide 6, you can see that we had a record year despite challenging operating conditions. We view our strong performance in 2022 as evidence that our long-term strategy continues to deliver for our stakeholders. Organic volume grew 2.7% for the year on pace with recent years, demonstrating the continued strength of our resilient brands and categories even in an inflationary environment. Organic net revenue grew by 12.3%, significantly lapping the prior three years performance with broad-based growth across all regions. We also delivered record adjusted gross profit dollar growth of $1.4 billion. We are proud of our team's ability to offset major cost pressures to enable us to continue investing in the business, which will drive further growth acceleration. Accordingly, we increased A&C investment by double-digit, helping to keep our brand top of mind for both consumers and customers. These pricing cost management an investing activities translated into strong operating income growth of more than $580 million. We remain confident that our virtuous cycle of strong gross profit dollar growth, which fuels local first commercial investment and execution, will continue to consistently deliver attractive profit growth. We are especially confident that our unique growth strategy centered on acceleration and focus will enable us to continue to successfully navigate the dynamic global operating environment, differentiating us from many other food companies. On Slide 7, you can see that despite the volatile environment, we have the right setup and strategy to ensure we deliver against our growth algorithm. Momentum in emerging markets, with particularly China and India showing strong results combined with the resilience of our categories as evidenced by strong volume growth is helping us to offset the challenges that many companies are facing, such as global cost inflation, the energy crisis, recession concerns in Europe and supply chain volatility. Our consumer continues to hold up well across most geographies, prioritizing snacking and buying more volumes of our products despite significant price increases. Our U.S. supply chain is gradually getting back to normal after a long period of sub-optimal customer service triggered by the 2021 strike and the subsequent overall supply chain volatility. We are continuing to implement appropriate incremental price increases across key markets, including Europe. We also continue to take appropriate action to hedge our commodity costs while continuing to advance our ongoing productivity initiatives. All of the above allows us to increase our investment in brands and capabilities every year, which underpin our growth momentum. Our ability to deliver real dollar growth enables us to make sound and choiceful decisions that drive the business forward and position us well for continued future growth. Slide 8 shows that our performance in 2022 gives us confidence that we have not only the right growth plan, but also the right execution to deliver it. Our core categories of chocolate and biscuits remain attractive and durable in both developed and emerging markets. We are accelerating our focus on these core categories because they have attractive growth and profitability characteristics and still a significant headroom in terms of penetration and per capita consumption. Our long-term vision is to generate 90% of revenue through these two core categories. We hit an exciting milestone in the biscuit category this year as Oreo surpassed $4 billion in global net revenue, further solidifying its position as the world's favorite cookie. Our acquisitions of Chipita and Clif Bar helped us expand our footprint in the growing Baked Snacks segment. While our acquisition of Ricolino helped us fill an important geographic white space, establishing a strong foothold in a priority emerging market of Mexico. We also continue to expand our presence in high growth channels, segments and price tiers. For example, silk premium chocolate doubled its prior year penetration in India, while in emerging markets, we added more than 400,000 additional outlets, and we have significant runway ahead of us. These are just a few examples of the ways our teams remain relentlessly focused on delivering the growth and acceleration plan we outlined at our Investor Day last spring. As Slide 9 indicates, we continue working hard to reshape our portfolio, which will accelerate our growth, and I'm pleased to share that we made significant progress in 2022. As we continue to drive focus on chocolate, biscuits and baked snacks, our nine strategic acquisitions since 2018 have enabled us to enter exciting adjacent spaces such as wellbeing and premium. They also have strengthened our presence in key geographies and expanded our trade coverage. Together, these acquisitions add nearly $3 billion in revenues and are all growing high single- or double-digit. Strong execution against our proven integration playbook enabled us to rapidly realize the value of the three acquisitions we closed in 2022. The Chipita business provides us an important platform to further accelerate growth in the attractive biscuits and baked snacks category. Similarly, Clif Bar expands our global snack bar business to more than $1 billion. Additionally, Ricolino Mexico's leading confectionary company doubles the size of our business and more than triples our routes to market in Mexico. Along with successfully integrating these three businesses, we announced in late 2022 the sale of our developed market gum business to Perfetti Van Melle for an implied EBITDA multiple of about 15x. This divesture will help fund these recent acquisitions and streamline our portfolio. We continue to have the Halls business, which has been performing well, but still intend to divest it over time in a way that maximizes value. In conclusion, I'm pleased to reiterate that 2022 was a record year. Our focus and portfolio reshaping strategy is working and we are well positioned to continue driving attractive growth in 2023 and beyond. By continuing to double down on the attractive chocolate, biscuits and baked snacks categories, investing in our iconic brands, focusing on operational execution and cost discipline, and empowering our great people, I am confident that we can deliver strong performance for years to come. Thank you, Dirk, and good afternoon, everyone. In 2022, we delivered unprecedentedly strong results, starting with double-digit topline growth through both volume and value, which in turn translated into gross profit dollar growth, allowing the investment in the business, solid earnings and cash flow. Growth was also broad-based in terms of regions, categories and brands. Revenue growth was 12.3% and 15.4% for the year and the quarter, respectively. Importantly, nearly 3 points of full-year growth and 1.6 point of Q4 came from volume mix. Emerging markets increased 22% for the year and 24.7% for the quarter with strong performance across a significant majority of countries, including Brazil, China, India, Russia, Mexico, the Western Andean countries, and Southeast Asia. More than 7 points of full-year growth in emerging market was driven by volume mix, confirming the great momentum of these geographies. Developed markets grew 7% for the year, and 10.5% for the quarter. Volume mix in developed markets was flat in Q4 as there were still some ongoing negotiations at the beginning of the quarter in the EU, that resulted in customer disruption, which in turn offset some good momentum in countries like the U.S, Canada, Australia, and others. Those negotiations are now fully closed, but we have just announced another pricing round in Europe. Turning to portfolio performance on Slide 12. Our chocolate and biscuit businesses both delivered double-digit growth, while gum and candy continue to recover with improved mobility. Biscuits grew 11.7% for the year and 18% for the quarter, supported by significant volume growth. Oreo, Ritz, Chips Ahoy!, Tate's, Give & Go and Club Social were among the brands that performed very well. Chocolate grew more than 10% for both the year and quarter with significant growth across both developed and emerging markets. Volume mix was virtually flat in Q4 due to customer disruption in Europe. Emerging market posted exceptional double-digit growth for the year and the quarter. Cadbury Dairy Milk, Milka, Lacta and Toblerone, all delivered robust growth. Gum and candy grew 25% for the year and the quarter. Brazil, Mexico, and the Western Andean area all performed well. Now let's review market share performance on Slide 13. We held or gained share in 40% of our revenue base, which includes 15 points of headwinds coming from the U.S. supply chain, that while improving, still weighs on the full-year share performance. Chocolate held or gained share in 50% of our revenue base. This number include a strong Christmas season, which gains in several key countries, but also reflect customer disruption in Europe. Retailer and consumer activities are now vastly restored in the region, but the price that we just announced might have a negative impact in the first two quarters of 2023 as far as share goes. Our biscuit business held or gained share in 25% of our revenue base. This includes 30 points of headwind from the U.S. supply constraint and customer disruption in Europe. The U.S. made significant service level improvements in the back half of 2022 narrowing share losses and we expect this trajectory to continue to improve in 2023. Turning to Page 14. For the year, we delivered strong double-digit OI dollar growth, driven by a record high increasing gross profit of nearly $1.4 billion. In Q4, we also saw strong double-digit OI and gross profit dollar growth. Moving to regional performance on Slide 15. Europe grew 7.4% for the year and 8.7% for the quarter. Thanks to strong execution, volume mix was flat for the year despite customer disruption in Q3 and Q4. Brand support remains a priority in the region and we have continued to increase our A&C. OI dollars for the year were up 4.3% and 12.4% for the quarter and the year, respectively. Q4 profitability saw a return to growth due to an additional price increase and the emerging market performance within the segment. To close on Europe, we continue to see more pronounced inflation in this region based on energy and other input costs. We also expect to see challenge margins in Q1 given our expectations of customer disruption. Although we saw a small uptick in elasticity for Q4, European consumer has continued to hold up well and the preference for snacking and trusted brands remains strong with elasticity levels below normal. North America grew 12.3% for the full-year and 19.5% for the quarter, higher pricing, robust volume mix and strength from our ventures such as Tate's and Give & Go fueled those increases. Volume mix was 0.8% for the year and 4.2% for the quarter. North America profit increased 18.7% for the year and 37.3% for the quarter due to strong pricing and healthy volume results. Besides the benefits of our pricing execution, the consumer remains resilient and elasticity continues to be well below normal levels. AMEA grew 12.5% for the year and 13.6% for the quarter with strong volume growth for both periods. India grew strong double-digit for the year and quarter, driven by both chocolate and biscuit. China increased high-single digits for the year despite COVID restrictions in certain cities and posted double-digit growth for the quarter. Finally, Southeast Asia also delivered strong double-digit growth for both periods. AMEA increased OI dollars by 9.8% for the year and 8.8% for the quarter continuing their virtual cycle. Latin America grew 31.9% for the year and 37.1% for the quarter with robust volume mix growth coupled with strong price contributions. All key markets posted double-digit increases for the quarter. Latin America has had its strongest year ever in terms of OI delivery. In fact, OI dollars in Latin America grew 48.5% for the year and more than 45% for the quarter. Broad-based volume growth, pricing and ongoing improvements from the gum and candy categories drove these results. Next to EPS on Slide 16. Full-year EPS grew 11.9% in constant currency. This growth was primarily driven by operating gains. And despite very significant currency headwinds, we grew adjusted EPS as reported ForEx by 3.5%. Turning to Slide 17. We delivered $3 billion of free cash flow for the full-year, including a one-time expense of $300 million related to the Clif acquisition and buyout of its employee stock ownership plan. Turning to outlook on Page 19. For the current year, we expect to deliver on or in excess of our long-term algorithm for all variables. There might still be meaningful variability for the year, so we expect plus 5% to plus 7% organic net revenue growth, which stands from the higher pricing. We also expect on our growth to adjusted EPS of high single-digit. Somewhat like 2022, we expect a slightly different shape related to the P&L with higher topline, strong profit dollar growth and lower than historical margin rate given elevated inflation and related pricing away in dollar terms. As far as assumptions grow, we are planning for another year of double-digit inflation with dollars higher than in 2022. This inflation is driven by the continued elevated cost in packaging, energy, ingredients and labor. This input costs are also more pronounced in Europe and some select emerging markets. We also had favorable coverage versus the market in 2022. And although spot rates have been easing in many cases, new hedges are coming at higher levels than what was incorporated in March of last year. We are taking action with a flexible hedging program by using options to minimize risk and volatility, whether commodity rise or fall significantly from current rate. That is to reassure you that in case of commodity price dislocations, we will still be in a position to hit our profit commitment while still investing for growth. In terms of interest expenses, we expect an incremental $90 million for the line associated with the financing of recent acquisitions that we plan to repay later in the year with the developed gum divestiture proceed. We are planning for a net increase in total pension cost of around $25 million as above the line service cost will be lower and below the line element will be worse due to the rising interest rate. Important to note that due to our strong funding levels, we do not have to make additional contributions to our plan. We will also benefit from the higher OI dollar contribution from the acquisitions of Clif and Ricolino and their related synergies. In terms of phasing, we expect Q1 to be lower from a margin rate perspective due to lower volumes in Europe associated with the expected customer disruptions and Chinese New Year phasing. Disruption in Europe might also continue into Q2. We are expecting $0.04 of EPS headwinds related to ForEx. With respect to free cash flow, we expect another strong year with $3.3 billion plus absent any significant one-time non-operating item. In this outlook, we also expect an adjusted effective tax rate in the low to mid-20s based on what we know today and a share repurchase of around $2 billion. Great. Thanks so much. Two questions for me, if I could. First, Dirk, maybe you could provide a bit of a state of the union in key markets, especially in Europe in terms of just what you're seeing with the consumer in response to recent pricing and if there's any sort of early update on what you're hearing from the most recently announced pricing in Europe? And then, Luca, you talked a little bit about a different shape to the year than would be typical. And it sounds like that's mostly incremental inflation and sort of the mechanics of pricing impacting margin. But just wanted to make sure that's kind of what you see it as as opposed to anything that could be deemed more structural that we should be concerned about when it comes to sort of the margin percentage compression that could still be the case, I guess, for the full-year a bit. Thanks so much. Okay. Thank you, Andrew. Yes. I would say we feel good if I look at the total business about the strength of our portfolio and the diversification that we have within that portfolio. So when there are some areas that are bit of a more difficult situation, we always have other areas that compensate for that. And so we can keep on delivering very good results. And it goes across brands, regions and categories for us. I also feel good about the strong topline performance with good execution of our pricing, but also for the year, almost 3 points of volume growth, which is in line with the previous years of volume growth. And I think that is a testimony to the strength of our brands and the categories. Share is obviously below expectations, but there is very good explanations for that because we had disruptions in our U.S. supply chain. And then also in Q3 and Q4, disruption with our European customers because of the price increases. I think also something that we feel particularly good about is our broad-based strength in emerging markets from a top, but also very importantly, from a bottom line perspective. And as you know, we're very focused on growing dollars in the gross profit line and the $1.4 billion is a very strong result, which enables us to offset some of the extra costs we're seeing, but also to significantly continuing to invest in our brands and increase our bottom line. Our margins, of course, are impacted by elevated inflation. It's something that it has a denominated effect as we price against that, but we do expect that over time, margins will come back. And then despite currency headwinds, we are having in constant â or in adjusted EPS, we have double-digit, but we still grew real EPS by 3.5%. So overall, I would say we feel very good about the results. If I look at the consumer â the volume growth rates, which is what we are looking for to see really how strong the categories are holding up really well. We see very good in-home consumption in the U.S. In Europe, there are some signs of a bit of a category slowdown. That's the only region where our categories are slowing in negative volume growth. But I would counter that with very strong volume growth in all our other regions, particularly in places like Brazil, India, China. I think from a competition perspective, we will start to see the differentiation between companies that can continue to invest in their brands and keep a very positive algorithm, while others will have to focus more on costs, and cutting back in this cycle. As it relates to pricing, so the pricing for 2023 in the U.S. has passed and is implemented. So we did that in December. In Europe, we have started discussion with our clients. I would say we are 60% done of what we need to do. So far, so good, but there is obviously still a few weeks and months to go, and we will know more by the end of March, beginning of April, where we stand. But so far, so good, I would say. The other thing I would mention as it relates to the consumer is that the elasticity is still very low. This is a slight uptick in Europe, but still well below the expectations. We are planning for more elasticity in our 2023 outlook, but we still have to see that materialize. The other one, I think is important to mention is that we will have double-digit cost inflation. There's a lot of talk about diminishing inflation. We don't see that at the moment, and that is driven largely by energy, ingredients and labor. Nevertheless, if you take all that together, I think we are positioned well for 2023. Luca will talk a little bit about the different shape of our P&L, but we will be on algorithm with a higher topline, but that is driven to the whole inflationary situation. Yes. Thank you for the question, Andrew. And as it relates to the shape of the P&L, particularly on gross margin, you will see some pressure, particularly in the first part of the year, a result of a couple of things. One, it is elevated inflation and us having particularly good coverage in 2022 and lapping the favorable pipeline that we had in commodity terms in 2022, and the fact that clearly, pricing, particularly for Europe, is not fully implemented yet. The new pricing wave I mean. And that is also compounded by the expectation that we will have some customer disruption kicking in towards the end of Q1 and potentially also into Q2. Having said that, I think when you look at the fundamentals of the business, I feel quite good about emerging markets. You saw the stunning number that we printed for Q4 and for the year. The momentum of those emerging markets is continuing into Q1. We started the year quite strongly. I'm quite happy with the U.S. and North America in general. I think there was an excellent pricing execution. And obviously, as the last pricing wave comes into effect into the P&L, that allows for reinvestment in the business. And I think also you will be positively surprised by share throughout the year. Clearly, EU is a little bit of a watch out. Happy to say that the profitability, as you saw in Q4 improved quite a bit compared to Q3 and that is the testament to the team of the pricing that was implemented. But clearly, there are some unknowns in relation to further pricing and potential disruption, and we have commented on consumers in general. So look, the key assumption here is double-digit inflation. Part of it is driven by the favorable coverage we have. And we will stay disciplined in pricing it away. And as I said in the prepared remarks, if commodities take a more benign impact, we will be able to take advantage of it because we have flexible coverage implemented. I may have missed this, but did you guys by any chance to talk about your expectation of price versus volume mix this year? I recognize it's not something you typically give in guidance, but I'm just trying to get a sense for how to model that a little bit cleaner just given some of the puts and takes? So I'll give you a little bit of a high-level answer. And the answer is, we have planned for modest volume contribution into 2023, and quite frankly, that is the direct outcome of us planning for historical elasticities rather than what we have seen as of recent. So there might be a little bit of an upside versus that assumption. As you dissect the business a little bit more, I believe you're going to see good volume growth in emerging markets, particularly in countries like China, India, Brazil and so on and so forth. You are going to see volume growth in North America. Clearly, there is an element of us replenish in stock with the trade that has a positive impact. But importantly, I think U.S. biscuit is really on solid ground and all the ventures, namely â Give & Go and paid particularly are really delivering volume growth versus last year. And finally, where I think you're going to see volume pressure is in Europe, and that is the direct outcome of potential customer negotiation disruption and relatively higher elasticity than in other places in the world. So volume leverage, I think, will be one important component of the 2023 P&L shape. Three regions, I believe, will be on positive ground in Europe due to disruption, there might be some volume pressure. Overall, I think you're going to see modest volume growth for the year. Very helpful. If I can just ask a quick follow-up. You talked about partly the reason for losing share in 2022 was because of your European customer disruptions, are your competitors not being disrupted as much? I'm just curious, are they not pricing up as much as you? Is it more of a timing issue? It just feels like if everyone's pricing up, maybe there shouldn't be share loss, but I'm missing part of that perhaps? Yes. Well, we have to take into account that our main competitors in Europe are private companies. And what we've seen is that they have not priced as aggressively as we have. We assume that, that eventually will have to come, but that is the main difference between us and competition. And so that is the explanation of the share loss. Some of the â the other competitors have had some events that they lapped of the year before, and that has helped them also to gain some share this year. So those are the two big reasons. I just had a question for you â hi â on â just a follow-up on Europe. If you look at 2022 fiscal 2022, were you able to get pricing up in line with inflation in Europe? And I guess I'm trying to understand if you look at 2023, is there any sort of catch up in pricing you expect in Europe, if that's possible, which may sort of compound some of these issues with share there? Chris, I think as you look at the quarterly gating in 2022, you saw the most pressure in terms of profit delivery in Europe in Q3. And in there, there was the fact that we were running out of hedges for the first part of the year and pricing was not fully implemented. As you saw in Q4, profit is up soundly. And in that context, we also increased investments. So as we close the year, the absolute inflation that you would expect annualized compared to the pricing annualized was a wash. The point here is, as we walk into 2023, there are a couple of events that came into play. One, it is the material energy pressure and the fact that in 2022, we had positive coverage in that area. And the second one is the fact, clearly that we have to price again. So all considered the 2022 inflation that was embedded in the base and the pricing wasn't at worse by the end of the year in terms of annual impact. Now going into 2023, there is more pressure coming and subsequent price required. You are going to see some subpar numbers in terms of profit for Europe, most likely in Q1 and Q2 as a result of pricing not fully implemented yet and customer negotiations. But then by Q3 and Q4, there will be a recovery of margins and profitability in Europe. And again, in this context, the last thing we want to do is to cut on investment, and we will continue to invest A&C regardless of pricing negotiations going on. Okay. Thank you for all that color. That was a good answer there. Then the other question I have was just in relation to China. You had a strong performance there this quarter and through the year. Is that a tough comp for 2023? Or if we see some improvement in mobility and travel, should that help China grow at even faster rate in 2023? I wouldn't say that we are immediately planning for a faster rate in China. But certainly, if you look at the country coming out of the COVID situation and the restrictions starting to ease and the travel restrictions being lifted, on top of that, our plants are open and operational, which was not always the case during the past year. So I think that we will be having a good supply situation, we do have some increased costs, and we will have to deal with that through price increase. But overall, I would expect China to continue with a high single-digit to double-digit growth for next year. The gum business, we expect to come back and we would continue on momentum with the biscuit growth that we've seen. We continue to increase our market share. I see no reason why that would not continue next year also. And so apart from the pricing, all the other indicators for China are pretty positive for us. Not quite sure if that really immediately translates in acceleration, but high-single digits to low double-digit is doable for China for next year. Maybe just one little add. There is a little bit of phasing as it relates to Chinese New Year. So in Q1, you're not going to see double-digit revenue growth. But as Dirk said, the fundamentals of the business are very strong, and the team is executing extremely well in the country. Hey, there. Congrats on the strong finish to the year, by the way. First, on the China New Year, can you help me understand that a little bit more? Is it that you shift, you pulled more into the fourth quarter, so we don't get the benefit in Q1? And also on timing, the North America volume was very robust, certainly more robust than we expected. Is there anything unique or one-time in nature that's helped the health volume in that region this quarter? So let's tackle maybe this last one first. As you think about volume in the U.S., clearly, the share situation is improving. The category despite double-digit pricing is posting volume growth, particularly in Q4. So we saw value and volume growing within the category, as I said, shall improve, but importantly, we are also recuperating service level, and that clearly helps a bit. So I believe all in all, there is a strong foundation in the biscuit business in the U.S. And the second element that has to be taken into account is the fact that what we call ventures, namely Give & Go, Hu and also Tate's are delivering volume and value growth. And we are clearly taking advantage of synergies, particularly in the case of Tate's, we are very pleased with the fact that, that platform going into DSD has delivered material revenue and bottom line growth. And clearly, in the case of Give & Go, we are seeing after price increases, the category thriving and that drives really the volume. In terms of Chinese New Year, China was north of 10% in Q4. And there was, I would say, 3, 4 points of contribution coming out of that 10-plus percent due to Chinese New Year. Clearly, that is a reversal in Q1. But again, fundamentally, the business remains very sound. I think you're going to see continued share gains. And we're not talking about small share gains in the category of biscuits. And again, as the country reopens, one of the things that we missed throughout 2022 was gum growing. And Gum is going to come most likely positive in 2023, and that will help also the bottom line because margins in gum are higher than in biscuits. So hopefully, that addresses your question. Yes. Very helpful. And a good segue into my second question is you brought up gum in margin mix. As we bridge out your margins for the fourth quarter, we've got a very big hole in our margin bridge, suggesting that we're meaningfully underestimating the amount of inflation, or there's some unusual cost or perhaps some much larger mix headwinds than you've contested with for the rest of the year. Can you unpack it for us and give us a little more color because with the price you got and the acceleration, it was just surprising to see margins move so much further south? Yes, I don't think â I mean, mix was positive. So I don't think mix in general is a problem. I think you saw gum and candy growing 25%, that's margin-accretive. I think what was underestimated in general in the modeling that I saw around it is the impact of inflation and the subsequent price that was coming out of it. As we price away dollar for dollar and not for percentage margins, I think the â there was an underestimation of both pricing and the inflation despite the fact that we said very clearly, inflation was double-digit. I think the way you have to think about it is you wouldn't have expected for the year a 3% volume growth, you wouldn't have expected a 1.6% volume mix in Q4, which, by the way, when adjusted for the customer disruption due to Europe in Q4 is again down about 3%. So I think versus what you had in mind, there is much better volume. There is higher inflation, there is higher pricing and the fact that we price dollar for dollar creates a little bit of pressure on the percentage margin. I think in terms of OI margin, you see a good number because obviously, also cost below the line have been kept in control or below GP, I mean. And so that's really all the put and takes that you have within the shape of the P&L. Hi, there. Can I stick with Europe with two questions? The first one, I think you mentioned the category slowdown. And I can't remember whether that was biscuits or chocolate. But is that to do with the high-fat sugar and salt initiative in the U.K.? Or is it just weakness in the consumer in general? And then I have a follow-up? Maybe we'll do first the categories and then I didn't quite understand the question on the weakness of the consumer in the U.K. Okay. So from a category perspective, in Europe, our category performance is obviously different from what we see the overall categories to do. I would say both biscuits and chocolate are showing slightly negative, minus 2%, minus 3%, the overall category in Q4, and that is probably a consequence of the consumer feeling some recession. We're a little bit worse than that driven by customer disruption. But I think that as we go through the first quarter of next year, I think that will gradually come back. I'm talking about the category here. So it's probably understandable seeing the economical situation in Europe that we see a little bit of a slowdown there. As it relates to the U.K., what we see with HFSS is, first of all, there's two limitations that come from HFSS. One is the limit on the location where HFSS products can be sold in the store. And the other one is a promotion and advertising limitation. The second one is not yet being implemented, that will be in October 2024. But so far, we have the change in store. And so it means that you don't find them in checkouts in the queuing area, no more at the store entrants, no more [indiscernible] and so on. If you look at our business there, which is mainly a chocolate business, it is about 60% plant purchase and about 40% is impulse. And obviously, the impulse is affected by this because you have less interruption locations in the store. But the 60% of plant, of course, continues. We have been partnering with the stores to offset this by finding new secondary promotional locations, making our brands stan6d out in the aisle, moving the singles category, which was the checkouts to the food-to-go areas and so on. So overall, I would say that the initial signs, while showing an effect on sales in the category and for our business, it is less or less bad than we would have expected. So in-store execution seems to be helping and it's helping to mitigate the less off-shelf display that we have. Smaller stores are sort of suffering a little bit more because they have less space to make up for what was lost. So if I look at the category volumes they're down 1.1%, which is not that bad in December for the last 12 weeks, down about 4.5%. But if you take into account that the off-shelf distribution is down by about 30% because of those locations. I would say that the category is holding up quite well as it relates to the changes we're seeing in-store. And so I would say, yes, there is an effect, but it's far from the magnitude that we could have taken, and I'm expecting that the consumer gets used to this new setup of the stores that the volume growth will come back. Great. And thereâs a super quick follow-up. I'm curious about these customer disruptions in Europe continuing into, I think you said the first quarter and 2Q, I thought all the pricing had to be done in the first couple of months of the year. So I thought all those customer disruptions were kind of in the fourth quarter rather than bleeding into the first half of the year. What's happening there? And I'll pass it on. Yes, there are some specific laws in France where, for instance, you have to be done with pricing negotiations by the end of February, reality is particularly on promotions and promotional calendars, there might still be negotiations underway and besides France, other countries can obviously, in terms of negotiations go a little bit longer. So we have announced pricing, we are clearly in active talks with most of the customers, by the way, successful implementation of pricing in places like the U.K., in the Nordics, in Southern Europe, namely Italy and Spain, predominantly. But clearly, places like France and Germany, there is still some ongoing negotiations. And we expect some of the disruption happening in March and potentially spinning over into Q2. That was a little bit the pattern we saw between Q3 and Q4 this year in 2022, sorry. And we expect the equivalent of that in 2023. Good evening. Thanks for taking our questions. I just want to go back to Jason's question earlier on the consumption or at least your shipments trend stronger than consumption in the developed markets. What is driving that? Was there any pull forward ahead of your price increases that you have going into the market in December and then again in 1Q? And then I have a follow-up? Thank you. The simple straight answer is no. When you look at the European segment, I think you saw a volume decline of â volume mix decline of 4%. So the last thing we did was to preempt the trade before future price increases. So no question, particularly in that segment. As you look at North America, when you dissect the performance of volume growth of North America, as I said, the category has positive volume dynamics. In that context, we are delivering better share. And the third element is, we are improving customer service level and increasing to sound levels that are not sound yet. The retailer-related stock. So the last thing we did was to increase trade stock ahead of price increases. This is all stock that is being sold and consumed by consumers. Thank you. That's helpful. And then there were recently headlines in the news about a grocer asking food companies to lower prices on the back of moderating inflation historically on the back of inflationary cycles, would you consider rolling back price increases? Or do you expect to lean more heavily into promotions? And if it is promotions, can you just update us on what you're seeing from the promotional environment? Thank you. Yes. So the request was in the U.S. And as we explained before, we are certainly not seeing for 2023, our costs coming down. We still are seeing double-digit inflation in our cost. We just implemented a price increase in the U.S. We're implementing price increases in Europe. So we are not in a situation where we can say that costs are coming down, if anything, they're up versus last year. From a promotional perspective, since we are rebuilding our customer service and our inventories in clients, there is no need for us to promote more. In fact, what we've done in last month is promote less to get our customer service back up. As long as volume continues to be this strong, we are not planning to increase our promotional pressure at all. Great, thank you. Shifting gears a bit. On Slide 9, you talk about the accelerating benefits to total company organic growth from recent acquisitions. And I guess I was hoping you could talk a little bit more about plans and expected contributions from Clif and Chipita and Ricolino in 2023, but I was also hoping you could talk about the profitability of growth from those newly acquired businesses and how that compares at this point to base portfolio profitability, whether you describe the relative bottom line contributions as fairly comparable and proportional or whether thereâs still remains upfront investment on the newer additions that will dampen profit margins for a time? Thank you. Yes. So I can maybe take you through the way we're thinking about the contribution to growth from businesses like Clif and Ricolino, and then Luca can talk a little bit about the margins. So as it relates to Clif Bar, we've taken over in August. We have strong results driven by good demand and good pricing, we had strong double-digit revenue growth, and we had high double-digit EBIT growth in the fourth quarter. We started to implement pricing, which was not normal for them. So we've done two pricing actions last year, and we've seen minimal volume elasticity. We've also started to prioritize the SKUs in their portfolio and working on their supply chain. So we are seeing good supply recovery through Q3, and now we're starting with the integration of the businesses and find the cost and the revenue synergies. So we have a full integration team in place, we have a wide variety of opportunities already identified. As it relates to future growth, I think we have a strong position in the U.S. in the protein and the energy bar space. It's a $16 billion market, which is growing very fast. We have an opportunity to expand through Clif, but also to a business like Grenade in Europe in this space and its well being oriented. It's ESG-focused. So it's right on the money as it relates to consumer interest. But even in the North America, we think that Clif has a huge opportunity for expansion, better distribution, and we are going to complement that with the international opportunity. So I would say that explains a little bit the Clif thinking. As it relates to Ricolino it's a very different type of setup that closed in November so far, well above expectations, top and bottom line. There's a very high strategic fit to in a category perspective that is very complementary to our categories. It allows us to enter chocolate and reinforce our biscuit business in Mexico. One of the biggest benefits is that we can triple our route to markets, which is going to add a significant amount of stores. We will be present in 440,000 plus stores. And they also have a good growth U.S. business, which we are planning to give a boost through our U.S. organization, particularly, of course, in the U.S. Hispanic market. It's a full integration Ricolino Clif is a partial integration. Ricolino will be a full integration and merger of our business with theirs. So there is a significant opportunity for top and cost synergies, and so that will have a big effect on margins. Maybe I'll leave it at that on what those two will do for us. So Luca talk a little bit about the financials. Yes. So I guess you were asking a little bit in terms of relative profitability of these platforms compared to the rest of Mondelez. I would say that Clif, which is almost a $1 billion platform projected into 2023 has sound gross margins at this point in time, given the fact that as we've said, we are about to implement another wave of pricing same dynamics that we saw in our U.S. business, little elasticity so far. So I think the P&L is going to shape up quite well. In terms of gross margin, the North American segment has the highest gross margin of Mondelez, particularly because of the DSD system that is quite effective from that standpoint. But Clif has gross margin that, albeit a little bit below the average of North America they are above the average of the company. So that is really a sound platform in terms of potential and profitability. Importantly, there are material synergies we are after â we just announced a new organization in place. And clearly, there will be some testing going on the platform through DSD and I think if you see what happened with Tate's this is quite promising potentially. In terms of Ricolino it is a $600 million, $700 million platform. It is growing double-digit at the moment. And in terms of margins, I think it's more important to say that the combination of both platforms between our existing business and Ricolino will step change materially the profitability of Mexico. And I think particularly in route to market and cost synergies, there is a big benefit to come now. We are in the process of combining the two companies. So the fruition into the P&L will come towards the second part of the year. I think that brings us to the end. Thank you very much for your presence and for your interest in the company. Obviously, if there's any other questions, Shep, and Philippe will be ready to answer them and looking forward to a good first quarter of the year. Thank you. Thank you, ladies and gentlemen. This does conclude today's Mondelez International Fourth Quarter 2022 and Full Earning Year Conference Call. You may disconnect at any time, and we appreciate your participation.
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Good morning. My name is Devon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2022 CSG Systems International Inc. 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 for your patience. Thank you, operator, and thanks to everyone for joining us. Like last quarter, we will be working from a slide deck, which can be found on the Investor Relations section of our website. Please take a moment to locate these slides. Today's discussion will contain a number of forward-looking statements. These include, but are not limited to, statements regarding our projected financial results, our ability to meet our clients' needs through our products, services and performance, and our ability to successfully integrate and manage acquired businesses in order to achieve their expected strategic, operating and financial goals. While these risks reflect our best current judgment, they are subject to risks and uncertainties that could cause our actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements in light of new or future events. In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in today's press release as well as our most recently filed 10-K and 10-Q, which are all available in the Investor Relations section of our website. Also, we will discuss certain financial information that is not prepared in accordance with GAAP. We believe that these non-GAAP financial measures, when reviewed in conjunction with our GAAP financial measures, provide investors with greater transparency to the information used by our management team in our financial and operational decision making. For more information regarding our use of non-GAAP financial measures, we refer you to today's earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K. With a choppy macroeconomic environment as a backdrop, 2022 showcased the strengths of CSG and our recurring revenue business model. We delivered 4.1% year-over-year revenue growth, a fantastic result, especially when factoring in the discount headwinds from two of our top three customers coming from long-term renewals that we signed in late 2021. Historically, CSG's revenue has been flat to down in the year following a top three customer renewal, let alone two customer renewals. Team CSG also proved the agile and resilient manner with which we will continue to run our business. After facing some inflationary cost pressures in Q2, we took timely action on our margin improvement plan that led to good profitability in both Q3 and Q4. As a result, we finished 2022 with adjusted operating margin of 16.6%, up from 15.7% in H1 2022. In addition, as a result of this increased profitability, favorable foreign currency movements and increased share repurchases, we delivered $3.61 of non-GAAP EPS, a 7.8% year-over-year increase. As we have said many times, over the medium to long run, we aim to have the bottom-line growing as fast or faster than our top-line and that is exactly what we accomplished in 2022. At the end of the day, our revenue growth success is fueled by exciting ongoing market demand for CSG's industry-leading SaaS products and our impressive sales results. We continue to win and wow big new customers in a wide variety of faster growth industry verticals. Team CSG grew annual contract value sales bookings a strong double-digit year-over-year in both Q4 and full year 2022. These sales wins bode well for CSG's continued revenue growth into 2023. Our 2023 guidance should prove that we see our strong business momentum continuing into the new year. I will go into more details on our 2023 guidance, but we are expecting organic revenue growth above the midpoint of our long-term 2% to 6%, with a revenue range between $1.13 billion and $1.17 billion this year. Put differently, the midpoint of this guidance represents year-over-year revenue organic growth of approximately 5.5%. Further, we foresee profitability, as measured by our adjusted operating margin percentage, remaining strong at a range of 16.5% to 17%. And tied to 2022 success and 2023 outlook, we are pleased to announce we are raising our dividend by 6% with a quarterly payout of $0.28 per share. We're also proud to announce that this will be our tenth consecutive year of increasing our dividend payout. At the heart of our success is what CSGers all over the globe are doing on a daily basis. Because of their dedication and innovation, we are taking CSG to heights unseen in our company's rich 40-year history. Thank you, Team CSG, for delivering fantastic 2022 results for our customers and for CSG. We will continue investing in our people, our products, and our customer to grow faster and to wow leading brands all around the world. As we do this, we will also demand a higher and more disciplined return on every dollar we invest. This combination is what will enable CSG to expand our operating leverage and accelerate our profitable revenue growth in the years to come. During Q4, we had several exciting customer wins and success stories. By year-end, we had successfully migrated substantially all the Charter subscribers we won in our November 2021 contract renewal and extension off a competitor's billing system. Globally, we expanded our relationship with a leading UK connectivity provider and landed sizable new deals with large telecom providers in Asia Pacific and West Africa. And on the customer engagement front, we won our first global CSG Xponent customer with Standard Life, the UK's largest long-term savings and retirement business. I'll provide more color on these wins in a few moments. Turning to Slide 5, I want to reiterate our four strategic objectives that will help CSG create more shareholder value and allow followers of our story to track our progress. CSG aspires to deliver long-term organic revenue growth in the 2% to 6% range, striving to consistently be at or above the midpoint of this range combined with highly disciplined accretive and strategic inorganic growth. We aim to add operating scale and expand our operating leverage by growing top and bottom-line to $1.5 billion in revenue by year-end 2025. We strive to be the number one SaaS provider of choice for global communication service providers by providing the most value-adding technology platforms and by being easier to do business with than our competitors. And finally, we plan to diversify revenue even more as we expand in big, faster growth industry verticals with more direct sales and channel partner success in retail, government, financial services, healthcare technology, and more. Moving to Slide 6. You can see that 2022 was a great year in delivering against all four objectives. On strategic revenue growth, we reported $1.09 billion of revenue during the full year 2022, resulting in 4.1% year-over-year growth. On the right-hand side of Slide 6, we believe that CSG's high recurring revenue SaaS business model and our strong healthy balance sheet make us a safe attractive harbor in the midst of macroeconomic uncertainty. By 2025, we aspire to gain scale in the markets where we compete and generate greater than $1.5 billion in annual revenue, which implies that CSG will add over $400 million in profitable recurring revenue by 2025. Over the medium to long term, we aspire to expand CSG's operating leverage and use our strong balance sheet to deliver non-GAAP EPS growth that meets or exceeds revenue growth exactly as we did in 2022 even with the margin pressure we faced in the first half of the year. On the last point, I will continually reinforce a key principle for the CSG Board of Directors and management team. Investors can be assured that Team CSG is laser-focused on creating shareholder value and growing profitable revenue, not building empires nor adding them calories. We will maintain a disciplined and high return on invested capital mindset as we explore a wide range of strategic moves to create more value. Turning to Slide 7. We had good success in 2022 on our goal to be the number one technology provider of choice for communication service providers globally. And our continued success with both North American and global CSPs proved that we are executing well against this strategic priority. It's great to see that CSG grew revenue year-over-year combined in our two largest North American cable broadband customers in Q4 2022 despite the approximate 5% discount headwinds at Charter following our long-term renewal in late 2021. With respect to Charter, the migrations of subscribers from a competitor's billing system are largely complete as we successfully migrated another pool of Charter customers to our platform in November. And during the quarter, we closed a new deal with one of the six largest cable providers in the United States to help them streamline and modernize their operations. Specifically, we are deploying our field service management tools as well as certain components of our customer engagement portfolio. And we also won more business in the global telecom market. During Q4, we expanded our relationship with a leading UK connectivity provider to digitally transform their BSS stack. The CSG solution will simplify their architecture by consolidating CRM, collections, payments management, product catalog and billing into a single CSG-hosted and managed solution. The new stack will reduce their time to market significantly and enable them to increase competitiveness in the UK connectivity market. We also signed a new deal with a leading telecommunications operator in the Asia Pacific region to digitize the revenue management and digital monetization efforts. This new customer has operations in six Pacific Island nations with approximately 4 million subscribers. Specifically, we were able to provide solutions that will help this customer bring new services to market quickly, gain better insights into their customer base to enhance customer satisfaction and provide improved business resilience through a fully supported BSS platform. And finally, we are pleased to announce that we won a significant deal with Moov Africa Malitel, the leading converged operator in Mali, West Africa. Malitel has selected CSG to improve its time to market and to provide new service offerings with an easier-to-use and more modern-tooled application. Turning to Slide 8. Since 2017, CSG has grown revenue from exciting new industry verticals, from 7% of total 2017 CSG revenue to 26% in 2022. Being a partner of choice for big brands in higher growth industry verticals where we help them digitize and modernize their customer engagement and integrated payments continues to be a game changer for CSG and for our customers. Last fall, we launched CSG Xponent Ignite, which brings over 100 pre-packaged customer experience journey templates, connectors, and reports that will turbocharge unforgettable outcomes for communication service providers, financial services, retail, healthcare and life sciences. This leading SaaS platform leads to quantifiably better business results with improved customer conversion, engagement and loyalty across the brand's digital channels. What does this mean for brands and a wide range of industry verticals? Low entry points, rapid launch in 90 days or less, turning customer data into powerful insights and faster return on investment. It was fantastic to see Team CSG win our first CSG Xponent deal outside of North America, Standard Life, the UK's largest long-term savings and retirement business. Standard Life will use our customer journey orchestration tool to operate dynamic, contextual and more personalized customer experiences across all channels. Also, we signed a CSG Xponent deal with one of the world's leading government contractors. This customer will use our Xponent smart notifications, so that they can simplify and digitize their communications with Medicaid enrollees for one of the largest states in the US. In the payments market, our growth is a testament to our industry-leading SaaS integrated payments platform. CSG Forte provides award-winning payment platforms to approximately 98,000 active merchants and ISV partners who need ACH, credit, payment gateway and payment processing capabilities, serving a wide range of recurring revenue industry verticals. As a leader in ACH processing, we continue to add scale by signing ISV partners in fast-growing industry verticals like property management. Looking ahead, we've built an exciting sales pipeline in our payments business that we believe will continue strong double-digit organic revenue growth in 2023 and beyond. Before I turn it over to Hai, let me provide some high-level color on our 2023 guidance and a few closing thoughts. In fiscal year 2023, we expect organic revenue growth at or above the midpoint of our long-term 2% to 6% range as evidenced by our anticipated revenue range of $1.13 billion to $1.17 billion. This range translates into an expected year-over-year revenue growth range of 3.7% to 7.4%, with the midpoint equating to a 5.5% year-over-year growth rate. This revenue growth is 100% organic with any acquisitions we do in 2023 being added to the strong revenue growth. Put simply, CSG has built meaningful revenue growth acceleration heading into the new year. We expect good non-GAAP adjusted operating margin performance in 2023 with a range of 16.5% to 17%. Hai will provide more details on all of our 2023 guidance. To wrap up on Slide 9, I hope you can see why Team CSG is excited by our outlook. We continue to turn today's challenges into tomorrow's breakthrough business results. CSG is building meaningful momentum and elevating every aspect of our business that we fully expect will fuel our continued long-term growth and transformation. We hope you see the same things we do when we analyze our business. We are attracting, retaining and developing the best and most diverse talent in the industry. We are helping transform the industries we serve, whether that be global CSPs, financial services, healthcare, retail or government customers. Our very strong sales win rate proves that the market wants more of what CSG has to offer. And when any part of our business underperforms our lofty expectations, then you see CSG's operating intensity kick into high gear just like we did mid-year as we turned our disappointing first half 15.7% adjusted operating margin into a solid full-year result of 16.6% in 2022, and we built even faster revenue growth momentum heading into an exciting challenging and growth-oriented 2023. With that, I will turn it over to Hai to provide more detail on Q4, full year 2022 business results and 2023 guidance targets. Starting on Slide 11. We generated $1.09 billion of revenue, which represents 4.1% year-over-year growth. For the year, the increase in revenue was mainly attributed to the continued growth of our revenue management solution, as the majority of the increase was attributed to organic growth. This growth was in the face of 3% to 5% discount headwinds for two of our three largest customers. Our 2022 non-GAAP operating income was $169 million or non-GAAP adjusted operating margin of 16.6%, as compared to $162 million or 16.5% in the prior year. The increase in non-GAAP operating income and non-GAAP adjusted operating income margin percentage can be mainly attributed to higher revenue along with the timely operating margin improvement initiatives we took in Q2 and the beginning of Q3. Specifically, we have seen margin benefits from our decision to dissolve our controlling interest in a Latin American business, the continued streamlining of our office space footprint, a rationalization of our headcount and hiring practices, and the strengthening of the US dollar to most global currencies. Moving on, our non-GAAP adjusted EBITDA was $226 million for 2022, or 22.3% of revenue, excluding transaction fees, as compared to $221 million or 22.6% in the prior year. Lastly, our 2022 non-GAAP EPS was $3.61, a 7.8% year-over-year increase as compared to $3.35 in the prior year. The increase in non-GAAP EPS is mainly due to the higher operating income in 2022. Favorable foreign currency movements and share repurchase activity over the last 12 months, offset by higher tax rate and increase in interest expense due to increasing interest rates, as our debt is primarily floating rate in nature at this point in time. Turning to Slide 12, I'll go through the balance sheet, our cash flow generation, and shareholder returns. Our 2022 cash flow from operations was $64 million as compared to cash flow from operations of $140 million in the prior year. Further, we had non-GAAP free cash flow of $27 million in 2022 as compared to $114 million of free cash flow generated in 2021. The main drivers of the year-over-year decrease in free cash flow are primarily timing-related, and include: unfavorable changes in working capital, resulting primarily from the accrual of our 2022 annual employee bonuses, which are significantly lower than the previous year; higher tax obligation of which the primary negative impact was from Section 174 of the 2017 Tax Cuts and Jobs Act which deals with the amortization of R&D spending beginning in 2022. As a result of this, we will not get the previously anticipated amount of the tax deduction benefit related to our R&D investment in 2022. We had previously expected this legislation to be repealed. But because the legislation would not repealed, we now anticipate higher cash taxes going forward. Over a five-year period, we believe this tax change will be neutral to our free cash flow generation. Further, we experienced higher taxation related to our profit mix in some of our global locations, which caused our tax rate to marginally increase. Slightly elongated cash conversion cycle from a couple of our recently signed large global telecom new logo wins that will result in good long-term profitable revenue as we continue to gain market share from competitors. The negative cash impact of our operating margin improvement plan that we initiated in Q2 that included increased restructuring charges, continued streamlining of our office space footprint, headcount reductions and enhanced scrutiny regarding new hires. Cash flow generated from operations before changes in working capital in 2022 was $160 million compared to $179 million in 2021. Importantly, absent the aforementioned impact from Section 174, we would have shown slight growth in cash flow from operations before changes in working capital during 2022 on a year-over-year basis. And as we communicated on our last earnings call, our Q4 free cash flow of $49 million in 2022 was slightly better than our 2021 result of $48 million. Moving on, we ended the fourth quarter with a $150 million of cash and short-term investments. That, along with our outstanding debt at December 31, 2022, results in $265 million of net debt, and our net debt leverage ratio sits at 1.1 times. Moving to the bottom right of the slide, we declared $34 million in dividends during 2022. In addition, we repurchased $88 million of common stock under our stock repurchase program. In total, we returned $122 million to our shareholders in 2022. Turning the page, let me layout our 2023 guidance. Starting with the top-line. We expect our revenue range -- to range from $1.13 billion to $1.17 billion and transaction fees to range from $78 million to $82 million. We are currently forecasting our first and second half 2023 revenue to be split relatively equal. Further, we anticipate Q1 revenue to be the strongest of the year due to the timing of a few opportunities which moved out of Q4 and that we anticipate to close in Q1. Similar to 2022, we also expect our non-GAAP adjusted operating margin percentage to range between 16.5% to 17.0%, well within our long-term target range of 16% to 18%. Consistent with the revenue trend above, we also expect Q1 to be our strongest quarter in terms of our non-GAAP adjusted operating margin. Further, we anticipate Q2 being the low point of the year on this metric as our annual merit increases begin to have an impact. On the next metric, we anticipate our non-GAAP EPS to range between $3.35 to $3.65 based on a non-GAAP tax rate of approximately 28.5% and a share count of 31 million shares for the year. The midpoint of our non-GAAP EPS range is below our 2022 performance of $3.61, primarily due to the projected higher effective tax rate, and increase in the borrowing cost of our debt in 2023 versus what we incurred in 2022, as a result of the full-year impact of higher interest rates. As a reminder, we currently have a predominantly floating rate capital structure, but continue to explore potential ways to maximize our balance sheet efficiency. Moving on non-GAAP adjusted EBITDA is expected to range between $231 million to $242 million. And finally, we expect a range of free cash flow to be between $80 million to $120 million with capital expenditures expected to come in between $22 million to $28 million. Going forward, the current challenging inflationary environment means we must relentlessly prioritize every investment we make and be discipline in the allocation of resources. Innovation and adherence to a risk-reward framework with continuous learning are two cornerstones of how we run our business. We remain devoted to a disciplined approach to managing our capital. In closing, our business is well-positioned with a strong sales pipeline, robust sales bookings momentum, a high-quality customer base and visibility into 90%-plus of our expected 2023 revenue. We remain committed to accelerating and diversifying our revenue growth, which may include closing and integrating disciplined value-adding acquisitions. Additionally, we are pleased with the results of our operating margin improvement initiatives in 2022, and we'll continue to be very careful stewards of our capital, especially in this uncertain environment. We believe this approach, combined with our consistent capital distribution, will serve our shareholders well. Okay, perfect. Okay. And then, when we look at the guide, obviously, solid revenue growth acceleration. But what's holding back the operating leverage? Is it just kind of external still inflationary environment? Or are you spending in certain areas for growth? Like why won't -- or why aren't we going to see the operating margin expand a little bit next year? Yes, I think you hit the nail on the head. There are still inflationary pressures that we'll feel going into 2023. And I think we'll be fairly conservative, middle of the road actually, in terms of our expectations of how those costs [indiscernible] performance for 2023. I think -- hey, Greg. Hope you're doing well. The only thing I would add to that is, we saw a weaker first half of the year last year. This team is laser-focused on having a strong Q1 and Q2 top-line growth and on the profitability side. So, we still see some of those pressures around wage, supply chain and others, but we want to have a strong start to the year and then see how we progress from there. Okay. And then, the Xponent win that you announced in the UK, how -- I don't know if you gave this information, but how much revenue are you generating from Xponent or your broader customer engagement solutions in North America? And what's the pipeline? Can the rest of the world be as big as your North American revenue stream? And what's the pipeline of those global opportunities look like for those services? It's a great question, Greg. So, thanks for that. What excites us about this product line so much is, A, just the applicability to all these industry verticals in terms of the value we can bring of being personalized around journey experiences of an individual customer, whether that's a consumer or an enterprise level. And the other side is the range of revenue that we could actually get. We announced last quarter, in the previous quarter, a big win with one of the large U.S. pharmacy retailers that could be tens of millions of revenue that comes from that. But we also see -- we can go in an individual use case and we can deploy for hundreds of thousands or low-single digit millions, add a lot of value, cross-sell into other lines of business they have in other vertical. So, it really does run the gamut in terms of size, because we have this modular SaaS solution, and it can really land and expand well as we proved. So, if a customer has a bigger need across their entire enterprise, it could be a much larger annual revenue number. We could also get in with the lower price point that speeds sales, and that's kind of what we're seeing in the market. Specifically on your question around geography, we wanted to prove this out to be effective and efficient with our resources in North America. We think we have tons of headroom in the North America market, but this has applicability in every country, in almost every industry vertical. All around the world, we have a huge expectation. And globally, we could see that be as big or bigger than our North American business. Obviously, we think we'll have to scale up both in terms of direct sales and channel partner sales, but has huge opportunity to drive revenue growth. Great. And then, lastly, the $1.5 billion target by '25, obviously, that's going to require some acquisitions to get there. So, what are you looking for? Is it technology or maybe some broader scale acquisitions? And what's the market for acquisitions looking like right now? Yes. I mean, it's really that combination that we've been talking about. We're pushing hard to perform at the upper level of our organic growth. That's what drives this earn the right to grow with operating leverage and operating margin expansion, to your first question, and then, just layering on good smart acquisitions. So, what we really look for from an acquisition, and we think the market is turning in our favor with the strong balance sheet, we don't have to do a deal, which means we can stay highly disciplined and be quite selective in terms of strategic fit, paying the right price with the financial accretiveness of deals we do, but it's pretty much the same as our strategic focus; winning big and the number one technology provider of choice in telecom globally. So, we're going to look at scale and rounding out our portfolio to bring more value to our North American broadband cable or our global telecom customers. We look for opportunities in that digital CX. We're again -- like we did when we acquired Kitewheel, and then we did announced our CSG Xponent launch a couple of quarters after that. It can really turbo charge the value we bring brands all around the world. You could see us do something in the payment space. But it really is strategic fit, financial fit, read the right risk return profile. And we like where pricing is coming on some of these potential deals. As you know, we didn't do a deal last year, because we wanted to stay disciplined. We did three or four the year before, and we think it could be a good opportunity, but it's all around that discipline and paying the right price. Hi, thank you. Congrats on the growth. Another question on some of those goals around global expansion. Are you expecting the global growth to be heavier for you in cable and telecom, or equal weight in other verticals? How are you thinking about that? Hi, Maggie. Glad to hear you back, and I hope you're doing well. I would say near-term, in terms of where we are, just the wins we continue to announce in global telecom, I would say, that's, first and foremost, that I would hit. I mean the three really, really strong deals we announced in global telecom this quarter in different regions of the world; one in Africa, one in APAC, one in the UK. And then, we also had a good deal that moved into the early part of Q1. So, we think that's just going to continue to drive nice growth in the telecom space. The digital CX, though, like we talked about on the answer to Greg's question, we think it's got a lot of opportunities. It was great to see the Standard Life win in the UK market and get the ball rolling around that. We think it'll take a little bit of time to both build the channel partnerships. And the reason we're focused heavily on channel is to be efficient and leverage their [rolodex] (ph), their proven brand recognition with other partners in those different geographies, in those verticals. And we think we can get a lot of pull-through as we also build out direct sales and marketing as a secondary approach. So, we like what will come from that, but we think that'll probably take time to build out with their focus, I would say, initially in the EMEA market to start. Got it. Thank you. And then, we've been talking about this Charter migration for some time now. With that fully wrapped, can you maybe kind of give us the recap, the detail on the impact of that in 2022, and then how you're thinking about the impact on the year-over-year comparisons? Yes, I'll hit the first part and then I'll let Hai just provide a few of the financials. So, I mean just a fantastic effort by the team to work with our colleagues at Charter to convert 14 million subscribers and do that in a way in a good timeframe. That also just brought a lot of value that fit the business need of our biggest and strong customer at Charter. So, grateful to our colleagues on the Charter side that worked with us on that. That came on the heels of after converting 11 million subscribers off of Amdocs at Comcast. So, now from a triple play standpoint, we have all the business and our platforms run all the subscribers at both Comcast and Charter. Yes. I mean, I think one of the tailwinds we benefited from and it contributes to our guidance range towards the higher end of our long-term guidance is that we have full year impact of those migrations. But in addition to that the other real benefit we have is over 90%-plus visibility into the business as a result, right? So, it gives us good confidence and good visibility in terms of our ability to generate that strong organic growth that we highlighted. Thanks, guys. The cable industry looks like it's going through a fairly aggressive network and technology upgrades and -- around the world, and here in the United States, kind of converging wireless with wireline a lot more. Do you think this is an opportunity as they do these upgrades? And do you think it's -- you kind of gain some market share during this process? Or maybe just how do you fit into the whole thing? Thanks for the question, Tim. Hope you're doing great. Obviously, it changes some quarter-to-quarter. We tend to look at it having served these big players for going on three decades, over a slightly longer period of time. We'd love to see the broadband adds 105,000 getting added back at Charter this quarter. We love to see the investment we're hearing in the infrastructure to expand the homes past 2% to 3% a year at both Charter and Comcast. I think Comcast, if you normalize out the hurricane, they added about 4,000. But yes, there is going to be technology evolution and disruption around this. And so that's why we're just focused on how can we bring more value, stay mission critical to what they're doing, be easier to do business with, and then try to give them reasons why they might look at expanding some of the parts of the portfolio we don't have with some of those other providers. The other thing that we want to continue to focus on, it's not loss on us when we see a competitor announce 50% of their revenue comes from two customers in the U.S., and those are big customers, and some of them are having some success on fixed wireless and that's going to continue to have some wins in the market in terms of the net broadband adds in North America. We'd love to earn the right over time to actually take some of our telecom wins outside of North America and see if we could do more in the local. Obviously, that may be a longer-term play, but that is where our R&D investment and technology is going to try to really bring more around that convergence. We could serve both sides of that equation. And I think it's going to continue to evolve, Because as you know and you report on quite a bit, there's different approaches being taken by different large service providers around how they might win in different segments of the market. That's for sure. And OpenAI and ChatGPT has been in the news quite a bit here lately, and AI in general. Can you talk a little bit about how you can kind of leverage AI with your product suite going forward? And do you think you can integrate ChatGPT into your products? Yes, we do a lot with natural language processing and AI and have for the last two or three years, I would say, the couple of areas that it's the biggest right now, and we work with several large and midsize innovative partners to do that. Around some of our solutions around digital CX where we can actually help take the mountains of data they have and drive personalized journeys and experiences for those individual customers, we see AI and natural language processing giving our solutions a huge leg up where we can then help these large brands to just get more targeted, improved experience in a more cost-effective way. And on the telecom side, we see it around both 5G, but also in some of the network fraud detection things where we use our technology combined with others to detect what might be fraudulent activity on an interconnect or roaming aspect. And I think we're just kind of getting started. ChatGPT, we've looked at. I mean, it is kind of -- it's almost -- it's hard to fathom what they're doing and some of the use cases that are coming out. We started to experiment. We don't have any live active integrations today, but I think that's likely to change and evolve quite a bit in the coming quarters based on what's coming out and with some of that, it's -- that's going to be fascinating and fun to watch. Well, and I guess, ChatGPT, there's going to be a lot of winners and losers, obviously, you have to execute, but do you think this is a positive opportunity for you? I think AI in general, I probably won't get to -- I won't pick the winner today. And it's likely that, that could change over time in terms of how we did just like cloud evolved a lot over the last five or six, seven years. But AI is a cornerstone of driving efficiency and automation in terms of how brands do work that make it easier for them to predict and give channels of choice for their customers, consumer or enterprise. So, I think it's hard to imagine that ChatGPT isn't going to both challenge and threaten and potentially create some displacement opportunities with some of the existing AI and natural language processors that are out there. Again, we haven't moved in their direction yet. It doesn't mean that we won't. So, we're still analyzing and doing. But AI as a core is essential to award-winning digital cost-effective digital customer experience in our mind. It's about mid 6% right? If you think about -- our floating rate debt is generally based on LIBOR. LIBOR has gone up north of 4.5% in 12 months. So, right now, we're projecting mid-6%. Thank you. I have two questions and one follow-up. You didn't touch that much on the payment business other than allusion in M&A discussion. But particularly on the ACH side, how is that getting affected in the current economic environment? And then, on Xponent Ignite and all that, how much resistance are you getting from your corporate clients on the marketing side off the economy? Or do you feel like you really have a pretty coherent selling strategy [saying] (ph), "I mean, look, this is just very high ROI. And what sorts of ROIs are you looking?" I'm sure you've got a pretty broad range there. Yes. No, thanks, Matt. Hope you're doing well. I'll take the first one. On the payment side, we took a meaningful hit as we talked about going back a couple of years ago when we saw the early- to mid-stages of COVID, we lost about 8% to 12% of our transaction volume, which is some of the recurring charges on the ACH and even the credit kind of get turned down, including some of the property taxes where state governments stopped charging for credit card fees and others. And we kind of grew through that as we kind of stayed flat. We saw good double digit growth return in 2022. And we expect strong double-digit growth in that business. We like the demand signals we're seeing across the board in our payments business, both on the ACH and on the credit side. And so, we think that there's -- we kind of weathered the storm, if you will, in 2020 and 2021. And now it's back to growth, back to margin expansion and just that scale in that business. We're pretty excited around what's going to come in the front windshield with that part of the business. Just sort of ROI you think your customers can see on Xponent Ignite? And is the economy hindering that, or is it actually pushing them to be a little bit more efficient? At this stage, I want to make sure, I guess, it could change. But at this stage, we see it being a board level decision with a hard ROI. So, what we're seeing in the market and the reason there's so much traction right now is there's an immediate payback. Usually, it can get deployed in 60 to 90 days. There can be a payback within less than 12 months in terms of where it is. And the payback really comes in three forms. One, often moving from a physical channel to a digital channel is actually going to reduce costs. And if you can take steps out by orchestrating the journey is better in a more efficient way, so it's a cost reduction that can pay for itself. Two, up-sell and cross-sell, and what we're seeing in some of these areas like we talk about on promotion roll off with a large cable or a telecom customer, if we can help them reduce the customers that churn during a promotion-ending period or around some of the appointment notifications where there's over $100 billion dollars lost in the healthcare industry alone by missed appointments, again, that's another example of driving revenue and paying for self. And then, third, just the retention and loyalty benefit that comes from an improved ease of doing business in a digital world. That's actually what we're seeing is just fantastic momentum in the market and we just got to take advantage of it and respond, sell more, sell faster, cross-sell and up-sell the existing new logo wins we get. And we love what we're seeing, but we also don't take it for granted. We know that can change, so let's push hard and make sure that we keep rolling in the new deals. And if you tip toward the upper end or the bottom end of the revenue guidance range, which isn't really all that wide, do you think it's more likely to be a function of having more selling opportunities and innovation? Or do you think it's more likely to be affected by wherever the macro goes both in the U.S. and Europe? I'll give a high level, and then I'll let Hai add little insights he might have on it. I mean, I think we are seeing and this is -- we're seeing a hot market and a big demand, which is driving that level of growth last year and even bigger organic growth in 2023. So, we love the demand signals in terms of where the market is both in global telecom in our North American business and in digital CX in payments. But we have seen -- I mean every company is trying to shave some discretionary spending. So, we actually felt that throughout the core over the last six or seven quarters. So, it's not like that cost pressure is not there. We grew through it, which is -- it will gives us a lot of optimism in terms of the upside. Will brands continue to try to squeeze costs? The answer is yes. They have been. They will continue to do that. So, to be at the upper end, what we've got to do is continue to have that strong win rate, the strong successful conversions and deployments of our solutions and continue to just win that double digit sales growth that will help us grow at the upper end even as we offset some of the discretionary spending that is definitely having. I think to be at the lower end, you would need to see a lot of things happen. But again, it's still a tough market. So that's why we give that range that we do. And we really want to see that strong start in Q1 and Q2. Yes, I mean, I would echo what Brian said. The only thing I might add is that consistent with the question about ROI, I think what we need to do is do a really good job of highlighting the opportunity cost in terms of driving urgency for our customers around delaying them making decision, right? Because some of our solutions particularly as you highlighted in the CX side, they're really driving some meaningful value, financial value for the customers. And so, to the extent that we can bring that to light for them and drive urgency, we'll be able to affect the timing and it actually plays into even the current economic environment. There are no further questions at this time. I'd now turn the call over -- back over to CEO, Brian Shepherd. Now, thanks everyone for joining. We're proud of the 2022 the Team CSG put on the board. We have an even bigger 2023 that we need to deliver. We're going to be laser-focused on doing that. Look forward to talking to you next quarter.
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Good day, and welcome to the Rithm Capital Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After todayâs presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Thank you, and good morning, everyone. I'd like to thank you for joining us today for Rithm Capital's fourth quarter and full year 2022 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm; and Nick Santoro, Chief Financial Officer of Rithm Capital. Throughout the call, we are going to reference the earnings supplement that was posted to the Rithm Capital website, www.rithmcap.com this morning. If you've not already done so, I'd encourage you to download the presentation now. I'd like to point out that certain statements today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earnings supplements regarding forward-looking statements and review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we will be discussing some non-GAAP financial measures during today's call. Reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. Thanks, Phil. Good morning, everyone, and thanks for dialing in. 2022 was a transformational year for us in many ways. First, on the market, our broad experience in financial services investing served our shareholders well as we navigated some of the more difficult fixed income markets we've seen in a few years. With the Federal Reserve raising rates seven times for a total of 425 basis points, the mortgage basis widening between 70 and 100 basis points, high yield index wider by almost 200 basis points and investment grade bond spreads wider by at least 25 basis points, capital markets essentially shut down during different periods. We managed to grow our book value by 5% during 2022, generated a GAAP return on equity of 15%, 11% on our core business and an economic return of 14%. This doesn't happen by chance. With a disciplined approach to investing, spending time with our partners, positioning the company and our balance sheet for higher rates, we generated a very good result during these difficult times. Unfortunately, the equity does not reflect the performance with the stock price trading at too large of a discount, in my opinion, to book, and we'll continue to do all we can to see us normalize towards book. During the year, in June, the company rebranded to Rithm Capital as the management contract was internalized. The results of these actions were to drive more earnings to our shareholders and begin the transition to an alternative asset manager. In the fourth quarter of 2022, we launched our private funds business with the intent of raising third-party funds. Our funds business will be a subsidiary of Rithm Capital with all management fees and performance fees flowing through the parent. This will enable us to generate more earnings for our shareholders and ensure we are aligned with our shareholders and our employees. We are currently marketing a financial services fund and look forward to working with partners to take advantage of the wonderful opportunities we are seeing and expect to see in 2023 and beyond. We will also be opening Rithm Europe, very excited about this. This will enable us to take advantage of dislocations in the EU and U.K. This should happen in Q2, and I'm very excited about the what-ifs here. In December of 2022, we acquired a 50% stake in a private equity commercial real estate platform, formerly known as Normandy Partners and renamed as Green--. This gives us real depth and expertise in conjunction with our Rithm employees to be opportunistic investors in the commercial real estate space, both on the debt and equity side. Regarding our operating business units, we right-sized our mortgage company, our G&A overall in the company by over 50% year-on-year. We are now in the position to drive higher earnings as a result of the actions taken. Our MSR portfolios, which totaled $600 billion have been fantastic, generating tons of cash flows into the higher rate markets we've seen. We've been very vocal we will not fight the Fed. And at this point, we will continue not to fight the Fed. Our average gross WAC in our portfolio is 3.7%, and that includes new production. We continue to explore different ways to engage our customer base of 3.1 million consumers by offering other products and are very focused on our customer retention. As you think about the housing and mortgage market, the weighted average mortgage rate for Fannie Mae and Freddie Mac loans in the United States is 3.62%. The weighted average mortgage rate for Ginnie Mae borrowers is 3.57%. I bring this up as the refi opportunity is way out of the money with mortgage rates currently north of 6%. This should continue to lead to great performance in the MSR sector. Our Genesis business, which is our builder business, had a great year, originating a little shy of $2.5 billion in loans. Average coupons on that portfolio right now are approximately 10%, and we look forward to growing the business in 2023 and beyond. On the single-family rental space, our Adoor business had a good year as our occupancy rates continue to â or as our lease-up rates continue to increase. Couple of things there. One is, we've halted our acquisitions very early in the year with the expectation that home prices would decline and cap rates would increase. We are seeing that. However, transactions have been very slow. As we go forward in 2023, and with home prices at this point down approximately 10% from peak, we think that housing supply shortages, home prices being less affordable where mortgage rates are, we'll be back acquiring units at some point later in the year. As you can tell a lot to do here super-excited for our future and super-excited for the growth prospects for our business. With opportunities in the market across many asset classes and companies, we look forward to putting up great returns for shareholders and our partners in the private credit business. I'll now refer to the supplement, which we posted online, and I'm going to open up on page 3. Just a couple of things here. On the Rithm side, currently 70 full-time employees here in the offices in New York. Balance sheet is approximately $32 billion as of the end of the year, a little under $7 billion of total equity. When you look at the portfolio of operating companies, keep in mind, this business was started in 2013 to be an asset manager of excess MSRs. Today, if you look across the board, we have a number of different operating companies in financial services, whether it be on the residential side, the commercial side, making loans to builders, we have property preservation businesses. We have a single-family rental business, and we have title and appraisal. So very, very proud about of the work that the team has done to build out these operating companies, which at all times is not the easiest place to be. Financial highlights, page 4. GAAP net income, $81.8 million or $0.17 per diluted share. Earnings available for distribution $0.33 per diluted share or $156.9 million. Our dividend is $0.25. Cash and liquidity at the end of the year was $1.4 billion. Today is $1.3 billion. That includes all the payments made to Fortress. Total equity $6.9 billion. That's for Q4. Full year GAAP net income, $864.8 million or $1.80 per diluted share. Earnings available for distribution $633 million or $1.31 per diluted share. Total economic return, 14%, GAAP return on equity 15%. Earnings available for distribution, return on equity 11% and book value growth 5%, ended the year at $12. Book value right now, we're probably something between 11.75% and 12%. Page 5, business highlights, Internalized Manager, Rebranded to Rithm Capital, launched our private credit business, bought 50% of the operating entity of GreenBarn and then we successfully rightsized our mortgage company. Very, very good year, a lot of work -- a lot of hard work by the team across the board. Page 6, the evolution of Rithm. Again, started in 2013 as a manager of -- or to acquire Excess MSR rights. As we progressed through the past 10 years, we drove growth through many different business lines, including becoming operators of different business lines, a lot of what I would call large-scale M&A, where we bought Caliber, for example, in 2021 for book value that was $1.6 billion. We bought Genesis Capital in 2021, that was $1.4 billion. Everything we do when we think about acquiring assets and/or companies is around trying to acquire these assets at book value with a view towards a real value in the underlying assets in the event that, for example, in the Caliber business, we see rates go up and the origination side go down. As we go forward, 2023 and beyond, the growth of our private funds business been running around the globe a little bit, meeting with different LPs and look forward to really developing the private credit business as we think it's going to give us the opportunity to deploy capital more opportunistically when those situations arise. Page 7, Rithm 2.0. Operating companies, I pointed out on the left side. Investment portfolio, no surprise what we have going on there plus our private capital business. I think it puts us in a very, very good place. And again, really excited about what the future looks like for our business. Page 8, the economic landscape. This year is going to be hard. I mean, the rate market is going to be a little bit more challenging than I think what we saw in 2022. 2022 is very clear, the Fed was going to keep their foot on the pedal and raise rates extremely aggressively. We saw, as I pointed out, Fed funds rise by 400-plus basis points, bond yields back up and we positioned the company extremely well going into that. As we look at this year, the yield curve continues to remain inverted, big employment print on Friday. The consumer seems like they are in very good shape. And I think you're going to see a fair amount more volatility in the rate market this year. And where we are now is we're much closer to home than I think where we were a year ago, and we'll continue to monitor rate moves and at some point, likely put on some mortgages and hedge out some of our MSR portfolios. Page 9, the Rithm playbook. Again, some of this is a little repetitive. The investment portfolio, we're going to continue to seek opportunities to deploy capital, not just to deploy capital, but there must be at good risk adjusted returns, monitor the credit performance of the existing portfolio. What happens if we go into recession, how do we think about our business and make sure that we're ready for that. Servicing and origination, the hard work that Baron and his team did in 2022 puts us in a very different place, I think, as we enter 2023 to be able to grow that business again. From an employee standpoint, we are right sized right now and look forward to growing our business throughout the course of the year. Private capital business. Again, really excited, going to be a lot of hard work there and look forward to really growing a proper funds business. Genesis Capital on the building side, we're going to grow that business. We love 10% unlevered yielding assets on our balance sheet. Adoor, the single-family business. Again, we'll enter the market when we deem it appropriate with higher cap rates and when we think HPA or HPD has leveled off. And then on the commercial real estate side, we're going to be more opportunistic as we think about deploying equity and/ or debt in that business. Page 11, just our experience. I'm not going to spend a lot of time on this across different asset classes, the ranges from residential mortgage loans to commercial real estate to consumer loans. Obviously, we've been involved in what I would call distressed debt situations, even buying the assets from Ditech out of bankruptcy. So a lot of experience and a great team that's in the office every day working their tails off to put up very good results for our shareholders. Mortgage company overview, page 12. For the fourth quarter, $24 million in pre-tax income. What I would caution everybody, as you look at our -- look at these numbers make sure if you compare us or other organizations to us, make sure you look at everything apples-to-apples. Nick Santoro, our CFO, and Baron are happy to walk you through any of the math in and around that. Year-over-year decline in G&A, down 53%. Unfortunately, with rates rising, head count reductions were very aggressive for us in 2022. Hopefully, we're done with that as we go forward. There are some interesting opportunities in the mortgage space around MSRs and other potential entities that we're currently working on as we go forward here. Focus on 2023, profitability, customer retention, and that leads into our recapture business. Page 13, our servicing business. Very, very strong business. Right now, we have $500 billion that we currently service in-house. That doesn't include assets that we service with third parties, either on the Rithm side or in some of the legacy mortgage company stuff that we have on the exit side. As you can see gain on sale margins, Q4, 1.81%. Big focus is on us. We've right sized our retail organization. It's going to be driven -- real earnings will be driven around, in our view, new home sales, which plays extremely well for the retail side and then the recapture business around DTC. On the non-QM front, just to point out a couple of things there. We continue to try to grow that business, not the easiest business to grow. Our credit team has taken measures now in light of our expectations that home prices continue to come down a little bit to lower LTVs, which may make us a little bit less competitive in what I would call some of the higher-risk products, which we're more than happy to be able to take these actions. Page 14, the MSR portfolio, $600 billion, 3.7% gross WACC. On the excess side 4.4%. On the excess side, those are legacy credit-impaired MSRs. Love where we sit here, a lot of cash flow. As I pointed out before, with lower mortgage rates well north of 6%, we expect those portfolios to perform extremely well as we go forward. MSR values, we took them down a little bit in the fourth quarter. A weighted average multiple is 4.9. We think that's a little bit on the conservative side. As you can see at the right side of the slide here, amortization has dropped from fourth quarter of 2020 from 30 CPR, down to 5 CPR in the fourth quarter of 2022. Servicer advances, nothing to talk about here. We continue to monitor performance on the underlying homeowner, effectively year-over-year, everything is unchanged. Should we see a material pickup in delinquencies and/or the need to cut servicer advances, our capital markets team led by Sanjeev Khanna has done a great job not only now, but over the years, having plenty of capacity in that space. Just to frame something going back, I think it was to like $14 billion or $15 billion. We had $11 billion of capacity in the servicer advance business. And as you look at this, there's really not much going on there. Genesis Capital I pointed out before, a little under $2.5 billion of origination, love the business, love the coupons, tightened up underwriting guidelines, and we expect some really good growth here as we go forward into 2023 and beyond. And then finally, on the single-family rental space 3,700 units. We are small in what I would call, a sea of big fish to the extent that we see cap rates at attractive levels and we are able to grow that business when we think home prices have leveled off, we will do so. We're not seeing a ton of opportunity there now. And our main focus continues to be on re-lease â getting assets re-leased. Current lease rates are, give or take, about 96% right now. And as we go forward, we've seen rent growth in and around 4%. So with that, that's my wrap right now. I'll turn it back to the operator for Q&A, and let's open up the lines. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Bose George with KBW. Please go ahead. Hi, everyone. Good morning. Wanted to ask just about the potential cadence for growth in alternative assets, and there's obviously a lot of chatter in the MSR market about Wells potentially selling, et cetera. I mean, is there a potential for something meaningful kind of happening in that area? So â good morning, Bose. Yeah, on the private capital business, when you look at where our equity trades, we trade at, give or take, 20 to â I'm sorry, roughly out of 80% of book. When you think about where we are in the marketplace now with the investment opportunities, typically, what happens is the investment opportunities will present themselves at a time when your equity is trading at a discount, which is really where we are now. Couple that with our pivot from Fortress into being internally managed, we think the private credit business is going to be a big win for shareholders, and it's going to be a big win for all of us, as we're able to deploy capital more opportunistically and have access to those large pools overall throughout the financial services landscape that we invest capital in. As you think about Wells and MSR opportunities, yes, I mean, to the extent that wells or anybody else comes out with large pools of MSRs that we think the risk-adjusted returns are attractive, we're going to pounce on those opportunities. The one thing I would say, counter to that is we do have $600 billion of MSRs. We manufacture our own MSRs every day. So we're in a really good place in that business. But to the extent that things come out a little bit cheaper than where we are able to create them, we're going to be all over that. And we are starting to see some opportunities there. Okay. Great. Thanks, And then actually, I wanted to ask about the servicing technology. You've mentioned a couple of times that there might be some opportunities to monetize that or move up internally. Just any update there? Currently, our servicing plan is we have a bunch of servicing that's moved to Service [Director] (ph), which is our own software. We continue to have dialogue and explore other ways to create value for shareholders with other -- either third-party software or third-party servicing systems. I would say right now, we're steady as she goes. Good morning. You mentioned talking about potential opportunities in Europe. Do you envision that kind of being on balance sheet, or would that be through the private capital? Most likely through the private capital, could be a little bit on balance sheet. We'll be pretty selective there. I mean, what I would say over the years and how long I'm doing this in some of my partners, Charles and others, managing businesses in Europe and having identified an individual to run our European business, who should come online in Q2, I think we're going to look for more situations around distressed debt, and we'll likely raise some capital around that business, more likely in private funds. But I think initially it could come out of the public company. Doug? Doug? Hey, good morning, guys. How are you doing? The MSR portfolio looks really stable here, maybe two questions. The first, just asking about your expectations for recapture and the piece that isn't subserviced directly by you, how you think about that? I would say everything kind of -- everything is out of the money at this point. We do have some servicing with Cooper that goes back to our longstanding relationship with Jay and his team and when we were at Fortress when Cooper was [owning the] (ph) equity funds there. We have some stuff with Loan Care. We'll continue to work with some third parties. We just want to make sure the economics are aligned with the best way to think about recapture for our shareholders. But -- with -- as I pointed out earlier in my remarks, with the weighted average coupon in the US housing market, give or take around 3.5 or so percent, these things are so far out of the money. You're not going to see a ton of recapture. Our thing and probably similar to, I think, the approach that Rocket's had, customer retention is a huge deal. Acquiring customers is a huge deal. We have three million of them. So that's a win. How we roll out other products to them, whether it be in consumer things, credit cards and other things is something that we are working hard on. And again, it's not necessary to do a transaction on the mortgage side because if they're not going to refinance, how do you keep them? How do you develop brand awareness? So we're spending a lot of time on the marketing side, as well as thinking about other [LOBs] (ph) that can be accretive and drive more earnings for shareholders. Yeah. That's helpful detail. Thanks. And then another one on the MSR. Do you have a rough idea for how big of a margin call you could withstand in that portfolio? And anything that could bring about a margin call other than a change in interest rates? And really just how you cushion for that risk in the portfolio more generally? Thanks. Have either make sure your financing is done in the capital markets in term structures, which we do or make sure that you have non mark-to-market facilities, which we have. As it relates to shocks, I don't think we'll see a bigger shock than we saw in 2020, and we withstood that extremely well. The other thing is with our financing facilities, all non mark-to-market, the team graded in capital markets, and we have term structures on pretty much all of our, what I would call, non-agency assets, we feel really good where we are. Good morning. Thanks for taking my questions. I just wanted to follow-up on the origination side. Do you see any particular opportunities emerging within certain channels that may make it more advantageous to invest in that space? I appreciate the comments around limited amount of refi opportunity with mortgages at 3.5%. But there are certain channels that may be opening up, whether it's correspondent, broker or even proportions of the shelter business. Is there anything in there you see that you can reinvest in? I mean, I think you're right, Wells exiting correspondent has certainly opened things up in that sector. Michael talked about non-QM. We feel like the wholesale channel where we can basically utilize brokers to try to expand there, and you continue to see activity on the retail side. And you see it from an M&A perspective, Michael talked about that in the third quarter earnings as well. So I think that there are -- it feels like there are more opportunities within origination. So I would also just echo Michael's comment, we're not growing to grow. So we're going to be strategic in how we look at different opportunities. And Kevin, I mean, there's been a lot of work, obviously, on the retail side. We've consolidated the retail side with the shelter business. So we've taken out a lot of expense, and that's -- you can think of that almost like an internal merger. You look at the correspondent business and pricing is still extremely competitive today when we put our rates. We're doing a fair amount of origination, but it's still despite the fact that Wells has pulled out of correspondent, we're still -- the pricing around MSRs has been pretty competitive and pretty aggressive. While saying that, we do think some mortgage companies are going to need some solutions, and there could be opportunities for either M&A work. But I think right now, we're in all the channels that we need to be. And unless something is accretive, there's just no reason for us to do it. And then could you just give us an update from an operational perspective, where you are with all the various integrations that have taken place and you've done a ton of work the last couple of years, but is there any other bigger integrations that still need to be finalized within the origination channel or even in the servicing channel? No, there's some servicing assets moving from the legacy Caliber MSP side to Service Director. That should be done, I think, in the second quarter. On the origination side, that's all set. And really some of the opportunities and as you think about the Genesis business, you think about the mortgage company, we have a ton of resources in all these different companies. The saves for shareholders are going to come as we integrate more around tech. One of the things we're going to do is we're going to create a tech hub that sits at the top of the house for all of our operating businesses that will create efficiencies and save us some money. And we look forward to doing that. But I think it's really going to be saves in and around synergies on bringing these operating businesses together, not necessarily just the mortgage company. Hi, Good morning. Michael, looking at the new segments, you really pieced together a broad investment platform. As we take maybe more of a medium-term outlook, say, two to four years, which of these segments do you think have the ability to have outsized growth or an outsized capital allocation as you think about what the business should look like in a handful of years? I think we're going to be -- well, here's what I would say. Our approach, and this goes back to when the company was first formed at Fortress has always been to be more opportunistic investors rather than just being an investor to deploy capital to do that. Including our capital formation when we would do an M&A deal, we would typically raise capital around M&A deals, not just to raise capital. So when you look at where we are going forward, let's use the GreenBarn company. GreenBarn was formerly the old Normandy partners, and they rebranded to Senlac. They do redevelopment work in office here in office here in the Northeast and they have a very good footprint with a great track record that goes back, I think, to the mid-90. David Welsh, who leads that business, a great guy and a great operator. That's a good example of something that will be grown strategically over time, and we like to allocate more capital then. We'll probably -- we'll also use either capital from the balance sheet and third-party funds to grow that business. MSRs, as I pointed out, we have $600 billion. We can go out and buy another X hundreds of billions, but we want to make sure the risk adjusted returns are something that warrant either growing that or if you thought about it, if your last dollar of capital was X, where would you put that money? We like the Genesis business a lot. I think at some point, you'll see some consumer companies come out towards the end of the year from folks in the private equity business that have some of these. So that could be an opportunity for growth. We're seeing some other opportunities around MH and other things. So it depends, but it's really going to be more opportunistically across the board, not just to grow a certain sector that we're in. The one thing I want to be clear to everybody on the phone and others that will listen to this is that we will always stay true to our core competency, which is financial services. So even on the funds that we're raising, we are going to stay whether it be in the commercial space, residential space, consumer space, everywhere where we have experience or have the teams that have experience, that's where we're going to deploy capital. So it's going to be more opportunistic where we think we could generate what I would call teens type returns. And if you look at our track record going back to 2013 in our core business, our real returns are probably in and around 12% on a return on equity basis while paying a $4.5 billion of dividends. Just one more question on the origination segment. You guys have, obviously, done a lot to reduce the expense level of the company over the course of the year. Would you say that the run rate numbers you show on slide 12 for expenses, is that kind of fully reflective of everything you've done, or are there any actions you've taken that are still able to show up in the Q4 expense numbers for originations? I would say that's fully reflective of what we've done. And go-forward reactions are actions are not going to be material. And Trevor, I think it all depends on the rate market. As I pointed out in my opening remarks, I thought the way that we positioned the company last year to higher rates was and that included unfortunately, reducing head count pretty dramatically in the business. Going back to Kevin's question about integration, we're through that. But we're going to have to adapt to markets. I think right now, we feel real good where we are head count. We feel real good where we are, the way the company is positioned, but we want to make sure that, obviously, that we manage expenses across our entire operating platform and that will include all of our businesses. Got it. Okay. You mentioned potentially looking to add mortgages and hedge out the fair value of the MSR at some point. Can you maybe expand on a little bit what you'd be looking for in the market to start trying to implement that strategy? Thanks. If we think the Fed is done, and we feel that the rate -- like -- I mean, here our general view, or my general view is that mortgages will do better over time. You'll have periods of volatility. When we think the Fed is closer to being done, I think we'll begin adding some hedges. Across our broader portfolios, all of our portfolios are hedged with either interest rate swaps and/or mortgages. And for now, I think in the MSR business, we'll stay the course. But at some point, we'll likely have a more balanced portfolio where the MSR business will hedge. And the other thing to keep in mind there is a 3.5% coupon is not going to refinance right now other than just through housing turnover. So that's an area where, unless we think the mortgage basis is really cheap, we don't need to hedge out that coupon right now. And even if the Fed is done, unless we think 10-year rate is going to go to whatever 1.5% and you have some COVID type event, then we'll react to that accordingly. But for now, I think it's -- we got to stay the course. The other thing I would tell you about our team, and we have third-party consultants on the economic side that we meet with monthly, we have a very strong presence, I think, in the markets as we think about the macro picture, and that's something that's really, really important for us to maintain discipline in the business and make sure we try to catch both the ups and downs of where rates go and mortgages go. Good morning and congrats on continued execution in a tough environment here. One thing I was curious about itâs probably the -- I think it was kind of addressed earlier on in the Q&A, but I'd like to see a slightly different angle. You obviously mentioned raising private capital on the fund side. And one of the slides is a little about on your MSR funds. I'd be curious if you think there's any opportunity to leverage the mortgage company, leverage the sub-servicing capabilities to do some sort of acquisition of MSRs from a fund perspective, because there's obviously a lot of capital chasing the MSR asset class? And, obviously, if the reports are correct and Wells looking at $200 billion to $250 billion MSRs on top of everything else in the market, there could be a lot of supply. I'm curious if that could be an opportunity for the Rithm platform as a whole that's an external capital and the fees and also leverage the sub-servicing? The answer is yes, yes and yes. If there were three questions. If there were two, I'm going to give you yes and yes. Right now, what I would tell you on the sub-servicing side, we have a very good sub-servicing business. That will grow. There's a little bit of uncertainty. There's a couple of large sub-services that potentially could come to market. We're extremely well-suited to be in a position to, what I would say, grow our sub-servicing and take out costs, where I think that gives us an edge over others. On the MSR front, same thing. We think MSRs are extremely attractive here. We do think there'll be some supply. Obviously, the Wells announcement until that actually comes, we'll see what happens. But we'll add as long as we think the risk-adjusted returns have teens in front of them. That makes sense. And this is hopefully not a three-part question, but when I look at the servicing side, CPR was down at 5% at just on a dollar basis, it looks like the amortization was 4.9% in the quarter. Obviously, that trend can continue in the short-term into the first quarter, and then obviously move around throughout the year. I'm curious, how long do you think the CPR is going to stay at near historic lows? And I have the same, on the other side of that, I'm curious how far out you think like the origination platform back to profitability, remove a little bit of a drag on the great servicing performance? So let's take the last part of the question. On the origination side, I think we should be back to profitability, either Q1 or early Q2. We've taken actions, obviously, on the retail side, which is a very difficult business, as you can imagine. And I feel like we're well-positioned now there. And in some of the earlier comments, we merged our JV business, the shelter business with retail. So again, creating more synergies and taking on more expense. Regarding MSRs and speeds, I mean it's going to come down to housing turnover. I'm not sure who's going to refinance a 3.5% coupon until mortgage rates go back towards the lows and housing becomes a little bit more affordable. So I think we're in this for a bit. I don't see -- there's no reason for somebody -- the reason you see probably less housing transactions is, why would somebody sell their house unless they need to, if they have a 2.5% or 3% coupon mortgage rate. So I think it's really going to come down to housing turnover, if home prices cheapen up, and I think it's more likely you'll see growth in the rental markets as things are less affordable today. Thanks. I just had a follow-up on the gain on sale margin trend. So this quarter order, I mean, it looked like the gain on sale margin is up for each of the channels. I was curious if the markets bottomed, or is it just more of your volume going down and you're being more selective in terms of engagement? Bose, we did see some improvement in margin in the quarter. And you also do see some impact from adjustments to prior quarter pull-through adjusted rates. So that impacted the margin for the quarter as well. But we are seeing improvement. In terms of prior quarter, you always estimate what your pull-through adjusted rate is when determining your margin for a given quarter. And to the extent you come in better in the long -- we think actually come in better, you will see improvement in margin in the current quarter. This concludes our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks. Thanks, everybody, for dialing in. Look forward to updating you throughout the course of the quarter and on our next call. Appreciate the support for Rithm.
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EarningCall_706
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At this time, I would like to turn the call over to Rachel Rodriguez, VP of Investor Relations. Please go ahead. Thank you, operator. Good afternoon, and welcome, everyone, to McKesson's Third Quarter Fiscal 2023 Earnings Call. Today, I'm joined by Brian Tyler, our Chief Executive Officer; and Britt Vitalone, our Chief Financial Officer. Brian will lead off, followed by Britt, and then we will move to a question-and-answer session. Today's discussion will include forward-looking statements such as forecasts about McKesson's operations and future results. Please refer to the cautionary statements in today's earnings release and presentation slides available on our website at investor.mckesson.com and to the Risk Factors section of our periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward-looking statements. Information about non-GAAP financial measures that we will discuss during this webcast, including a reconciliation of those measures to GAAP results can be found in today's earnings release and presentation slides. The presentation slides also include a summary of our results for the quarter and updated guidance assumptions. Thank you, Rachel, and thanks, everyone, for joining us on our call this afternoon. Today, we reported third quarter fiscal 2023 results, another quarter with solid adjusted operating profit growth, underscoring the significant progress we continue to make in our company in terms of our overall company priorities. It also signals the continued strength and stability of our North American businesses. As a result of our third quarter performance and business outlook, we are raising our guidance range for fiscal 2023 adjusted earnings per diluted share from $24.45 to $24.95 to an updated range of $25.75 to $26.15. During today's call, I'm going to highlight the progress we've made across our four strategic priorities. Then I'll ask Britt to provide additional details on the financial performance in our third quarter. As you know, a few years ago, we crafted our enterprise strategy and we shared our priorities with our stakeholders. We are evolving our portfolio of capabilities, and we have divested businesses that are not aligned with our strategy. And we have invested both organically and through acquisitions to add to our differentiated capabilities. We're increasing our focus on the areas where we have deep expertise and that are central to our long-term growth strategy. Our progress to date is underpinned by the execution against these important company priorities a focus on people and culture, intentional efforts to evolve and grow our portfolio of capabilities, to advance and expand our differentiated oncology ecosystem and our biopharma services platform and our commitment towards sustainable core growth. The strength of our core distribution businesses continued to show solid growth and generate free cash flow, which provides us a strong balance sheet and the ability to invest internally and externally into the business. I'll start with our first priority, our focus on people and culture. Embedded in our daily operations is our purpose, advancing health outcomes for all. McKesson is an impact-driven organization. We recognize that giving back to the community is important to our associates, and we continue to provide engaging and, most importantly, impactful ways for Team McKesson to do exactly that. In the third quarter, we had another successful Community Impact Day, where nearly 13,000 members of Team McKesson across North America volunteered to support nonprofits that provide food to people facing hunger. McKesson also held its annual Giving Tuesday, where Team McKesson's generosity resulted in $1.5 million in employee donations, with a portion of that matched by the McKesson Foundation, which will ultimately be distributed to 1,500 local, national and global charities. In addition to the progress made by our employees, the McKesson Foundation donated more than $4 million to pharmacy schools to help increase workforce diversity and improve overall health outcomes for vulnerable populations. These grants, which range from one to five years in duration, will support various pharmacy school education and community outreach programs. The innovative student support, professional development and community outreach that the McKesson Foundation is funding through these pharmacy school partnerships will help transform patient-pharmacist interactions, which we believe will lead to improved health equity and patient outcomes for vulnerable populations in their respective areas. I'm proud of our talented team as their dedication, hard work and innovation enables our business to positively impact our partners, our customers and our communities. Our next priority is to evolve and grow the portfolio. We have continued to evolve and grow our capabilities, ensuring that our capital deployment is tightly aligned with where we have the best growth opportunities. This led us to our decision to exit the European region as well as a handful of smaller businesses over the last several years. We're progressing on our plans to exit the European region and have successfully exited 11 of the 12 countries we operated in. We remain committed to exploring strategic alternatives for our business in Norway, which is the only country we have not yet divested. These actions allow us to focus our resources on areas that support our long-term strategy. It's provided us additional flexibility to invest internally or to look externally to expand our oncology and our biopharma ecosystems, which aligns well with our next company priority. We have made meaningful progress expanding our oncology and biopharma ecosystems as exemplified by the strategic investments made year-to-date. McKesson recently announced that The US Oncology Network, the U.S.'s largest oncology practice management organization, has continued to expand its geographic footprint with the addition of two new practices, Epic Care in California and Nexus Health in New Mexico. Both are now part of The US Oncology Network as of January 1, 2023. These practices offer a wide range of specialties, enabling more comprehensive care that helps ensure patients can conveniently receive the care they need in their local communities during their entire treatment and healing journey. And we're excited by the new opportunities that our joint venture with Sarah Cannon Research Institute as well as the acquisition of Genospace bring to our overall oncology ecosystem. I'm pleased with the substantial progress we've made in the development and expansion of our oncology ecosystem. This progress supports the solid performance of the U.S. Pharmaceutical segment as we further our long-term growth strategies. We will continue to evaluate internal and external opportunities to invest, to grow and to evolve this business. In addition to our oncology assets and capabilities, our biopharma services platform remains another priority area of growth. Over the last several years, we've systematically built and acquired an ecosystem of assets that complement on each -- that complement each other and are more valuable together than as separate stand-alone solutions. Together, these assets leverage our network reach, technology and clinical expertise to enable better access and affordability of medications, which ultimately improves patient outcomes and impacts real lives. We started building this business in 2006 with the acquisition of RelayHealth, which gave us connectivity to over 50,000 pharmacies. We've been able to integrate value-added services right into the workflow so that we can help their processes be more seamless and give the customer the experience they need and deserve. We then acquired CoverMyMeds, a long-term partner of McKesson in 2017. This expanded our network by providing connectivity with over 750,000 providers. The integration of CoverMyMeds' automation solution alleviates some of the friction out of the workflow providers, improving overall access for the patient. RxCrossroads brought a scale in the business that we already had, a hub services and patient support program, and they expanded our clinical expertise across many new therapeutic areas. In 2020, recall, we brought these businesses together as prescription technology solutions so we can migrate from providing individual offerings to a more comprehensive end-to-end suite of solutions. This enabled us to enhance our value proposition and to help find and get patients started on appropriate therapy more quickly. Most recently, we acquired Rx Savings Solutions, which helps employers and health plans reduce prescription drug costs by utilizing its advanced analytics capabilities. It's more than just price transparency. It really gives members insight and actionable guidance that can drive savings and improve health outcomes for patients. So, by bringing these businesses together, Relay, CoverMyMeds, RxCrossroads, Rx Savings Solutions, our McKesson prescription technology solutions connect pharmacies, providers, payers and biopharma manufacturers for really next-generation patient access, affordability and adherence solutions that are automated and integrated into provider workflows. CoverMyMeds now processes approximately 21 billion pharmacy transactions annually on behalf of patients to support medication access and affordability. We continue to build and invest in innovative products that allow McKesson to provide unique insights and capabilities to our customers. And these investment dollars are reflected in our results in the segment year-to-date as well as in our fiscal 2023 outlook. During the third quarter, we continued to organically invest in this segment as we position our products and services for sustainable long-term growth. The investments have enabled us to expand the network and connectivity, develop new solutions and meet the growing demands of our customers. While we continue to invest and grow the platform, we're also always assessing opportunities to evolve and streamline the portfolio to ensure our resources and investments are focused on the products that bring the most value to patients. This business saw substantial momentum coming out of COVID-19 pandemic as our biopharma manufacturers continued to bring more brands to our platform and prescription utilization trends continued to improve. These factors led to strong adjusted operating profit growth in this segment in recent fiscal years. We remain confident in the overall trajectory in this segment and our financial target of 11% growth. And we will continue to reinvest profit into this business to accelerate this business over the long term. The investments made in our oncology and biopharma ecosystems have been possible largely due to the long-standing growth in our sustainable core distribution businesses, which are our fourth company priority. As we exit the European region, we've been able to focus our efforts on our North American businesses. Our teams are continuously evaluating how to drive efficiencies in our core operations. Whether that's leveraging a more modernized platform, it allows us to act with more speed and agility or ensuring we have the optimal talent and resources to help these businesses succeed. The fundamentals of our U.S. Pharmaceutical and Medical-Surgical Solutions segment remains strong. The work that Team McKesson has done to streamline process and efficiencies, combined with positive prescription volume and patient utilization trends, reinforces our confidence in our long-term growth for our North American distribution businesses. In the U.S. Pharmaceutical business, I'm excited to announce that our contract to extend our pharmaceutical distribution partnership with CVS Health through June of 2027 has been finalized. Our long-standing partnership with CVS further exemplifies the value of our scaled distribution capabilities. The performance of the core operations in our North American distribution business enables strong cash flow generation that's allowed McKesson to continue to innovate and become a leading diversified health care services company. We believe we've made significant strides against our strategic priorities to focus on our people and culture, to grow and evolve the business, to invest in our oncology and biopharma services ecosystem underpinned by the sustainable core growth in our distribution businesses. Let me shift gears just a bit. McKesson has also made progress recently to address environmental sustainability. In January, McKesson received approval by the Science Based Targets initiative for its near-term climate change targets that contribute to reducing its greenhouse gas emissions. Our SBTi target serves as another example of our commitment to sustainability and our response to climate change. We look forward to leveraging the advancements in climate related technologies that will address these environmental challenges while also enhancing our business and helping to fulfill our company purpose of advancing health outcomes for all. We will, of course, continue to provide updates on our progress to stakeholders on these targets as well as our ongoing ESG-related initiatives on future calls. As an organization, we're also committed to advancing diversity, equity and inclusion. McKesson was recently recognized by Newsweek as one of America's greatest workplaces for diversity in 2023. We're quite honored that Newsweek recognizes McKesson's ongoing efforts to be a more diverse and inclusive employer. All right, let me wrap things up. We are pleased with our solid results in the third quarter as we delivered on our growth strategy and as a diversified health care services company. McKesson's talented employees continue to demonstrate exceptional performance, and our third quarter results reflect their dedication and our execution together as a team in a dynamic operating environment. It also highlights the resiliency of our portfolio of businesses and solutions. Thank you all for your time. With that, Britt, I'm going to toss it over to you for additional comments on the financial results. Well, thank you, Brian, and good afternoon, everyone. Our solid fiscal third quarter financial results reflect continued strong execution and momentum, advancing our company priorities. In the fiscal third quarter, we delivered solid growth across our North American segment, led by strong performance in the U.S. Pharmaceutical and Medical-Surgical Solutions segments. And we continue to evolve and grow our diversified portfolio through focused and strategic investments in oncology and biopharma services. As a result of our solid financial performance and confidence in the underlying business, we are increasing and narrowing our full year outlook for fiscal 2023 adjusted earnings per diluted share to a range of $25.75 to $26.15. Before I provide more details on our third quarter fiscal 2023 non-GAAP adjusted results, I want to point out two items that impacted our GAAP-only results in the quarter. First, we received proceeds of $129 million related to our share of an antitrust class action settlement. We recognized the gain within cost of sales in the third quarter. And second, we recognized a pretax gain of $97 million from the termination of fixed interest rate swaps. This gain is included under other income in the third quarter. Let's move now to a review of our third quarter non-GAAP adjusted results on a year-over-year basis. Consolidated revenues of $70.5 billion increased 3%, driven by growth in the U.S. Pharmaceutical segment resulted from increased specialty product volumes, including retail national account customers, partially offset by lower revenues in the International segment, resulting from the completed divestitures of McKesson's European businesses. Excluding the impact of our European business operations, including completed divestitures, revenues increased 11%. Gross profit was $3 billion for the quarter, a decrease of 10%. Excluding the impact of our European business operations and completed divestitures, gross profit increased 7%, primarily a result of growth in the U.S. Pharmaceutical segment. Operating expenses in the quarter decreased 14%, largely driven by completed European divestitures in the International segment. Excluding the impact of our European business operations, including the completed divestitures, operating expenses increased 9%. Operating profit was $1.4 billion, an increase of 9%, driven by a pretax benefit of $126 million related to the early termination of a tax receivable agreement, or TRA, with Change Healthcare and due to growth across North American businesses led by the strong performance in the U.S. Pharmaceutical segment. As a reminder, McKesson was a party to a TRA entered as part of the formation of the joint venture with Change Healthcare. Under the terms of the TRA, Change was generally required to pay McKesson a portion of net tax savings resulting from amortization by the joint venture. In October of 2022, Change exercised its right to terminate the agreement and paid McKesson $126 million. Consistent with our prior practice recognizing similar items, this benefit is reflected in other income in both our GAAP and adjusted operating results in the quarter. Moving below the line, interest expense increased to $69 million in the quarter, primarily due to higher interest rates and unfavorable impacts in our derivative portfolio as we exit the European region. And the effective tax rate was 23.4% for the quarter. As a reminder, our effective tax rate can vary quarter-to-quarter, driven by our mix of income and the timing of discrete tax items. For the full year, we continue to expect an adjusted effective tax rate in the range of 18% to 20%. Wrapping up our consolidated results. Third quarter diluted weighted average shares outstanding was approximately 141 million, a decrease of 8%, resulting from share repurchase activity. Overall, third quarter adjusted earnings per diluted share was $6.90, an increase of 12% compared to the prior year. When excluding the impacts from COVID-19-related items and the benefit from the early termination of the tax receivable agreement with Change, adjusted earnings per diluted share increased 6%. Moving now to our third quarter segment results, which can be found on Slides 7 through 12 and starting with U.S. Pharmaceutical, where revenues were $61.9 billion, an increase of 13% year-over-year, resulting from increased volume of specialty products, including higher volumes from retail national account customers, branded pharmaceutical price increases and strength in oncology, which included increased patient visits, partially offset by branded to generic conversions. Operating profit increased 6% to $778 million. Our contract with U.S. government for COVID-19 vaccine distribution provided a benefit of approximately $0.25 per share in the quarter compared to $0.26 per share in the third quarter of fiscal 2022. When excluding the impact of COVID-19 vaccine distribution, U.S. Pharmaceutical segment delivered operating profit growth of 7%, driven by growth in distribution of specialty products to providers and health systems, contributions from our generics programs, and improvements in pharmaceutical prescription volumes and oncology visits. In the Prescription Technology Solutions segment, revenues were $1.1 billion, an increase of 9% year-over-year, driven by increased prescription volumes, faster growth in our third-party logistics business and higher technology service revenues. Operating profit increased 7% to $155 million, driven by growth in access affordability and adherence solutions, partially offset by continued organic investments as we position our products and services for sustainable long-term growth. Next, moving on to Medical-Surgical Solutions. Revenues were $3 billion, a decrease of 3%. Lower volumes of COVID-19 tests and kitting storage and distribution of ancillary supplies for the U.S. government's COVID-19 vaccine program partially offset the growth in the Primary Care business. Operating profit increased 2% to $336 million. The contribution from COVID-19 tests and our contract with the U.S. government for the kitting storage and distribution of ancillary supplies provided a total benefit of approximately $0.38 per share in the quarter as compared to $0.57 per share in the third quarter of fiscal 2022. Excluding the impact of COVID-related items, the Medical-Surgical Solutions segment delivered operating profit growth of 25%, driven by growth in the Primary Care business and favorable sourcing activities, which partially offset lower volumes of COVID-19 tests and lower contribution from kitting storage and distribution of ancillary supplies from the U.S. government's COVID-19 vaccine program. Next, let me address our International results. revenues were $4.4 billion, and operating profit was $143 million, a decrease of 36%. On an FX adjusted basis, revenues were $4.9 billion, a decrease of 48%, and operating profit was $158 million, a decrease of 29%. Third quarter results reflect the year-over-year effect from the divestiture of the European businesses. Moving next to corporate. Corporate expenses were $19 million, a decrease of 88% year-over-year, driven by the early termination of a tax receivable agreement with Change Healthcare and lower opioid-related litigation expenses. Excluding the benefit from the early termination of the tax receivable agreement, corporate expenses decreased 9%. Additionally, we incurred opioid-related litigation expenses of $9 million in the third quarter, and we anticipate that fiscal 2023 opioid-related litigation expenses will be approximately $50 million. Turning now to our cash position, which can be found on Slide 13. As a reminder, our cash position, working capital metrics and resulting cash flows can each be impacted by timing and vary from quarter-to-quarter. We ended the quarter with $2.8 billion in cash and cash equivalents. During the first nine months of the fiscal year, we made $376 million of capital expenditures, which includes investments in distribution center capacity, automation and regulatory enhancements and investments in technology, data and analytics to support our growth priorities, including our oncology and biopharma services ecosystems. For the first nine months of fiscal 2023 and 2022, we had free cash flow of $1.5 billion and $1.2 billion, respectively. During the quarter, we allocated $833 million towards M&A activities, including a joint venture with the Sarah Cannon Research Institute and the acquisition of Rx Savings Solutions. We also returned $2.1 billion to shareholders, including $2 billion of share repurchases. Year-to-date, we returned $3.7 billion of cash to shareholders, which included $3.5 billion of share repurchases and $216 million in dividend payments. At the end of our fiscal third quarter, we had $3.8 billion remaining on our share repurchase authorization. Let me turn to our fiscal 2023 outlook. A full list of our assumptions can be found on Slides 15 through 18 in our supplemental slide presentation. And I'll begin with our consolidated outlook. Our revised guidance assumes 3% to 7% revenue growth and 2% to 6% operating profit growth as compared to fiscal 2022. Our guidance includes $2.30 to $2.50 of contribution attributable to the following four items: $0.70 to $0.80 related to the U.S. government's vaccine distribution in our U.S. Pharmaceutical segment; $1.10 to $1.20 related to COVID-19 tests and the kitting storage and distribution ancillary supplies in our Medical-Surgical Solutions segment; approximately $0.15 related to year-to-date net losses associated with McKesson Ventures equity investments; and a $0.65 benefit related to the early termination of the tax receivable agreement with Change Healthcare. As a reminder, our contracts with the U.S. government for the distribution of COVID-19 vaccines and the kitting storage and distribution of ancillary supplies extends through July of 2023. We anticipate corporate expenses in the range of $435 million to $475 million, which includes net losses associated with McKesson Ventures' equity investments, which we recorded in the first three quarters of the fiscal year, and the benefit from the early termination of the tax receivable agreement with Change Healthcare, which was recognized in the third quarter. As a reminder, our practice has been and will continue to not include McKesson Ventures portfolio estimates in our guidance. When excluding the impacts from COVID-19-related items, net gains and losses associated with McKesson Ventures equity investments and the benefit from the early termination of the tax receivable agreement with Change Healthcare, we anticipate operating profit to increase 7% to 11%, above the previous operating profit growth target. Moving below the line, we anticipate interest expense to be in the range of $245 million to $255 million. The increase compared to the prior guidance reflects the higher interest rate environment. Our anticipated full year effective tax rate of approximately 18%, 20% remains unchanged. Based on our third quarter results and our outlook for the fiscal year, we're increasing and narrowing our guidance range for adjusted earnings per share to $25.75 to $26.15 from the previous range of $24.45 to $24.95. When excluding the impacts of COVID-19-related items, net gains and losses from McKesson Ventures equity investments for both fiscal 2023 guidance and fiscal 2022 results and the fiscal 2022 benefit from the early termination of the tax receivable agreement with Change Healthcare, our adjusted earnings per diluted share guidance indicates approximately 13% to 16% growth over the prior year. Moving now to the segment outlook for fiscal 2023. In the U.S. Pharmaceutical segment, we anticipate reported revenue to increase 12% to 15% and operating profit to increase 5% to 8%. As I outlined earlier, our outlook includes approximately $0.70 to $0.80 related to COVID-19 vaccine distribution for the U.S. government. When excluding the impact of COVID-19 vaccine distribution for the U.S. government, we anticipate 7% to 9% operating profit growth. We are pleased with the momentum of the segment. Our Pharmaceutical Distribution business continues to deliver stable growth through focused execution and operational excellence. Let me highlight a few of the factors that are leading to the strong segment performance. First, we've observed stable prescription utilization growth, which underpins the momentum in our health system and retail offerings. Second, we maintain a favorable outlook for our oncology platform, which we see delivering higher growth and higher margin contributions. We continue to execute and invest against our oncology strategy. As Brian touched on earlier, we continue to add practices and providers to our scale and growing US Oncology network, and we are well positioned to capture increased oncology volumes. Third, we have a scaled an efficient generic sourcing operation, delivering stability of supply and low-cost products for our customers and patients. And specific to fiscal 2023, through the month of January, we observed branded pharmaceutical pricing that was modestly above our expectations. While fiscal 2023 results benefit from this modest increase, I would make the following two comments: first, the impact from higher branded pharmaceutical pricing remains less material now than historically, as more than 95% of our manufactured contracts are now on a fixed fee-for-service arrangement; and second, we would not anticipate this modest benefit to repeat in future years. Our U.S. Pharmaceutical segment is well positioned and has exhibited strong performance, leading to the increased fiscal 2023 growth outlook. As a result of our execution and the factors that I just noted, we anticipate that this segment will now grow above the 4% earnings growth target rate that we previously provided, including at our 2021 Investor Day. The products and services within the Prescription Technology Solutions segment delivered differentiated access adherence and affordability products. We are pleased with the solid growth in both revenue and operating profit this quarter. Biopharma Services remain an important strategic growth and investment area for McKesson. We're confident this segment will exhibit faster growth and higher margin. We remain confident in our differentiated assets and capabilities. We have unmatched scale across transactions, provider and retail connectivity and product breadth. Our commitment to this segment is evidenced by the investments that we have made. Over the past three years, on average, we've organically invested approximately $100 million a year into new and existing products and services. And the recent acquisition of Arc Statement Solutions will accelerate the breadth of capabilities we continue to build out. We also anticipate further organic investments in new capabilities as well as more M&A. The internal investment pattern, the mix of technology products and third-party logistics services and the life cycle of the products we serve, including the timing of launches, have resulted in variability in performance quarter-to-quarter. As we continue to invest and grow the business, we anticipate that there could be charges to further integrate product portfolios and supporting infrastructure. We anticipate delivering revenue growth of 10% to 16% and operating profit growth of 14% to 17%, which is in line with the 14% to 20% initial guidance that we communicated on our May 2022 earnings call and above the operating profit growth target of 11% provided at our Investor Day event in 2021. We are well positioned for strong growth, and we're committed to the operating growth targets that we've previously communicated. In the Medical-Surgical Solutions segment, we anticipate reported revenues to decrease 1% to 5% and operating profit to decrease 1% to 4%. As previously mentioned, our outlook includes approximately $1.10 to $1.20 related to COVID-19 tests and the kitting storage and distribution of ancillary supplies for the U.S. government. Excluding the impact of COVID-19-related items, we anticipate Medical-Surgical operating profit to increase 12% to 15%. Finally, in the International segment, we anticipate revenues to decline by 42% to 46% and operating profit to decline by 26% to 29%. This year-over-year decrease includes the loss of operating profit contribution from businesses and transactions that we have closed to date. For fiscal 2023, we anticipate our European operations will contribute operating profit of approximately $0.90 to $0.95 per diluted share, primarily in the first nine months of the fiscal year. This includes year-to-date contributions from operations prior to completed sales, our operations in Norway and the contribution resulting for held-for-sale accounting for the transaction with PHOENIX Group. Let me conclude our outlook with a review of cash flow and capital deployment. We continue to anticipate free cash flow of approximately $3.2 billion to $3.6 billion, which is net of property acquisitions and capitalized software expenses. In fiscal 2023, our cash flows have also been impacted by European divestiture activities and other transactions. As discussed last quarter, our free cash flow guidance includes approximately $900 million of negative impacts from our European operations and divested assets. We remain committed to be good stewards of capital for our shareholders. We have and will continue to take a disciplined approach to capital allocation. We strategically think about capital allocation in three broad categories. First, we prioritize growth by investing internally and through M&A. We are focused on accelerating our strategic growth pillars of oncology and biopharma services. These growth platforms have differentiated asset scale and network capabilities. Next, we will continue to return capital to shareholders through a combination of our growing dividend and share repurchases. And the third piece of our framework is a strong balance sheet and adequate liquidity underpinned by the maintenance of an investment-grade credit rating. Our outlook continues to incorporate plans to repurchase approximately $3.5 billion of shares, which has been largely completed by the end of our fiscal third quarter. As a result of the share repurchase activity, we estimate weighted average diluted shares outstanding to be approximately $142 million. Let me take a moment and reflect on the fiscal 2023 outlook and our growth targets. At our 2021 Investor Day event, we shared with you a set of growth metrics that reflect our commitment to drive continued momentum across the business segments. Since then, we've executed on our strategy and delivered operating profit growth consistently at or above the targets that we communicated on a consolidated and on a segment level. Some of the business dynamics that we outlined previously have materialized as tailwinds and contributed to recent growth, including growth in prescription volume and patient mobility, our ability to grow through macroeconomic unpredictability and successful execution on a disciplined capital deployment strategy that focuses on growth and maximizing shareholder return. More importantly, the solid performance is further demonstration of our shareholder value creation framework. We continue to be focused on profitable growth and efficient deployment of capital. Our 24% return on invested capital illustrates our focus on shareholder value creation. In closing, we are pleased with the results of our fiscal third quarter. We continued to deliver solid operating results through focused execution and strategic investment. Looking ahead, we're confident in our ability to deliver sustainable long-term growth. Our disciplined growth strategy and financial framework give us the confidence we will deliver on our operating profit growth targets. Thanks for everyone. Diving into the Prescription Technology Solutions business a bit, I know it continues to evolve in terms of the assets that you've put in place, continued organic investment you make. As you think about the ability to continue on sustain the pathway of your long-term growth targets, how much are you working on in terms of the dynamics of visibility within your own business, not just to the Street, but ensuring that on a quarter-by-quarter basis, some of the, I guess, I'd call it, lumpiness that we've seen in the last couple of quarters can smooth itself out. And how will this business evolve on that front in terms of that level of visibility and your ability to continue to convert successful sales, successful organic investment into the sustained long-term growth rate. Great question. I'll let me kick it off first. I'd say we continue to be pleased with the performance of this business. And we've got revenue growth of 9% year-over-year, AOP growth of 7% this year. Last two years have been particularly strong for this business. And what you find is as you continue to add capabilities into this business, we find opportunities for new ideas, new invention, reinvention, sometimes reprioritization of the projects. But we shared at Investor Day, we think this is a $15 billion-plus market opportunity in access affordability and adherence. And we see a relatively long runway and we feel pretty confident in our 11% target growth for this segment. Now there are things that naturally happen in this business that may make it. I think your word was lumpy. Maybe that was our word. It became your word. Things like the recovery pace of underlying prescription volumes. The commercial success of some of the projects we partner with as they underachieve or overachieve their expectations, loss of exclusivity events. Our investments, I mean, we've made significant investments in this business over the last three years. We see continued opportunity to do that and that's not always completely smooth. I mean, the nature of those opportunities is going to be variable. Our process is to make sure that we've got disciplined line of sight, financial expectations and that those are prudent and good investments to make to sustain the growth in this segment long term. And Mike, maybe what I would add is while we have seen a little bit of variability quarter-to-quarter, one of the things that is just inherent in this business and we talked about this is the annual customer verification process that we do for a lot of our customers, and that usually happens in the fourth quarter. What I would say, though, is that what we are pleased with, if you go back to the guidance that we gave you at the beginning of the year in May, 14% to 20%. The guidance that we're giving you now to finish the year is really within the balance of that guidance. It's been, as I said, a little bit of variable quarter-to-quarter, but it's really in line with the guidance that we gave at the beginning of the year. And we're really pleased that while we've been investing in this business, both organically and through M&A, that we're seeing this business develop above the long-term target rates that we gave you at Investor Day. So while we've seen a little bit of -- a little more variability this year quarter-to-quarter than we may have seen historically, when you look at it on an annual basis and you look at it over the long term, which is how we manage the business, we're seeing this above the long-term target rates that we gave and really in line with the initial guidance we gave at the beginning of the year. Good afternoon everyone. I hope everyone is safe in Texas. Just wanted to go back to a couple of comments that you made around U.S. drug distribution. One would be the renewal with CBS through 2027. Just want to understand if there's anything new or nuance to that relationship? And then secondly, as we think about oncology within U.S. drug distribution, Britt, I don't know if it was you or Brian that made the comment that you're going to see higher growth and higher margin there. At what point does that become big enough that, that actually drives the margin? Or is that part of what we're seeing in the margin improvement today? Just any kind of guardrails you could give us around how to think about that on a go-forward basis as that business continues to grow. Sure. Look, we were obviously -- I think last quarter, we shared we had a binding LOI with CVS. We've just finalized that contract work, Lisa. We've been partnering with CVS for a long time. We're incredibly proud to support the work they do and be affiliated with them. I would not say that the services that we're providing has materially changed. And so, we're thrilled to have the opportunity to extend that to 2027. In terms of oncology, I mean, we call it an ecosystem because we think it all sort of reinforces each other. So, as we do things like bring practices into the network, that gives us more access to data, which supports oncology. It gives us more purchasing power and it supports our GPO business. And so, we've been really pleased with the progression in the oncology business and our ability to scale out in each of those dimensions. But each piece does help to reinforce the other piece. And we continue to think oncology is a very large market opportunity, in excess of $50 billion, and that we have the assets that position us quite well to succeed in the long term here. And Lisa, maybe what I would add, what we've done over the last year or two through the development of Ontada, through the partnerships with Sarah Cannon Research Institute and Genospace, we're moving up the value chain. And so, we're leveraging the scale that we have in The US Oncology Network, the distribution scale, the GPO scale that Brian just talked about. We're adding more practices as Brian referenced earlier. And by moving up the value chain with more scale, we're very optimistic that, that's going to add to margin over the coming years. Thank you. I appreciate the commentary on fiscal year '23 relative to long-term guidance targets. I believe last year at this time, you provided a little bit of forward commentary in advance, the formal guidance on the factors that might be worth keeping in mind as we all model fiscal year '24. What would you call out relative to those items that have been helping '23 and may or may not drive you above/below long-term guidance next year? Thanks for the question, Eric. I tried to address a little of that in my comments but maybe I can capture it here. I think there's really a handful of items that we think could be impactful as we go forward. Clearly, we talked about the stabilization of prescription transactions and patient mobility and utilization seems to be quite stable. We saw prescription volume growth of about -- roughly about 5% in our third quarter, so that seems to be in line with what we've seen in the last few quarters. Certainly, biosimilar acceleration. We're going to see more biosimilars coming to market. We've got just over two dozen that are on the market today and more are coming. Some recent announcements certainly back that up. I'd say the timing and size of the growth investments that we make and really the timing of our integration, some of the acquisitions that we made, we think could be very impactful in a positive way. And then I think there are a handful of other items. The trajectory of COVID, we think that, that's going to go into the commercial pipeline here in 2023. Our contract goes through July of 2023. It doesn't mean that those services and products are going to go away. So, the pace and trajectory of that will certainly be impactful. And we have a very strong balance sheet. We expect to continue to deploy that balance sheet in a very capital-accretive way, whether that's returning to shareholders or, as you've seen us do here recently, more towards acquisitions that are right on strategy. And clearly, we had the opportunity to invest organically as well. So, there's a lot of really positive things that are going on. There are some things that could go the other way in terms of trajectory of COVID as an example. But we feel like we're really well positioned against all of those items. Yes. I mean, the macro backdrop remains a bit dynamic, right? We've got China open, China closed, inflation, obviously, workforce dynamics we've dealt with. We've successfully, I think, contemplated that in our FY '23 guidance. Did not really assume any material impact and I think it's played out that way, and we'll be thoughtful about those as we go into '24 as well. Hi, thanks for taking my question. I just wanted to touch a little bit on the Medical segment. Obviously, if we back out COVID, very strong growth here. And just wanted to dig a little deep to understand what's driving it? I know you mentioned the Primary Care business. But maybe you can go a little deeper into that. Is that a -- is there any changes in product mix? Or is this -- because I don't think its probably volume growth per se, but I think about your customers and their growth or new customer wins. Anything that you can kind of call out there would be helpful. And because the 25 obviously, is higher than the full year. And how should we think about that, maybe to Eric's question earlier, about thinking about '24 as well. Yes. I would say that in the quarter, we identified that we had some strength in some of our sourcing programs, and that's really what drove above the trend that we've been seeing for the last really several years now. At our Investor Day, we talked about a long-term target rate of around 10%. We certainly are growing a little bit faster than that this year. Certainly, the volumes have been strong. And obviously, the sourcing programs were really a good contributor in the quarter. I think as you think about going forward, clearly, we've given the guidance for '23. But I would anchor you around the long-term growth rates that we've seen now really for the last three to four years. Those are good growth rates. They are good margins within this business. And we think that the Primary Care business is really going to be supportive of that 10% growth rate going forward. Thanks for taking my question. Britt, I'm going to ask you to double check my math on this, which is if I look at your guidance for the Pharma segment for the full year, you're basically -- you have it growing 200 basis points faster for the balance of the year ex COVID, which I assume if I annualize, is going to look like something greater than 6% versus preliminary expectations or at least going into the quarter. I guess, could you talk about what's driving that at the core? And can we think about kind of the sustainability of the pockets of strength you're seeing in that business? Thank you. Yes. Thanks, George. So, we did raise the guidance for the full year to 7% to 9%, excluding COVID-related items, and we're very pleased with the performance of the segment. As I talked about in my comments, there's really a number of factors here. We've got stable prescription utilization. As I mentioned, we saw -- we're seeing about 5% based on IQVIA data in the third quarter. We're certainly seeing strength in our oncology platform. I think we just talked about some of the factors that are driving that. We're adding practices and we're certainly moving up the value chain from that perspective. And we're seeing growth, really stable growth in specialty providers as well as in health systems. And so, all of those things are performing quite well. And that's also why I talked about that we're expecting now that we're going to grow faster than long-term target growth rate that we gave you at Investor Day and that we've reaffirmed in previous quarters. So, I think all of those things are really positive contributors. And that's why we're seeing faster growth than we would expect, faster than the 4% long-term target growth rate that we gave you previously. Good afternoon. And thanks for taking my question. I guess, separate from all of the helpful color around the COVID profit streams, are you able to comment just on how much flu may have been a key factor in the earnings upside in the quarter, either in the Pharma segment or the Medical segment? Thank you. As we've talked about previously, this has been a stronger flu season that we've seen historically. It really started in our first quarter. We talked about in our first quarter that there was an extension of the illness season from our fiscal 2022. It's not a material driver to the enterprise. It certainly does drive more visits. We're seeing that the illness season is driving not only vaccines and test flu test kits but also some combo kits, which is -- which started last year. So, it's not a material driver to the enterprise. It certainly does drive more foot traffic and that certainly is beneficial to other products and services that we have, not only in Medical but in Pharma. Thank you, guys. I guess just to follow up on Lisa's question and Britt's comments on the oncology side. It sounds like you guys are looking to get more aggressive with the roll-up of Oncology Networks, and it seems like there's consolidation there. So, as I think of catalysts and maybe like big moves in that space, I mean, do you see opportunity with -- or should we be thinking about the Sarah Cannon partnership as an opportunity that could bring a big chunk of new doctors into the network in the coming years? Or how should we be thinking about that? Thank you. Well, oncology is clearly one of the key growth priorities we've identified for the company and talked a lot about over the last years. And there are various capabilities within our oncology ecosystem, distribution as an anchor, GPO as an anchor, our practice management business you saw on clearly important and the innovation we've done around Ontada and the most recent addition of Genospace and the Sarah Cannon joint venture. So, we think all of these things sort of add to our differentiation, add to the attractiveness of McKesson as a service provider and a partner in this area. We've been really happy to be continuing to add to the growth of the US Oncology Network. We do it in a very disciplined way. We have a model that works for us and any acquired practices need to be able to operate consistent within that model. But it's clearly our actions this last quarter indicate, we have opportunities to continue to grow and expand. And we think that, that's part of our model and we expect that we can continue that into the future. Thanks for everyone. Maybe just to get you to expand, if possible, a little bit more on your comments around specialty and the development of biosimilars. I guess if you look out over the next few years, we have a significant number converting. I know it depends in your business on how that drug is administered today and how it's -- the patient receives it but as to how much benefit you'll derive. But is there a way to talk about how you see that progressing over time? And then maybe another aspect of that is we hear from a number of players that they're expecting to put more resources behind specialty and grow. Can you give us a little bit of a sense of how you assess the competitive landscape at this point and your positioning? Well, I would start by saying that the contributions from biosimilars has been increasing over the past years. We do think the pipeline holds a lot of promise. It continues to strengthen, and we think this could be a long-term opportunity really exists in front of us. I mean to date, there's 40 approved biosimilars, 25 launched, I guess, maybe 26 because if you count today's news on HUMIRA. And the impact of those are going to really be dependent on the rates of adoption, things like the interchangeability. For us, clearly, the channel will matter. Part B is we have more services to offer and more support we can provide to those biosimilars in Part B, Part D will be less impactful. But I think we continue to look at the majority of the opportunity being ahead of us. I do think this market is still young, and I think as people get more experience with biosimilars, we would be hopeful that adoption rates would continue to accelerate. But it depends on things like pricing strategies that the innovator adopts and the biosimilar comes to market with. So, there's a lot of dynamics that I think are still playing out like they always do in a young market. But we're in the very early days, and we believe biosimilars will be good for our business model going forward. Okay. Well, thank you, everyone, for joining our call this evening. Appreciate, as always, the thoughtful questions. I want to thank Carrie, our operator, for facilitating this call. Let me just wrap up by saying McKesson delivered really good third quarter results. And it's really driven by the continued momentum in our underlying business. I'm confident in our ability to consistently execute on our company priorities and drive sustainable long-term growth as a diversified health care services company. None of this is possible without Team McKesson, so I'd like to thank everyone for their dedication, for the big and small actions they take every day to help our customers, our partners and our patients. I'm proud to be a member of and the leader of Team McKesson. Thanks again, everyone, for joining our call. I hope you all have a great evening.
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Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm First Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, February 2, 2023. The playback number for todayâs call is 877-660-6853. International callers, please dial 201-612-7415. The playback reservation number is 13735295. I would now like to turn the call over to Mauricio Lopez-Hodoyan, Vice President of Investor Relations. Mr. Lopez-Hodoyan, please go ahead. Thank you, and good afternoon, everyone. Todayâs call will include prepared remarks by Cristiano Amon and Akash Palkhiwala. In addition, Alex Rogers will join the question-and-answer session. You can access our earnings release and a slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our website later today. . During the call today, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website. We will also make forward-looking statements, including projections and estimates of future events, business or industry trends or business or financial results. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent 10-K, which contain important factors that could cause actual results to differ materially from the forward-looking statements. In fiscal Q1, despite the ongoing macroeconomic headwinds and short-term challenges impacting the semiconductor industry, we delivered revenues of $9.5 billion and non-GAAP earnings of $2.37 per share, including year-over-year growth in QCT Automotive in IoT. QCT revenues of $7.9 billion were down 11% year-over-year as a result of weaker handset demand and inventory drawdown. In the current quarter, combined auto and IoT revenues represent 27% of total QCT revenues, reflecting continued progress on revenue diversification. QTL delivered $1.5 billion in revenues within Q1. As the handset industry continues to experience reduced demand, we are now expecting elevated channel inventory levels to persist at least through the first half of calendar â23. In addition, multiple end industries within IoT are also experiencing weaker-than-expected demand and elevated inventory levels. Given the current macroeconomic and demand environment, weâre implementing further spending reductions and streamlining operations without losing sight of the significant growth and diversification opportunities ahead. This is consistent with our commitment to actively manage operating expenses as indicated during our last earnings call. Combined with the actions we have already taken in the quarter, we expect to reduce non-GAAP operating expenses by approximately 5% relative to a run rate exiting fiscal â22. Despite near-term headwinds, our long-term growth opportunities remain unchanged. Our leading technologies, such as advanced wireless connectivity; high-performance, low-power compute and on-device intelligence are enabling the ongoing trends of digital transformation across industries. From a product and technology perspective, we believe we are in the strongest position in our history. Our strategy is working, and we remain focused on expanding our addressable market to approximately $700 billion in the next decade and firmly establishing Qualcomm as the connected processor company for the intelligent edge. In automotive, the industry continues to evolve at an unprecedented rate, driven by the adoption of digital technologies. The software-defined vehicle is at the core of this transformation, offering automakers a significant opportunity to deliver enhanced connectivity, improved safety and security features, increased levels of autonomy as well as new business models and revenue streams. We believe the Snapdragon Digital Chassis is the industryâs preferred purpose-built platform to help drive this innovation for the next generation of vehicles. At CES, we announced Snapdragon Ride Flex, which enables digital cockpit, advanced driver assistance systems and automated driving functions to coexist on a single SoC, a first for the automotive industry. Automakers and Tier 1s can now scale a unified center compute and software-defined vehicle architecture across their portfolio. We also demonstrated our expansion into two-wheelers with the latest infotainment and cloud connected digital services to enhance safety and deliver a more personal experience for riders. Our solutions also enable OEMs and fleet providers to deliver over-the-air updates, subscription services, remote diagnostics, geofencing, theft protection and more. We are very proud of the progress we have made in automotive, and we believe that we are the best positioned technology partner to help drive this industry into the future. In handsets, our recently announced Snapdragon 8 Gen 2 mobile platform begins a new era of AI accelerated experiences for smartphones. The Snapdragon 8 Gen 2 includes our first ever AI-powered camera processor that enables real-time semantic segmentation for photos and videos. A dedicated 5G AI processor that can enhance 5G data speeds, coverage, latency and battery life and an updated general purpose AI engine with a larger tensor accelerator for increased formats. We are also pleased to enable the worldâs first satellite-based two-way capable messaging solution for Android smartphones. Snapdragon Satellite will provide global connectivity for messaging, utilizing Iridiumâs weather-resilient L-band spectrum and will initially be available on next-generation premium smartphones using Snapdragon 8 Gen 2 within the second half of 2023. Yesterday, I was pleased to join Samsungâs Unpacked event, where they launched the Galaxy S23 family of smartphones, powered by the Snapdragon 8 Gen 2 mobile platform for Galaxy globally. This premium platform features accelerated performance and unique customizations made possible by our expanded strategic partnership with Samsung. The Galaxy S23 represents the first smartphone announced from this partnership. In IoT, which is poised to become our largest addressable market, our revenue stream spans across three categories: consumer, edge networking and industrial. In consumer IoT, our next-generation PC platform with integrated custom Oryon CPUs and upgraded AI engine has sampled on time and is exceeding our internal KPIs, delivering disruptive CPU performance per watt across tiers. In addition, Snapdragonâs AI capabilities and leading battery life opens unique new possibilities for differentiated user experiences for the modern workforce. Key examples are Windows Studio Effects, including portrait blur, eye framing and noise cancellation with voice focus. Together with Microsoft, weâre broadly engaged with the app ecosystem and are pleased that native applications have been launched for Windows on Snapdragon by market-leading ISVs such as Zoom, Amazon Prime Video, VMware Carbon Black, Cisco AnyConnect and CrowdStrike. Additionally, as Adobe announced at our Tech Summit, its creativity suite of apps, including Adobe Photoshop, Lightroom, Fresco and Acrobat will run natively on Snapdragon. Weâre now engaged with major PC OEMs with multiple platform design wins across their product road maps for consumer and commercial. In edge networking IoT our Wi-Fi infrastructure and networking products continue to gain share, led by strength in enterprise Wi-Fi access points and carrier gateways. We see several trends that are favorable to our Wi-Fi solutions. Wi-Fi mesh networking continues to grow in popularity worldwide, increasing the number of Wi-Fi chipsets installed per home. The hybrid work trend appears to have had lasting impacts on enterprise networking with workers relying on real-time collaboration tools regardless of whether they are in the office or remote. Broadband internet service providers are turning increasingly to a modular software development model, creating new opportunities for Qualcomm in next-generation home gateway routers, and the transition from Wi-Fi 6 and 6E to Wi-Fi 7, which weâre currently leading across home, enterprise and carrier segments. In 5G, fixed wireless access, weâre encouraged by the significant momentum in India following the recent 5G auctions. Operators have publicly stated their ambition to provide broadband services to 100 million homes using 5G FWA. Qualcomm is well positioned to enable the 5G FWA ecosystem in India with our leading product portfolio on 5G millimeter wave-based high-power CPEs complemented by small cell and compact macro cell infrastructure modem RF platforms. We are currently working with CPE and infrastructure OEMs on the commercial rollout in India, spanning both millimeter wave and sub-6 spectrum. In industrial IoT, digital transformation is still in the early phases, and the scale of the opportunity for Qualcomm in the long term across many verticals is significant. In the tracking and logistics space, we believe we have established one of the largest ecosystems of manufacturing partners. Last month, we announced a new IoT optimized modem, the QCX216 for applications such as smart utility meters, trackers, e-mobility, parking meters, home automation and security and other location-based solutions. The QCX216 reduces power consumption by up to 80% versus the previous generation solution while also enabling customers to design modules with an up to 40% lower cost structure. In retail, our point-of-sale solutions continue to drive the transition from traditional terminals to full-feature Android-based terminals. We have shipped over 70 million Snapdragon devices since 2016 into handheld and desktops point-of-sale terminals worldwide. In enterprise video collaboration, weâre leading this rapidly growing segment, powering many of the key OEMs such as Poly, Logitech, Nit, [ph] Cisco, Bose, AVer and Alibaba. These are just a few examples of our traction within industrial, and we remain excited about the growth prospects as digital transformation accelerates. In summary, the overall long-term growth opportunity for Qualcomm remains unchanged as demand for technology extends to virtually every device at the edge. Our track record of innovation provides a unique perspective and capability to be at the forefront of the digital transformation across new and diverse end markets. Thank you, Cristiano, and good afternoon, everyone. And thank you for joining our call during a busy earnings week. Iâll start with our first fiscal quarter results. Consistent with our prior guidance, we delivered revenues of $9.5 billion and non-GAAP EPS of $2.37. QTL recorded revenues of $1.52 billion and EBT margin of 73%, reflecting slightly lower global handset units. QCT revenues were $7.9 billion and EBT margin was at the high end of our guidance range at 28%. Handset revenues of $5.8 billion reflected the impact of industry-wide headwinds we had previously communicated. IoT revenues were up 7% year-over-year to $1.7 billion, mainly driven by growth from our edge networking products. Automotive continued its momentum with year-over-year revenue growth of 58% to $456 million, driven by the adoption of our Snapdragon Digital Chassis. Non-GAAP operating expenses were lower than our guidance, decreasing 6% sequentially, which includes the benefit of certain cost actions we outlined last quarter. Our balance sheet remains strong with $8.2 billion in cash and marketable securities at the end of the first fiscal quarter. In addition, we expect to receive a majority of the transaction price of $1.5 billion on the completion of the sale of Veoneerâs active safety business to Magna by SSW Partners. We expect the transaction to close by the end of the fiscal year. We returned $2.1 billion to stockholders, including $1.3 billion in stock repurchases and $842 million in dividends, in line with our capital return program. Lastly, our GAAP EPS results included a $0.10 benefit from the U.S. tax requirement to capitalize and amortize R&D expenses. This benefit is excluded from our non-GAAP results. Before turning to second fiscal quarter guidance, Iâll provide an update on short-term cyclical headwinds facing the semiconductor industry. The environment continues to be dynamic with challenging macroeconomic conditions and COVID headwinds in China, driving industry-wide demand weakness. Given this uncertainty, we are incorporating a negative bias for 3G, 4G, 5G handset volumes for calendar â23 relative to calendar â22. The impact of broadening demand weakness across handsets and IoT products and the easing of supply constraints has contributed to elevated channel inventory. Based on our current assessment, we expect QCT customers to continue to draw down on inventory, at least through the second and third fiscal quarters. At this point, weâre optimistic that the demand and channel inventory may normalize during the second half of the calendar year, and we remain in a strong position to take advantage of the opportunity when it occurs. While our business is not immune to the macro environment, we are confident in our ability to navigate this landscape. As Cristiano summarized, we have continued to expand our actions to reduce operating expenses beyond the initiatives we previously outlined. While we are reducing spending on handsets and SG&A, we continue to fund our diversification investments in IoT and automotive, which is consistent with our long-term strategy for the business. The initial benefit of these actions is reflected in our fiscal first quarter results and second quarter guidance. Overall, we are targeting a combined 5% reduction in non-GAAP operating expenses relative to our fiscal â22 exit rate. Turning to guidance for the second fiscal quarter. We are forecasting revenues of $8.7 billion to $9.5 billion and non-GAAP EPS of $2.05 to $2.25. The midpoint of our guidance includes an assumption of lower end market demand and the continued drawdown of channel inventory. We are forecasting QTL revenues of $1.25 billion to $1.45 billion and EBT margins of 66% to 70%, reflecting a sequential seasonal decline in handset units. In QCT, we estimate revenues of $7.4 billion to $8 billion and EBT margins of 25% to 27%. We expect handsets and automotive revenue to be flat sequentially, offset by a reduction in IoT revenues due to the factors I just outlined. We estimate non-GAAP operating expenses of approximately $2.25 billion. This reflects the typical calendar year increases for certain employee-related costs, offset by the savings from our cost reduction actions. In closing, with the uncertainty of the macro environment, we will remain focused on operating discipline and managing the factors we control. Our diversification strategy is on track, as evidenced by our design win pipeline across IoT and automotive customers. In addition, our long-term secular growth opportunity remains unchanged. We are focused on executing on our strategy, enabled by our leading technology road map and best-in-class product portfolio. I have a couple. Maybe for the first one, I hear you on the inventory digestion. But maybe one of the other concerns that investors have had for this year on the handset side is sort of delay, if any, in terms of launch plans from the Android OEMs about sort of related to their new handsets or any changes in their pricing strategy and sort of the chips that they intend to then sort of prioritize or sort of the high-end versus maiden chips that they want to prioritize to achieve those pricing strategies in the market. Maybe if you can give us some color in terms of what youâre seeing from the OEMs on that front outside of the inventory digestion? And I have a follow-up. Thank you. Sure. Samik, itâs Akash. Really from a handset launch perspective, especially in the tiers that Qualcomm is very strong at, weâre continuing to see our customers launch on time. So, youâre -- we obviously saw the Samsung launch happen yesterday. Our Chinese OEMs are also planning to launch their devices on schedule. So, no change from our perspective on launch timing in the key tiers for us. Okay. And maybe just for my follow-up. On the IoT side, you mentioned the weakness that youâre seeing in that broader market, but maybe if you can delve into that a bit more. Are you seeing sort of more weakness just sort of being higher on consumer IoT, or is that more worsening across industrial IoT and edge networking as well? And if you can quantify what -- how to think about the edge networking opportunity relative to India in 2023? Thank you. Sure. So from an IoT perspective, itâs very similar impact to other parts of the industry. Itâs really the short-term cyclical headwinds that the entire industry is seeing. Weâre seeing a factor of that as well. And so, itâs two parts. Itâs demand weakness and then OEM inventory drawdown, both of those factors similar to handsets. And within our product line, weâre seeing -- we obviously started seeing impact in consumer IoT that weâve talked about previously, and weâve seen that expand a bit into industrial and edge networking. But, as we look at these -- we see these are short-term factors that are clearly kind of driven by the cyclicality in the industry thatâs going on. But, when you step back and look at our design win pipeline, it still reflects the opportunity in front of us. This is Cristiano. Samik, just to add one thing, you ask about India. Yes. We -- as we said in our prepared remarks, weâre excited about that opportunity. Itâs probably likely itâs going to be one of the largest opportunity for 5G as fixed wireless access. And as we mentioned, the opportunity will be across all the operators to connect in the order of 100 million homes. So, that could be very significant. What we like about it is that millimeter wave has been utilized as well for fixed wireless access. So, thatâs a great opportunity for us. Akash, I wanted to ask a little bit of question -- a couple of questions about margins. You talked pretty explicitly about OpEx, but weâre seeing no surprise maybe with the dynamics in the macro and the inventory correction that the QCT operating margins have come down some. And maybe you could just walk us through the puts and takes on margins from here. Is March the bottom? And how should we model sort of gross margin in QCT as we go forward, given the mix of the segments might be a bit different during this inventory correction? Thanks. Sure, Matt. So, let me address it in two parts. First, from a gross margin perspective, we did slightly better than our expectations and the results that we announced for the first fiscal quarter. And then, weâre guiding similar margins into the second quarter. So, from a gross margin perspective, we are holding well. And even in the challenging environment weâre in, we are doing a relatively good job. As weâve said in the past, we always expected that once we get to supply constraints, thereâll be some gross margin pressure, and that was factored into our long-term target. So, thereâs really nothing new that we havenât told you before on gross margin side. On operating leverage, which is really the second driver here is the impact that weâre seeing from the inventory drawdown reduces the operating leverage in the business temporarily in the short term. And so, youâre seeing the operating margins being impacted by that. But kind of once you step back and abstract out of that change, you should see the operating margin more in line with your expectations. Cristiano, while Qualcomm has done really well in premium tier Android, with supply easing, whatâs the appetite to maybe go down to into the mid- to high-tier Android? And if so, what would be time line to maybe take share if you have interest in that market? Thank you, Mike, for your question. Actually, itâs a great question. What we have seen in this current demand environment as well as the inventory drawdown, actually, the premium tier had done a little bit better than what the mass tier has been impacted, I think, consistent with our expectations. I think you saw that in some of our customersâ earnings call as well. However, we expect that as you get to the second half of the calendar year, we hope that the inventory drawdown situation improves as well as China reopens. And we will see an opportunity for the mid and the low tier to come back and our design traction is good in those tiers with the OEMs, and weâll see what happens. So, weâre not -- weâre not factoring that better second half yet in our planning assumptions. I think weâre waiting. But, I think thereâs optimism just because of the inventory drawdown as well as China reopening. I have two. For the first one, Akash, youâre talking about the inventory correction, March as well as in June. Youâre guiding handsets kind of flattish in March. I was wondering if thereâs any sort of like preliminary color you could give us on the June quarter trajectory. Like, do you guys think March quarter in general is the bottom? And then, I have a follow-up. Yes. So, the way, Stacy, we are thinking about kind of how things play out is the short-term headwinds, cyclical headwinds that weâre seeing that uncertainty remains, and weâre seeing that in handsets and IoT, so both from a demand perspective and inventory drawdown. So, we expect our QCT customers to be cautious. And until there is more visibility, theyâre going to be careful with additional purchases and draw down inventory. So, thatâs whatâs factored in our updated guidance. When we look at the second half of the year, as Cristiano said, weâre pretty optimistic that demand and channel inventory normalizes. And that allows us to take advantage of the growth from that point on, given our strong position when the dynamic occurs. In terms of bottom, the way I think about it is weâre going to see impact for the March and June quarters, and I think thereâs an opportunity from that point on as we grow in the second half of the year. Got it. If I could ask a quick follow-up. In your Q, you talked about you had a $344 million tailwind from higher average selling price year-over-year in the quarter, and that was for the overall chip segment. But you used to give that number strictly for handsets. Can you give us some feeling for how pricing has been trending in the handset business relative to that overall benefit you see in QCT? Yes. So, if you think about pricing in the handset business, itâs usually a function of two things. First is within a given year more capabilities being added to the device, especially on the application processor side. And so, youâve seen us benefit significantly from that over the last three years. And as we look forward, we are continuing to see demand for additional functionality. So, thatâs kind of tier for tier improvement opportunity for us and for the overall industry. And then, the second factor is mix within peers and that, of course, changes across quarters. And so, that goes up and down based on what sells through in that quarter and which customer it is. But thatâs more timing versus kind of a fundamental trend of revenue growth. I want to focus on the handset guidance for the next quarter fiscal 2Q being flat sequentially. Can you just talk about the puts and takes that are getting you to flat? And Akash, last quarter, you gave a framework about, I think, $2 billion of inventory burn headwind. I just wonder if you were indeed successful in getting halfway through that, or is the issue now pervasive because just demand has dropped? So just the puts and takes on that would be helpful. Yes, Ross. So, from a handset perspective, what weâve assumed in the March quarter is a standard seasonal decline, and I said this in my prepared remarks from December into March. So, itâs what you would expect seasonally happens once you go between the quarters. And so, thatâs what weâve assumed, and that informs our QTL forecast for the quarter as well. But you guided flat sequentially. So, Iâm just trying to -- from December to March, are you saying it would be down, except for now itâs going to be flat because youâre burning less inventory? Okay. So I understand the confusion. So, the -- what I talked about was the total handset market, which we are expecting to be down quarter-over-quarter, consistent with seasonal trend. What we said was flat was QCT handset revenue, we expect to be flat. And of course, thatâs a function of mix of chips and also inventory drawdown differences. Going back to how much inventory youâre reducing in handsets. Whatâs your visibility into that? And I mean, are you -- are there certain customers where they sort of didnât take anything in December and so you know that theyâre coming back? Just can you give us a sense of are you sure this is all inventory reduction and not end demand? Yes. Joe, we have a sense of kind of what sell-through the OEMs had because of our QTL business. And then we have the ability to compare that with whatâs happening in QCT. So, we do have a pretty good sense of what is happening in the industry. And weâre confident that a large portion of it was inventory drawdown. Okay. Great. And then specific to the China region, I think you mentioned some new launches in the March quarter, but it sounds like the situation there is pretty challenging in terms of visibility. Like, is China different than the rest of the world for you right now? Yes. The uncertainty in China definitely reflects in our customersâ purchases, and thatâs what we talked about that we expect until there is more visibility, we expect customers to be careful with additional purchases and draw down on inventory. But in terms of handset launches, we are still seeing the OEMs being extremely active and planning handset launches on the regular cadence and driving functionality within the market. This is Cristiano. Let me just add one thing. If you look at the China handset market, the majority of sales, even though they have a big online component, the majority of sales is offline market. So, as we have -- saw, with the lockdowns and the COVID situation, there was a big impact in the handset market in China. Common sense, and thatâs how some of our OEMs are also thinking is as the COVID gets behind China, you should expect the markets to open up. And what we have visibility right now is a lot of the new device launches preparing for that and some of it, which is going to be announced at Mobile World Congress. Itâs too early to draw a conclusion. So, letâs go back to that conversation that there is optimism that second half could be better. I guess kind of a combination of the two. Iâm curious inventories are up on your balance sheet, Akash. Just kind of curious whether you need to work those down as well? And then I guess for Cristiano, just going back to a prior question, on the midrange. Iâm curious about the pricing environment. I mean, MediaTek is having a tough first half as well. Can you just comment on what that environment is? And then, your kind of just thoughts in general about pricing and moving for share within the modem business? You did a good job navigating at the high end during the shortages, but just kind of curious, favoring profitability versus share? What are your thoughts? Thanks. Sure. Blayne, itâs Akash. Iâll take the first one, and then I think Cristiano will take the second one. From an inventory perspective on our balance sheet, youâre seeing something similar to what youâre seeing on our peers and customers as well, the same set of drivers. As you know well, for leading-edge nodes, which is where we operate, the lead time is 5 to 6 months now for the foundry and chip production. And so, we were clearly starting wafers based on a different market expectation and before the inventory drawdown. So, weâve calibrated that down. We are working with our suppliers and over time, weâll get to a reasonable place. It is important to also remember that when you look at three years ago versus today, weâve grown tremendously in terms of revenue and scale across our businesses. And then also supply has caught up to demand. So those two factors would naturally increase inventory anyways. But the remaining weâll be working through, as I mentioned. Hi Blayne, Cristiano, Iâm going to take your second question. Look, itâs probably clear, both us and the other chip supplier in the handset market, dealing with the same challenges, which is the demand weakness and inventory drawdown. In the areas that we have more competition, which is mid- to low-tier, we also saw thatâs the one thatâs most impacted by the demand weakness. So, as we think about the market open up, our view is weâre very well positioned from a competitive perspective. We have visibility into the design pipeline. And we will remain disciplined on pricing, which is consistent to how we have behaved over the past few years. I wanted to ask about fixed-wireless access. And I think you talked about in the prepared remarks that you saw a big opportunity in India playing out over the next couple of years with fixed wireless access. But can you maybe just talk a bit about the ASPs that Qualcomm gets from a typical device in fixed wireless access? And how do you see the business evolving in the next couple of years as you start to attack that in the opportunity and you can see some of the success youâve had in the U.S. so far here and maybe other markets? Just maybe help us understand how this really plays out for Qualcomm? Thank you. So, I will start by saying that we really like that market, and we think the market is a long-term market. I think the -- itâs clear to see now that home broadband, for the first time, you have a wireless solution that can augment fiber. And itâs really about fiber and 5G, you donât find cable everywhere outside the United States. So, we think thatâs an opportunity for both, developed and developing economies. And of course, if you look at the size of India, thatâs why weâre very excited about it. We saw the auctions. The investments are being put into place by the operators and infrastructure. When we sell into that market, I think while I canât really talk about the ASP, I tell you, itâs accretive in margins to our handset business, especially because we have a lot of content, in many cases, we also have the ability to do on Wi-Fi access point in addition of the 5G modem. And we are very well positioned with millimeter wave technology. Okay. Did you say -- sorry, Cristiano, did you say you booked that in mobile systems, or is that an IoT business? Yes. What I mentioned is itâs compared to our handset business, the ASPs that we have for fixed wireless is really accretive to margins. Thatâs what I meant, but itâs in the IoT business. Okay. Maybe just a follow-up. I wanted to ask about the recent U.S. restrictions around Huawei. Are you seeing any impact in this at all? I mean, it looks like Huawei has been shipping quite a lot of 4G devices recently. Have you been shipping components to Huawei? And if so, can you maybe just help with the impact of the latest restrictions on the business? Thank you. Yes. So, this is Alex. Iâll start, and then maybe Akash can fill in if he has anything further. So, I donât think itâs fair to characterize it as the latest restrictions on Huawei. What weâve seen are news reports to the effect that Commerce is considering not issuing new licenses to Huawei. And we havenât heard anything from Commerce itself. Qualcomm has a set of licenses that weâve had for a while that basically allow us to ship 4G and other chipsets, including Wi-Fi to Huawei. Those licenses were she goes Commerce reached the determination that they donât affect national security issues. Those will continue for some number of years. And so, within the scope of those licenses, we donât see an impact. Akash, anything else? Two questions. Inventory days doubled and it has been going up every quarter in the last 4 quarters, 5 quarters. Can you talk about inventory days? And what is it composed of if there is any anything special we need to discuss just because of the high value? And second, more qualitatively, I want to understand what is the lag or what should be the lag on sales in China from inventory levels versus demand recovery as China reopens? Meaning, from the time that China reopens and there is demand for handsets, how should we think about the lag from that to being translated into demand from you? Yes. So Tal, itâs Akash. From our perspective, the way weâre about our inventory -- and itâs really not necessarily inventory, itâs really wafer starts. What we would like to do is, given the lead time of 5 to 6 months, start wafers, 5 to 6 months in advance, plus some room on top for mix changes that might happen during the period. So, thatâs the framework under which we operate. Youâre right that our current inventory balance is higher than where weâd like it to be. And earlier in the call, I went through the rationale as to how we ended up there. So, weâre working with our suppliers, and weâll kind of normalize it over time, and we feel confident we can do that. On your second question on the lag, I think thatâs already embedded in the way we provided our view into the future, which is -- as we expect inventory drawdowns to happen through the March quarter then going into the June quarter, but as we go into the second half of the calendar year, as demand comes back and normalizes, we have the ability to benefit from it. Got it. Last question. Iâm getting a repeated question on your licensing part. I saw today the -- what you said about Nokia and Ericsson. Can you discuss licensing portion in terms of any forthcoming discussions, negotiations or anything that we need to be aware of, or is it as stable as it was the previous year? So, this is Alex. It really is just as stable as weâve described previously. All the major OEMs are signed up long term. No other new renewals are coming up until fiscal year â25. The Nokia license basically split into a couple of parts, infrastructure to Nokia handset to Microsoft. Those licenses as they evolved, were not -- no longer material to the QTL business. So, thatâs pretty much where things stand. Two if I may. The first one, if you look back three months ago, you talked about kind of a two-quarter correction. Now itâs at least three. And so just curious to level set kind of how things have transpired over the last three months. How much of the change statement here is just end demand declining versus your customers working down Qualcomm semiconductor inventory? And then, the second question, you kind of spoke to it earlier around building inventory, and would love to hear your thoughts around kind of wafer start volume commitments. How to think about the impact to QCT margins in calendar â23? And is there any risk of a onetime catch-up payment on reduced volumes? Thanks so much. So, on your first question, C.J., from an inventory perspective, there are a couple of drivers to it. So, first is the weaker market; second is inventory drawdown. And both are significant factors. And then the third, Iâd say, is weâve also seen IoT having the same sum of the characteristics. And so, youâre seeing a combination of those factors impacting the time period for which the drawdown lasts. Again, as we look at it, this is a shorter-term thing that when you step back, it doesnât necessarily -- the drawdown doesnât impact the strength of the business. And so, as the recovery happens, weâll be in a position to benefit from it. Can you repeat your second question? Iâm not sure I understood it well. Yes, sure. As it relates to your wafer commitments, particularly with TSMC, if youâre taking down the volume purchases, any risk to pricing and/or catch-up payments? Yes. So, a lot of our commitments were more in the form of prepayments rather than volume commitments. So, that just means you get the prepayment back over a longer period of time. But weâre navigating through those and nothing to report at this point. Yes. Maybe just to summarize, I think how we see the earnings call. I think beyond 2023 for Qualcomm, we see many of our growth initiatives, increasing scale, including auto, PCs, XR and 5G FWA, weâll talk about it in industrial. When we look at the current environment, we remain very confident in our ability to navigate the economic downturn and the short-term challenges, given our strong balance sheet and consistent history of strong free cash flow generation. As you can see, weâre taking action where we can control, and we believe weâll emerge even stronger as we continue to execute on our strategy. Weâre focused on Qualcommâs long-term success, and weâll work diligently to continue to drive growth, especially auto and IoT, diversify the company and deliver value for stockholders. Iâd like to thank all the employees for the dedication and contributions to Qualcomm as well as our many partners and suppliers, and thank you all for attending the call. I know it was a popular earnings day today. Thank you.
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Good morning, and welcome to the Core Laboratories Fourth Quarter 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]. Please note this event is being recorded. Thanks Drew. Good morning in the Americas, good afternoon in Europe, Africa and the Middle East, and good evening in Asia-Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories fourth quarter 2022 earnings call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer; and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations. The call will be divided into six segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments, including a high-level review of important factors in Core's Q4 and full-year 2022 performance. In addition, we'll review Core's strategies and the three financial tenets that the Company employs to build long-term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the Company's outlook and guidance. I'll then review Core's two operating segments, detailing our progress and discussing the continued successful introduction and deployment of Core Labs' technologies, as well as highlighting some of Core's operations and major projects worldwide. Then we'll open the phones for a Q&A session. Before we start the conference this morning, I'll mention that some of the statements we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the Company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties that cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed in our most recent Annual Report on Form 10-K, as well as other reports and registration statements filed by us with the SEC and the AFM. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our comments also include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our fourth quarter results. Those non-GAAP measures can also be found on our website. For the fourth quarter of 2022 Core Lab achieved sequential improvement in revenue, operating income, operating margins, and EPS with strong incremental margins. These improvements translated into higher free cash flow, which enabled the company to reduce net debt by $11.7 million or 7%. For the full-year 2022, revenue was $490 million, increasing by more than 4% compared to 2021. However, for 2022, revenue for the full-year was adversely impacted by currency devaluation of the Euro and British pound. Using a constant dollar exchange rate, 2022 revenue would've been nearly $13 million higher. For the full company operating margins for the fourth quarter grew to 12%, up from 11% in Q3. Full company sequential incremental margins ex-items exceeded 80%, driven by a strong quarter in production enhancement. Reservoir Description margins lagged after two successive quarters with very high incrementals, reflecting adverse impacts from the Russia-Ukraine conflict. The Russia-Ukraine conflict posed a headwind to revenue in the fourth quarter and throughout most of 2022, as trading patterns for crude oil and derived products were disrupted in Europe, Russia, and Ukraine. For 2022, demand for laboratory services tied to the assay of crude oil and derived products in these regions declined in excess of $9 million year-over-year offsetting growth in other international regions. Lastly, for the full company, quarter-over-quarter, EPS grew sequentially by 11% to $0.20 per share ex-items. As we look ahead, Core will continue to execute on its key strategic objectives by one, introducing new product and service offerings in key geographic markets; two, maintaining a lean and focused organization; and three, maintaining our commitment to de-levering the company. Now to review Core Lab's strategies and the financial tenants that Core has used to build shareholder value over our 27 plus year history as a publicly traded company. The interests of our shareholders, clients, and employees will always be well served by Core Lab's resilient culture, which relies on innovation, leveraging technology to solve problems and dedicated customer service. I'll talk more about some of our latest innovations in the operational review section of this call. While we navigate through the current challenges and pursue growth opportunities, the company will remained focused on its three longstanding, long-term financial tenants. Those being to maximize free cash flow, maximize return on invested capital, and returning excess free cash to our shareholders. Before moving on, I want to thank our employees for the dedication, loyalty, and adaptability in meeting all of our clients' needs and for the commitment that many have shown as we navigate the moment and prepare for more active market. I would like to begin by highlighting a couple of announcements we made since our last call. As you may be aware, the company shares were previously dual listed on the New York Stock Exchange and the Euronext Amsterdam Exchange. However, as we rationalize benefits versus the cost of maintaining the dual listing, we decided to de-list the shares from the Amsterdam Exchange, which became effective in early December of last year. In following the de-listing of the shares on January 17 of this year, we announced our plan to reorganize the company's corporate structure which includes redomesticating the parent company from the Netherlands to the United States. The company and its Board believes the redomestication will enhance long-term shareholder value by reducing administrative costs, simplifying the corporate structure, as well as gaining some operational efficiencies. The company filed a preliminary prospectus and proxy statement associated with the redomestication, which will require shareholder approval. We anticipate the redomestication transaction will be completed sometime in the first half of this year. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls specifically excluded the impact of any FX gains or losses and assumed an effective tax rate of 20%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, the GAAP financial results for the fourth quarter include a non-cash adjustment of $1.9 million, which decreased stock compensation expense associated with performance share awards, which vested during the quarter. This adjustment has also been excluded from the discussion of our fourth quarter and full-year results. Now looking at the income statement, revenue from continuing operations was $127.6 million in the fourth quarter, up slightly from $126 million in the prior quarter. The sequential increase in revenue was driven by growth in both the U.S. and international markets. However, nice growth in multiple international regions has been partially offset by continued disruptions caused by the ongoing Russia-Ukraine conflict, which adversely impacted service revenue in the affected regions. Of this revenue, service revenue, which is more international, was $88.9 million for the quarter up from $87.9 million last quarter. During the quarter, we saw nice sequential growth of 11% in the U.S., which was led by our laboratory services and well diagnostic services. We also see nice sequential improvement in multiple international regions outside the areas impacted by the Russia-Ukraine conflict. However, the Russia-Ukraine conflict has continued to disrupt the trading patterns and flow of oil in the affected regions. The realignment of these trading patterns still continues, and the realignment of these trading patterns has not been consistent or linear. For example, in Europe, our crude oil assay activity increased during the third quarter, but activity decreased again in the fourth quarter. The company believes these trading patterns will become more stable throughout 2023, and we will continue to monitor the changes to the trading patterns and appropriately adopt -- adapt our operations accordingly. For the full-year of 2022, service revenue of $347 million was relatively flat compared to $344.3 million in 2021. As Larry mentioned, two main factors have adversely impacted our international revenue by over $20 million in 2022. The devaluation of certain currencies, primarily the Euro and British pound; and disruptions caused by the Russia-Ukraine conflict as we just discussed. Product sales, which is equally tied to North America and international activity were $38.6 million for the quarter, up slightly compared to $38.1 million last quarter. International product sales for the quarter were up 15% sequentially, and our energetic sales to the U.S. market were also up sequentially. However, this growth was partially offset by a decrease of approximately $2 million in other product sales. For the full-year of 2022, product sales revenue was of $142.8 million was up 13% from $125.9 million in 2021. Moving on to the cost of services ex-items for the quarter are 78% of service revenue, which is comparable to last quarter. The service side of our business has been more impacted by the Russia-Ukraine conflict, although we see improvements in absorption of costs and nice incremental margins in regions where activity is expanding these gains are being offset by disruption to the business in other regions more directly impacted by the conflict. Cost of sales ex-items in the fourth quarter were 79% of revenue and improved from 82% last quarter. The improvement this quarter was primarily driven by gains in manufacturing efficiencies and higher international sales. Manufacturing costs continue to increase due to inflation on materials and other operating costs. However, some of the impact has been mitigated through gains in manufacturing efficiencies and some improvement in pricing. G&A ex-items for the quarter was $10.4 million, relatively flat compared to last quarter. For the full-year of 2022, G&A ex-items was $39.3 million, up from $37 million in 2021 due to restoration of employee compensation and benefits. For 2023, we expect G&A to be approximately $40 million to $42 million. Depreciation and amortization for the quarter was $4.1 million and comparable to last quarter. For the full-year depreciation and amortization expense was $17.2 million, down from $18.5 million in 2021. EBIT ex-items for the quarter was $14.7 million, up 10% from $13.3 million last quarter, and representing an EBIT margin of approximately 12%, which is also up from 11% last quarter. Operating income for the fourth quarter on a GAAP basis was $15.6 million. And for the full-year of 2022, EBIT ex-items was $44.8 million, down from $52.3 million in the prior year and on a GAAP basis, EBIT was $41.5 million for 2022 and $45.3 million in 2021. Interest expense was $3.1 million in comparable to last quarter and interest expense ex-items for the full-year was $11.4 million, up slightly from $11 million in 2021. Although, interest rates have significantly increased throughout 2022 the company has substantially offset the impact of this increase by reducing our outstanding debt. On a GAAP basis, interest expense for the full-year of 2022 was $11.6 million, up from $9.2 million in 2021, as 2021 interest expense included a $1.4 million gain associated with settling some of our interest rate hedges last year. On a GAAP basis, the company recorded income tax expense of $5.8 million for the quarter. And for the full-year, income tax expense was $10.3 million, resulting in an effective tax rate of 34% for 2022. However, income tax expense was significantly increased in 2022 due to the devaluation of foreign currencies, primarily Turkey and the United Kingdom, which we discussed in prior quarters. Excluding the impact associated with the devaluation of the Turkish lira and British pound, the company's effective tax rate would've been approximately 18%. The effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items discrete to each quarter. However, we continue to project the company's effective tax rate to be approximately 20%. Income from continuing operations ex-items for the quarter was $9.3 million, up 11% sequentially from $8.3 million last quarter. For the full-year 2022 ex-items, it was $26.8 million, down from $33 million in 2021. Earnings per diluted share from continuing operations ex-items was $0.20 for the quarter, up from $0.18 last quarter, and was $0.57 for the full-year of 2022. GAAP earnings per diluted share from continuing operations was $0.14 for the quarter and $0.42 for the full-year. Now moving on to the balance sheet, receivables were $106.9 million at December 31, up $6.7 million from last quarter end. Our DSOs for the fourth quarter were at 70 days also up when compared to 67 days last quarter. The increase was primarily driven by the timing of billings during the quarter and a slightly higher mix of international revenue, which generally has a longer collection period. Inventory finished the year at $60.4 million, up approximately $5.6 million from last quarter end. Inventory turns for the quarter were at 2.1 down from 2.3 in the last quarter, and primarily down due to shipping delays postponing some larger international sales into 2023. As previously highlighted, the company continues to experience an increase in cost of raw materials, labor, packaging, and transportation costs, which are increasing the cost of inventory. Additionally, challenges in the supply chain persist, which will continue to require carrying a larger amount of inventory to help mitigate disruptions. We anticipate inventory turns will remain at similar levels, but we have a focused effort for improvement as we progress into 2023. On the liability side of the balance sheet, our long-term debt was $175 million at December 31 and was reduced by $10 million this quarter. Our debt is currently comprised of our senior notes at $135 million as well as $40 million outstanding under our bank revolving credit facility. As Larry mentioned earlier, our free cash flow has also improved as the company's financial performance has improved the last couple of quarters. Our free cash flow continues to be focused on reducing outstanding debt, considering cash of $15.4 million, our net debt was $159.6 million at year-end, a reduction of $11.7 million this quarter, which also improved our leverage ratio to 2.29 from 2.42 at last quarter end. Since announcing the company's commitment and focus on reducing debt in the fourth quarter of 2019, we have reduced net debt by 46%. The company will continue applying free cash towards reducing debt, so that company reaches its target leverage ratio of 1.5 or lower. Looking at cash flow for the fourth quarter of 2022, cash flow from operating activities was $13.2 million, and after paying for $2 million of CapEx, our free cash flow was $11.2 million for the quarter. Our free cash flow generated this quarter is the highest we have achieved since the third quarter of 2020. Looking forward to 2023, we expect CapEx to modestly expand and will continue to remain in line with historical levels, but also be aligned with activity levels. For the full-year of 2023, we expect capital expenditures to be in the range of $12 million to $15 million, which is an increase from $10.2 million in 2022. Core will continue our strict capital discipline and asset-like business model with capital expenditures primarily targeted at growth opportunities and initiatives. Core Lab's operational leverage continues to provide for the ability to grow revenue and profitability with minimal capital requirements. Capital expenditures have historically ranged from 2.5% to 4% of revenue even during periods of significant growth. That same level of laboratory infrastructure, intellectual property, and leverage exists in the business today. We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders when comparing and projecting company's financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuations. Looking forward into 2023, we see crude oil macro fundamentals continuing to support a multi-year recovery cycle for the oil and gas industry. Crude oil demand for 2023 as forecasted by the International Energy Agency in January of this year is projected to increase by 1.9 million barrels per day to a record 101.7 million barrels per day as consumption in China grows along with the reopening of its economy. As crude oil demand is projected to exceed pre-COVID levels, crude-oil supply is projected to tighten. Production growth continues to face constraints due to prolonged underinvestment in many regions around the globe as well as natural decline of production from existing fields. As a result, we expect operators to expand their upstream spending plans for 2023 by mid-teens compared to 2022. This supports our continued improvement in international onshore and offshore activity, with projects emerging and underway, most notably across the Middle East, Latin America and West Africa regions. Moving on to the U.S., we see similar challenges with crude oil supply which should require increased spending by operators to grow and replace production. While operators remain focused on capital discipline, 2023 forecasts indicate their U.S. upstream spending will increase by approximately 15% year- over-year. Turning to the first quarter of 2023, we anticipate Reservoir Description to be down low to mid-single-digits sequentially. There are two factors causing the sequential decline in revenue. First, the typical seasonal industry pattern, which will cause activity in the first quarter to decline in some regions; and second, continued volatility with crude oil trading patterns which may impact Reservoir Description's international growth within its Russian, Ukrainian, and European operations. For Production Enhancement, revenue is estimated to be up mid-single-digit as U.S. land activity is projected to recover from normal seasonal declines experienced at year-end. We project first quarter 2023 revenue to range from $125 million to $129 million and operating income of $11.5 million to $14.5 million, yielding operating margins of approximately 10%. EPS for the first quarter is expected to range from $0.14 to $0.19. The company's first quarter guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. First quarter guidance also assumes an effective tax rate of 20%. First, I'd like to thank our global team of employees for providing innovative solutions, integrity, and superior service to our clients. The team's collective dedication to servicing our clients is the foundation of Core Lab's success. Turning first to Reservoir Description, for the fourth quarter of 2022, revenue came in at just over $78 million down slightly compared to Q3. When looking at revenue growth for Reservoir Description, it is important to consider the sharp devaluation of the Euro and the British pound. These currency devaluations lowered Reservoir Description revenue for the full-year, by more than $12 million using 2021 exchange rates. Operating income for Reservoir Description ex-items was $6 million, and operating margins were 8%. Growth across most regions was offset by impacts from the Russia-Ukraine conflict. Demand for crude oil and derived product assay work across Europe, Russia, and Ukraine, which rebounded somewhat during Q3, subsequently slowed in Q4 as sanctions became formalized. As previously discussed, we expect continued volatility and demand for these laboratory services as global trading patterns realign. However, as Gwen mentioned, the International Energy Agency recently forecast crude oil demand for 2023 to average a record high 101.7 million barrels per day, up by 1.9 million barrels per day from 2022, even after assessing global financial forecasts. This bodes well for growing demand for Reservoir Description's assay work. As we look ahead, while still well below pre-COVID levels, we see the growing international rig count as a harbinger of an improving landscape for Reservoir Description a trend that we project will play out for the next several years particularly in the Middle East, North and South America and most other regions. Early movers in the oilfield service sector that are more exposed to well construction have already felt the impact of this cycle shift. As projects progress into field appraisal, field development, and eventually production demand for Core Lab's Reservoir Description services will rise accordingly. Now for some operational highlights from the fourth quarter, Core Lab's Reservoir Description services were employed on both U.S. and international projects to help our clients evaluate their assets and develop programs to optimize production. Under the direction of a South American National Oil Company, Core Lab conducted a series of Enhanced Oil Recovery and flow assurance studies for a multi-well onshore program as evaluating the use of CO2-rich injection gases. This laboratory work is determining the impact of blending these CO2-rich gases with existing reservoir fluids and are providing the basis for advanced equation-of-state modeling. While defining the gas injection parameters for a successful field application are critical to improving crude oil recoveries, operators must also assess the potential for the injected CO2 to unintendedly cause flocculation of asphaltenes. These long chain asphaltene molecules can clog pores in the rock and impair permeability, thus reducing the effectiveness of CO2 injection programs. Broadly, CO2 injection projects like this reflect a globally expanding interest in enhanced oil recovery and carbon capture and storage technologies. When properly evaluated with rigorous laboratory testing, injecting CO2 into hydrocarbon bearing subsurface formations can simultaneously improve oil recovery and reduce CO2 emissions. Also, during the fourth quarter of 2022, Core completed an integrated study on conventional core from a lower Barnett shale pilot well in the Permian Basin. The key objectives of the study were to evaluate the resource potential of the strata and identify landing zone targets that will optimize stimulation and hydrocarbon production. Core analysis data acquire from the pilot well was benchmarked against key performance indicators from 21 wells in Core Lab's proprietary Woodford-Barnett joint industry project to provide insights into future production potential of the play. Core applied its new proprietary prism mudstone laboratory workflow, which combines advanced petrophysical and geochemical technologies, including measurements from high frequency, nuclear magnetic resonance and multi-rate pyrolysis to also provide rapid assessment of mobile versus non-mobile hydrocarbons in the rocks. The Prism workflow also refined petrophysical models and allow for refined calibration of downhole logs, which in turn resulted in an increase in both calculated reserves and estimated ultimate recovery. Moving now to Production Enhancement, where Core Lab technologies continue to help our clients optimize their well completions. Revenue for Production Enhancement came in at $49 million, up 5% sequentially and up 10% year-over-year. Operating income ex-items was $7.7 million, while operating margins were 16% for the fourth quarter of 2022 and sequential margins were more than 100%. During the fourth quarter of 2022, Core Lab continued to build on the success of its expand, casing and tubing patch technology. The industry-leading versatility and reliability of the expand system yield significant savings in the remediation of all types of wells with casing damage, ranging from oil and gas producers through to disposal and geothermal wells. Recently, an operator in Alaska had casing leaks in a horizontal water disposal well at four different depths over a 5,000-foot interval. As the disposal well were to become unavailable, hydrocarbon production from nearby oil and gas wells would need to be severely curtailed. Remedial steps that would have otherwise required a workover rig would have been both costly and time-consuming. Instead, Core Lab experts recommended placing four separate expand patches via wireline with a configuration that would enable operations in this highly deviated wellbore. All four patches were successfully deployed, set on depth and the well passed the mandatory mechanical integrity tests required by state authorities. This allowed the disposal operation to continue rigless intervention to repair the well with expand resulted in significant cost savings and enable the nearby producing wells to maintain hydrocarbon output. To-date, Core Lab has run over 100,000 feet of proprietary casing and tubing patches. The expand system has a proven track record of reliability and is one of the most effective solutions of its type. I wanted to maybe dig in a little bit in just the contrast of the two projects that you highlighted in RD. It's kind of interesting that in Latin America, you guys are doing all this work on EOR and coal assurance, but then in the U.S., you're kind of evaluating resource potential of the Barnett Shale, which I haven't really thought of in a while. I was just wondering if you could maybe talk a little bit more about that. Just -- could we be seeing just like a switch at some point where the U.S. shale players think a little bit more about just EOR? I mean, you guys spent so much time talking about permissible floods in the past. So I'm just kind of curious if there's any sort of pickup in interest in trying to get a little bit more production out of existing wells in the U.S. Yes. So let's unravel a little bit. The project I talked about on the Barnett. I think most people; perhaps mistakenly assume that everything is known about the variability and reservoir quality across the U.S. unconventional plays. That's not the case. We have a good perspective on that because we've done work for -- in all the basins, multi-company studies where we've gotten to see everybody's results. And so there are areas of higher quality and lower quality reservoir rock. Over time, technology has helped to bring forward the productive potential of lower quality rock. But people are always aware that, hey, they've done -- they've cherry-picked in many cases, some of the better quality areas that they had. They did exactly what you and I would have done during tough times. They focused their efforts on their best opportunities. And now as people move into, call it, peripheral or second-tier opportunities, they've got to assess what's the quality of the rock and how much movable oil there is. On the -- particularly on the question of EOR and unconventionals, we've been on the forefront of that for quite some time. We have a joint industry project that has assessed the viability of doing gas injection to strip additional hydrocarbons out of the rock. We won't give you the results of that because quite frankly, we sell the results of that to our clients. But we have demonstrated in the lab that with the right combination of injection gases and the right existing oil in place in the ground that recovery can be substantially improved, and there are a number of companies that are doing that right now. The EOR project in South America that I talked about today, I think we wanted to highlight that one a bit because there is a growing worldwide, I'll call it reaction to, hey, there's going to be a lot of CO2 that's going to be captured and available for EOR projects. I think if you look back historically, there would have been more CO2 injection for enhanced oil recovery if large, long-term reliable sources of CO2 were available. Well, regulations are now creating that environment where CO2 is going to be captured in large quantities and available for long periods of time. And so we're seeing it across the globe, there's an increased attention to, hey, I can take some of that CO2 that's coming from an emission point. And if I put that into my reservoir, what can I get in terms of additional oil recovery. And that's going on in North America. It's going on all over the globe. Just a real quick follow-up on that. Can you take associated gas and treat it and do whatever and then use it for injection for -- to boost production? Yes, absolutely. And in fact, that was the focus of our -- or one of the primary focuses of our EOR study on unconventional reservoirs was to take available gases associated either with nearby production or simultaneous from the well. And then look at what chemical changes, what composition you would need to achieve maybe adding some propane or dialing in some ethane, getting the right chemistry of the associated gases or available gases and going back into the same wellbores that you've been producing. And that goes through a soaking process, the physics involved in that, are different than a traditional gas flood where the main driver was to push drive oil from injections to producers. Rather, in this case, the injected gas vaporizes some of that oil. And then as its withdrawn and the pressures dropped, that oil drops out of the injection gases. And so this is a multi-cycle process that goes on where we keep adjusting the chemistry of the gas for injection to get the most oil out. And there are companies that are doing that today. Okay. Great. And maybe for my next question, just a little bit on the PE side. What are you anticipating in terms of the energetic sales, obviously, a rebound here in the frac activity? I'm just kind of curious what you're expecting throughout the year in terms of demand for your energetic products. The type of seasonal trends, I guess, we should be thinking about for PE beyond the current quarter? Yes, Samantha, we think that for PE and our energetic product sales will continue to have market penetration with that as well as benefit from activity that will go on throughout 2023. We have seen, as we've started the year that we're on a bit of a climb out, let's say, from Q4 from the holidays. So we're not quite back to pre-holiday let's say, frac spread levels, but we can see that we're starting to move in that direction. So we think it's going to be another nice year of healthy activity. Are you guys anticipating like much of an increase in frac activity this year? I think it's a bit of debate in terms of what the demand is and the movement across the basins. Yes. So this is Chris. I think what we're seeing is at least we exited. If you look at where we were in Q4, it was at a pretty high-level, I think the frac spread either approached or reached 300. And like, Gwen was saying, we're -- it kind of dipped off as the holidays were in, which is very typical. And then it sort of rebounds as we begin the New Year, and we're seeing that as well. So we think it's going to come back to that 300 level. But we think there are some headwinds to growth there. The rigs are kind of full up and the frac spreads are also kind of full up. But as companies start to bring new equipment online, we do think that that will be put to work and maybe there's more opportunity for some growth from where we kind of exited the year as we get a little deeper into 2023. I think I'd sum it up by saying we think in total, 2023 will be a better year for energetic sales than 2022. Thank you for taking my question. I saw that you acquired own shares for about $1.6 million in the fourth quarter, which I guess is the first buyback since the invasion. I know that you guys are focused on bringing the leverage ratio down to 1.5. But should we read into this that you'll gradually resume the buybacks simultaneously as you continue to reduce the leverage ratio? Yes. Hey Simon, this is Chris. So when you think about the share buybacks, think about that in maybe two buckets, one is where we go into the open market and buyback shares. The other bucket is when employees have share awards that vest, they have the opportunity or they generally will sell those shares that are for tax -- their tax burden associated with that to the company. So we will buy those shares from the employee to settle their tax burden associated with the vesting awards. And that's what you saw in the fourth quarter. We did not go out to the open market and buy any shares. Having said that, once we get our leverage ratio down to where at least we're getting towards the target, we've got more clear sight on what the forecast looks like. Absolutely, we could see ourselves getting more active in the share buyback program off the open market. I think we've got a little bit of a crowded earnings release date. So since we're not seeing any other questions, we'll end right there. In summary, Core's operational leadership continues to position the company for improving client activity levels in both the U.S. and international markets for 2023 and beyond. We have never been better operationally or technologically positioned to help our global client base, optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced client-focused reservoir optimization company in the oilfield service sector. The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividends, we'll bring value to our shareholders via growth opportunities, driven by both the introduction of problem-solving technologies and new market penetration. In the near-term, Core will continue to use free cash to strengthen its balance sheet and while always investing in growth opportunities. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. The executive management team and the Board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with their continuing achievements.
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Ladies and gentlemen, good day and welcome to the CNA Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. And at this time, I'd like to turn the floor over to Ralitza Todorova, AVP, Investor Relations for remarks and introduction of today's speakers. Please go ahead. Thank you, Jamie. Good morning and welcome to CNA's discussion of our fourth quarter and full year 2022 financial results. Our fourth quarter earnings press release, presentation and financial supplement were released this morning and are available on the Investor Relations section of our website, www.cna.com. Speaking today will be Dino Robusto, Chairman and Chief Executive Officer; and Scott Lindquist, Chief Financial Officer. Following their prepared remarks, we will open the line for questions. Today's call may include forward-looking statements and references to non-GAAP financial measures. Any forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made during the call. Information concerning those risks is contained in the earnings press release and in CNA's most recent SEC filings. In addition, the forward-looking statements speak only as of today, Monday, February 6, 2023. CNA expressly disclaims any obligation to update or revise any forward-looking statements made during this call. Regarding non-GAAP measures, reconciliations to the most comparable GAAP measures and other information have been provided in our earnings press release financial supplement and other filings with the SEC. This call is being recorded and webcast. A replay of the call may be accessed on our website. If you are reading a transcript of the call, please note that the transcript may not be reviewed for accuracy, thus it may contain transcription errors that could materially alter the intent or meaning of the statements. Thank you, Ralitza and good morning, all. CNA produced strong results in the fourth quarter, capping off a great year of underwriting performance. I'll start off by drilling down on the fourth quarter and then provide some detail on our full year performance. Core income increased by $9 million in the fourth quarter to $274 million. Our P&C operations produced core income of $342 million down only slightly compared to last year, even with cat losses nearly twice as large in the fourth quarter of this year compared to last year and investment income was down due to lower returns on our alternatives portfolio. We were able to largely offset that with higher underlying underwriting gain and slightly more favorable prior period development. In the fourth quarter, the all-in combined ratio was 93.7%, an increase of only 0.8 points compared to the prior year quarter with pretax catastrophe losses of $76 million or 3.6 points of the combined ratio compared to $40 million or 2 points in the prior year period. Approximately 90% of our catastrophe losses in the quarter were from Winter Storm Elliott and the rest from several smaller events. Prior period development for P&C overall was favorable by 1.1 points on the combined ratio. The P&C underlying combined ratio was 91.2%, consistent with last year and continues a string of underlying combined ratios of near-record levels for 7 consecutive quarters. The underlying loss ratio in the fourth quarter of 2022 was 59.9%, down 0.2 points compared to the fourth quarter of 2021. The expense ratio of 31.1% was up slightly from last year. As usual, Scott will provide more details on expenses. In the quarter, we continued to achieve a strong production performance with 8% gross written premium ex captives growth and 9%, excluding currency fluctuation. Net written premium growth was 5% and 7%, excluding currency fluctuation. Written rate increase was 4% in the quarter, down 0.5 point and renewal premium change remained strong at 7%. We continue to see strong exposure increases in inflation sensitive lines like work comp, property and general liability. New business was down slightly in the quarter due to the reduced opportunities in management liability that we mentioned last quarter but it remained very strong in Commercial, up 12% in the quarter. Retention remained high at 86% this quarter as the underwriters locked in the hard market benefits of increased pricing and substantially improved terms and conditions across the portfolio. Before commenting on the individual business unit results for the quarter, the march to the 1/1 reinsurance renewal season was obviously a big focus for property treaties. Now our property treaties do not renew until June 1 but some of our third-party treaties did come up for renewal in the quarter and the renewals went well. There was some minor movement in ceding commission on a few of the treaties but we got all of the capacity we wanted and in some cases, a little extra capacity in exchange for that movement. And so the economics of our reinsurance coverage and ceding commission remain very favorable on these lines of business. Turning to our 3 business units. The all-in combined ratio for Specialty was 88.8% in the fourth quarter which is now the 10th consecutive quarter below 90%. The underlying combined ratio was 89.4%, reflecting 0.7 points of improvement compared to last year. The underlying loss ratio improved 0.7 points to 58.4% and the expense ratio of 30.8% was 0.1 points lower than last year. Gross written premium ex captives growth for Specialty was down minus 2% this quarter. And net written premium growth was down minus 1%. Growth was lower this quarter due to less new business from significantly fewer IPOs and M&A opportunities in the quarter compared to the same period last year which impacted our D&O line and program growth. Rate was down 2 points to 3%, driven by the financial and management liability portfolio where rates were flat in the quarter. Within management liability, public D&O rates were negative after having achieved triple-digit cumulative increases over the hard market and the rate levels are still more than double what they were at the start of the hard market. Private D&O rates were positive mid-single digit and cyber rate increases were high single digit. Because of the large increases in these areas over the hard market, our Specialty earned rate increases of about 8% in the quarter. We're still well above our long-run loss cost trends. Retention was particularly strong at 88% for the second straight quarter with all lines in Specialty achieving high retention levels. Turning to Commercial. The all-in combined ratio was 99%, producing a small underwriting profit in the quarter even with catastrophes, adding 7.2 points to the combined ratio compared to only 2.9 points in the same quarter last year. The underlying combined ratio was 92.7% with an underlying loss ratio of 61.5%, stable year-over-year, while the expense ratio was up about 0.5 point to 30.8% in the quarter but down 0.7 points to 30.4% for the full year. Gross written premium ex captives grew by 16% this quarter and net written premium growth was 13%. In the quarter, Commercial renewal premium change was 9%, up 2 points from the third quarter and the strongest quarterly renewal change all year. Rate change was 5% and exposure was 4%, both up 1 point in the quarter. Rates were higher for almost all Commercial products and lines of business in the quarter other than work comp where rate decreases were low single digit and relatively stable with the last 7 quarters. The most significant rate increases were achieved in National Accounts Property and let me provide a little more detail on property. In anticipation of the 1/1 reinsurance renewals, rate increase in the fourth quarter was 18% in our National Accounts Property portfolio, 6 points higher than it was in the third quarter. And rate in January has accelerated compared to the fourth quarter by an even greater magnitude. So everything we are seeing is certainly indicating that we are entering another significant correction period and we are leveraging this mini hard market not only to get more rate but to continue to push for better terms and conditions which, as I have indicated to you in the past, tend to persist much longer than the hard market cycle. This has broadly included substantially lower sub limits and higher deductibles on severe convective storm, earthquake and named storm perils which have a significant positive impact on controlling our catastrophe exposure while allowing us to continue to offer sustainable capacity to our clients. On top of that, we continue to push hard to secure increased property valuations to ensure we have an accurate reflection of exposures. We saw high single-digit valuation increases in TIV at renewal in the fourth quarter and that has continued in January. We have strong capabilities and expertise to leverage property opportunities in the market. However, we intend to underwrite growth cautiously in order to continue to manage our cat PML conservatively. So while we currently expect to grow this portfolio throughout the course of the year, we expect the growth will be driven more from rate. Outside of National Accounts, rate was also up in middle market, where it was 1 point higher than the third quarter. Because of the packaged nature of this portfolio, where property is sold together with other profitable lines like work comp and general liability, the middle market rate acceleration was more muted in the quarter, as was true throughout the hard market. In the quarter, the middle market renewal premium change was plus 8%, excluding work comp. And for work comp alone, renewal premium change was up mid-single digit, both keeping pace with loss cost trends. Commercial retention remained strong at 86% and has been quite strong all year. For International, the all-in combined ratio was 88.9% this quarter, a 6-point improvement over last year. The underlying combined ratio was 91%, stable with last year. The underlying loss ratio of 58.1% is lower by 0.4 points and the expense ratio of 32.9% is up 0.5 point compared to last year's fourth quarter but down 0.8 points to 32.3% for the full year. International gross written premiums grew 6% or 16%, excluding currency fluctuation. Net written premiums grew 2% or 12%, excluding currency fluctuation. Renewal premium change in International was plus 9%, split evenly between rate and exposure. Retention was very strong in International, 84% for the quarter, as here, too, we are locking in the benefits of all the underwriting actions we have conducted and commented on previously as well as the very strong terms and conditions and cumulative rate increase of 50% since the start of the hard market. Now let me provide some perspectives on the full year. For the full year, our core income was $1.048 billion or $3.84 per share compared to $1.106 billion or $4.06 per share in 2021. The decline in core income was driven by a decrease in limited partnership and common stock returns partially offset by an increase in underwriting gain and an increase in investment income from fixed income securities. Our P&C operations produced core income of $1.240 billion for the year, an increase of $56 million over the prior year. Underwriting income increased by $269 million to a record $559 million for the year. This was partially offset by $196 million decrease in net investment income due to lower LP and common stock returns. The all-in combined ratio was a record low of 93.2% and 3 points lower than 2021. This included $247 million of catastrophe loss versus $397 million in 2021. We also had 1 point of favorable prior period development. Our P&C underlying combined ratio of 91.2% for the year was a record low and marks the sixth consecutive year of improvement in the underlying combined ratio. The underlying underwriting gain improved by $65 million to $730 million for the year, a 10% increase. The underlying loss ratio was 60%, consistent with 2021. The expense ratio improved by 0.2 points to 30.9%, the lowest since 2008. All 3 operating segments produced very strong all-in and underlying combined ratios in 2022. For Specialty, the underlying combined ratio was 89.8%, our second consecutive year with a sub-90 underlying combined ratio. We have effectively achieved a turnaround in our health care business due to extensive re-underwriting and focus over the last 5 years and we continue to cover the loss cost trends on this revamped portfolio with rate in the high single digits. The all-in combined ratio for Specialty was 88.6%, the lowest since 2018. Commercial produced an underlying combined ratio of 92.4%, the lowest on record. The all-in combined ratio of 97.3% was also the lowest on record. For International, the underlying combined ratio was 90.8% and the all-in combined ratio was 91.8%, each of which is a record low. Turning to production for the year. Gross written premium growth ex captives was 10% this year and 11% excluding currency fluctuation and the second consecutive year with double-digit growth. Net written premiums were up 9% and 10% excluding currency fluctuation. New business grew by 13% and was up over $200 million compared to last year. Retention was very strong at 86% and was 4 points higher than 2021. Renewal premium change was 8% for the year with rates up 5% and exposures increasing 3%. Core income of $274 million is up 3% compared to the fourth quarter of last year, leading to a core return on equity of 8.9%. Net investment income of $503 million pretax was down $48 million this quarter. Our fixed income portfolio generated a $33 million increase in investment income this quarter offset by an $88 million decline in investment income in limited partnerships and common stock. Our P&C expense ratio for the fourth quarter was 31.1% which is a slight increase compared to last fourth quarter's expense ratio of 30.8%. The increase of 0.3 points was driven by higher underwriting expenses, including continued investments in technology, analytics and talent partially offset by net earned premium growth and lower acquisition expenses. As I have noted in prior calls, there will be a certain amount of variability quarter-to-quarter. However, we continue to believe an expense ratio of 31% is a reasonable run rate for 2023. The P&C net prior period development impact on the combined ratio was 1.1 points favorable in the current quarter. Favorable development in the Specialty segment was driven by surety and was somewhat offset by management and professional liability. In the Commercial segment, favorable development in workers' compensation was partially offset by unfavorable development in general liability and commercial auto. Our Corporate segment produced a core loss of $52 million in the fourth quarter compared to a $94 million loss in the fourth quarter of 2021. The loss this quarter was predominantly driven by our annual asbestos and environmental reserve review. The results of the review included a noneconomic after-tax charge of $28 million driven by the strengthening of reserves associated with higher defense and indemnity cost on existing claims as well as lower expected ceded recoveries prior to the application of our loss portfolio transfer cover that we purchased in 2010. Following this review, our cumulative incurred losses of $3.5 billion are well within the $4 billion LPT limit, while cumulative paid losses are $2.4 billion. You will recall from previous year's reviews that there is a timing difference with respect to recognizing the benefit of the cover relative to incurred losses as we can only do so in proportion to the paid losses recovered under the treaty. As such, holding all else constant, the loss recognized today will be recaptured over time through the amortization of a deferred accounting gain as paid losses ultimately catch up with incurred losses. As of year-end 2022, we have $425 million of deferred gain that will be recaptured over time. As we have noted in prior calls, we perform our annual review of asbestos and environmental reserves during the fourth quarter and all other Corporate segment reserves during the second quarter, although we will adjust such reserves in between these annual reviews as facts and circumstances warrant. For Life & Group, we had a core loss of $16 million for Q4 2022 which was a $22 million reduction from last year. The results this quarter reflects a $40 million pretax reduction in investment income from limited partnerships, partially offset by improved morbidity. As we have said in prior calls, we will be adopting the GAAP Long Duration Targeted Improvements, otherwise known as LDTI, accounting methodology effective January 1, 2023 but will apply it as of January 1, 2021. The estimated impact of adopting LDTI will be a $2.3 billion decrease in stockholders' equity as of the transition date of January 1, 2021. Assuming that December 31, 2022, interest rates were in place on January 1, 2021, we estimate an approximate $250 million decrease to stockholders' equity as corporate Single A [ph] rates were substantially higher at December 31, 2022, than at January 1, 2021. Finally, as we have noted in prior calls, I'd like to emphasize the transition to LDTI accounting has no impact to the underlying economics of CNA's business. Turning to investments; total pretax net investment income was $503 million in the fourth quarter compared to $551 million in the prior year quarter. The decrease was driven by our limited partnership and common stock results which returned a $20 million gain in the current quarter compared to a $108 million gain in the prior year quarter. The gain in the prior year quarter reflected particularly strong results from our private equity and common stock portfolios. Our fixed income portfolio continues to provide consistent net investment income which has been steadily increasing over the last several quarters. We continue to benefit from a higher invested asset base driven by continued strong P&C underwriting results. As a point of reference, the average book value of our fixed income portfolio has increased $800 million from the prior year quarter. Additionally, the average fixed income effective yield -- effective income yield in our P&C portfolio was 4% in the fourth quarter, an increase from 3.8% in the third quarter, 3.7% in the second quarter and 3.6% in the first quarter of 2022. The consolidated CNA portfolio fixed income effective yield was 4.5% in the fourth quarter compared to 4.4% for the third quarter and 4.3% for the second and first quarters of 2022, reflecting the higher P&C yields in that portfolio. The Life & Group portfolio yield was about flat in the current quarter as compared to the first 3 quarters of this year. As of the end of the fourth quarter, reinvestment rates were about 125 to 150 basis points above our P&C effective yield, while our Life & Group current reinvestment rates are about flat to our effective yield given the long duration nature of our Life & Group portfolio. Pretax net investment income for the full year 2022 was $1.8 billion compared with $2.2 billion in 2021. Similar to the quarter, the decrease was driven by our limited partnership and common stock results which returned a $31 million loss in the current year compared to a $402 million gain in the prior year. Our fixed income portfolio produced an additional $79 million of pretax income in 2022 compared to 2021 as we pass the inflection point on reinvestment rates during the year. Accordingly, we see earnings from our fixed income portfolio being a significant tailwind for us in 2023. At quarter end, our balance sheet continues to be very solid with stockholders' equity excluding AOCI of $12.4 billion or $45.71 per share. which is an increase of 7% from year-end 2021, adjusting for dividends. Stockholders' equity, including AOCI which reflects our investment portfolio moving into less of a net unrealized loss position during the quarter, was $8.8 billion or $32.58 per share. We continue to maintain a conservative capital structure with a leverage ratio of 18%, excluding AOCI and our capital remains strong with our financial strength rating of A+ from Standard & Poor's having just been affirmed in the fourth quarter with a stable outlook. Operating cash flow was strong once again this past quarter at $512 million and over $2.5 billion for the year as compared to $2 billion in 2021. The 2022 operating cash flow results reflect record underwriting results as well as higher earnings from our fixed income portfolio. In addition to strong operating cash flow, we continue to maintain liquidity in the form of cash and short-term investments. And together, they provide ample liquidity at our holding company as well as the operating company level to meet obligations and withstand significant business variability. For the full year 2022, the effective tax rate on core income was 18.1% and would be closer to 19% adjusting for a onetime deferred tax asset benefit arising from pending changes in the U.K. corporate tax rate. Looking forward, our effective tax rate on core income will continue to depend on the relative contribution of tax-exempt investment income to total pretax core income. Given the significant disposition activity in our tax-exempt portfolio in 2022, we expect tax-exempt investment income to continue to trend downward in 2023. Accordingly, we expect a 2023 core income effective tax rate of about 20% with a certain amount of variability quarter-to-quarter. Finally, given the company's strong underwriting performance, we are pleased to announce we are increasing our regular quarterly dividend 5% from $0.40 per share to $0.42 per share. In addition, we are declaring a special dividend of $1.20 per share, both to be paid on March 9 to shareholders of record on February 21. Thanks, Scott. To recap, we have steadily and methodically improved our results over the last 6 years and 2022 was a particularly strong underwriting performance with record low all-in and underlying combined ratios and strong production results across the board. Of course, it's all about going forward and we are encouraged by the opportunities in front of us. With the anticipated continued acceleration in property pricing and growth in exposures that act like rate, we expect to continue to cover our current loss cost trends as we enter 2023. Additionally, we will gain meaningful benefit from the tailwind of fixed income returns. Yes. I was looking at the operating cash flow, I'm not the best thing to look at for insurance for me [ph] but substantial growth, $2.5 billion of operating cash flow generated this year, up from $2 billion last year. But the -- it looks like -- and obviously, FX is part of it but reserves didn't grow at all over the course of the year. Can you sort of break out why you're having such good cash flow growth and why, I guess, paid to incurred levels are somewhat less attractive in the year? Sure. Thanks, Josh. It's Scott here. So yes, you're right, $2.5 billion operating cash flow for the full year 2022. It was about $2 billion in 2021. So recall, in 2021, we had a significant loss portfolio transfer from some older workers' comp business, that was a negative -- that was about a negative $600 million or so, maybe $500 million impacting that 2021-year amount. So if you adjust for that, cash flow from operations are about flat year-over-year, albeit still very, very strong. As far as paid to incurred goes, so for the fourth quarter 2022 by 85%, a year ago was by 89%. So there's going to be some natural distortions quarter-to-quarter, I mean much of that driven by catastrophe activity. And when you look at it, it has increased as courts have reopened. But at the end of the day, it's still substantially below where it was pre-pandemic. So that would be really my observation on the -- paid to incurred as well as the cash flow question. And Scott, you really took it where I wanted to take it as well. So if we talk about courts reopening and what is the frequency of losses being paid right now compared to what might have been thought about a normative frequency had courts not been closed, is there a catch-up going on? And how long should this last? Yes. I think we've talked about this before. I mean the courts, there's significant backlog out there. We're seeing it, absolutely. We expect it to emerge slowly as we move out from the pandemic. I'm not in a great position to predict how quickly that will emerge this year but things are loosening up and we're seeing that. Yes. Josh, it's Dino. Thanks. We had said that, during the pandemic years, right, we just thought it was obfuscated. And clearly, as soon as the courts opened up, notwithstanding the -- some of the backlog that Scott mentioned, you could see it, it just sprung right back. So we're at an elevated 6% loss cost trend. And so it's right what we had expected it. And if I can sneak one more in. You just said an elevated 6%, do you perceive that 6% to be elevated? Or is that a new normal that it's 6% for the foreseeable future and we have no plans to expect it to go down? Or do you think that's a temporary 6%? Yes, that's a good question, Josh. I mean, I think elevated just relative to pre-pandemic levels, right? And so social inflation clearly impacted it tremendously. Now it's at 6%. As the backlog gets worked through, is it possible it can go higher? I mean, I guess so. But even at 6%, compounding annually, it's going to take a lot of discipline and we got to keep pushing hard for rates to stay ahead of those loss cost trends. So right now, we see it at 6%. I guess it could go higher but that's high, 6%. You talked about keeping property PMLs broadly flat. I was wondering, if you could remind us of what the internal constraints are on that and what you're building in for, I guess, loss trend there relative to rate increases that you're expecting. Yes. okay. So we don't parse out sort of our PML accumulations. It is less about internal constraints and more simply just given what we have seen over the last decade of elevated cats and secondary type cat perils having such a dramatic impact. We're just prudent in how we manage our cat PMLs and the reinsurance that we purchased. In terms of the property, you'll recall early on when we saw the inflation hit, right, we had increased our property loss cost trends about 2% and we've kept them at the elevated levels. So clearly, the rate we're now getting and also the TIV which is why I wanted to sort of detail that we're being successful in getting valuations up, we're covering -- we're clearly covering our loss cost trends there. But we had increased them about 2 points. Okay. And I know it's early but I was wondering whether you've had any conversations yet with the property quota share reinsurers. Just we're trying to get a sense in terms of how net exposure might change over the course of this year in a tougher reinsurance market. Yes, yes. I mean that's -- we haven't -- and I think they were all sort of consumed with the 1/1s and that made a lot of sense. You've got to get through the April 1s and then the June 1s. Look, I mean, all I can say is when I look at what the press has been about the activity on renewals, there's clearly a possibility that we can get a little bit more -- have to take a little bit more net. And so we'll just -- we'll see how that plays out. And then on the pricing which obviously was quite substantial, I mean it was -- it had a big variability to it. And I think, look, our overall results have been good for us and the reinsurers and we would expect to be on the better end of that. But we'll have to see, right? To a large extent, Meyer, it probably depends also on what happens in the next several months. You have a very active catastrophe season before June 1, that could change the calculus a little bit. But we're being -- one of the reasons why we're prudent now about how we write property and how we look at cat PML. Okay. That's helpful. And then one final question, if I can. I know there was a lot of commentary in the back half of last year about sort of the sudden emergence of rate cuts in D&O. and I'm wondering whether that trajectory has changed more recently. Or is it the same intensity of competition as in previous months? It's -- I don't know if it's really changed much recently. I mean it was an abrupt change which we saw obviously, going into the third and fourth quarter. I think a function, as I said in my prepared remarks is the fact that, look, D&O got over 100% rate increases during that hard market. And so I think it's a bit of an adjustment. It's still -- our rate level still double what they were -- I think we'll -- now look, I mean, if it continues to persist that way, then obviously, in a few quarters, that could be a little bit more problematic. But I'm not there yet. I think we're going to continue to push and we have the expertise that continue to drive this thing profitably. And I think we've demonstrated, right, through all of our re-underwriting efforts and we're not going to chase accounts that you can't make a good return. So I think it's too early to suggest. Look, this thing is just overly competitive and it's going to play out -- continue to play out that well -- that way, rather. [Operator Instructions] And ladies and gentlemen, at this time, I'm showing -- we do have a follow-up question from Josh Shanker from Bank of America. All right. So obviously, this is not the quarter for the LTC study. Where do you -- in terms of thinking about interest rates and behaviors for reserving as we close out the year, obviously, we've gone through COVID, you're learning more about behaviors. Can you talk to us a little bit about how you think about incidents and adequacy of coverage given where rates are? Sure, Josh. It's Scott here. So yes, if I can comment a little bit about just the past few years and then kind of where we're at right now with the long-term care book. So I would say, over the past 3 years relative to reserve expectations, the long-term care block [ph] has generally experienced lower claim frequency, higher claim terminations and more favorable claims severity amid the effects of COVID-19. And those effects were definitely more pronounced earlier in the pandemic. And as the pandemic has abated, these effects have largely dissipated as we've worked our way through 2022. I'd also remind you, in the third quarter call, when we talked about the GPV update, we also reduced our IBNR. We had actually built up IBNR over 2020, 2021, expecting somewhat of a delay in reporting of claims that did not materialize. So we reduced IBNR by $107 million. During the third quarter, it was somewhat masked by an uptick in our claims reserves for LTC for our disabled life [ph] reserves that was about $82 million. So I think that's a big picture how things are looking as we're emerging from the COVID era as we sit here right now. And then obviously, the things -- you're probably more so than any [indiscernible]. You're slow to recognize good news in LTC but quick to recognize anything that might be unfortunate. Is there good news in the trends that's not baked into reserves yet? Well, I guess I would point you back to the third quarter call when we did our GPV review. We ended up increasing the margin. We increased the margin from $72 million to $125 million. We had some puts and takes. We had a very positive tailwind around discount rate, higher interest rates. That was a significant positive. Also rate, we had increased margin by $190 million for -- increased outlook for rate on a net present value basis. And then offsetting that was cost of care inflation and higher utilization. So you kind of shake that all up and we were at a net plus $125 million margin at Q3. We have not updated our study since then. So I would say that's pretty much how we feel right now because right now that $125 million is our best estimate. And then it's probably too early to ask this question. But if I go back in time to the previous decade, sometimes people might have said, if we knew how good the business was back then, we would have written more of it and maybe been a little more aggressive on the price because it turned out to be so strong in the profitability. When you think about the 2020 to 2022 period and then there's a lot of puts and takes with social inflation and whatnot but there was a lot of pricing, do you think that those years are going to be years that people reflect on, if we knew how good it was going to be, we would have written more? I think that's obviously a wait-and-see, right? I mean, listen, we have been cautious and prudent in how we recognize margin because of the social inflation dynamic to relatively new sort of going back 2016, '17, it's had a significant impact. And we obviously watch it closely. As I mentioned earlier, we also had economic inflation. I think we'll just have to see how these more recent accident years where earned rates well above loss cost trends, how that all plays out over the next 4 or 5 years and in the meantime, it's really what's fueling the caution that we bring to recognizing margin. And at this time, I'm showing no additional questions. I'd like to turn the floor back over to Dino Robusto for any closing remarks. And ladies and gentlemen, with that, we'll end today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
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EarningCall_710
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Good morning, and welcome to Brunswick Corporationâs Fourth Quarter and Full-year 2022 Earnings Conference Call. All participants will be in a listen-only mode until the question and answer period. Todayâs meeting will be recorded. If you have any questions, you may disconnect at this time. Iâm sorry if you have any objections you may disconnect at this time. Good morning and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswickâs CEO, and Ryan Gwillim, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forwardâlooking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on these factors to consider, please refer to our recent SEC filings and todayâs press release. All of these documents are available on our website at Brunswick.com. During our presentation, we will be referring to certain nonâGAAP financial information. Reconciliations of GAAP to nonâGAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying todayâs results. Thanks Neha, and good morning everyone. We concluded 2022 by delivering record performance of $6.8 billion in net sales and almost $1.05 billion of adjusted operating earnings for the full-year, continuing our exceptional history of strong operating performance and cost control and a challenging macroeconomic environment. Our full-year adjusted earnings per share of $10.03 highlights the strength of our businesses and leaders and the robustness of our portfolio and earnings profile. All our divisions contributed to the strong performance, with our Boat segment exceeding 10% full-year adjusted operating margins for the first time in company history. And the Propulsion and Parts and Accessories segments delivering exceptional top-line and operating earnings growth versus prior year. Boat fee inventory levels are recovering, but global units exiting the fourth quarter were more than 5000 units lower versus the same time in 2019, and there is no indication of material wholesale cancellations. Our boat and engine production levels finished above prior year despite some continuing supply chain challenges. As the overall market sector dislocation continued, we executed $90 million of share repurchases in the fourth quarter, bringing our full-year share repurchases to $450 million. Turning to the segment highlights. Each segment contributed to the robust adjusted operating margins in the fourth quarter, as compared to the fourth quarter of 2021. Despite some supply chain shortages earlier in the quarter, our Propulsion business delivered exceptional results with 17% top-line growth versus fourth quarter 2021, enabled by favorable product mix and pricing actions taken earlier in the year. Mercury has captured significant market share in our boat engines with approximately 300 basis points of retail share gain in the U.S. and more than 10 percentage points in over 300 horsepower engines, since December 2019, which has been a key focus area for our investments. Our new products continue to perform above expectations with the recently launched V10 outboard engines being extremely well received in the marketplace and met with strong demand. The capacity expansion project in our Fond du Lac, WI campus, primarily for higher horsepower outboards, is materially complete and will enable increased production for recently underserved international and repower channels, together with new and existing OEM customers in 2023 and beyond. Our boat business delivered outstanding topâline and earnings growth in the quarter, reaching 10.2% fullâyear adjusted operating margin for the first time in company history. Each product category posted strong topâline growth and delivered operating earnings expansion for the fourth quarter compared with the same prior year period. Our boat business continues to diligently manage global pipeline levels which remain healthy at 18,000 units, or 24% below 2019 levels. Freedom Boat Club had strong same store membership sales increases in the quarter, despite its Southwest Florida operations recovering from the impacts of Hurricane Ian. All hurricane impacted locations have now reopened. Freedom continues to grow globally and now has more than 370 locations and a fleet size of approximately 5,000 boats all while expanding synergies with Mercury Marine and our boat brands. Freedom also recently announced the opening of its first location in Australia. Our parts and accessories businesses delivered solid adjusted operating earnings and operating margin growth in the fourth quarter. Operating earnings contributions were broadâbased across our P&A businesses as optimized pricing and the initial benefits of the redesigned Navico Group organization more than offset the negative impact of currency and the return to more normal seasonality in the quarter. Sales were impacted by certain headwinds, including currency, leading to slightly lower topâline performance; however, on a full-year basis, revenue was down less than 1% excluding the impact of currency and acquisitions versus a record 2021. Finally, we have now lapped the oneâyear anniversary of the P&A transactions and are very pleased with the integration of the businesses. Shifting to revenue, we continue to deliver growth across regions on a constant currency basis, excluding acquisitions. In the fourth quarter, all regions grew sales versus fourth quarter 2021. Overall, U.S. sales increased 13% and international sales increased twelve percent versus the prior year quarter. On a fullâyear basis, sales increased twelve percent compared to 2021 on a constant currency basis, excluding acquisitions, led by gains in our propulsion and boat segments. Finally, with increased production capacity in high horsepower outboard engines, we anticipate further share gains via new customers, international markets and repower channels. Turning to external factors, we continue to see overall improvement in supply chain stability and delivery but with some persistent issues continuing to require very active management and impacting productivity and efficiency for some product lines. Despite these challenges, our teams continue to work diligently and creatively to optimize production. Input cost inflation has moderated, and we have essentially returned to historical pricing cadences and price increases. Higher interest rates have become a consideration mainly for buyers of value product. inâline with preâpandemic levels and appropriate for the lowâseason. Early season boat shows have been encouraging with many shows sold out and attendance above prior year levels. We are also seeing strong attendance and activity at shows outside the U.S., notably at the very recent Dusseldorf International Show, the largest show in Europe, where our brands reported solid sales as well as strong lead generation. Mercury share of outboard engines above 150 horsepower at the show was close to 60%. From a dealer standpoint, while our channel partners are aware of the macro factors, dealers are appropriately stocking and order levels remain healthy with no signs of material wholesale cancellations. Moving now to the 2022 U.S. retail boat market. Fourth quarter activity did not materially change fullâyear results, with the main powerboat segment down midâteens percent from 2021, and approximately 7% lower than 2019. Outboard engine industry data was more favorable, with U.S. industry registrations finishing 2022 down less than 1% versus 2021, and 9% ahead of 2019. Mercury performance in the fourth quarter remained strong, especially in highâhorsepower, with 360 points of retail share gain in the fourth quarter in 300 plus horsepower engines versus fourth quarter 2021. Brunswickâs boat retail unit performance in the fourth quarter and fullâyear was broadly consistent with the overall market performance, with outperformance in recreational fiberglass products and premium pontoons and underperformance in value aluminum, where we continue to focus successfully on margin maintenance and expansion, and have shifted production to higher margin product lines at the recent expense of some unit share of value aluminum product. As we look to 2023, we remain confident in postâCOVID boating participation rates with more than 10 million boats still being registered in the U.S. each year and people continuing to have more flexibility in their working arrangements. Alternative participation models, including Freedom Boat Club, are also driving participation by a more diverse consumer demographic. Over recent history, industry retail sales generally show a positive outlook. Despite softness in 2021 and 2022 caused by a combination of inventory shortages and macroâeconomic factors, industry retail boat sales have increased at a low to mid single-digit CAGR since the end of the Great Financial Crisis. Unlike in some other industries, although boat sales were somewhat elevated in 2020, inventory constraints prevented a true COVID sales spike and subsequent dislocation between inventory and demand. As we start 2023, industry sales of approximately 170,000 units are similar to 2016 levels, whereas with a fairly constant 10 million boats in the U.S. boat park and assuming a typical boat useful life of 30-years to 35-years, replacement rates would suggest sales potential close to 300,000 units. On the subject of pipelines, U.S. unit inventory remains 28%, or almost 5,000 units below 2019 levels. Fiberglass inventory levels remains even lighter, with 31% fewer units in dealer hands at the end of 2022 than in 2019. Boat inventories at dealers outside the U.S. are at similar weeksâonâhand levels. Dealer inventory is very fresh and our brands have done a fantastic job getting our many very exciting new products to our dealers ahead of the prime 2023 selling season. As always, we are continuing to monitor inventory levels and will adjust production accordingly. Our initial plan for the year is generally to match wholesale with retail, except in premium fiberglass categories where it is still necessary to rebuild from current low levels. Thanks Dave, and good morning everyone. Brunswick delivered an excellent fourth quarter, with record sales, operating earnings and EPS for any fourth quarter in our history. When compared to prior year, fourth quarter net sales were up 10.6%, with adjusted operating margins of 12.8%, up 190 basis points. Operating earnings on an as adjusted basis increased by 29% and adjusted diluted EPS of $1.99 increased by 38%. Sales growth resulted from steady demand, new product performance, and pricing implemented in previous quarters, partially offset by unfavorable changes in foreign currency exchange rates. All segments contributed to the strong operating earnings and margin growth versus the fourth quarter of 2021, with the net sales growth, coupled with prudent cost containment efforts, partially offset by continued elevated inflationary pressures and spending on growth initiatives, ACES, and new product technology. Lastly, we delivered free cash flow of $193 million in the fourth quarter, which equates to a FCF conversion of 133% On a fullâyear basis, Brunswick has also delivered record results, including net sales of over $6.8 billion and adjusted diluted EPS of $10.03. We also increased our adjusted operating margins versus a record 2021, a testament to our ability to operate efficiently in a challenging external environment. We successfully executed our capital strategy in 2022, ending the year with over $600 million of cash, while funding growth in our businesses and returning capital to shareholders. We deployed $388 million for capital expenditures on exciting new products and capacity projects across our businesses, which we believe will drive future revenue and earnings growth. In addition, as Dave mentioned, we took advantage of market and Brunswick share value dislocation, repurchasing $450 million of our shares, representing approximately six million shares or 8% of the company. We also increased our dividend for the 10th consecutive year. Finally, our investment grade credit rating remains strong, reflecting a healthy balance sheet where net leverage is at 1.6 times, and there are no material debt maturities until the backâhalf of 2024. In addition, our strong liquidity and cash flow generation capabilities continue to provide investment and spending flexibility across the enterprise. Turning to our segments, our Propulsion business delivered yet another quarter of outstanding topâline, earnings, and operating margin performance. Revenue increased 17% versus the fourth quarter of 2021 as higher sales were driven by continued gains in global sales volume, favorable product mix, and higher prices as compared to prior year. Operating margins were up 90 basis points and operating earnings up 24%, each enabled by the increased sales and lower operating expenses, slightly offset by higher inflationary costs and investments in new products and capacity expansion. Note that the previously discussed capacity expansion at the Fond du Lac, Wisconsin facility, which is adding more than 50% capacity in the 175 horsepower and higher categories, is materially complete and will enable increased sales to underserved repower, international, and consumer markets while also ensuring our OEM partners have the engines they need for the 2023 retail season. Our parts and accessories business leveraged strong operating margin performance to drive earnings growth versus the fourth quarter of 2021 despite sales being down 8%, or down 5% on a constant currency basis. Note that there is no acquisition impact in the quarter as we have now lapped the anniversary of the 2021 P&A acquisitions. Aside from the negative impact of currency, fourth quarter P&A sales showed the return to more normal seasonality in the marine channel, while RV OEM customers, primarily in the Navico Group and distribution businesses, deferred purchases into later periods to match their revised production schedule. On the Navico Group side, retailer restocking continues to trail point of sale retail performance, but trends here continue to improve. Finally, the destruction caused by Hurricane Ian in Southwest Florida did impact our distribution businesses in the area. For the full-year, despite the U.S. retail boat market being down midâteens percent, our total P&A business net sales were down less than 1% once you remove the impact of currency and acquisitions, or still 21% higher than 2020 and 32% higher than 2019, all reinforcing the stability of this annuityâbased business. Our boat segment had another fantastic quarter, delivering strong topâline and earnings growth, together with doubleâdigit operating margins for the third straight quarter. As Dave mentioned earlier, the boat business reported fullâyear adjusted operating margins of 10.2%, reaching doubleâdigits for the first time in Brunswickâs history. The boat segment reported a 26% increase in net sales and a 60% increase in adjusted operating earnings in the quarter. Segment operating earnings and margin growth were enabled by the increased sales volumes, together with operational efficiencies and positive mix, partially offset by continued cost inflation and limited discounting. Freedom Boat Club, which is included in Business Acceleration, contributed approximately 5% of the boat segmentâs revenue during the quarter. Moving to our 2023 outlook, we enter the year with the momentum created by a strong 2022, and we remain extremely focused on executing our strategic plan and leading the marine industry in growth and innovation. We do however; recognize that uncertainties in the macroâeconomy may impact our consumers and the markets in which we participate. Our 2023 guidance still remains biased to growth versus 2022 but allows for more variable outcomes should economic conditions worsen. As a result, we anticipate net sales between $6.8 and $7.2 billion; adjusted operating margin of approximately 15%; a continued focus on operating expenses with a slight increase as a percentage of sales; and adjusted diluted EPS in the range of $9.50 to $11.00. We also plan to continue our emphasis on generating more cash in 2023 and anticipate free cash flow generation to be in excess of $375 million. I will discuss the various factors in a few slides. Lastly, we are also providing directional guidance regarding the first quarter, where we anticipate flat to slight growth in net sales versus the first quarter of 2022, with EPS between $2.30 and $2.40. Turning next to our segment outlook, we anticipate that each of our businesses will play a role in our 2023 success. Our propulsion business looks to leverage the new capacity for highâhorsepower engines to satisfy demand around the world and grow market share from new and existing OEM customers, while still having the available products to reach the recently underserved market channels. The result is anticipated topâline growth in the mid to high single-digit percent, with operating margins plus or minus 30 bps versus. 2022. Our P&A segment sees a topâline that is flat to slightly up, with benefits from a steady marine market, market share gains, and pricing offsetting continued currency headwinds and a slower RV channel for the early part of the year. Similar to our propulsion outlook, we believe that P&A operating margins look flattish to 2022, with a bias towards growth. Lastly, our boat segment comes off a record 2022 and believes its top line will look similar to 2022, with potential upsides in premium boat products and growth in Freedom, balanced against possible reductions in sales of value boat products. As Dave mentioned earlier, we plan to be very prudent with pipeline inventories and believe we can reach our 2023 goals without adding unnecessary units into the market. Finally, we also believe we can maintain our doubleâdigit segment margin in the current environment. I will conclude with an update on certain items that will impact our P&L and cash flow for 2023. We anticipate working capital usage during the first half of the year, but have a keen enterpriseâwide focus on generating working capital in the back half of the year and continuing the secondâhalf 2022 trend of moderating inventory levels. Depreciation and amortization will be higher than 2022 reflecting the increased capital spend in recent years on new products and capacity, with acquisition amortization expected to be similar to 2022. On taxes, and assuming no material changes to the federal tax legislation, we anticipate a federal effective tax rate of approximately 23%, with a slightly lower cash tax rate. Lastly, consistent with the past several years, we expect to execute a balanced capital strategy in 2023, leveraging our strong cash position and liquidity. With the Mercury capacity project mainly behind us, we believe our capital expenditures will decrease versus 2022, resulting in $350 million of CapEx spend for the year, primarily used for new product investments, cost reduction and automation projects in all our businesses. Note that we have the ability to significantly reduce this capital spend during the year should economic conditions dictate. We plan to spend around $150 million on share repurchases, but similar to 2022, we have the ability to aggressively increase this figure should market conditions or a dislocated share price create opportunities to be more aggressive. I will note that we have already purchased almost $15 million of shares this month. We have approximately $80 million of longâterm debt coming due in 2023, but given our fixed debt profile and low cost of debt, we do not plan to retire additional debt during the year. Our net interest expense is estimated to be approximately $100 million. Note that FX will continue to be a headwind despite recent rate moderation. From a currency exposure perspective, favorable EUR rate movements will be more than offset by unfavorable CAD, AUD and JPY comparisons. In addition, our hedging benefits will be lower due to a less favorable effective hedge rate which reflects the trailing impact of USD strength. We continue to execute our systematic hedging strategy which effectively reduces yearâoverâyear volatility. Thanks Ryan. Before we close out, I wanted to share a few more recent updates. In 2022, we received 95 awards recognizing exceptional product, business and individual performance across our enterprise; the highest number of awards we have won in a calendar year. Iâm extremely proud of this recognition which reflects the extraordinary talent across our organization, our inclusive culture, and our commitment to moving our Company and industry forward. We began a new year at the 2023 Consumer Electronics Show in Las Vegas with a very exciting exhibit and the launch of a major refresh of the Brunswick brand, including a new company tagline, Next Never Rests, that signifies our longâterm commitment to technological and business model innovation. At the show, we officially launched the Mercury Avator 7.5e electric outboard engine and our new boat brand, Veer. Avator and Veer generated huge interest from consumers, channel partners and dealers. As I previewed earlier in the year, 2022 and early 2023 has been an extraordinary period for new product introductions across our businesses. In November, Mercury introduced the allânew V10 350 and 400hp Verado outboard engines, the smoothest, lightest and quietest engines in their class running 45% quieter than a leading competitor at cruise. In addition, the new engines come with optional dualâmode 48 volt/12volt alternators, a first in marine, to seamlessly pair with Navico Groupâs new Fathom II eâPower System, providing boaters the opportunity to eliminate the onboard generator system. Demand has been outstanding and we expect to see many at the upcoming Miami Boat Show. As I mentioned, at the beginning the year, we began the launch of the Mercury Avator electric outboard family, with the unveiling of the Mercury Avator 7.5e which has now begun mass production. These engines are designed with the same outstanding customerâfocused features, quality, and durability as all Mercury products, and consumer interest is very high. Also in January, we launched Veer, an allânew boat brand designed to support electric propulsion and expand access to boating. The first model, the V13, is a 13âfoot fishing and multiâpurpose vessel built from durable rotomolded polyethylene designed to be powered by Mercury Avator electric propulsion systems and conventional Mercury outboards. In addition to the Fathom II ePower system, our Navico Group launched two new fishfinders, the Lowrance HDS Live and HDS Pro, and finally, last week we launched the next generation Sea Ray SPX 210, with the new Sea Ray design DNA and the new Bayliner M19, at the Dusseldorf International Boat Show. And the excitement is not over, we will be launching more new products at the upcoming Miami Boat Show. So, before I close, I would like to remind you about our Investor and Analyst Event on February 16, 2023 at the Miami International Boat Show, where we look forward to hosting you to see our latest products and technologies from across our brands and businesses as well as meet with members of our management team. Hi guys, thanks for the question. Maybe first, you talked about modest retail pressure or declines in 2023. Can you maybe elaborate on what that means that down maybe mid-single digits, low single digits, and then within guidance, a little bit of a wide range is the difference between the top end and the low end, just better retail, like low single-digit, maybe on the high end and high single-digit decline on the low end or maybe any color on that would be helpful. HI Xian, it is Dave. Thanks for the question very much. Maybe I will start with the guidance range for - that was certainly has a lot of internal discussion on that. I think a couple of things reflected there. One is we are coming off several years where external factors have played an outsized role, I think, in business overall and certainly, to some extent, in our results, although I think we have been extremely resilient. But the top end of our range, we are not counting on kind of market support to get to the top end of our range if Retail is flat to even slightly down. We can access the top end of that range. It would need to be something much more significant for us to get to the lower end, there would be external factors involved and Ryan can walk you through some of those. I think I would note, though, that even the lower end of our range is significantly above some of the kind of worst-case scenarios that we laid out 18-months or so ago in our investor presentations. So I think we wanted to be balanced and hopefully, we can spend the year walking it up and not talking too much about the lower end of that range. In terms of what is going on this year, what has been quite difficult is to kind of call the shape of the year because I think even at a macro level, it is been difficult for economists to call the shape of the year. I would say the early year is up versus 2019 in retail and a bit down versus 2022 in retail. If you would ask me two-months ago, what I take for, I absolutely would have taken it. I think some of the highlights have been boat show attendance and really strong consumer interest in purchasing. But then we also are facing a consumer that is under pressure. So I would say that we currently believe we will see continued strong performance in kind of premium of fiberglass with some underperformance in aluminum and the underperformance in aluminum could be down, mid, could be down high, but not really sure how to call it right now. But I would just reinforce that we can still access the top end of our guidance even if the market is flat to slightly down. Okay and then maybe on propulsion. Maybe can you break down a little bit more your expectations for volume, mix and price within the revenue guidance because with the capacity expansion and it is higher horsepower, I would think that mix is a benefit, and then maybe you have some share gains, but at the same time, maybe the organic volume is a little bit lower, so that maybe the volume is flat and mix of benefit and pricing you kind of hold. Is that kind of how you are thinking of it? Yes, Xian, I will take this one for you. This is really a high horsepower story. The demand for high horsepower engines, certainly Mercuryâs high horsepower engines is extremely strong all over the world. And now with the capacity materially behind us, we have the chance really to go out there and service our current OEMs, conquest new ones and reach repower international commercial markets, that frankly just havenât gotten marked up, have not gotten units for quite a bit. So I would tell you, of the three overall volume, if you look across all of our horsepower nodes, may not be much greater than this year, but it will be greater in the higher horsepower, which is obviously a mixed up, both on revenue and on margin. And then there is probably a little bit of price baked in at the back half of the year, like Dave said, normal price increases that are anticipated. And you know that means it is generally low kind of low single digits on the Mercury side. So lots of mix, high horsepower, not a whole lot of price and volume certainly up on high horsepower, but certainly could be flat to slightly down on the small stuff under 60 horsepower. Hey good morning. Thanks for taking my call so I wanted to dig into - David, you alluded to it a little bit. You had given us some potential downside scenarios a year-ago, the $8 and the $6 scenarios, it seems like at the low end of your guidance this year, we are getting pretty darn close to that 30% cut to the industry, versus 2021, I believe. It is $160, $170, I think, was sort of the range to get to that $8, I guess, what has changed? It seems like there is some incremental earnings power even at that - I donât want to say worst-case scenario, but unfortunate case scenario. What is ultimately changed there to at least get us to the $950 million. I understand that the whole goal will be get towards the higher end of that guide. But Iâm just trying to sort of shape up the downside here as we sit here and your stock is trading at nine times even that lower end a bad case scenario, so to speak. Thank you, James, for the question. Yes, I think - well, maybe a couple of things are different. Although I think we would say that the market is probably over a couple of years down 20% plus, I would say, but probably not 30%, maybe in the mid-teens this year and something in the kind of mid singles to maybe high singles last year. I think what we have - that, that is a unit basis, obviously. We havenât really talked about the fact that we have had two years of pretty strong pricing that the top end of the market particularly the premium end of fiberglass remains very strong. So we are benefiting from mix. And we have deliberately responded to some of that weakness on the boat side by mixing up in terms of producing fewer of the really kind of lower end value product than we used to and focusing more on some of the top end. Another factor is, I think, as you saw that, although the boat market is down, the outboard engine market is anything but, so even though it was essentially flat to last year, I think you know what is happening with our share gains, and we anticipate those share gains continuing as we get the capacity online. And Iâm even excited about the introduction of Avator. We expect to make thousands of units of Avator this year, and we expect them to be profitable as well. So I think outboard engines in which was a real big strength of ours are not down with the market. And then what we have seen is pretty robust. I know that we were a bit down in the fourth quarter, which we can talk about, but pretty robust voting participation, which led to our P&A business being pretty much flat on a constant currency acquisitions basis. So we continue to see that good participation. So I think some components of that downside story occurred to some extent. But I think our response to it and the way that the market has developed in our favor, particularly in high horsepower, more premium product has mitigated a lot of that impact, and we donât foresee that changing. Maybe the two points I would remind people is our OpEx control, our ability to really watch cost and counteract some of the market implications has been proven this year, and I think we will continue to be disciplined throughout 2023. The other item that we kind of talk about every call, every new product that comes out is at a stronger margin profile than the one it is replacing and the focus on design for manufacturing at the right cost continues to really be able to keep a higher floor on propulsion certainly and in P&A. James, if you look at the $9.50 case, if you go down and look at kind of the - that really has to assume the worst of all of our guidance pieces, which we find very unlikely to happen in an environment that we are seeing today, certainly held up by propulsion and P&A with the boat business continue to be healthy despite lower value. Got it and then one more question for me. You talked about how, in most cases, wholesale is going to match retail this year, except for that premium segment. Maybe you can help us quantify how big that exception is. And ultimately, if I think about wholesale versus retail and units, what sort of a delta we are looking at. And I guess, how much that adds to these numbers that is sort of that remaining inventory fill, if there is a way to think about that from an earnings perspective? Yes. I donât know if I can connect all the dots, so I might ask help from right. I would say a significant factor here is we were all through last year, essentially ramping up a second large Boston Whaler facility and Boston Whaler, retail and wholesale will continue to be constrained. So we could have sold a lot more Boston Whalers, last year, we were better off with Sea Ray. So Boston Whaler inventory continues to be very low. That facility is now up and running and being productive. So currently, we are anticipating that facility running pretty much at capacity unless something materially changes. I still do not anticipate at least for Boston Whaler that we will get fully to equilibrium. This year, we might be Sea ray. Yes, that is a good way to put it. I mean, from a unit perspective, James, you know that our premium is kind of a third of the overall volume with value being the rest. But it flip flops more or less on the dollar side. And so you have got Sea Ray, Whaler, Lund on some of our premium pontoons, all of those areas, we think we are still going to be relatively strong and pipelines are low. And so from a wholesale in total could be down a couple of thousand units where premium is up a little bit on wholesale with pipeline staying about the same. We have no interest in putting more - putting outsized inventory in the field. But we do have work to do certainly on Whaler and certainly on bigger Sea Rays, and we will be working on that throughout the year. Hey guys. I just have one quick clarification. You guys keep referring to the engine capacity project is materially complete. Was there a delay versus planned or is that just sort of in-line with the original timing? No, it is in line with the original timing. Some parts of the project just were already planned to spill into this year. It is really a project, I think I said at one point, there were 150 different projects. And some of you actually visited the facility in citing that was going on that needed to be completed. But essentially, we have access to all of the volume that we need now. We did mention in the call that when we do the - or at least in Iâm sorry, in the deck that we not only had to get the facility up to capacity. We also had to get the supply base up to capacity. If you look at Q4, if - we have that now, but if we get a little bit of a slower start with some suppliers. We took a bit more time to get up to full speed than we would have liked. We have that behind us now, but that did cost us some revenue in Q4 in propulsion, which is, to be honest, most of the gap between what we anticipated fourth quarter revenue to be and what it ended up being. But now we are in very good shape. Things are running extremely well across all the product lines, supply base is up to speed and producing as we need them to satisfy volumes this year. Makes sense and then I thought that earlier there was a fear that there would be some headwinds from tariff exemption expirations impacting 2023 numbers. Did that wind up happening? Is there anything that you guys are sort of baking into guidance on a year-over-year basis? Fred, I will take this we had hoped to get through a call without talking tariffs, but you have to get there we are. The tariff we are taking advantage of certain exclusions for 2023, but they expire kind of midyear-ish right now. On the flip side of that, we are taking more components, slightly more components from China that are subject to tariffs that we donât have the exclusions from. So net-net, our year-over-year tariff impact is about the same. It is probably a little bit worse and by a little bit, I mean a couple of million dollars worth maybe five-ish. It is still a $50 million headwind to the overall P&L versus the no tariff world. But the reason we kind of dropped it from the year-over-year guidance slide is it is kind of status quo from a total dollar tariff impact despite the fact that the pieces are different. Hey guys, just a question on the boat business. I think youâve mentioned now for, I think, the second conference call in a row that you are kind of you are kind of prioritizing some of the premium and value boat lines and understanding that probably has to do with some of the market demand that you are seeing. But is there any resource allocation to think about as you think about the Boat business and maybe model make up longer term and then if you are shifting more towards the premium side of the boat business, is the supply chain where it needs to be. Obviously, those are more heavily contented models, usually are there any potential hiccups or risks to that? Yes, Mike. Yes. So shifting doesnât necessarily mean a kind of wholesale move from aluminum to fiberglass or something like that. It is really shifting to different model lines within those categories. So as you know, we make both the cost $1500 small aluminum jumbos. But we make them in the same facility aluminum facilities where we make $100,000 Lund premium fishing, aluminum fishing boats. So that kind of emphasis, if you like and certainly, it does and has involved resource allocations within facilities, essentially means producing less of those commoditized type products within a facility and more of the premium product lines with higher margins, it isnât a wholesale shift from like Crestliner to some way or something like that. What we have really seen in the market in the value aluminum is none of the - with kind of major players are gaining share. What has happened is some of the small kind of letâs more scrappy, I guess, I would say, players in that really value aluminum segment that were dominant during COVID and really challenged by supply chain have kind of come back to life and taken some share in that really kind of value, value and the aluminum market. We are just not interested in kind of chasing that much, when we can reallocate resources to more premium aluminum product lines, particularly Lund and Pontoon product lines. So there really is a huge difference between what you see in terms of unit volumes in the marketplace and where the profit pools are and it is more about product line resource allocations versus a major shift of emphasis. And maybe on the supply chain, Mike, I think, yes, the supply chain is coming along with us. But I will say that we have made concerted efforts to in-source some of those pain points. Several examples would be furniture at Whaler, pontoon, fencing that we brought in-house. A lot of these, not surprisingly, where we share with RVs and when they are running really hot, it is kind of hard to get value. But we have taken a lot of our pain points and start doing them ourselves. Mercury has always been famous for their vertical integration and the boat business has been concentrating on it as well. So we are working with our supply chain to ensure their up to the task. But when they are not or where we see challenges, we are very happy to take it in-house. Okay. Great. And then maybe just one follow-up on the guidance, I think your moving pieces would suggest that gross margin may be flattish to down 50 basis points or something of that nature. Maybe walk us through the moving parts, the pluses and minuses as we think about gross margin. Iâm sure currency is a big one, but maybe some of the other things we are not thinking about specifically? Yes. No, you are in the ballpark, Mike. And at this point of the year, it is hard to judge where everything is going to land. Currency certainly it is a bad guy, and it is primarily the first half of the year, where the comparisons are challenging. But gross - I would say gross margins have the ability to be flat to slightly up or slightly down versus a pretty good year, as we think about inflation, some other things, that continues to be elevated by getting a little better and then really the mix throughout the portfolio. So there is both mix within product lines, which we have said is angling more premium, but also just the mix of our overall revenue, a little bit heavier in propulsion and P&A a little lighter in boats as we have said. So that will have help on keeping those gross margins pretty buoyant. . Hey good morning, thanks for taking my question. I just wanted to touch on the retail outlook. We have had reports from Marine Max and one water this morning, kind of what is driving the delta between the flattish to slightly down retail with what you are seeing in the market? Anna, I think the part of that is trying to understand the shape of the year this earlier in the year is extremely difficult. So I would not be at all surprised to see a relatively wide range of outlooks. Certainly, there are some - I wouldnât call them mixed signals exactly, but different points of reference at this time of the year, we are continuing to see, I would say, early boat shows more encouraging than we anticipated. We are obviously more of a global footprint than MarineMax. We saw a very strong Dusseldorf Boat Show, for example, somewhat stronger than we anticipated, where we sold higher - our revenues, for example, the Sea Ray brand were up about 10% or something like that and certainly up over two-years ago. So there might be an element of mix in there. But I think, to be honest, there just isnât a common set of data points at the moment. I think we - as I mentioned earlier, one thing that is a bit of a delta is Boston Whaler remains a significant part of the market. And you could say that Boston Whaler volume has probably been holding back that portion of the market a little bit. So as we free up more volume in there, I think it is not going to - obviously, we will over index on that, but probably the market will be up a bit more, too. Great. And on the last quarter call, you talked about how improvements at Navico could bring the delta narrowed versus the overall P&A business. I guess where do we stand there and when does that provide a tailwind? Well, I think you began to see it really in the fourth quarter where we did the first kind of consolidation integration efforts. And mid-third quarter, and we again see the margins flow through. We had a nice bump in the operating margins in Q4, I think, despite top line being down a bit. But there is more to go. We have to - as we go through a big integration like this, when we integrated Navico we are essentially kind of doubling the size of that group. So we have to take it in chunks. But yes, there is considerably more to be done beyond what we have already accomplished, and we are hard at work on that right now. Yes. I know it seems looking backwards, it seems not to be the case, but Navico is only been in the portfolio now for 15-months. And the deal model assumed cost and revenue synergies growing for the first three-years, four-years, to a run rate kind of by starting year five. So we are really only in kind of the early innings and there is work to do. Like Dave said, really nice proof point there in the fourth quarter. And that is also at a time. Navico itself is about 10% RV. And we did we are - obviously being a supplier to the RV industry, didnât get a whole lot of sales there as they shutdown production here in the first quarter. So there is always tense, but we believe that integration is right on track, and you will see a strong 23% from that business. . Thanks. Just maybe kind of a multipart question on the Mercury expansion. Can you just update us on kind of or the visibility in terms of orders for the year and then how do we think about - a lot of these will be new customers, new OEM customers that are coming over from other competing brands or didnât have access to before, which I assume they are coming in at higher price points, higher margins than someone who has been an established customer for some time. How does that play into it and then my assumption would be that in the following years to become more an established customer that pricing margin would be kind of more normalized. Yes. Thanks, Eric, very much for the question. So I think our - and Fund du Luc unit volumes were up 13% or 14% this Q4 over last Q4. And obviously, in the course of Q4, we were ramping up, so that doesnât reflect the kind of terminal rate of kind of production increase, I guess. So we are going to be exercising the facility above that rate in Q1. Some of the - as we have mentioned earlier, the in order for us to do the OEM conversions, we needed to be clear to them on what we could supply and when we could supply it. And we also needed to make sure that we could satisfy our existing OEMs. And to be honest, some of the existing OEMs would have liked more product from us this year than we were able to provide. So we have to get for existing OEMs, the products that they need, which will require additional volume from us and then we will bring on board the new OEMs. And I would say the model year changeover point, which is typically in June will be the point of - a particular point of high conversion where you will see those conversions really materialize as OEMs do the model year changeover. We certainly do have a lot of opportunity, obviously, right now, there are no V10s, for example, in going to dealers or going into the aftermarket or repower and very few have made it to international markets so far. So you will begin to see those work their way out through the various channels in the course of the year. So we anticipate that we will use a substantial portion of that additional capacity and continue to be ramping up through the first half of the year as we get to the changeover. Yes. At full go, Eric, the capacity project is adding 50% capacity and 150-horsepower and above. Does it mean we are going to use - be able to use all of that right away, but that is the number we have quoted and that is where it stands. Good morning and thanks for taking my questions. Moving over to P&A, obviously, the RV business, notably with the OEMs and supply is quite different than we are seeing in the powerboat market right now. So if you were to flesh out, I guess, the Navico business with the RVs is it safe to assume that the P&A business was closer to being flat? Land and sea, our distribution business also has kind of high single-digit percent going to the RV business. So it is an impact, albeit relatively small. Okay. And then last question on engines. I know that you have been constrained from being able to put more of your engine production into the repower market. How does that shape up for 2023 by midyear, do you think you will be able to take more advantage of that part of the market? Yes, I think we will. I mean we have been generally shortening that part of the market for some period. I donât see any reason now why we canât supply the demand in that market. It might take us a bit of time to make sure that we get through ramping up our existing OEMs and ramping in some others. But yes, by the middle of the year, I donât see why we shouldnât have the capacity to satisfy that demand fully. Well, thank you all for joining us. Thanks for the great questions. I think as you have seen, despite the very dynamic external environment, we delivered another very strong year. Revenue up 70%, EPS up over 20%, our businesses are all operating well. I do want to congratulate our boat group for getting into those double-digit margins that we have been promising to this group for some time. Despite the kind of muted economic backdrop, there is a lot to be excited about in 2023. The new engine capacity coming online, new electric product lines in propulsion and beyond, 60 new products that we put into the market next year - last year coming into the market now and experiencing that first full-year and a lot of other things going on. As we mentioned earlier, we did set an unusually large guidance window, not because we think thereâs a high chance we will be at the bottom of guidance. But because we had several years where external events has really played an outsized role so we wanted to make sure we reflected that in the guidance. But as we talked about earlier, even the low end of our guidance is well above the kind of worst cases that we talked about 12-months or 18-months ago. And none of the guidance scenarios anticipate an up retail market. So we can get an access to that top end with no real help from the market. It is difficult to call the shape of this year exactly, but I certainly am encouraged by the early season boat shows, which have indicated a lot of consumer interest, which is what we need to - that is the basis of how we get to sales. Just a reminder to please join us at our investor event at the Miami Boat Show, which will be very exciting for us. There will be new products introduced, and you will get a chance to look at those new products and technologies and speak with our management team on February 16th.
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EarningCall_711
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Good day and thank you for standing by. Welcome to the NuStar Energy Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Pam Schmidt, Vice President, Investor Relations. You may begin. Good morning and welcome to today's call. On the call today are NuStar Energy L.P.'s Chairman and CEO, Brad Barron; our Executive Vice President and CFO, Tom Shoaf; and our Executive Vice President of Business Development and Engineering, Danny Oliver, as well as other members of our management team. Before we get started, we would like to remind you that during the course of this call, NuStar management will make statements about our current views concerning the future performance of NuStar that are forward-looking statements. These statements are subject to the various risks, uncertainties and assumptions described in our filings with the Securities and Exchange Commission. Actual results may differ materially from those described in the forward-looking statements. During the course of this call, we will also refer to certain non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to GAAP measures, reconciliations of certain of these non-GAAP financial measures to U.S. GAAP may be found in our earnings press release and if applicable, additional reconciliations may be located on the Financials page of the Investors section of our website at nustarenergy.com. I'm excited to tell you about our great fourth quarter and solid performance for full-year 2022, as well as our positive outlook for 2023 and beyond. Let's get started with a few highlights from our fourth quarter 2022 results. We generated $197 million of total adjusted EBITDA in the fourth quarter, 16% higher than adjusted EBITDA in the fourth quarter of '21, and the highest fourth quarter in NuStar's history. Our pipeline segment EBITDA was up in the fourth quarter by 18% over the same period in '21, thanks in large part to the continued strong performance of our Permian Crude System. Our Permian Systems volumes hit another high in the fourth quarter, handing in a record breaking average of 584,000 barrels-per-day, that's up 13% over the same quarter of last year. Our Mid-Continent refined product systems once again delivered a solid, dependable revenue contribution in the fourth quarter of '22. In South Texas, we're pleased that our Corpus Christi Crude System throughputs averaged over 368,000 barrels-per-day in the fourth quarter, which is above our MVCs for that system and 8% higher than our third quarter volumes. We're also encouraged by the continued improvement we saw in January on that system, as our average volumes rose almost 400,000 barrels-per-day last month. Our fuels marketing segment also had a great fourth quarter, generating $12 million of EBITDA, up $7 million over the fourth quarter of '21. With that, a few observations about 2022 before I turn it over to Tom. 2022's historic inflation and volatility made for a bumpy ride around the globe and across financial markets. Given that economic context, I'm particularly proud of our 2022 results, which demonstrated once again, the stability and strength of NuStar's business. Our 2022 revenue was up from growth in our Permian Crude System, growth in our West Coast Renewables network, the positive impact of indexation, the outperformance of our fuels marketing segment and the steady, solid revenue contribution from our refined product systems. We generated higher adjusted full-year EBITDA for 2022, through a combination of revenue improvement and expense optimization, which helped mitigate some of the impact of 2022's historic inflation, and by continuing to high-grade our capital spending program, we were once again able to self-fund our business, including our capital spending and our growth footprint in the Permian and on the West Coast. Through optimization and careful planning over the course of 2022, we were able to meaningfully reduce our leverage, which positioned us to get a head-start and kicking off our plan to simplify our capital structure. And in November, we were able to repurchase about one-third of our Series-D Preferred units, while keeping debt-to-EBITDA -- our debt-to-EBITDA ratio under four times for the year 2022. We're now planning to redeem the remaining Series-D units in 2023 and '24, which is about two years ahead of our original schedule. I'm also proud that in 2022, once again, NuStar outperformed our industry in terms of safety stewardship with the total recordable injury rate, or TRIR was 13 times better than the bulk terminal industry and twice as good as the pipeline industry as a whole. And we published our second Sustainability Report, which provides more information about the culture of responsibility that has distinguished NuStar throughout our history. As Brad mentioned, our fourth quarter adjusted EBITDA was up $28 million or 16% over the fourth quarter 2021. Our fourth quarter 2022 adjusted DCF was $89 million and our adjusted distribution coverage ratio was 2.01 times. Turning to our segments. In the fourth quarter of '22, our Pipeline segment generated $176 million of EBITDA, up $27 million or 18% over fourth quarter '21 EBITDA, of $149 million, largely from a strong performance of our Permian Crude System as Brad described earlier. Higher contributions from our Permian Crude System were complemented by higher results from our McKee system pipelines and our refined products pipelines. Turning next to our Storage segment, our EBITDA for the fourth quarter '22 was $41 million, which is about $6 million lower than fourth quarter '21 EBITDA. That decrease was due to customer transitions and required tank maintenance at our St James Terminal and an amendment and extension of our customer contract at our Corpus Christi North Beach Terminal. Our West Coast region's revenues continued to grow, driven in a large part by our West Coast renewable strategy, up 20% over fourth quarter '21. And for our Fuels Marketing segment, EBITDA was $12 million, up $7 million from fourth quarter '21, partly due to stronger margins. I'm also pleased to report on our continued progress in reducing our debt and building our financial strength and flexibility. We ended fourth quarter '22 with a debt-to-EBITDA ratio of 3.98 times. At the end of the fourth quarter '22, our total debt balance was $3.3 billion and our revolver availability is over $775 million of the facility's $1 billion capacity. Moving now to our outlook for 2023. For full year, we expect to generate EBITDA in the range of $700 million to $760 million, and we plan to spend $130 million to $150 million on strategic capital in 2023. We expect to allocate about $60 million to growing our Permian System and we plan to spend about $25 million to expand our West Coast Renewable Fuels network. Turning to reliability capital, we now expect to spend between $25 million and $35 million on reliability in 2023. As I mentioned, our optimization in 2022 was integral to NuStar's solid results in facilitating an important first step to improve our capital structure last year. Optimizing our business and maximizing our free cash flows in 2022 was more than a one-and-done effort. By systematically scrutinizing every dollar of spending, we've been able to significantly increase our cash flow with systematic changes that will continue to reap benefits in 2023, but also in 2024 and beyond. And by investing that increased cash flow in our growth footprint, we're already on the path to compounding those benefits, with the EBITDA growth we expect from organic capital projects on our Permian System and in our West Coast Renewables networks, as well as the projects we hope to announce later this year across our ammonia system. We plan to continue to optimize our business and build our financial strength and unit holder value, while we continue to safely and reliably store and transport the essential energy that fuels our lives. As we embark on this new year, the future looks bright and we look forward to talking to you next quarter. Good morning. Thank you for taking my question. I wanted to ask about the puts and takes to the high versus low range of guidance for the year, just given the wide range, can you help us walk through like what aspects of your business could drive the higher versus lower end? Yes, Theresa, this is Danny Oliver. It's kind of the same story we had last year. We've forecasted some growth in the Permian, although it's a little bit lower growth rate than we saw in '22, but if our producers are more active than what we have forecasted, we could see some growth there. Our Corpus Christi Crude System, we have forecasted at the MVC levels and so there's really no downside there, but we could -- we could see some upside if we see volumes start to pick up, which we've actually seen some at least in January. And then, on our West Coast volumes, on the West Coast Biofuel System could be a little bit stronger than what we've anticipated. Got it. And given the elevated maintenance and turnarounds for your refining customers this year, it seems to be somewhat industry-wide. Does that have any read throughs on your crude system either as a positive or a negative? We've got all that forecasted that's in the guidance, obviously, but some -- those turnarounds are not always the same across our system. We have some refineries that when they go down, we actually see a pickup in volumes, where we shipped more refined products on other lines to cover the refinery outage and, and then other refineries, we feel the pain, like at McKee, but McKee had a heavy turnaround period this year and it's pretty light going into next year. So we're not expecting any significant impact. Got it, and lastly, just on the Series D pay down. So I believe that you had negotiated a premium with the holder to front load a portion of the pay down in 2022, does that impact the premium that you were scheduled to pay for 2023, 2024, can you just give us an update on that? Yes, Theresa, in all likelihood, the premium we pay will be the stated premium or call premium that's in the agreement, which in 2023, that'd be 125% of par. Hi, everyone. This is Chris Jeffrey on for Gabe, congrats on the quarter. Just curious about the strategic spend kind of the balance besides the $25 million and $60 million, any particular areas, projects that's marked for? I suppose one mentionable is we're forecasting spending some money on our ammonia system Brad mentioned in his comments about some deals that we hope to be able to discuss in further detail a little later in the year, when we -- when we fully execute those, but we are forecasting some spend there. The rest of it is we say every year, we have a basket of what we call singles and doubles, smaller projects, good return projects just scattered out across our various systems and that's what makes up the balance of that number. Great, thanks. And then, just curious on the blending margin backdrop, how that kind of impacted the quarter and the outlook for 2023, you're kind of taking that into account at all? So I mean we just had historically high margins in that business. Last year, just as a reminder, a lot of the margin that we make in that butane blending business, we lock up in the summer months. We bought butane in the summer, when margins are typically at their widest and sell the fall and winter gasoline and then we, we store the butane and blend it in the transition period in the fall, and we saw again, historically, high spreads last summer. It's still early to be predicting what's going to be going on the summer. But it looks like at least currently margins have reverted back to what we would consider normal. One moment. For our next question our next question comes from Michael Blum with Mizuho. Your line is open. I'm sorry Wells Fargo, sorry, Michael Blum with Wells Fargo. Good morning, everyone. I wanted to ask about refined product or gasoline volumes on your system. At least nationwide, it looks like based on EIA data that volumes have been a little bit weaker of late, but it looks like your pipelines are holding up better. So can you just talk through why that's the case and do you expect that to continue into '23? Sure. Michael, this is. Danny. We saw in the fourth quarter, our volumes running right at or above pre-pandemic levels. I will tell you that we've -- in January, we've seen volumes increase pretty significantly at least versus what you would anticipate even pre-pandemic in January. Most of that is due to a Suncor outage at their refinery in Denver. It's has created a really tight market up there and some of our refinery customers have reacted by running higher utilization rates at their refineries to help supply that market than you would normally expect in January due to seasonal demand issues that they usually experience. I would add that we don't typically see the variability that some of the other regions of the country do, just given where our pipelines are. I mean, I would remind everybody, our pipeline has returned to pre-pandemic levels by September of 2020. So I mean we've been, we've been running there pretty much since then. Okay, perfect. That helps and then I just wanted to ask about the Permian growth expectations for 2023, it sounds like you think the rate of growth did slow a bit versus '22, but do you have an exit rate that you're sort of pointing us to for year-end like you typically provide? We're look -- we're looking at somewhere around 600,000 barrels-a-day next year, we have a little lull in activity forecasted just in the first few months of the year. It's just really kind of a timing thing. But for annual averages obviously, we'll beat 2022, we expect to beat '22 in '23. But from an EBITDA perspective, we expect some of that growth to be offset by PLA -- excuse me PLA prices going back to the current forward curve versus what we realized in '22. And I'm not showing any further question at this time. I turn the call back over to Pam Schmidt for any closing remarks. Thank you, Kevin. We would once again like to thank everyone for joining us on the call today. If anyone has additional questions, please feel free to contact NuStar Investor Relations. Thanks again and have a great day.
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Good day and welcome to the Benchmark Electronics, Inc. Fourth Quarter 2022 Earnings 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, Chad, and thanks everyone for joining us today at Benchmark's fourth quarter fiscal year 2022 earnings call. Joining me this afternoon are Jeff Benck, CEO and President; and Roop Lakkaraju, CFO. After the market closed today, we issued an earnings release pertaining to our financial performance for the fourth quarter of 2022. And we have prepared a presentation that we will reference on this call. The press release and the presentation are available online under the Investor Relations section of our website at bench.com. This call is being webcast live and a replay will be available online following the call. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as the appendix in the presentation. Please take a moment to review the forward-looking statements advice on Slide 2 in the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks that are not statements of historical fact are forward-looking statements, which involve risks and uncertainties as described in our press releases and SEC filings. Actual results may differ materially from these statements, most notably due to the ongoing impact of the global supply chain constraints, macroeconomic conditions and COVID. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, Jeff will be covering a summary of our fourth quarter and fiscal year results. Roop will then discuss our detailed financial results and our first quarter and fiscal year 2023 guidance. Jeff will then return to provide more insight on sector demand trends, business wins, and closing commentary. If you will, please turn to Slide 3. Thank you, Paul. Good afternoon and thanks to everyone for joining our call today. Hopefully by now, you have seen our press release and results for the fourth quarter of 2022, which again demonstrated our continued execution of our growth strategy. Referencing Slide 3, revenue in the fourth quarter of $751 million was up 19% year-over-year. Our GAAP and non-GAAP gross margin was 9.6%, while our GAAP operating margin was 3.6% or 4.3% on a non-GAAP basis. Supply chain premiums were approximately $10 million lower than our guidance in the quarter as we continue to see these decreases. Excluding the effect of supply chain premiums, we delivered non-GAAP gross margin of 10.2% and non-GAAP operating margin of 4.6%. When comparing the most of our peers, who exclude stock-based compensation from their non-GAAP results, our non-GAAP margin would be 5.2% given the approximately 70 basis points of stock-based compensation included in our results. Finally, we delivered both GAAP and non-GAAP earnings of $0.60 per share, which was another record quarter of earnings for the company. In the fourth quarter, although we saw some greater than expected softening in the Semi-Cap sector late in the quarter, we still managed to grow Semi-Cap well into the double digits year-on-year. Coupled with the continued strength in EMS and the diversity of our model, we delivered quarterly earnings at the midpoint of our guidance range. Turning to the full year on Slide 4. In 2022, we grew revenue 28% and delivered non-GAAP earnings of $2.09. This represented a record earnings performance for the company. GAAP and non-GAAP gross margins were 8.8%, while GAAP operating margins were 3.1%. On a non-GAAP basis, our operating margins of 3.6% were up 60 basis points year-on-year. Excluding the effects of supply chain premiums, revenue grew 20% year-over-year to approximately $2.6 billion with double digit growth in five of our six sectors. Non-GAAP gross margin expanded to 9.7% and non-GAAP operating margin of 4%, was up 80 basis points year-over-year. I would like to congratulate the entire Benchmark team for their continued execution as we deliver on our strategic objectives. As many of you are aware, we communicated specific financial targets back in 2020 that indicated what we felt was possible by the end of 2022. These were established in the middle of the global pandemic and before the full effect of the related supply chain disruptions were known. Despite these challenges, we never lost focus on our execution and ultimately met or exceeded each of these targets across every metric. However, we recognize this is a journey and while 2022's results represented a key waypoint, we have much room for further improvement. Thank you, Jeff. And good afternoon. Please turn to Slide 6 for our revenue by market sector. Total Benchmark revenue was $751 million in Q4, which is 3% lower sequentially and 19% higher year-over-year. Medical revenues for the fourth quarter decreased 13% sequentially due to material constraints, but increased 14% year-over-year due to growth with existing customers and new program ramps. Semi-Cap revenues decreased 5% sequentially, while increasing 9% year-over-year. A&D revenues for the fourth quarter increased 5% sequentially due to increased demand, but decreased 5% year-over-year as we worked to try to offset continued supply chain constraints. Industrials revenue for the fourth quarter were down 8% sequentially, but up 14% year-over-year. Throughout the year, we saw increasing demand from energy-related products, building infrastructure and LiDAR solutions. In the Next-Gen Communications sector revenues were up 24% sequentially and 64% year-over-year due to continued demand strength from existing programs and new ramps for broadband infrastructure. In the fourth quarter, our top 10 customers represented 53% of sales. Please turn to Slide 7. Our GAAP earnings per share for the quarter was $0.60, which represents 71% growth on a year-over-year basis. Our GAAP results included restructuring at other one-time costs, totaling $800,000 related to the closure of our previously announced site in Moorpark, California, offset by net gain of $2.3 million from legal settlements. For Q4, our non-GAAP gross margin of 9.6% improved 100 basis points sequentially, primarily due to a better absorption across our sites and a reduction in supply chain premiums. Excluding supply chain premiums, our gross margin was 10.2%. Non-GAAP operating margin was 4.3%. This compares to operating margin of 4.6%, excluding supply chain premiums. In Q4 2022, our non-GAAP effective tax rate was 19.1%, which was as forecasted. For the quarter non-GAAP EPS of $0.60 was in line with the midpoint of our Q4 guidance, up 25% year-over-year. Non-GAAP ROIC in the fourth quarter was 9.9%, a 10 basis point increase sequentially and 130 basis point improvement year-over-year. Turn to Slide 8 for our revenue comparison by market sector for the full year 2022 versus 2021. Total Benchmark revenue for 2022 is $2.9 billion, an increase of $631 million year-over-year, aided by growth in all sectors except A&D. For the year, medical revenues increased 28% year-over-year from growth with existing customers and new program ramps. Semi-Cap revenues increased 31% due to increased demand for wafer fab subsystems across our customer base. The A&D sector declined by 9% due to market constraints, even as end demand continue to improve throughout the year. Industrials revenues were up 39% primarily from continued demand improvements from oil and gas control systems and building infrastructure programs. Advanced Computing was up 56% from the planned ramp and execution of high performance computing programs that will continue throughout 2023. Next-Gen Communications revenues were up 36% primarily from new program ramps, and continued strength in broadband infrastructure programs. Our top ten customers represented 51% of sales for the full year 2022. We had one customer Applied Materials that was greater than 10% of revenue for the full year. Please turn to Slide 9. Our GAAP earnings per share for fiscal year 2022 was $1.91, representing 93% growth on a year-over-year basis. Our GAAP results included restructuring and other one-time cost totaling $5.7 million related to the closure of our previously announced site, Moorpark, California and other smaller restructuring activities and a net gain of $3 million from legal settlements. Our non-GAAP gross margin of 8.8% decreased 30 basis points due to higher supply chain premiums. Without supply chain premiums, our gross margin was 9.7%. Our SG&A was $150.2 million, up year-over-year due primarily to higher variable compensation, continued investment in IT infrastructure and medical expenses. Non-GAAP operating margin was 3.6%. Excluding the impact of supply chain premiums, our operating margin was 4%. Our non-GAAP effective tax rate was 19.1% for the year. Non-GAAP EPS of $2.09 was 55% higher year-over-year. Turning this Slide 10 to review the effects of supply chain premiums on a trended basis over the last eight quarters. We expected supply chain premiums to decline sequentially in Q4 and they did to $46 million versus $74 million in the prior quarter. Excluding supply chain premiums, our revenue in the fourth quarter was $705 million, a sequential increase of $7 million or 1% growth and a year-over-year increase of $113 million or 19% growth. Please turn to Slide 11 to review our cash conversion cycle performance. Our cash conversion cycle days were 96 in the fourth quarter compared to 79 days in Q3. The largest contributor to the increase was due to the lower accounts payable days, which was impacted by inventory being procured earlier in the quarter. Our accounts payable decreased $98 million sequentially or 19% lower. Total inventory declined sequentially in Q4 by $19 million. Turn to Slide 12 for an update on liquidity and capital resources. In Q4, we used $53 million of cash and operations and invested $13 million in CapEx. Our cash balance on December 31 was $207 million. As of December 31, we had $131 million outstanding on our term loan. $195 million outstanding borrowings against our revolver and had $251 million available to borrow under our revolver. Turning this Slide 13, to review our capital allocation activity. In 2022, we invested $47 million in capital expenditures. We expect our CapEx spending in Q1 2023 to be between $20 million and $25 million. In Q4, we paid cash dividends of $5.8 million, culminating a $23 million for the full year 2022. Since 2018, we have paid cash dividends totaling $113 million. We did not repurchase any outstanding shares in the quarter. The total share repurchase in 2022 was $9.4 million or approximately 400,000 shares equal to a reduction of 1% of shares outstanding since the beginning of the fiscal year. As of December 31, 2022, we had approximately $155 million remaining in our existing share repurchase authorization. We continue to evaluate share repurchases opportunistically while considering market conditions in 2023. While cash flow from operations in Q4 2022 fell short of our projection. Based on the progress we're making in reducing our inventory and management of other working capital elements, we continue to expect to generate free cash flow in the $70 million to $90 million range in 2023. Please turn to Slide 14 for a review of our first quarter 2023 guidance. We expect revenue to range from $640 million to $680 million, which at the midpoint represents a 4% year-over-year growth. As we are no longer including supply chain premiums in our outlook. Excluding these, we are guiding to a midpoint equal to 14% year-on-year growth on a comparable basis. We expect that our gross margin will be between 9.5% to 9.7% for Q1, sequentially lower due to reduced semi-cap revenue, higher payroll taxes, and merit increases throughout the enterprise. Our first quarter gross margins are holding up better than our forecasted revenue levels might indicate due to favorable EMS mix, continuing through 2023, we do have a number of new program wins that are expected to ramp, which will provide some temporary headwinds to gross margins. As we proceed through the second half of 2023, we expect sequential improvement in margins. SG&A expense will range between $38 million and $40 million. Our non-GAAP operating margin range is forecasted to be 3.6% to 3.8% from modeling purposes. Our non-GAAP guidance does exclude the impact of amortization of intangible assets and estimated restructuring in other costs. We expect to incur restructuring in other non-recurring costs in Q1 of approximately $200,000 to $600,000. The costs relate to continued activities associated with completing previously announced site closures. Our non-GAAP diluted earnings per share is expected to be in the range of $0.39 to $0.45 or a mid-point of $0.42. Other expenses net are expected to be $6 million due primarily to interest expense. Our interest expense is growing sequentially in year-over-year as a function of the additional borrowings to support our growth as well as the higher interest rate environment. We expect to reduce our borrowings and our interest expense throughout 2023 as we generate free cash flow. We expect that for Q1 our non-GAAP effective tax rate will be between 18% and 20% with a weighted average share count of 35.5 million in the period. Thanks, Roop. Please turn to Slide 16. First, let me provide some additional color on the updates that Roop provided. Our first quarter guidance comprehends Semi-Cap sector softness impacting the first half of 2023. That being the case, we continue to see strength in several other sectors including medical, industrials and next-gen communications. In both 2021 and 2022, the effective supply chain premiums obscured the underlying rate of growth in several of our sectors. For comparative purposes, weâre providing a view of the sectors excluding these premiums, which we have presented in Slide 16 for your reference. In Semi-Cap, we closed out a banner year in 2022, growing revenue 30%. Weâve all seen the news from several companies and industry analysts in this space regarding forecast for lower Semi-Cap wafer fab equipment spending, attributable to the weakness in the memory markets and global trade restrictions, including those stemming from the U.S. Department of Commerce. Our share gains, our exposure to logic versus memory and our involvement with EUV systems partially insulated us from this downturn. However, weâre not entirely immune. On a near-term basis, we have seen many estimates referencing WFE capital budgets coming down 20% to 25% in 2023, which most believe will be first half 2023 weighted. We expect this downturn to be briefed by historical standards and are confident in the multi-year demand drivers including increasing silicon content, the emergence of many new domestic fabs like here in Arizona for TSMC and further government investment via measures such as the CHIPS Act. We believe that weâll continue to outperform sector growth rates given our program wins that will be starting in 2023, but in Q1, we are forecasting a sequential and year-over-year decline in this sector. In Medical, we grew revenue 13% in 2022. This could have been much more, but supply chain challenges acutely impacted our ability to fully meet demand during the year. Looking forward, the anticipated macro resiliency of the Medical sector strength of our customers installed base and improving supply together give us confidence in the growth expected for the quarter and full year. In Industrials, 2022 saw revenue increased 24% excluding supply chain premiums on the back of growth from existing customer products and continued momentum and new program wins. We continue to see our business and industrial shift to support automation and energy efficiency solutions. We expect 2023 to be another growth year for our Industrial sector. Moving to the A&D sector, weâre expecting recovery in 2023. Although commercial aero demand improved throughout the year, our defense sub sector was and is more heavily impacted by supply chain challenges in legacy systems where redesign is not an option. However, demand is solid and we are confident that defense spending will support continued growth. With steady improvement and component availability and deployment of next-generation systems later this year, we expect A&D to be a contributor to our growth. Turning to Next Generation Communications, we grew revenue in the sector by 24% in 2022, with the last few quarters growing at a much higher rate. We are well position here to benefit from major broadband infrastructure investments, satellite communications proliferation and government sponsored wireless broadband programs. We expect 2023 will prove to be a significant year for us in the space with our sector growth expected to well exceed corporate averages. Finally, in Advanced Computing, weâve been helping build some of the largest and most sophisticated high performance computing systems in the world. We have a large project currently underway on a new supercomputer platform that will contribute to the next two quarters performance in this sector. As that project completes, weâre expecting sector growth to moderate resulting in relatively flat revenue for the year. Turning to Slide 17, let me finish our sector discussion by highlighting some key wins we secured in the December quarter. Once again, we saw good balance across the portfolio, reflecting the diversity of complex projects that we take on to help customers navigate through the product lifecycle and accelerate their time to market. This helped us end the year with over $930 million in new bookings, which is a leading indicator of future growth. In Medical, we continue to be awarded critical medical device and life science programs, this quarter we won new design opportunities for a minimally evasive robotic surgical platform and a novel rapid cancer diagnostic solution, as well as a manufacturing win for a cosmetic surgery treatment system. In Semi-Cap, we continue to execute with a number of significant wins. Our 2022 performance was a record year for us in next generation tool bookings. In Q4, we won a manufacturing award for a new way for handling project. And in engineering services, we had key wins in process metrology and in cutting edge lithography platform. In the A&D sector, we won an RF manufacturing program, which will be used in a compact flight computer for a space application. We also won the design and manufacturing of an advanced communications module that goes into fighter jets. Finally, we want to secure communications module for military ground vehicles. In Industrials, we continue to rack up wins in the energy space that will also positively impact the environment. This quarter, those included manufacturing wins for a wind energy management system and energy efficient heat pumps. Within engineering, we are designing test development systems for climate controllers. In Advanced Computing and Next Generation Communications, this quarter we had two key wins in EMS and one in engineering. Within EMS, we won the program for a secure biometric reader in existing customer. We also won the business to provide a high performance optical transceiver, which represents a new logo for us. Finally, in Advanced Computing, weâre helping an existing customer engineer a large functional tester for a high performance computing platform. In summary, please turn to Slide 18. 2022 was another significant year for us as we overcame many challenges delivering record revenue and earnings. We did this with the aid of double digit growth in five of our six sectors. We expect that momentum will continue in 2023 across most of our sectors and we are guiding to grow in at least four of the six. We recognize some customers are frustrated with the current environment as supply chain issues persist, costs have escalated, and like our peers, weâre not able to meet all of our demand. In fact, we continue to have approximately $200 million in unfulfilled demand exiting 2022. We saw gradual improvement last year, but look forward to meaningfully close the gap in 2023 working closely with our OEM customers on solving these critical issues. Finally, Iâd like to highlight the teamâs effort in ESG. Iâm very proud to say in its report published in November of 2022. MSCI elevated us to a AA rating. That puts us in the top 10% of MSCIâs peer group for Benchmark. This is obviously a team effort and one for which every Benchmark team member should be proud. In conclusion, I want to say that I am as confident today in the future for Benchmark as I was back in 2020. Weâve invested for sustainable growth, while further demonstrating our resiliency to overcome unforeseen challenges. I just want to reiterate, despite our near-term Semi-Cap headwinds, we believe the long-term targets that were introduced at our Analyst Day in November are still achievable by 2025. With the anticipated return to Semi-Cap growth beyond 2023, coupled with the growing frequency of manufacturing outsourcing discussions in key growth sectors and the larger trend toward near sourcing. The leading companies of today and tomorrow need partners like us more than ever to help develop and ultimately build their increasingly complex and innovative products. We look forward to updating you on our progress in the quarters to come. Hey guys. Thanks for taking my questions. Just want to start with the commentary on the Semi-Cap market. Just curious if you could provide more color on sort of what youâre seeing. You mentioned that it started to soften at the end of Q4. I mean, is this primarily just order softening or have you started to see more cancellations and decommits from customers within that segment? It was really pushing of orders to the out quarters. We did see demand drop and thatâs kind of been reflected in what weâre looking at for 2023 Jaeson. As we said, it did start. We had anticipated some slowdown in fourth quarter and that was kind of considering our guidance, but I would say it was more pronounced as we got to the back end of the quarter than we had anticipated. And thankfully with the diversity of the portfolio, we were able to still bring in the earnings in the midpoint of our guidance. But as we look into 2023, particularly the first half that that softness in semi continues. We also, even since our Analyst Day there were further the restrictions on China and I would say the memory environment didnât get better. And so, incrementally, I think we saw increased pressure on that. The industry a lot of people are picking wafer fab equipment to be down 20%, 25%, obviously, we feed into that with some of our large OEMs. That being said, we do think that we will do better than the industry. We had gained a lot of share in the last few years and we do have a number of new wins that will help us there. And we also â it wasnât every customer in the segment, so there are some customers still that have backlog that hasnât changed, that also contribute to kind of supporting that business. But that being said, you see us reflecting that there is headwinds in Semi-Cap. Okay. No, thatâs helpful. And just curious, what sort of gives you the confidence that this is really just the first half issue. Just assuming, I mean, supply chain constraints ease a little bit and just given how tough this first half is, the second half should be better? Or do you have better visibility into some of the orders that youâll start to ship in the second half? Can you just give us some comfort in why the second half should be better? Yes. I can give a little color there. I mean, we do have particularly in this environment, we do have visibility into the back half of 2023. And we certainly see the opportunity for sequential improvement based on the demand thatâs reflected on us. Of course, that can change. But right now weâve talked to all of our key customers here. Everyoneâs porting to a very strong 2024 and they want to prepare for that. So, thereâs even some thought about what does the â what is fourth quarter or the back half of 2023? Does it incrementally improve from here? But weâre seeing the more pronounced impact in the first half. Okay. And then just the last one from me, and Iâll jump back into queue. Just want to make sure I heard right. So, I mean, it sounds like gross margin will take a step back as these new programs ramp, but you expect an improvement in Q3 and Q4 sequentially? Yes, thatâs right, Jason. So, obviously from a sequential standpoint, from Q4 to Q1, weâll see a slight drop, but still staying strong. But with the new ramps or incremental ramps through the middle of the year, weâll see a little bit of a headwind there, and then it sequentially picks back up in the Q3 to Q4 timeframe as youâd indicated. Hi, good afternoon. I had a few questions. First of all, just following up on the Semi-Cap question about the second half of this year. Jeff, would you attribute it mainly to sort of new fabs coming online? No transitions, any other color you can provide in terms of why your customers are confident about 2024? And along those lines, there were some incremental China restrictions from other governments that seemed to be online to be enacted. Are you considering those in your revised thinking for Semi-Cap? And then I had a follow up. Yes, I think when you look at 2024, certainly incremental fabs coming online is meaningful. I mean, right here, weâre looking across the way here in Phoenix where weâre headquartered, and Intel is building a new fab. We got TSMC thatâs really just signed up to their second, what I would call not just a typical, but substantial multi-node fab here as well. And thereâs been a lot of indications that other handheld device customers are going to use the most, going to buy more silicon from the Phoenix area, and the fab thatâs coming on. All those â all of that you can imagine itâs not out of the ground yet. The buildings arenât completely completed. And obviously once they come online, you got to buy the fab equipment to be able to produce silicon and stuff. So, we certainly see that, I think as a pretty good pickup. Also, just watching the commentary on memory and right now thereâs been a lot of pressure on that, but I think people believe that the inventory gets burned off in the first half and thereâs some incremental positive commentary from that. But a lot of what we are â we have pretty senior relationships that our customers and weâre talking to them about what theyâre seeing and theyâre much closer to it, because they â we donât sell directly to an Intel at TSMC, but we, obviously we sell to the wafer fab equipment suppliers, and theyâre just universally bullish on 2024. Doesnât mean, that they canât change that view, but weâre just trying to give you the best insight we have at this point. I do think that the advanced nodes, the EUV growth there to be able to achieve some of the 5-nanometer, and more 3-nanometer technology is more significantly dependent on that. So, weâre seeing, really solid strength in EUV platforms and a lot of demand there. So that also is great that weâve got that a strong position there and that also supports a little bit our outlook. So thatâs kind of where, how we see things. Yes. Thatâs interesting. Itâs I canât say that, thatâs fully reflected necessarily because some of that only came out in the last week or two. Itâs interesting though I would tell you that there was a big impact we thought in fourth quarter from China and those restrictions, but then people got licenses to ship for another year and that kind of muted the impact a little bit. So itâs pretty dynamic, so itâs a little bit hard to â at first thereâs like, oh, this is another big impact, but then, I saw the other one moderate a bit. So, weâre kind of waiting to see kind of how that plays out and where peopleâs wins are with those fab customers. Thereâs also been a commitment, I donât know if youâve seen, but for incremental fabs to be built in Japan and Europe outside of China. And so while weâre seeing a lot go on domestically with the CHIPS Act thereâs this increased fabs support and commitment by the governments outside of China. Great. Thatâs really helpful. Yes. And then as a follow-up, the new bookings number is pretty impressive, is 930 million. Can you just sort of â from just a high level standpoint, tell us whatâs going on with your new win rates, where youâve been most successful? What maybe are the key drivers behind the latest new bookings number that you just gave us? Thanks. Yes. I mean, weâve been on a pretty good trajectory. Well, I think about three, four years ago we might have done 600 million in bookings and then, we got to 800 and then 900 and had another strong year this year. It does vary a lot. And so, weâve gotten away from this quarterly reporting on it. But we did want to give some indication that hey, weâre still winning at a pretty good rate. We donât â because of the competitiveness, we donât actually share what the win rate is, but I feel like weâre winning our fair share of what weâre going after. Weâve been a little more selective. I would say, as weâve increased capacity, which really trying to make sure that weâre taking business that fits our margin profile thatâs got the complexity and the value add that makes sense for us. We did, there was a nugget in there that we talked about. We had a really strong year in Semi-Cap, next generation tool wins. They are not going to contribute to 2023 unfortunately, because it takes time for that to come online. But we were pretty encouraged with that, particularly since weâre investing in some incremental capacity and some new buildings related to Semi-Cap. So that was a very strong quarter for us, really good participation in industrial and medical as well. But itâs pretty balanced across, itâs not like, one is a fraction of the other. But we do think itâs important that we continue that win rate. Obviously, if we want to grow at the double digits that weâve put out in the long-term model. Hi, good evening. This is actually Chris Grenga on for Jim. Just with respect to Semi and the comment that you expect to perhaps outperform the industry, could you talk about some of the factors that could lead to that outperformance and higher than market growth? Yes, I mean, I think we touched a little bit, but I can certainly reinforce. We have over the last few years been gaining share and there were places where I think some of our OEMs had single sourced some tools and weâve â with our vertical integration capability where we can machine, we can start with the machining piece of aluminum or welding a frame and then been able to build all the sub-assembly work into it and vertically integrate has allowed us to participate in some solutions where theyâve been produced for a while, but we hadnât been a part of that. Weâve also won some next generation tools. And while those arenât going to ramp significantly effective, if anything weâve seen a little bit of movement and next gen tools. We are still doing some pilots and some NPIs, some new product introduction work that will give us some incremental business. And then, the fact that we â a few years ago, we were pretty dominant with one large player in Semi-Cap and now we really have diversified across the space quite a bit. And so, just participation in EUV where they â it seems like in this environment thereâs a bit more resiliency there in those kind of solutions is enabling us to really mitigate a bit of the impact. But as we said, weâre not immune to it. But we do think that we will grow well depending on how much theyâre down that weâll be down less. Yes, Chris. One additional point maybe just to reinforce a lot of the news thatâs come out is memory focused or more heavily influenced by the memory situation. We have a greater weighting towards logic than memory. So that obviously helps us keep some of that demand up strong as well. Yes, good point. Great. Thank you very much. And you had mentioned that with respect to A&D that the weapon system replenishment could be a tailwind. What have you seen there to date? Are there â are you having conversations around that? Or is that something that youâre just getting ahead of? Thanks. Yes, I mean, I think itâs obviously, we do support subsystems for defense contractors that are supporting the war effort going on over in Europe. And we've certainly seen some orders drop in within lead time because there is incremental demand. The bigger challenge I think for us, and particularly in A&D is that a lot of the systems they have a long life cycle and there's â they're really careful about alternatives and even second source parts and that. So it's not given us quite the flexibility to even look at brokers or other places to get components. And so we've struggled a bit with that, but nonetheless some of that business is perishable as you can imagine, as those munitions are used and then you see replenishment of orders there; so that's kind of what we were indicating. Hi, and thank you for taking my questions. Can you just elaborate a little bit about what you're seeing in the component challenges? You expect that to improve throughout the year, but at what pace and where are you currently, because I've been hearing from others that they still find it very challenging? Yes. I mean, what I would've said is hanya [ph] like a year ago, it was so broad-based across so many classes of product. What I'm â what we're seeing more now is that there's specific analog devices and specific custom semiconductors and stuff that actually, believe it or not more legacy node. It might be like a 16-nanometer product, 90-nanometer where the particular semiconductor manufacturer maybe is increasing capacity, but on the new nodes so there's a reluctance to build more capacity in old nodes. But broadly we are seeing lead times come down and have seen that shrink quite a bit. We still have pockets that are very difficult that in fact can gate a build. So we would also say, look, it's not a â it's not wide open, but what I'm finding is incrementally we're solving more problems than we were a year ago, which probably provides a bit of opportunity where we might be able to get something clear or be able to deliver something on a shorter lead time than in the past. So it's incrementally better, but we're still going to be dealing with this through 2023. We didn't mean to indicate that hey, it's all bets are off. The other thing is our willingness to buffer inventory, right? We're being more vigilant on bringing inventory down and so â so now as you see upsides, right, you may not â you sound like you're setting out a ton of excess inventory to go do other things with. So we have to line these things up, but that, that's kind of what we're seeing. Thank you. And in terms of labor, do you see â still see challenges there or how has that been developing? It's interesting. It's there's â when I look around it, some of the people that are doing layoffs or resource actions, it feels like the marketplace is going to soften up particularly in consumer related business. Maybe even some in more compute in the â on the laptop side and things like that. So I'm anticipating that we're going to see more available resource. As you can imagine in our own semi-cap business we're going to â we're going to moderate what resource we bring on there. At one point we were going after a lot of incremental resource and obviously with the demand shift, weâre also going to be balancing what we do. But I anticipate the labor market will continue to improve as people get through making the cuts that they want to make. We still have needs in, we are growing in four and six sectors and some of our facilities are on a pretty significant ramp with new products and we will need incremental research, not all of that in the U.S., of course. So, I think that we will still be pushing that. And inflation puts pressure on that, right, as wages go up and that, but I think weâre going to be seeing an improved resource environment as we go through the year. Anja, Iâll just add to Jeffâs comment I think, and he mention of it and I think itâs important where we are seeing additional load and growth is in some of our international sites. And so labor will continue to be challenging in bringing on the level of resources and the skill set in the Mexico, in the Malaysia and some of these locations as well beyond some of what might become available here in the U.S. Okay, thank you. And just in terms of your new program wins, are most of them from existing customers are adding new logos and can you also talk about the competitive landscape? Itâs pretty balanced. We have a number of new logos. I think we referenced one or two on the call. Weâre winning some incremental business as well. I think in this environment we donât see a ton of customers looking to necessarily switch EMS providers because of the supply constraints and if youâve had a particular partner pursuing that, is it the right time to make a change there? A lot of what weâre seeing is customers that, weâre in sourced and have said, hey, in this environment, in this economy, are we the best to do this? So as in the past, we have found ourselves competing more with internal manufacturing or plans for that. And so we have seen follow on wins with folks that are already with us, but then also new decisions to build a product out of the shoot with us. We also have seen pretty good attach rate. I noticed a stat I saw from the team just a few weeks ago that we had, over 75% of our new wins had an engineering component to it, which is pretty encouraging because if we help develop the product then weâre â who better to build than if we do some of the engineering there. And thatâs been a belief of ours with longstanding belief that makes sense for us. I also, I would say in the competitive environment, itâs been pretty rational. We havenât seen, as weâve seen this, the whole space look at profitability and margins. I havenât seen any competitors do something irrational that has made it inherently more difficult to compete in an RFQ kind of environment. So, I think from that standpoint thatâs encouraging. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Paul Mansky for any closing remarks. Thank you, Chad and thank you everybody for participating in Benchmarkâs fourth quarter 2022 earnings call. Before we go, Iâd like to remind listeners that will be presenting next at the Sidoti Virtual Conference being held March 22nd through the March 23rd. With that, thank you again for your support and we look forward to speaking with you soon. Good night.
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The time has come to start the Hitachi Limited briefing on the consolidated financial results for the third quarter ended December 31, 2022. Thank you very much for attending this briefing despite your busy schedules. We have the information available in the Hitachi website for your reference. We will now introduce the speakers for today: Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO; Tomomi Kato, Vice President and Executive Officer, Deputy CFO; The CFO Kawamura will be providing the outline explanation of the results. We will be switching the screen. Kawamura, please start. Thank you very much for attending this briefing despite your busy schedule. I would now like to present the consolidated financial results for the third quarter for our company. Please refer to page one. This is the content. There are four areas to cover, points - key points. Second, is the cumulated results to the third quarter results and fiscal year 2022 focus and appendix. Here we have presented the third quarter results for your reference. Please proceed to page three. These are the key messages for the third quarter, one to four. The first point is the numbers for a third quarter and second is orders and the third area is the portfolio reforms. And the fourth part is the forecast regarding the third quarter and one. Revenues was Â¥8,108.7 billion, which is a 10% increase year-on-year. Adjusted EBITDA was Â¥624.2 billion, and net income was Â¥292.2 million. On a YoY basis there was a decline. It is mentioned below. And that because of the shift to the risk-sharing corporate pension plan and Hitachi Energy's goodwill impairment and that is accounting for the second composition of this negative number. Second, orders remained very firm. Digital and Green Energy & Mobility have remained very strong. For Digital Systems & Services for the third quarter, well this was Â¥651.3 billion year-on-year, 22% increase. For Green Energy & Mobility between Quebec and New York, AC transmission electricity was gained. We have been able to be awarded this contract. And for Railwayâs we have won major project for Ontario Line. Itâs about Â¥1 trillion overall. This is being received, this order. As a result, Hitachi Energy for Q3 orders was Â¥554.4 billion and we have the backlog of Â¥2.5 trillion. So in terms of completion, its Â¥1 trillion, so it has increased by Â¥2.5 trillion. Railway Systems was Â¥666.5 billion, YoY 135% and backlog is Â¥3.9 trillion, so orders have remained very firm. Third, is the portfolio reforms. As we have been reporting from the past, we are making the steadfast progress in this area. Hitachi Energy, ABB had 20% stake, but in December we have taken back this 20%. Therefore it is now a wholly owned subsidiary. For Hitachi Metals in the beginning of January we have completed the selling of shares. Proceeds have been obtained. For Tender â and Hitachi Transport System is also proceeding well as well. Fourth point is the focus for fiscal year 2022. Revenues is Â¥10,550.0 billion, 1% increase on previous forecast. Adjusted EBITA, Â¥877.0 billion, no change to the previous forecast, while core free cash flow, Â¥270.0 billion increased by Â¥20.0 billion from the previous forecast. For net income we will make upward derivation. We have reported Â¥600 billion, but recorded high of Â¥630 billion has been recorded. Now page four. Let's now look at the Macro Economic Outlook. This is from the Tokai Research Institute and also from the World Bank. IMF has also provided focus from 2023 from the second half, the outlook looks positive. But this is based on the World Bank forecast, so therefore it is more conservative, 1.7% global. As you can see on the right hand side, PMI, Purchasing Managers Index should be referred to, regarding the outline going forward as presented. For major countries it is currently below 50. 50 is the medium, so this global outlook is 1.7%. Japan is 1.0%, the U.S. is 0.5%, Europe is 0% and therefore out of this Japan is relatively high. China is plus 4.3%. Overall for fiscal year 2022, as well as for 2023 economic outlook cannot be too optimistic, but based on this understanding we will be managing our company. Positive factors on left hand side. Below there are various measures implemented, especially economic measures has been turned here. Forexample, the resilience program in Japan as well as in the United States infrastructure investment and economic measures are presented, such as like CHIPS and Science Act, and Inflation Reduction Act. China is also promoting infrastructure construction as well. There are negative factors on the right hand side as well as shown in the middle. For fiscal 2023 interest rates are likely to rise further. There is likely limit, but interest rates will go up. This will have impact. Therefore, we have to watch very carefully about the negative factors going forward. Please refer to page 5. Here I would like to talk about the Semiconductor and the material impact on our business. As a mentioned in the caption above, semiconductor shortage is affecting mainly Hitachi Astemo, especially in the automobile area. So this is not high end, rather logic, analog and discrete semiconductors. Supply and demand remains tight and Astemo has been impacted. For material prices, this is having impact on Hitachi Energy as well, as well as Hitachi Astemo. And steel sheet, electrical steel sheets remains very high. To the right, in terms of energy, electricity price is rising in Japan and elsewhere. But this is having an impact on our factory operations for Ukraine and Russia. In the beginning, we were very concerned, but so far the impact for our company has remained minor. It is [inaudible] that will have a significant impact on our performance. Page six, please. Here I would like to talk about the Q3 results. Left hand side should be reflected starting with the Digital Systems & Services and global uptick is now included, and connective industries, and Astemo are shown here as well. As you can see in the bottom, the orders are shown here as well. For Digital Systems Â¥578.1 billion, adjusted EBITDA is Â¥70.8 billion and ratio is at 12.3%. So increase in revenues as well as EBITDA. Below is GlobalLogic. This is on a sentiment basis, Â¥54.8 billion and to the right an increase of revenues by 46% and adjusted EBITDA is 3.7 and remaining very strong. Green Energy & Mobility should be referred to as Â¥652.1 billion and Â¥46.1 billion, 7.1% increase in revenues, as well as profit to Hitachi Energy, Â¥388.4 billion and Â¥32.8 billion increase in revenues as well as EBITDA. Connective Industries, Â¥742.5 billion in terms of revenues and Â¥78.2 billion adjusted EBITDA. 10.5% increase in revenues as well as profit. Below, Hitachi Astemo Â¥493.1 billion and its 5.7% lower than other sectors. Last year was very difficult, so this year Astemo is increased in revenues as well as EBITDA. Third quarters have been strong for all the sectors. Page seven, these are the Orders Results for the third quarter. YoY should be referred to from Digital Systems & Service, 22% increase in third quarter. Hitachi Energy increased by 15%, Railway Systems increased by 135% and Building System increased by 9%. So you can see that orders are increasing. Hitachi High-Tech is minus 28%. Last year there was a significant order, so therefore itâs a reactionary decline. Page eight, Lumada business is presented here, left hand side graph should be referred to. Left hand side is the three quarters of fiscal year 2021. To the right is the three quarters for the fiscal year 2022 and to the right is for the whole year, fiscal year 2021 and to the right of that is fiscal year 2022 forecast. As you can see, the right, if we compare the two fiscal years, so the â â21 was Â¥1.393 trillion and this year Â¥1.9 trillion increase by 36%. And in terms of adjusted EBITDA is 13%. Numbers have not changed. At the very top, the light red is GlobalLogic. Here Digital engineering is the business and therefore it is showing steadfast growth. Now, please look at the right had side, composition by segments are presented. The right hand side is the fiscal year 2022 forecast and if you look at the breakdown of Â¥1.9 trillion, Digital Systems is Â¥810 billion. Connective industries is Â¥800 billion accounting for more than half. The Green Energy & Mobility was Â¥280 billion, so that is the breakdown. And the results of the breakdown between overseas and Japan, 50% each are presented. Now please look at the lower side. We are taking measures for the next growth, especially for GlobalLogic in Romania, as well as Uruguay DX companies have been required. Delivery personnel and customers have increased. Therefore GlobalLogics service capability has been announced. It is being sold to all these acquisitions. So those are the highlights for the third quarter. Please now refer to page nine. Q1 to Q3 fiscal 2022 results are presented. Referring to page 10, this is on a cumulative basis, Q1 to Q3. Left had side is revenues and in the middle adjusted EBITDA increase in revenues as well as earnings, left hand side is revenues. The dark gray is the three sectors and Astemo. The light gray is for listed subsidiaries. Please refer to these numbers. Right hand side, overseas revenues is Â¥5.235 trillion YoY, 70% Lumada business, Â¥1.361 billion plus 51% and the net income was Â¥292.2 billion, decrease by Â¥158.5 billion. This is because of the pension shift and Hitachi Energy impairment are reflected here. EBITDA, Â¥881.6 billion. The cash flow from operating activities is Â¥380 billion, increase by Â¥122.9 billion. This is because of a tax effect as well as operating profit, which are reflected in the slide. Our KPI is core free cash flow, Â¥74.9 billion, year-on-year increased by Â¥123.4 billion. You can see that all the items, the performance has been very strong. Page 11, these are the results of the three sectors. Three sectors on the left hand side, Astemo, and the Listed Subsidiaries are shown. The three sectors are submitted here, increasing revenues as well as profits and Â¥5.408 trillion for EBITDA, as well for net income we have seen an increase. And for Astemo last year was very difficult. Therefore looking at the slump shot, it looks like revenue increase and profit increased, but as you can see at the very bottom net income is minus Â¥26.4 billion because of the FX impairment, as well as pension shift. That is the reason why it is negative. For the Listed Subsidiaries on the other hand, the two companies are different. For Hitachi Construction Machinery, a reduction in revenues as well as earnings. We have sold all the shares. Hitachi Metals are both increase in revenues as well as earnings. On a consolidated basis, revenues was total is Â¥8,108.7 billion and the net income was Â¥292.2 billion. Now from next slide onward letâs look at the business segment. Please refer to page 12. At the very top there is Digital Systems & Services, so Â¥1,678.0 billion or Â¥188.3 billion EBITDA. Ratio is 11.2%. Front Business YoY EBITDA is minus Â¥5 billion. This is because of the transportation as well as power have led to a reduction in investment on the part of the customers, so this has had an impact. For some projects the cost have increased, therefore we have a slight negative, but we will recover this going forward Next is Green Energy & Mobility, Â¥1,723.7 trillion or 5.3% as well as Â¥91.9 billion in terms of EBITDA. Hitachi Energy Â¥1,018.4 billion, adjusted EBITDA was Â¥69.7 billion, 6.8%. On a full year basis it looks different, but this is for the three quarters. Railway System at the bottom part are Â¥509.7 billion, Â¥28.4 billion, 5.6%. Page 13, Connective Industries are shown here. Revenues was Â¥2,170.3 billion and adjusted EBITDA was Â¥227.4 billion, 10.5%. Water & Environment report is the second area, Smart Life & Ecofriendly Systems. This is home appliances minus 5% in terms of revenues and minus Â¥8.5 billion for adjusted EBITDA. Because of end of year, revenues were lower than expected and in Shanghai lockdown has prolonged the impact. Page 14 should now be referred to. Iâd like to talk about the Astemo as well as Construction Machinery as well as Metals. Last year was very difficult, therefore if you look at December YoY 20% increase in revenues and adjusted EBITDA is Â¥2.5 billion, so it has increased in both revenues and profit. And next page, page 15 this shows the FX quarter through the third quarter. You will see the fiscal â21 on the left hand side and the fiscal â22 and at the top is revenue and at the bottom in adjusted EBITDA. Iâd like to talk about adjusted EBITDA. On the left hand side the Â¥575.2 billion for fiscal â21, Â¥10.7 billion because of the GlobalLogic acquisition and then the divestiture of Hitachi Construction Machinery minus a Â¥28.5 billion, and then foreign exchange positive Â¥ 64.5 billion and then others. So on the right hand side, fiscal â22 three quarters. The total is Â¥624.2 billion. Next page, page 16 shows the financial position and cash flow and in the middle gray, the hedged area is as of the end of December 2022. Please look at the total. Assets which is at the top, Â¥13,281 billion and down the table the cash conversion cycle, it came down to 56.7 days, nearly 20 days reduction. In order to have data, more cash and be prepared for the conversion and the trading and the total Hitachi Limited Stock Holder Security Ratio 34.1%, a 2.8 percentage point EBITDA, D/E ratio. They improved up to 0.59 times and they are at the bottom of the page. Cash flows and the operating cash flow Â¥380 billion increased by Â¥122.9 billion and the investment on the cash flow negative Â¥145.2 billion. On the free cash flow the Â¥234.8 billion, which is on the year-on-year basis increase of Â¥1 trillion and the core free cash flow Â¥74.9 billion. Please go to the next page. This is the revenue by market. The second from North America. In the circle you see the percentage which is the increase, 32% increase and Europe 21% increase. China, this is different form the other years, 5% increase. So this means that China is not expanding, so it is a very difficult situation and below that Japan is also struggling, and the Asean and India 18% increase in other areas, 6% increase. As you see at the bottom, the overseas revenue of Â¥5,235.6 billion, 65% overseas ratio. 4% increase year-on-year. That is the increase of the overseas ratio. So far I talked about the numbers up to the third quarter. Now I'd like to talk about the full year forecast for the fiscal 2022. Please go to page 19. This is the highlight of the forecast. Left hand side revenues and in the middle you see adjusted EBITDA. So you see increase both in revenue and the EBITDA. On the right hand side you see some notes, Lumada business revenues, Â¥1.9 trillion, and then net income Â¥630 billion. Positive impact is because of the construction machinery, the sale of shares, of these group company and well it comes up to Â¥630 billion. EBITDA, Â¥1,390 billion, and the cash flow, the operating cash flow of Â¥110 billion, quarterly cash flow Â¥270 billion and the ROIC is 7.4% and the Assumed foreign exchange rate and also the sensitivity. So the adjusted EBITDA, the impact is positive Â¥0.2 billion and also Â¥4 billion the impact for the revenue when yen changes and it weakens against the dollar. Next page shows the forecast by three sectors, Astemo and Listed Subsidiaries. As you see at the top, the three sectors increase the revenue and the profit and Astemo likewise. But just like the third quarter, the bottom line the profitability is negative Â¥8 billion. Thatâs on how we have recovered. But this is the current status and the Listed Subsidiaries, and both revenue and profitability decreased. And on the right hand side, the revenue total and the Â¥10,550 billion adjusted EBITDA Â¥877 billion and then, so these are the numbers we are going to announce, and their net income as well. And the next page onward, you will see forecast by business segment. So at the top Digital Systems & Services on a full year basis, Â¥2,290 billion, Â¥300 billion for adjusted EBITDA, so increasing revenue and profit. Green Energy & Mobility, Â¥2,440 trillion, Â¥559 billion, 6.5%. Once again increasing revenue and the EBITDA. Hitachi Energy, which is the third from the bottom, Â¥1,396 billion or 7.5% or Â¥105.2 billion. So they have both increased in the revenue and the profit. And the Railway Systems Â¥726.9 billion, Â¥45.8 billion, so both increased in the revenue and profit. In the Connective Industries on the next page, Â¥2.84 trillion, Â¥303 billion for revenue and EBITDA, 10.7%. So the second from the top, Smart Life & Ecofriendly Systems. As you see on YoY basis, adjusted EBITDA is down by Â¥4 billion. This is a quite difficult business right now. And then High-Technology, which is the Hitachi High-Tech Measurement and Analysis Systems. Here the business is quite solid to making contribution. Page 23 please. Astemo is shown here. Astemo adjusted EBITDA Â¥92 billion. So here in the first quarter, we still have the semiconductor supply issue. So we have to see, wait and see how it will help them. But the 4.9%, Â¥92 billion, that is what we expect and therefore Hitachi Astemo. Next page, which is the trajectory of the revenue and adjusted EBITDA. Therefore the fiscal â22 total, and if you could take a look at adjusted EBITDA it was Â¥855.3 billion in 2021. We have some positive impact on the acquisition of our GlobalLogic, but they are negative because of the divestiture of the companies and therefore in exchange and others have several items. And on the right hand side, well and the forecast for â22 is 877. And the adjusted EBITDA on this page, page 25. So how is it reflected on the net income. At the top is 2021 and at the bottom is 2022. Iâd like to use the bottom part. So the 877 which was shown on the previous page, appears here once again on the left hand side. And then we have acquisition related amortization, Â¥83 billion negative and then 297 positive for the net gain on business reorganization. And then the structure reform impairment and the 100, the income taxes and the others. So the pension and the issue is also included, tax is deducted, and then it comes down to Â¥630 billion. So as you see, for 2022 listed and divestiture of listed companies contributed to the performance of the company. Please go to page 26. So this is the consolidated statement of profit analysis and you see cumulative quarter one, quarter three over fiscal 2022 and you see other details. So the -- starting from the adjusted operating income and going down, we have the equity in earnings and the affiliates acquisition related amortization and then we have adjusted EBITDA and then we get the EBIT, and then after that we have interest, interested taxes, non-controlling interest and the net income is Â¥630 billion as you see on the right hand side. And then we have appendix, and here in the appendix part we only have the page 28 for example. These are the numbers only for the third quarter. Page 29, once again these are the numbers only for the third quarter. Page 30, 31, so all these pages cover the numbers in the third quarter alone, so the â sorry, I rushed through with the materials, but so much for my presentation. Thank you very much. Thank you very much. We would now like to proceed to the Q&A period. If you wish to ask a question, please use the raise hand button on the screen, we will call your name. And when your name is called, please unmute, state your name and affiliation and ask your question. If you no longer need to ask the question, please release the raise hand button. We will not show the video of the person asking the question today. We will take questions from the press on the Japanese channel and then institutional investors and analysts and then go to the English channel. So this is the procedure we would like to follow today. So we would like to take questions from the press on the Japanese channel first. Please indicate if you wish to speak by the raise hand button. I have two questions. The first question is the evaluation of the results, and for next fiscal year and onward what is the outlook of the performance, especially for next fiscal year and onward, what are the prevailing risks that you invested in geopolitical as well as foreign exchange and industry. Please elaborate further. Question number two is regarding customer. It is still negative in terms of the net income. EBITDA is positive in profit, but why is it negative in terms of net income. Why is this the case and what are the measures you intend to implement? Thank you for your question. For your first question regarding the evaluation of the results of the third quarter, the management environment has been very difficult. There was a pandemic and there was Ukraine issue, so the environment is very difficult. But in the third quarter we have been able to record the revenues according to our forecast and we have been able to also make an upward revision as well. So we are quite happy with this result internally. For the next fiscal year, as I already mentioned, the macroeconomic environment may not recovered in the second half. Therefore, we believe that the environment will remain difficult for the fiscal year. Foreign exchange 130 and is likely to remain at this level. The difference in the interest rate, as well as the prices between Japan and the United States will have an impact as well. So there's still a weakened and strong dollar trend is remaining. But they will look into the prices. The inflation rate that in Japan is lower compared to the United States. The difference in the foreign exchange as well as the prices difference will lead to adjustment going forward. I don't think it is going to, again it is going to deteriorate, depreciate further, that is not the case according to our outlook. In terms of foreign exchange, foreign exchange remains Â¥130, so there is no significant impact. For interest rate we are concerned. In terms of our borrowings, our debt has been controlled and therefore interest rate increase by 1%, 2%, we can absorb that. But when interest rate goes up, it will have the impact on the asset value. Therefore, this will have an impact on the real economy. That is a concern, because it could have a negative impact on the economy. So we are watching the interest rate environment very carefully. Against this backdrop for next year, we hope that profit can be generated similar to this year. Astemo has issues regarding semiconductors. So for next year you know it is likely that this situation will continue for about six months. But there is demand for automobiles and the resources to the earlier gratification demand that is very strong. So if this recovers, we believe that the similar levels can be achieved for next fiscal year according to our budget. Regarding Astemo net income level, there is the impairment, as well as a shift in the pension system. If you need details, Kato can provide information, but this is a one-off impact. Therefore, it doesnât say if management measures will be required for Astemo. This will fall off next year. Regarding the third quarter evaluation, let me get further information for the third quarter. Compared to what we had expected, the impact of foreign exchange is very significant about the 100 billion upside was obtained, and there's about 85 billion was foreign exchange, and organic with the three sectors and for Astemo there were upsides recorded as well. In terms of profit level, 12 billion upside was recorded and 9 billion was foreign exchange. 3 billion is for the three sectors. You know there were upside for the three sectors, especially for the Green Energy & Mobility, Hitachi Energy, as well as Railway Systems have had the strong orders apart from positive impact of foreign exchange. For fiscal 2023, as congress has already mentioned, foreign exchange inflation must be taken into consideration, and regarding the pandemic, there could be further increase, the resources of geopolitical risk that are concerns that we have identified. For Astemo on the other hand, on page 20, the outlook for the year has been presented. As you can see here, the adjusted EBITDA, you can see that the profit is provided. But although it is not written here, non-operating, about 60 billion is expected. This is impairment as well as the corporate pension plan shift. These are all one-off measures. It will not be prolonged in terms of the net income before tax is positive and therefore for the next fiscal year we have high expectations; that is all. Thank you very much. Can you hear me? I like to ask Mr. Kawamura, and this may not be related to financial results, but they are domestically in Japan. The prices are rising in Japan in wages and salary. What is your view about the compensation and the salary schemes on the â of the company. Can I have your comment? Yes, so thank you very much for the question. Yes, wage increase and also increase of the composition and annual income of the employees. This has become the national agenda in Japan, and Hitachi is also looking at this in a sincere manners. So how much the salary increase is possible? Will spring enable negotiation we will be starting and that will lead to the conclusion. But we like to take as much response as possible to the question. What we are thinking is that the wage increase, a compensation increase, it shall be sustainable. If it is done only one or two times, it is not sustainable. Well as we learned from the economic theory, you know the labor productivity has been raised by increasing the wages. So we have to improve the labor productivity, and that should be reflected on the higher salary, so that shall be the basic structure, so that it's going to be the sustainable program on the â amid the long term basis. As you know, it is up to the labor negotiation to decide, but we'd like to take as much on the actions as possible to this question. Thank you very much for your question. I hope you can hear me. Now, this time in terms of revenues, as well as the net income bottom line attributable to the parent company have been revised. What are the factors that has led to this revision? Compared to October, you know what has changed. Can you please elaborate? Details will be presented by Kato some later, but in terms of macroeconomic point of view, up to the third quarter there have been impairment measures implemented, and therefore compared to the beginning of the fiscal year risk factors was not necessary for the fourth quarter. That was a management decision made. Secondly, the revenue remained stronger than expected, so therefore we have decided to make the upward revision at this time. So the macroeconomic factors as well as the revenue generating capabilities have increased. That is the reason why we have done the revision. Kato will provide more detailed information on this matter. First of all in terms of revenues, on page 21, by segment information is provided for the fiscal year. Out of this, Green Energy & Mobility, we have made upward revision, Â¥130 billion. Hitachi Energy and railway systems mainly. The foreign exchange impact up to the third quarter, as well as order has been very strong. The revenues are increasing. Therefore we have decided to make this adjustment. But semiconductor prices are increasing, as well as personnel costs is also increasing, therefore in terms of profit it is being suppressed to a certain level. And for the adjusted EBITDA it has remained flat from the last time. Regarding net income, we have made upward revision. Please refer to page 25. The adjusted EBITDA through the waterfall chart is presented. Around the middle there â the 10 billion in terms of global risk. Last time we had estimated this to be 40 billion impairment and unexpected events and to the end of fiscal year. But after ending the third quarter, there is only the fourth quarter remaining, and we don't think that there are significant risks. Therefore we have reduced the global business risk to 10 billion. So that is the reason why for the net income it is 630 billion. Thank you. Hitachi Energy and you mentioned that the supply/demand is very brisk. And in the previous meeting and once again you mentioned that the business is brisk for statute energy, so the environment, business environment surrounding the company and also about the product and services of the company, could you please explain more about the briskness of the business? And also the energy is security and also energy price is shooting up and that's negative to your cost. But your energy related businesses, how does it affect the demand for your business in the energy sector? Yes, thank you very much. This is the answer. The reason why the business over at Hitachi Energy is so brisk is because microscopic environment is one factor. In Europe there was a Ukraine situation, so well the transition to Green is slowing down mainly in Germany. But basically the passing towards the Green Energy is very strong. So what's going to happen, for example in Germany, the wind, the wind power, they operated in the northern part of Germany mainly, and there is no industrial area in the northern part of Germany. And then they have [inaudible] in the middle and Munich over the area. Surrounding Munich is the industrial area. So the wind power and we have technology to bring the power generated in the northern part of the country down to the southern part of Germany. And also looking at the Middle Eastern countries, the petroleum or the natural gas if the price changes. So they want to change them into the power. So from Saudi Arabia to Egypt, yeah the cross on the [inaudible] across the national border. So these are also related to these situations in the oil producing countries and the conservations for the Green Energy. So GE, Siemens are the competitors and we are trying to get business in this competitive environment. That's microscopic energy environment. And the technology wise, Lumada is something that we can use. So the India and the bigger station, the transformation station we can put Lumada in order to optimize the distribution of the power, that's what we are doing in this business. So in the field of software, new technology is making progress. So related to Lumada, these are what we are doing. So microscopic environment and also when it comes to technology, Lumada is contributing a lot to this business. And as for the energy, the national security point of view, the private company alone is not able to make the big trend. So we have to work together with the governments and we are having the discussions with the regulators or the government offices. So the natural gas is expensive, but we have to burn the fossil fuel to generate energy. However, in the long term perspective we have to incorporate and embrace some more on the Green Energy. So the high voltage and the transmission is where we are good at and also the energy that can be based upon all natural resource and they can also be utilized. And also I was looking at the government policy, the reassumption of the nuclear power plant is what the government is talking about and we also have the capability there. If the nuclear power plant is to be resumed, that is another area we can contribute. So not just the fosse fuels, but the transmission lines, renewable energy and in some cases probably the nuclear power generation maybe part of the efforts and with all these activities, we like to make contribution. That is all. Thank you very much. Thank you very much. Next we will take questions from the institutional investors as well as analysts on the Japanese line. Those of you with question, please indicate by using the raise hand button. Thank you very much for this opportunity today. I have three questions. First question is regarding Astemo. In the third quarter, if we look at the revenue it is a Q-on-Q plan, but what are the â but still you made improvement, why was this the case. You said that non-operating basis 60 billion for the year was mentioned for the â up to the third quarters or for the full year. For the non-operating area, what is the relevant risk as well as the impairment alleviating the cost because of the impairment. Please elaborate further. In terms of Astemo, revenue is not growing, but profit has increased. This is because of the past business in the automobile in the first quarter, second quarter and third quarter movement are seen. In the third quarter and fourth quarter the price adjustment are often made for the third quarter. Although it is not really related to revenues. There have been priced adjustments made. And against this backdrop, profit has been impacted. Towards the fourth quarter, we are still negotiating this area. So if this is generated, it will be incremental. We believe that the risk, remaining risk can be absorbed. The price adjustment is having an impact on the profit, even in the absence of increased revenue. And for the second point, Iâd like to ask Kato sir to address in detail. Regarding non-operating expenses, the 60 billion was mentioned for the year. Although it is not detailed numbers, I would like to give you the scale information in terms of impairment and as well as pension shift was one-third each in terms of impact. As far as I mentioned earlier, these are one-off factors. For the third quarter, Astemo and profitability is such that it looks inflated, is that case or is it a result of negotiation? Has the price been set and therefore we assume this to be an appropriate level or what about continuity? Every year this is occurring toward the end of fiscal year and therefore we can expect the same for this fiscal year as well. Itâs not just product volume and revenues and profit. This is a commercial practice that is continuing, therefore the numbers are likely â therefore it has been factored in. Thank you. Question number two. It was mentioned in the first questions, next year macro-economic conditions may not recover in the second half. Why is this the case? What is your take on this? Furthermore, if it is not going to return in terms of the environment, what are business domains that is concerning for you? This is regarding the economy, therefore there could be different views, but we are looking at the environment with a conservative perspective, there are three or four factors to consider. First of all pandemic seems to have run its course as you can see in China, but the variance are emerging. So we donât know when the next round of pandemic will occur. Secondly, the interest rate is also to be considered in our company. 1% increase in interest rate does not mean a negative impact on funding, but there is the impact on the assets having an impact on the environment. But in terms of foreign exchange, according to â compared to the real economy, just this is not met yet, therefore the interest rate is concerning going forward. Another factor is geopolitical, as well as U.S. and China, as well as Taiwan. And in terms of Ukraine, this is as if the exit is clear. Therefore, compared to before the pandemic and before Ukraine, the comfortable environment that we had prior to these are unlikely. Therefore we believe that the macroeconomic environment will continue to be very difficult. That is the basis of our management operations. Core free cash flow has increased Â¥20 billion. For your three years, capital allocation plan, based on that core free cash flow, is there an upside or has it remained the same in that context? Related topic, is about half is to be returned to the shareholders. Â¥200 billion of the buyback was made. What is the schedule in terms of buyback as well as shareholder return enhancement for the second year and third year, upon the point of view of core and free cash flow. Is there an upside? Please elaborate further. In the current environment, core free cash flow remains the same as when we announced our midterm management plan. So we are not going to change as a result of upside. As I have already been emphasizing, fiscal 2023, we cannot be overly optimistic, therefore we must achieve the results for the midterm management plan in a steadfast manner, therefore we are not going to change at this time. Therefore in terms of shareholder return, the half to be returned is a policy that remains unchanged. Cash flow situation will have an impact, because how cash flow is generated is subject to volatility. But so the dividend, as well as share buyback policy in terms of shareholder return policy will remain unchanged. Thank you. Thank you very much. I have two questions. It may sound a little abstract. But in the previous, the second quarter and this time third quarter the business is quite solid, performance is solid. But you cover very extensive business areas and in many areas the business is improving. At the same time, there is no major â the difficulties or the â it is noteworthy that you do not have any segment which is the assembly blocks so to speak. So the â and the business is going quite smoothly, and I know that you're making a lot of efforts to run it smoothly. And are there any changes to the approaches taken by management team? Mr. Kawamura if there is anything that you can talk about. For example, the business is expanding in a stable manner. Is it just happened that way that they turned out to be stable or the management team made a different commitment? Do you have a higher sense about the urgency, new attitude or something new happening in the management team to stabilize the performance. Could you please explain? Thank you very much for your question. So the question related to underlying concept of the management. So in the â under the current President basically a approach to the business has not been changed. So what we are trying to do is that we approved the businesses under Power Grid and Railways and GlobalLogic and high-tech, Hitachi High-Tech. These four businesses, these are the engines and when they are stable, then that stabilizes the entire Hitachi business. So these are the four, the major assets. And we, the management team, executive team are paying close attention, so that we can closely monitor the performance of these four engines, and if something goes wrong, then we'd like to provide the correction, so that's the attitude. And as for the low profitability business, unprofitable business, in terms of OP they are 5% contribution that is the threshold and we looking into that. Even if it is a cash generating business, if the ratio is below 5%, then we are trying to combine that business with others or divestiture possibly, so that we can minimize the unprofitable businesses. So it is a low key step-by-step activities, but this kind of activity is also supporting the profitability. And the management, particularly now Mr. Kojima is the President, and what is noteworthy is we are focusing a lot of attention on the cash flow. So of course the P&L is important, but ultimately cash is the king. So how to generate the king and the cash and how to secure that and how to share that with the investors. That is quite an important agenda for us, and that is the notion of shared by all the management executives and all the management team. So the forecast management of the four important portfolio and also the management action is to focus more on the cash flow. It is a commitment, so these are the features of our management approach. If I may ask another question. So as you mentioned, Energy in the railways business, the macroscopic environment. Looking at the environment in North America and Europe, the growth rate is not so significant, and it is a difficult business in these markets. But yeah, the center of your activities is in the North America and Europe and currently or next year the macro, the environment may slow down in the Europe and the U.S, but do you think this business is sustainable and will be viable. Yes, a power grid⦠Power grid and Railway business, yes, these are not commodity business. We have to go the market and sell and buy with the customers. We are not the type of business that is affected by the market condition. It is infrastructure and both also in North America and Europe we are their regular. We are the security funding to make this project long standing on the long term basis. So regardless of the changes of the market and the sentiment, these are quite the resistant to the changes in the market. Particularly in the U.S. as I mentioned earlier, well the currently under Biden administration, they made it clear that they invest heavily in the establishment of the infrastructure. So the power grid, as well as the Railway businesses will benefit from that. So our intention is to get to business there. And in case of Europe, well there is the Ukraine situation. It's quite difficult to foresee what's going to happen, but still as the power grid business and yeah, we were able to capture it and the railway business is running quite smoothly. It is an infrastructure business. So, it is not the â it is quite resistant to the cyclicality of the market. So we believe that we can continue this business in fiscal 2023. Thank you very much. Thank you. Question, I have three questions. I think for equipment, I think you can make profit. Well, generally speaking I think you should have more profit in Digital System. Digital System & Services, a Â¥20 billion increase in profit is our focus. GlobalLogic is about Â¥20 billion. So if you exclude that, that means that you are not making money, profit, but the environment has been very good. So what is the background to this. What is the outlook for the next fiscal year, that's my first question. Second, for power grid. The Â¥2.2 trillion at the beginning of the year and has now increased from Â¥1.2 trillion to Â¥1.4 trillion. But in terms of the profit thereâs been hardly any change. It could be the impact of foreign exchange, but please elaborate on the difference over the change. Third is the Railway Systems revenues are going up. It has increased, but in terms of profit, operating profit, 368 is now 336, it is a reduction. Adjusted EBITDA is almost flat. Why is this the case? The business environment should be good. Compared to the top line favorable, it seems that there is no upside in terms of profit. Please elaborate further on this point. Answer, for the individual numbers, Kato will make a follow-up. But regarding IT, first I would like to address your question. As I mentioned at the onset, for some customers there have been costs increases and suppression of investment. Generally speaking, IT investment is D/X investments are increasing, but there is customer circumstances to consider. That is the reason why growth is limited to where we are today. Regarding power grid, revenues are increasing and what about profits, that was your question. The revenues Â¥88 billion, Â¥90 billion, it has increased on a net basis, but the profit has not been generated, because of the semiconductor issues, as well as employee bonus. Because we have all these other incentives to be paid, so there have been cost increase, reducing the profit. Regarding Railways System, the profit recognition timing is different depending on projects. This is having an impact. Kato will provide further detailed information. Thank you for your question. Please refer to page 21. I think that is what you are referring to. It is true that â and compared to Hitachi Energy, revenues increasing by 30%, profit has increased by Â¥40 billion approximately. So your question is regarding this. The recent impact of foreign exchange, revenues look inflated or very significantly increasing. From the beginning of the fiscal year, we have mentioned that price increase is being reflected. So because the material cost is increased and only 30% of the country can reflect that on price, but now it is increased to 70% and it can be reflected in price increase and we are trying to negotiate further. There are customers that are more willing to accept this. But generally seeking, the raw material cost is not fully reflected in the price, in our price. But what I would like to emphasize, that the revenues are increasing and profit capabilities on a similar basis is improving by 1.4. For Railway System, foreign exchange impact has meant the revenues have increased, but depending on projects there are ups and downs, it's mixed. Therefore 1.7 point on profit, the ability improvement has been achieved compared to [inaudible]. Compared to the last forecast, for Hitachi Energy, for our associate cost as well, it has increased in profit. For Railway the System has increased as well. But the sector rule, profitability improvement is under way. Hitachi Energy and affiliated cost has been accounted for. Therefore Hitachi Energy Railway Systems have not changed. Yoshihiko sir will also provide more information regarding energy. Semiconductor has had an impact, therefore high profit grid automation. Product mix improvement is forthcoming. Going forward, the scanner system monitoring, as well as process control, enterprises management software. This profit is high compared to hardware driven business. So as we increase the ratio of these businesses, for the backlog installed basis, we will be able to visualize a significant portion of this, which means that the profitability can be improved significantly going forward. Regarding the Railway Systems in the long term, 6% plus close to more than 6.5% margin is â compared to our peers, European peers, we are becoming closer, and in fact we are exceeding them in this fiscal year. It is our long term business. Based on the installed base, we have to establish that fully and signaling business can be improved, further increase by improving the mix. We will be able to generate more profit. That is how we would like to generate more profits going forward, Regarding these three businesses, what about the margin profit? You think margin profit, what is your view on that for the next fiscal year? This is this is Kawamura speaking, answer. Regarding margin profit, that we are always considering this. For the three businesses we don't have the numbers with us to give you details. So the IR department will be able to give further information at a later date. Regarding three, it's not just limited to three businesses, but for Hitachi overall, in terms of gross margin, it's not margin profit, but in terms of gross margin for the three quarters compared to the previous year there is hardly any change, but we want to increase this further. But in the recent past there have been cost increases having an impact, and that is the reason why we have not been able to increase the gross margin. But we want to reflect this in our prices further and profit mix will be improved as centering on the Lumada business. We want to increase the ratio of Lumada by certainly where we believe that gross margins can be improved. Thank you. This is Ayada. I have three questions. Number one Green Energy and the profitability there. I would like to know more about this point. Earlier, the Railway Systems of profitability shall be raised, and they tell us the business in the U.K. seems to take more time than you expected, that's what I heard. So acquisition â the timing of the acquisition, the feasibility, whether it can be realized. Could you please give us your comment? And when it comes to Green Energy, the strategic team on the Green Energy, Mr. Kawamura is no longer the member. So could you please explain the significance of that? Yes, thank you very much. As [inaudible] the Railway Systems. In the corporate side we were involved and we are paying close eye on what is happening there in the original contract. And sometime in March come out, weâll be realized and it was supposed to be consolidated. But as you mentioned, in the UK because of the competition low in the UK and also EU, the French and the competition is low, it has taken more to satisfy these requirements. Particularly in France, Phase 1 is already completed and the refiling in the second phase and to reassure that we can go ahead to that stage and itâs going to be cleared in the near future. And as for UK, it is quite interesting, but specifically there is the low business, but the UK regulator is talking about the anti-competitive situation. So locally we are taking actions towards the regulator. So right now, in fiscal â23, sometime in summer time in â23 or by the end of the calendar year â23, we hope that we will be cover everything so that we can â and they cover this out and bring this to our side. So the HR IT accounting, well they are not evaluating the gun jumping. We hope to integrate and this business once and it is caped out. Immediately after the capping out, we will be ready to incorporate this business to us. Yes, I will make some additional comment. In the EU â in the European Commission, submission to the commission, well we already submitted the application. But in November last year we decided to withdraw the submission, because once the examination process is over, then we can start negotiating and talk with the Commission once again and the process wise and we judged that it is more positive for this entire project. So that was the judgment we made and so now we are having the prior discussion right now. And the once that is done, then we will submit once again the application to start the official procedure. And as for the Green and the HR matter, Mr. Kojima used to the person who led this initiative so far, and there are things that we are not able to disclose, but now we have a clear target as to what to do and we have the clear story about the investment. So Mr. Kojima has the other businesses to attend, and a lot of them, so the Kojima and the position shall be transferred to the [inaudible]. And it will be the executive and the Vice President and he will be overseeing this business. And now we have a clearer idea about the direction of this on the project. So that is a reason for this change of the membership. Thank you very much. Second question, DSS and the top line. In the third quarter alone the 22% increase in the order, but how is it divided into Japan and the Overseas and how does it look like and also on the sustainability of the business. The third quarter number, is this the number because you have the large project or the GlobalLogic and the Lumada made the contribution. So in this addressable market, continuously do you think that you can outperform in this market. So this is my next question. Yes, I donât have the breakdown between Japan and others, but we have three sub-segments in our disclosure. And talking about them, well three of them means the front business, IT services, and the services and platforms, these are three, and the 22% positive for the total, from the 24% positive IT service 12% positive. Service and platforms are 21% positive. So respectively they contributed the growth, double digit growth. In case of upfront business, well the financial DU is doing quite well. They are large deals with banks and also frontloading of the projects. Next, IT services. Hitachi Solutions is a company invoked in this. So in Japan and also North American orders that they are receiving in these countries are increasing. So in the industrial area, the security assist and cloud shift, these are the businesses that we are getting. And the services impact platforms, domestic clouds and the DA projects are increasing and hardware storage server business are increasing, and storage overseas are also increasing in orders. So the business are quite smooth and this is partly because of the exchange rage situation, but excluding that well the growth is higher than 20%. Thank you for the response and you also asked about the energy and Railways in the third quarter. Do we have â yeah, so we happen to have our large deals. And is this sustainable? Will this continue in the fourth quarter onward? We are monitoring large projects and the transactions even before we submit tender. Now there, once we get the project, then the risk will change. So they have to control the portfolio, that is an important conservation. Specially, it is difficult to disclose right now, but to submit the tender to the system for Power Grid and the Railway systems, there are a lot. So we have many opportunities and we are chasing them. In the revenue systems, about 10 cases and power grid 10 cases we are chasing and the tracking the different on the tender opportunities. Sometimes we can win, sometimes we lose, but we are tracking and we have the mechanism to track all these large deals. And sometimes we are successful, sometimes not, but in the fourth quarter and the next year we believe that we will be able to get the large deals one after another. But as I mentioned, another aspect of the question is how to control the cost, the risk. So that's the management decision to balance the risk and opportunities. Thank you very much. And lastly, I have one more question. Connective industries, four key businesses and also Hitachi Hi-Tech. The demand is declining in the third quarter, fourth quarter. It is because of the supply demand and it may hit the P&L next year probably. So if Hitachi Hi-Tech will be struggling in the next year, how about other businesses for example. The businesses in the pipeline. Are there any areas that you can expect the growth in next year? Because this may have the macroscopic â the macroscopic environment may have an impact on this segment. But if you have the promising areas, please share information with us. Yes, as for Hitachi Hi-tech, we were able to get a lot of deals. And so that is the reason why it looks quite slow. However, business is doing quite well. There are two pillars, the semiconductor producing equipment and also the medical diagnosis and the analysis system, and they are contributing a lot and the market condition is favorable. So compared to last year, it looks a lot like last this year. However, constantly this segment can make a continuous contribution. And also, the household appliances or the Smart Life concurrently may have a difficulty. But if Shanghaiâs situation recovers, then our refrigerators and washing machines, I believe that we will get more demand. Our demand will come back. And as you see, industrial digital business. So the â this is about the manufacturing, the DX and the robotization of the manufacturing facilities factories and this is where we can expect the growth. And also industrial products, which is the mainly hardware business on Page 13. It is contributing to the profitability of the company. So this is not the 1 trillion business like high-tech. However, all these businesses are positive. So connective industries, of course it is subjected by the market conditions, but they are still and they are resistance to some extent, so we hope that we can continue performing well in the next year. Thank you very much. This is Yoshihiko Kawamura. In high tech, this is not only semiconductors. There are complementary businesses. The immunity type of the business, even if high-tech is the business is volatile. For example, even if the semiconductor is down in vitro business and they can compensate for that. So 60% is â even if 60% is a semiconductor, the others, this is in the appendix, but the medical technologies in the Europe. Well, the high tech and the non-semiconductor business of Hitachi Hi-tech that is contributing. The industrial machineries is growing in the U.S. for example, so in industries these businesses are complementary with each other. Deal systems, building systems in China for example, supply chain is a very strong and that was programmed, and at the same time it is a country where many accidents happen. So the manufacturerâs warranty is important in the building systems, the maintenance and also the contract based upon the warranty is increasing. The volume is increasing and the wallet is increasing, TAM is getting higher. So in the sense of building systems it has become the resilient business. So that was the supplementary comment I wanted to add. Thank you very much. I have just one question. For Lumada, Â¥1.9 trillion is for this year. There is no change. But for the first three quarters â in the fourth quarter, plus 10% is the revision made. It seems like digital engineering and it seems you're looking at lower revenues. Is that a conservative outlook â is there an upside that can be expected? Regarding Â¥1.9 trillion, it is not an easy target in the first place and Lumada business is receiving many orders. There is opportunity for upside indeed, that's all. Thank you, I have a follow-up. Upside is in service. Is that the case for the second quarter and third quarter? Â¥150 billion for the second quarter and third quarter and Â¥130 billion for the third quarter? I think this is very conservative. In other words, looking at the run rate, it could be increasing. Is this a positive factor? Well, we see no hand right now. We still have some time, so we would like to go back to the Japanese channel and we see many hands on the Japanese channel, but we have to welcome one last person to ask a question and I appreciate your understanding. Thank you very much. I have two questions. On the Hitachi Astemo, on the previous meeting I asked the question and you mentioned that you will be able to achieve the annual plan. And well, the profitability of the motorcycles business, the re-campaign, good expectations. So what I understand is that, that is the key to achieving your annual, the plan. So could you please clarify on this point? This is Kawamura. Thank you very much for your question. Yes, in the third quarter, basically the structure of the business has not changed. So the motorcycle accounts for 50% of the business performance. But speedily we are switching towards the digitalization. So the models invertors are also ramping up. One year ago, well the motorcycle â we depended very heavily on the motorcycles. However, motorcycles account for 50% of the performance. But the vehicles are struggling because of the shortage of the semiconductors and that also helped the ramping up of the EV. And now the 50% of the profitability is generated by motorcycles, as you mentioned. Thank you very much. If I may, I'd like to ask the second question. In the connected industry segment, Building Systems and Hitachi High-Tech, I'd like to ask about these two. In the fourth quarter, just the deduction, but the building systems and the profitability appears to be quite limited or small in the fourth quarter. Is this a temporary situation? And in the next fiscal year, well, will you be able to maintain the same level of profitability concerning the Chinese environment right now. So that's the question about the building systems. And the industrial, the charging and the semiconductor business is affected significantly by the market and conserving the contribution next year. It seems that there is a risk of the significantly lower profitability in the Industrial business. And could you please elaborate on this point? Thank you very much. As for the elevator, the new businesses in Japan, China is struggling, but we have significantly the base of the business. The remote maintenance and the repair and maintenance is the major part of the business. So rather than depending on the new projects, we are doing more on the maintenance side. So we do not foresee any significant downside here, and at the same time, it is not possible to see the skyrocketing of the profitability. But the stable profit contribution can be expected from next year onwards. As for the industries and also semiconductor, this is not about the low end of the automobile, but the high-end semiconductors are related. And as you know, the recovery is the same in the investment on the semiconductors, high-end semiconductors. So the high tech and the high end, the semiconductor side, I don't think the impact is not as big as the automotive. But still, we'd like to pay close attention to this, but in the connected industries, and we do not foresee any significant impact because of the semiconductor situation. In the Building Systems fourth quarter, on a Q-on-Q basis from third quarter to fourth quarter last year, the profitability declined and the market is still, we just have to foresee. In excluding the exchange rate, it maybe a breakeven or the same level and there is a sense of the uncertainty. So that is the basis of the first quarter assumption. And as for Astemo, the four wheel and the motorcycles, they are not separate. So we have the powertrain Axel, the technologies based upon the passengers and that can be utilized for the next generation of motorcycles. So our intention is to combine them together. So we are not separating the vehicles and the motorcycle separately, we'd like to combine them for the future. The time has come to bring this meeting to a close. We still have many people with their hands up, but we would like to now close the meeting. If you have any questions, please refer the questions to the department in charge. With this, weâd like to bring the Hitachi Ltd. briefing and the consolidated financial results of the third quarter ended December 31, 2022. Thank you for your attendance today.
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Good day, and welcome to the 2022 Fourth Quarter Sallie Mae Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. Thank you, Michelle. Good morning and welcome to Sallie Mae's fourth quarter 2022 earnings call. It is my pleasure to be here today with Jon Whitter, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the companyâs Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, the potential impacts of the COVID-19 pandemic on our business, results of operation, financial conditions and/or cash flows. During this conference call, we will refer to non-GAAP measures, we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the earnings supplement for the quarter ended December 31, 2022. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you, Melissa and Michelle. Good morning, everyone. Thank you for joining us today to discuss Sallie Mae's fourth quarter and full year 2022 results and our outlook for 2023. I hope you'll take away two key messages today. First, on most dimensions Sallie Mae had a strong 2022. Second, we now believe that the level of charge offs we [Technical Difficulty] experienced in 2022 will likely improve, but remain at an elevated level for a period of time. As such, we have taken tough financial and operational medicine to start to put that impact behind us. And third, and as a result, we believe we have strong momentum entering 2023 and are well positioned for future success. As we released last night, Sallie Mae experienced a loss of $0.33 a share in Q4 and diluted earnings of $1.76 a share for the year. This quarterly loss was due to both an increase in our provision for credit losses, as well as the write-down of the value of an investment in non-marketable equity securities. As Steve and I will discuss, we believe both charges help position Sallie Mae for strong performance in 2023 and beyond. Absent these charges, our financial results for the quarter were in line with our guidance expectations. Let's get into the details that drove our performance in the quarter and the year. Private education loan originations for the fourth quarter of 2022 were $819 million, which is up 11% over the fourth quarter of 2021. Consistent with guidance on our last call, our full year originations ended at approximately $6 billion, which is up 10% over 2021. This momentum has carried into 2023 as we have just experienced the strongest January originations month in our company's history. We also saw a notable market share growth in 2022. Sallie Mae's share of the core student loan lending market increased 200 bps year-over-year according to the most recent industry report, reflective of our 2022 peak season success. We also observed important changes in the mix of our originations. Specifically, we saw a 15% increase in underclass disbursements compared to last year. Underclass originations have higher lifetime value to us due to greater serialization opportunity, which bodes well for future peak seasons. This performance was driven by a number of factors, including realized benefits from our acquisition of Nitro College, improvement in our marketing effectiveness enabled by past MarTech investments and the strength of our partnership and school relationships. Credit quality of originations was consistent with past years. Our cosigner rate for fourth quarter 2022 was 82% versus 83% in the fourth quarter of 2021. Average FICO score for the fourth quarter of 2022 was 747 versus 749 in the fourth quarter of 2021. For the full year, our originations were 86% cosigned and had an average FICO score of 747. Year in and year out, our quality loan portfolio generates net interest income, significant net interest income. For the full year of 2022 we earned $1.5 billion of net interest income, higher than full year of 2021 despite having slightly lower loan balances. In this rising rate environment, our treasury team has effectively managed interest rate risk and grown our net interest margin from 4.81% in 2021 to 5.31% in 2022. We have also managed expenses rigorously in this highly inflationary period coming in on the lower end of our guidance at $559 million. This is despite an increase in volumes and in costs such as wages, benefits and other expenses. Despite this pressure, we continue to ruthlessly prioritize and invest in our most important operational and strategic initiatives. In the fourth quarter of 2022, we continued our capital return strategy, repurchasing 10 million shares at an average price of $16.25. We have reduced the shares outstanding since January 1 of 2022 by 14% at an average price per share of $17.58. We have reduced the shares outstanding since January 1 of 2020 by 44% at an average price of $15.44. While we are excited about this performance, charge off results in the year were worse than our original expectations. Specifically, as discussed on page 15 and 16 of our earnings press release, our net private education loan charge offs for the year were $386 million, above the revised range we set at the end of the second quarter. You will remember at that time we expected charge offs to remain elevated in Q3 and begin to abate in Q4. While we have seen improving performance in many of the transient factors we previously discussed, some factors remain elevated. In addition, while we don't see evidence of stress across the portfolio as a whole, we began to see elevated levels of delinquency and charge offs in pockets of our portfolio toward the end of the year. As we assess industry and competitor data, we believe this is a trend similar to those seen in other areas of consumer lending. These combined factors have led us to conclude that while we expect charge offs to be lower in 2023 than in 2022, the charge off rate will likely remain elevated. In fact, we saw this play out in January where results improved relative to our expectations. We have reflected this view in our charge off estimate in results and allowance calculations. Specifically, we expect charge offs in 2023 will be between $345 million and $385 million. As a result, we added $181 million to our reserves in Q4. In addition to this charge off outlook, this provision build incorporates portfolio and commitment growth, modeling changes and a true up of modeled and actual results. Roughly 70% of this allowance build is related to elevated charge off expectations over 2023 and into 2024 that I described a moment ago. The remaining 30% comes from a prudent assumption that while we are optimistic that credit will eventually normalize, we are not willing to assume an immediate improvement where we and others are continuing to see economic stress. In addition to this financial charge, we have also made significant changes to our people, processes and programs to improve loss performance. We will continue to evaluate performance and the effectiveness of these changes and make further enhancements to our operations as results dictate. The other main factor of our financials in Q4 involve the valuation of our investment in non-marketable equity securities. In the third quarter, we made the decision to exit the credit card business and divest the portfolio. However, as you may recall, we made a strategic investment in a service partner when we entered the credit card business in 2018. In 2021, we marked this investment up by $35 million. However, based on prevailing market sentiment in the fourth quarter of 2022, we were required to write the asset down and have done so by $60 million. The remaining investment on our balance sheet is immaterial. The increase in our provision and the write down of our equity investment were the primary drivers of EPS coming in approximately $0.74 lower than our expectations. About two-thirds of this impact was driven by the provision build I just described and the remainder was due to the write down of a strategic investment in a business line we are exiting. Thank you, Jon. Good morning, everyone. Let's continue with a deeper dive into our loan loss allowance and provision. Our total provision for credit losses on our income statement was $297 million in the quarter, driven by an allowance build of $181 million and net private education loan charge offs of $116 million. This Q4 provision represents an increase of $90 million from the prior quarter and $313 million from the year ago quarter. At a more detailed level, the increase in allowance during the fourth quarter brings our private education loan reserve to $1.48 billion or 6.3% of our total student loan exposure, which under CECL includes the on balance sheet portfolio, plus the accrued interest receivable of $1.2 billion and unfunded loan commitments of another $2 billion. As Jon mentioned, there are a few factors that influence this increase in allowance, the largest being our charge off expectations over 2023 and into 2024 due to the persistence of operational issues, credit administration practice changes and the potential for increased pressure on our borrowers from the current economic environment. We also built allowance in the quarter for slower than expected prepayments. Let's now discuss our credit metrics. Private education loans delinquent 30 plus days were 3.8% of loans and repayment, a slight uptick from 3.7% in Q3 and up from 3.3% in the year ago quarter. It is worth reminding everyone that a natural result of reducing forbearance is an uptick in delinquencies. In fact, since we implemented our forbearance policy changes, the increase in our 30 plus delinquency rate is equal to the decline in forbearance usage. We now expect 30 plus day delinquencies to remain at recently experienced levels through 2023. Private education loans and forbearance were 1.8% at the end of the quarter, an increase from 1.4% at the end of Q3, and lower than 1.9% from the year ago quarter. As May graduates exit their grace period in November and December, it is typical to see seasonal pressures push up forbearance usage. Net charge offs for the portfolio were 3.1% in the fourth quarter compared to 2.7% in Q3 and 1.6% in the year ago quarter. Full year charge offs were 2.55% in 2022 compared to 1.33% in 2021. We expect the private education loan charge offs for the full year of 2023 to total 2.4% to 2.5%. As Jon mentioned earlier, we are appropriately reserved for this outlook. Let me provide some further context around our projections and implications for lifetime loss. Today's discussion has highlighted the fact that we continue to believe 2022 charge offs do not reflect our long term run rate. This belief is reflected in our provision, whereas Jon mentioned earlier, 70% of the increase was driven by expectations of elevated charge offs over the next two years. With that said, we also believe that our 2021 charge off rate of 1.33% does not reflect our long term expectations either. We believe that our long term through the cycle loss rate should be closer to 1.9% to be consistent with our expected life of loan default rates at underwriting. In recent years, we have seen loss rates well beneath that. 2022 was a catch up year for a lot of reasons that Jon and I have already discussed. However, when we look at vintage curves and the expected remaining credit performance of our assets over time, we think that life of loan losses will be within the estimated range, anticipated at underwriting and will continue to drive attractive returns and profitability going forward, generating life of loan return on equities in the 20% range despite recent credit performance. Jon has already reported on our solid NIM performance. I would like to add to that discussion that we remain marginally asset sensitive and should benefit from a continuation of rising rates. We continue to expect our NIM to exceed 5% throughout 2023. Income tax expense for the year was $162 million. This represents an effective tax rate of 24.9%, which is a reasonable run rate for our company. Fourth quarter operating expenses were $138 million compared to $150 million in the prior quarter and $125 million in the year ago quarter. Expenses were down from the prior quarter which was our peak lending season. Full year operating expenses in our core student loan business increased just 7.8% from the prior year despite significant inflationary pressures and dispersed volume being up 10.2%. We will continue to focus on driving both servicing and acquisition costs lower on a unit basis. Finally, our liquidity and capital positions remained strong. We ended the quarter with liquidity of 23.5% of total assets. At the end of the fourth quarter, total risk based capital was 14.2% and common equity Tier 1 capital was 12.9%. GAAP equity plus loan loss reserves over risk weighted assets are an important metric and the CECIL environment was in a very strong 15.9%. We believe we are well positioned to continue to grow our business and return capital to shareholders going forward. Thanks, Steve. As I said previously, I believe Sallie Mae is well positioned for the future. While we expect the private student lending market to return to a more normalized growth rate in 2023 compared to the post COVID bounce back year of 2022, our originations engine is strong and prepayment speeds continue to slow, both of which bode well for balance sheet growth or continued loan sales. Our NIM is resilient and we have demonstrated strong expense management. While charge offs are elevated, we have taken measures by increasing reserves and making operational changes that we expect should help insulate future performance from these effects. On top of these factors, we are also seeing positive signs in the fixed income markets. Rates are now at the levels where we executed our 2022 loan sales. Credit spreads are normalizing and prepayment speeds slowing. All of this helps support future loan sale plans. As such, subject to market conditions, we plan to sell $3 billion of loans in 2023 in keeping with our past loan sale and share buyback arbitrage program. These sales are likely to take place in Q2 and Q3. In addition, under our 2022 share repurchase program, we still have the authority to purchase $581 million worth of shares this year. We do not anticipate having to seek additional board approval for repurchases this year. Beyond 2023, we remain committed to our capital return strategy. It is in this context, I'd like to provide our guidance for 2023. Specifically, we expect full year diluted non GAAP core earnings per share between $2.50 and $2.70. Full year private education loan origination growth of 5% to 6%. We expect our non-interest expenses for the full year of 2023 to be between $610 million and $620 million. And as stated earlier, we expect our loan portfolio net charge offs will be between $345 million and $385 million. Great. Thanks. Maybe just to think about, given the strength in originations in 2022, Jon, the deceleration that you're seeing is -- that you talked about or that you're expecting, is it an element of conservatism or what do you think about -- how do you think about that guide in the context of what's happened now? We can see this morning a report that the freshman class at least has started to grow again. I know there has been some declines in college enrollment over the last couple of years. So can you put the 5% to 6% in context for us? Yes, sure. Happy to, Moshe, and good morning. Thanks for your question. I think the biggest thing to remember is, in 2021 we were still dealing with the impacts of the federal government HEERF program as a result of COVID. And that had, as you'll remember, a pretty material impact on borrowing requirements for students as colleges had just a lot of money directly geared more toward direct aid in assistance to college. We are -- we absolutely expected in our numbers last year to see a rebound of that program went away by statute. And I think we believe that the market this year will look more like a normal market. And I think our view is sort of long term this is a market that is growing in the sort of mid to upper single digits. And that's sort of the expectation that we have brought in. We have been, I think, excited by the performance we put out in 2022, both in terms of sort of the growth of the market and our market share gains. As I mentioned before, I think we saw a very strong, in fact a record setting start in our January originations. And so, I think we are optimistic about our originations outlook, but it's really the loss of the HEERF program that led to a view of just a different market wise growth rate from 2022 to 2023. Okay. Got it. Thanks. And just as a follow-up, very good to hear your comments about the interest rate environment, we can see things with this spread environment is getting a little bit better. Can you talk a little bit about whether the improving margin slowing, kind of slowing prepays, but somewhat higher credit losses, how to think about that in the context of how we should be thinking about the value of those loans, the gain on sale that you can achieve? Sure, Moshe. I'll take a stab at answering that question. So the fixed income market has been extremely volatile and we saw our interest rates go up and come back down over 100 basis points from where we last executed. I think it's pretty widely known that we last executed in the high single digits. And since that points in time, I think, [ABS] (ph) spreads, which many of our loan buyers go to the ABS market to fund their purchases have actually tightened a little bit since then. The market is wide open and deals are getting done very actively. So that's very, very encouraging. The fact that prepayments have slowed significantly, I think we saw consolidations down something like 50% year-over-year extends the life of these loans and generates additional residual cash flows, that is a very big positive. So look -- and as I discussed, I think in some detail, while we did have charge offs that exceed our expectations in 2022 and probably going to persist into 2023 and a little bit into 2024. We don't think that that has had a major impact on our life of loan expectations, which is certainly what investors will factor into their pricing on the product. In our guidance, we were a little bit conservative in terms of the premiums that we expect to receive. And I don't want to start negotiating against myself here. So maybe I shouldn't even brought that up, but we are very optimistic that we will be able to execute some very strong loan sales. And finally, I will point out that there are many, many interested buyers [indiscernible] continues to grow as we steadily sell $3 plus billion of loans each year. So we are very encouraged and looking to get the process rolling now that we have released earnings. Yes, just one follow-up on those comments, Steve, on the gain on sale margin assumed in guidance. Is it kind of consistent with the last sale or when you say conservative, potentially lower than that? Or how should we think about that? Okay, fair enough. Next question is just on cosigner rates. Well, I think you alluded to it being kind of consistent. I think it's been steadily migrating down over the last several years. Can you just talk about what's driving that? And also what share of kind of the charge offs and delinquencies are coming from the population of loans where you don't have a cosigner? Mark, let me take the first part of that question. We have not seen material changes in our cosigner rate on what I would describe as sort of a mix adjust basis. So when you look at sort of the various types of schools and you look at the population of those schools, we have not seen a change there. I think the biggest change that we have seen is a growth in a sort of a different set of programs, which tend to attract oftentimes older and more established credit risks customers who don't in fact need a cosigner to support the underwriting decision. So, a great example of this is, think about the 20, 26 year old individual recently got out of the [army] (ph) services has decided to go back and get their degree, that's a pretty good indicator of the kind of person that would not have a cosigner. And so, I think the sort of steady drift down that you're referring to, we have not noticed patterns of that as we normalize for the underlying segments of customers. I do not have -- Mark, let me ask Steve, if you do views on sort of the specific cosigner, non-cosigner default rates. We can certainly follow-up on that Steve if you don't have that. Look, we obviously pour over the full stats every quarter and there has been no meaningful move in the percentage of defaults that come from cosigned versus non- cosigned. And in reality, I think we went from 87% to 86% over the last couple of years. So it hasn't been really a big mix shift in that either. Hi, good morning. I think I heard Steve mention lifetime loss estimates now up 1.9%. I thought I heard Jon previously say 1.75%. So that's an increase in that estimate. Correct? And also, I wanted to ask how can you have confidence of estimating these lifetime losses when you're having trouble forecasting even current quarter credit metrics, which happened in Q4? Thank you for that question, Michael. So look, I went back and I took a look at what Jon said at the Barclays conference and I would call his comment 10.5 divided by six is really being illustrative to try and put life of loan default rater into perspective. What I've done with the 1.9% is, I have taken a look at basically the disclosures that we've included since CECL was implemented where we basically provide information on what origination cohorts our defaults come from quarter in and quarter out. And basically what I've done is, applied charge off rates informed by the charge off rates that we disclosed occur in the principal and interest repayment cohorts and I essentially normalized the current charge offs that we are seeing excluding things like our best estimates of the defaults from the continuous enrollment program that was the gap year population that we talked about and also normalizing for the issues that we've seen in our collection centers, as well as the issues that we have seen with the forbearance changes trying to estimate what was acceleration and what was a continuation of an increase in life of loan default rates. And I would just add Michael that, look, we're confronted with administrative changes and operational issues that are quite candidly difficult to forecast. The model doesn't do that and we need to rely on management judgment to calculate what we think are the appropriate and meaningful overlays. Jon, anything you'd like to add to that. Yes, Steve, I think that was all right. And Michael, first of all, let me say, thank you for your question and I appreciate and understand the frustration you feel in sort of the charge off performance we showed last year. And let me just assure you, there is no one who takes it more seriously and there is no one who is more sort of disappointed in the fact that we were behind on forecasting those losses then Steve and I. It is something that has and continues to have our utmost attention. As I look forward, first of all, let me say, we're in a pretty uncertain economic environment. So everything we're about to say is in that context, obviously, if things change dramatically on a broad macroeconomic perspective, then obviously our outlook and our views can change. But I think, Michael, there's three things that give me confidence in sort of our ability to better predict going forward than we have in the last year. First, we're now a full year into the seasoning of the last of the credit administration practice changes that Steve referenced. I think the last changes went in early last January if memory serves me right. Getting that kind of ability to look and start to understand on a year-over-year basis is really, really useful for us in disentangling sort of the credit administration impacts versus seasonality, and quite frankly just the normalization of life you have post COVID, where I think everyone saw a delinquency and sort of charge off performance sort of behave differently than historic norms. So I think seasoning is the first thing that I would look at. Secondly, you will not be surprised at all. We have ripped apart and reconstructed our analytics around loss forecasting. And I think in particular, has started to build new and different models that specifically look for and track the kind of unique patterns, the unique subpopulations that really seemed to drive the outsized loss performance in 2022. So we now feel like we have analytics that specifically take that into account. And again, we couldn't previously, because those were populations that behave differently in 2022 than we had seen before that. And I think the good news is, we have validated those models again our historic models and actually think we have a good understanding of the similarities and the differences between them. So I think our level of analytical understanding has really grown in this post credit administration world. And look, the third thing is, I am incredibly impressed with our company's ability to swarm to an opportunity when we understand an opportunity is out there. And it's a little bit of a tangent, but I would look at originations as a great example. I think if you go back two years, what you will see is, I think we had a pretty good marketing and origination engine. We saw that as a huge opportunity and we made leadership and talent changes, we made technology changes, we made analytic changes, we made process changes. And I am biased, but I would say we are on the verge of that being a real source of distinction for us in the financial services space. After lots of years of good performance, I don't think we recognize coming out of 2022 that we had the opportunity to improve our collections and loss mitigation programs to that degree. Believe me, we understand that now. And we talked really hard about the tough medicine we've taken. And I think we have done many things over the last six months to put that change into effect. I think some of those things are already starting to gain traction. And we will continue. As I said in my talking points to work that hard to make sure that we get actual losses to their appropriate and lowest level. And that we can quite frankly, Michael, regain your trust in our ability to call our shot. We will really look forward to a day where you say we've kind of gotten back on the right footing there. So appreciate your question. But Steve, maybe that's what I would add to it. Thank you for that. My follow-up question is also on credit. Besides the impact of the forbearance policy changes and a whole staffing operational issues that are going to impact 2023, what's kind of the underlying financial health of your borrowers? I think you mentioned something about seeing some pockets of weakness in the opening statements. Could you just elaborate on that like what's going on? Yes, Michael, happy to. First of all, I want to say and I said this in my statements, we continue to look, I continue to ask as recently as yesterday, we do not see sort of evidence of broad stress across the portfolio. What I think we started to see partway through the third quarter, but really into the fourth quarter of last year was growing stress on what I would call sort of smaller kind of layered risk segments of the portfolio. So I'll give you an example. If you look at our performance of charge offs by payment, you don't see sort of much of a difference between high and low payment, but if you start to layer in payments and years in repayment. So like high payment amount, say, over several hundred dollars first year in repayment, you start to see very different levels of performance than what we would have seen for a similar cohort in the past. And so, as we've really done the analytical work that I talked about earlier, we've gotten very deep into understanding these kind of layered risk pockets. I think we understand now where that risk is coming from. By the way, as I mentioned earlier, those are the kinds of populations that we have tried to build explicitly into our loss forecasting methodologies going forward. So we know that these are things that maybe in the past we didn't have to pay as much attention to, but we need to now. And we're developing specific programs, policies, procedures, products to go after those types of customers. So -- again, it is not broad, but it is the sort of two and three dimension layered risks where we are starting to see sort of pockets of outsized performance difference. And I think that really is driving a meaningful part of our forward-looking credit outlook. So I just want to make sure I understand that you're saying the pockets of weakness of these borrowers that have higher relative payments and that they're earlier in the life cycle of their repayment. Is that right? Why is that? What's happening? Like why are you seeing that weakness there? Yes. I think, Michael, it makes a lot of sense. If you're a brand new out of college and maybe you haven't fully grown income-wise into your full payment and inflation is going up 7% or 8% a year. So, again, when you think about that person's individual income statement and balance sheet, it's a thinner income statement and balance sheet. On top of that, maybe they have some other variable rate loans, you can all of a sudden see very clearly why that small sub-segment of customers might be very different than someone who has the exact same payment but three years later in their post-graduate journey. And so I do think we see a pretty direct correlation between the sort of layered risk segments and the broader economic environment. And the way that I would sort of describe it to you, I don't think we believe that there is a broad recessionary environment out there today. Again, that's why we don't see the stress in the portfolio as a whole. But I do think we have places where there are, for lack of a better analogy, sort of some scattered showers where this economic environment is hitting certain borrowers harder. And I think that's really what we're tracking and trying to manage with those borrowers to help them return to financial health. Thank you. Good morning. I wanted to follow up on some of the previous questions. Jon, can you maybe just talk about what specifically went wrong with the process element of it and what's been done over the fourth quarter to remediate that? Maybe we could just do a little bit of a case study there? Yes. I mean -- great question, Sanjay, and sort of thank you for that. And we would probably need an hour to do justice on all the diagnostics and analysis that we've done. I think at the end of the day, the simplest thing that I would say is, I think it all starts with our historical modeling of the portfolio. And I think at the end of the day, these types of layered risk segments that I talked about before are exhibiting in this economic environment, very different patterns than we have seen them exhibit in the past. And I think we needed to see some of that experience to sort of retrain our analytics and to retrain our approaches. I think the most important question is like what are we actually doing about it and what are we changing? And again, I can't be, Sanjay, comprehensive with you in a short period of time. But let me give you a couple of examples to maybe give you a flavor of it. First, we've looked really hard at sort of leadership talent and the skills of the people that we have on these teams and the way that they are organized and we've made meaningful changes in that space. We are working hard at developing specific programs for these sort of layered risk populations to make sure that we're being as effective as we can. So one that I'm particularly excited about is recognizing that new-to-repayment seems to be a subpopulation that's feeling real stress right now. We implemented a pre-delinquency loss mitigation program this year that was heads and shoulders above what we've done historically. So, even before someone gets into trouble, establishing communication with borrower, cosigner, beginning to sort of help them understand the options should they be feeling financial stress, reinforcing and recommunicating the programs that exist for them like our existing Graduated Repayment Program, GRP. And by the way, even just some simple things like making sure we have right-party contacts, text and e-mail information again, borrower, cosigner, so that we -- if we do get into a situation where they're delinquent, it's just a lot easier to make that first contact. We have implemented over the last quarter or two pretty major technology improvements in the collection space. So we are doing an awful lot of work right now to give them the workflows and the tools to make it easier for them to navigate with these customers and more cost effectively and efficiently get them into the right programs in a shorter period of time. That's a great way for us to sort of manage that. We're looking a lot at our training programs. We are fully staffed today. That's different from where we were mid-year. We are not seeing our new collectors despite a really high-quality set of classes we brought in, reach proficiency and effectiveness in all the areas as quickly as we would have expected. So we're doing a lot of work. For example, looking at what's the right way to train them in person versus remote, how do we make sure we've got sort of the right actual tools and experiences for them and the like. So, probably can't go into all of it, but I mentioned before the way we swarmed the opportunity that we saw in originations, you can rest assured we are swarming the opportunity that we see in loss mitigation in exactly the same way. Okay. Great. And then just maybe a follow-up question for Steve. I'm just trying to reconcile that 1.9%. I seem to recall, like in the past, that number was closer to 1%, right? And when I look at some of the peers like Discover, I understanding they have a smaller portfolio. I mean they're kind of in that 1% range still in terms of their annualized loss rate. Is there something different about sort of your portfolio versus there? I'm just trying to reconcile that. Thanks. So look, the credit card lenders have talked about the seasoning of recent borrowers, what we see in our portfolio. So if you go back and take a look at our disclosure on where losses emerged from -- in 2019, you will see that basically 75% to 80% of losses basically come from origination cohorts that are three plus years and older. Half of it from origination cohorts that are five plus years and older, which makes perfectly good sense because with people borrowing while they're in school and not starting to make full P&I payments until six months after graduation. That is exactly where you would expect our defaults to come from. So if you look at the 2019 cohort, which totaled 1.3% of loans, there wasn't a high volume of loans in repayment at that point in time. If you take a look at the 2022 cohorts, obviously, we had some challenges in the organization, total default rates were 2.55%. Obviously, the default on the older cohorts was much higher than our run rate sort of P&I default rates. So if you apply a more normalized P&I rate -- default rate to those cohorts across time, you basically could triangulate back to that 1.9% default rate. And I'd be more than happy to offline walk you through those disclosures and show you how I arrived at that number, which I believe is perfectly reasonable. If you look at P&I default rates over time from cohort to cohort, they sort of peaked at 4% and then drop back down into the 3% level. Ours are running much hotter now. Obviously, you can see that in all of our Reg AB disclosures. What I did was applied the default rates that are stressed compared to what we've seen over time to accommodate for the potential for higher default rates from, for example, our forbearance administrative changes. Difficult to describe a spreadsheet verbally on a conference call, but did that kind of make sense for you, Sanjay? Yes. I guess I'm just trying to think about you guys relative to others in that -- in the same space, right, in private student loan. So it's very important to point out, we have a much higher volume of loans now that are actually in repayment than we did in 2019, in 2018 and 2017. So to try to expect our default rates year in and year out to run at a 1.1% or 1.3% or even a 1.5% rate doesn't add up with Jon's illustrative math or what you see in our disclosures when we publish full P&I default rates. So it really is very similar to the seasoning issue that I think half one described on their call where they said, "Hey, we grew the book 18 months ago, and now those defaults are starting to emerge." Our origination cohorts went from $3 billion and $4 billion -- $5 billion to now $6 billion and higher over time. So it really is an issue of seasoning with a little bit of an increase in life of loan charge-offs from both our operational charges that changes that Jon was just talking about and the well telegraphed forbearance changes that we've been talking about since 2019. And Sanjay, it's Jon. I think the only thing I would add to Steve's discussion. It's hard to compare loss rates across companies. There's different customer strategies, there's different underwriting strategies, there's different pricing strategies. And so I'm not sure I'm the right one to sort of try to do the sort of specific crosswalk. I think what is important to me, though, is not the charge-off rate in isolation, but the charge-off rate in the context of the overall ROE on those loans over time. And obviously, there's a level of charge-off rate that we would be uncomfortable with from a reputational risk perspective and just the impact it has on customers, no matter how much we could price for that loan. But I think within those guardrails, the process that we employ is really a pretty rigorous process. We look at every kind of credit sale. We look at sort of expected lifetime loss for that unique credit sale. We look at the cost to acquire within those credit sales. And we look at the pricing of those credit sales. And we very routinely will sort of ex small cells off if we feel like losses at a place again where it's not in the customer or our reputations kind of best interest to do that business. But what we really focus on for the majority of it is, are we earning that attractive ROE that Steve talked about previously? And that's why, quite frankly, we really focus so much on what is our expected lifetime loss versus what we assume at underwriting, because we know if we can stay within that and we use our vintage curves to sort of manage that, then we know we're generating those high-quality returns, which our investors should really appreciate. Good morning, guys. Thank very much. Most of my questions have been asked. I guess, one question is maybe just a refresher. The yields moved up pretty big from Q3 to Q4. I know there are some kind of resets during the year. Maybe can you just, I guess, refresh us about the repricing mechanisms in the portfolio? Sure, John. So pretty straightforward. Basically, half of our portfolio is tied to one month LIBOR as for portfolio is fixed rate. Borrowers have been choosing fixed rate at a much higher rate in the last two or three years of originations for all the obvious reasons. So that mix is changing slowly, but surely. The bottom line is that, we were positioned marginally asset sensitive over the last year or two, and we have benefited to a certain degree from the rise in LIBOR, which is up obviously four plus percent over the last year. So we have benefited from that somewhat. But we try and run a pretty balanced book. So we're not really getting out over our SKUs in terms of taking interest rate risk. Our real goal is to book a nice solid NIM year in and year out. And I think we're pretty much in that sweet spot right now. Okay. Thanks. And then in terms of just thinking about capital allocation, I mean, it seems like you're targeting a similar amount of sales in 2023 versus 2022. How do we think what that means in terms of like comparable buyback cadence in 2023 versus 2022 or other kind of facets of your capital return program? Sure. So we're trying to be balanced here. We want to maintain a steady program at that $3 billion mark. We do want to see slight growth in the balance sheet over time as CECL gets phased in, it is a little bit more challenging to maintain the size of the buyback program that we have in the past and we did $1.5 billion, then we did $700 plus million. Last year, Jon in his prepared remarks indicated that we have $581 million of authorization left from our Board-approved buyback. We do not expect to go back to the Board this year to acquire additional share repurchase authorization. So I think that gives you an indication of the size of the program that we're contemplating this year, it's probably a little bit under the $581 million. We did just make our second down payment on CECL phase-in with two left to go, and we don't talk a lot about the medium term, but we have indicated in the past that as we fully phase-in the CECL charge on equity, we will get to a point where we can generate capital to return to shareholders without a significant loan sale. And I think that's very important to keep in mind because that means we can start to grow our balance sheet, grow our earnings and return capital to shareholders without a major charge on our balance sheet. And obviously, it's probably always worth reminding people that in the loan sale process, not only do we earn the premium, but we release a big hefty CECL loan loss reserve and then a nice chunk of capital that's applied to the balance sheet to return to shareholders. Jon, anything you would like to add to that? Hi. Thanks for taking my questions. Jon, I appreciate all the color you've given so far on the actions you're taking to remediate some of the issues you're seeing. But thatâs my question, it sounds like that's more on the P&I side, on the repay side. I guess I'm wondering, is there anything you're also doing on the front end of the book as you underwrite? I know that takes a little bit longer to play out in terms of impact to credit down the line. But just wondering if there's anything you're taking away from your new modeling and analytics to apply it to your underwriting today? Yes, Jeff, great question. And you can imagine that's getting a lot of our thought and it goes through effectively the same process that I just described a few minutes ago. So every year, and we'll do this again as we sort of head into peak season, we will go back, we will look at all of the losses by all these layered risk segments that I've talked about. And we will look at the returns, we will look at sort of the pricing, and we will look at sort of the ROEs that result from that. I think at this point, I am sure there will be some adjustments on the margin. Any time you have greater insight about sort of potential losses, you have to incorporate that into that process. I don't think we have reason to believe at this point that that will be a major redefinition. And of course, remember, we're underwriting today for loans that will come into P&I a year, two, three, four years from now. And so we also want to make sure that what we're picking up on is a true lifetime loss change versus just a blip because of environmental factors. So we will think through all of that as a part of this. So yes, we absolutely think through that, by the way, not just during times like this where we see a little more strain, we do that during the good times too where we see less strain, and we feel like we're always trying to optimize those underwriting conditions. Got it. And then just to maybe follow-up on the other questions with the loan sales this year. Can you may be shed some light on what your potential buyers are thinking about as they see these losses start to tick up a little bit? I know you mentioned you don't think that this is changing your lifetime loan assumption, but are the buyers willing to maybe accept a little bit of that because of the higher interest rate they're getting today? Or maybe what's the thought process you're handing from them? So buyers always stress their default expectations when they're pricing up a loan portfolio, I think it is the case that an increase in life of loan losses of 1% or 2% does not have a meaningful issue on the IRR on that portfolio and our loan buyers are very serious students of the historical performance of our assets, and I'm pretty confident that they will be able to assess the issues that we're having with the portfolio at this point in time and draw the appropriate conclusions. Are they going to try and challenge us and get a better premium? No doubt whatsoever, but I think that the long-term performance of this portfolio will carry the day. Jon mentioned in his prepared remarks that we are starting to see some improvement in default rates. And I think that, that will manifest itself in the stats as they emerge, for example, in the next monthly ABS servicing report, et cetera. So hopefully, that answers your question. Yeah. I just wanted to follow-up on the net interest margin. You guided above 5%. Can you give us an idea of that much about 5%? And what kind of cadence, I think cash usually kind of swings around your net interest margin quarter-to-quarter? Sure. So I mean, I'll try and answer the question with as much candor as possible. I think that you can be pretty confident that our net interest margin should be relatively close to what you saw in 2022. Give or take a handful of basis points. It is the case that our funding is pretty steady and pretty long term. So in any given year, we're replacing, I don't know, 20% to 30% of our funding and our portfolio performance is pretty predictable. And I think we actually have done a very good job of estimating our net interest margin year in and year out. So I feel pretty confident in making the statement that I just did. And you are correct. So for example, we ended the year with 23.5% of total liquidity on the books and that was positioned to fund the big loan disbursements that we made in the first quarter of this year. So there is cyclicality in the NIM, but it's not as meaningful as it was back in the days when we carried a lot less liquidity than we do today. Great. That's helpful. And then just last question is with the higher loss expectations kind of booked into the provision this quarter, does that essentially kind of reduce the need for additional provision builds well above the, I guess, the charge-off rate. I know it's kind of different because it's more geared towards the originations? And then the last -- other part of that is what kind of unemployment rate are you assuming this year in your net charge-off guide? Sure. So, the one benefit of CECL, and I can't think of many more, is that, at any given point in time you are reserved for all expected losses in the future. And I think we were pretty thorough in our reserve build this quarter. So unless there are major changes in the performance of our portfolio or the outlook for the economy, the only reserve building we should be doing in 2023 is for new loan originations. So I think that's the situation there. In terms of economic assumptions and unemployment rates, we are a user of Moody's forecast. We blend the base, the S1, which is a slight improvement in the economy and the S3, which is a meaningful economic downturn. And when we compare expected unemployment rates at both the college graduate level, and the household unemployment level prediction for the economy is large. We're seeing pretty steady unemployment rate. So no major changes, for example, from Q3 to Q4. Although that being said, as a result of the probability of default model and the economic outlook, there was a component of the reserve build that was attributable to -- in change in the -- negative change in the economic outlook. God morning. I realize a lot of these -- the questions around the subjects have been asked. One thing I'm curious about, when you think about your reserve forecasting and your expectation around sales. You were highlighting that a higher contribution from kind of less seasoned or early in the life cycle borrowers with higher payments being a larger source of weakness at the moment. I'm curious how you think about student loan forbearance. I realize that it's never ending [indiscernible]. It's been the way it's been playing out. But I'm curious how you think about the restart of a payment on federal loans because that obviously had an additional payment on top of a lot of those borrowers we are seeing weakness with higher payments. Yes. Giuliano, it's Jon. Happy to take that question. First of all, again, just to make sure there's no misunderstanding, the example I gave you is a true and indicative example. There are other small pockets as well, but I think that's one that's pretty easy for folks to get their head around. But to your specific question of forbearance, I think our analysis and our perspective for a while has been that student loans -- federal student loan forbearance when it is no longer an active when it's -- when payments come back will be a slight negative to our sort of kind of a loss forecast. And I think we believe should it happen that debt forgiveness is probably a small positive to that forecast. So you can pick from column A or column B of various federal proposals and it's probably a marginal benefit, a marginal cost or maybe even just sort of neutral down the middle of both happen. I think the thing that's really important to note on this is, our customers, we rarely very actively move back into repayment and Steve remind me of August or so of 2020, September of 2020. So we really feel like keeping people in good financial habit is the most important thing that we can do. And so, I think part of why we believe the impact is probably more muted is, if you're in the habit of making your regular payments to Sallie Mae, you're probably going to continue to do that. And by the way, if you do feel stressed because of your federal programs, I think what we see pretty clearly is, there's a lot of options for federal borrowers to get forbearance and other forms of income-based repayment and the like. And so my guess is, for the ones that are really in trouble and really sort of struggling with that added federal payment, they will have other options that are available to them through the federal program. So you sort of put all of that in the proverbial mix master. And I think we believe it's sort of probably a small negative, but nothing that I think we believe will kind of meaningfully move our results. So hopefully, that gives you some perspective. Thank you. There are no further questions. I'd like to turn the call back over to Jon Witter for closing remarks. Great. Well, thank you. And let me just say thanks to everyone. I thought the questions were great. Hopefully, they provided you really good information that you can use to make sense of what I know is a little bit of a challenging quarter here with lots of moving pieces and parts. So really I do appreciate everyone's thoughtful engagement and I would just sort of continue to offer if any of us in our IR group and Melissa can be helpful as you sort of continue to do your assessment of the quarter, please reach out, happy to engage. I think with that, Melissa, I'm turning the call back over to you. Thank you for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, as Jon mentioned, feel free to contact me directly. This concludes today's call.
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Welcome to the Fourth Quarter and Full Year 2022 Stryker Earnings Call. My name is Tanya, and I will be your operator for todayâs call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question-and-answer session. This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the companyâs most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in todayâs press release that is an exhibit to Strykerâs current report on Form 8-K filed today with the SEC. Welcome to Strykerâs fourth quarter earnings call. Joining me today are Glenn Boehnlein, Strykerâs CFO; and Jason Beach, Vice President of Investor Relations. For todayâs call, I will provide opening comments, followed by Jason with the trends we saw during the quarter, Mako performance insights and updates on Vocera and Wright Medical. Glenn will then provide additional details regarding our quarterly results and 2023 guidance before we open the call to Q&A. I will begin with the macroeconomic environment. 2022 was a year where we, alongside many companies, faced unprecedented supply chain challenges and inflationary pressures. We faced these challenges and delivered for over 130 million patients and for our customers all over the world. We also remain focused on the future, as we progress our pipeline of innovation, enabling a super cycle of new product launches across our portfolio in 2023 and 2024. I want to thank our 50,000 employees for their unrelenting determination and agility. In the fourth quarter, we delivered organic sales growth of 13.2%, which brought our full year organic sales growth to 9.7%. During my 10-plus years in this role, these were record quarterly and annual growth rates. The growth was balanced across our businesses and regions in implants, disposables and capital equipment, and was highlighted by our Medical division, which had Q4 organic sales growth of over 25%. Additionally, for the fifth consecutive year, our international organic growth rate exceeded our U.S. growth rate, demonstrating the progress we are making on globalization. This was highlighted by Europe, Canada, Australia and emerging markets, which all posted double-digit growth in the quarter. International growth remains a significant opportunity in the years ahead that should continue to complement our strong U.S. business. Next, we delivered quarterly and full year adjusted EPS of $3 and $9.34, respectively, exceeding our latest guidance range. This was driven by our strong sales performance, which offset inflationary pressures and negative foreign currency. Also, we are progressing with our actions to address higher costs, which include both pricing and targeted restructuring plans. We have begun to see the impact of these initiatives and expect an improving trend over the course of 2023. We also expect the positive trends in procedural recovery to continue alongside strong demand for capital products. And while component availability will continue to be variable in 2023, we do expect that it will gradually improve throughout the year, lessening the need for spot buys. We will remain disciplined with our spend and we will continue to invest in innovation, including potential tuck-in M&A. We remain confident in the outlook of our business and expect to continue to deliver sales growth at the high end of med tech, which is reflected in our full year 2023 guidance of organic sales growth of 7% to 8.5%. This growth combined with the continued challenging macro emit environment, our pricing and cost actions will translate to an adjusted EPS of $9.85 per share to $10.15 per share. Thanks, Kevin. My comments today will focus on providing an update on the current environment, as well as Mako, Vocera and Wright Medical. Procedural volumes continue to recover throughout the fourth quarter in most countries. Parts of Asia-Pacific, however, have continued to be more volatile due to ongoing COVID-related impacts. While volumes are recovering, hospital staffing pressures have continued in pockets around the globe and patient backlog remains. As mentioned on the Q3 call, these challenges will likely resolve gradually and we continue to expect this will be a moderate tailwind as we move through 2023. Additionally, demand for our capital products remained very healthy in the quarter, as seen from the double-digit organic growth of our Medical, Endoscopy and Instruments divisions. Even considering our finish, we exited the year with a very strong order book. Next, specific to Mako, we had a record quarter of installations in both the U.S. and internationally. We continue to be agnostic to the form these deals take and will continue to offer flexible options for our customers to acquire capital equipment. The great progress of our Mako offense has resulted in strong growth of our installed base alongside continued increases in utilization. In the U.S., we saw approximately 55% of knees and almost 30% of hips performed using Mako in the quarter. Also, in December, we surpassed our 1 million cementless knee procedure with cementless knees continuing to index higher in make accounts. So in addition to being the leader in robotic-assisted surgery, we are also well ahead on cementless knee adoption. Finally, we are making good progress with the development of our Mako spine and shoulder applications, and expect to have the initial launch of spine in the back half of 2024 and the initial shoulder launch at the end of 2024. Now to our key acquisition and integration activities, our Vocera integration continues to progress well, and as a reminder, we will anniversary in February of this year. Q4 results were consistent with our commentary on the last earnings call, as is the expected sales ramp beginning in Q2 of this year. Turning the page to Wright Medical, we have now passed the two-year mark of the integration of Wright Medical. This has been our largest acquisition to-date. Now complete, we have exceeded expectations on both our sales and synergy assumptions, as the cultural fit was strong and we implemented our integration playbook very effectively. Additionally, it was a catalyst that drove the creation of three separate business units, allowing us to serve unique customers across core trauma, upper extremities and foot and ankle. All three businesses exited the year with terrific momentum and strong R&D pipelines. Overall, this acquisition has proven to be a great success and we are excited about what the future holds. Thanks, Jason. Today, I will focus my comments on our fourth quarter financial results and the related drivers. Our detailed financial results have been provided in todayâs press release. Our organic sales growth was 13.2% in the quarter. The fourth quarterâs average selling days were in line with 2021. The impact from pricing in the quarter was unfavorable by 0.6%. We continue to see a positive trend from our pricing initiatives, particularly in our U.S. MedSurg businesses, which all contributed positive pricing for the quarter. Foreign currency had a 3.8% unfavorable impact on sales, the supply chain disruption somewhat lessened during the quarter and our capital order book continues to be very robust as demand from our customers remains strong. In the quarter, U.S. organic sales growth was 11.2%. International organic sales growth was 18.3%, impacted by positive sales momentum across most of our international markets. For the year, organic sales growth was 9.7% with U.S. organic sales growth of 8.9% and international organic growth of 11.7%. The impact from pricing in the year was unfavorable by 0.9% and 2022 had the same number of selling days as 2021. Our adjusted EPS of $3 in the quarter was up 10.7% from 2021, driven by higher sales and strict cost discipline, partially offset by inflationary pressures and the impact of foreign currency exchange translation, which was unfavorable $0.16. Our full year adjusted EPS was $9.34, which represents growth of 2.8% from full year 2021, reflecting the favorable impact of sales growth, lower net interest costs and a lower effective tax rate, partially offset by inflationary pressures and the unfavorable impact of foreign currency exchange translation of $0.31. Now I will provide some highlights around our quarterly segment performance. In the quarter, MedSurg and Neurotechnology had constant currency sales growth of 19.3%, with organic sales growth of 16.9%, which included 14.9% of U.S. organic growth and 22.5% of international organic growth. Instruments had U.S. organic sales growth of 11.7%, led by double-digit growth in the Surgical Technology business. From a product perspective, sales growth was led by power tools, Steri-Shield, waste management and smoke evacuation. Endoscopy had U.S. organic sales growth of 9.7%, highlighted by strong growth in sports medicine, communications, video, general surgery and ProCare. Medical had U.S. organic sales growth of 22.9%, driven by our emergency care and acute businesses. The growth was fueled by double-digit growth across our emergency care and Prime Structure businesses, and also benefited from improvement in product supply throughout the quarter. Our U.S. Neurovascular business had organic sales growth of 1.5%, driven by continued market softness and competitive pressures. The U.S. Neurocranial business had impressive organic growth of 19.7%, which included double-digit growth in our Sonopet iQ, Signature High Speed Drills, silver glide bipolar forceps and Max space Neuro product lines. Internationally, MedSurg and Neurotechnology had organic sales growth of 22.5%, reflecting double-digit growth in all businesses. Geographically, this included strong performances in Europe, Australia and emerging markets. Orthopedics and Spine had constant currency sales growth of 8.3% with organic sales growth of 8.4%, which included organic growth of 6.2% in the U.S. and 13.6% internationally. Our U.S. hip business grew 11.3% organically, reflecting strong primary hip growth fueled by the recent launch of our Insignia Hip Stem, the ongoing success of the Mako THA 4.1 software upgrade and continued procedural growth. Our U.S. knee business grew 7.8% organically against a very strong Q4 2022 comparable of over 14%. This reflects our market-leading position in robotic-assisted knee procedures. Our U.S. Trauma and Extremities business grew 11.9% organically with strong performances across all three businesses, led by double-digit growth in upper extremities and foot and ankle, and strong performances in plating and nailing. Our U.S. Spine business grew 0.5%, led by performance in our enabling technology business, including the recently launched Q Guidance navigation system. U.S. Other Ortho declined organically by 18.7%, primarily driven by the impact of deal mix changes, specifically more rentals related to Mako installations in the quarter. Now I will focus on operating highlights in the fourth quarter. Our adjusted gross margin of 62.7% was unfavorable, approximately 310 basis points from the fourth quarter of 2021 and in line with Q3 2022, reflecting the impact of the purchases of electronic components at premium prices and other inflationary pressures primarily related to labor, steel and transportation costs, and unfavorable business mix. Adjusted R&D spending was 5.5% of sales, which represents a 90-basis-point decrease from the fourth quarter of 2021. Full year adjusted R&D spending was 6.7% of sales, which was slightly higher than our 2021 adjusted R&D spending of 6.6% of sales. Our adjusted SG&A was 30.6% of sales, which was 150 basis points lower than the fourth quarter of 2021. This reflects the impact of increased focus on discretionary cost control and headcount discipline. In summary, for the quarter, our adjusted operating margin was 26.6% of sales, which was approximately 70 basis points unfavorable to the fourth quarter of 2021. This performance is primarily driven by the aforementioned inflationary pressures, primarily on gross margin and the negative impact, resulting from foreign currency exchange translation, somewhat offset by cost discipline. Other income and expense of $53 million for the quarter decreased from 2021, primarily due to net favorable interest income. For 2023, we expect a quarterly run rate of $65 million for other income and expense. Our fourth quarter and full year had an adjusted effective tax rate of 13.8% and 14%, respectively, reflecting the impact of geographic mix and certain discrete tax items. For 2023, we expect our full year effective tax rate to be in the range of 14.5% to 15.5%. Focusing on the balance sheet, we ended the fourth quarter with $1.9 billion of cash and marketable securities, and total debt of $13 billion. Approximately $150 million of term loan debt was paid down in the quarter, which brings our year-to-date payments to $650 million. Turning to cash flow, our year-to-date cash from operations is $2.6 billion. This performance reflects the results of net earnings, partially offset by lower accounts receivable collections due to higher sales at the end of the year, the impact of higher costs for certain electronic components and pre-buying of certain other critical raw material inventory during the year. For 2023, we anticipate that capital spending will be approximately $600 million. Again, in 2023, we do not plan to do any share buybacks and we will continue to focus on further debt reduction. And now I will provide 2023 full year sales and earnings guidance. As we assess the current operating environment, we believe that there will continue to be macroeconomic volatility, including supply chain constraints, recession and inflationary risks and currency fluctuations. Despite this environment, we have positive momentum in many parts of our business heading into 2023, including continued procedural recovery, many new product introductions and a very robust order book for our capital products. Given the above, we expect organic sales growth to be in the range of 7% to 8.5% for the full year 2023 when compared to 2022. There are the same number of selling days in 2023 compared to 2022, with one extra day in Q1 and one less day in Q3. Based on the steady progress of our pricing actions, we would expect the full year impact of price to be between zero percent and minus 0.5%. If foreign exchange rates hold near current levels, we anticipate sales and EPS will be modestly unfavorably impacted for the full year, being more negative in the first half of the year. This is included in our guidance. While we are not specifically guiding the quarters, keep in mind that as you compare the first quarter to the prior year quarter, Q1 2022 did not have the inflationary pressures that we are now experiencing. So despite a strong growth outlook, we do not expect Q1 EPS to be much better than Q1 2022. Finally, for the full year 2023, we expect adjusted net earnings per diluted share to be in the range of $9.85 to $10.15, representing a return to op margin expansion. This guidance range assumes a gradual improvement of the global operating environment, including a progressive easing of supply chain disruptions throughout the year. Great. Thanks for taking the questions and congrats on a really nice quarter. I wanted to start out on the MedSurg side of the business, where you had really, really strong performance in the fourth quarter. You talked about a healthy order book, but I was hoping you could give a little more visibility into exactly what you saw, was there a bolus of demand there, was this all underlying or catch-up demand and then you talked about a healthy order book, but just what you are seeing in terms of your hospital clients around the world and their desire to continue to buy capital here? Yeah. As you can tell, Robbie, it was a terrific quarter for all of Instruments, Endoscopy and Medical. Medical in particular, had a giant growth in the quarter, really digging out of some of the backlog that they had of orders. If you look at the backlog entering 2023, itâs actually higher than what we had at the end of 2022. So it was a little bit of catch-up from prior quarters, but as we think about next year, right, the outlook for all divisions is strong again next year. We also have a lot of new products coming in those three divisions. So strong order book, strong demand for our product, strong cans of new pipeline, terrific leadership teams. This really -- these three divisions have been, if you go back even from 2016, there -- every year they are either high single-digit or low double-digit growers and that was no different in 2022. Great. And maybe a follow-up for Glenn, you talked about second half, probably, better than first half. I have been on this call a bit before this call and you talked about first quarter EPS not being much better year-over-year. Any other color you could give us both on the topline as we think about 2023, just given there are some highly variable growth rates on the topline, as well as margin things to think about down the P&L? Thanks. Yeah. Yeah. First of all, just picking up where Kevin left off, if you think about the topline, entering the year with such a strong order book, itâs really going to kind of bode well for growth of our big capital businesses. The other thing we are really seeing is this procedural expansion and so we feel really good about our momentum, especially in hips and knees and trauma and extremities. So we are going to continue to see those grow as well. That plays into the mix of what we see when we get down to gross margin. We do think the first half of the year we will be working our way through some of that higher dollar inventory that was built up at the end of last year. We are seeing some bright spots in supply chain. We are seeing an environment where we think there will be less spot buys and so all of that will go into in terms of us progressively improving both our gross margin and our op margin. I think the other thing to keep in mind, too, is that, our pricing initiatives and actions really took hold in Q4 and we felt that especially on the MedSurg side. We will benefit from those actions for the full year in 2023. We will also see thatâs not included in price. All the new products that Kevin talked about that we will launch, those come out at premium prices. So that will also benefit and help us with our op margin improvement. And then the last thing is, we still have some targeted restructurings that will take place in 2023, especially in the first half of 2023. So we will also begin to feel the benefit of those in the second half. So I think Q1 is a little pressured year-over-year just because the inflation wasnât sitting in last yearâs op margin and it is sitting in 2023 op margin. But I think as the year progresses, we will continue to improve on that op margin, and obviously, that will drive to the EPS growth that we guided to. Good afternoon. Kevin, at the Analyst Day, when was it, this was a couple of years ago, you really exercised international. The performance in the quarter was phenomenal and itâs been really strong. I am just wondering the durability of that and should we think about international being not quite half of the growth on the topline this year, but something around that level. Is that how important international should be for you guys in 2023 and even beyond? Thank you. Yeah. Rather than thinking about what percentage of the growth is, is just how durable is it? Five years in a row now, organic sales growth has exceeded the U.S. organic sales growth, and of course, China has really didnât contribute anything in 2022. So Europe was double-digit grower. Itâs a growth engine for Stryker. I have talked about Europe for the last six years or seven years and we are hitting our stride in Europe. But even other emerging markets, whether itâs Latin America, whether itâs the Middle East, Eastern Europe, parts of East Asia, we have really started to hit our stride. It feels exciting. We have great leadership teams. We are getting great penetration now with Mako and fluorescence imaging, some of those power brands are now really starting to show up effectively. So the way Iâd like to think about it is that emerging markets should grow roughly double the growth rate of Strykerâs growth rate, and overall, we should continue to grow above the Stryker growth rate in these international markets. And as over time, if we donât continue to have large acquisitions in the U.S. then that will become a bigger and bigger percentage of our business. But being acquisitive itâs still pretty small, if you think about 72% roughly of our sales are in the United States. But itâs starting to have a material impact and you saw really an outstanding quarter in Q4. Hi, guys. Thanks for taking my question and congratulations on a really strong finish year. Kevin, maybe the first one on the performance here in the fourth quarter, at least organic, thatâs quite outstanding. Sequentially, it looks like your growth accelerated by 350 basis points. Is this -- can you put some -- put those numbers in context for us? Is this share gains or is this your supply chain situation improving? And I am assuming there was some headwind from China, maybe if you could quantify it and just help us understand what went into that pretty stellar 13% number in the fourth quarter? Yeah. Look, I think, the outsized growth is in the Medical division, right? So Medical division isnât going to typically grow 26% organic, right? Thatâs outsized and thatâs really, letâs call it, making up for supply. So they had huge orders and we were able to get healthy in some of the product lines and we were able to get a lot of shipments out the door. That kind of variability could happen from quarter-to-quarter. But if you look at a full year kind of organic growth rate, Instruments 10%, Endoscopy 15%, Medical 11%, kind of on a rolling four-quarter basis. Those are really outstanding results. So itâs not a one quarter wonder. I would kind of look at the overall year having organic growth of 9.7%. Thatâs the highest I have had in my tenure. And we have new products, I would say, they are as good a set of pipeline as I have had since I have been in this role. So that bodes well for next year. We are starting with the highest organic growth guide that we have ever started with and assuming launches go well and everything, this should be another very, very strong year. I think you will see a little bit of volatility quarter-to-quarter primarily with Medical, because they do have the largest backlog of all the divisions in the company and a more consistent performance with the implants side of the house. Understood. And maybe off of those comments, Kevin, and maybe perhaps for Glenn as well, that 7% to 8.5% guide for fiscal 2023, is that a front-loaded guidance? Just when I look at the comps here for 2022, is that so 8.5% front-loaded? And what is it assuming for supply chain, are you assuming supply chain to improve just given off of Q4 levels? And the order that you mentioned, Kevin, did that backlog grow versus third quarter or are we starting to work down on the backlog? Hi, Vijay. I will take some of these. If I miss a part, you can correct me. First of all, the growth is not front-end loaded. Itâs pretty steady throughout each of the quarters and you will see that there is going to be solid growth just given sort of the momentum that we are feeling from fourth quarter. In terms of the order book, we exited 2022 with an increase in the order book year-over-year. So we are actually feeling very bullish about capital sales, about our customerâs willingness to buy capital. So we donât -- we feel like thatâs a great tailwind for the whole year and did I miss the third part? Yeah. As I mentioned, we assume that we will see gradual improvement in the supply chain. We saw some of that in Q4. We actually feel pretty good about our access to supply, we are seeing a reduced volume of spot buys, which are those really high cost items and we are also beginning to work with our original set of vendors and also going up the food chain and actually working with chip suppliers so that we feel like we have a good handle on whatâs going to happen with supply chain, but it should become better quarter-to-quarter-to-quarter with good improvement and visible improvement in the back half of the year. Great. Thank you so much for taking the question. I was just wondering what you have assumed for margin expansion in 2023 relative to your at least 30 basis points of outlook that you previously shared. And then I was wondering if you could talk a little bit about the VCON [ph] business in hips and knees. In knees, your major competitor does have a new cementless launch. Do you see that as a price mix benefit for them or something that could drive competitive account conversion, and then on hips, it came out stronger than what we were expecting. I was just wondering if you could talk a little bit about the drivers and if we could see meaningful share gains on the hip side, similar to what we have seen in knees? Thank you for taking the questions. Yeah. Yeah. Great question. I will start out and just touch on the margin expansion. We typically do not guide on op margins. So we are not going to pinpoint an expansion number. I think backing up from EPS and looking at tax and OI&E and where we are with sales that, you will see that the math doesnât work unless we expand op margin. So I think what you will see is a progressive improvement each quarter in that expansion, especially as the comparable includes inflation from the prior year, so thatâs what our plan is. Yeah. And related to joints, obviously, we are delighted with the year that we have had in both hips and knees. Having global double-digit growth in both hips and knees is terrific. The hip strength clearly driven by the launch of the Insignia Hip Stem, and as a reminder, we are only about a little less than halfway through that launch. So we still have a lot of sets to get out. It will take us all of this year and maybe into a little bit of the first quarter of 2024 to be fully launched with Insignia. So we are still kind of in the gaining momentum mode with Insignia and thatâs coupled with the 4.1 Mako hip software. So we can -- we expect hips to continue to be very strong. As it relates to knees, clearly, thatâs been an outperformer for us for the past six years, seven years since we launched the Mako Total Knee application. And with cementless, where we continue to gain, I am not at all worried about competitive entrants on cementless. People arenât going to move away from our cementless for a competitive product when we have tremendous proven, Jason mentioned, 1 million procedures already done and competitors just starting to launch theirs. They are going to be awfully very cautious before they move to another product on something like that and that synergy with cementless and Mako is really significant. Last thing Iâd say is, we are launching new software, just like we did with hip with the 4.1, we call it, TKA 2.0 Mako software. We have just -- we are in the middle of a limited launch. Itâs going exceptionally well. We expect the full launch sometime by around Q3 of that new software upgrade, which creates better user experience, better for training residents and teaching hospitals, so very, very good feedback on that. So we do expect to continue to outperform in both knees and hips again in 2023. Hey. Thanks for taking the questions. Not to take away, this is a really good quarter, Kevin, but I do want to ask about two segments that are maybe a little softer than expectations. Neurovascular and Spine, both come on the back of what I think what we would consider easier comps and you can probably challenge me on that. But what are you contemplating in terms of your guidance for growth in those areas for 2023, and just commentary on both the Neurovascular and the Spine segment this quarter and kind of what impacted results? Yeah. No. Certainly, on the Neurovascular comps, I -- we did have pretty good performance a year ago in Neurovascular. I think that the challenge is kind of looking at versus the prior year Neurovascular and then going back versus 2019. So, but certainly, we have had our challenges with Neurovascular in the U.S. We have had continued good growth outside the United States and I think I have mentioned on prior calls that the ischemic market segment has certainly gotten softer. There are a lot more competitors that are kind of distracting and taking up time. We still think itâs a great market. Thereâs still a lot of patients that are -- that have not been treated. We are only treating a small percentage of people that have these large vessel occlusions in the brain. So we do think itâs a good long-term market. We are launching a new coil called Tetra Coil here in the United States, which is exciting. And we will continue to invest. We have a deal thatâs pending. Obviously, regulatory clearances before it closes on a one and done for the hemorrhagic segment. We are very excited about that. acquisition. That will give us another shot in the arm. So, yes, we have had our challenges in the U.S. this year. We continue to grow very well outside the United States. Itâs still a market we are very committed to. Thatâs kind of on the Neurovascular side. On the Spine side, look, the launch of Mako Spine is going to be critical. The Q Guidance launch is going very well and that was important for us. We had a gap, obviously, with enabling technologies, which is really important in the Spine segment. So I do believe this is, 2023 will be a year where we will continue to grow kind of around the market growth rate and then really get ready for the Mako launch to be able to start to grow above market. So, yes, they are not as glowing, the divisions, right now as some of our other divisions. But they are certainly competing well in the marketplace, growing roughly in line with the market, maybe a little bit below, but still highly profitable, highly important businesses to the long-term future of Stryker. Very helpful. And then if I could just ask a follow-up. I mean this was the first time you really, I think, put those time lines out on spine and shoulder. We have kind of danced around these topics for some time. What is it now thatâs a comfort to put those out there and ensure that those will be on time with the time lines you outlined? Yeah. As a company, we tend to be pretty conservative on getting time lines and robots are hard, right? Ask any of the companies who are trying to launch robots, whether they are in heart tissue robotics or soft robotics. Robots are difficult. What gives us confidence is our prototypes are built. We have tested it with surgeons. We have gotten feedback. We have had some meetings in one case with the agency to get an idea on the regulatory pathway. So we have enough in the pipeline right now. Thereâs always a little bit of uncertainty around approvals and full launch. And notice the term I used was initial launch, right? So we do expect to get approved and to start doing cases. But then as you do those initial cases, you might have to refine some of the training and things, so it might be a little bit slow out of the gate, we will see. The beauty of our approach is itâs the same robot thatâs being used for hips and knees thatâs going to be used and we have, as you know, thousands of them now out there. So that is exciting that we will be able to just do a software upgrade and have a different attachment and be able to use the same robot and I think a lot of hospitals will be excited about that if the robots not being used on one day of the week and they can have that being used for spine initially and then as the demand increases, then they can have a dedicated robot for spine. So we really believe that will be different than when we started where each robot had to sort of justify it on its own. Having one sort of robot with all these different applications will be powerful over time. But we feel confident just based on we spent a lot of money, and we spent a lot of time on this. The shoulder one took a little longer. As you recall, we were -- we thought that was initially going to be before spine, but we decided to move away from our implants to the Tornier implants and to use the BLUEPRINT planning software. So that caused a slight delay. But the teams are really working well and we are -- the feedback we are getting from surgeons that are seeing it is extremely positive. Hi. Thanks for taking the question. This is Vik on for Larry Biegelsen. Kevin, you talked about a super cycle of new products. Just remind us sort of what they are and how we should think about their impact in 2023. And my second question is, maybe just a comment on your trend in China, sort of what are you seeing there and maybe just the impact on Neurovascular, any color you could provide would be helpful? Thank you. Okay. Thereâs a few questions in there. So I will do the super cycle and then I will pass it to Jason for China. On the super cycle, so System 9, our new power tool and Instruments launched just at the end of last year. So we are going to see the first real year of impact here in 2023, initial feedback, extremely positive. We know how to do these. As you know, we have -- from System 6 to 7 to 8 to now 9. So thatâs one of the flagship product. We have the 78 camera in Endoscopy that will be initially launched in Q2. We will probably see more of a pickup in Q3, Q4, but a fabulous new camera, which, as you know, we have done in the past, whether itâs 14, 15, 88, 68. So these are things we know how to do and these are fabulous products. We have Neptune S, which is a small footprint Neptune product designed really for GI that is terrific new market for us. So we -- today Neptuneâs are not really being used in GI. Itâs designed special purpose for that to catch the polyps. Nurses are going to absolutely love this. We actually believe it could increase the procedures that they can do in a day, which, of course, the GI teams are going to love. So thatâs also another really powerful product that we are excited about. Towards the end of the year and wonât have a big impact in 2023, but certainly much more in 2024 is going to be a new defibrillator. It will be in 2023 outside the United States and then early in 2024 inside the United States, which is the big pre-hospital expensive, complex life pack defibrillator. So that -- those are three big flagship products thatâs very rare to have them all within kind of an 18-month period. Thatâs a super cycle. But beyond that, obviously, Insignia product is going to continue to launch. We have the CD Next product, which allows for depth perception as you are drilling. We have Signature 2 in the -- which is launched just this year, which is going to have a full effect next year in neurocranial, which is for neuro power drills. And I could list another whole bunch of foot and ankle products. We have got products in the shoulder space. So it -- thereâs a full, full list of products. But those big ones I mentioned are thatâs what I call it a super cycle is, you normally have one of those every two years or three years, not all in a short compressed timeframe. You have got the ProCuity bed thatâs continuing to get rave reviews and thatâs kind of still in the early phases of its launch. So, as healthy as I have had in my time here at Stryker in terms of new product cadence. On China? Yeah. Vic, as it relates to China, as you all know, right, China, as it relates to total Stryker less than 2% of our sales. So even as you consider some of the lockdowns and things in 2022, immaterial to our results in terms of Q4. Then as you think about 2023, early days as it relates to Neurovascular VBP. We are certainly keeping an eye on that and as we think about Q1 and the full year of 2023, when we get to the next earnings call, if thereâs anything material to disclose, we will certainly do it at that time. Yeah. I just wanted to maybe get a sense and I know we could spend a lot of time talking about the many things that are going well and could go really well this year. But just a follow-up on Spine, the investment in the robot is significant, the portability of that hardware and upgrading the app, as you described, Kevin, is great. Between now and then, whether itâs Q Guidance or whether itâs implant launches or system launches or investments that you are making, can you talk about maybe anything that you would see as kind of gradually driving up momentum in that business as you head into -- as you get into that introduction of the robot next year? Yeah. Yeah. Sure, Matt. So, certainly, we canât just wait only for Mako and Iâd tell you that Q Guidance has actually exceeded our expectations. Customer feedback has been excellent on that and the sales of those systems have been terrific. We also have a bunch of distribution deals that we have entered into for expandables, for different products, so two or three of those. We have the Monterey new product as well with Tritanium, which is pretty exciting. So itâs -- we do have a, what we will call it a cadence of new products planned that will be either developed by Stryker or through distribution to help fill product gaps. I am pretty excited we have our sports medicine leader, Andy Hamel, whoâs the Head of R&D, has moved over to Spine. And if you look at the last decade, our sports business was the fastest launcher of products across all of Stryker and I think he will give that team a big shot in the arm. He moved over kind of midway through last year and excited to have him as part of the team. As you know, we have made other changes within our management team and I am pretty bullish on their prospects for the future. So we wonât sit on our hands and just wait. And already, some of those products, even the Life Spine distribution deal, those kind of products are really helping that, I was at the Spine Sales Kickoff meeting for the year. The momentum is really strong. The teams are feeling good about the future and knowing that Makos coming, of course, helps a lot. But, yeah, itâs going to be -- itâs a tough market, as you know, and it has been a tough market for a long time. But I feel like the combination of this distribution filled we will call gap-filling products, as well as some new products that we have planned, should put us in a pretty good position even prior to the launch. All right. Great. So pre-COVID, the first quarter is about 23% of the annualized EPS. So with the commentary on no EPS growth for first quarter 2023, it looks like you guided about 20% of annual EPS. I understand the hard inflationary comps in 1Q, but why should 1Q be underweight the annual EPS number versus recovered years or should we take this as just back half margin expansion for 2023? Yeah. I think you are astute in your numbers. Definitely, it will be back half margin expansion for 2023. So you are right, we will see relative flat EPS in the first quarter, and then obviously, meaningful expansion starting in Q2, but really accelerating in Q3 and Q4 to drive to the EPS that we guided. Okay. And then just a quick one here on capital outlook, your commentary is very bullish. Can you just quantify us what the new orders in fourth quarter of 2022 were and how it compared to the fourth quarter 2021? Thanks so much. Hey, Pito. Itâs Jason. We wonât quantify in terms of what we have from an order book perspective. But I would just point back to, I think, what Glenn said earlier around and maybe it was Kevin. But the order book, as we exited 2022 is even larger than when we exited 2021. So we continue to be quite bullish on the capital side as we enter the New Year. Yeah. And thatâs not a new commentary. So the last four months, I think, our commentary has been very consistent on capital. Our hospitals having challenges with their P&L and in some cases, sure, itâs not yet -- we are not seeing it in orders. We are not seeing any cancellation of orders. Are some projects being delayed here and there? Sure. But it really is not having any kind of material impact on our outlook for capital. Again, a lot of our capital is revenue-producing type of capital. So you wouldnât expect any kind of slowdown. But even the large capital area, if I look at our communications business within Endoscopy, had a fantastic year, helped drive some of the Endoscopy growth and they have a terrific order book going into next year and thatâs large capital that sometimes in prior recessionary cycles have been deferred. So we just arenât seeing it yet. So that gives us optimism to kind of lean in on the growth for at least for 2023. Okay. Great. Just on growth in the quarter, one of the factors you pointed to, Kevin, was procedural volume recovery. One of the factors discussed, obviously, throughout 2022 on in terms of capturing those procedures was hospital staffing. Are you starting to see an easing of that factor, any color you are seeing in terms of that here in the U.S. would be helpful? Yeah. Look, there are flashpoints where you do see staffing as a challenge, but the hospital systems are getting better at dealing with it. And we saw through from September through to the end of the year, kind of a nice building of procedure and a steady kind of high volume. The demand is clearly there. Thereâs no question that thereâs some pent-up demand and surgeons are booked out for a good three months, four months in general. And so we are seeing, I would call it, a nice, steady kind of improving trend and I think we will see a moderate tailwind throughout the rest of this year. These flashpoints tend to be very short and even in some of the -- if you look in Europe and some of the areas that had strikes and real causes for worry, they have kind of come and gone pretty quickly. And so we are feeling good about the outlook on a procedure standpoint and expect this to be a tailwind throughout the year. Got it. Great. And then, Glenn, just real quickly, I know you donât want to provide specific margin guidance. But relative to inflation, did you call out or could you talk about what the impact was to gross margin in 2022 from inflationary headwinds and generally either directionally or specifically what you are looking for in 2023 on that front? Yeah. I think as you think about inflation, obviously, we felt the impact of the inflation numbers in the -- that were in Q3, especially that were very large. A moderation of that, I would say, occurred in Q4. But keep in mind, to the extent that we purchased raw materials or made inventory, those inflated raw material prices, thatâs capitalized in our inventory. The other place that we will feel inflation and that it carries over to in this year is really going to be labor costs that went up that are baked in now solidly for the year. We are still experiencing a pretty high inflation in our freight and transportation costs. Energy costs, especially in Europe, now have inflation baked into them, we will feel it there. I think what we are thinking, though, is we are not -- as we look at 2023, that we are not thinking that inflation will continue to be at the levels that it was showing in 2022. So we are feeling that, that will moderate and thatâs whatâs included in our guidance. Hi, everyone. Thanks for taking the questions. Kevin, just for you to start. You have -- we have talked about the capital order book being stronger year-over-year. But can you maybe talk a little bit more specifically of what you are seeing in the hospital versus in the ASC setting? Any noticeable trends in -- even in procedures in the ASC as you are entering 2023? And then I have a follow-up. Yeah. So, clearly, this trend towards procedures being shifted to the ASC is continuing. It really accelerated during the pandemic, but thereâs no signs of that slowing down. Even if I look at our Mako installations, I would say, this year, itâs a record number in the ASC setting. So as procedures move to the ASC, they certainly want to use great technology and I donât think thatâs going to slow down. We are going to -- every hospital system you talk to has construction plans around ASCs and so I think thatâs just an undeniable future trend. Obviously, that takes -- it will take time to build out more and more capacity, but we saw that increase in Q4 versus Q3, which increased versus Q2. So itâs just a steady gradual trend and I am talking mostly about hip and knee replacements, but we are also seeing even some spine procedures being done in the surgery centers to shoulders. And I just donât think thereâs any slowdown, itâs just going to continue over the next few years. Got it. And then just for Glenn, you talked about the margin expansion for 2023. Could you maybe just highlight kind of what you are expecting for free cash flow generation, 2022 is obviously a tough year? It sounds like inventory will get better in the back half, but just any broad-based thoughts on free cash flow for 2023? Thank you. Yeah. I think as you think about the biggest contributor to cash flow, honestly, itâs earnings. So as we see progressive improvement in earnings throughout the year, I think, we will see that carry over into cash flow. There are some things that were maybe one-offs that we felt that we hope will get better in 2023. That bolus of AR that we had at the end of the year in 2022, obviously, we will collect that and kind of get back to a regular cadence of DSO. And then, finally, as inventory costs moderate and we feel more confident about supply, we will draw down on some of the safety stocks that we had pre-buy. We will also see just lower cost of inventory in raw materials and that should carry over to cash flow, too. And then the other area that I would highlight that maybe doesnât get a lot of attention is, we continue to work on our AP and AP days, and we have made incredible improvements over the past two years to three years in terms of working with vendors and pushing AP out to beyond 70 days and we will continue to work on that as well. So I think all of that bodes well for cash flow improvement. But generally, I think, what you will see is as you see progressive improvement in earnings. You will also see cash flow fall out. Yeah. Thanks for fitting me in. I guess I want to ask one on M&A. So I think you called out that you would be looking to do some more tuck-ins. What are you seeing out there with regard to the valuation expectations from potential targets? It seems like there was -- in the past year, thereâs been sort of a disconnect between what the buyers are willing to pay and what the sellers want. I mean is that starting to get more realistic now and just maybe you can just comment generally what you are seeing there in terms of deal flow? Yeah. But thereâs, obviously, the stock market reaction over the last year on companies that werenât making profits was pretty harsh. And it takes time for that, letâs call it, a new reality to set in with people that want to sell. But as a company that is acquisitive and has been acquisitive over time. This could bode well for us over the next couple of years if valuations kind of stay at this level. Obviously, the tuck-ins that -- a lot of the tuck-ins we do tend to be private companies, not necessarily publicly traded companies. But we have an active list of companies that we look at. We are focused also on paying down debt, given that we took on a lot of debt for Wright Medical and Vocera, so thatâs kind of job one. Letâs continue to keep paying down that term loan. We still have about $850 million left on the term loan. We want to pay that down. But if we see good opportunities and there of the tuck-in nature, we arenât going to wait, we will make sure we do that. We can do two things at the same time and continue to pay down debt, but also do some small tuck-ins. And so the divisions are actively pursuing those and we will be ready to strike if the prices are right. But I think this pricing environment is going to be positive. Now profits do matter and there was sort of a period of time where a lot of companies run away from us, to be honest, just on valuation, given that they were growing fast and the valuations were just out of sight. And we just wonât pay just whatever for something, even if we like the technology, we have to make sure itâs going to meet financial returns. So thanks for the question. We will continue to look and sort of thread the needle between paying down the debt and then being opportunistic where we can. There is a moment when you were rattling off, rattling maybe the wrong word, all the different growth in MedSurg and Neurotechnoology. And I could not get my head around some of these numbers and I am just sort of curious and maybe this has been addressed. How did this happen? Was this some level of pent-up demand in the capital equipment cycle, was it just the end of the year people have money in their budgets may want let go. Help me understand what this is and do you expect there to be more of a depleted effort in the beginning of this year? Yeah. Look, Joanne, one of the great news about this quarter. First of all, it felt like a pre-pandemic record quarter is the way I describe it, where our sales teams were kind of firing the way they normally do at Stryker. You have seen in the past and you have been covering us for some time. Having a big fourth quarter is not new for Stryker. We have had big fourth quarters many, many, many times. Our teams know how to finish. They chase their numbers. Our hospitals also kind of want to use up some of their budgets if they are on -- depending on their calendar cycle that they are on. And so thatâs not new. Whatâs really exciting is that we were able to dig out of some of the backlog, specifically in medical, but not deplete. These are not pull-forward sales. We still have strong orders. We still have a growth momentum thatâs going to continue next year and thatâs why you saw such a, I would say, positive guide on organic sales growth. We are not calling for a soft Q1, and I think, Glenn even in the Q&A mentioned that we are not calling for a soft topline in Q1. Our implant businesses are continuing to hum. And these businesses are just their special businesses. We have these dedicated business units. We have split them many times. If I look at within Instruments, Instruments had 10% organic growth in 2022 and thatâs because we decided to split orthopedic instruments and circular technologies a few years ago and they are both growing extremely well. They both have new products, right? We have a new Neptune and we have a new power tool. In the old days, it was the same rep trying to sell both of those. Now we have different reps selling them. So our ability to scale those launches is so much better with specialization and dedication. Thatâs kind of our formula, our growth formula and thatâs just -- itâs absolutely happening in our company. So our leadership teams are terrific. Our dedicated e-business units are firing and the products are flowing. So I expect more of the same. But if you look back, even going back to 2016 as I mentioned before, and if you look at the kind of organic growth, itâs of these three divisions, Instruments and Ortho and Medical, not to mention Neurocranial, which has been an absolute home run, right? And thatâs really run by instruments, but we report it separately. They are growing every year, 8%, 9%, 10%, 11%, 12%. Thatâs not unusual. And now that they have -- when you have new product launches that tends to be on the higher side of it. So, yeah, itâs a good point to be a Stryker right now, especially in those businesses. If I may, you do discuss new product cycle a couple of times. You have got a new power tool. You have got a new Neptune. What else would you like to highlight? Yeah. I mentioned before the camera, so in Endoscopy, a new camera. Thatâs big sort of blockbuster flagship product. Sports Medicine has a number of new shoulder products that they are launching. Those are -- but that sort of helps fill out the bag. At the end of the year, we have the new defibrillator within our Emergency Care business. They launched a new -- I didnât even mention they launched a new power chair at the beginning of this year. So if you want to go up in these apartment buildings, we now have a powered chair, which is fabulous. Itâs called Expedition. I didnât even mention that one. I mean itâs just -- thereâs no end. I mean we have invested pretty heavily in R&D over the past four years, five years, six years, seven years and spending close to 7% of sales and the new products are flowing. So those are -- I mentioned a couple of other ones before, Joanne, but that hopefully is a good look for you. Excellent. Maybe thinking about cementless knees. I think about half of your knees are now going in cementless, correct me if I am wrong there. Where do you think that rate could be exiting 2023 and then maybe thinking longer term, what portion of your needs do you think will ultimately be cementless? Yeah. Itâs a great question. So we -- we have now -- we exited the year over 50% in the U.S. on our knees being cementless. The rate does vary in other countries of the world, but itâs been a steady climb, frankly. They are going to be more conservative on cementless than hips just because itâs weight-bearing versus hips. And do I think it will get to close to 100 like hips? Probably not, just because of bone quality, because itâs weight-bearing. But we have not seen a slowdown. Itâs been just this kind of steady march. If you recall a few years ago, it was kind of 30%, then it moved up to 40%, now itâs north of 50% now and I think you will just continue to see that kind of steady climb. Where we will end, I donât know. Itâs hard to predict, but probably somewhere in the 70%s is kind of what I would -- I think it will. So thereâs still room to run on cementless, and obviously, we have a proven system thatâs delivering terrific long-term results, given that we have done 1 million of them already. Understood. Thanks for that. And apologies if I missed it, but are there any selling day impacts in 2023 that we need to consider? Yeah. Thereâs one extra selling day, one less selling day in Q3. But for the full year, itâs the same number of days. Hey, guys. Eric on for Jayson from Raymond James. A quick question on your pricing outlook, are there any segments that have a particular impact or is it across all? Thank you. Yeah. The -- obviously, the segment that has the biggest impact is really our MedSurg businesses. We saw Q4 pretty much all positive pricing impacts across MedSurg and so we expect that to continue into 2023. I mean that being said, on the Ortho side, thereâs a lot of work around contracts and structures and rebates, and so we are seeing good momentum there as well on pricing. I think the other thing to keep in mind is that, pricing is legacy product over legacy product and so to the extent that we have these product launches, like Kevin was talking about, we generally will launch with premium pricing over the legacy product, but it wonât be included in that pricing statistic. It really gets included in volume. So net-net, I think, you will see probably more favorable pricing coming out of the MedSurg businesses, but we are making great progress on the Ortho side, too. Thank you so much. There are no further questions. I will now pass it back over to Kevin Lobo for concluding remarks. Okay. Great. So, first of all, I want to thank all of you for your patience working through our technical challenges. As you can see, we had a terrific finish to last year, a really good start this year and had a chance to be out with our sales teams across Stryker and I could tell you the momentum is palpable. It feels like itâs going to be a strong year. We, obviously, have -- are going to continue to have some challenges around spotting this in the supply chain, but it certainly feels like the worst is behind us as we experienced last year. So I want to thank you all for joining our call. We look forward to sharing our first quarter results with you in April. Thank you.
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Good day, everyone, and welcome to the Power Integrations Fourth Quarter Earnings Call. Today's call is being recorded. 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, Lisa. Good afternoon, everyone. Thanks for joining us. With me on the call today are Balu Balakrishnan, President and CEO of Power Integrations; and Sandeep Nayyar, our Chief Financial Officer. During this call, we will refer to financial measures not calculated according to GAAP. Non-GAAP measures for the December quarter exclude stock-based compensation expenses, amortization of acquisition related and tangible assets, and the tax effects of these items. The reconciliation of non-GAAP measures to our GAAP results is included in our press release. Our discussion today, including the Q&A session, will include forward-looking statements denoted by words like will, would, believe, should, expect, outlook, plan, forecast, anticipate, prospects and similar expressions that look toward future events or performance. Such statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied. Such risks and uncertainties are discussed in todayâs press release and in our most recent Form 10-K filed with the SEC on February 7 of last year. Finally, this call is the property of Power Integrations, and any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations. Thanks Joe, and good afternoon. Fourth quarter revenues were $125 million, in line with our guidance and down 22% sequentially, reflecting the downturn in the semiconductor industry. We expect a further sequential decline in the March quarter as end demand continues to be soft and distribution inventories remain elevated. For those less familiar with our history, we are typically among the first semiconductor companies to see a downturn because our products are used in power supplies, which are often built in advance of end products. This dynamic can also result in large cyclical fluctuations than our peers because many of our customers are suppliers to OEMs, creating an additional layer of inventory between us and the end market. Of course, these dynamics apply to both ends of the cycle. And while we tend to underperform our peers at the front end of a down cycle, we tend to outperform on the other side. For example, we underperformed the analog industry in 2018 as we were early into the down cycle, felt across the industry the following year. We went on to outperform analog by a wide margin not only in 2019, but in each of the next two years as well. We are now into our third quarter of sequentially lower revenues and channel inventories are declining after peaking in the September quarter. While the slope of the recovery will, of course, depend on the strength of the end market demand, we do expect revenues to bottom in the March quarter, followed by a sequential growth in the June quarter. Looking at the fourth quarter from an end market perspective, appliances, which dominate the consumer category, have weakened considerably in recent months, driven by the softer housing market, inflation and the overstimulation of demand for appliances during the pandemic. Sell-through for the consumer category in the fourth quarter was down about 40% year-over-year affecting all subcategories, including major and small appliances and air conditioners. Despite the short-term headwinds, we remain as bullish as ever on the opportunity in appliances, where we have gained significant share over the past couple of years. Dollar content continues to rise, driven by increased penetration of features like Wi-Fi connectivity, the adoption of GaN products and the ongoing transition to brushless DC motors, which we are addressing with our BridgeSwitch products. In the industrial category, reported revenues were down more than 25% sequentially, reflecting elevated channel inventories, while sell-through fell by only about 10%. Broad-based industrial applications are down significantly, but we are seeing offsetting strength in home and building automation and high power, particularly in renewable energy and energy exploration. In the communications category dominated by smartphone chargers, sell-through has stabilized and channel inventories are approaching normal levels, suggesting that end customer inventories have improved significantly. Revenues for communications were up double digits in Q4 compared to Q3. And while we expect Q1 to be seasonally lower, we do anticipate sequential improvement in the June quarter. Having said all this, we are looking past the short-term macro and cyclical gyrations and staying focused on the long-term and profitability -- long-term growth and profitability. The fundamentals of the business are strong, and we continue to gain share across a broad range of end markets and geographies such as Japan and India, where our combined revenues grew more than 30% last year. Most importantly, we are executing on the opportunities we laid out in our recent Analyst Day, including our plan to double our SAM over the next several years. We will also do so by expanding our portfolio of GaN products to address a wider range of applications while growing our presence in brushless DC motors and EVs, each of which we expect to be a $1 billion opportunity by 2027. Our high power products are winning in renewable energy, power grid and industrial motor applications, and we have new gate driver products in the pipeline that will strengthen our long-term competitive position in high power. We also continue to press our advantage in energy efficiency, helping customers meet tighter specs like those implemented recently in China for air conditioners and India for ceiling fans. In fact, several of our largest design wins in Q4 were for air conditioning customers in China, while a major Indian customer is now among the largest users of our BridgeSwitch motor drive products. In all, BridgeSwitch is now in production with more than a dozen customers, and we expect that number to grow significantly after tripling the size of our design funnel in 2022. We also tripled our opportunity pipeline last year in the EV market, where our silicon carbide InnoSwitch products are an exceptional fit for power supplies in electric passenger cars and commercial vehicles. As EV architectures evolve, customers are increasingly using the main battery voltage for subsystems that today are still powered by standard 12-volt batteries. This trend is creating new sockets for InnoSwitch and our other automotive qualified power conversion chips, which are superior to discrete solutions in terms of reliability, efficiency and footprint. We won five new automotive designs in Q4 and now have more than three dozen designs in production at about 15 end customers. Both of these figures are on track to raise significantly with as many as 20 new programs already scheduled to enter production this year and many more in the pipeline. Our high power business rebounded nicely in 2022 from the pandemic-induced slowdown of the prior two years, growing more than 20% and contributing to high-teens growth in our industrial category. We expect strong growth again in 2023, driven primarily by renewable energy and power grid projects. In summary, the fundamentals of our business are sound, the opportunities in front of us are as exciting as ever and we continue to invest for long-term growth. We also continue to return cash to stockholders through a combination of price conscious buyback as well as dividends. As noted in the press release today, our Board has increased the quarterly dividend by 6%, beginning with the March payout. Before I turn it over to Sandeep, I'd like to highlight two very welcome additions to our Board of Directors, starting with Nancy Gioia, who joined the Board on January 1. Nancy had a distinguished carrier in the automotive industry, comprising 33 years of service at Ford Motor Company, including executive roles in product development, manufacturing, strategy and planning. She has extensive experience in the EV space having served in the later part of her carrier as Ford's Director of Global Electrification, and she currently serves on the Board of Lucid Group, a leading EV manufacturer. Joining our Board on April 1 will be Ravi Vig, who was CEO of Allegro Microsystems until last year, concluding a 38-year career at Allegro and its parent company, Sanken North America. In addition to leading their IPO several years ago, Ravi helped Allegro navigate the transition to the EV market after decades supplying sensor and power chips for internal combustion vehicles. In speaking out these highly accomplished automotive executives, one from the industry and one from the semiconductor side, we are underscoring our commitment to the EV market and adding highly relevant expertise to support our efforts. Just as importantly, I believe their willingness to join us in this effort says a lot about the attractiveness of the EV opportunity for Power Integrations. Finally, I will note that in December, we received Great Place to Work Certification following an anonymous survey in which 82% of our employees stated that Power Integrations is a great place to work. That is 25 points higher than the average U.S. company. I believe this award reflects our culture of innovation, the consistency and focus of our strategy. The fact that our products contribute to the health of our planet and that we value employees regardless of semiconductor cycles and macroeconomic turbulence. Thanks Balu and good afternoon. I will start by reiterating what I said on the last quarter call, which is that we are well-positioned to weather the current downturn, thanks to our balance sheet and our lean expense structure. While we are taking prudent steps to moderate spending and production levels, we will not deviate from the long-term focus that was an important theme of our recent Analyst Day. That includes looking beyond the downturn and continuing to invest in people and products as well as maintaining production capacity to be ready for an upturn in demand. While internal inventories are above our target, this is consistent with how we have managed through past downturns, an approach that has served us well throughout our history. Our products are largely fungible across customers and end markets and have minimal obsolescence risk, especially when kept in wafer form. We also continue to hire around the world, while working hard to develop and retain current employees. This includes normal salary increases despite the economic downturn and continuing to pay an above average portion of the cost of benefits despite rapidly rising insurance rates. I will now discuss the Q4 numbers and the outlook before we begin the Q&A session. Revenues for the quarter were $125 million in the middle of our guidance range and down 22% from the prior quarter. The consumer category, which is dominated by appliances, was down more than 30% with weakness across all categories of appliances. While domestic demand in China continues to be soft, the slowdown in appliances has broadened geographically. The industrial category was down more than 25% sequentially, primarily reflecting elevated channel inventories. As Balu noted, sell-through was lower by only 10% sequentially in the industrial category. Computer revenues fell by high-teens percentage sequentially, reflecting ongoing softness in that end market. Revenues from the communications category, which is dominated by smartphone chargers, increased sequentially by a low-teens percentage of a low prior quarter low level. While smartphones demand continues to be weak, channel inventory has fallen to near normal levels, indicating that end customer inventories are healthier than they have been in some time. Overall, channel inventory stood at 13.5 weeks at quarter-end, just below slightly from the prior quarter, though the decrease was most significant in dollar terms, with sell-through exceeding sell-in by about $8 million. Revenue mix for the fourth quarter was 39% industrial, 26% consumer, 23% communication and 12% computer. Collectively, the communication and computer markets increased by eight percentage points from the prior quarter, a less favorable mix than we anticipated, resulting in lower-than-expected gross margins. Specifically, non-GAAP gross margin were 54.7% compared to our guide of 56% to 56.5%. Relative to the prior quarter, gross margin was down about three percentage points, driven primarily by mix and the impact of lower production volumes. Non-GAAP operating expenses for the quarter were $40.2 million, down slightly from the prior quarter and about $2 million below our guidance, primarily reflecting the timing of headcount additions and other spending. Non-GAAP operating margin for the quarter was 22.5% and non-GAAP earnings of $0.48 per diluted share. The non-GAAP effective tax rate for the quarter was 3.3%, reflecting a catch-up to bring our full year tax rate to 8.2%. Weighted average diluted share count for the quarter was 57.5 million, down about 100,000 from the prior quarter. We utilized $19 million for repurchases during the quarter, buying back 266,000 shares at an average price of just over $70. We had $81 million remaining on our authorization entering the March quarter. Cash flow from operations for the quarter was $24 million. We used $6 million during the quarter for CapEx and paid out over $10 million in dividends. As Balu noted, our Board has increased the quarterly dividend to $0.19 per share, an increase of 6%. For all of 2022, we returned $353 million to stockholders through buybacks and dividends. That's about two-thirds of the cash and investments we had at the start of the year and about 200% of last year's free cash flow. Nevertheless, our balance sheet remains extremely strong with $354 million in cash and investments at year-end. Inventories on the balance sheet rose to 215 days at quarter-end. As noted earlier, the nature of our product allows us to build wafer inventory during downturns to ensure continued access to foundry capacity and to be ready in the event of a sudden recovery in demand. I expect inventory days to peak in the March quarter and then to taper down gradually through the remainder of the year. Turning to the outlook. We expect revenues for the March quarter to be $105 million, plus or minus $5 million. We expect sell-through to once again be meaningfully higher than reported revenues as channel inventories continue to come down. I expect non-GAAP gross margin for Q1 to be approximately 53.5% with a sequential decrease driven again by lower back-end manufacturing volumes and a less favorable end market mix. Gross margin should rebound after the March quarter as volume and mix related headwinds abate, and we realized the benefit of the weaker yen that prevailed in the second half of 2022. For the full year, non-GAAP gross margin should be around the high end of our target range of 50% to 55%. Non-GAAP operating expenses for the first quarter should be between $42 million and $42.5 million, up from the fourth quarter, reflecting our hiring plans as well as the resumption of FICA taxes and the comparative impact of the year-end shutdown in the prior quarter. I expect non-GAAP effective tax rate for March quarter and for the year to be between 8.5% and 9%. Hi, guys, thanks for asking the question. Just wanted to see, during the course of the fourth quarter and heading into the first quarter, you guys had thought a quarter ago that the March quarter might be flattish sequentially. Obviously, that didn't happen. Is it just that the demand weakened? It sounds like the channel inventory directionally headed like you expected, but just wanted to get some of the puts and takes that's causing the weakness in March? It's definitely the demand weakening more than we thought, especially in the consumer space. That is our -- which is mainly appliances. We thought that would -- we never expected it to go down as far as it did, and it clearly reflects not only slowdown in demand, but also inventory in our channel and at the OEM. I think they were surprised -- as surprised as we are in terms of the sudden reduction in demand. And Ross, we started seeing this after the earnings call, somewhere in November timeframe and December, and they attended a couple of conferences. And there, we actually publicly did indicate that we expected March to be the quarter where it will be lower than Q4 and that will be probably where we'll bottom out before we start moving upward again. Thanks for the color on that. And I guess as my follow-up, you talked and this will kind of be a revenue and a gross margin question, but you talked about the mix headwinds in the quarter and the guide and then talked about those lessening than the kind of the shape of the upturn coming out the other side. What are the mix dynamics that you expect to normalize if you talk by segment within the March quarter? And the gross margin side of things, how do you expect the linearity of that to work for the year? As I know, Sandeep, you said it would be close to the high end of your 50% to 55% range as the year progresses? Correct. So, if you look at it, even in Q4, even though the consumer came in weaker, we were able to kind of make-up that by the cellphone and computer being a little better. And that's why you saw we came in at like 23% was the communication in Q4. We expect communications to be still strong even though every category will decline in Q1. But as a percentage, communication and computer will remain healthier and the decline is more in the consumer and industrial side a little bit. And as a result, we are giving the guidance. Plus the volumes are lower, which is really having an impact for us. And as the year progresses, we will start seeing the benefit of yen. And basically, the volumes, the headwind that we had will start going away. If you remember, the yen had really moved very well in the back half of 2022, which will -- because of the inventory starts flowing in Q2 and Q3. And now you know, the dollar is weakening. And so, the reversal was actually go the other direction in Q1 of 2024. So, if you look at the rest of the year, I think after the first quarter, we will start moving towards the 55% give and take for the rest of each of the quarters. And if you look a little long-term, I had talked about on the Analyst Day that even though we are moving on the higher end towards the mix, but I had talked about that my gross margin would remain on the higher end of the model and primarily was because I was anticipating the yen to start moving back and it's exactly what's happening. Yes. Thank you. Let me start with the internal inventories, Sandeep. So, I think 215, that's probably the highest number I've seen from POWI. And I think I do understand why. But what I wanted to sort of get more color on is -- how much of that is cyclical, meaning you obviously buy -- I mean, you build inventory during the downturn because of the shelf life. But how much of that was also opportunistically taking advantage of the Japanese yen? Well, we werenât trying to just tie the Japanese yen, I'll be honest. I think it's more looking at the planning and working with our foundry partners. This is really a partnership, and we have to look at the economics on their end, too. But I think if you really look in dollar terms, it has gone to about $135 million. Even if you look in Q1, looking ahead, the days will peak, but the dollar value probably from this $135 million is not going to move more than $4 million to $5 million. And I think what's going to happen is as we come back in the second half, I expect the days to start tapering down each quarter in Q3 and Q4, though even in Q4, it will be above our model because if you looked already historically, as we had talked about in 2018, when we were out of sync with the analog, we always see the downturn first. And when we come back, we come back always strong. So, if we believe -- and I think I've talked about that the second half being stronger, we have got, hopefully, the pull-in of demand on the consumer side and appliances, anniversarying in Q2 because if you said you had a pull-in of demand of a year, I really think if we believe the second half which we do, it should bode very well for 2024. And that's why we very feel very good at keeping the inventory where we are because historically, it has really helped us in the long run when the rebound happens. Fair enough. And moving on to the sell-in versus sell-through. And obviously, I understand what you're trying to do there, get the channel inventory down and so on and so forth, that's fair. But when I look at the Q1 guidance, that's a $105 million, that's sort of back to early 2020. So, I mean, is it fair to say that you are going to be under shipping pretty materially to end demand in Q1? Yeah. I expect -- if you just think about it last year, from Q1 to Q3, we probably sell-in and sell-through disconnect was around $32 million. So, if you look at what happened in Q4, sell-through was higher than sell-in by about $8 million. I expect in Q1, at least a $15 million give and take, where sell-through will be higher than the sell-in. And then the balance will kind of adjust by Q2. And that's why the second half story. That's very helpful. Just one last one for Balu. Balu, obviously, with the percentage since coming down with some of the other segments, automotive now, I think, has a real chance to shine, right? Because I mean, obviously, you're seeing growth there. Is it possible that automotive could become 10% of your revenues either this year or next year? Is that a possibility? No, not. It is a much slower market to develop. I would say that it will grow very nicely. We are expecting it to go from low single-digit millions last year to mid-single-digit millions, and it will continue to grow. But the real growth will come really in 2026 onwards because some of the designs will take much longer to develop. But where we will come back very strongly, I believe, is in all other areas, especially consumer and industrial. In consumer, the one thing I want to point out is we are continuing to gain share significantly. It's just not showing up because of the inventories in the channel and the weakness in the market. And there will be a time when people will start buying appliances. Certainly, they bought too much during the pandemic and the general weakness across the world has hurt us -- has hurt a lot of people, not just us. But it looks like the GDP growth in China and worldwide is going to be better than everybody anticipated. If you look at what the IMF is saying right now. So, we are optimistic that, that will come back. More importantly, our share gains, you know that we are gaining share across many competitors in appliances. And on top of that, we are making a huge penetration with our BLDC motor chips, the BridgeSwitch. The combination of those two should really give us a springboard to get back in the appliances. And in the industrial space, the high power is doing very well. The home and building automation is doing extremely well. So, I'm also very optimistic. Computer, we have a lot more share to grow into the notebook market. And even in cellphones, even though at the moment, there is a kind of a lull because not only of the weakness in demand, but also because some of the Chinese companies have moved to lower end chargers, simply because that's what happens when the demand is low, they focus on cost. Having said that, the same companies are working on some really high power charges, which tells me that it is temporary and they'll come back to higher power and higher performance type of products. So, I think we have a lot of growth ahead of us. I mean, I'm completely overlooking what's going on right now because it doesn't really reflect our long-term capability. I mean, all of the shares wins will eventually turn into growth. Hey, good afternoon. Thanks for taking the question. I guess, just kind of from a high level, Balu, can you talk about where you are seeing areas of strength today, maybe areas that are a little stronger than you would have expected? What are the, I guess, the biggest bright spots that you see in the market currently? Currently, we are seeing a strong growth in home and building automation, the high power products. These are renewables like solar and wind and power grid products like high voltage DC transmission and also traction. Traction refers to electric locomotives. Now we are also seeing very strong activity in EVs, electric vehicles and also in appliances, but they won't turn into revenue overnight. We'll have to -- they have longer design cycles especially EVs. But having said that, we have already gained significant share in the consumer market. And so when the inventory is depleted, we should see a rebound and also it's been, as Sandeep mentioned, it means almost a year since the pandemic-driven demand for appliances has really over stimulated that area, and that should eventually come back to some normal consumption, and we are looking forward to that as well. I don't know the exact timing, but I feel very good about those two markets. And then in computers, we are making inroads into notebooks and monitors. That should help us grow. As you can see, that's become at least for now 12% of our revenue, but it has been growing consistently from 5% over the last three years. And I think that also will be a growth area. Now cellphones, I think, will hold our own. We have -- the market itself has softened because people are not replenishing the phones as much. But we are seeing that market going more towards higher end, which will benefit us in terms of ASP. Okay. Fantastic. Thanks for the color there. And then maybe any thoughts on the channel inventories that are out there in terms of what level they're looking to burn those down to. Is this -- do you think it's back towards normal levels that we saw pre-pandemic? Or do you sense that maybe they're trying to get down to maybe a higher level than we were previously. Just trying to understand how much inventory is going to tell need to be burned out completely? Yes. So, if you really look at it, I would say we typically run channel inventory eight weeks for us. Now if you look at it from an end market standpoint, the Communications segment, channel inventory seems to be coming at a give and take around that level, which is reflecting that the OEMs have kind of burned the inventory. And that's why if you remember some time back, we said that will be the first market to come back. Now the other areas are definitely elevated, and that's what I think will get normalized in Q1 and part of Q2. And that's why we start feeling very good about what will happen. If you look what happened in Q4, especially in the appliance area and air conditioning, Q4 typically tends to be a quarter when after Q3 things started ramping, while in fact, we had a significant decline, which leads us to believe that they are clearing out their inventory. And as they do that between Q4 and Q1, I think Q2 will start looking better for us. And then typically, as whenever this happens, and we look -- whenever we come out of a downturn, we come out stronger. And if you look historically, if the second half bodes well as we are expecting it to, it will actually position us very, very well for 2024. And if you look at what happened in 2018, after 2018, when we saw the downturn first is exactly what happened, very similar to what we are expecting this time. Hey, guys. Thanks for the question. So, I assume we should assume all segments down next quarter or perhaps can give us some color as to force ranking them? It sounds like consumer might be the main culprit here. But I think that would be incredibly helpful. And then -- would you also expect all segments to be down year-over-year in 2023 as well? Or do you think there's a chance one of those could be up? I think in Q1, basically, Industrial and consumer will be down more than the other two. But as a result, the percentage of revenue what we are guiding to, you should see that communication and computer as a percentage of revenue will hold, which is why the mix we talked about. As far as for the year, I would say you should see more downturn on a full basis in the consumer and industrial, and that's why I talked about a little bit of a mix headwind compared to the communication and computer segment. Yeah. Yeah. Exactly. And I would say at this point, with revenue expected to be down, I think, 40% plus into March. This has all hit you guys a little harder than others, at least thus far. So, I kind of wanted to put all the pieces together there. I know for communications, for example, you guys typically see it first. But what else is going on here in your opinion? Was there a greater than normal inventory build because you guys had availability of parts when others didn't. So, people built. Or is it just the cyclicality of the end markets? If you were kind of to do a postmortem on why the drop was so much more significant than others? What are all the kind of main culprits you could point to? That's a very good question. And there are several reasons why you're setting us harder. The first one is we always see the downturn before other people do. We talked about that. And also because we have one more layer of inventory that is we sell primarily to power supply manufacturers who then sell it to the OEM. So, we get -- our gyrations are much bigger, if you will. The other one is if you look at two-thirds of our revenue at the beginning of the year were from smartphone, species and appliances. And those areas have been hit much harder than areas like automotive, where we have, at this point, very little exposure. Hopefully, that will change over time. But -- so it has differentially hurt us more than other analog peers who most of them have very good exposure to automotive market. And the other thing is we did not implement a non-cancelable, non-returnable orders, or long-term agreements that many of our peers have done. And because we do value pricing, we didn't have as much increase in prices as most of our large peers. In fact, if you look at the growth in 2022, a large portion of the growth was simply change in ASP. So, you have to keep that in mind when you compare. And of course, the positive side of that is that we will recover first. And so, I think we'll outperform the market when we recover. And if you go back to 2018, you can see the similarities. The second half was down for us in 2018, and we saw that before anybody else did. So we were down 4% in 2018, and the industry was up 11% that year. But the next three years, we significantly outperformed the industry because we came out faster and that allowed us -- and also we gained a lot of share during the downturn. So, every downturn is an opportunity for us to gain share because we always invest for the future. In fact, we invest into the downturn. So that's why I try to not pay too much attention to the macro because I don't control the macro, but I pay attention to how much share gains we're getting. So, those are the differences why we have seen a much larger change than our peers. Hopefully, that's helpful. Yeah. Hi, guys. This is actually Ethan Potasnick on for Matt. I know there have been a bunch of questions regarding inventory in the channel. But I kind of want to ask a similar question a little bit. I was wondering if you guys had any sense of what you are under shipping and when you anticipate selling to true demand. And any expectations of what the shape of the recovery might look like as kind of see just rolling correction across segments kind of flows through? Okay. We have definitely understood the cellphone market until now, but it looks like the inventories are normalizing there getting close to normal, at least at the deep sea level, it's already normalized, we think that's because our OEMs also have brought down the inventory. But in consumer, the demand slowdown came so quickly our customers were surprised how quickly that happens. So, they are stuck with inventory at various levels at our distributors at OEMs and then, of course, at the OEM and also at the retail level. And that's what is painful at this point because the consumer is down so much. But it will come back. The question is when will those inventories normalize. Our best bet is sometime in Q2, it will normalize, so it will benefit us in the second half. We do expect Q2 to be better than Q1, but the second half, and of course, 2024 is where we will see the significant growth. In terms of industrial, the broad-based industrial, clearly, that is over inventory and there is a slowdown in -- across the board. It's not as bad as consumer, but there is over inventory. And because of that, you can see industrial is down, and there is inventory buildup at the distribution. The good news is the sell-through was only down 10% versus our sell-in. So that is also improving as we speak. So that's why we've been comfortable saying Q1 is where the bottom is likely to be. Okay. Got it. Got it. And then as my follow-up, how should we think about the GaN outlook for 2023? What types of penetration rates are you guys seeing, I guess, pre and post kind of this inventory correction? Yeah. We think we'll grow GaN very nicely in 2023. In 2022, we didn't grow as much as we thought primarily because most of our designs, GaN designs were in smartphone chargers. And obviously, that market didn't do very well. In spite of that, we grew some, we grew marginally. But in 2023, the design wins have expanded to many other areas, including consumer and industrial and, of course, computer. As a result, we expect to see a significant growth in GaN going forward. Yes. Thank you for asking the question. Just looking back at 2021, you had very strong growth. Could you parse out how much of that was units versus ASP? Typically, you guys have 5% ASP decline annually. And I'm just wondering what that -- also what that looks like today? So, in 2021, unlike many of our peers, we didn't do significant price increases. Obviously, to the extent we are pricing our products at value, there is a benefit to that. And we did benefit somewhat from that, but nothing like our peers. I don't know the exact numbers, but as we said, we base it on the product -- so the components we replace. So, I couldn't tell you the exact number. But all I can say is it's far less than most of our peers who did a very, very strong increase in price. And how is pricing today? Or are you reverting back to historic norms and normal price decreases? Or how is that going, given the weakness in demand? Well, I think the pricing will normalize this year. You have to understand that for two years, we didn't have to give any annual price reduction. So, in some ways, that helped us quite a bit. But going forward, I think things will normalize because supply situation is getting better. But one thing does the input costs still have a very significant upward pressure, especially in the front end. So, I think that's the tension that is going on right now, and we do value pricing. So, depending on how we see the value pricing, we will stay competitive. But I think the input costs are still having pricing pressure. Yeah. That will prevent us -- that will prevent the market not just us from lowering prices very much because input costs are continuing to go up. Got it. And then just last one for me. When you think about 2022, in consumer, how much of that business is appliances? Yes. Sandeep, I was hoping you could just help me a little bit with the math here. So, I'm just looking at revenue growth since 2019. And by adjusting for that $65 million that you called out, kind of excess channel inventory, I mean, it looks like the revenue will be growing about 12% a year. It's kind of interesting. If you do adjust for that $65 million, it's almost exactly 12 a year. So, I mean, is that kind of how we should just look at the business going forward? I know that your long-term target is obviously within that range. But it's so interesting Yeah. Go ahead. It's a great observation. Low double-digit growth is the model. But whenever these gyrations happen, -- you know we have -- unfortunately, whenever the downturn comes, it seems to happen in the middle of the year, and it affects two years of growth. But if you look what happens, so we -- for two years, we'll be really bad in growth, then we will do couple of years better than our model. But if you look on the long-term, we come pretty close to the double-digit growth. And that concludes the question-and-answer session. I would like to turn the call back over to Joe Shiffler for any additional or closing remarks. All right. We'll leave it there. Thanks everyone for listening. There will be a replay of this call available on our investor website, investors.power.com. Thanks again, and good afternoon.
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Hello, everyone, and welcome to the presentation of Husqvarna Group's Year End Report for 2022. My name is Johan Andersson, responsible for Investor Relations at Husqvarna Group, and I will be the moderator today. As we have announced and very sad to repeat is that our CEO, Henric Andersson, is not likely to return to active status as CEO. Pavel Hajman has been appointed acting CEO. And today, we have Pavel and our CFO, Terry Burke, to present the report. After the presentation by Pavel and Terry, we will open up for a Q&A session, and you are welcome to ask your questions over the phone conference. You can also use the web interface to post your questions there, and I will read them here in Stockholm. And before I start, I would like to take the opportunity to welcome everybody to this session. I would also like to say that I'm truly sad that Henric Andersson is not here presenting the report today himself. And in my temporary assignment as acting CEO, my ambition is now to lead our experienced organization and continue the implementation of the strategy that was formed under Henric's leadership. I would like to thank Henric, the full team and our business partners for their dedicated work in 2022. Together, we've taken a number of important steps to build an even stronger group and also to strengthen our sustainability leadership in this past year. So, moving on to the report for the fourth quarter and the full year 2022. Starting with the quarter, we closed the year on a strong note and delivered an 8% organic growth, which was driven by our core segments: robotic mowers and battery-powered products. And subsequently, adjusted EBIT is the best quarter four result in many years. Looking at the full year and in the face of global challenges, I must say that our teams have come together in a very good way and delivered for our customers. As a group, we delivered a stable result for the year. And importantly, we executed on our strategic priorities despite macroeconomic and supply chain concerns that we've had. Our direction is clear. We took an important step in the group's ongoing transformation this year when we initiated an acceleration of our strategic transformation to lead our industry to low-carbon solutions. We're stepping up our initiatives and investments in robotics, battery, watering and professional solutions. We're also strengthening our technology leadership, and we have made several moves this year with ground-breaking innovations. Gardena, EcoLine, Husqvarna Construction, 94-volt PACE battery platform and also the CEORA robotic professional mower being some of our successful launches. We have a strong product portfolio lineup for '23, and we are committed to deliver on our customers' high expectations. And with this introduction, let's take a closer look at the quarter. Looking on the left -- top-left side, sales was up 26%, whereof organic growth was 8%. And as I said, the key driver was robotics, both from the professional segment as well as the consumer segments, and also battery products. And subsequently, as these are main products for the Husqvarna Forest & Garden Division, their organic growth was 15% in the quarter. On the more challenging side, Gardena experienced continued destocking by our retail partners in the quarter also, and this leading to a minus 11% organic sales growth in the quarter. The Construction Division achieved a minus 1% organic growth due to somewhat lower volumes. We managed to deliver a close to zero EBIT result, which is strong looking at our historic performance for quarter four. Terry will further discuss this in detail, but the key drivers were really our success with substantial price increases implemented during the season, and that offsetted both the raw materials as well as logistics' increased costs. Both sales growth and improved mix have also contributed to the result, of course, while we had a negative currency effect in quarter four. Cash flow came in at almost a similar level as in quarter four last year. But still, we have a too high working capital level driven by both receivables and high inventory. We have a lot of activities in place now to reduce our inventory levels for the season 2023. Furthermore, the Board has also proposed an unchanged dividend for the year at SEK3.00. Robotics and battery achieved an improved growth in the second half of the year, and this drove up the share to 15% for the full year. As you recall in previous years, we have been on a higher level, and now our ambition is to continue this recovery. We have had a better supply chain situation and product availability during the second half of 2022, that now will go further into '23 also. Importantly, we have a strong robotics portfolio and also many new battery products for the season 2023. With that summary, I leave it over to you, Terry, now to go through the numbers a little bit more in detail. Please. The Q4 result, I think, overall was a solid Q4 performance from a financial perspective, and that was really driven by the Husqvarna Forest & Garden Division. Organic sales growth in the quarter was some 15%, operating income of 4%. The improved sales and also the operating income was really driven by our robotic mowers, both as a continued solid performance with our professional robotic mowers really with CEORA and also an improved supply chain situation, which enabled us to fulfill some of our back orders in the residential robotic lawnmowers. Price increases have continued to be good, and they have also continued to offset the higher raw material and logistics costs that we faced during the year. Forest & Garden Division did have a negative currency effect of some SEK60 million, which impacted the operating income negatively, of course. If we look at it from a full year perspective, organic sales of flat and an operating income of 10%. We had good growth in pro handheld during the year. And particularly during the second half of the year, we had an improved situation with our robotics. We are still down overall from a volume perspective in robotics, but at least during the second half of the year, we were able to catch up. I think one thing to really call out there is around the CEORA launch, which was extremely successful during the year, and we reached our target with regards to sold units in 2022. The result was impacted by lower volumes and unfavorable product mix. And overall, there was a currency effect of some negative SEK50 million for the year in Forest & Garden. Moving over to Gardena. It's been a challenging year for Gardena, and Q4 was more or less a continuation of that. And what I mean by that is organic sales 11% down as the retailers have continued to destock and an operating margin of a negative 21.4%, which is an improved situation compared to Q4 '21, which had a negative 25.3%. The lower volumes have clearly impacted the operating income. However, price has offset and compensated for the higher raw material and logistics costs. Orbit had a solid Q4 and contributed to 26% of the sales, and no dilution effect. Taking the full year perspective, overall, a negative 7% organic growth for the full year and an operating income of 8.6%. We've talked about this in previous quarters. Clearly, there has been a retailer destocking during the course of the year in the retail channel impacting Gardena. What has been positive in a sense that we have improved our market positions. So, whilst our sell-in has been challenged, actually, from a market perspective, we've improved our situation slightly. Orbit contributed to 31% of sales. And for the full year, they had a dilution effect of 1.4 percentage points. Construction. Construction, they had a negative 1% sales development in Q4 and an operating margin of 6.1%. They were clearly impacted by the lower volumes and the negative mix during quarter four. We did have good growth in demolition robots and diamond tools. And the price increases have continued to offset the raw material and logistics costs. Moving on to the full year perspective, organic growth of 2%. We've had a particularly strong year in power cutters, which has been really great to see. And that has really helped us with our organic growth of 2% over the course of the year. Unfortunately, Construction have been impacted by negative supply chain disturbances, which have really driven up costs, and also the lower volumes have impacted the operating income. Operating income for the year landed at 10.4% versus 11.7% 2021. In quarter three, we announced our strategic acceleration program. And this was really to take another significant step to make the group more competitive, sustainable and increase focus on value-creation levers. I'm happy to say we are on track with our program. Of course, it's still early days, but so far, we are on track and things are moving according to plan. We talked about wanting to increase our investments in these value-creation levers and an additional SEK400 million per year to be invested in the four areas that you see on the right-hand side, being robotic mowers, battery-powered products, professional solutions and watering. We will also proactively exit around SEK2 billion of low-margin, petrol-powered consumer business from 2024 and also reduce our installed capacity. This will deliver yearly savings of some SEK800 million with a full year effect by 2025. In Q4, we booked SEK1.8 billion of the one-time costs. In Q3, we announced approximately SEK2 billion of one-time costs for this program, and we've booked SEK1.8 billion of those during the quarter four. Moving on to the bridge. First of all, let's keep the perspective, this is our smallest quarter by far. And we have a solid performance during the quarter, moving from a negative 2.2% margin to more or less a flat margin, a slight negative 0.1% in the quarter. We have a positive mix effect during the quarter, really driven by the robotics. Again, we call it recovery rather than growth. So, really driven by that robotics recovery improved our mix. Price increases, as you can clearly see on the chart, more than offsetting our raw material and logistics pressure. We continue with our transformational initiatives, and we continue to invest some SEK110 million in the quarter in this area. And we had a negative currency effect of some SEK45 million. Full year. We moved from a 12.1% EBIT to a 9% EBIT for the full year. Obviously, during the course of the year and particularly during the first half of the year, we were really impacted by the negative supply of robotics, which impacted the mix and the financial result. Lower volumes throughout the year and some higher costs around our operational cost and such like, they have all impacted with a negative SEK1.4 billion. We've had very robust price increases during the year and getting very close to SEK3 billion, which I think has been a very solid performance by the group in price, which, again, as you can see visually on the chart, more than offsets the raw material and logistics pressures. We've invested, continue to invest with just below SEK400 million in our transformational initiatives. And we have a positive currency effect of some SEK320 million. That lands us at the SEK4.85 billion and 9% EBIT. Moving on to the balance sheet. We have a very solid financial position. So yes, I think that's -- we have to be clear, we are in a solid position here with the balance sheet despite our negative cash flow development during the year, which I'll come on to in a later slide. We have had higher working capital, and you can clearly see that. Inventories have increased by some SEK5 billion when we look at it from a year-over-year perspective. And if I could just spend a minute to explain what that SEK5 billion, what it consists of. We have SEK1.4 billion of currency effect. We have SEK1.6 billion of cost increase. So, those two combined are some SEK3 billion, and I would cluster them as non-operating increases, if you like. Our finished goods have increased by SEK1.3 billion and our components by roughly SEK1 billion. And we've talked quite a lot during the year about the golden screw with our supply challenges, and that has really impacted around the components. So that takes us to the SEK19 billion -- SEK19.3 billion. Trade receivables has increased by SEK2 billion at the end of the year. But also, be mindful, our sales have increased by more than SEK2 billion in quarter four. So that's more of a timing issue. Borrowings have also significantly increased, and that is really driven by our weaker working capital performance and negative cash flow. Moving on to our direct operating cash flow. And of course, this has been a challenge for us throughout the year, and we've landed at a negative SEK572 million. What I would say is during quarter four, the cash flow was more comparable, and we landed at a negative SEK1.3 billion versus a negative SEK1.1 billion previous year. So, a much more stabilized Q4 cash flow. That was really impacted by trade receivables, which, as I explained earlier, is more of a timing issue. We had stronger sales in Q4, which then also impacted the cash flow as that trade receivables is carried into 2023. Inventory, of course, also playing a part, and accounts payable is lower as we've tried to drive our inventory levels down. Net debt/EBITDA, we are at 1.8, which is more or less back to the pre-COVID levels. The reasons behind this, we have a lower EBITDA in the year, some SEK7.4 billion, and we have a higher net debt, which I touched upon a little bit earlier. With our working capital challenges and cash flow, we have increased our net debt quite some. So that has, of course, had a negative impact on the development of this ratio. So, as you know, sustainability is at the core of our strategy, and we are on track on delivering on our Sustainovate 2025 program. For carbon, we have reduced our absolute CO2 emission from the value chain, including Scope 1, 2 and 3, by 32%. And this implies a reduction of 1 percentage point compared with the last quarter -- I mean quarter three, and minus 5 percentage points further reduction compared to last year. Predominantly, this year, the decline is supported by the overall lower volumes sold. For circular, the last quarter of '22 provides a total summary of 10 circular innovations, and we also have 19 nominees in the pipeline. And we feel we are on the right path here towards the target of 50 circular innovations. We have two new innovations in this last quarter. The first relates to ReSpare. This is a new marketplace for dealers to trade used parts and spare parts related to Husqvarna Forest & Garden Division. This is actually also a marketplace that can be used for trading refurbished machines. The second innovation that was approved here is the introduction of recycled polyethylene in blister film packaging in the Gardena portfolio. As for people, we're executing on our target to empower customers and employees to make more sustainable choices. We are increasing our assortment of sustainable choices, that is products and solution offerings that we have a -- that has significantly and a proven lower impact on the use of natural resources and on the environment. And now with 572,000 sustainable choices sold, we are now picking up the speed on this journey to really empower 5 million people by 2025. Moving over to our operational ambitions. At the Capital Markets Day in 2021, we introduced operational ambitions to further demonstrate our commitment to our strategy for sustainable value creation. The ambitions include to be, by '26, a doubling of the sales of robotic mowers, to double the number of connected devices and also to increase the share of electrified products up to the level of 67%. On robotics, we ended up the year on par with last year, measured in Swedish crowns. A good catch-up in the second half, as we have touched upon earlier in this call, but we need to remember that we have a positive currency and price effect here. Nevertheless, we still have full confidence in the long-term future growth prospects for robotic mowers, and we are executing on our strategy to change how the world is really mowing their lawns. Our share of electrification shows a decline compared to last year, and this is mainly due to the result of the supply chain challenges that we had in the first half of the year. Connected devices, they grew by 30% in this year. A strong performance, mainly driven by smart watering, but also supported by connected robotic mowers. If we move over to the product portfolio for 2023, we have a strong line-up of products for this year, which supports our strategy. It makes us also very well positioned in several areas. Let me mention a few ones here. In watering, first of all, with Gardena, we have launched several interesting products which are addressing the resource scarcity. One is the extension of our well-received Gardena EcoLine product range. This is high-quality tools made with significant shares of recycled materials. And in this range, we are now additionally launching a new watering hose made of recycled material. Another launch from Gardena is the new MicroDrip System with water conservation, so making watering much more efficient for gardeners. Within robotic mowers, the Husqvarna CEORA is now entering its second season. And we are introducing a new low-cut cutting deck as an add-on, and this is specifically targeting the golf courses, which increases the application in the area of CEORA, of course. Husqvarna Automower by the name of NERA is actually our first virtual boundary robotic lawnmower for the residential gardens, which we are introducing here in 2023. This is based on our proven and professional EPOS system. And this NERA product now will cater to lawns up to 5,000 square meters with a precision actually down to around one to two centimeters and with no physical boundaries needed. As for battery products, we are launching several new battery-powered products that will play an important role in our electrification journey. In the United States, we launched the MAX series for residential customers. For Construction, we are launching the BLi-X battery system. This is a powerful 36-volt system that really makes a big difference, and we are adding products to that line. And in line with our collaboration with Bosch and the Power for All Alliance, we are also introducing a new range of battery solutions that will be launched for residential customers in Europe by Husqvarna Forest & Garden Division. In our professional segment, we also will launch several new products, among them, new powerful chainsaws, actually, which has also an improved emissions reduction. So, summarizing our presentation and the year, it is so that we delivered a strong end of the year. We delivered a strong quarter with a high sales growth, mainly driven by key categories such as robotics and battery. We are progressing well towards our Sustainovate targets. The CO2 reduction is now on minus 32%. And I'm also proud that during a full year of challenges, we have made good progress on our strategy execution as well as delivering on our accelerated transformation. We have a strong product lineup for '23, and we are well positioned for the coming years. Thank you very much, Pavel. And before we initiate the Q&A section, we also have a section on the dividend. So, I hand it over to you, Terry, to go through that. The Board makes a proposal for a SEK3.00 dividend for the 2022 year. We are confident in our long-term strategy and the execution of our strategy. We continue to strengthen our positions in value-creation levers. And during 2023 and onwards, of course, we expect an improved cash flow situation and working capital. Thank you very much, Pavel -- Terry. And now we're done with the presentation, so we will start to kick off with the Q&A session. And just to remind you, you can ask your questions over the telephone conference, and we also have a web interface here in Stockholm that you can ask your question through as well, and then I will read them here. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Hageus, Gustav from SEB. Please go ahead. Thanks, operator. This is Gustav Hageus with SEB. If I may start on price increases rolling into 2023, and if you could put that in perspective to your own cost basket for logistics and raw mats? It seems as if external cost pressure has eased and maybe will decline year-over-year in 2023. And if you're right in the report, you fully compensate in Q4 for higher costs with own price increases. So, could we get some color on that delta as you see it with current market conditions this year? That would be helpful. Hello, Gustav. What I would say is, first of all, our outlook for 2023 from raw material and logistics is relatively flattish. We see some positive developments, but we also see some continued negative developments, like, for example, energy and such like. So overall, we're really looking at that from a flattish development. Price, I think we've talked about, we've had a very good price performance during 2022, high single-digit price. There will be a carryover -- some carryover positive effect of price going into 2023. And in addition to that, of course, there will be more normalized annual price increases. They will not be to the levels we had during 2022, but there will be some price activity also. So that sounds to me like a mid- or low-single digit net price increase to top-line this year. Is that reasonable on a flat cost base? And with the improved supply chains now, has that also impacted unit costs as you see it? Or is that included in what you referred to as external costs? Also, I guess, warehousing costs might add to unit costs? Okay. And looking into 2023 then, you're right that the -- as I interpret it, robotics still has some way to go to catch up with market shares you had before the pandemic as some Asian competitors seemingly have had an easier time to get hold of components. What's the magnitude of that delta in terms of recouping your lost market shares just from being able to supply in order to fulfill demand? Is that something you could try to quantify a bit? Yes. We have had a good, of course, improvement in the delivery of robotics here during the second half of the year, as we have told earlier. The supply chain issues have been mitigated. Of course, still, risks remains. As we look at it right now for the year, we feel confident that we will be able to deliver up on the demands of our channel partners that they have imposed on us. Of course, this is something that will stepwise take place here in the Q1 and then potentially into Q2 also as the season starts. And exactly how that will play out in the end is, of course, difficult to say as we don't know exactly how the season will go. But we feel that our delivery capability is on a good level for next year in relation to robotics, both on the consumer side as well as on the professional side, I should say. And then last question related to the professional side of robotics. CEORA seemly sort of a nice end to the year. I think you referenced earlier that you're hoping to exceed 1,000 units in 2022. If you can confirm that, that was, in fact, the case? And secondly, if an optimistic yet reasonable assumption for 2023 might be some 3,000 to 4,000 units of CEORA? That would be helpful. Yes. Well, yes, we can confirm that we reached our ambition of approximately 1,000 units in this -- in 2022. And we see a very strong interest for these products. I mean our customers are appreciating the productivity that they are getting through this product. Given also that we're launching the cutting deck, the low-cut cutting deck now for this year, we think that we have even a greater application opportunity. And we have ambition in this product. I wouldn't like to maybe necessarily confirm your numbers, but we are aiming at high growth of this product. Hi. Christer Magnergard from DNB. Getting back to the balance sheet, you mentioned that you had clearly higher borrowing in Q4. Is that only to make sure that you have enough capital or cash during the Q1 season where you have normally high capital? And secondly, interest cost going forward, given the very high interest costs we had here in Q4, what should we expect for '23? Yes, the borrowings have increased as a consequence of our cash flow situation during 2022. And as I stated earlier, we are much more optimistic of an improved cash flow situation going forward, really heavily impacted by the working capital and inventory buildup. Q1, if you refer back to the cash flow chart that we talked about, Q1 typically is at best a small negative. But of course, we need to be in a good position with liquidity in quarter one can be a negative cash flow development. So, we're trying to be geared up in a good way for that. Of course, once we reach quarter two and the season starts, we really expect to see that improved situation from our inventory and cash flow. Yes, sorry, I've missed this one. The net interest cost, yes, that has increased. Obviously, higher interest rates, as you say, higher borrowings has impacted. And for 2023, we expect some SEK700 million to SEK800 million during the year. And then in terms of -- you mentioned that cash flow should be positive on the back of working capital release. What kind of production cuts should we expect during Q1, Q2 in order to free up inventory? I mean, of course, we are adjusting our volumes to drive down inventory. We have to -- we obviously have to do that. So, there will be some volume impact to the financial results as a consequence of that. But that's in our plan, and we feel confident that we will manage our working capital in a much better way during 2023. Okay. Thanks. And then finally, on -- in Q4, you took a SEK221 million write-down of inventories related to this restructuring program. That write-down, is that the components to -- that should have gone to products that you won't produce? Or is it obsolete products? Or what kind of inventory write-down is it? It's a mixture. It's a few little bits and pieces that all go in. You're right in what you're saying, there is some component write-offs and some write-offs of inventory that we will take as a consequence of our plan of exiting some of the consumer low-margin petrol business. Thank you very much, Christer. And we have one question from the web here. It's from Anton Brink at Antaurus. And he wonders, would you dare to give some qualitative comments on 2023? How should we think around consumer demand? Well, I think we're all aware of the macroeconomic uncertainty looking into this year. If we look into our own ability, we have strengthened that substantially over the last year. I wouldn't say that all problems relating to components and transportation are fully solved, but we are in a much better situation. We have also geared up our production during the second half to be able to deliver on that, so to say, input supply into our operation. We are prepared now. We are prepared also with a certain flexibility, both to take a potential smaller downturn as well as a smaller upturn in the demand that could happen. I think that the macroeconomic uncertainty can play out in various ways. The pressure on consumers and their wallet is potentially there. At the same time, we also know that during the last couple of years, due to the pandemic, there has been a great interest in gardening. Many people have picked that up, have invested in their gardens. And potentially, they could also continue with that even though they would cut back on other kinds of spending. As you know, we are very early into the year. Only January has passed. Our season doesn't really start until April, May. So, it's really very, very difficult to give any kind of, let's say, statement on how we think the year will go. I think to add to that, Pavel, I would say we have been doing some scenario planning because of the high uncertainty. We've built the business around certain scenarios for 2023. So, depending on how we see that play out, obviously, we'll follow the scenario as close as how the market develops. Yes, good morning. This is Johan. I was just wondering about this sourcing situation. You mentioned that it has sort of improved. Have you taken any decisive factors? Have you moved some of your sourcing? I understand it was the semiconductors that was the issue from China, for example. I mean we are hoping China will perform better this year, obviously, but who knows? Have you changed the geographic sourcing or dual sourcing or anything similar to make your supply more robust should these challenges come back? The simple answer to your question is yes on all of your, so to say, statements there. We have worked very actively with the component supply. We have started actually to deal directly with main manufacturers of components versus previously going through various kinds of dealers and also partners that are producing, let's say, subassemblies into our products. We have also broadened the span of suppliers. And that is based on the fact that we have also, over a longer period now, redesigned our products so that they actually can take in a variance of components of similar types so that we simply reduce the dependency on one single supplier, one single component. So indeed, we have taken, let's say, decisive actions on this that has basically led to the improvement that we have seen here during the second half of the year also. Does this imply that your sort of gross margins will be negatively affected going forward? Or are you still achieving these good gross margins, especially on the robotics side? Okay. Excellent. Then could you just repeat how you see the inventories at your retailers for Gardena and the dealer networks for Forest & Garden, as well as Construction? Is it high, low, normal? Yes. No, I would say that from a general perspective, I'd like to express it in the way that we see a normalized level, but then it also depends a little bit more specific on which retail partner. If we go -- if we say -- talk a little bit about the dealer network, as you know, we have had some difficulties to actually supply into the dealer network earlier in the year. The supply that we managed to increase during quarter three has mainly been going out to customers. Whereas, I would say, the majority of the supply that we have managed to deliver into the dealer channel during quarter four is stock-filling to be prepared for 2023. At this point of time, I would say that we are coming to a more normalized level in the dealer channel. Still, so to say, some, let's say, lower levels of robotics, which we mentioned here earlier, which will come in during quarter one. At the retailers, and especially when we talk about Gardena's retail channel partners, as you know, we -- there has been a destocking throughout basically the full second half of the year. And this has led to a situation where we see that in some of the retailers where we have the insight into their stock situation, that it is a little bit below on watering and, of course, subsequently also on robotics. And that will be then filled up here given, of course, their view on how they want to position themselves versus the potential demand for the future. As for Construction, there has also been a shortage of deliveries of certain products throughout the year. We have been improving our ability also subsequently going over the year. And I would say that the levels at the construction dealers and customers today is more or less on a normalized level. Thank you. And we have a few more questions here over the web. I think here is one important for Terry from Henrik at Carnegie. And he asks, what are your concrete actions to take down the net working capital by 2023? And are you confident to achieve that even if there might be a negative volume development? What's your view there, Terry? Yes, we are confident. Of course, one of the big impacts that we had during 2022 was the golden screw and the component buildup as we were waiting for this one or two golden screws to be able to complete the product. That situation, as it stands today -- now I must say, supply challenges can come very quickly, so I wouldn't say we are completely out of the woods for the rest of the year. But as it stands today, we are positive, and that golden screw issue disappears and that will help significantly to drive down components. Of course, an increased focus on our inventory management and also driving that down in a good way to really drive a positive cash flow will also be part of 2023 plans. On a trade receivables perspective, it's more of a timing issue in the sense that during quarter four, we have higher trade receivables, but that really is a consequence of the higher sales. And that will correct itself and normalize during the course of 2023. Thank you very much. And maybe this is a question for Pavel. It's from [Michael Johnson] (ph). And it's basically two questions around Bosch. One is, of course, your battery collaboration, how important is that? And how has it developed? And how do you see that going forward? And of course, the other one is, do you have any other comment on that Bosch has, I should say, committed to buying 12% of the shares here? We have an ongoing cooperation with Bosch under the name Power for All Alliance. We created this together with Bosch already in 2020. And the purpose of this was, of course, to ensure that we will be able to quickly drive the transformation versus electrification and also enable customers to actually have one battery that gives them a versatile use over many products, Husqvarna as well as Bosch, but also other brands that are within the alliance. The ecosystem from a sustainability perspective is, of course, a very, should we say, sustainable thinking and has proven to be successful for us. We have a good cooperation with Bosch in this respect. And we have also taken, since earlier, a decision to actually launch an additional product assortment for the Husqvarna division. The previous cooperation or the existing cooperation is for Gardena. But we have now taken a decision also to actually introduce a new product line for Husqvarna Forest & Garden, a consumer line that also builds upon the one battery within the Power for All Alliance. And as I said, over the years, this cooperation have proven to be very good. The ecosystem thinking is something that we strongly believe in enabling our customers to have a much more flexible versatile use and, again, the sustainability aspect there. And we have, of course, also taken in the news of their shareholding in Husqvarna in the recent days the last -- from last week, but we have no further information of what any potential ambitions from Bosch would be. Thank you very much. A quick clarification from Henrik. What was your sales volume target for CEORA for 2022? And is it right that you're not putting out a specific number for 2023? Our ambition for CEORA was to reach above 1,000 units in 2022, and we achieved that. We were above the 1,000 units. So, definitely on track from that perspective. I don't think -- for 2023, I don't think we've ever been specific on a given number. I mean, yes, there's been numbers around, but I don't think we have officially communicated anything. But what I would say is it's a significant increase and a ramp-up from that 1,000 units. And as Pavel mentioned earlier, demand is strong. It's been very well received in the market. And now we bring the low-cutting deck to the market as well, which will even further enhance the application and demand for the product. So, we're very confident about CEORA, and we're very proud of the product. A follow-up there on CEORA from [Stephen Walker] (ph). With CEORA, are you seeing any competition out there today? Or is it more you're competing with more traditional larger ride-ons? Yes. There are certain attempts to enter into the professional segments also from other competitors. We, at this point of time, do not really see any strong competition. And I would say that still mainly the competition is among the traditional ride-on products that are out there. Yes. Another one from Nicolas at Moneta. Your SEK1.8 billion in restructuring cost that you have taken out of the SEK2 billion, how much is cash? And how should we see, I should say, cash impact here going forward through the years you are executing on that? At the moment, it's purely a provision booked into the accounts as in accordance with accounting principles. So, at this moment, a very little is actually cash-out. We believe, over the course of the next two, three years, there will be approximately SEK900 million of cash-out. But within the 2022, nothing really or very, very small. 2022, there's been very little. 2023, there will be some, a small amount, but some. Yes, good morning. Karri from Handelsbanken. Two questions from me. First is regarding your EBIT bridge. These transformational initiatives that I think the total was close to SEK400 million in 2022. Can you discuss or give us a few specific examples what are these initiatives? And then, maybe an outlook for 2023? Will these investments accelerate, stay flat or go down compared to last year? That's my first question. Yes. Hi, Karri. What is in that? I mean, if I just was to give you an example, it would be something along the lines of our robotic investments. So, for example, CEORA investments would be in there and some of the go-to-market investments, electrification, those type of things are already in there. And I think we talk about, on average, some SEK400 million to SEK450 million in transformational initiatives every year. So, we don't -- we expect to maintain those kind of levels, maybe a little bit higher. And then, as we execute on our acceleration program, then we will increase that, and, as we stated earlier, an incremental SEK400 million per year once we get to 2025 and achieve the savings and so on and so on. All right. Thanks. That's very helpful. Then the comment that you made about reducing installed capacity as a part of this restructuring program that you are executing, when should we expect to see something on that front? And are you referring to potentially closing down some of your factories? Well, as we, of course, ramp up our investments into the areas which are our, let's say, future value-creating levers, we, of course, also have to adapt our overall operation where we are predominantly petrol-based. Our ambition to adapt this is, of course, the whole organization, but then also manufacturing units. Now we are producing in a number of places in the world. And we are right now looking into how do we actually ensure that we have the best possible efficiency within the units that we have, how do we can -- how do we in a good way consolidate, how do we get the scale and the efficiency out of that. And the exact conclusion on any potential close down of units is something that will come later. And eventually, that is also something that will come towards the later period of the three-year program. All right. Thank you. And then finally, what's your go-to-market plan for NERA, the virtual boundary lawnmower? Are you doing a Europe-wide launch in 2023? Or is this more of a local launch at this point or regional launch at this point? Yes. Hi, again. I was just curious a bit talking about this NERA and then the consumer robotics. We, a few years ago, talked a lot about the U.S. opportunity. What are you seeing there? Any changed ambitions in the U.S. consumer robotics now potentially with this NERA technology? I think you have some competitors entering the U.S. robotics like Toro with their plans around the visual site sort of robot as well? Do you think it will support the market to finally take off? Or have you become more cautious to the U.S. opportunity again? Thanks. Our ambition for establishing robotic mowing in the U.S. continues, of course. We have done a good progress in the past year with our products. We also see that CEORA is very well received as a professional product on the U.S. market as well, so not only in Europe, but also in the U.S. We continue to launch new products there as well. We continue to invest in go-to-market. We continue to invest in our dealers to be able to help us with the establishment of the auto-mower market. We do not really see that competition yet. We know that there's a lot of competition being marketed, but we do not really see it in the market. But I think that once it would come, I would say that it is a mixed feeling about that, because on one hand, it is competition; but on the other hand, yes, I think it will help us to build the acceptance and understanding of the robotic mower in the U.S. But overall, our ambitions are there. They are remained for the U.S., but please also be aware of the fact that there are also other markets which have a low penetration of robotics as of today, in Europe, U.K., for example. You also have Australia on the other side of the globe. And we can also increase our penetration in other European markets as well where we already have the product. I think it's just also worth pointing out as well, you referred to the Toro robot coming in North America, that's actually a residential robotic, not a professional robotics. So, we don't see that as competition against our CEORA, but of course, competition against maybe perhaps our residential robots. But I think it's worth clarifying given the Toro brand is normally a professional brand. Yes, that's good. Then on the subject of U.S., Orbit, are you seeing any synergies from Orbit and Gardena this season? Or will that be further out? I think you have mentioned you want to take the Gardena robots into the U.S., for example, through Orbit's distribution network or retail partners. How is that looking this season? Yes. Well, if we start on the 2022 side then, we have, of course, worked with Orbit to ensure that the integration into the group suits well. As we have pointed out, Orbit has certain difficulties on the cost side, on the supply side, but the demand for their products have been there, and they had a good growth throughout the year. They are now launching a number of new products. And we continue to believe that Orbit will make a good platform for the Gardena brand launch into the U.S. And of course, we will be planning to address this with robotic mowers as well. And the exact details of how to, let's say, tap into the existing channel partner structure of Orbit and potentially also how to coordinate this with the establishment of robotics through the Husqvarna Forest & Garden Division in order to actually have a larger, should we say, penetration and awareness in the market, those things are still being worked on, but they will come. Okay. Excellent. And then just finally, you had this chart on connected devices going from, it looks like, just below 3 million last year to 3.6 million. The delta here, is that Orbit's installations, primarily of connected watering systems? Or is it the robotic volumes in 2022? Okay. Thank you very much. We have a few additional questions over the web here. But since the time has become 11, we will reach out to you through e-mail and answer them separately. So, I think with that, we take the opportunity to thank you, everyone, that was -- joining here today and looking forward to see you soon again. And if not, we will talk to you when we report Q1 in April then. Thank you very much.
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Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth Quarter 2022 Earnings Call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on Credit Acceptanceâs website. Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation fourth quarter 2022 earnings call. As you read our news release posted on the Investor Relations section of our website at ir.creditacceptance.com, and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of federal securities law. 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 the cautionary statement regarding forward-looking information included in the news release. Consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, I should mention that to comply with the SEC's Regulation G, please refer to the financial results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures. Our GAAP and adjusted results for the quarter include unit and dollar volumes grew 25.6% and 26.2%, respectively, as compared to the fourth quarter of 2021; a decrease in forecasted collection rates for loans originated in 2021 and 2022, which decreased forecasted net cash flows from our loan portfolio by $41 million or 0.5%. Adjusted net income decreased 26.6% from the fourth quarter of 2021 to $156 million. Adjusted earnings per share decreased 17.7% from the fourth quarter of 2021 to $11.74. Stock repurchases of approximately 8,000 shares, which represented 1.6% of the shares outstanding at the beginning of the quarter. At this time, Ken Booth, our Chief Executive Officer; Jay Martin, our Senior Vice President, Finance and Accounting, and I will take your questions. Thank you. [Operator Instructions] The first call, questions I have is coming from Moshe Orenbuch of Credit Suisse. Your line is open. Great. Thanks. I'm hoping you could give us a little bit of, kind of a help understanding you've had after several quarters of kind of write-ups of your cash flow expectations, the last three they've been down and mid-40s, 80s and now 41 again. How do we think about like where you're sitting in this process? Like how is that and how should we think about how that affects the yield on the adjusted earnings basis? Well, we update our forecasts based on primarily loan performance and how loans with the same attributes have performed historically. So what we've seen I believe for the last three quarters is that loan performance was actually a little bit worse than expected. At the end of the preceding quarter, that's caused our forecast of future net cash flows to decline a little bit. So where we're at, I think, is impossible to say, that what happens to our forecasting collections and therefore the adjusted yield on our portfolio is really dependent how long performance is in the future. But we did that. We have volume in there for the first 28 days of the month, but we don't have anything particularly. And then Doug, the other element is that the level of originations you just mentioned, I mean, it was up a little bit in January and units, but was kind of flattish to slightly down a little bit in terms of where it was in the fourth quarter. And the spreads don't look like they got any better. Can you kind of characterize it for us sort of the competitive environments. I think there are some people that would have expected by now to see that competitive kind of balance shift away from some other originators. So I guess where are you seeing and can you kind of talk about that a little bit? Well, I mean, I think we had a strong fourth quarter from an origination perspective. And through the first 28 days of January, we had strong originations as well. So I think that the numbers we put up from origination perspective, really the third and fourth quarter and thus far in January indicates that the competitive environment has improved. Got you. And the spreads that you're able to achieve and that was the difference between what your -- for [indiscernible] collections in your -- what you pay for the loans? The spread -- we modified a table in the press release this year to show you or this quarter to show you what spread was based on the initial forecast and what the spread is as of December 31, 2022. And really since 2017, the spread has been approximately -- the initial spread has been approximately 20%. The variability you've seen there has been primarily due to loan performance being different than expected. In â19 and â20, it was -- well performance is better than expected that had a positive impact on the spread. And then in 2022, with loan performance, that's probably the worse than expected that will put a bit of pressure on the spread. Our initial spread in Q4 was certainly better than it was in the first three quarters of the year. But that's a relatively unseasoned book of business. We'll just have to see what happens to loan performance. Got it. Thanks. Then last one for me. I mean, the first three quarters of every year you filed a Q along with the earnings release obviously in the fourth quarter, the 10-K takes a little while longer. Given all the activity this quarter, any chance that we'll get an update on kind of the legal and regulatory situation before the K is out? And then I can talk a little bit about right now, we generally don't comment on access litigation, but I'll say, we disagree with the allegations on the complaint. We intend to strongly defend ourselves and the pending lawsuit. There was a time consumer (ph) with the regulatory expectations were more clear and enforcement was for companies that didn't take compliance seriously. This lawsuit in my opinion reflects a different approach. For the company, we always strive to comply with extensive primary to laws, regulations, the governor industry and we work hard to do what's right. When you think about our industry and we provide financing options to dealers nationwide that enable dealers often opportunities and millions of consumers who are kind of impaired or kind of miserable. There's approximately 30% of all consumers, which is 67 million adults that are credit score below 670, which is credit impaired. There's millions more that are credit visible. Now if the allegations of the lawsuit are credited, there would be a significant impact on the finance industry and all these consumers across the country. So we'll be addressing them with the court during the course of litigation. But again, we disagree with the allegations and we intend to vigorously defend ourselves. Thank you. One moment while we prepare for the next question. And our next question will be coming from John Rowan of Janney. Your line is open. Well, since you're willing to speak about the lawsuit a little bit. I figured I would just ask -- or just to make sure that everyone understands and maybe just get your take on it. Obviously, you can read the complaint, we can see what the maintenance of it are. When you settled with Massachusetts, I just want to make sure there was nothing in that settlement that had anything to do with user laws, right? The settlement isn't totally clear, but it looked like it was two technical issues that one was a Massachusetts specific requirement. And another one is about posting some resale value on our repossession. There was nothing that you settled in Massachusetts from the main charge of user that you settled for, if I'm not mistaken. Okay. So just moving past that. Obviously, there was a little bit of a jump up in G&A expense. Was that there anything to do with legal expenses? Okay. The provision expense, is it safe to assume that excluding forecast changes that it's in the $90 million run rate based on the growth that you're putting on? It was less than that in the -- it was less than that in the fourth quarter. The new loan provision was $60 million, but again, keep in mind that unit volumes in the fourth quarter are typically in a kind of a seasonal low. Okay. And then just again, to go back to the competitive environment, obviously, fourth quarter -- the funding markets for most subprime ABS were higher in disarray or at least the spreads are really, really wide, but we've seen a little bit of a retrenchment here in January. There are a lot of subprime ABS deals that have come out. Spreads are quite a bit lower than they were late last year. I mean, is there anything that we can read through to the competitive environment? And how do you help us think of how this fits with you guys in a cycle that brings some spread back to you guys if this would be any indication of more competition there with more -- less risk adverse funding markets? Thank you. Yeah. I mean, potentially, that causes the market to be a little bit more competitive. I mean, you're right, the market tone this year has been more constructive. You still have a situation where base rates are elevated and credit spreads, though not as high as they were in Q4 are certainly higher than they were for a number of years. So, we'll have to see what happens, but it's conceivable that the competitive environment could become a little bit more intense if the funding markets continue to be constructive. We'll just have to see how it plays out. Thank you. One moment while we prepare for the next question. Next question will be coming from Rob Wildhack of Autonomous Research. Your line is open. Hi, guys. Just one more on the funding market. Given your origination growth and the better spreads now, why not tap the ABS market yourselves? Well, we certainly intend to. But at the end of the year, we had about $1.6 billion in unused availability at our committed revolving credit facilities. So a very strong liquidity position. But I mean that's something we'll do at the appropriate time. Okay. So safe to assume and to tie it back to New York State, there's nothing in that lawsuit that would preclude you from continuing to tap the ABS market, right? Got it. And then to switch over. In the press release, you called out forecasted profitability on a few different vintages. Can you define that for us? And then I'm kind of wondering why forecasted profitability for the '22 vintage would be significantly lower, but the forecasted collections are only like 1 percentage point lower than initial. Yeah. I mean forecast and profitability, the way we're defining it there is really forecasted economic profit. The non-GAAP financial measure we referred to in the press release. Relative to 2022, it just were -- it was a pretty low standard for significantly. It's basically a tenth of the percent in the collection rate which is it's arguable whether that's significant or not, but that's the standard we've chosen to use. I'm sorry, 1%. Okay. So 1% on collections is significantly lower in '22. Okay. Got it. And then one more. On past calls, you've said that when you're growing originations, you probably buy back less stock. This quarter, you were able to kind of do both. What's going on there? And how should we think about share repurchases if you do continue to grow in '23? As weâve said before, the first priority is always to make sure we have the capital that we need to fund anticipated levels and originations. So thatâs going to be the first priority. In terms of share repurchases, I think it just depends on how the capital markets function, what our growth rates are and things like that. But the first priority will always be the funds to levels of loan originations. Thank you. One moment while we prepare for the next question. Our next question is coming from John Hecht of Jefferies. Your line is open. Good afternoon, guys. Thanks for taking my questions. You touched on earlier with a set of questions about the last three quarters, write-downs in cash flows. I'm just wondering, what do you -- like do you guys think about an attribution for that? I mean, is it tied to structural factors on the loans recently? Is it tied to inflation? Is it because asset values are declining? Do you have a sense for the causation of that over the recent quarters? It's tough to say precisely, but I think it's likely primarily the impact of inflation on a subprime consumer and then declining vehicle values for the last six, seven, eight months. And then, I mean, I don't know if you're willing to do this. But I mean, obviously, you guys are probably in communications with your dealer partners all the time on your comments about inventory levels and purchase kind of volumes. Is it your perspective that kind of the worst is behind the dealers, meaning that this system is starting to stabilize or do you guys think there's more to come in terms of reduction of demand and reduction in part prices? How do you think about the what's your kind of forward perspective? Used car price is a decline, which has helped address affordability issues the inventory situation is better than it was, but it's not where it was pre-pandemic and used car prices are still elevated. Where it goes from here, I think is anyone's guess. We don't have the ability to predict the future. So we'll just -- we'll have to see. So with that in mind, I mean, maybe it seems like a more confusing picture. Would you consider yourself a more selective or is there ways for you to tighten given that uncertainty or is it just sort of just keep eyes wide open and is a day-to-day thing? I mean we always build a very significant margin of safety into the way we price our loans. We recognize that if you're writing a 60-month volume, there's a whole host of things you can't predict that will occur over the next 60 months. What will inflation do, what will unemployment do, what will used car prices do. So the way that we address all those uncertainties is by building a significant margin of safety and the way that we price. We're writing business that generally produces very high returns, and we price our business so that if loan performance is worse than expected, our loans are still highly likely to be profitable. Thank you. One moment while we prepare for the next question. Next question will be coming from Ray Cheesman of Anfield Capital. Your line is open. Thank you. Doug, just following up on John's question. As you look forward now, I'm guessing you have a model of what you expect the world to do. I'm wondering, if you would be willing to share any of your modeling assumptions like where do you think unemployment will be at the end of the year or where do you think the 10-year will be at end of the year, the things that would drive that CECL model? I mean, like I just said in the last question, there's a whole bunch of things that are unforecastable. So we don't attempt to forecast the things that are unforecastable. We just address those uncertainties by pricing our loans of the big margin of safety. So when we put together our forecast of future cash flows, they're based on actual loan performance and the historical performance of loans with similar attributes and those forecasts historically have been pretty accurate. As we proceed into 2023, and we read a lot of the press from the various talking heads about lower tax rebates and exhaustion of savings. Is your expectation that your pricing and risk adjustments are underway to protect you? So you're adjusting your terms on the fly and you're maintaining margins and maintaining profitability and -- it's just that over the course of the last couple of quarters, the water seems to the â the tide is going out on the economy. And I just want to make sure that I'm confident you guys are greedy as historically, I'm sorry to say it that way, but you're a highly profitable company, and I just want to make sure that CACC stays that way. Yeah. I mean we -- when we're making decisions about how to price our loans, we are certainly considering what we are experiencing from a loan performance perspective. And then just one more, the fact that the used car market is dropping, I guess I saw recently, Ally (ph) expects 13% and other people expect between 10% and 20% that's not great news for prior vintages, but it actually should be good for growth of future vintages, right? Thank you. One moment while we prepare for the next question. [Operator Instructions] Our next question will be coming from [indiscernible] of Bank of America. Your line is open. Doug, this is Shane (ph) from Bank of America. Thanks for taking my question. So I just -- I think your bonds now are kind of trading in the low-90s. And you talked about capital allocation with a focus on investing and maintaining enough to originate your growth in volumes next year or this year. But with the bonds in the low-90s, could you look to maybe be opportunistically addressing some of the maturities before they come due in 2024? Conceivably, we've explored retiring some of the bonds early. Obviously, have elected to do anything thus far, but we've taken a look at that. And we'll just have to weigh the attractiveness of that alternative with the need to invest in new loans. Thanks. And then I guess, previously, you had filed the 8-K expecting the New York lawsuit. I guess, have you had any -- or seen anything from any of the other states potentially suggesting that they are moving forward with lawsuits or you haven't really seen anything new come across yet? Thank you. One moment while we prepare for the next question. Our next question is coming from Christopher Ryan of Radcliffe. Your line is open. Hi. Thanks for taking my question. Just is there any timeline known right now about the New York CFPB lawsuit they can give us? Thank you. That concludes today's Q&A session. I would like to turn the call back over to Mr. Busk for any further additional comments or closing remarks. We'd like to thank everyone for their support and for joining us on our conference call today. If you have any additional follow-up questions, please direct them to our Investor Relations mailbox at ir@creditacceptance.com. We look forward to talking to you again next quarter. Thank you.
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Good afternoon. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the SkyWest, Inc. Fourth Quarter and Annual 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions] Thanks everyone for joining us on the call today. And as the operator indicated, this is Rob Simmons, SkyWest's Chief Financial Officer. On the call with me today are Chip Childs, President and Chief Executive Officer; Wade Steel, Chief Commercial Officer; and Eric Woodward, Chief Accounting Officer. I'd like to start today by asking Eric to read the Safe Harbor, then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results, then Wade will discuss the fleet and related flying arrangements. Following Wade, we will have the customary Q&A session with our sell-side analysts. Eric? Today's discussion contains forward-looking statements that represent our current beliefs, expectations and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward-looking statement. Actual results will likely vary and may vary materially from those anticipated, estimated or projected for a number of reasons. Some of the factors that may cause such differences are included in our 2021 Form 10-K and other reports and filings with the Securities and Exchange Commission. Thank you, Rob and Eric. Good afternoon everyone and thanks for joining us on the call here today. Today, SkyWest reported a pretax loss of $62 million or $0.93 per share in the fourth quarter of 2022. Reflecting in those results were $69 million of deferred revenue related to successfully amending the majority of our flying contracts, $36 million noncash impairment on 10 CRJ700 aircraft and an $11 million accelerated lease expense. We expect moving forward, we will be discussing deferred revenue regularly until the fleet utilization normalizes. Despite the noise in the fourth quarter, I want to point out that over the past year we have set ourselves up to be a fundamentally different and better company. We have done this by focusing on the core areas of our business that will help us set up for growth in 2024 and beyond and ensure we have a solid sustainable future. These fundamentals include: enhancing our partnerships and arrangements to adapt to a new industry and ensure we continue to deliver on our partner's needs; two, shoring up our operating processes and IT systems; three, effectively and efficiently utilize our industry leading fleet flexibility today and in the future. Four, maintaining a healthy and strong balance sheet, which is a key SkyWest differentiator; and last and most importantly continuing to ensure that we take care of our people and create value for our shareholders. We are confident our ongoing execute of these fundamentals will ensure we're able to deliver value for all of SkyWest stakeholders. As we discussed last quarter, we invested heavily in our people throughout 2022, including increased pay for nearly every work group when finalizing a pilot agreement in the third quarter. While this pilot agreement represents a significant cost increase, we are pleased to have worked with the majority of our partners to amend our contracts to help offset these higher crew costs. We continue to strengthen our partnerships and we appreciate their continued support and deep engagement in our efforts in the new environment. We remain committed to working with our partners to evolve, adapt and provide strong solutions to their needs. Our focus on dual class flying continues to deliver with 83% of our flying now dual class. We took four E175 aircraft in the fourth quarter and are expecting three more by the middle of 2024. Additionally, as we near the end of this fleet transition CapEx cycle, this leaves us capacity for growth and drives free cash flow within the existing fleet. The pandemic fundamentally changed our industry and our ongoing environment. We have spent the past couple of years identifying vulnerabilities and refining and reinforcing our operation and systems. Post pandemic realities have had an impact on every aspect of our operation from fuel supply and airport staff to lodging and accommodations for our crews, We spent a large part of 2022 ensuring that we have the resources, processes and systems in place to run the most reliable operation and to mitigate negative impacts on our people and our customers. We also remain transparent with our partners about our constraints and are disciplined in ensuring we deliver on our commitments. As we've seen throughout the industry, over commitment without the ability to execute is a recipe for disaster. As a result of our continued focus, I can proudly say our teams delivered some of the strongest operating performance in 2022 with over 99.9%% adjusted completion for the fourth quarter. This performance included the peak Christmas holiday travel period during which we experienced severe winter weather. In fact, SkyWest experienced severe weather disruptions in every key location across this geography. But we were able to proactively manage through this challenge with extensive planning and resources and as a result of our teams -- as a result of our teams delivered exceptionally well to get 2 million passengers safely to their destinations between December 16 and January 2. I also want to commend SkyWest people for over 180 days of 100% adjusted completion for the full year in 2022. Our teams have done a tremendous job as we develop the new normal and continue to provide the best product in the regional industry. Thanks again to all of our amazing people. We're making good headway in our captain imbalance and we're cautiously optimistic as we plan for the years ahead. We continue to fill our new hire pilot classes and are maximizing our training resources with priority on upgrades as we work to rebalance our crews. SkyWest is clearly recognized as one of the most desired career destinations. We continue to believe it will take some time over the next couple of years to rebalance our cruise and restore production and full utilization of our highly accretive fleet. As we rebalance, our ability to restore even a portion of production becomes accretive within our existing fleet mix. We've made great progress with our SkyWest charter entity and once operationally ready, we expect to conduct charter flights in the second quarter. SkyWest looks forward to raising the bar in the Part 135 space with the implementation of several proven safety programs not required within Part -- existing Part 135 operations. This entity represents another strong opportunity to utilize existing assets and deliver critical service in small and underserved communities. Overall demand for our products remains stronger than ever. As we execute on our business fundamentals, we remain laser focused on executing reliably for the long game and ensuring we are best positioned to respond to opportunities and the exceptionally strong demand for our products. Today, we reported a fourth quarter GAAP net loss of $47 million or $0.93 loss per share. Q4 pretax loss was $62 million. Our weighted average share count for Q4 was $50.6 million and our effective tax rate was 24%. First revenue, total Q4 revenue of $681 million is down 14% sequentially from Q3 2022 and down 12% from Q4 2021. Q4 revenue breaks down with contract revenue down 14% from Q3 and down 11% from Q4 2021. Prorate revenue was $81 million in Q4, down 15% from Q3 and down 26% from Q4 2021. Leasing and other revenue is up 3% sequentially and up 6% year-over-year. These GAAP results include the effect of an increase of $69 million of deferred revenue this quarter compared to $13 million released in Q3 and $23 million that was released in Q4 2021. As of the end of Q4, we have $125 million of cumulative deferred revenue that will be recognized in future periods. Let me move to the balance sheet. We ended the quarter with cash of a little over $1 billion, up slightly from last quarter. Our CapEx during the fourth quarter was $111 million for four new E175 aircraft and other fixed assets. Total 2022 CapEx was $645 million including the purchase of 25 new E175 aircraft compared to $556 million in CapEx for 2021. We ended Q4 with debt of $3.4 billion up from $3.1 billion as of year-end 2021, with this increase driven by the 25 new 175s delivered and financed in 2022. Just a reminder that the only government debt we have on our balance sheet is a total of $201 million in PSP 10 year unsecured no amortization low coupon loans. Let me say a couple of things about liquidity. As of December 31, 2022 our cash position of $1 billion included the effect this quarter of repaying $110 million of aircraft debt. Additionally, we added $78 million of debt financing the four new E175s delivered during the quarter. We also have over $1 billion of unpledged collateral that could be deployed for additional liquidity if ever needed. Additional flexibility comes from the fact that including partner owned aircraft 50% of our fleet in service has no financing obligation. Consistent with our policy and practice, we are not giving any specific EPS guidance at this time, but let me give you a little color. Last quarter, I stated that we expected Q4 earnings to be down from Q3 levels, but still be slightly profitable. Q4 actual results of a pretax loss of $62 million included the following items not factored into last quarter's comment. Number one, $69 million of revenue deferred in Q4 related to the successful amendment of the majority of our flying contracts. Number two, a $36 million impairment charge on 10 CRJ700s that were placed into a held for sale arrangement during the quarter. And number three, $11 million in accelerated lease expense on 21 CRJ aircraft being stored prior to lease expiration. Consistent with last quarter's comments, we currently expect total 2023 results to be down from 2022, but remain modestly profitable before the effect of roughly $60 million per quarter in deferred revenue in 2023. This new deferred revenue expectation in 2023 comes from future variability in the fixed monthly reimbursement component of our newly revised flying contracts, the future shift to a partially variable model for fixed month reimbursements is causing this timing difference for GAAP where cash is received before the revenue is recognized. The revenue deferred will be fully collected in cash in the quarter deferred with performance obligations fully met and the cash is not refundable. Excluding the effect of this estimated $240 million in deferred revenue in 2023, we expect a modest GAAP profit in 2023. We expect this deferred revenue balance will reverse by approximately $10 million to $15 million per quarter in 2024 with $240 million of this balance expected to reverse by the end of 2026. In spite of the GAAP loss expected in 2023, there are seven points would like to call out. The fleet in place today can accommodate large future growth without more capital investment. Wade will give more quantification around this in a minute. We expect CapEx to be down over $400 million year-over-year in 2023. We expect cash at the end of 2023 to still be near $1 billion including expected debt repayment in 2023 of $450 million. We expect debt at the end of 2023 to be below 2019 levels with ongoing annual principal reductions expected to be over $400 million. Our leverage at the end of 2023 could be the lowest in the last five years. Debt net of cash at the end of 2023 could be $500 million lower than at the end of 2019. This CapEx reduction could drive the best free cash flow in the last five years. We believe that our strong cash position and the actions we are taking now to prepare the way over the next couple of years for incremental utilization of our fleet to work through the pilot imbalance affecting the industry and to preserve the optionality of monetizing strong demand opportunities over time will position us well to drive total shareholder returns. Wade? Thank you, Rob. I'll provide a fleet and production status update as well as an update on our charter, prorate and leasing businesses. As we've discussed, we are nearing completion of our strong delivery schedule. We previously announced an agreement with Delta for 16 new E175s. During the quarter, we took delivery of four aircraft for Delta, bringing us to 13 of those 16 aircraft. We anticipate taking delivery of the last three Delta aircraft at the end of 2023 and the middle of 2024. After we receive these aircraft, we will have 87 E175s under long term contracts with Delta. We have an agreement with Alaska to add 11 E175s to our contract, of which we have received 10. We anticipate taking delivery of Alaska -- the last Alaska delivery in the middle of 2025. We currently have 42 aircraft under long term contracts with Alaska. Following delivery of the remaining four currently on order, our E175 fleet will be 240 aircraft. As we discussed last quarter, we came to an agreement with our pilots on a new pay package during the third quarter, which is a significant cost. During the fourth quarter, we came to an agreement with most of our mainline partners on addressing these new costs. We appreciate their support in this additional cost reimbursement. As Rob mentioned, we anticipate differing $60 million per quarter of revenue during 2023. This is primarily related to turning the fixed reimbursement to a variable rate towards the end of some of the contracts. The fixed rate does not turn variable for several more years. The cash will be fully collected. There will be no additional performance obligations after the flight is completed and we will have reconciled the monthly invoices with our partner. We put the emphasis on optimizing economics, cash flow and risk mitigation. We chose cash flow and risk mitigation over a better account, Let me review our production. The fourth quarter block hours were down by approximately 12% as compared to the third quarter. Based on the current schedules we have from our major partners, we anticipate that our block hours will be down approximately 3% to 4% in the first quarter as compared to the fourth quarter. As we look to the full year of 2023, we anticipate that our 2023 block hours will be down 19% as compared to 2022. As we look to 2024 and beyond, we can add approximately 30% more block hours to our ERJ fleet without any additional aircraft. This same number is over 40% for our CRJ fleet and makes each additional block hour very accretive to the model. Given our conversations with our partners, they are very engaged in supporting our efforts to restore production. Let me give a brief update about the status of SkyWest Charter, our new charter business. In June, we purchased a Part 135 aircraft carrier. Shortly thereafter, we applied to the DOT for commuter authority to operate scheduled public charters as permitted by both the DOT and FAA. The commuter authority application primarily is meant to demonstrate the fitness of the carrier in terms of financial, managerial and operational matters among other things. We believe SkyWest Charter is a well-capitalized entity and has some of the best operational leaders in the industry. We have provided the DOT with all the information they requested and are waiting for them to approve and issue the commuter authority. Regardless of the status of our commuter application, we are moving forward with our plans for SkyWest Charter to operate on demand charters under its existing DOT authority once we are operational -- operationally ready. We anticipate that our first revenue flights will be in March or April of 2023. As far as our prorate business, the demand has been extremely strong just like the rest of the industry. We have seen very strong yields and great community support. We will continue to work with the communities on the best way to continue our service. Shifting gears to our leasing business. We have a total of 40 CRJ700s and 900s under long term leases with third parties. This line of business has very good cash flow and strong margin characteristics. Demand for our engine leasing business is returning. We placed a few more engines under third party leases last year and anticipate placing several more engines under leases during 2023. The demand for our engine leasing business will not fully be realized until the flying levels for the regional industry start to rebound. During the quarter, we also made the decision to part 21 CRJ aircraft prior to lease expiration, resulted -- resulting in an accelerated lease expense of $11 million. We also are having success in selling some of our excess CRJ assets. During 2022, we sold over $7 million of assets and we currently have signed letters of intent to sell approximately $20 million of assets. We anticipate these transactions will close during the first and second quarter. We have spent the last several years reducing risk and enhancing fleet and financing flexibility to ensure we're well positioned. We are committed to continuing our work with each of our major partners to provide creative solutions to the continued exceptional demand for our products. Hey, good afternoon, everyone. I'm just kind of curious on the pilot front that you said kind of cautiously optimistic. I wonder if you can help provide a little bit more color. It seems like -- I know you said it's going to probably take a couple of years to kind of get back to kind of full operations that you saw before, but just curious if you can provide a little bit more color on the cadence there and what level you think you might exit 2023 with? Yes. Thanks, Savi. This is Chip. That's a great question. And when we -- we spent most of our time evaluating like we've done in the past, particularly through 2022, we didn't give any specific numbers, but we can kind of give you how we feel about what's out on the horizon. We are, I would say, growing in optimism, yet not ready to do a wholesale change in our data or models going forward. But I think that there's some things within the tone of our existing pilots. What's happening in the environment out there that we're gaining -- being cautiously optimistic about how we can do it. I think that the big thing is that, 2022 is a big year, we lost a lot of pilots, specifically cabins and it just takes a lot of time to mathematically get back to the math that where we can increase our utilization 30% to 40% compared to where we are today. So I would say, that's about as much as we can say today. I think we're -- certainly when we've got with the new pay package that's helped quite a bit, but until we get some more data closer to summertime. We're not ready to really make a big modification in our models. That's helpful color and especially around the timing of when you might have a better idea. Thanks, Chip. And then just on the asset sales, I was curious what type of assets you're kind of taking off the books right now? And just any general kind of thoughts on where you want the fleet to be over the next couple of years? Obviously, the E175 fleet is what it is and will get to 250. But just curious on the CRJ fleet, what are the moves that you'd like to do and how you'd like to size that? Yes. Savi, this is Wade. So as we said there, we did have some excess and we do have some excess CRJ assets. They are primarily CRJ200 assets that we are selling right now. There's good demand right now in the market for those assets. They -- people like assets that have been well maintained and have good engine time on them. And so we are able to monetize some of the assets out there. There is some demand also for some of our CRJ700s as well, but primarily what we have sold and what is under letters of intent are CRJ200 assets. Yes. Hey, Good afternoon. Just a couple here. Just the 21 airplanes that were parked, the lease CRJs, what's the model? Yes. Mike, this is Wade. There's a combination of assets in there. We have one big lease structure that's remaining. And these are primarily CRJ200 and CRJ700 assets. Okay. And just given the fact that I always was under the impression that the CRJ200s would be the first to go and the fact that you have some 700s there and then you have another 10 that are available for sale. What's going on? Is it just they're getting pushed out by the better E1 70, E175? Is it CRJ900s? What -- I figured that these would be valuable assets you'd want to hold on to them. Yes. The majority of what we are getting -- what we are selling right now are CRJ200s for sure. There are some pockets of some CRJ700s. We -- right before COVID, we purchased some CRJ700s for some extremely good prices and we are able to flip those at good values. And so we are going to be in the marketplace if there are good assets that we can trade where we have some excess CRJ700s, we will look at those and we'll start trading some of those. Mike, this is Chip as well. I think it did not get too lost in what's hitting the for sale block we still have a tremendously large base of both CRJ700s and CRJ200s and not only a large base of it, but a large buffer of aircraft we can still fly before we get to these. So I think from our perspective, as we manage the assets, these are assets that I think itâs good for us to put in a for sale scenario because we don't see that we have so many still leftover that we can utilize over the next two to three years. I think it's just smart asset management to kind of see what other people can do with this stuff and the response has been pretty good. So it's good cash flow as well, particularly if we don't likely think we're going to get back to flying them many times soon. Okay. That's helpful. And then just one more before I get back in the queue. Just to talk about the deferred, so it's $240 million deferred, right? $60 million per quarter, and then it releases $10 million to $15 million, so let's call it $10 million, that's your two years 2024, 2025 or 2025, 2026. Just trying to think. I guess it maybe [indiscernible] slower rate? Yes. Mike, let me help you with that, Mike. So yes, for 2023 we're expecting a deferred -- revenue deferred of about $240 million that's the $60 million per quarter. Over the years 2024 through 2026, we expect $240 million to be reversed. Okay. What about -- so we had $69 million in the fourth quarter, which I think, Rob, you said that brought the previous deferred amount up to $125 million, does that also bleed out? So does that -- that no longer builds. Right? Does that offset the $240 million. I'm just trying to figure that other component there? Yes. So the $125 million is the ending deferred balance as of the end of year. 2023, we're saying that there's going to be another incremental approximately $240 million. And then starting in 2024, it starts to reverse and bleed off. [Multiple Speakers] Itâs $10 million to $15 million over, you know, 36 months instead of 24 months, that makes sense. Okay. Now I have that -- I have that figured out. That's great. Thank you. Hey, thanks. Rather than the accounting treatment, can you just expand a little bit on why this variable versus fixed component of your contracts makes sense. What drives a higher reimbursement versus a lower reimbursement in the future or I guess revenue rec in the future? Yes, this is Wade. So a great question. So what we tried to do in all these agreements with our partners. We tried to optimize cash flow and risk mitigation, right? And so what we focused on was the next several years, there's not really much of a change, but as we get into some of the back end of some of these contracts, some of the fixed rates will turn more variable, right? And at that point in time there is some anticipation that the utilization will be back to normal. So really the way the economics are working on this, the cash flow is going to be good and reimburses for the costs that we're incurring now. But there is some anticipation that the utilization will go up in the future. And just the shape of the recovery is really bringing in the revenue that's how the block hours -- it is based on the block hours that we fly is how the revenue gets brought back in. Okay. So effectively removing minimums towards the back end of the contract, but the expectation that you're going to well exceed those minimums at some point down the road. Okay. And then on the down 19% on block hours next year, can you just speak a little bit, is that kind of base case or is that conservatism? Is this your upper limit? Is that what your staff to support? Or are there kind of staffing events that could unfold over the course of the year that could take -- that could give you a higher level than that down 2019? Yes. So I would say that 19% is a very good predictor of where we think attrition is going to be combined with development of cabins in 2023. If the attrition levels, like I said earlier, go to last year's attrition levels, then it would be less than 19%. If we gain some -- like I said, we're going to have to see how this plays out closer to summer, but we're optimistic of what the ratios are today. And if those continue to hold, which I don't know that they're going to hold perfectly, then there could be some upside of that 19% by the end of the year. But I think the factor is when we're sitting here in January and February, these are not great predictive, these were lower than last year -- these were lower than last year's January and February by a fair amount, but we want to see what's happening in the springtime going in through summer and see what that is. But again, look, the mood of pilots, the horizon of what we can kind of see out there. It feels a lot different this year than last year, but we're not ready to do a wholesale model and that's kind of how we got to the 19% but there's -- it's probably a number that we're not going to hit one way or the other. We just don't know which way perfectly how that's going to go until we get closer to summer. Thanks very much, operator. Hi, everybody. Thanks for the time. So just two questions. One, can you actually be more specific on attrition? What was attrition last year and what does it look like currently? Yes, Helane, this is Chip. I'm sorry, I can't, those are kind of some things that we've decided to make sure that we keep kind of with us and our partners and we have some confidence, we have relative to a lot of our contract. But I will say that, like I indicated to Dwayne earlier, so far, December, January and February are less than they were last year. And when we have the pay package that we have this year, we see tremendous demand for folks to come to SkyWest. And there's a lot of things we hear anecdotally about pilots that have left and want to come back, a lot of pilots that have had commitments to leave and turn them down and stay. So look, the only thing that we can say is that attrition is not quite as bad as it was last year and we're growing in some optimism. But again, we have to see more on the meaty side of what happens this spring or before summer before we can really make a wholesale model assessment. Great. That's really fair. Thanks. And then just for my follow-up question. So when you negotiated these contracts with your pilots, did you get input from your partners or I mean, obviously, they had to sign off that they were okay with you raising pay as much as you did and willing to reimburse some portion of it. So when you are having those conversation, was there a lot of pushback, where they thinking maybe they would reduce their reliance on your aircraft and move to other operators, how did that go? I think that, to go back to what we do at SkyWest, and that is to be able to evolve, take care of our people and take care of our partners is I think what SkyWest has done better than anybody else in the regional industry for the last 50 years. So admittingly, I will say that it is a very stressful time, I think that as you go through -- and it's not just pilots, we've had conversation with all of our work groups. This was one of the first ones where we certainly have to coordinate with some of our partners, some of our partners quite candidly, started this process. I mean we were down the road with some things and we had one of the wholly owned carriers do some things that caused us to completely rethink it. So to the extent that it's a fluid market relative to what happened -- what happened in 2022 with regional pay was an understatement. Did we have to commit to the pay before we got the complete commitment from our partners? Yeah, we did because that's the way labor negotiations work and I think it's hats off to the team of us -- we had to bridge some of the gaps to connect with what's best for our people and what's best for our partners and I'll go back and say, what I said in my script before. Candidly, our operational credibility and the quality of team that we have here at SkyWest from all of our 14,000 professionals, I can tell you it comes down to the credibility that we have with our partners, it comes down with a very efficient ability to work with our work groups and it comes down to how stable and solid an operation that we've had throughout our history and when you combine all those long-term investments and long-term approaches, it makes a difficult situation a lot easier and we're happy -- we're really happy about the outcome. And it has. I would say the desired effect for all the parties involved Hey gentlemen, good afternoon. Great to see you guys again this quarter. Maybe, my first one's for Rob. Can you just help us think about some of the puts and takes on costs. Underlying the commentary on roughly breakeven ex deferred revenue for this year, should we think about the fourth quarter being a good run rate for salaries and benefits given has the full quarter of the new pilot agreement. And then I know maintenance has been a bit lumpy last couple of years, how do you think about that trending forward just to touch on a couple of the large line items. Thanks. Yeah, I mean obviously if you look at each of the line items, we were up a little bit and labor in Q4, where the pilots deal was struck in Q3 and some of these reimbursements covered part of the quarter. So I mean Q4 was a little bit of a noisy quarter, obviously, with impairment the lease acceleration and the deferred revenue. But all in all, the net -- the net sort of operating results of the company, we were pleased with. Okay, got it. Understood. And then great news on getting these contract amendment done and being able to pass through a portion of the higher pilot wage rates, can you just help us think like really high level about how much of the pilot costs we passed through? And then on the portion that's not being passed through today, how far are we out from negotiations on those contracts. I know we're approaching like the 10 or 12-year mark the first E175 delivery. So maybe some of it is coming up. Thanks again. Yeah, this is wade. So a great question. So as far as the pilot reimbursement as we said, we worked with each of our major partners, our four major partners, most of them have reimbursed us there. We're still working with one of the partners on the additional reimbursement. So we are well above 60%, 70% right now covered where we're at. So we feel pretty good about where we're at. We're working with the other partners going forward -- on the other partner going forward to get the additional cost reimbursements. That's great. I need to sneak one more in on the charter business, there's been an update. Can you just remind us on about how many planes are you thinking that this business ultimately comprises of or maybe you haven't shared that before. Just wondering like to think about pricing it? And then how is hiring going there on the pilot front, couple of months out, I think you can tap into some additional pilot pool versus like your traditional in the main business. So any additional color will be great. Thank you again for the time. Chip this is. Cathy, welcome back. It's great to have you back, hope everything is well with your family. Just going back to that charter side, I think that if you look at the scope that we could make this, I would suggest you look at a couple of numbers in the fleet. I think we have about 120 CRJ200s available that we could put into Charter maximum for now. I think that if you look at what our historical prorate model was like back in 2019, we had about 50 CRJ200s within a 50-seat model that would work within our prorate operation. And then I think if you pay for it from there, I think that demand since 2019 has become significantly stronger. So I think that hopefully, gives you a couple of benchmark to think about, I can't tell you exactly where we're going to be, certainly, as we discussed about Charter, we will be flying on-demand charter flights starting in March, we anticipate that the demand for non-scheduled service chart on-demand charter business model is extremely strong right now as well. So there's a lot of options here. And then you get back to what we've what we've talked about, the pilot situation is extremely good for an operation like this mostly because of -- it's a new seniority list. I don't know that we're going to operate this significantly differently with a different circumstance pilots and what we do with SkyWest but there certainly is some different availability and some compelling reasons to do some things within a separate certificate and a separate seniority list just because it seems like these days specific with pilots, people want to get on a new seniority list and be an early participant in that. I think that's why we lost a lot of pilots this last year because the seniority list throughout the country opened up and that's what we're doing here. And so, in a nutshell, the pilot demand to come to the charter operation is extremely good, not just for new first officer entrants, but also for direct entry captain is extremely good. So look, we're going to be patient. We're going to make sure we do it right as we usually do and we're going to continue to work forward and give probably another good update after we start to operating some revenue flights in the May timeframe when we call you again, and hopefully have some more visibility on it. So hopefully that gives you a little bit of -- a little bit of an idea high level of what some of the opportunities and capacity may be. Hey, thanks for the follow-up. Just first one just on the -- to follow up on Cathy's question, just on the charter how -- is that the significant portion of the breakeven earnings outlook or are you just not really including it until you have a better idea of how that ramps up? Yes, Savi. This is Wade. So for 2023, we do not anticipate significant profitability as we are growing that entity. We are going to be doing maintenance events to get airplanes ready, training pilots and so that is not a major driver in the overall breakeven for our for SkyWest Inc. Got it. And then if I just might ask a bit of a slightly longer-term question, just based on the kind of the revised contracts that you've gotten, the fact that you have more E175s than you had in 2019, I was just wondering if you can kind of compare it to your level of profitability in 2019 and kind of once we get back to -- if you're able to kind of fully utilize your fleet, could you just talk about like maybe the things that are positive or negative versus your 2019 earnings? Really like what's going to be better than and what's going to be maybe a little not-so-great? Yeah, I think -- Savi, this is Chip, just real quick, I think there is some comparability on the 175 fleet on a unit basis once we get the utilization levels that we want, that could be very comparable from a profitability perspective. I think that we continue to have -- we continue to manage the fleet in a way that I think is going to be very good from a cost perspective, and I think, again, we just -- on the CRJ fleet we have a 30% gap we got to overcome, which is purely non capital investment very accretive block hours that we just have to start to get to the point where we can fly. So I don't doubt that that is going to be that different from 2019. The other element relative to what else was contributing to that as the CRJ fleet, particularly on the prorate side as well. Obviously we pulled out a significant amount of prorate relative to what's happened in 2022. I will be very clear on the call that that was higher margin than what our contract margins were, despite with some entities in the United States think that we're not making money in small towns and are pulling out, that's absolutely false. These flying prorate an essential air service was very good profitability. So to the extent that we compare where we were in 2019, I would have to say, it depends on what we can do relative to the non-ERJ and dual class CRJ fleet relative to Charter and/or other essential air service models. Now, the flip side of that also Savi, and you don't hear the big guys talking much about this, so we will certainly talk about it, is the fact that throughout the pandemic since 2019, small city demand has -- travel has just exploded. We get a lot of calls. It's not us calling somebody else, we get a tremendous amount of calls from local cities and states and everywhere that are also nonessential service flying, wanting us to find ways to serve their cities. So certainly the deurbanization throughout the pandemic has gone -- put demand back in our favor, even in a pre-2019 level. So from our perspective, like I say, we've got a great balance sheet, we've got great assets. We're just going to continue to be patient and deliberate about taking care of our people in a way in which we can get our utilization on our fleet back up and then be more strategic about what we can do with partners and additional aircraft or shifting some of that stuff around later, but we got a lot of -- we got a lot of runway left to get utilization -- accretive utilization back up before we get to that time. So hopefully that's a helpful perspective. Yeah, hey, I just actually two here. Thanks for giving me the follow-up. I just want to go back to the fact that you haven't been able to -- you kind of closed deals with, I guess you said the majority of your partners. I don't know if that's one or two, you said 60% to 70% covered, Chip, is there anything that we should read into that or is it just timing that it just takes time to do each of these deals or is there some read through here? I think I think mostly just timing, honestly, Michael, I think that we continue to have great dialog with all of our partners. That's the fun part about our job is collaborating and finding ways that works to do business with both of us or all of us, all four of us and some are more aggressive than others and some are more patients than others, and I don't think there's anything to be read into it. I think if there is we will probably be updating in the next quarter or the quarter after. But we're optimistic that they're all thinking of the same lines, the fact that we can offer incredibly good product that is predictable and reliable, and stable and we try to do all we can to make their lives easy and they I think recognize that very clearly. And as we work toward long-term sustainability, I think that we're very optimistic about all of our partnerships. Okay, that's great. And then just my second. Thanks for giving us kind of a sense of your capacity to grow without adding shells. I think you mentioned by 2024, that you could add 30% block hour increase on the ERJ fleet without adding any additional shells and 40% on the CRJs, you only have a few airplanes coming over the next few years, is the right way to think about it that you're really not planning to take delivery of anything beyond what you have order for the next several years. Is that how we should think about like -- is that the planning for the next 2 to 3 years, it's just a few units, it's all about stabilization Yeah, this is Chip again. I would agree with that Michael, only from the perspective that it's going to take a lot to get that utilization back. I would reiterate, we are having conversations with manufacturers and certainly creative conversations about long-term ESG and fleets and so there's a lot of conversations about fleet. There's a lot of that conversation with our partners, but there's just too much opportunity until we close off that gap of that utilization before we get serious about it. The other thing is, I mean, you've got a couple of other things running against this. You've got higher interest rates, airplanes are expensive. And so from our perspective, it's not that we're not looking down the road of continuing to grow the fleet. It's more like, let's be focused on making sure we get the accretion without unnecessary investment first and then which by today if we're talking the timeframe that we've talked about over the last little bit. We should we need to pay attention to adding additional fleet because it takes a while to make aircraft. So I think it's rather fluid and we'll keep you up to speed in the upcoming quarters about that, but we haven't put the conversation on ice, we're continuing the conversation. We just, it's more important to get the utilization up. There are no further questions at this time. I'll now turn the call back over to CEO Mr. Chip Childs thanks Thanks, Devin. We appreciate your help with the call today. It's been a -- 2022 is a very exciting and eventful year. I will reiterate what said in the script and throughout the call, I think that we're in a fantastic position to continue to capitalize on what SkyWest is about, what things we have going for us and we're going to continue to be disciplined and work towards making sure that we take care of all the stakeholders at SkyWest. Again, one more thanks out to the amazing people at SkyWest and all the work that they do every single day to provide this reliability and we look forward to talking to next quarter. Thank you.
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Good morning. My name is Chad and I will be your conference operator today. And at this time, I would like to welcome everyone to Energizer's First Quarter Fiscal Year 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Jon Poldan, Vice President, Treasurer and Investor Relations. You may begin your conference. Good morning, and welcome to Energizer's first quarter fiscal 2023 conference call. Joining me today are Mark LaVigne, President and Chief Executive Officer; and John Drabik, Chief Financial Officer. A replay of this call will be available on the Investor Relations section of our website, energizerholdings.com. During the call, we will make forward-looking statements about the company's future business and financial performance, among other matters. These statements are based on management's current expectations and are subject to risks and uncertainties, which may cause actual results to differ materially from these statements. We do not undertake to update these forward-looking statements. Other factors that could cause actual results to differ materially from these statements are included in reports we filed with the SEC. We also refer in our presentation to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in our press release issued earlier today, which is available on our website. Information concerning our categories and estimated market share discussed on this call relates to the categories where we compete and is based on Energizer's internal data, data from industry analysis and estimates we believe to be reasonable. The battery category information includes both brick-and-mortar and e-commerce retail sales. Unless otherwise noted, all comments regarding the quarter and year pertain to Energizer's fiscal year and all comparisons to prior year relate to the same period in fiscal 2022. Good morning, everyone. Before we talk about the results of the quarter, I want to introduce Jon Poldan, who has been with the organization for 13-years. He is Energizer's Vice President and Treasurer and he will lead our Investor Relations efforts going forward. Now on to the results. Our fiscal year is off to a strong start. During our call last November, we highlighted how the restoration of margins, free cash flow generation, and debt reduction were key focus areas as we commence the new fiscal year. Our first quarter results demonstrate significant progress across all of these areas. Let me walk through how we've been able to get off to this great start. It all starts with our categories. In batteries, the category remains resilient despite the economic environment as it is an essential category for consumers. On a three-year stack, U.S. category value is up over 20% in the 13-weeks ended November with volume up over 4% during the same period. In the quarter, global category value was up almost 6% with volumes down roughly 3% and consumers prefer our brands with Energizer outpacing the category. Our value share was up 1.2 points globally versus prior year behind a strong performance in the U.S. Now turning to Auto Care. Category leading indicators remained strong and each of our four subcategories has experienced double-digit value growth since pre-pandemic levels. Year-over-year, the category value grew over 3% with the benefit of pricing more than offsetting volume impact. While this is the smallest quarter of the year for Auto Care, both Armor All and STP grew share, including in the important appearance subcategory, which represents nearly half of our total Auto Care portfolio. As John will explain in a moment, our first quarter sales did not track with syndicated data across our categories. We mentioned last quarter that retailers entered the quarter with slightly elevated inventory levels. Particularly in batteries, which partially contributed to that disconnect. As the quarter progressed, retailers also began to more aggressively manage inventory levels, despite the strong consumer demand. After a strong holiday season, many of our customers were either below or at the low end of their historical inventory levels. While this impacted our net sales in the quarter, the strength of our categories, our performance at shelf and lower retail inventory gives us the confidence in delivering our full-year outlook. Against the backdrop of those strong category fundamentals, our focus on restoring gross margins has begun to pay dividends. First, let's cover pricing. As we discussed in previous quarters, we have taken multiple rounds of broad-based pricing across both Battery and Auto Care to offset the inflationary headwinds we were experiencing. And we expect to continue to benefit from favorable comps in the first two quarters of the fiscal year. Looking ahead, any additional pricing actions are expected to be more targeted in nature. In addition to pricing, savings from the initiatives under project momentum has driven gross margin improvement year-over-year as benefits from reengineering our products, consolidating suppliers and improving labor efficiency are beginning to flow through. The Auto Care business has been a point of emphasis as gross margins were impacted significantly by inflation and is one where we are already making great progress. Our considered efforts around pricing, combined with the benefits of project momentum contributed to a significant improvement in segment profit in the quarter. Project momentum is not just improving gross margin, it is also driving much improved working capital efficiency, which John will provide more detail on later in the call. The combination of our expanded margins and leaner balance sheet helped to generate over $150 million of free cash flow in the quarter, which we use to pay down over $100 million of debt in the first four months of the year. As we look ahead, debt pay down continues to be our primary capital allocation priority. Thanks Mark and good morning, everyone. I will provide a more detailed summary of the quarter and update on project momentum and some additional color on our outlook for the remainder of the year. For the quarter, reported net sales were down 9.6% with organic revenue down 5.4%. Our initial outlook for the quarter was for low-single-digit organic declines, due to lower current year volumes in response to pricing actions over the last year. The exit of lower margin battery business and slightly elevated retail inventory levels entering the quarter. While our categories performed in line or better than our original expectations, retailer inventory management across both Battery and Auto Care businesses at the end of the quarter created additional headwinds of 300 basis points to 400 basis points. The volume declines in the quarter were partially offset by roughly 950 basis points of pricing. Adjusted gross margin increased to 150 basis points to 39%, driven by pricing actions, savings generated from project momentum and the benefit of exiting that lower margin battery business in the quarter. While the cost environment has stabilized, we continue to see elevated operating costs, including material and ocean freight costs and unfavorable currency impacts versus the prior year quarter. Adjusted SG&A increased $2.5 million, primarily driven by higher stock compensation amortization, factoring fees tied to rising interest rates, and depreciation expense related to our digital transformation initiatives. The increases were partially offset by project momentum savings and favorable currency impacts. A&P as a percent of sales was 7%, up from 6.1% in the prior year. The increase was driven by planned brand support and shifting spend from Q4 of the prior year to Q1 of this year to better align with the holiday season. Interest expense increased $5.9 million year-over-year, due mainly to rising interest rates, partially offset by lower average debt outstanding. We delivered adjusted EBITDA and adjusted earnings per share of $145.6 million and $0.72 per share respectively. On a currency neutral basis adjusted EBITDA and adjusted earnings per share were 155.6 million and $0.83 per share respectively. We also generated over $152 million of free cash flow in the quarter, nearly double our long-term algorithm of 10% to 12% of net sales. We achieved these excellent results by combining strong operating earnings with a nearly 250 basis point improvement in working capital as a percent of net sales since the start of the year. In the quarter, we paid down over $50 million of debt through a combination of term loan retirement and open market bond repurchases. Our strong cash flows also enabled us to pay down another $53 million of the term loan in January. Including this payment, we have paid down over $100 million of debt in the first four months of the fiscal year and over $170 million in the previous five months. Our debt capital structure remains in great shape. With a weighted average cost of debt of around 4.75 and 87% fixed with no meaningful maturities until 2027. Project momentum is also off to a solid start in the quarter with savings of $7.3 million. Our plans are focused on generating savings through network optimization, strategic sourcing efforts and SG&A savings enabled by our digital transformation. And as previously mentioned, we expect the benefits of these efforts to impact each of our segments. The program is on track to deliver $80 million to $100 million in run rate savings with roughly 80% of those benefits impacting gross margin and the remainder recognized throughout the rest of the P&L. We anticipate $30 million to $40 million of those savings will benefit our results in fiscal 2023. Working capital improvements are also off to a fast start with project momentum generating over $20 million of improvement this quarter. Bolstering our efforts across inventory, payables and receivables management. We continue to expect our initiatives to deliver over $100 million in working capital improvements over the life of the program, further supporting our free cash flow efforts. And finally, I would like to provide additional color on our outlook for our second quarter and the remainder of the year. We expect our top line in the second quarter to continue benefitting from pricing actions, partially offset by lower volumes with organic growth in the low to mid-single-digits. On a reported basis, we expect reported revenue of flat to low-single-digits. While our cost of goods will continue to reflect the negative impact of inventory previously built at higher total costs, our gross margin should benefit from both pricing actions and project momentum savings with gross margins expected to improve by 150 basis points to 200 basis points from the prior year quarter. We expect A&P as a percent of sales to begin consistent with investment levels in the prior year quarter and SG&A roughly flat on a dollar basis. Interest expense is expected to be up $4 million to $5 million from the prior year, driven by higher interest rates and partially offset by lower average outstanding debt in the quarter. And finally, at current rates, we forecast currency headwinds to impact the quarter's pretax earnings by approximately $8 million to $10 million. We remain on track to deliver the full-year as guided in November. Despite top line softness in Q1, we still expect low-single-digit organic net sales growth led by pricing and recovering and category volumes as we progress throughout the year. Pricing, mix management and project momentum savings are expected to result in improved gross margins of 100 basis points to 150 basis points year-over-year. We've also seen a weakening of the U.S. dollar relative to a number of our currency exposures and now expect full-year negative impacts of $50 million on the top line and $20 million on pretax earnings. Combined with continued cost management down the rest of the P&L, we are reaffirming our outlook for adjusted EBITDA in the range of $585 million to $615 million and adjusted earnings per share of $3 to $3.30, both of which represent in excess of 9% growth at the midpoint on a currency neutral basis. Thanks, John. We delivered a strong first quarter. Project momentum is already delivering savings and we remain confident the program will achieve $80 million to $100 million in run rate savings, and over $100 million in working capital improvement. Our ability to execute projects like momentum and our digital transformation position Energizer to deliver for our customers and consumers, while also delivering our financial algorithm and driving long-term shareholder value. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And first question will be from Lauren Lieberman with Barclays. Please go ahead. Just first off, I mean, something I've -- good morning. So, I've gotten a few times from people already this morning was just the question on FX being less of a headwind to the full-year, but holding the year. So just -- and I have more interesting follow-ups, right? Just curious if you could comment on that decision and why there wouldn't have been an improvement to the range given FX is less a bad one? Sure. Let me talk just specifically Lauren to the FX treatment. So the currencies that move the most for us were euro and pound. Those are also our largest hedge position, so coming into the year, we had a pretty significant offset when those turned over in the last couple of months, the benefits that you're seeing on the top line aren't going to flow through the bottom line as much, because the hedge actually reverses. So and as you know, we average into these positions, so it's going to take a little while for some of those benefits to come through. And as we talked about, we're only getting $5 million to $7 million of benefit on the bottom line incremental to, let me say, versus the downside that we expected originally. So we're picking up only $5 million to $7 million, so not a significant change overall to our outlook for the year. Okay. All right, great. And then another question I've gotten is just the gross margin -- during the call, just the gross margin commentary. For 2Q is a bit almost like let's call it half the expansion maybe if what at least I have in my model for second quarter. So just if anything timing related that we are talking about on gross margin build? I know this quarter was well ahead of expectations, but just wanted to know if you could comment on the 2Q outlook too? Yes. Well, 2Q, I mean, partially you get mix impact, so it's going to be more Auto than Battery. It's also one of our smaller quarters, we expect to be 150 basis points to 200 basis points better than last year. So I think a lot of the improvement that we've been seeing will continue to flow into the second quarter. And then as we go throughout the year, we're still expecting 100 basis points to 150 basis points of total improvement. So we expect pretty good improvement in Q2 and then full-year improvement to be in a pretty good place. Okay, great. And then just any commentary on volume versus the [Technical Difficulty] there were the inventory destocking and the exits, which you specified as well. But just reads on kind of I guess elasticity that you would effectively be seeing in market? How that's shaping up versus what you might have expected? I know market share performance is good, but how would you discuss elasticity? Thanks. Yes, Lauren, on that one, I think we're off to a really solid start for the year. And largely in line with our expectations. I would say the one unanticipated development that we dealt with is how tightly retailers managed inventory as we worked our way through the holiday season. But to your point on elasticity of -- in the categories performed really well with Batteries up almost 6% and Auto Care up 3% and that was ahead of our expectations. And obviously, our Batteries were able to gain share, so we're outperforming the category. So I would say from elasticity standpoint both are probably better than our historical analysis would have indicated. We feel like we're in a really strong position, and then as John mentioned, we're trending ahead on margin with healthy free cash flow and we're able to pay down debt. So off to a good start, we're one quarter in and recognize we haven't made the year yet, but certainly good enough for us to be able to reaffirm our outlook and get off to the good start that we needed to. The next question will be from Bill Chappell with Truist Securities. Please go ahead. Bill, your line is open. Perhaps you're muted on your end. Please proceed. Thanks. Good morning. Hey just trying to understand the inventory reductions at retail during the quarter. I guess, is the plan that for the rest -- I mean, did you expect that when you were given guidance in November? And so this is all, kind of, in line with expectations? Was that a surprise by how deep they went and you're just -- it's taking out some of the cushion that you had baked into the year? Or do you expect to kind of makeup with Battery sales in the off season? So I think there's a couple of different things in your question and maybe John and I will tag team on separately. I think the first part of your question, we expected low-single-digit decline coming into the quarter. We ended up in mid-single-digit decline. That is entirely related to a change in the way retailers have dealt with inventory in October, November, December most prominently in December as we got towards the end of the holiday season. Really, the low-single-digit decline, the mid-single-digit decline is entirely explained by the way retailers dealt with inventory. I would say we are starting to see that revert, I think the way we said it in the call was there are some retailers that are well below historical averages. And so for those retailers that were on the more extreme side of that, as soon as we got into January, we started to see that reverse and start to get back to not yet to but closer to normalized levels. In terms of the retailers that really just trended down to the low end of their historical range, it wasn't as an abrupt change, but we expect that over the course of the year for them to work back to where they've been on a more normalized basis. So we are assuming that. We're already seeing it in some cases, but we certainly did see a different -- we saw a change particularly as we got into December. I also think as part of your question, there's a difference between what's in scanner data versus in our results. And I think John can decompose that and walk you through the different pieces of that, because that's related, but a little bit different. Right. Yes, obviously a lot of the changes are -- what were in our outlook, but there was a little bit of incremental. So what was in our outlook and what was the difference between the scanner that we saw in the quarter, in our actual reported results, lower current year volumes, unit response to pricing actions that was in our outlook. The shift in holiday orders that definitely had an impact. And then we had talked about exiting some of this low margin battery business, part of our margin management group. And I think it was the right move to make and it was definitely accretive to our margins, but that did have an impact on the top line. And then I think a little bit more of what we also saw. You saw track channels performed very strong. Non-track channels were actually lower than that. So that was a drag as well on our top line. Got it. Yes, and then just a follow-up on Auto Care. Just kind of your expectations for the upcoming season, I mean, with the understanding of in the four, five years you've owned this business, it never seems to have been a normal year, either we've had weather or we've had COVID or we've had weather in COVID? And so just what is a normal, I mean, are you -- do we expect a normal year? Do we expect easy comps? How are you looking at it this year? Well, from the overall year, we expect organic growth and then we're going to expecting organic growth in both auto care and batteries, in which is built into the outlook that we provided. You're right, every year plays out a little bit differently than the previous year and certainly that as expected. But when we go into the year, you followed us long enough to remember when there's been a particularly bad weather year for A/C Pro. We modeled what we would consider to be sort of normalized demand. And so it's not an extreme heat, it's not extreme cold. So we moderate in terms of what the expectations are in that organic growth call, we do expect volumes to be down, but that's consistent with batteries as you work our way through the fiscal year. Pricing is really going to carry the day from an organic growth standpoint, volume is going to pick up as you progress through and by the time you get to sort of Q4, you're going to be at flat volumes and then you're going to move forward on kind of a normalized category basis from that point forward. A couple of quick questions. First, I don't understand this timing on holiday orders. Can you provide a little more detail on that? You recall, Jason, in Q4, we talked about we were going into the holiday season slightly elevated inventory levels. There was a pull forward of some orders into Q4 from Q1. We noted that on the previous call. That was at least part and that was a known item as we provided outlook, as we provided outlook for the low-single-digit declines in Q1. The incremental piece to that is related to retailers was the inventory destocking that went on as we got into December. They were separate in terms of what caused the impact on our P&L. Yes, yes. I got that. Okay. And then looking at your gross margin bridge, this is a lot of volume decline, yet you're not calling it out as a drag on gross margin. Why are you not seeing more substantial deleverage there? Look, I think we're attacking costs across the board. So you see project momentum is really going after a lot of that. We have seen some impact, but we've -- we had that also last year. So it's flowed through into this year and I think we're in a pretty good spot overall. Okay. And gents, it sounds like you're looking for your categories to firm biometrically as the year progresses. Yet you came in highlighting now consumption level from both the value and volume perspective are still above pre-COVID levels. Why wouldn't we expect a continued reset lower? In other words, why shouldn't we expect volumes to remain a headwind for much longer than your guidance suggest? Well, I think we're seeing the categories perform in a really healthy way, Jason. I think as we've had negative volume trends as we did in this quarter, but we just expect them to moderate as we get through the quarters. I mean, one, you're going to see pricing settle into the market. Last year was a very active year from a pricing standpoint that obviously has an impact on consumer behavior, you have this general macro trend that's impacting consumer behavior. But really, I think at the end of the day, batteries in particular are an essential category to consumers, they continue to shop the category and it showed those healthy trends as we got through holiday and we expect. And also as you get through the year, Jason, you're going to have mitigating impacts of the COVID comps as you work your way through this fiscal year, because at this this time last year, we were still having a little bit of elevated demand from COVID, not to mention some of the overall category dynamics. Yes, thank you. Good morning, everyone. I was hoping you can comment on inventories, but not necessarily battery inventories. I'm more worried about end market demand and inventory levels for the batteries go into. So I'm just curious kind of how you guys think about that? Have you kind of thought about that in terms of the guide and would that present any potential risk down the road? Yes, I'm talking -- no Iâm talking more about end market demand for controllers and TV remotes and things like that, because the retailers are obviously skinning down on inventories across the board. But I feel like there's still a lot more that they might hold back on as it relates to some of those more discretionary items. So that's kind of where the question is coming from. So it's not painter inventory, it's more retailer inventories of things that batteries go into. Understood. Well, I do think Nik in terms of as you worked your way through the pandemic, you saw a great deal of pull forward of consumers purchasing devices as they were stuck at home during the pandemic and gaming controllers are certainly one of them. When consumers buy devices, the great thing is that just expands the installed base that they have in their home. And 60% of the devices that consumers have in their homes take primary batteries. Those devices are still there. What's really going to drive our consumption is going to be the usage of those devices. There is an ample installed base of devices already existing within consumer homes to more than drive our categories. What we want to make sure is one, as devices consistently, they'll roll off in terms of usage or some devices convert into battery onboard, but you see new devices come online. And I would say that what we're seeing in new devices is roughly the same percentage of those devices take primary batteries. So there's a constant replenishment in consumers' homes for batteries. And then as they engage with those devices, as they utilize them more, then the change out frequency increases and they consume more batteries. The consumption of batteries per household is still up. We would expect that to continue. We just would expect the growth to moderate. I think we said a number of times the category is larger. Coming out of the pandemic from a growth rate standpoint, it will revert back to where it was pre-pandemic, but also is a larger base. So I would say from a device universe standpoint, from an installed base standpoint, categories as healthy as it's been in a long time. Thank you. Good morning, everyone. I have a clarification question on the inventory following up on the non-tracked channels on the performance that you called out. Was it mostly on the sellout basis? Or any inventory drawdown at your largest e-commerce partner? And if that's so -- is that a normalized -- mostly normalized at this point? And another question on distribution, you gained a lot of share during COVID, and do you see any potential changes to that and you are lapping or understanding, you're probably lapping a lot of that this year. So I wonder if what's happening there from a distribution standpoint? Thank you. And on the distribution side, you're right. I mean, we did gain a lot of distribution during the pandemic. We've been had a very long run of share gains, particularly in the U.S. Any distribution gains or losses is built into the outlook we provided, I think we've mentioned a number of times share is not the ultimate objective for us, I think if from a share standpoint of if we were to have share moderate, if we were even to lose a little bit of share, but we were able to improve the financials of our business, that's an okay trade-off for us. So it is not something that we're focused on in terms of preserving it. We're more focused on improving the financials and driving gross margin improvement. But thus far we've been able to hold share while doing that at the same time, which is a great place to be in. No, that's fair. And then the other fine point on just on a clarification. On a commentary of getting out of one of the, I believe, contracts, is that something that we -- if you can kind of parse out that or bridge that change in the quarter, if I understood it correctly? And then what's the impact for the next few quarters? Well, it was OEM business, so very low or no margin on the battery side. So you really won't -- it won't be very visible to you other than in our financials. Hey, good morning, everyone. The question on the guidance and I'm just trying to sort of reconcile a bit the tone on the call versus the way the market is digesting your quarter today. It sounds like from your perspective is currency is a little bit better, but you're still within the range. Are you toward the midpoint of the range? Are you toward the high point of the range? Is it currency got a little bit better, but the first quarter maybe a little bit worse? So it kind of gets you squarely back to the midpoint of the range. I'm just trying to sort of understand based on what you know and understanding the volatility of the environment? How are you guys just, kind of, digesting the quarter relative to the full-year guidance? And then I have a follow-up on Nielsen data. Yes, Kevin, I'll probably risk repeating something I've said earlier, but I'll kind of kick it off and then John can maybe get into specifics as we've walked through the outlook. But certainly the tone from our perspective is intended to be that we're off to a great start. I mean categories are performing better than we anticipated through Q1. We did have the inventory issue with retailers that we're working our way through and we're already starting to see that reverse as we get into Q2. Margins trended ahead of our plans with great work on pricing, but also the project momentum which is off to a fast start. We've been able to really advance that program and have great line of sight to $80 million to $100 million of savings. Working capital is off to a great start with $21 million and we're going to have $100 million of improvement over the course of the program. All of that, I think, gives us great confidence as we head into the rest of year, but then it also lays the foundation for a great â24 as well. So I think we feel great about the start -- to the year, certainly a lot of work to do. The only unanticipated development like I said was in the retail inventory space, but we're working our way through that this quarter. The only thing I would add, Mark, so Kevin, you hit on the FX and so a slight benefit from what we originally had in our outlook. I'd also say if you look at the way we're calling gross margin for the full-year, there's a little bit of headwinds going into the back half and what we're seeing is some of our raw material costs are a little bit higher, as well as some of the energy surcharges that we're seeing. So we're still calling for 100 basis points to 150 basis points up, but probably not as much push here as we had, if it was just the FX and that's not a little bit headwind. Okay. That's helpful. One follow-up, and I would also agree with Lauren's point earlier, I think some of that around transactional FX, I think is probably driving some of the disappointment. But sitting on the side, just tying together some of the commentary around the Nielsen data and then the retailer commentary in destocking? Should we expect now given your commentary that you feel comfortable, it was sort of a seasonal sort of dynamic that your U.S. business should start tracking much more closely to what we see in the Nielsen, because obviously the gap was very, very wide. So I'm just trying to connect your commentary with you seeing reasonably comfortable with where they are now. So is that to say that investors should be relying much more closely again on sort of what we see in terms of retail takeaway and the Nielsen going forward, then I'll pass it on. Thank you. Yes, Kevin, it's a great question. I mean, I think certainly as inventory levels would recover, you would expect Nielsen, as well as our financial results to track more closely together. But I caution a little bit, because there are other things which impact our business. Both positively and negatively times and one is the on-track channels that we've mentioned. And the other piece is the international part of our business, which is frequently not captured in that scanner data. So I would say, yes, as inventory levels, sort of, recover that there will become closer alignment, how closely is remains to be seen both given, sort of, the ordering patterns of the quarters, but then also the other untracked pieces of our business, which impact the overall financials. Great. Thank you very much. A couple of follow-ups from the opening commentary. Can you give us maybe a little bit more color on the plan savings, what particular operations, functions are involved? And maybe most importantly, are those savings going to fall to the bottom line? Are they net of reinvestment in some of the systems improvements you're talking about? So that's the first question. And then possibly related to that, I was just wondering if you could give us more detail, more specific detail on the working capital programs and other debt pay down programs and given everybody's desire right, to manage working capital. What gives you the confidence that you're able to execute on them? Thank you. There's a lot in there, Rob. Let me start to chip away at it and we can kind of direct us in places that maybe we didn't cover. Let me -- I'll just sort of remind you and others on the call about the overall details of the program, $80 million to $100 million by the end of 2024. Cost to implement the program is roughly 50% of savings. We achieved $7 million of savings already in Q1, $21 million working capital benefits already in Q1. We expect $30 million to $40 million of savings in fiscal â23 from the program. It's going to be split roughly 80% gross margin, 20% SG&A. And then the balance would be achieved into â24. And the intention is certainly for that to drop to the bottom line. I want to be careful in saying that though because I don't want to get ahead of ourselves and provide â24 guidance prematurely. But that's certainly the intention of the program is to call back margins, improve earnings of the enterprise as we go through this program and to be able to drive incremental earnings power as we get into â24 and â25. Yes. The only thing Iâd add to that Mark is on the $30 million to $40 million, that's going to drop. And that really is very much in gross margin that's helping us drive those gross margin numbers this year. And offsetting some of those inefficiencies in my comments, some of those volumes came down to an earlier question. On the working capital, Robert, we've really prioritized inventory and continue to do that even outside this program. Just over the last quarter, we've taken out close to $100 million of our working capital, we were able to go after inventory AR and AP, it will continue to be a high focus. I think you'll see some normalization as we go throughout this year, this was a very good quarter for us and obviously close to 20% free cash flow as a percentage of net sales is we're calling from more like 10% to 12% for the full-year and I think that'll give us the opportunity to really fund the momentum project in the back half of the year. So free cash flow is really a positive number for us this quarter and we expect it to be really strong throughout the rest of the year. As far as debt pay down, still number one priority for us for capital allocation. As we talk about in the prepared remarks, we paid almost $170 million over the last five months. So something we'll continue to focus on as we go throughout the year. Have you kind of disclosed and had approved your working capital objectives with your supply chain? Alright, because there's two sides to every kind of transaction? Understood, Rob. I mean, there's certainly a counterparty in some of these changes we're trying to drive through, but we have confidence in our ability, I mean, some of the things are just better internal working capital management, which are sort of unilateral actions we can take and have taken to implement. But then it's also working with your counterparties to improve your working capital and we certainly have confidence in our ability to do that. Hi. This is [Mary] (ph) on for Bill. Thanks for taking our questions. So first, I know you touched on some of the value share increase is in the quarter, but are you seeing any signs of trade down to private label? We are not. Private label, particularly in the battery category is basically flat. You're seeing some increases in international markets, but as of now private label is just staying consistently flat in the reporting periods we've seen thus far. Got it. And I know that reduction is your primary focus, but is there any potential for M&A? And if you could share your expectation for debt reduction for the year if you have one? I think with our stated priority of debt pay down, I mean, M&A would be on the side line. I mean, I think, it's very difficult to speak in absolutes with something like M&A, but with our stated priorities and our point of emphasis of paying down debt, M&A would certainly be a secondary consideration right now for the business. And we're looking to pay down around a half a turn from the beginning of the year and that's both through debt pay down and earnings growth. Hi, thank you. Did you say which of the -- how much of the debt paydown was bonds versus term loan? And in each of the quarters that you just bought buybacks? Yes. In the first quarter, it was about half and half bonds versus term loan. And then when we paid down, it was all term loan to start second quarter. Okay, great. And then you mentioned about this quarter, there were some timing differences in the brand support. And I'm wondering as you go into spring, summer and next holiday, if we should think of any -- is there any change in your cadence of brand support? Or is -- and is that dictated by kind of what's going on with the retailer? Is that something you can set month in advance? Meaning was it a surprise change? No, it wasn't a surprise. Last quarter, we had talked about shifting some of this into the holiday season, that's why you saw it higher. I think in, general, our biggest quarters are going to be first quarter and third quarter, because you've got the holiday for battery and then you've got the summer for the auto care. So I would expect as we talked about 5% to 6% for the full-year, but you're going to spike in the first and third quarter, you'll be the lowest in the second and you'll be also lower in the fourth. Okay, great. And then could you give a little more clarity, you mentioned about some cost, you made some comments on the cost and you called a material ocean freight. Can you just talk about any more color you can give there? And is it still inflationary and when we should see the cost come down and how much of that is because what you've locked in versus just where the markets are? Well, so we're about 75% locked for the year in our total cost positions and that's inventory on hand and what we've already experienced. So we're in a pretty good shape for knowing what's coming down at us for the rest of the year. What we are seeing is a little bit of headwinds in some of these metals really on the battery side. So zinc, lithium, we're also seeing energy, which energy impacts our own plants, as well as some of the conversion costs for those metals. So all of that's a bit of a headwind for us as we're building this next round of inventory for the back half. But we've seen ocean free moderate. Now we had kind of anticipated some of that in our outlook. So it's not a big upside to what we were originally calling, but it's still positive. And then I did call some outperformance in the first quarter, warehousing and distribution, which was mostly in North America, and that also was a little bit lower than we had anticipated. So a positive there. Good morning. I just had two quick ones. You called out in the script negative headwinds from higher factoring rates. And I was wondering if you could sort of give us a sense of what that looked like and if it changes your view on whether factoring is an attractive source of cash? Yes, that's a good question. We called it out because that factoring goes through SG&A. And it is kind of variable rate, so we are looking at whether we can optimize that and I think there's to the extent that we use it, it might be less. We'll also look to use pro. We have multiple programs, we'll try to find the ones that are the best for us, but it is something that we're evaluating. Great. The second question was, I was wondering if you could tell us which bonds you bought back in the fourth quarter. I can wait for the queue if you need me to. I hate you beat a dead horse on the inventory levels. You guys mentioned the stocking at retailers I'm curious which business are channel inventories in better shape at the moment, auto care or batteries? And then secondly, I'd be curious your opinion of consumer inventory in terms of pantry loading or lack thereof in both businesses? Thank you. No, we're happy to revisit this obviously itâs an important point. I think from a consumer standpoint, we continue to see consumers buying for immediate needs. So we do not anticipate nor are we seeing that pantries are loaded from a consumer standpoint. They are migrating either to larger pack sizes or smaller pack sizes depending upon the individual consumer and value means something different to most consumers. But in the overall research that we're seeing, we are seeing that a very high percentage of consumers are buying for immediate need. Retailer standpoint, when you go October, November, December, it's a critical quarter for batteries. You tend to see inventory levels shift quite a bit during that time period. We are now entering peak season for auto care, so it will be inventory builds as we work our way into the spring season, which Q2 and Q3 tend to be the big quarters for that business. So I would say we're seeing a recovery on the battery side, which was the main impact that you saw in Q1. But in auto care, we're also going to see a recovery, but that's also just going to be because you're heading into peak season. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mark LaVigne for any closing remarks.
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Good morning, and welcome to the Cadence Bank Fourth Quarter 2022 Webcast and Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. Good morning. Thank you for joining the Cadence Bank fourth quarter 2022 earnings conference call. We have our executive management team here with us this morning, Dan, Paul, Chris, Valerie and Hank. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to our Investor Relations page at ir.cadencebank.com where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed yesterday afternoon. These slides are also in the Presentations section of our Investor Relations website. I would remind you that the presentation, along with our earnings release, contain our customary disclosures around forward-looking statements and any non-GAAP metrics that may be discussed. These disclosures regarding forward-looking statements contained in those documents apply to our presentation today. [technical difficulty] marked a year of tremendous change, progress and success for our company, highlighted by the fourth quarter completion of our rebranding across our footprint and the related systems integration. The results of our business development efforts will be discussed this morning. We'll validate the unity, optimism and excitement shared by our teammates, as we are now operating under one name and brand. As we look at our annual and fourth quarter 2022 financial results, the story lines and key highlights are very similar for both the quarter and the full year. So I'd like to make a few comments about both of those. We reported adjusted net income for the fourth quarter of $142.9 million or $0.78 per common share, which resulted in annual adjusted net income of $542 million or $2.94 per common share. Adjusted PPNR was $195.5 million or 1.62% of average assets fourth quarter. We continue to benefit from a strong pipeline, which is reflected in net loan growth of $1.1 billion or 14% annualized for the fourth quarter and $3.5 billion or 13% for the full year. Our fourth quarter results were again very diverse from a product and geographic standpoint. We had six of the seven regions within our Company report net growth for the quarter and our corporate banking team had another outstanding quarter. We also continue to see favorable results from many of our specialized industry verticals, along with our mortgage team. Total deposits were flat for the fourth quarter and down $860 million or 2.2% for the year. While we, like many of our peers, have seen a decline in average account balances and a shift towards interest bearing products, our bankers remain focused on preserving and growing core deposit relationships. We continue to evaluate and tweak our product offerings and our posted rate structure, in an effort to ensure our relationship managers have the tools necessary to compete in this highly competitive environment. The rate environment combined with the balance sheet dynamics that we just discussed, resulted in continued improvement in our net interest margin. Our fourth quarter margin improved 5 basis points linked quarter and our margin for the full year was 3.15% up almost 20 basis points compared to the prior year. Valerie will discuss the margin components in just a few more minutes. Credit quality continues to be a positive story. While we had a -- while our -- let me start that again. Our fourth quarter provision of $6 million was necessary to support continued loan growth. We reported net recoveries for both the fourth quarter and the full year. We have now reported net recoveries six out of the previous seven quarters. Our nonperforming assets also declined 8% for the quarter and 38% for the full year and now stand at 24 basis points on total assets at year-end, which is very low by any standard. We will continue to monitor credit quality very closely as we move into 2023. But as of today, we simply aren't seeing any areas of significant weakness. We continue to improve our operating efficiency. Our fourth quarter adjusted efficiency ratio of 58.7% marks our fifth consecutive quarter of improvement in this metric. As we move into 2023, while there are some headwinds that Valerie will mention in a moment, continuing this improvement is a key strategic focus for our team. Finally, I'd like to briefly touch on capital. We repurchased 6.1 million shares of our 2022 share repurchase authorization during the first half of 2022. Recently, our Board approved an authorization of 10 million shares for 2023. While we currently remain on pause with our repurchase activity, we are pleased to have this authorization in our toolkit and we'll continue to monitor both, the economic environment as well as our capital position as we move forward this year. Dan spoke to the key highlights that are applicable to both our quarterly and annual results that you'll see on Slide 4. Very consistent loan growth, continued margin expansion, stable credit quality and steady progress in the adjusted metrics. Focusing on the fourth quarter of 2022, the results include quarterly improvement in our net interest revenue due to loan growth and increasing margin and improvement in adjusted expenses due to year-end employee benefit adjustments. These were partially offset by seasonal declines in insurance revenue and change in mortgage servicing rights valuation and the bonus provision for credit losses. Fourth quarter adjusted PPNR was $195.5 million, up from $5.7 million from the prior quarter. Referencing Slides 5 and 6. We reported net interest income of $359 million for the fourth quarter, an increase of $4 million compared to the third quarter of 2022. Our net interest margin was 3.33% for the fourth quarter, up 5 basis points from the linked quarter. Not surprisingly, the pace of improvement in the margins slowed this quarter as our deposit costs accelerated in response to continued rate increases and strong deposit competition. Total cost of deposits increased to 76 basis points from 35 basis points in the third quarter. Despite this increase, we continue to have a favorable deposit beta, thanks to our large mix of community bank deposits. Our total deposit beta was 28% for the fourth quarter and 17% cycle to date. This compares to the fourth quarter's loan beta, excluding accretion of 49% and 39% cycle to date. Our yield on net loans excluding accretion was 5.41% for the fourth quarter, up 71 basis points from the prior quarter. Our balance sheet remains asset sensitive, with approximately 48% of our loan portfolio or $14.8 billion, repricing in the next 12 months, of which $12.6 billion of that reprices within the next three months. At a higher level, as laid out on Slide 7, 72% of our loan book is floating or has variable rate terms with 28% fixed rate. Non-interest revenue highlighted on Slides 8 and 17, was $114.9 million, which represents a decline of $9.6 million for the quarter. The decline is driven primarily by a $7.1 million unfavorable swing in the MSR market valuation adjustment as well as a $5.2 million decline in insurance commission revenue related to seasonality in the policy renewal cycle. While the insurance decline is in line with typical fourth quarter seasonal results, on a year-over-year basis, total insurance commission revenue actually increased 6.3% from the fourth quarter of 2021. In addition to these two items, we saw a decline in deposit service charges, primarily as a result of an increase in the earnings credit rate on corporate analysis accounts and an increase in BOLI income which is attributable to timing of death benefits. Moving on to expenses, which are highlighted on Slides 9 and 10, total adjusted non-interest expense was $279.3 million for the fourth quarter, a decline of $10.9 million compared to the third quarter. The decline was driven primarily by a decline in compensation expense, largely related to employee benefits, year-end adjustments, including lower accruals on insurance costs and the annual assessment of other employee benefit obligations that have been impacted by higher discount rate. The decline in other miscellaneous expense included a number of small variances including lower franchise taxes, legal and other items. You may recall that last quarter we guided toward a $290 million base level of adjusted non-interest expenses, which was in-line with the fourth quarter results, factoring out the year-end adjustments made to employee benefits. Regarding non-routine adjusted items, merger and merger related costs increased to $53 million this quarter, as we completed the franchise rebranding and the core system conversion. A large component of these costs were in advertising and public information, which reflects the rebranding of our franchise under the Cadence Bank name and new logo, including nearly 400 offices. We also incurred a $6.1 million pension settlement expense due to the elevated number of retirements in the fourth quarter and branch closing expense of $2.3 million, associated with a 17 branches that were closed or consolidated in the fourth quarter. Dan spoke to the loan and deposit activity included on Slides 11 and 12. Slide 13 provides credit quality highlights that further demonstrate the points Dan made earlier with steady declines in nonperforming assets throughout the year. Classified assets increased somewhat during the quarter, but declined 15% as compared to the end of 2021. As mentioned earlier, the $6 million provision for the quarter supports continued growth in loans and unfunded commitments that we've experienced. The ACL coverage finished the year at 1.45% of loans. Capital, as shown on Slide 14, continues to be stable across the board with the quarter's earnings absorbing the growth in risk-weighted assets. As we look forward into 2023, from a loan growth perspective, we anticipate a high single-digit growth rate with investment security cash flows continuing to support loan growth. We expect that approximately $3.3 billion in securities cash flows and maturities in 2023, including $1.5 billion of low-yielding treasuries, maturing in the fourth quarter of this year. Deposits continue to be more difficult to predict with increasing rates and aggressive competition. However, we do anticipate our deposit costs will continue to increase and currently expect to reach our cumulative total deposit beta of 28% to 30% towards the middle of this year. Net interest margin will be in part dependent on our deposit levels and pricing, but we do anticipate margins to be higher in the fourth quarter of this year than in the '22 fourth quarter. This expectation is due to the asset mix shift out of lower yielding securities into higher yielding loans, combined with the ongoing asset repricing in our variable loan books. Slide 7 in the slide deck provides a nice visual of the repricing timing of our portfolios. We also anticipate steady growth in our fee businesses, except for mortgage and analysis service charges, which we expect to continue to be negatively impacted by the higher rate environment. Regarding non-interest expenses, we currently anticipate a low single-digit growth rate on an annualized basis, compared to the $290 million quarterly run rate guidance we previously provided for the fourth quarter of 2022. This factors in the anticipated benefits from our merger integration, but also the number of headwinds, including increased FDIC insurance assessments, higher pension expense, increase CPI levels in many vendor or technology agreements and continued wage pressure. Importantly, we expect merger and merger-related expenses to be materially behind us, although we are continuing to aim to reach efficiencies beyond our initial targets. Our 2022 net charge-offs, which were actually a small net recovery for the year, were clearly very low. So we do expect those to increase to a more normalized level in 2023. However, as Dan noted earlier, while cautious, we're just not seeing areas of significant weakness currently. We have a lot to be pleased with looking back at the results and accomplishments of 2022, but I think we would all agree the excitement is in the opportunity that lies ahead. No. All good, all good. Valerie gave a lot of great guidance at the end of your comments. So, thank you for all that. And I wanted to start my questions with maybe on expenses. So it seems like, you're saying take the $290 million from this quarter and then grow that at a low single-digit pace. So, is that net of cost savings? Or should we grow at that pace and then allow the rest of the cost savings to offset it from there? Just want to make sure, I'm clear on that guidance. That's a fully baked-in number, realizing the savings that we've got baked-in, as well as the work that's continuing to be done and the expense headwinds that we, and I believe our peers are also experiencing as we look into 2023. Okay. And then that $9 million, that was from some of the employee and insurance changes from this quarter, how do we think about that in the run rate for next year? Is that coming, as I was kind of give you as like a one-time event from this quarter? Is that partly in the run rate as we pull that forward to next year? Yes. The big chunk of that is really related to the annual assessment of employee benefit obligations, and the fact that a higher discount rate because of interest rate changes, allowed us to take a credit on that. So that's not something that happens every quarter. Great. Okay. Okay. And then maybe -- just on the margin. It doesn't feel like you're saying that this is peak margin, but I found it interesting that your guide is fourth quarter to fourth quarter is going to be higher. So does that imply that there may be some fluctuations between now and then, just depending on how deposit costs flow, but ultimately, by the time we get to the end of next year, we'll have a higher NIM. Is that a fair way to read that? I think you've got it well. As you said, it's -- the deposits are the bigger key there. But assuming no surprises there, we actually -- we could have some modest improvement, where things kind of stabilize or soften but we are anticipating a better margin as we look to the end of the year, really related to all the repricing and the mix out of the securities book into the loan book and as we've talked about a number of times, the variable rate loans that's continued to reprice as long as we're at a higher rate environment. The way you said I think, Catherine, is correct. I think, we see an upward trajectory on our margin, but maybe not linear. We could bounce around here, but we're moving in the upward direction. Hi, good morning, guys. Thanks for taking my questions. Just wanted to start on your commentary around the fee businesses. Obviously, understand mortgage and service charges under pressures given the ECR, but can you just kind of lay out expectations for some of the other businesses, like, I know insurance obviously benefiting from a relatively hard pricing market. And I guess, maybe I'm a little bit of -- on the trust in wealth side, maybe that's a little bit harder to see, but it sounds like you're kind of guiding or at least the outlook is to see kind of year-over-year progression. Can you just kind of walk through some thoughts there by business line? And maybe how we should think about them? Thanks. Yes, I think you've covered some of that, Michael, good to hear from you. Mortgage is clearly flying into headwinds. I would expect that 1Q is not going to be a good quarter for mortgage hopefully, 2Q, 3Q, during normal home selling season will come back a little bit on that piece. We're portfolioing more of those loans to the secondary market for ARMs is not working today if that market comes back on, and then we can fix that. That means we're not collecting that gain on sale for the loans that we're booking onto the balance sheet the ARMs. So, mortgage is clearly under pressure. I think you spot on insurance. Insurance looks to be in good shape today. I think we continue to win business. Our insurance team is growing customer base. Our insurance team is growing their fee income and the hard insurance market will help us. So we expect to see good progress on the insurance side in 2023. The wealth management team is all similar to anybody else in wealth management, dependent upon asset values. So, depending upon what asset values do, this year will drive that revenue. We're hoping that the market will move up and that, that we'll see benefit there. And then, I think you hit the ACR on treasury management. We do believe that we'll see some pressure because of rising ACR on treasury management. Other than that, though, I think our bank fees, we've already given back the pieces of the puzzle we needed to give back. And so, we continue to see stability there. Our card servicing fees, we continue to see increasing volume on cards. We continue to see increasing average ticket, or average transaction on cards. So the card income continues to be moving up. It sounds like the big ones. Thanks for the color. Maybe just a question on capital and the repurchase. It sounded like, if I got this right from the prepared comments that maybe buybacks wouldn't be a near-term thing, maybe like capital, build a little bit here is kind of the operational efficiencies from the merger continue to play out. Is that the way to think about it, that maybe near term purchases, not on the forefront, but maybe, think about it more usage in the back half? Yes, I think that's a fair way, Michael, to look. I think, we want to be prepared, if the market backs up on us. We certainly have that in our tool kit. We can take advantage of the market if it backs up. But we're currently watching where we are. We're watching the economy. They are still unknowns in front of us and we want to make sure that we're fully prepared. Okay. And then maybe just finally for me, just on the margin, back to the margin color. I assume you-- Valerie, you're talking about the core margin. I believe last quarter you kind of talked about accretion income for the year, somewhere in the $22 million to $23 million range. It's obviously higher this quarter. I just wanted to clarify that and then get any sort of updated expectations for what you'd expect for scheduled accretion for this year? Thanks. Yes, no, that's exactly right. The core margin is really the direction that we're headed there. On the accretion, you're spot on, on the scheduled accretion numbers for next year, close to $23 million and that is a headwind for this year. We had $47 million nearly for the year of 2022. It was a little bit higher than fourth quarter because of some paydowns and so forth, but no change to the expected scheduled accretion for 2023. I wanted a follow-up on the comment on deposit betas. I think you noted 20% to 30% cumulative deposit betas by the middle of this year. Do you expect that to be the peak or just given your other comments on the elevated level of competition that you and others in the industry are seeing right now, should that deposit beta ramp-up as we go towards the end of the year? Yes. No, actually what we're modeling is an increase from where we are today, which is a 17% cumulative to kind of our peak deposit beta mid-year of next year, which would be in that 28% to 30% level on a total deposit basis. Got it. And then, as you think about the mix of funding, to the extent that loan growth exceeds the securities runoff between the quarters and the year, could we assume that you would plug that with FHLB or the other funding levers that you might want to pull, such as growing the CD book? Yes, I think that -- we've got lots of securities running off in 2023. So most of the loan growth in 2023 can be funded, if not all, with securities portfolio and the move up of the loan to deposit ratio. So moving our loan to deposit ratio north of 75% is a goal of ours. We would like to see our loan to deposit ratio higher in a more normal environment. So, I think from a funding standpoint, that's just a temporary spot. So, we're currently playing in all of the spaces that you just mentioned. I think we've got our team moving to grow deposits. Some of our customers are moving CDs around, some people, because of rates have taken CDs. So I think the answer is all of the above, is where we would be funding from. Yes, CD is such a small piece of our book. It's mostly short. We're not offering any special spending long-term money. Hi. So I'm curious, with putting all the pieces to guidance together, are you still sticking with kind of 54% efficiency ratio target for next year? Yes. So what we're anticipating is gradual progress, just like what we saw in 2022 gradual progress on that efficiency ratio improvement and expect to continue that. There are a few headwinds as Dan mentioned, some of the FDIC expense, somebody other things that we talked about. That's -- it may be early 2024 before we get to that number, but I think, we'll be at -- we'll be making gradual improvements and certainly working towards that number pretty aggressively. Okay. Yes, yes. Okay. And then on loan growth, high single-digits, this seems to be a bit above peers. I'm just curious, what gives you confidence in that number and kind of what you're seeing as far as demand -- you know, community platform versus corporate? So, I'm not sure I'm hearing the whole question. You're talking about loan growth being above peers and what was the second part of that? Yes, yes. So, loan growth, kind of, what gives you confidence in that high-single digit growth figure for next year? And then if you could provide some commentary around community versus the corporate lending, kind of the demand outlook there? Yes, okay. So opportunities within the corporate lending and confidence around the high single-digit loan growth, I think is what you're asking about. I think our footprint is going to give loan growth. So the footprint that we're sitting in, is continuing to perform well. As I've said, we're not seeing really any weakness to speak up today, Chris and Hank are both in the room here and can talk about -- all you want to talk about on loan growth. Which one of you guys wants to go. Yes, Dan started it, the 400 branch footprint, commercial teams with deep relationships, with diverse products and services. We're in resilient growth markets as well as what I would call more stable and lower risk markets as well. So there's just a lot of leverage that we can pull. And when we look at pipelines, we're seeing still active, and we still see looking at least out the next few months, we feel like we've got a good pipeline and activities. So we're comfortable with some others loan growth targets. So, I agree 100% with Chris, I would categorize it as not few hot but not too cold and we're positive on 2023. We do have capacity in our corporate teams, which is a nice thing to have when you're headed into some NIMs -- or having -- to have some loan growth, which we're going to do. And lot of it depends on the macro environment and what that gives us to the second half of the year. But right now, I would tell you that I feel good and positive about the guidance we're giving that Valerie mentioned earlier. Hi, good morning. Thanks for taking the questions. Wanted to talk about credit for a second, and obviously, spectacular numbers, thinking about the reserve. It's basically been flat the past three quarters from a dollar perspective and just wanted to hear some thoughts on provisioning going forward and just thinking about the black box of CECL, as well as the classified assets are really low, but they did tick up a little bit in the fourth quarter. Any anything that was prevalent in that increase and anything that you guys are watching from a credit perspective? Thanks. As I've said, I don't think we're seeing anything today that's got any alarm bells ringing on it. So I think the move around in classified assets is just normal move in, move out balance and I'll let the guys who cover that further. When we look at CECL, I think our model continues to work for us. I think what you saw this quarter was provisioning for growth. So we're not seeing weaknesses in the portfolio. So we're provisioning for growth. You guys want to touch on. Yes. Back to the classified loans, normal cycle, normal loan grading, our average -- the legacy BXS from a view, we've got an average -- larger average loan size now, so you're going to see some larger loans moving out. Nothing in there that was systematic or a trend that we would note. Normal loan grading, normal working with customers and I think from there it's a model. It's what's the model that are going to project for us the economic forecasts and what our own loan grading systems do. Okay. And then anything, maybe not for your bank but just anything that you would point out as something that you kind of view is potentially problematic for the industry, whether it's office or some other segment of lending that you would say, hi, this is something that we're keeping a close eye on? We're just not seeing that, Brett. So, when we look at what's happening today, we're like everybody else. We're watching carefully. We're paying attention. We think we're making good credit decisions. The credit team is asking lots of questions. But across the footprint that we're serving, the economies continue to move along. We're still seeing some stress on labor in some places. Some places are still not able to find labor. People are moving up their labor cost. But we're still moving. I didn't mean to jump in front of that. My follow-up is just back to the efficiency ratio question that Brandon asked. Valerie, can you just clarify what number efficiency ratio you were referring to? Is that the -- I think you originally put out slides when the deal came together, I think it was a 54% efficiency ratio. Is that a number that you think is achievable by '24? Or do you think it's higher than that, just given some expense headwinds, you talked about? Yes, I think, that things that have happened in the last little bit, has delayed that trip -- that trip to get there a little bit, but we're going to get there. No worries at all. I think most of my questions have been answered. Just wanted to circle back on the insurance segment. I know insurance has been an important part of the strategy going back several years even in the BancorpSouth days. I guess there is some speculation in the marketplace about some of your larger bank peers that may not be married to their insurance segment longer term. I'm curious about the strategy of Cadence in the insurance segment. Just, I'm curious how important this insurance segment is to the longer-term strategy of the Bank? Yes, I think we're no dear than anybody else. We're watching what's happening in the market, but we like insurance. We've always liked the insurance. We continue to grow insurance. In the last quarter, we added another insurance agency that we were able to add into our team. So it's clearly a big part of what we're doing every day. But the market is always doing something different and so you pay attention to what's happening in the market. Just a couple of follow-ups. Maybe obvious, but the high single-digit growth rate you're assuming period end. We use period end as a base. Is that right? Yes. Okay, good. Valerie, you talked about just some -- easing some securities, cash flow from securities to fund loan growth. How do you feel about earning asset growth and balance sheet growth for the year? Help us understand the mix change. Yes. It's -- again, it just all goes back to deposits, and what we saw the industry see this year. You're not going to grow much in earning assets deposits. That we're able to grow deposits so forth and that would allow for some earning asset growth, otherwise, it -- that just simply the variable. Yes, nobody wants to go backwards. And I think when we look at 2022, we're going to see that the industry as a whole lost deposits. We lost some too. Hopefully that trend is turning and so that's really the question here, if we can grow deposits, then you'll see earning assets growth. Okay. Yes, the earnings look kind of the opposite of what we wrote 18 months ago, right, on balance sheet movements. Yes. What would you say, like an average new interest bearing rate that you're paying right now? And are you seeing that pressure ease at all kind of a second derivative of deposit pricing pressure? Yes. The competition is fierce out there. Most people are competing out the yield curve. You see in the short-term as competition is in the short term CDs base and money market space and that's I think, why you're seeing the move out of non-interest bearing accounts. But if you have an average number of both that the CDs were booked, on the specials we're running in the 4s, and specials on money markets, some exception pricing there in the high 3s. Okay. And then any difference between -- on the pressures between the community bank footprint and that 76% you flagged in the other parts of the business -- everywhere. Yes. It is intense everywhere, not from my perspective. Somewhat -- in some ways the Canadian bank gives that local competition maybe more fierce than the Metropolitan competition. It just depends. Okay. I'll wrap it up. I could go on further on Slide 7, but I like it. It's good. But I guess, Dan, an easy one for you, maybe a softball, but rebranding feedback, is there anything that hasn't gone while you'd be generally been satisfied with it? 5,000 and some odd funds changed in a short period of time. Lots of activity went on to that. We've been really pleased with the way that was executed. I think that, we could have had a whole lot of issues. But we spent some time getting ready for that. The full 18 months were slower in getting everything done. But the benefit of waiting, the benefit of putting it all together at one time, the benefit of getting it all behind us in the fourth quarter, we're really excited about where we are. This concludes our question-and-answer session. I would like to turn the conference back over to Dan Rollins for any closing remarks. Thanks, again, everyone, for your questions and your participation today. As I mentioned a little bit a minute ago, 2022 marked a year of tremendous change, progress and success for our company. In closing, I just want to take one more opportunity to brag on our team. It took an incredible amount of effort and focus for everyone in our company to achieve what we accomplished in 2022. And as we continue into 2023, we are committed to continuing to grow our business, improve our operating performance and enhance the value created for our teammates, shareholders and communities that we serve.
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Good day and welcome to the Q1 2023 Berry Global Group Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you and good morning, everyone. Welcome to Berry's first fiscal quarter 2023 earnings call. Throughout this call we will refer to the first fiscal quarter as the December 2022 quarter. Before we begin our call, I would like to mention that on our website we have provided a slide presentation to help guide our discussion this morning. After today's call a replay will also be available on our website at berryglobal.com under our Investor Relations section. Joining me from the company, I have Berry's, Chief Executive Officer, Tom Salmon; and Chief Financial Officer, Mark Miles. Following Tom and Mark's comments today, we will have a question-and-answer session. In order to allow everyone the opportunity to participate, we do ask that you limit yourself to one question at a time with a brief follow-up and then fall back into the queue for any additional questions. As referenced on Slide 2, during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and in investor presentation on our website. Please note that in our commentary today and within our presentation, when we compare our results to the prior year quarter or full-year, we have adjusted to present on a constant currency basis and remove the impact of divested businesses to provide the appropriate comparable results. Reconciliations to reported results have been provided in our earnings release and the appendix of our presentation. And finally, a reminder that certain statements made today may be forward-looking statements. These statements are made, based upon management's expectations and beliefs, concerning future events impacting the company and therefore involves a number of uncertainties and risks, including but not limited to those described in our earnings release, our annual report on Form 10-K, and other filings with the SEC. Therefore the actual results of operations and financial conditions of the company could differ materially, from those expressed or implied in our forward-looking statements. Thank you. Dustin. Welcome everyone and thank you for being with us today. Turning to our key takeaways for the quarter on Slide 4. Our business delivered solid first quarter results including 3% operating EBITDA growth and strong adjusted earnings per share growth of 11%. Throughout the last two years, we have made concentrated investments to gradually pivot our portfolio into higher growth markets and regions. We have a robust pipeline of investment opportunities ahead of us in several areas such as food service, health care dispensing, and pharmaceutical markets, including sustainability focused customer linked projects. Also, we've seen significant cost inflation taken proactive pricing actions, invested in cost reduction projects, and work diligently on cost productivity across all of our businesses. During the quarter, those cost reduction efforts along with a modest easing of inflation helped offset short-term soft market demand across our businesses. Furthermore, we continued our focus on returning capital and repurchased another $178 million of shares outstanding, nearly 3 million shares or 2.4% of total shares outstanding and expect to repurchase at least $600 million of shares in fiscal 2023. Additionally, we've lowered our long-term leverage target to 2.5x to 3.5x net debt to adjusted EBITDA. And finally, we are confident in our ability to sustain earnings growth and have reaffirmed our guidance provided on our last earnings call, which includes an 8% EPS growth target at the midpoint and strong free cash flow generation, which will continue to support our focus on investments for long-term earnings growth along with strong capital returns to shareholders. Turning now to the financial highlights on Slide 5. The December 2022 quarter performance for both earnings per share and EBITDA met our expectations, including strong price cost spread, primarily driven by our cost reduction efforts. These internally driven actions were partially offset by a 6% volume decline, primarily driven by short-term softer market demand, which was in-line with what our global customers have reported. From an earnings perspective, operating EBITDA was up over 3% and adjusted EPS increased 11% from the comparable prior year quarter, including a $55 million benefit from positive price cost spread. As we've demonstrated historic and during the most recent quarter, we remain committed driving cost improvements, passing through inflation, and believe we're well-positioned given our scale along with our ability to service customers from our facilities in close proximity to their location, which provides both cost and sustainability advantages. During the quarter, we've taken additional actions to reduce our cost structure, optimize our assets, and further automate our facility, which will bring our total savings from cost initiatives for the fiscal year to over $100 million. In-line with our long-term strategy to provide strong capital returns to our shareholders, we returned $211 million to shareholders through both share repurchases and dividends in the quarter. Now, before I hand over to Mark, I want to review Slide 6 and what we're focused on in both the near and long-term. We remain focused on driving consistent, dependable, and sustainable organic growth and continue to invest in each of our businesses to build and maintain our world-class low cost manufacturing base with an emphasis on key end markets, which offer greater potential for differentiation and long-term growth, such as healthcare and the pharmaceutical markets. Additionally, we will continue to invest and expand our emerging market position in support of our commitment to global growth. We believe that by increasing our presence in faster growing end market along with continuing to invest in emerging market regions, we will further enhance our ability to provide consistent, dependable, and sustainable long-term growth. We've done a great job since our IPO in 2012 growing our emerging markets from less than 2% to now 15%. Longer-term, we believe our emerging market presence can be 25% or more of our total revenues. And lastly, innovation and sustainability are increasingly embedded in everything we do and we continue to believe this represents a great opportunity for growth and differentiation. These drivers when combined with our ability to deliver continual cost improvements by leveraging our scale advantages and capabilities give us the confidence we will continue to consistently deliver solid earnings growth from our stable portfolio of businesses. Thank you, Tom. I would like to refer everyone to Slide 7 for our quarterly performance by each of our four operating segments. Our businesses continue to perform well and focus on inflation recovery, and generating cost productivity, while driving long-term sustainable revenue and earnings growth. Our Consumer Packaging International division reported modestly lower revenue dollars, primarily driven by softer demand from our customers, partially offset by higher pricing from the pass-through of inflation. Demand was relatively stable across our consumer facing categories such as retail food and beverage with weaker overall customer demand in discretionary markets such as automotive and surface coatings. And the outbreak of COVID in China also negatively impacted volumes and earnings in the quarter. Operating EBITDA was essentially flat as positive price cost spread offset softer customer demand. The positive price cost spread was driven by cost productivity, inflation recovery, and our focused effort to improve our product mix by increasing our presence in healthcare packaging, pharmaceutical devices, and dispensing systems. We continue to recover cost inflation through pricing actions and cost reduction initiatives while driving revenue growth from our sustainability leadership. Next, on Slide 8, revenue in our Consumer Packaging North America division was down 10% from the prior year quarter from lower selling prices as a result of the pass-through of lower resin costs in the U.S. and softer overall customer demand, primarily in our industrial markets. We continue to deliver strong growth in our food service market as we continue to see conversion from other substrates to our clear polypropylene cup. We continue to add incremental supply for cups, including an additional manufacturing location for this technology as demand continues to outpace supply. Operating EBITDA increased by an impressive 23% over the prior year quarter, primarily driven by our internal cost reduction efforts along with continued inflation recovery and improved product mix. And on Slide 9, revenue in our Engineered Materials division was down 15% for the quarter, due primarily to volume declines in lower selling prices from the path to a lower resin cost. The volume decline was related to soft overall customer demand, including our European industrial markets. Volumes were also impacted by our focused effort to mix up in certain categories like [shrink and transportation zones] [ph], along with customer destocking as supply chains normalize. Operating EBITDA was up an impressive 15% over the prior year quarter, primarily from our focused effort on improving sales mix and higher value product categories and internal cost reduction efforts. On Slide 10, revenue in our Health, Hygiene, and Specialties division was down 17% due to volume declines along with lower selling prices in the past curve of lower resin costs. We continue to see stable demand inside our hygiene markets, while portions of our business continue to see ongoing inventory destocking along with softer demand in our specialties markets such as building and construction. Operating EBITDA was down 21% for the quarter as expected due to a timing lag in recovering inflation on costs other than polymer. We continue to pass-through these cost increases to our customers and expect earnings will improve sequentially. Next, our fiscal 2023 guidance and assumptions are shown on Slide 11. Today, we are reaffirming our guidance for both adjusted EPS and free cash flow. We have a strong track record of EPS growth, improving every single year as a public company and continue to expect between $7.30 to $7.80 of adjusted earnings per share, which at the midpoint would be another fiscal year record and our tenth consecutive year of delivering EPS growth. Additionally, we expect free cash flow to be in the range of $800 million to $900 million with cash from operations of $1.4 billion to $1.5 billion [less] [ph] capital expenditures of $600 million. Our cash flow year-in and year-out has been a dependable core strength and core value of our company. It provides us the opportunity to invest in our businesses to grow and become more efficient by returning capital to shareholders. As you can see on Slide 12, our capital allocation strategy is a return-based and includes continued investment in organic growth and cost reduction projects, share repurchases, debt repayment, and a growing quarterly cash dividend. In fiscal 2023, we expect to return $700 million or more to shareholders via share repurchases and dividends, including further reducing our shares outstanding by 8% at current valuation levels. During the quarter, we repurchased another $178 million of shares or 2.4% of shares outstanding and paid our first quarterly dividend, thus returning $211 million back to shareholders in the first fiscal quarter. As Tom mentioned earlier, given our strong dependable cash flows and earnings, we have moved our long-term leverage range down to 2.5x to 3.5x as we continue to focus on driving long-term value for our shareholders. We believe we are well-positioned for continued value creation through both our resilient business model and strategic portfolio management opportunities. Thank you, Mark. Our business model has proved resilient, including a broad portfolio of polymer-based packaging solutions with strong dependent on stable cash flows to allow us the flexibility to drive strong returns for our shareholders. Our in-house design centers footprint and build to serve local and regional customers and markets all while being both a top 5 global toolmaker and the top 5 recycler in Europe provides us with scale advantages and differentiation capabilities unmatched by our competitors. While the demand environment has remained choppy, we've been able to offset softer customer demand with stronger price recovery and productivity improvements. From our current viewpoint, we believe our industrial markets will be in-line with our global customers demand and remain challenged throughout much of fiscal 2023. We will focus our internal cost reduction efforts and inflation recovery, while also driving strong cost benefits through efficiencies and asset optimization throughout our global footprint to offset any demand challenges. We believe very stable and dependable portfolio will allow us the ability to provide earnings growth and demand stability as we had historically demonstrated. As you can see on Slide 13, we have consistently driven top-tier results in nearly all key financial metrics, including strong compounded annual growth rate for revenue, earnings, and free cash flow, including growing our adjusted earnings per share every year as a publicly traded company. The targets we've settled over the past several years, including our focus on driving shareholder value continues to be our top priority. Starting several years ago, in each of our four segments, we began investing more heavily in growth with the emphasis in faster growing markets and regions, while working to improve the mix of our product portfolio. As you can see on Slide 14, we delivered results at or above the peer average from these strategies and commitments. Historically, we have used the majority of our cash to reduce our debt and improve our balance sheet post an attractive acquisition opportunity. Now, we've chosen to make a concerted effort to keep our leverage in a lower range, providing us the opportunity to return the majority of our cash to shareholders via share repurchases and now similar to our peers, initiated a quarterly dividend. We believe our new long-term leverage range of 2.5x to 3.5x will further strengthen our balance sheet and be rewarded in the equity market over time and believe these strategies will continue to close our valuation gap, which provides a very attractive opportunity for investment. Next on Slide 15. Since the RPC acquisition in mid-2019, over the past three years and including our expected use of cash in fiscal 2023, we've reduced our net debt by nearly $3 billion. Furthermore, in fiscal 2022 and fiscal 2023, we will have returned over $1.3 billion to shareholders via share repurchases, while also paying our first ever quarterly dividend. These uses of cash from debt reduction, share repurchases and dividends will total $4.3 billion of value returned to shareholders while growing our adjusted earnings per share more than 70% since the RPC acquisition. We believe our cap return model underscores our commitment to enhancing long-term value for our stakeholders and the stability and consistency of our portfolio. The RPC acquisition has provided substantial cost and revenue synergies over the past several years, and we believe there are additional attractive opportunities ahead. The ability to leverage our combined know-how include sustainability and innovation, product development and technology has created significant value for shareholders. On Slide 16, we're excited to announce a new international Center of Excellence and Circular Innovation Hub that will be located in Barcelona, Spain. This new location is designed to foster our One Berry spirit and demonstrates Berry's commitment to global growth, sustainability and talent development. Several locations were considered for the new center with Barcelona being the preferred option, due to high scoring and international talent, sustainability, diversity, and economic indicators. Barcelona was elected recently as one of the best cities to live in the world. This new innovation hub will house an interactive and learning customer experience center, a showpiece for various designs and innovation capabilities and be a focal point for circularity sustainability underlining how Berry's products are part the solution in achieving a net zero economy. Furthermore, as you can see on Slide 17, through our strategic customer linked investments, innovation and sustainability have been a strong part of our value creation. We believe we are well-positioned to deliver significant value for our customers and shareholders through investments like these recent innovations presented here with an unmatched global footprint and design capability to support circularity. We're proud to highlight a few recent innovations, starting with Berryâs SuperLock container that provides healthy spreads with an innovative and reusable packaging solutions, combining improved imaging and longer shelf life. Next, as you might have seen in a recent press release, I'm pleased to announce our collaboration with Coca-Cola to provide tethered caps in the European Union markets. Berry was recently given a Prestigious Sustainability Award at PACK EXPO International for this circular solution. We became the first plastic packaging manufacturer in Europe to supply the Coca-Cola company with a lightweight tethered closure for its carbonated soft drinks in PET bottles. The new tethered closure for Coca-Cola is designed to remain intact with the model, make it less likely to be littered and more likely to be recycled. And finally, we worked together with a leading German dairy customer, Milchwerke Schwaben and met their sustainability needs and goals by providing 19% weight reduced product offering, while at the same time providing smart logistics and efficiency improvements for their filling lines. Innovation and sustainability are core strength of Berry. We have leading R&D and material science capabilities and considerable expertise. When coupled with our unmatched scale and geographic reach, these capabilities provide unique ongoing opportunities to develop differentiated products to meet the needs of our global customers. Next, on Slide 18. I want to discuss the key investment highlights for Berry long with our long-term targets for our key metrics. We are a global leader across several manufacturing platforms with extensive innovation technologies and [indiscernible] capabilities. With our more than 255 locations around the world, our scale benefits from both procurement and proximity to our customers, provide us with a low-cost platform, providing products to the largest CPG customers in our primarily stable non-discretionary market. We have a proven history of earnings growth, as shown earlier on Slide 13, along with exceptionally stable and consistent set of cash flow businesses. Additionally, we've taken a sustainability leadership role as one of the largest plastic manufacturers in the world, evidenced by a portfolio of products, innovative with our customers and a focus on reducing greenhouse gas emissions supporting a net zero economy. Our long-term targets further evidence the consistency and dependability of our model, which includes operating EBITDA growth of 4% to 6%, EPS growth of 7% to 12%, and total shareholder returns of 10% to 15%. As you can see, over the past three years, we've met or exceeded these long-term growth targets and expect to similarly do so going forward. Additionally, we expect our newly initiated dividend to grow annually, and we've updated our long-term leverage target to be in the range of 2.5x to 3.5x. We believe we can achieve these similar metrics while operating the business with lower leverage and providing consistent capital returns to shareholders. In summary, our strategic priorities remain unchanged. Our entire global team emphasis on working safely and servicing our customers remains our Number 1 priority and has made us a stronger, better, and safer company. We will continue to operate with agility as we navigate current market dynamics to drive sustainable growth while recapturing inflation. At the same time, we remain focused on executing our long-term strategy of driving shareholder value, expanding our competitive advantages and delivering on our financial priorities to position Berry for long-term success. I'm very pleased with the hard work of our employees, delivering solid results in the face of persistently higher costs and a dynamic global economy. Thank you all for your continued interest in Berry. Now, before we turn to Q&A, I want to note that we announced today that I plan to retire at year-end. As we make the transition throughout 2023, the company remains very well positioned to continue to deliver significant value for all stakeholders. With that, Mark and I will be glad to answer any questions you may have. Hi guys. Good morning. Tom, congrats on your announcement on your retirement. Yes. I guess, first off, on just the volumes down 6% based on your December quarter, it's very, very similar to volumes being reported by the major CPG companies. Do you have a sense as to where we are on the inventory destocking cycle across your core end markets and maybe split that between consumer and also some of the industrial markets as well. Yes. I think certainly from a consumer side, any time there's uncertainty, the prudent measure they take is to reduce the inventory count and they frankly have higher expectations that we can deliver in smaller quantities on a more regular basis. I expect that to continue until there's greater certainty in terms of specific cadence of consumer demand. So, I don't expect that to change dramatically. We are certainly seeing some green shoots. I would describe it as demand improvement, being â in January. And as there's more certainty, the destocking will become less prevalent in people's print, if you will. From an industrial basis, we showcased that we expect industrial demand remain relatively sluggish for a better part of fiscal 2023. Okay. Thank you. And then maybe a question for Mark. On the EBITDA bridge for the first quarter, it looks like price cost was about a $55 million benefit. What are you, sort of embedding for that number for fiscal year 2023 relative to your EBITDA guidance? And I'm just asking because it looks like resin will start to be heading higher, sort of correlating with typical earlier seasonality. Sure. Thanks, Ghansham. Yes, I'd say on the price cost side, we have gone into the year thinking of 100 million. We're now feeling better about that number. I think we're thinking of more like 125 million for fiscal 2023, and that's driven by the cost reduction activity that the company has taken action on. Thank you. One moment for our next question. [Technical Difficulty] from the line of Anthony Pettinari with Citi. Your line is open. Good morning and Tom, congratulations and best wishes on the next chapter. Just following up on Ghansham's question. On the last call, you talked about full-year EBITDA guidance, assuming flat volumes with earnings growth coming from cost recovery and cost reductions. So, the accelerated cost reductions, which I think are now 100 million, should we think about that as maybe offsetting volumes a bit weaker than expected or maybe a weaker-than-expected view on volumes for the fiscal year? And if so, where is that â maybe where is that concentrated along the four segments? Yes. If you consider the operating plan for 2023 primarily incorporate two areas, one cost reduction, other offset inflation with price. And clearly, any type of deviation we see on the demand front, will leverage â will variablize our cost structure to get it done. And I would say, the following. The company is performing on all cylinders right now operationally. We've made in the last three years alone over $250 million in capital improvements to remove over 5 million labor hours from our operations through deploying more automation from an energy efficiency and sustainability perspective, which is a huge component of cost. We've invested over $100 million to remove over 200 million-kilowatt hours from our operations. So not only are we making the right financial messaging and decision, but we're also doing the right thing for sustainability actually improving what is ultimately the material with the best carbon footprint and making it that much better. And not to mention what we continue to do in terms of safety. And again, safety is our Number 1 priority, but keeping our people safe, keep them in the game, productive inside the site. Those are some of the areas that we've had a heavy focus and â when you think about the scale of our company overall, it can have some really significant benefits. So that's where Mark had quoted that we're estimated to be in the range of plus of $125 million and we've taken the right actions from the investment to get that done and make that happen. Okay. That's very helpful. And then just on the updated 2.5 to 3.5 turns leverage target that definitely makes sense. I think in the slides, there's a reference to 2023 leverage potentially staying at 3.7x, which is, I guess, unchanged from last year. Understanding it's not too far from your target range, but I'm just wondering if you talk about debt paydown versus repurchases as, sort of a priority for 2023 and how you balance those? It's a great question. We anticipate being within that target range at the end of fiscal 2024. And the reason is that the compelling opportunity to repurchase our shares right now, given the dislocation in our valuation takes precedent, we believe it is an unmatched opportunity for us. So, we're going to continue to focus on buying back our shares as part of our capital allocation program in 2023. And certainly, as we see improvement in the valuation of those shares, we can ultimately pivot further to debt reduction. But again, we believe we'll be in that range by the end of fiscal 2024. Yes. I think Anthony, I mean the stability and just quantum of cash that we generate and the earnings growth of the business, we can do all three. We can continue to grow our dividends. We can buy back a substantial portion of shares and repay debt. So, I think we have a great opportunity to do all three. I think, Anthony, one of the enablers is, we're starting to see some improvement in the financing markets out there. We clearly have showcased that we have opportunities inside our portfolio to perhaps look at businesses that are better suited for other operations. As such, that should get easier to do as the financing markets improve, and we expect that to be a big component of our energy and focus here throughout 2023 and beyond. A big opportunity for a portfolio of our size. And that clearly allows us then to pivot some of those proceeds to the capital allocation wheel that we've built, if you will. Thank you. One moment for our next question. That will come from the line of Kieran De Brun with Mizuho. Your line is open. Hi, good morning. Maybe just a follow up on the capital allocation. When we think past 2023 into 2024, like, how do you think about M&A now fitting into, kind of your longer-term growth strategy? And where are the areas where you'd like to, kind of see that focus, I think, going forward? I mean, should we be thinking about that more focused on the circularity side of things, which seems to be a big opportunity or any thoughts on that front would be helpful? Thank you. Yes. Berry is in a unique spot right now. There's no large-scale acquisitions that we have to do to create scale. The real focus is on how we ultimately utilize bolt-on acquisitions as a means to accentuate organic growth. We clearly believe that some of the more attractive markets that we've articulated in the past, like health care, pharmaceutical dispensing solutions, sustainability solutions are all right not to mention, at least of which in â growing our access to emerging markets. So, while we just recently announced a greenfield site in Bangalore, clearly, at some point, it will provide the opportunity for bolt-ons to complement that health care and pharmaceutical [sites] [ph] to take advantage of that growth. And again, all that can be supported by â as we look â as I just mentioned, we look inside our own portfolio, having opportunities to dispose of pieces of that â of the portfolio today that could be better utilized by others can allow us to deploy some of those proceeds against those objectives. That's why, as Mark said, it's a balanced approach. We really believe we can operate the company at a lower leverage range, we can continue our balanced capital allocation between buybacks and dividends, and we continue to invest in organic growth to reaffirm our commitment as growth as a priority for us. Great. Thank you. And then just maybe a quick follow-up on China specifically, I mean it seems like the rebound in China has been gradual throughout the first quarter. I'm just curious on your thoughts on what you're seeing? Are you seeing kind of that acceleration post the Chinese Lunar New Year? Is it something that you still expect to, kind of gradually increase throughout the year and how that impacts your volume outlook for the fiscal second quarter and the back half of the year? China is a relatively small part of our portfolio overall. That said, there was some impact relative to the COVID-related shutdowns. But as those normalize inside China, I think it will provide a steadier, more consistent [indiscernible] path for growth in the coming quarters. So, that would certainly be a tailwind for sure. Thank you. One moment for our next question. And that will come â George Staphos with Bank of America. Your line is open. Thanks very much. Hi, everyone, good morning. Thanks for all the details, and Tom, I'll echo everyone else's comments. Congratulations to you. Company's evolved significantly over your time. So, congratulations on that. A couple of questions. The first on targets and then the last on price cost. So, in terms of the targets, you talked again to the deleveraging target now being 2.5x to 3.5x, we certainly would agree with that view. In your view, what changed most in terms of why this is the right target now? Is it where Berry is mature to in terms of you don't need to do acquisitions anymore to continue the growth? Is it cost of capital you see being applied to companies with higher leverage? Was there anything that changed in your view in terms of why this is now the better place to be. Relatedly, you mentioned a number of targets on Slide 18, and that's terrific. I don't see a return on capital target. Will you expect to have one in the near future? And do you have a view in mind in terms of what recurring capital growth could be over the next several years? No doubt, George, we're maturing as a company. We've doubled in size in a relatively short amount of time. As Mark mentioned, the robustness of our cash flow gives us an amazing amount of flexibility. And we're fortunate that the company has grown to the point that scale is not the predominant focus for us. What is the prominent focus on is our â how we ultimately can add pieces to the portfolio that accentuate our global growth and then allow us to scale those given our global market presence. That's the real driver relative to the larger target or the lower leverage range. And again, it also is consistent with some shareholder feedback that we've received as well in terms of the driver. On the return of capital, George, I mean we've â our return of capital over the last several years has been around 14% as a company. That's pretax. As we look for incremental investments, we tend to target something north of that. So, we're looking to obviously, to grow that number, but I don't think 14% plus is a bad way to think about it because obviously, that number includes a lot of different things, including acquisitions that were larger in size, and therefore, it just naturally had a little bit lower return on capital on them. So, I think 14% is a good spot overall for the company, but on incremental investments, I think we can drive to 20%. Thanks to that Mark. And then the other question, kind of near term or more micro, so your other segments, other than HH&S did a real good job on price cost. Again, congratulations to you on that in the quarter. You mentioned HH&S was a lag. But was there anything else going on that made it a more difficult price cost period? And when do you expect HH&S to be positive on price/cost over the course of this year? Thank you and good luck in the quarter. Yes. I think on your first part of your question, relative to what impacted the quarter, mix certainly was a factor, as we mentioned, some of our more specialty product categories that carry a little higher margin negatively impacting the results. So, as those markets improve over the course of the year, I would expect that component of the relationship to get better. We've also got, as mentioned in the prepared comments, incremental price impacting that business ongoing over the course of the next several quarters. So, I think we're going to continue to make progress. I think as to when we go to positive outside of something changing relative to inflation, we would expect the back half of 2023 to inflect a positive. And George, the hygiene piece of that business continues to be very stable. Some of those niche spaces that ultimately, there were some discretion areas like dryer sheet, filtration, house wrap. These are all really very solid franchises and any improvement in terms of customer outlook or demand or customer confidence is only going to benefit those businesses. So, as Mark said, we'll see sequential improvements as contracts are renewed and implanted. Thank you. One moment for our next question. Will come from the line of Phil Ng with Jefferies. Your line is open. Hi Tom, thanks for all the help over the years, and you'll certainly be missed. So, we really appreciate. I guess, first off, how do you guys see volumes tracking this year by segment? Is flat volume still a realistic goal at this point? And do you kind of see the declines in volumes in 2Q being less bad and potentially inflecting in the back half? Like how should we think about the progression this year? I'll first start by saying that the demand that we're seeing is pretty consistent with our customers around the world, frankly. And for the print we had in the quarter, I think we fared really quite well in that regard based on some of the other peer reports that are out there. That said, certainly, would anticipate the front half being softer than the back half, but as we've demonstrated, we've got plenty of irons in the fire that should that not materialize. We can further variabilize our cost structure as the team's done. And again, I'm really excited that these investments that have been concentrated and they have been made over the last several years put us in a really good position going forward, both in terms of soft demand, as well as enhanced productivity and profitability as demands ramp. So, all pieces of that puzzle, difficult to ultimately call it exactly. But again, our performance is very consistent with our customer base, which we would expect. Got you. And I guess, a question for Mark. I think you called out 125 million of price cost this year, so up 25 million. Is that largely from like self-help productivity stuff? And how are you thinking about just your inputs, whether it's resin from here? Maybe some of your non-resin cost profile, are you seeing any deflation there that could be potentially a good guy and provide some upside to that number? Sure. Yes. I would say â I think Tom mentioned the breakout, but 100 million of that, you know 125 million is on the cost side. Obviously, our largest cost is material. So, anything we can do to drive down material costs our sourcing and operations teams are working diligently to cross â across approved different products to generate cost savings. We've got a long pipeline of cost reduction projects. Tom mentioned some of the labor is our next largest cost category. We've got a lot of great productivity improvement initiatives, including investments in automation that are driving reductions in our labor costs. So, as Tom said, we've got a number of levers we can pull, obviously, focusing on the largest cost categories of material and labor generate the largest savings, but certainly, energy falls right behind that. And we've got a lot of initiatives across the company to reduce our energy usage. And as Mark said, resin being the biggest part of it, I mentioned that teams are â and operationally are working at a very high level right now. Just to give you a sense, since 2020 alone, we've seen an over 20% improvement in our net yield across our sites being generating that type of efficiency. So, you're reducing your scrap, you're generating more efficiency across your operations, and that provides, as I said, a near-term benefit, as well as a long-term opportunity as your volumes continue to grow and ramp. Hi, thanks for taking my question and Tom, again, congratulations on your retirement. So, just a quick question on the long-term targets. I wanted to â I was hoping we could break those down a little bit more and give us a little bit more color as to how you're seeing, particularly as we think about, for instance, the EBITDA growth of 4% to 6%, how are you thinking about that in terms of the sales breakdown, how much of that is organic versus inorganic potential bolt-on opportunities? And then beyond that, how much would it be, kind of EBITDA or margin expansion? And then lastly, kind of on the EPS line, how are you kind of breaking that down in terms of underlying growth and buybacks? Sure. I think in the aggregate, we think our business has grown in the low single-digit range. We've got a lot of focused effort to as we talked about in the prepared comments and have now for many quarters, pivoting to higher-growth markets. So, certainly, over time, we're looking for a higher result, but at the moment, our current mix of business support low single-digit growth on the volume side, which we can again deliver something higher than that on EBITDA as we get the benefit of leverage on our fixed costs, as well as mix improvement opportunities. So, bolt-on acquisitions, how to predict those year-to-year, I think, is very difficult. Obviously, it depends on market conditions and sellers in the market at a price that's attractive to the company that meets our return thresholds, et cetera, et cetera. So, those targets are meant to be long-term targets, you know year-to-year, the contribution of bolt-on acquisitions is going to vary, could be higher in one year and lower in another. But again, that low single-digit volume growth should provide something incremental on the EBITDA side supplemented by acquisitions. And then on the EPS side, curious kind of longer term, how are you thinking about if it's just kind of 4% to 6%, is the rest more buybacks or anything else we should be mindful of there? Yes, same thing. Yes, the market is going to provide us with different opportunities at different times. Right now, our share price is very attractive. And so, it's providing us very great investment opportunity that we're taking advantage of, and that's bolstering our EPS results, certainly. But depending on the situations and what the market provides us, we'll be able to respond accordingly to drive at those results. Got it. That's helpful. And then just lastly on the destocking question earlier, you mentioned seeing some green shoots in January. Could you give us a little bit of color as to what you're seeing or hearing from your customers, maybe what those green shoots might be? And how are those kind of conversations with customers evolving? It sounds like frequency and size of orders maybe changes a little bit, but just any incremental color would be helpful? Yes. It's not an uncommon strategic path that's been taken whenever there's uncertainty in demand. They take their inventories down. And ultimately, it requires us to be more agile relative to meeting peaks and valleys relative to that demand. We'd expect that to continue to play out here in the coming months with an improvement as we get into the back half of our fiscal year. We're in regular conversation with our customers and have as much visibility to that consumer demand is possible, but it's changing, and it's evolving. And they're learning what that means in terms of their order patterns and what type of inventory levels they need to meet that demand. So, we'll be flexible with them. While that gets worked out. Nonetheless, we'll be in a really good position given the proximity of our plants to their locations to meet their needs as expeditiously as possible. But we feel very good, though, that as part of those discussions, the pipeline of opportunity that we have from a growth perspective continues to be very, very robust. You heard Mark mention in some of his commentary relative to the success and advancements that we're seeing inside of foodservice with additional investment for point to meet demand that continues to be incredibly robust certainly in North America with our quick serve focus on carryout with our all polypropylene cup and lid. And growing in Europe is around reusable cups that are ultimately being marketed by some of the largest QSRs in the world, and they're very participating in the creation of those programs, the execution of those programs as well. So, lots going on in the pipeline, a lot of compelling reasons for us to continue our targeted investments to lock our customers to support growth as we work through this choppiness in demand. Thank you. One moment for our next question. And it will come from the line of Kyle White with Deutsche Bank. Your line is open. Hi, good morning. Thanks for taking the question. How are you thinking about your portfolio of assets here? Obviously, you're improving the mix in Engineered Materials. You have the newly established capital allocation community, is there any more pruning to be done? And where do you see the most opportunity for optimization within the portfolio? Yes. We're a diverse portfolio of businesses around the globe. As we shared on previous calls, it's a priority, key area of concentration by our Board relative to the opportunities to dispose of certain assets and then redeploy those proceeds towards opportunities that can support our growth or other capital allocation needs. That continues to be front and center for our teams and for our Board. We disposed of three businesses in fiscal 2022. I'd expect that to be as financial markets begin to improve, and we are seeing some of that. I think it's going to create an opportunity for greater velocity in those types of dispositions that will continue to be an area of concentration and focus for us. Again, all these ultimately allow us then to take those proceeds, redeploy them against our capital allocation wheel based on what's going to maximize shareholder value. Got it. And then on Engineered Materials, where are we at in the purposeful shedding of the lower margin business as you improve the mix there? How many more quarters should we expect to see these actions impacting top line, but obviously improving returns? Yes, the business has done a fantastic job in a hyperinflationary market offsetting that inflation with price, as well as enhancing their mix of business, which did two things. One, that was already supported by capital investments and then the opportunity to further support it throughout this inflationary period curates a nicer mix of business inside EM. Same thing as the year plays out, I think you'll see more of the same in the front half of the year an improvement towards the back half of the year. And no different as we see the consumer and the industrial networks start to improve, they'll similarly benefit from that. Thank you. One moment for our next question. [Technical Difficulty] from the line of Arun Viswanathan with RBC Capital Markets. Your line is open. Great. Thanks for taking my question. Congratulations on the retirement announcement, Tom. So, I just wanted to, I guess ask a couple of questions. So, you provided some long-term targets, the 4% to 6% EBITDA growth and the 7% to 12% EPS growth. Just wondering if we do need to see organic growth in the low single-digit level, to achieve that kind of operating leverage. I know it's been a little bit of a challenging environment the last couple of years, and there's been some [calling of business] [ph] and inflation and so on. So, assuming that the environment kind of stays a little bit challenging for the next 12 months to 24 months, would you still be able to achieve that kind of growth in, say, a flat volume environment or what are some of the levers you have to still hit those long-term targets in a maybe more sluggish environment? Yes. I mean unfortunately, right, you're seeing that right now with weaker demand, and we're delivering on those commitments. So, obviously, when the market is weaker, it gives us more opportunity on the material side, to do exactly what we're doing is executing on optimizing our costs on materials. And so, while we would certainly rather get there through incremental volume, we're certainly in a good spot that we think we can drive positive results even in a weaker economic backdrop. Okay. Thanks Mark and then just on the â on some of the outlook items on free cash flow. So, assuming that you delivered the 800 million to 900 million in fiscal 2023, how do you expect â how should that evolve in 2024 and 2025, I mean maybe you expect a little bit greater free cash flow growth from here going forward just given the potential pivot in the strategy to less M&A and more internal focus, would that help working capital and potentially accelerate your free cash conversion. Just wondering if that algorithm has changed as well. Thanks. Yes. Look, we're always trying to improve our results. Obviously, there's a number of different things that can impact it. Yes, certainly, earnings and cash are ultimately the same thing outside of changes in working capital. So, we gave earnings target goals, and we're looking to continue to achieve those. If I can just ask one more quick one. So, just on the strategy now for the 2.5x to 3.5x leverage, are you effectively saying â and you made the point that you're not necessarily looking for scale from here on. So, are you effectively saying that there aren't as many attractive consolidation opportunities in the market anymore, and you can deliver better growth by investing organically. I would still think that there's potentially some scale advantages on the procurement side that you could read from potential acquisitions, but has that changed as well? Thanks. It has not changed at all. The market still remains fragmented, still presents an opportunity. But for our portfolio, and again, given the number of acquisitions we've done, we understand where we have scale and it's significant in certain pockets. As such, we feel very comfortable that the right approach for us is targeted bolt-on acquisitions that support our organic growth investments, again to get us access to faster-growing markets, faster-growing geographies, which is consistent with what we've been doing. And we're very bullish because, again, as these financing markets begin to improve, it's going to facilitate more of those dispositions and opportunities. And like we said, for us, we've got a circle. And it presides a number of opportunities and one of those is, the opportunity to look internally at our own portfolio, find opportunities to market those externally, use proceeds then to support our various capital allocation needs that maximize shareholder return. Thanks Tom, Mark and Dustin. And Tom let's reiterate what everybody else said, congrats on your retire now. Just wanted to get a little more color around potential dispositions. I know you've spoken about it a number of times in response to some of the other analysts, but would they be focused on some more of the cyclical elements in your portfolio, maybe looking at your industrial exposure, your automotive service companies that you've highlighted in CPI, maybe in some of the more of those industrial elements in CPNA in order to make your portfolio maybe less cyclical and more consumer oriented? Yes. I think, frankly, it's a pretty fair characterization that, you know the more we can build up the stable non-discretionary piece of our portfolio, falls in-line with our strategy. And again, we're not going to be specific on which businesses are going to be divested by and when, but I think the premise that you laid out is very accurate. It makes very good sense for us. And again, it just â it further helps build our value add to our customers as we do that. Got it. And just one quickly on HHS, the volume weakness there. I think last quarter, you mentioned that the volume weakness was due to destocking related to COVID benefits, which at that point was fully cycled through. What really occurred this quarter where you saw destocking? And was it more of just, kind of the consumers dialing back their purchases? Or was there some other things other factors driving the volume makes in HHS? Areas like filtration, areas like house wrap, the dryer sheet space as well was modestly destocked in the period, but we don't expect that to be a long-term phenomenon. As I said, these are great franchises inside our HHS portfolio, we expect those to pivot as we see a general improvement in the economy. Thank you. One moment for our next question. And that will come from the line of Gabe Hajde with Wells Fargo. Your line is open. I hate to put you on the spot here, Tom, but kind of being obviously in covalence and as part of the organization through the IPO process and just the company's maturation, as the company looks out to search for the next person in charge, where would you expect some of the focus to be within the organization? I mean you talked about, obviously, not looking for scale, being more focused on maybe some bolt-on M&A, something that comes to mind that maybe wasn't a focus or priority for the organization in the past was â I mean I know you guys have done things in the plants to be more efficient, but footprint consolidation and things like that. Maybe someone more want say, operational background. But just any color you can give us on, sort of what that might look like, and perhaps the answer is we're not going to tell you. Well, no, I appreciate the question. Thanks for the kind words. Remember, Berry has a very structured and a long-term planning succession process that we adhere to. We're incredibly fortunate to have fantastic internal candidates to consider for my replacement, which again is until the end of the year. So, you guys are [indiscernible] me for a while. But we also have contracted with Spencer Stuart to also take a look externally as well to make certain that we're making the best, most informed decision. And as we have more information that we can share with you along the way, we'll do so, if appropriate. But that's really all I can say at this stage. The bottom line is, the company is in an amazing spot right now. When you stop to think about the changes that we've made, the catalysts that we have today, it's an exciting time. We articulate on a long-term leverage ratio 2.5x to 3.5x, EBITDA growth of 4% to 6%, a 10% to 15% TSR growth, we've established annual dividend. We're buying back our shares because it's a compelling opportunity. When you consider where we trade versus our peer group, and you contrast that with our results. This is an exciting time. So, this is a great franchise that will be focused on how we take it to the next level and our targeted investments around organic growth, are absolutely paying dividends that as you can see in the investor deck in terms of how we've been trending versus our peer group since 2019, the story around Berry and Berry's growth, it's addressed in that slide. We're in-line with our peer group right now and you couple that with our scale, our geographic footprint, our leadership position in sustainability, we're in a great spot, Gabe. I'm proud to be part of this team. I'm proud of what the team is doing and whoever has the opportunity to take this seat is in a great spot to take the company to the next level. So, we're in a great place. One moment for our next question. [Technical Difficulty] will come from the line of Josh Spector with UBS. Your line is open. Hey guys. Thanks for squeezing me in and I echo my congrats, Tom. So, I wanted to ask on Consumer International. If I look at, when you first bought that business, first 12 months, it did about 650 million in EBITDA, last 12 months it's done about 650 million in EBITDA. Consensus is forecasting that same level for this year. I mean I understand FX probably slightly negative over two years, but you have synergies rolling through, I guess, how much is that business or is that business under earning in your view? And can you help us think about what the normal level of earnings is for that business today? Thank you. Yes, it's Mark. So, yes, I didn't exactly follow on your numbers, but I would say the other thing that you got to consider is divestitures. The divestitures that Tom mentioned were in that business. It has grown its EBITDA, and we think it will continue to be able to deliver that. We've got a lot of great opportunities. Tom mentioned some of the investments that we're making in that business, health care, dispensing solutions, pharmaceutical devices continue to be areas of opportunity. And we've also got the growth dynamics in India, China, et cetera. So, we think that business can â we're doing the right things. Pete is doing a great job, and we're opportunistic about the future of that business. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks. Thanks, everybody, for your time and attention today. We appreciate your interest in Berry. We look forward to seeing you all and hearing from you on the next call. Thank you.
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EarningCall_723
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Hello, and welcome to BD's First Fiscal Quarter of 2023 Earnings Call. At the request of BD, today's call is being recorded, and a replay of the call will be made available on BD's Investor Relations website on bd.com. The call is also being made available by phone at (800) 695-0395 for domestic calls and area code +1 (402) 220-1388 for international calls. [Operator Instructions] I will now turn the call over to BD. Good morning, and welcome to BD's earnings call. I'm Francesca DeMartino, Senior Vice President and Head of Investor Relations. On behalf of the BD team, thank you for joining us. This call is being made available via audio webcast at bd.com. Earlier this morning, BD released its results for the first quarter of fiscal 2023. We also posted an earnings presentation that provides additional details on our performance. The press release and presentation can be accessed on the IR website at investors.bd.com. Leading today's call are Tom Polen, BD's Chairman, Chief Executive Officer and President; and Chris DelOrefice, Executive Vice President and Chief Financial Officer. Tom will provide highlights of our performance and the continued execution of our BD 2025 Strategy. Chris will then provide additional details on our Q1 financial performance and our updated guidance for fiscal 2023. Following the prepared remarks, Tom and Chris will be joined for Q&A by our segment presidents, Mike Garrison, President of the Medical segment; Dave Hickey, President of the Life Sciences segment; and Rick Byrd, President of the Interventional segment. Before we get started, I want to remind you that we will be making forward-looking statements. I encourage you to read the disclaimer in our earnings release and the disclosures in our SEC filings, which are both available on the Investor Relations website. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period. Revenue percentage changes are on an FX-neutral basis unless otherwise noted. When we refer to any given period, we are referring to the fiscal period unless we specifically note it as a calendar period. I will also call your attention to the basis of presentation slide, which defines terms such as base revenues and continuing operations. We delivered another quarter of strong performance in Q1. Our results reflect the momentum of our BD2025 strategy, which we are driving through a powerful combination of innovation and strong execution. We exceeded our revenue and earnings expectations in Q1 despite market disruption in China and continue to drive consistent, durable performance in our base business, with revenue growth of 5.2% and $2.98 in adjusted diluted EPS. Our results are a testament to the continued relentless focus by our team of talented associates who are delivering BD products and solutions that are enabling our customers to provide high-quality, cost-effective care to patients around the world. In Q1, we continue to make excellent progress driving all three pillars of our strategy to accelerate growth, simplify the company and empower our associates. Our growth continues to reflect consistent performance of our durable core, which has become known as the backbone of health care and our continued shift into attractive and higher growth end markets through investments in both R&D and tuck-in M&A. These higher-growth transformative solutions are focused in the three areas we see reshaping health care and where we are currently investing approximately 60% of our R&D. And that's in smart connected care, enabling new care settings and improving chronic disease outcomes. Today, we have what I believe is the most exciting innovation pipeline in the history of the company. And through our investments, we are systematically increasing the WAMGR across our portfolio and supporting our strong growth profile. I'll have a few of the end markets that are driving our growth and some of the key products recently launched and in our pipeline that we're excited about. Our Medical segment is focused on improving medication delivery across a wide range of settings, making it safer, simpler and smarter across end markets that include medication management solutions, pharmacy automation, pharma and biotech drug delivery and vascular access management, where we recently launched PosiFlush SafeScrub, consistent with the expected launch timing we shared on our Q3 FY2022 call. A prefilled flush syringe with an integrated disinfection device, PosiFlush SafeScrub, is designed to simplify nursing workflow and enhance compliance with infection prevention guidelines. It's a good example of how we're driving continuous innovation that extends our leadership in our durable core and within the broader $9 billion vascular access management market. Another milestone in our vascular access portfolio was clearance of our new PowerMe midline catheter by the Chinese regulatory agency NMPA. This was designed by our R&D center in China for China and is our first midline in this geography and offers up to 30 days of continuous venous access while reducing patient complications. We're excited about the opportunity PowerMe creates to help develop and category for vascular access in China, and we look forward to the expected launch later this quarter. Our BD Life Sciences segment provides solutions from sample collection and discovery to diagnosis and serves dynamic end markets like single cell analysis, clinical microbiology, point-of-care and the molecular diagnostics market, where we continue to advance our strategy of menu expansion with initial sales outside the U.S. of our BD MAX respiratory viral panel or RVP. This multiplex respiratory panel detects COVID-19, flu A and B and RSV in a single test and is an ideal solution for endemic respiratory testing. This aligns to our strategy to accelerate our growth in the $4 billion molecular diagnostics end market that's growing about 9%. The RVP panel is currently under FDA EUA review for U.S. launch. We also continue to progress our strategy in blood collection at the point-of-care. Point-of-care is one of the fastest-growing categories in diagnostics today that we believe will accelerate as diagnostic testing migrates to new and more convenient care settings such as retail clinics and pharmacies and even the potential of at home. Our BD MiniDraw capillary blood collection system is a disruptive innovation that enables collection of a high-quality blood sample without a venipuncture and is designed to provide a better patient experience across a broad range of care settings. We remain on track for 510(k) submission by the second half of FY2023. Our BD Interventional segment, which provides solutions for chronic disease management, serves end markets that dramatically improve people's lives, such as oncology, incontinence, advanced repair and reconstruction and the $5 billion peripheral vascular disease market, a space that's growing about 6%. Within PVD, we continued our strategy to globalize the BDI portfolio with the recent launch of our Venovo venous stent in China. The first stent in this market, specifically designed for iliofemoral venous disease. Within the $3 billion oncology end market, the space also growing about 6%, we achieved a significant milestone, completing safety testing for a multimodality vacuum-assisted biopsy system, and we're on track for FDA submission and launch in FY2024. The BD multimodality VAB device is expected to be the first vacuum-assisted biopsy system designed to work across all three imaging modalities of ultrasound, CT and MRI, allowing customers to consolidate capital equipment, standardize consumables and simplify physician and nurse training. These launches and milestones are good examples of how we're strengthening our position in attractive end markets across our portfolio. Our purposeful strategic investments in R&D as well as tuck-in M&A and CapEx are supported by our strong flexible balance sheet and disciplined and balanced capital deployment strategy. This framework also gives us the flexibility to return capital to shareholders through a competitive dividend and share repurchases. In Q1, we also continued to simplify our company with programs across our manufacturing network, our portfolio and most recently, our operating model. More specifically, we continue to make progress on our RECODE portfolio simplification program, where we are reducing SKUs of older generation products in order to focus on the most important products needed to deliver care today. We remain on track to remove 20% of our total portfolio by 2025, having achieved more than half of these SKU reductions thus far. In addition, we have numerous initiatives underway to consolidate our manufacturing footprint in more cost-effective locations. All of these efforts are designed to reduce complexity, drive supply chain excellence, and make BD more agile while supporting the achievement of our margin expansion goals. Our BD2025 strategy is balanced, robust and resilient. And our foresight planning and agility are enabling us to deliver strong performance despite the continued macro environment, challenging all companies. To share some perspective specific to health care, overall, the environment continues to stabilize and is in line with our view that challenges are going to persist, not escalate at least through 2023. While inflation is easing in some areas, we do expect that it will remain well above what we have seen historically and have planned for another year of outsized inflation primarily in labor and raw materials. We see continued labor pressure with different market dynamics impacting hiring and increasing wages for certain roles primarily in our manufacturing organization. Across raw materials, some categories of resins used in finished goods are beginning to show signs of improvement while other materials such as packaging and rubber are still inflated versus historic prices. In terms of the COVID pandemic, broadly speaking, we see stabilization. While there continues to be surges in certain pockets around the world, similar to our customers, we have become more accustomed to managing through COVID-driven dynamics and have been effective at avoiding any extended manufacturing and distribution disruptions. Specific to China, we anticipate that the recent COVID restrictions that impacted us in Q1 will affect our peers as well. Our local teams are navigating these restrictions well, which reflects the resiliency and strength of our China organization and the diversity and durability of our business. By successfully navigating the challenging macro environment, we are distinguishing BD and supporting our ability to continue delivering strong performance. Before I turn it over to Chris, Iâll share a few updates on the strong progress our team is making to advance our ESG strategy and goals. In December, we published our second annual ID&E report, which provides details about our progress towards our 2030 ESG goals for promoting a healthy workforce and communities. The report highlights our improvements towards increasing diversity at the management and executive levels and spotlights our global associates who are advancing our culture and driving meaningful change within BD and the communities that we serve. We also published our third annual cybersecurity report. BD was the first in med tech to outline our ongoing efforts to advance cybersecurity in a report, including our work to protect against cyber-attacks and empower customers with information about cyber risks and vulnerabilities. Weâre proud to receive continued recognition for our ESG efforts, most recently being named for the fourth consecutive year to both Newsweekâs list of Americaâs Most Responsible Companies, ranking in the top 25%, and the Bloomberg Gender-Equality Index, recognizing our ongoing commitment to workplace equality. In summary, Iâm proud of our progress and momentum. Our associates are bringing our BD2025 strategy to life as we operate as a more agile, innovative med tech leader. BD is well positioned to drive profitable growth and create long-term value. First, our growth profile is consistent and durable. Second, we are enhancing our leadership positions through purposeful portfolio shifts into higher-growth markets, increasing the WAMGR across our portfolio. Third, we are improving our margin profile through our differentiated growth, enhanced simplification programs and ongoing supply chain excellence. And fourth, we are committed to remaining disciplined and maintaining a strong and flexible balance sheet. We see an increasing capacity through our BD2025 time frame to support value creation and continued strong growth through tuck-in M&A. All of this adds up to a compelling financial profile with a long-term targeted base revenue growth of 5.5% plus and double-digit EPS growth. Our updated guidance for FY 2023 reinforces our confidence in our ability to achieve these targets. Thanks, Tom. Echoing Tomâs comments, we delivered another quarter of strong performance in Q1, which demonstrates our consistent, reliable, durable growth profile in our BD2025 strategy, playing out as planned. So first, beginning with our revenue performance. We exceeded our expectations for the quarter, delivering $4.6 billion in revenue with base business growth of 5.2% or 3% organic. We see underlying organic growth more at mid-single-digits when adjusting for strategic product exits, the licensing fee comparison in life sciences, and several COVID-driven comparisons. COVID-only testing revenues were $32 million, which is expected, declined from $185 million last year. Total company base business growth was strong across BD Medical and BD Interventional with approximately 6% growth. Base revenue growth in BD Life Sciences of 3.3% reflects the comparison to licensing revenues that impacted growth by almost 400 basis points. Base revenue growth was strong regionally as well with mid-single-digit growth in the U.S., EMEA and Asia Pacific. Revenues in China declined slightly, which reflects the impact of COVID restrictions, offset by strong performance from new product introductions in BDI and research solutions in BDB. For the full year, we continue to expect to deliver near double-digit growth in China. Our base business revenue performance continues to be supported by our durable core portfolio, and an increasing contribution from the transformative solutions in our innovation pipeline and tuck-in acquisitions. We also continue to benefit from the organic contribution from acquisitions we anniversaried, which was about 30 basis points in the quarter. Let me now provide some high-level insight into each segmentâs performance in the quarter. Further detail can be found in todayâs earnings announcement and presentation. BD Medical revenue totaled $2.2 billion in the quarter, growing 6.1%. BD Medical performance reflects strong growth in both Medication Management Solutions and Pharm Systems, which more than offset a decline in Medication Delivery Solutions. The decline in MDS of 1% was driven by COVID-related comparisons and the impact of recent COVID restrictions in China as well as planned strategic portfolio exits. We continue to see strong performance in Vascular Access Management outside the U.S. Double-digit growth of 15.5% in MMS was driven by strong demand for our pharmacy automation solutions, including both Parata and Rowa. Weâve been very pleased with customer response and the performance of Parata. As expected, growth in MMS also reflects the comparison to higher dispensing installations and infusion set utilization in the prior year driven by COVID dynamics. We continue to have a very healthy backlog of customer orders for Pyxis and BD HealthSight, which reflects the strength of our connected medication management portfolio. And despite strong growth of 18% in Q1 of last year, Pharm Systems delivered another quarter of double-digit growth of 10.6%, driven by continued penetration in the high-growth biologic and vaccine markets. BD Life Sciences revenue totaled $1.3 billion in the quarter. The decline of 7.3% year-over-year is due to the expected lower COVID-only testing revenues. Life Sciences base revenues grew over 7%, excluding the licensing grow over as previously discussed. Growth was driven by growth in Integrated Diagnostic Solutions base revenue of 1.3%, or 6.4% when excluding the licensing comparison. This strong underlying mid-single-digit growth was driven by BD Kiestra that is helping to address laboratory labor shortages through automation and informatics and continued leverage of our molecular testing menu across our expanded BD Max installed base. In addition, there was strong demand for our respiratory testing portfolio that was partly aided by the timing of orders. High single-digit growth of 9.2% in Biosciences reflects continued growth from new product launches combined with strong double-digit growth in research reagents, enabled by our differentiated content and dye strategy. We continue to see demand for our expanded suite of flow cytometry analyzers and sorters as researchers continue to do even higher parameter cellular analysis for cancer and other immune-related conditions. BD Interventional revenues totaled $1.1 billion in the quarter, growing 5.6%. Growth was driven by surgery growth of 3.1%, which reflects strong performance in advanced repair and reconstruction driven by continued strong market adoption of Phasix, Hernia, resorbable scaffold and double-digit growth in biosurgery, aided by the Tissuemed acquisition. Growth in surgery was tempered by planned strategic portfolio exits and then expected decline in BD ChloraPrep due to a tough comparison to the prior year as a result of dealer stocking. Peripheral Intervention grew 10.8%, which reflects double-digit growth in PVD, driven by the Venovo relaunch, coupled with continued global penetration of Rotarex, and the acquisition of Venclose, which addresses chronic venous insufficiency. Additionally, growth was strong in oncology, within Greater Asia due to an improved backlog situation associated with prior year supplier constraints. Urology growth of 1.8% reflects double-digit growth in our PureWick, chronic, incontinence solutions and endourology that benefited from reduced back order due to improved supplier performance. Offsetting this strong performance was a difficult comparison in urological drainage due to shore step back order release and distributor stocking in the prior year. Now moving to our P&L. We reported Q1 adjusted diluted EPS of $2.98, which included gross margin of 54.7% and operating margin of 22.9% that were consistent with our expectations. While we are no longer providing a specific breakout of the impact to margins from COVID-only testing, you will recall the comparison to higher testing in the prior year is weighted to the first half and as expected is the driver of the decline in reported Q1 margins year-over-year. Excluding the COVID impacts to margins in Q1 of both years, both gross and operating margins in our base business were up slightly year-over-year. The improvement in base margins was delivered despite around 350 basis points of outsized inflation that as expected was primarily driven by selling through inventory that included peak inflation impacts from FY 2022, such as increases in certain raw materials noted earlier as well as the impact of labor inflation and elevated shipping. We were able to offset a large portion of this impact to our simplification and inflation mitigation initiatives and the benefit from strategic portfolio access of lower-margin products as planned. We expect the impact from inflation to moderate as we move through the year. Base margin performance also includes growing over the impact from licensing revenues in the prior year. As expected, we had favorable FX that was recorded in inventory that benefited our GP as it flow through sales. R&D of 6.4% of sales reflects our innovation investments aligned to our strategy in support of our long-term growth outlook. Q1 reflects timing of project spend. We expect R&D to remain elevated in Q2 and normalize over the balance of the year to around our long-range target of 6%. Our tax rate in Q1 was lower than anticipated due to the timing of certain discrete items that were planned for during the year. Regarding our cash and capital allocation; cash flows from operations totaled approximately $400 million in the quarter. Operating cash flow reflects an impact of approximately $300 million from higher inventory balances. The increase reflects the impact of inflation and our strategic investments in raw materials to optimize product delivery and meet customer demand. We've seen good progress in December and January on WIP [ph] and finished goods rightsizing with January inventory dollars down sequentially from December. We are working to moderate strategic raw material purchases as stability improves in select markets. However, we continue to make prudent trade-offs where necessary to ensure we support our customers while delivering strong results. Assuming continued stabilization of the macro environment and supply chain, we expect to continue to manage inventory levels down and by the end of the fiscal year had this be a positive source of cash and meaningful progress towards meeting our long-term cash conversion goals. We paid down approximately $500 million in long-term debt in Q1 and ended the quarter with a cash balance of approximately $600 million and a net leverage ratio of 3 times. As the year progresses and we build cash, we can increase our capacity to deploy cash towards tuck-in M&A. Moving to our guidance for fiscal 2023. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation. Given our first quarter performance, we are confident in increasing our revenue and EPS guidance, given the strength of our base revenue growth, consistent execution of our margin goals, and reflecting the latest FX rates. Starting with revenues, I will provide some insights into some of our key guidance assumptions. First, we are well positioned for strong growth across our three segments, which are delivering at or above our initial expectations despite the impact of restrictions in China, and thus, we are increasing our base revenue guidance. On a currency-neutral basis, we now expect base revenues to grow 5.75% to 6.75%. This is an increase of 50 basis points from our prior guidance of 5.25% to 6.25% and is driven by our Q1 revenue outperformance and the confidence we have in our consistent durable growth profile. Our base revenue guidance continues to include planned strategic portfolio exits that will enable increasing manufacturing efficiency and capacity and ensure the reliable supply of the products that matter most to our customers. We initiated these actions in Q1 and for the full year, continue to expect the impact to base revenue growth of approximately 100 basis points while being accretive to margin. Offsetting this revenue impact, we continue to expect a positive contribution of approximately 100 basis points from the full year benefit of our recent acquisitions with Parata being the predominant driver. While we aren't providing segment-specific guidance, we are on track to deliver strong performance across our segments this fiscal year, in line with our long-term planned commitments. We expect Medical segment growth to be above the total company range, which includes the acquisition of Parata; Life Sciences growth to be below given strong prior year comps and Interventional to be above the midpoint. For COVID-only testing, we are now assuming about $50 million to $100 million in revenue versus our previous expectation of about $125 million to $175 million and is driven by reduced testing volumes and the continued shift in the market to combination testing for respiratory illness. Regarding Alaris, we continue to only model shipments related to medical necessity in line with fiscal 2022 demand. Regarding our assumptions on earnings, we continue to expect operating margins to improve by at least 100 basis points while absorbing the decline in COVID-only revenue, which has a higher margin profile. Despite the challenging macro environment persisting, our focused execution on driving profitable revenue growth, combined with our simplified programs, gives us the confidence that we will be able to continue to mitigate inflationary pressures and make meaningful progress to achieving operating margin levels of about 25% in fiscal year 2025. We continue to expect over 80% of the improvement in operating margin to come from SSG&A [ph], driven by internal cost containment and leverage. The balance is expected to come from slight improvement in gross margin and R&D as we normalize back closer to our target of 6% of sales. Below operating income, our assumptions regarding interest, other and tax remain unchanged. We continue to expect adjusted EPS before the impact of currency to be around double-digit growth and within a range of approximately 9% to 11%. This includes absorbing about a 350 basis point headwind from the anticipated decline in COVID-only testing, which is about 50 basis points more than we previously anticipated. As a result, this implies a very strong low-teens base earnings growth of approximately 12.5% to 14.5% compared to 12% to 14% previously anticipated. Let me now walk you through the estimated impact from currency. As a reminder, we manage our business and provide guidance on an operational basis, but provide perspective on currency using current spot rates. Since our last call in November, the U.S. dollar weakened against all of our major currencies. Based on current spot rates, which assumes the euro at $1.08 for the remainder of the year. For illustrative purposes, currency is now estimated to be a headwind of approximately 200 basis points, or about $370 million to total company revenues on a full year basis, which is an improvement of approximately 250 basis points compared to our prior view. The currency headwind to adjusted EPS growth has also declined significantly since our November earnings call. At current rates, currency would represent a total headwind of approximately 230 basis points to adjusted EPS growth compared to approximately 420 basis points previously. All in, including the estimated impact of currency, we are increasing our reported revenue guidance by approximately $500 million to a range of $19.1 billion to $19.3 billion compared to $18.6 billion to $18.8 billion previously and are raising our adjusted EPS guidance to be between $12.07 and $12.32, which is an increase of $0.22 at the midpoint compared to our prior guidance range of $11.85 to $12.10. As we think of fiscal 2023 phasing, there are various items to consider. We have outlined more detail in the accompanying presentation slides, but the following are key areas to note. First, regarding margins. We expect Q2 operating margin to be similar to our FY 2022 full year margin. This demonstrates our strong focus on profitable growth given the continued impact of inflation and the grow-over impact of our COVID-only testing revenue, both of which we expect to be most prominent in the first half of the year. As a reminder, COVID-only testing has a higher margin and reinvestment of COVID-only testing profit was weighted to the back half of the year. As the year progresses and we continue to benefit from our simplification and inflation mitigation programs, we anticipate margin expansion to be most prominent and to increase through the second half. Second, regarding FX. At current spot rates, we expect the headwind to revenue and EPS will be over-indexed to the first half with about 90% of the full year impact to revenue and about 80% of the full year impact to EPS occurring in the first half. For the full year, we expect the FX drop-through to earnings to be in line with our BDX operating margin. Lastly, a couple of timing items to note. We expect R&D as a percentage of sales to remain elevated in Q2 and normalize over the balance of the year to around our long-term target of 6%. Additionally, the midpoint of our full year effective tax rate guidance indicates an effective tax rate over 16% for the balance of the year, which is best to assume occurs evenly throughout the year as the exact timing of any other discrete items is hard to predict. In closing, we are very pleased with our performance, which demonstrates our consistent, reliable, durable growth profile and our BD 2025 strategy continuing to progress as planned. As we look forward and as reflected in our FY 2023 guidance, we are well positioned for growth with excellent momentum in our base business. Thanks, Chris. The future has never been brighter for BD. We have demonstrated a powerful combination of innovation and strong execution and have the talent, vision and momentum to continue delivering robust performance. As we move through the back half of the fiscal year, you can expect to see continued relentless focus on execution of our strategy. I'd like to thank our associates worldwide once again for their tireless commitment to our purpose of advancing the world of health. Hey guys. Congrats on the quarter and thanks for taking my question. Tom, maybe at a high level, when I look at this guidance here and Q1 performance, I think your prior comments were Q1 organic to be a couple of 100 basis points below the annual guide. And I'm looking at the annual guide â prior annual guide of 4.75, which included the product exits. So I think the Street was looking at sub 3%. You came in at 3%, slightly better. But the base here was increased by 50 basis points. It looks like underlying business momentum is accelerating. So maybe just talk about what's giving you confidence? I think you mentioned some new products. So what's driving this confidence in organic guide raise? Yes. Thanks, Vijay. Thanks to everyone for joining the call. Maybe a couple of macro comments. One, I just think this represents another quarter of strong execution, consistent with what we shared overall. When you think of our kind of forward-looking view from our updated guidance, I think, a few key things, not that we highlighted and then I'll address your question maybe with where we see some pockets of strength. But one, we did increase to your point, 50 basis points of growth on our base business. That strength is pretty broad-based when you think of it. I'll come back to that. And that's despite the fact that you had the restrictions and impacts in China as well. So we more than absorbed that. We also absorbed the COVID-only testing revenue, which given the testing dynamics in the marketplace are not surprisingly down when you think of COVID only relative to our position in the market. That's a higher-margin offering, and we absorbed that as well. I think importantly, we continue to execute against our margin, and we committed to our â at least 100 basis points of margin improvement and then we incorporated FX. Yes, and to your point, when we're entering the year, I mean, one, Q1 is still under-indexed relative to our full year guide. Right? So that still holds together. We know there was about 100 basis points of headwind associated with the licensing revenue impact in our Life Sciences business that you saw in our results. We had estimated there is maybe about another 100 basis points of other dynamics, comp-related issues, mostly attributed to COVID. We also had some difficult comps in the quarter in certain areas like pharma systems, for example, grew 18%, Q1 last year, and we still delivered north of 10% growth in this quarter. So, I think that continues to be a source of strength for us. I think the flu season, there is probably a timing dynamic there. It peaked a bit earlier than we thought and was a higher spike. As we go through this call, Dave can certainly amplify that, but it's played out like it's played out in other areas with a quick season that's going to abate. So I think you have a timing dynamic there as well. So there is various items such as that. But largely speaking, I think, things are very consistent. We feel really good about the first quarter of the year, and it gave us confidence to increase our guidance. Understood. And then just one follow-up for me, Chris. And perhaps, Tom, you can chime in. One on, did you â a few questions here on combo and flu revenue contribution. I think on the prior call you had said you expect somewhere around 150-ish for the year. Did the estimate change? What was the China impact here in the quarter? And Chris, did I hear you correctly on gross margins? Should they be up sequentially here into 2Q? Or should gross margins be flattish or down? Yes, real quick on gross margin, we didn't give specific guidance on gross margin, we more â just to give you kind of an anchor how to expect Q2 to play out. We said it would be in line roughly with how we ended our full year fiscal year 2022, which when you think of the inflationary environment we're in, in the first half of the year, right, we talked about peak inflation rolling through in Q1 and Q2. We had a 350 basis point impact of inflationary pressure in Q1. And so, a Q2 margin similar to how we exited the year is what we're thinking. We did not specifically highlight gross margin. Vijay, on the other two questions that you asked, on China specifically, so China declined slightly in the quarter, obviously due to the COVID impact. We did see at the end of this month â last month, January, starting to see some recovery there. So, we're optimistic for the year, we still â as you know, we delivered double-digit growth in China. Last year, we said high singles or near double or about that this year, and that's unchanged. We think we will be able to recover in the back portion of this year. We still have our four-pronged strategy that we have in China we remain very confident in. We've got a very strong team there that's been navigating that challenging environment. Again, they delivered 10% plus growth in 2022, and we expect another strong 2023. And that strategy that focuses on bringing our global pipeline to China continuing to drive China tailored R&D. And you heard us talk about a new launch there in the midline of a product developed in China for China. We continue to move in to expand our market coverage into lower-tier settings, continue to manage through the BOBP where it exists, that's in our run rate. And we continue to strengthen our local presence in China, both our manufacturing presence as well as clinical expertise as we continue to train thousands and thousands of clinicians each year. That formula has worked very well for us in the past, and we continue to double down on that. I think as we think about the combo test, I'll turn that over to Dave to speak a little bit about what we're seeing there. Thanks, Tom. Hey Vijay, good to hear you. Thanks for the question. Yes, so just on COVID and combo, as I think about both of those. I mean, as you saw in the quarter, we posted COVID-only revenues of $32 million. And as we said on the call, we now expect COVID only for the full year to be between $50 million and $100 million. I think Chris commented right, we are seeing obviously stabilization in the market. We are seeing a decline in testing for COVID only. Actually, as that testing shifts to these combination tests, and actually, for us, in Q1, our performance in that area did actually help offset that COVID-only decline. We had anticipated that that's the way that was going to become the standard of care. I'm actually very proud of the team in terms of the way they sort of anticipated and reacted and built these combination test supplies to support the Q1 performance. And I think if you think about the installed base that we've grown on BD MAX, the fact that we've released these combination assays on both BD MAX, BD Veritor, BD COR actually now in Europe is CE-marked. I think that dynamic, and we can talk about it later, the dynamic of what that looks like for the full year on the respiratory testing obviously continues to play out. But yes, COVID only, we definitely see a decline. Yes. So for the year, we think COVID only now will be in the range of $50 million to $100 million. So, yes. So, we never really â so, if I think about that, the way â if you think about what we said from a, let's say, a flu season pre-pandemic, we had said that was always in the $75 million to about $100 million range on the antigen testing and so on and so forth. There is obviously a lot of unknowns right now in terms of how the full year is going to play out. Obviously, quarter one, we saw the season start early, if you track those CDC graphs, we saw the season start early, it peaked, and we were able to respond to that. If we were looking at it now and for all the assumptions we have, we would think it will be about 1.5 times, let's say, a normal season. So $75 million to $100 million, we would say 1.5 times. And that's really enabled and driven by the installed base increases that we have and the fact that we have developed to launch these combination sets across those platforms. Hi, thanks for taking the question. Sorry for the delay there. So, congrats on quarter, even though I'm not a â usually congrats on a good quarter guy, but that was very nice. So... Of course, Tom. I had a question, a follow-up on Chrisâ comments on just the operating margin expansion improvement being more back-half weighted. I was hoping you could just talk a little bit more about that and maybe unpack that and talk about the sources of it just because thereâs been so many moving parts and itâs an important part of the story. Yes. No problem. Thanks, Matt. I appreciate the question. Yes, things are pretty consistent with what we shared when we started the year, and it seems to be playing out as such. Some of the key factors to contemplate. First of all, we talked about that from a full year standpoint, inflationary headwinds being another 200-plus basis points. This is on the back of two other years with last year also being over 200 basis points. So, weâve been navigating an extremely challenging macro environment, right, when you think of that on a cumulative basis. What we did say around the inflationary pressures, it would be significantly weighted towards the first half of the year will be highlighted in Q1 that you saw flow through because a lot of this was inventory that was built last year that sold through. 350 basis points of outsized inflation. Thatâs on top of, I think, of normal inflation merit increases that everyone takes that would happen in any kind of environment, more of those 3% level. So, youâre really talking about, call it, 400 basis points plus of costs that you have to contend with within your P&L. So then when you think of the mitigation offset to that, so -- by the way, so when you think of our Q1 performance and margin on the back of a 350 basis point inflationary pressure in the quarter, weâre very pleased with how we started the year, because we knew the front half was going to be kind of the more challenging times. As we progress through the back half, thereâs a few things that will play out. One, it starts with our internal focus on cost improvement initiatives, simplify, whether it be Project RECODE, driving outsized cost improvement through our plants and other facilities. Weâre very focused on portfolio, whether it be driving mix. We took this bold strategic action around portfolio product exits that contributed within the quarter. And so, you donât do this was one thing. The strong growth rate, of course, gives you natural leverage. And then as we go through the back half of the year, while weâll still be in an elevated inflationary environment, the cost of materials will subside. Youâre seeing some of that subside in certain pockets of raw materials as an example, while other areas, like labor is continuing to persist. But you should see it trend down from that 350 basis points to get to our average of over 200 basis points that we talked about. So then when you think of kind of the dynamics within the P&L between GP and operating margin and where it will play out, GP, we said would be largely in line to just a slight improvement for the full year. And again, that goes back to the fact that weâre absorbing the significant inflationary pressures. So, youâre doing a lot of work to kind of stay flat to slightly above. And then the majority of it will end up showing up in operating margin as you think of leveraging your cost base there, some cost improvement actions weâre also taking in OpEx, and we also continue to normalize our R&D spend in the second half. If you saw in Q1, and we expected in Q2 to have more outsized R&D above 6%, so the back half will be below 6% to normalize to our 6% rate. So, I think those are the biggest puts and takes as you think of the year, but weâre very pleased again with Q1, how we started and how focused weâve been on the margin profile. Good morning, Tom. Good morning, Chris. Thanks for taking the question and Iâll reiterate my congratulations on the nice quarter here. Chris, just one follow-up to Mattâs question. How much visibility do you have? I mean, the second half margin ramp is pretty strong. How much visibility do you have on that? And trying to calculate the numbers here quickly, but it implies, I think, pretty low OpEx growth, if Iâm not mistaken. Just color on that, please? Yes. Thanks, Larry. Thereâs a few things that obviously, I would call naturally. Well, kind of like, for example, we had reinvestment of the higher COVID-only margin from the first half and reinvestment was in the back half. That will stop. We talked about timing differences of the R&D spend. I mean, you got a 50 basis point swing just timing there from first half to second half as an example. I had also indicated on the call some of the SSG&A [ph] that we had incurred in Q1, thereâs timing elements there. So thereâs timing elements in probably R&D, SSG&A. You have the lack of reinvestment that you just stopped at. Those were onetime in nature. The other dynamic that you have in GP that I mentioned is the trend of some abatement while still elevated, but itâs all on a relative basis of the raw material cost in the second half in GP. Short of something significant changing, we have pretty strong line of sight to those dynamics. And then from there, itâs really just continuing the rhythm of our cost improvement initiatives. So, I think to your point, obviously, the macro environment has been fluctuating. So, we keep monitoring that. But I think given where we are, we feel pretty confident and weâre certainly well on track to deliver the, at least 100 basis points of improvement for the year. Thatâs helpful. And just one quick follow-up. Tom, it looks like Parata is doing really well. I mean the $86 million inorganic contribution in Medical. It looks like there was one other acquisition there, but I assume most of itâs Parata. So any color on how Parata is doing? It looks like itâs doing better than the initial expectations. Thanks. Larry, youâre right. Weâre at or actually a bit ahead of the deal model there. We couldnât be more pleased with Parata. And weâve got Mike here in the room. So let me turn it over to Mike to talk about what the other acquisition is thatâs in those numbers and a bit more about Parata. Yes. The other acquisition is the acquisition of MedKeeper. Thatâs a pharmacy automation software that helps automate the processes that a pharmacy tech would use to prepare IV medications in the pharmacy hood. So that contributed a small amount into that acquisition number. From a Parata perspective, I think what weâre seeing there, and we are really pleased with it, is the combination of the energy and the product that Parata provides and the energy that the people from Parata are providing, along with the sort of discipline and coaching that BD and the scale that we provide to access new markets, access acute care settings and help drive the transformation of the pharmacy for acute care. So Parata is continuing to grow very strong in the alternate site in the retail area. And then weâre starting to open up the discussions with IDNs that are looking to transform their pharmacy operations. So I think that bodes really well for the future. We are very pleased with it, and we hope to continue to see the same type of response from our customers. I think we â fair to say, Larry, we donât see any change in the trajectory around the macro factors that are driving demand for that, right? The labor shortages, the need to repurpose pharmacists to do more things in the retail setting, like wellness checks and vaccines and address patients, all of that, right, drives the demand for automation and robotics. And itâs really a great example of our smart connected care strategy, one of the three transformational areas that weâre focused on. Itâs a great example of us bringing that to life. So really good momentum in the Medical segment there. Good morning and congrats on nice quarter. Chris, maybe to dig into some of the points you made already. COVID testing is a high-margin business going down. How much of the base business upside in guidance is coming from the combo COVID test? And then a lot of competitors are outperforming on COVID testing and potentially raising numbers for the year. I guess, how are you thinking about just Becton, Dickinson in the framework of COVID testing and your assumptions underlying how testing will be used for the balance of the year? Thanks. Yes. Good question, Robbie. So I'll start with the COVID and Dave can add in here. But I would say a few things. One is, so our COVID testing as you know is primarily in professional settings. And when we talk about our â and molecular, to a degree as well, too, we don't have a strong presence in At Home. We do have an At Home test, but it's not it's a â it's not nearly as big of a presence as in our professional setting. So I think perhaps where you see the most outsized performance there is in company â is from companies with a large At Home presence where you've just seen a lot of the COVID testing migrate to At Home versus in professional settings since it's so easy to do and people can do that without going into a clinician. So I think that's one factor probably influencing some of the delta for us. As you know, we do have a combo test in development for At Home, and we'll share once we get that, hopefully that EUA and able to launch that. Yes. Hey Robbie. I mean I think, Tom, you captured well. I think when we did our At Home COVID test; we made a very deliberate decision to pursue a digital strategy. You saw the acquisition that we made of Scanwell. We were very much aligned to the test, treat and trace reporting dynamics. And we intentionally sort of targeted that digital ecosystem with a higher price, higher margin rather than the visually red at-home test. We still think on a go-forward basis, as the sort of, let's say, the sort of the government contracts and things abate, as testing perhaps becomes more regulated At Home, 510(k) environments and so on, a digital ecosystem, again plays into the smart connected care of BD will be important. But I think for us, we just look at it all as we're seeing the softening in the COVID decline. We firmly believe that the standard of care going forward will be these â in an endemic type of approach, these combination tests and we've built a portfolio across BD MAX, BD COR, Veritor and potentially Veritor At-Home across all of these combination portfolios. I think the good thing, Robbie that we would look at as is that we're really getting more to a durable revenue number in that, right? So I think as we look at 2023, it's a number that could be very much in line with how we think about it playing out in future years as well at that level where there's not still significantly high numbers that would drop in the future that were really at a kind of a durable level of performance in those categories. Well, just the way you started your question, Robbie. So if you think of us absorbing the COVID-only and increasing our base revenue guidance by the 50 basis points, it wasn't like a swap out into combination testing. It was actually broadly based across the business. As Dave mentioned earlier, we still see the combo part of our portfolio at that 1.5 times, and we'll continue to watch how it plays out. There was a little bit of strength there, but it wasn't outsized relative to the other areas we also had stressed. Typically, yes. Just to add we typically wouldn't raise unless it was a highly unusual situation, trying to predict expectations on a full year basis on flu or a flu combo test just because it can drop off so quickly. And in fact, we are seeing, right, that's happening if you look at the CDC charts, those charts are showing significant drop-off like what happened in Australia. Rapid early peak and then a rapid drop, unclear if there could be second or third peaks in the future, but that's not something we can easily predict. So typically in Q1, we try to be conservative around that â those outlooks in that specific product category. More after Q2, we get a sense of where the full year plays out. Hey thanks. Wanted to follow-up with a couple of questions; one on sort of the margin side and then just a couple of clarifications on the revenue side. And just too sort of maybe summarize and make sure we've got a clear understanding of the sort of dynamics this year. I mean you have these significant restructuring efforts underway that you've talked about, that sounds like on a full year basis you're expecting those to kind of offset the inflationary â outsized inflationary cost at the COGS line, at the gross margin line? I'm guessing you're probably not fully offsetting those here in the first half. But as you pointed out, that 350 basis point of inflationary hedge or inflationary pressure are going to sort of ease in the back half. So full year, you sort of manage that to sort of neutral and then the benefits that you're getting here to get you to that 100 basis points really happened below the gross profit line in the form of leverage, in the form of timing as you pointed out. Is that the right way to think about the overall margin picture front half, back half, just to summarize and make sure I'm clear on it anyway? And then as â I have a couple of quick revenue follow-ups. Yes. I think that â I mean, there's other puts and takes within there. But generally speaking, yes, that's how we see the year playing out. Great. And then on the revenue side, just some other folks who have had some China pressure in the quarter as you did and obviously managed through that to deliver the beat here. But if you could maybe quantify that is sort of one clarification is give a sense of what the growth might have been if it's a 50 basis point overall hit to growth on the clarification on the combo testing, COVID testing changes that you made in terms of your expectation of COVID-only testing. It sounds like that's â that maybe not so much of an expectation that COVID testing in total is coming down, but it sounds like it's a bit more of a mix shift that's just â you're getting COVID testing in the form of that combo testing. So not directionally inconsistent, it seems with what other folks are talking about. They just don't have that combust [ph] exposure. And then I'll leave it there just with those two clarifying points would be super helpful? Thanks. Yes. I think just real quick on China. Thanks, Matt, for the questions. So I mean, last year is just an interesting proxy, right? We went through restrictions in our fiscal Q3. Despite that, we navigated. We had an impact in the quarter. We actually still grew in that quarter last year and posted around double-digit growth in fiscal year 2022. This quarter, we saw a modest decline, 1%, and in China specifically, and normally if you think of it as a double-digit growth business. With that said, Q1 last year, was a strong comp for us in China. We had a very strong quarter for various dynamics, including some new products that were introduced, et cetera. So we would say the impact is probably just south of 50 basis points, if you want to think about it, plus or minus in the quarter headwind just to give you some direction. We did highlight we still feel great, as Tom mentioned earlier, with the core strategy with that business, short of like further disruptions occurring this year and these being a more kind of acute. We should see again around double-digit growth for the year is what we had shared. So we did see some trends, recent trends, like we're watching it. So we're watching it closely, but it looks like you're starting to kind of see some turnaround in that market. It's still early. So we'll look at it and we'll update, of course, in Q2. But I think longer term, our strategy and performance in China is really strong. I think just to add in there, we had seen even versus the first half of January to the back half of January, we started seeing good recovery towards the back half of January as the COVID outbreak began to subside. Yes. I think, COVID, I can let Dave and Tom jump in here too, kind of half accurate, I think, in your depiction. Thereâs significant market dynamics on call it, COVID-only testing in the marketplace this year. If you think of last year, there was a lot of government intervention and school requirements and businesses. I mean thereâs â a lot of that has subsided. So thereâs a portion of the reduced testing thatâs just market dynamics playing out in terms of total volume, and thatâs not just shifting the combination testing. With that said, we still feel good about our combo assay in having that because we do see that as the assay of choice as folks have are symptomatic going in and want to get tested for flu. So we saw strength in our platform. But as Dave articulated, the flu season did kind of spike early. So weâll have to kind of continue to watch that as we navigate through Q2. So it certainly wasnât a one-for-one shift by any means, not even really close to that. Yes. And I think the only other things that I would talk about, Matt. Just in terms of the market dynamics, we track things like bed occupancy and so on really closely. And if you look at a lot of the data sort of in our first quarter and sort of beds that were occupied by COVID-only patients was like maximum peak of like 6%, which is way down from sort of north of 22% in sort of prior period. So that COVID-only dynamics is definitely softening. And I mean Iâll just reinforce what I said earlier on around these combination assays where the unmet need is if somebody presented symptomatically and you want to know, particularly in the respiratory season, do I have COVID, do I have flu, do I have RSV, we think that is going to be the norm on a go-forward basis. And I think we talked earlier on that we have those on MAX outside the U.S., on Veritor. Two things I would also highlight that is for the combination assay here in the U.S., we are under EUA review with the FDA right now. And actually, just late â or BD MAX, yes. And late last month, we actually did file our EUA for an at-home combination assay. So there are also two EUAs that are under review right now. Who â as I said, right now, the season is extremely quiet. But this is also about us planning and preparing for whatever the respiratory season may be towards the end of this calendar year. Good morning to you. Let me start off with new products. Tom, I was looking for the last couple of quarters, handouts here. And I donât recall, but it feels like starting off with innovation in our handouts and the passion with which you review everything is â tells us all something very important about the direction youâre heading. And I was just curious from two angles. Which do you see â which would you want us to view as the most impactful to growth margins and to the franchises, which are you most focused on? And separate, but related, maybe you know that, as Chris highlighted, the balance sheetâs getting back in such excellent shape, what are your priorities? Itâs clearly tuck-in, but is there any sort of franchise or technology or area we should be thinking about? Great questions, Rick. Thank you. So on the innovation side; obviously, we appreciate the comments there. Weâre really pleased with the momentum that we have. And as Iâve said many times, we think we have the most exciting pipeline in the companyâs history. If you look at last year in FY 2022, we had 25 new product launches, things like our HealthSight diversion management moving into the operating room or the new Pyxis ES platform or a series of new dyes and the first of their kind in BDB or our core high-throughput platform. Asprex [ph] in the U.S. or PureWick Male are all great examples of products that we launched last year that are going to help drive growth this year. As we think about â and we highlighted quite a few this quarter as well. As we look ahead, as you know, thereâs no â you canât say for BD, hey, thereâs these three or four products that are going to drive our performance and that if they go really well or donât go as well, that itâs going to change our outlook and our thesis. Thatâs one of the strengths of BD. Weâve got a lot of singles, a lot of doubles. Weâve got triples here and there. But weâve got a deep bench. Whatâs â what Iâd point you to is weâve been systematically moving our portfolio into higher-growth markets and shifting our WAMGR up. We talked a lot about that at JPMorgan this year. We gave updates specifically on our progress versus the WAMGR goals that we set at Analyst Day two years ago, and weâre very much on track to those. Weâre really pleased with how our portfolio is progressing. Weâre really pleased with how weâre executing R&D. Weâve shared before we exited FY 2022 with our best performance ever, 87% on-time launches, 84% milestone delivery. Thatâs up significantly versus where weâve been in the past, and so weâre pleased with how our R&D team is performing. We highlighted quite a few of the many exciting launches that we have coming up this year or submissions that we have. Certainly, think about Life Sciences, facts discover is a breakthrough new platform. Any time youâre on the cover of Science Magazine, weâll consider that an exciting technology, and weâre launching that later this year. A lot of exciting interest from our customers as well as the new dyes that are associated with that to take advantage of the spectral technology and in FACSDiscover. YODA around capillary blood collection, enabling blood collection by non-phlebotomists, non-venepuncture, really highly preferred by patients. 75 out of 100 will prefer or more blood being drawn with that device than a venepuncture. And we see that as starting to enable more routine care in places, like retail. When you look at the majority of clinical decisions being driven by diagnostic data itâs hard for care to move into new settings if youâre not getting that diagnostic data available there. You still got to go into the old system. They have your blood drawn. Weâre working to change that. Thatâs something that weâre going to be excited about as we go forward. In BD Medical, obviously, weâve got products and pharm systems that weâve talked about in the past, including Libertas as well as new vaccine delivery solutions that weâve launched recently in BDI, weâve talked about quite a few. We highlighted PureWick in the past, PosiFlush in MDS, list goes on again in JPMorgan went through those pretty deeply, and I highlighted a few here on the call today. I think as we think about tuck-in M&A, weâre going to remain extremely disciplined. Iâve shared in the past, of course, many times, weâre still focused on tuck-in M&A exclusively. Weâre very focused on maintaining that strong balance sheet that we have, and we are going to continue to increase the amount of cash that we generate, and we feel really good about how that looks over the next several years. We have our very focused priorities. We donât disclose specific market categories that weâre focused on there. But weâve obviously pointed very specifically to three areas of focus around smart connected care, around technologies that enable the shift to new care settings and around technologies that help us improve chronic disease outcomes in the chronic disease spaces that weâre focused in, like oncology, peripheral vascular disease, et cetera. And so, over the last three years, 90% plus of the M&A dollars that weâve spent have been focused in those three categories, and we would certainly expect that continue going forward, that level of focus. Thanks for the question. And there are no further questions at this time. Iâll turn the call back over to Tom Polen for closing remarks. I just want to thank everyone for your time today. Great series of questions. Obviously, weâre â we feel really good about the performance as we started this year, and we look forward to providing updates in the future. Thank you. Thank you, and that does conclude todayâs audio webcast. As a reminder, a replay of this call will be available on the BD Investor Relations website. Please disconnect your lines at this time, and have a wonderful day.
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EarningCall_724
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Good morning, ladies and gentlemen. Welcome to Kimball Electronics, Second Quarter Fiscal 2023 Earnings Conference Call. My name is Daily and I'll be the facilitator for todayâs call. All lines have been placed in a listen-only mode to prevent any background noise. After the completion of the prepared remarks from the Kimball Electronics leadership team there will be question-and-answer period. [Operator Instructions]. Today's call, February 7, 2023 is being recorded. A replay of the call will be available on the Investor Relations page of the Kimball Electronics website. At this time, I would like to pass the conference over to Andrew Regrut, Vice President of Investor Relations. Mr. Regrut, you may begin. Thank you, and good morning, everyone. Welcome to our second quarter conference call. With me here today is Don Charron our Chairman and CEO; Jana Croom, Chief Financial Officer; and incoming Chief Executive Officer, Ric Phillips. We issued a press release yesterday afternoon with our results for the second quarter of fiscal 2023. To accompany today's call, a presentation has been posted to the Investor Relations page of our company website. Before we get started, I'd like to remind you that we will be making forward-looking statements that involve risk and uncertainty and are subject to our Safe Harbor provisions as stated in our press release and SEC filings, and that actual results can differ materially from the forward-looking statements. All commentary today is focused on adjusted non-GAAP results. Reconciliations of GAAP to non-GAAP amounts are available in our press release. This morning Don will start the call with a few opening comments, Jana will review the financial results for the quarter and guidance for fiscal 2023, and Don and Ric will complete our prepared remarks before taking your questions. Thanks, Andy, and good morning everyone. Let me begin by welcoming Ric to the Kimball Electronics family and congratulating him on his new role. Ric, we are thrilled to have you as a member of the team and feel very fortunate that an executive with your pedigree, depth of experience and track record of success will be leading our company. Recognizing that you don't officially start until March first, we also appreciate you taking time out of your schedule to join us today. I know you're excited to say a few words, and I'll turn the call over in a moment after we review Q2 results, which were very good. For the fourth consecutive quarter, net sales were at an all-time high for the company, and operating margin expanded both sequentially and compared to the same period last year. Our team continues to ramp-up production on new and existing programs, leverage our facility expansions in Thailand and Mexico, and begin to work down the backlog of open orders, resulting from pandemic-related global supply chain disruptions and component shortages. We expect improvement in sales and margin to continue for the balance of the year, as part of a stair-stepped fiscal 2023, and we are raising our outlook for full year sales and expect operating margin to be in the mid-to-upper end of the guidance range. Net sales in Q2 were $437 million, a 39% increase compared to the same period last year and 8% better than Q1, which was previously our best quarter. While overall conditions in the global supply chain continue to improve, the recovery has been gradual, with only modest increases in the availability of the high grade components needed for the applications we support. A very rough estimate suggest net sales in Q2 were constrained approximately 10% from part shortages, so there was additional upside in the quarter that we could not realize. Similar to Q1, all three vertical markets reported robust double digit increases, with two of them posting all-time best. Net sales in the automotive vertical, our largest business were $200 million, a record high. This represents a 44% increase compared to Q2 last year, and 46% of total company sales in the quarter. There's also an 8% sequential step up from Q1, with the growth fueled by the next generation electronic breaking system in Reynosa, a recent launch. This is our largest automotive program and is featured on some of the most popular pickup trucks and SUVs in North America. We continue to see excellent opportunities in this vertical as our manufacturing capabilities align with industry growth from the electrification of vehicles. Features such as automated driver assist, lane departure warning and self-parking are available on today's most popular cars and trucks, and we expect more functionality to be added as consumer adoption increases. More and more functionality resides in the steering modules that we manufacture and over 70% of our work in automotive is in electronic power steering, with three major market leading customers, who collectively provide steering systems to the car makers of many of the most popular brands in the world. Significant growth in content is coming from these customers, and we are strategically positioned to benefit. It is important to note, it is essentially the same steering architecture to turn the wheels of a vehicle, regardless of whether it is powered by a motor, an internal combustion engine or a hybrid of the two. The steering applications we support are largely agnostic. As a result, our growth is not dependent on the type of vehicle produce, which is important as the industry continues to transition to electric vehicles. Second, as additional functionality is hosted in the Electronic Control Unit or ECU, our average selling price increases. This has been the case over the last decade, and we expect it to continue with new applications. Also, the physical size and space dedicated to the ECU within the vehicle is tight. So adding functionality increases the complexity of assemblies, also aligning with what we do well. This business, our automotive business, is sticky. The automotive industry is highly regulated, requiring certifications, stringent validation protocols and carefully monitor change management systems. Selecting the right partner and the value chain is crucial and often requires high levels of investment and program life cycles that can span eight to 10 years in length. Consequently, program awards are frequently single sourced. Finally, it is important to stress that our growth in automotive is not solely tied to seasonally adjusted rates of vehicle production around the world. It is also driven by the increase in electronic content being added on a per-vehicle basis. Turning now to the medical vertical market, net sales were $125 million, a 39% increase compared to Q2 of last year and 29% of total company sales. This is the third consecutive quarter for the business to post gains, well in excess of 30% versus the same period in the prior year, and it is a 9% step up in sales from Q1. We are very proud to have served customers in the medical industry for over 20 years, with applications supporting sleep and respiratory care, image guided therapy, in vitro diagnostics, drug delivery systems, automated external defibrillators and patient monitoring equipment. Future growth within the industry is expected to be fueled by macro mega trends, including an aging population, increasing access to affordable care and decreasing device sizes, connected drug delivery systems. We are strategically positioned to support this growth. Our current manufacturing capabilities extend beyond electronics and printed circuit board assemblies and includes, but is not limited to operations involving precision injection molded plastics, complete device assembly for drug delivery systems and sterilization and coal chain management. While printed circuit board assemblies are important, there is a lot of value ad beyond them. The essence of our strategy is to grow the medical business at a faster pace, and expand to more aspects of the manufacturing solution. Our branding campaign of Kimball Medical Solutions highlights this full service of capabilities, so that customers recognize that our offering expands beyond electronic. Net sales in the industrial vertical market totaled $105 million, a 27% increase over the recasted second quarter of last year and 24% of total company sales. This result was also an all-time best for the company. As a reminder, public safety is now included in this vertical. A large part of the industrial business, which we call green & clean is in climate control, and we are well positioned within the value chain of all major brands for well-known heating and cooling products. Also, for the last few years we have been building out a cluster in smart metering. It started in Europe and we now have a good grouping of customers with products that promote better consumption of water, gas and electricity by raising consumer awareness. So in summary, another very good quarter of financial results with record setting sales, improving margins and momentum that will build throughout fiscal 2023. In November, we were also honored by CIRCUITS ASSEMBLY for achieving the highest overall customer ratings in seven categories of service excellence. The awards are based solely on direct customer input, and an indication of outstanding achievement. I'd like to congratulate and thank our associates around the world for once again receiving this prestigious recognition. I'll now turn the call over to Jana to provide more detail on the financial results for Q2 and our guidance for the full year. Jana. Thank you, Don, and good morning, everyone. As Don highlighted, net sales in the second quarter were $437 million, a 39% increase over Q2 last year and an all-time record high for the company. Foreign exchange negatively impacted sales by 5%, so once again this quarter the year-over-year growth would have exceeded 40% at historical rates. The growth margin rate in Q2 was 7.8%, a 120 basis point improvement compared to the second quarter of fiscal 2022, with our record sales volume driving operating leverage versus a year ago, when production was more significantly constrained by part shortages. Adjusted selling and administrative expenses were $16.4 million compared to $13.5 million in Q2 last year, with the increase coming from added resources to support our significant growth, wage inflation and accounts receivable factor in fees. When measured as a percentage of net sales, however, adjusted selling and administrative expenses were 3.7%, a 50 basis point improvement compared to Q2 a year ago. Adjusted operating income for the second quarter was $17.8 million, or 4.1% of net sales, which compares to last year's Q2 adjusted results of $7.3 million, or 2.3% of net sales. Other income and expense was an expense of $3.3 million compared to expense of $200,000 in the second quarter of last year. With higher interest expense primarily accounting for the increase, an outcome of elevated debt levels and today's interest rate environment. The effective tax rate in Q2 was 24.5% versus 23.7% in the second quarter of fiscal 2022. Adjusted net income in the second quarter of fiscal 2023 was $11 million or $0.44 per diluted share, compared to adjusted net income in Q2 last year, a $5.1 million or $0.20 per diluted share. Now, turning to the balance sheet. Cash and cash equivalents at December 31, 2022 were $26.3 million. Cash flow used by operating activities in the quarter was $11.7 million, and cash conversion days were 103 days up from 81 days in the second quarter of last year, and 99 days in Q1. Once again this quarter, our cash flow and CCD results were driven by working capital increases to compensate for component part shortages, as well as our new product introductions as evidenced by our robust top line growth. We continue to see meaningful growth across our geographies and expect our inventory to normalize relative to higher levels of revenue overtime. Inventory ended the quarter at $487.5 million, up $183 million from a year ago, and $38 million from last quarter. As Don noted earlier, we are continuing to see improvement in the global supply chain, but we are still purchasing materials not impacted by part shortages in advance so that we can fulfill customer orders once the components in short supply are received. From a growth perspective, our facility expansions in Thailand and Mexico continue to ramp up production, contributing meaningfully to top line growth. It is important to highlight that the increase in inventory is also heavily concentrated at these two facilities to support the higher volume and increasing capacity utilization. We continue to focus on turning inventory faster, measure his production day, sales on hand or PDSOH. Capital expenditures in the second quarter were $22.7 million, focused on completing the facility expansion in Poland, adding equipment in Mexico and capital needed for new productions across our entire footprint. Borrowings on our credit facility at December 31 were $273.5 million, compared to $103 million a year ago and $232.5 million at the end of last quarter. Our short term liquidity available, represented as cash and cash equivalents, plus the unused amount of our credit facility totaled $79.8 million at December 31, 2022. On February 3, 2023 we entered into a $50 million short term credit facility to provide additional domestic liquidity to support additional equipment and working capital needs and coordination with our Mexico facility expansion, as well as supporting other customer growths. There were no shares repurchased in the second quarter of fiscal 2023. Since October 2015 under our Board Authorized share repurchase program, a total of $88.8 million has been returned to our shareholders, by purchasing $5.8 million of common stock. We have $11.2 million remaining on the repurchase program. As Don noted earlier, we are raising our guidance for net sales in fiscal 2023 and expect full year results to be in the range of $1.7 billion to $1.8 billion, a 26% to 33% increase year-over-year. As a reminder, the original guidance for net sales was a range of $1.6 billion to $1.7 billion. Operating margin is expected to be in the mid to upper end of the range of 4.6% to 5.2% and capital expenditures are estimated to be in the range of $80 million to $100 million. Thanks, Jana. As previously announced, I will be retiring at the end of February, so this will be my last earnings conference call and webcast as Chairman and CEO of Kimball Electronics. While I am planning on standing in the Jasper area for the foreseeable future and remaining a major share owner of the company, there will be a clean transfer of responsibility and authority to Ric as CEO, and Bob Phillippy, as our non-Executive Chairperson on March 1. It is with immense gratitude and pride that I say farewell, and thank you. I've been very fortunate throughout my career and I'm confident our global enterprise, our exceptional leadership team, the Board of Directors and Ric, with his track record of success and inspirational leadership will build on our legacy of award winning service to customers, the communities where we operate and our shareholders. In my 24 years with the company, I've never been more excited about the future of Kimball Electronics. Thanks, Don. Let me start by congratulating you on your retirement. Today truly marks the end of an era for the company and your legacy is impressive, highlighted by countless achievements and a strong company culture focused on long term relationships. I feel very fortunate and humbled to be stepping into the role of CEO, and I cannot tell you how excited I am to join the Kimball Electronics family. The company has a rich history of excellence and is positioned for growth with near record levels of open order backlog, new program wins and increased capacity resulting from the recent facility expansions. The $2 billion annual revenue milestone is in the planning horizon, and I am confident the company will not only reach it, but grow well beyond. I'd like to thank you, Don, the leadership team and the Board of the Directors for this opportunity. I look forward to leveraging my experience in cultural leadership and long term value creation to work closely with the Kimball Electronics team in writing the next chapter of our successes. In the near term I will be traveling to many of our facilities around the world to spend time with our people and to get fully up to speed on the business. I look forward to meeting and working with all of you. [Operator Instructions]. Our first question today comes from the line of Anja Soderstrom from Sidoti. Please go ahead. Your line is now open. In terms of the growth rate, it seems like you have some impact in the second quarter, some supply chain challenges. How should we think about that for the second half? Do you see things improving there? Was there something that was extra tough for the second quarter or what do you see in terms of supply chain and how she would think about the gross margin for the second half? Yes, so we definitely continue to see gradual improvement, and we expect the same for Q3 and Q4. Obviously, we were constrained, still as I stated in - earlier in my comments, and it was roughly for about 10% thatâs a really rough estimate, but still constrained. But we look at the incremental sequential growth from Q1 to Q2 and we're encouraged by that. So a $31 million step up overall, and yeah, we know we need to make a couple of steps just like it in the second half of our year, to get to the run rate that our customers need us to be at. So, looking ahead at the part shortages and our expectation of continued gradual improvement, we think we're going to see that gradual improvement and itâs going to result in two more nice steps in the second half of the year in terms of our revenue. Well, we donât get to that level of detail. It's a little more complicated to get to the impact on the earnings per share or even the operating margin for that matter. Obviously, a 5% impact on the topline, you know in terms of the dollar strength in the period. As weâve said in the past, typically when the dollar gets stronger, it's a bit more of a headwind for us, just overall, and when at weekends, it becomes more of a tailwind for us. But it's really hard to get to an exact number, and we certainly wouldn't want to give you any sort of false sense or precision. Okay, thank you. And then just in terms of the end marks, the auto you had a record quarter. How much of that is sort of backlog and how much is that driven by the new ramps of the new programs and how should we think about that growth in the coming quarters? Yeah, well, you know the good news is, the bigger part now is the true growth from new programs. We mentioned â I mentioned, in my comments, the next generation breaking program, one of the largest programs the companies ever been awarded, that program was not in our revenue, the same quarter a year ago. So you know how hard weâve been working to get to the point to ramp up that program. So that was significant new ad of business coming from a new program. We still have some catch up, we still have some backlog that we're catching up on overall, but the bigger portion of what we see now in this quarter and ahead of us is actually ramping up new programs. Okay. And just in discussions with your clients and given the sort of recessionary environment, how do you see their decisions cycles. Have they changed that? Do you see the outsourcing increasing or? Well, certainly they â all of our clients remain committed to the outsourcing model, and in some cases even from pre-pandemic to now, it's even increased in terms of how much they want to outsource. I think our execution during the last few years, during this pandemic has gained a lot of trust in the partnerships we have, and they've been willing to give us even more business. In terms of how they let's say, sort of outsource to multiple partners. Some of our accounts, as you know are very large, and so their own risk mitigation strategies have them bringing on other partners besides Kimball to fulfill their needs, but â you know so we have an opportunity to gain more share of their wallet or their spend just through performance, and I think that's something that's really helped us here, coming out of the out of the pandemic. In terms of what our customers are seeing, obviously we turned up the robustness on our sales and operations planning, just to make sure that we understand how they see 2023 calendar year forming up for their business, and that's a key part of how we then set our business, not only capacity, but how we drive demand onto our suppliers, and I would say that there is some caution that's factoring into the updated forecast that we're getting from our customers, I think itâs prudent. But at the same time, I think they're looking at their business, and 2023 and they are planning growth. They are planning growth for us and they are planning growth for themselves. Thank you. The next question today comes from the line of Jaeson Schmidt from Lake Street Capital. Please go ahead, your line is now open. Hey, guys! Thanks for taking my questions. And I also want to pass along my congrats to you Don on the news and the best wishes on the next chapter. Yeah, definitely, I want to kind of follow-up on kind of your comments just now. I mean, you guys obviously are feeling more confident in fiscal â23, but can you help us kind of recognize that confidence with the macro, which seems to have gotten more challenging? Are you just seeing such broad base strength or is it a couple programs or customers that are really giving you that confidence? Yeah, I would say, you know yes to all the above. We too are cautiously optimistic, knowing and seeing what's going on in the world in terms of forecasted economic growth. I do think that you know there's a pent up demand picture. It's probably more unique for us as a company and for the end market verticals we service. A lot of that has to do with the fact that the components that go into the stuff we build for our customers are not the same components that go into cell phones and computers. And so while those components have fully recovered, for the most part, you know some of the high grade material we use and high grade components we use are still lagging supply to demand. So we do have a â that sort of pent-up demand sort of piece of it, couples with again - we won a lot of net programs that are ramping up, that gives us a great deal of optimism. The customers that we serve, they have a longer term horizon, but at the same time they have pretty good visibility, short term in terms of what their needs are going to be. They're able to lay out their four, five, six quarter operating plan and what they see developing in their end markets, and they share that with us. Every month, we're updating to our sales and operations planning processes. We're updating those demands, and so coming out with an increase in our guidance for the top line is after a fairly thorough review of that demand profile being placed upon us. It's after a very thorough review of component availability and how we see our success and the ramp ups of some of these programs, and so yeah, overall we're cautiously optimistic. We're looking at what's going on around us in the world, but we're not alone. Our customers input is really huge in terms of how we see the future. Okay, that's helpful. And I assume just based on that, you guys haven't been seeing any significant issues from decommits or cancellations. Let me get the answer on both sides. On either side, we see some softening and we factor that in on the customer side in terms of demand input, they put on us. And you know yes, we still have shortages as I mentioned earlier that constrained our output in Q2. But it's improving and I would say our suppliers are doing a better job of getting their arms around their backlog and being more consistent in their recovery plans. So overall that's when we say we see the environment continuing to improve, albeit gradually it's improving, all of those areas are improving with it. Okay, and then just the last one for me, and I'll jump back into queue. Jana just following up on your comments on inventory, should we then expect current levels that start to be worked down this quarter or will they remain elevated here in the near terms? So my anticipation is that it's going to take two quarters to work down the level of inventory, and then you're going to start to see a normalized level right in terms of absolute dollars and better returns. And part of that as Don alluded to is just the timing of that final component coming through, and our ability to ship. So as he said, it's definitely getting better, and it's continuing to get better. My expectation is for fiscal year in 2023. Maybe to build on that also, Jaeson, you know if you think back and I think you've been following us at least that long and more that six quarters now, that we've had, we've been in this sort of component shortage situation, that's really hampered our ability to not only ship what our customers want us to ship, but to execute on some of our own operational plans. And so you now that seems like a long time. It seems even longer to us and our teams how long we've been working these shortages, and but it's got our full attention in terms of having this inventory peak in dollars, start to work down from there. Days should get much better with our expectations of what will ship in Q3 and Q4. It's got our full attention, and our teams are working on it, and we do expect as Jana said, you know to see some improvement over the next few quarters. And Jaeson, I don't think our experience is too terribly different from our peers. I think we're all carrying higher than normal inventory days. Some if it is customer directed. A lot of it for us is new product introductions, right building up and anticipation of, which is, what you would expect given our expansions in Thailand and Mexico, and then we'll just continue to work the backlog down as that last golden screw comes through. Thank you. The next question today comes from the line of Hendi Susanto from Gabelli Funds. Please go ahead, your line is now open. Good morning, and thanks for taking my question. This is Reno [ph] on behalf of Hendi today, and congratulations on a strong unfortunate retirement Don. I guess my third question is on your growth margins, so there's, besides a supply chain, there's headwinds of ramping up for the extension and ramping up new programs. So would you be able to share more color on how this headwind will subside. Do you still expect gross margins to return to its normal range exiting June fiscal year â23? Yes, we do. As we take the next two steps and if the stair stepped, fiscal year â23 that we have, you know we do expect gross margins to get back to where they were, and that 9% and a little north 9% that's our expectation. Especially as we get to the last step in the stair step plan. So, if you look at, if you do the math on the updated guidance, we have to have another couple of $30 million a quarter steps. So 430 to 460 to 490, however you do the round off in the math, that's what we got to do, and as we do that, it will drive better utilization, better absorption, and we expect at that time, we'll see gross margins that, or at historical levels, if you will, 9% a little north of 9%. Thanks, pretty helpful. And then just my second question, you doubled manufacturing capacity in Mexico and Thailand. Do you have a milestone target of when the new capacity addition will be fully utilized? As Ric mentioned in his comments, you know we can see the $2 billion in annual sales now in our planning horizon. You know as we get to that $2 billion number, we'll be looking at where else is our footprint bulging if you will. We have a pretty good idea based on the awarded business we have right now, but we'll dial that in a little tighter. We also have the Poland expansion coming online this summer. So, we are well position where we need to be, but we do have some plants that have done very well in terms of winning new business and approaching also full capacity. So hard to put an exact number to it in terms of the consolidated annual number that puts us at our capacity. It kind of depends where it ends up in our footprint. But I would say in the next two to three year plan. We'll be looking at further footprint expansions to satisfy the needs we have from a capacity standpoint for the growth that we see that lies ahead. Thank you. [Operator Instructions]. And next question today comes from the line of Mac Furst from Singular Research. Please go ahead, your line is now opening. This is Mac of Singular Research. First of all, congratulations on the quarter, excellent! Congrats to Don and congratulations to Ric. Can you provide a little bit more color on the component shortage that has been going on for quite a while? When do you think this will â the situation will improve? Can you comment maybe on the region where you're for the biggest problem? Can you maybe comment on the type of components that you're struggling with obtaining? Yes, so maybe starting with the automotive grade components, which typically have an entirely different manufacturing part number than any of their sort of similar parts that are served in other applications, consumer, computer, communications type products. So there, two factors really are happening and it's the first is the capacity constraint itself. The second is, that the technology sort of range of those components is a bit behind the leading edge, maybe seven years to ten years in some cases. So when I said what we buy, and what we build into our products for our customers is very different than what's in a computer or a cell phone. Those products typically have the leading edge technology incorporated into their designs. In these long lived product life cycles of automotive, medical and industrial, you know they - the components are typically off that trailing edge as I said, by maybe as much as seven to 10 years. It is difficult for those component manufacturers to make capacity decisions. When to add capacity, when do they think they'll work it off? They've all been burned in the past by adding too much capacity in the wrong technology range. So they're cautious about that, and we're very aware of that. And so we work very closely with our customers on what we see is the life of those components, and when designs need to change, etc. That's ongoing work that hasn't changed, but coming back to when do we see it getting better? You know, again, we saw some gradual improvement in Q1, more gradual improvement in Q2. We expect the same in Q3 and Q4 and our expectations is by the time we conclude with Q4, we're talking a lot less about part shortages and the constraints. That's our view anyway, and we're watching it very carefully, and our people are watching it very carefully, we're working on it every day. Thank you. [Operator Instructions]. There are no additional questions waiting at this time, so I'd like to pass the conference back over to Don Charron for any closing remarks. Please go ahead. Thank you. Thank you everyone for joining the call today. I wish you all the best and we'll look forward to talking to you on our next call. Take care.
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Welcome everyone to the Rapid7 Q4 2022 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7's fourth quarter and full year 2022 financial and operating results in addition to our financial outlook for the first quarter and full fiscal year 2023. With me on the call today are Corey Thomas, our CEO; and Tim Adams, our CFO. We have distributed our earnings press release over the wire and is now posted on our website at investors.rapid7.com, along with the updated company presentation and financial metrics file. This call is being broadcast live via webcast, and following the call, an audio replay will be available at investors.rapid7.com. During this call, we may make statements related to our business that are considered forward-looking under federal securities laws. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements related to the company's positioning, strategy, business plans and financial guidance for the first quarter and full year 2023 and the assumptions underlying such goals and guidance. These forward-looking statements are based on our current expectations and beliefs and on information currently available to us. Actual outcomes and results may differ materially from the future results expressed or implied in these statements due to a number of risks and uncertainties, including those contained in our most recent quarterly report on Form 10-Q filed on November 3, 2022, and in the subsequent reports that we filed with the SEC. The information provided on this conference call should be considered in light of such risks. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Rapid7 does not assume any obligation to update the information presented on this conference call, except to the extent required by applicable law. Our commentary today will be primarily in non-GAAP terms and reconciliations between our historical GAAP and non-GAAP results and guidance can be found in today's earnings press release and on our website at investors.rapid7.com. At times in our prepared remarks or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or quarterly results. Please be advised that this additional detail may be one-time in nature, and we may or may not update these metrics in the future. Thank you, Sunil, and good afternoon, everyone, on today's call. Thank you for joining us. Rapid7 finished 2022 with $714 million in ARR, consistent with our expectations, or 19% over the prior year. Revenue exceeded our expectations, and we delivered better-than-expected operating profit and free cash flow as we continue to drive operational efficiencies in our business. ASP and ARR per customer continued to rise during Q4 as customers are using more of the Insight platform, reflecting Rapid7's growing value as a platform consolidator. And while it's still early days for our new platform consolidation offerings, the early results are positive. Over 10% of new ARR in the fourth quarter was generated either by threat complete or cloud risk complete consolidation offering. We are pleased with the early traction we're seeing in key areas of our business as we look to improve execution, even as certain economic headwinds escalated during the fourth quarter. Consistent with the range of scenarios embedded in our outlook, we saw greater economic pressure during the fourth quarter in our mid-market segment, which represents roughly half of our total ARR. The net result was that positive traction in key parts of our business was offset by macro dynamics bringing us to the midpoint of our ARR outlook to end the year. A few comments on the current spending environment. Customers continue to face an evolving and complex threat landscape and there remains broad-based executive and board level support for cybersecurity projects. Despite this fundamental demand, the ability to obtain incremental budgets for these projects has gotten more difficult in the current environment. As a result, CISOs are being forced to scrutinize and prioritize our budgets, driving longer deal cycles and more uncertainty around deal timing as contracts take longer to push through procurement. This dynamic is exacerbated by the increasing size of our deal opportunities as we gain traction as a platform consolidator. Despite a challenge budget environment, we're seeing certain tailwinds gain traction. Constrained security budgets are accelerating customers' focus on security vendor consolidation with greater value being placed on the efficiency and impact of integrated platform technology in a fragmented IT landscape. We are seeing solid engagement with enterprise customers as they look to consolidate vendors and gain better security outcomes from their budget dollars. Our Insight platform is positioned to benefit from this shift while empowering security teams to more effectively and efficiently manage the expanding scope of their security operations. Rapid7 is resonating with security teams looking to manage and consolidate their vendors. As CISOs and security practitioners evaluate our SecOps stack, Rapid7's platform stands out for a few important reasons. We have built the breadth of critical capabilities on our platform that customers require to run a best-in-class security operations program. These capabilities are deeply integrated to deliver a highly productive automation-centric platform and experience. And our platform is built for security practitioners by security practitioners, further enabling us to offer on-demand security expertise as part of our direct and partner managed offerings to help customers scale their security operations efficiently and effectively. The breadth and value of our Insight platform is illustrated by an $800,000 deal during the fourth quarter with a high-growth software company. This existing customer had a small VM footprint, and was going through an RFP to replace their existing detection and response solution, with a mandate to gain visibility into their expansive cloud environment. Rapid7 stood out during the technical evaluation as one of a few partners who could address their comprehensive set of use cases. As part of the deal, the customer standardized on Rapid7 SecOps platform by consolidating VM and D&R through our threat complete offering while adding cloud security, automation and threat intelligence. In addition to offering a compelling platform technology, Rapid7's new threat complete and cloud risk complete consolidation offerings are refining how our sales force goes to market. These solutions lean into vendor consolidation as well as the prioritization of security budgets around critical spending areas that include detection and response and cloud security. As a reminder, our threat complete enables customers to consolidate our best-of-breed expert-driven threat detection and response solution, along with unlimited coverage of our market-leading VM through a single subscription offering. And cloud risk complete is our cloud-centered risk visibility offering, which consolidates unlimited visibility across customers, on-prem, cloud and external environment at various stages of transition to the cloud. It enables use of cloud and application security with unlimited VM coverage together in one platform subscription. These solutions are part of the realignment of our sales strategy and an important step in advancing our platform selling motion. The strong value proposition of Rapid7's leading platform technology and compelling new go-to-market offering are evident in a multiyear seven-figure deal with a Fortune 500 manufacturing company in the fourth quarter. As an existing vulnerability management customer, we knew their security team was looking for a better way to manage, detect and respond to threats across the organization. After a robust and competitive process, our managed threat complete offering was chosen to replace their existing SIEM solution and managed service provider based on the quality of both our technology and the support that we can offer around it. Their decision was reinforced by the compelling economic value of consolidating multiple features across our platform and speaks to the early traction we're seeing in the market for our new consolidation offers. As we look to build upon this early traction, we're cognizant of the need to balance our execution optimism with the current macroeconomic and budgetary headwinds as we frame our forward outlook for 2023. Tim will discuss these dynamics in greater detail. But at a high level, I will point to three critical areas of focus that I expect will have the largest impact on our performance this year. The first two are under our control and related to the executional challenges we spoke about on the last call. The introduction of our risk and threat complete consolidation offerings and the training enablement of our sales force as they master a platform selling motion. We see positive early traction in these areas exiting 2022 and we believe we remain on track to see improvements to support growth in the second half of 2023. The third key area is the broader macroeconomic environment. Looking ahead, we expect a continuation of the customer budget pressure we saw in the fourth quarter and are incrementally more cautious in the near term on the mid-market customer segment, which slowed as we exited 2022. We assume moderate ongoing deterioration in this segment as we entered the year and have accounted for elongated sales cycles and large deal timing uncertainty, particularly as we begin to drive more growth from our platform consolidation offerings. All in all, we're taking a prudent view of our full year outlook to account for a more uncertain economic backdrop. With that said, we remain confident in the mid to long term sustainable growth profile of our business while acknowledging the time line for reacceleration will depend on the severity and duration of the macroeconomic pressure we're currently seeing. And lastly, I want to reinforce our commitment to scaling profitably by executing against our margin expansion targets for this year. This is a dedicated focus area for me as we look to drive continued operational efficiency and increased rigor around how we invest for growth. The work we're doing to make our business more efficient will support our commitment to profitability, both in the current environment and as the economy recovers. Our strong focus on cost optimization across the business gives us confidence in meeting a 300 basis point operating margin expansion target while doubling free cash flow this year. With that, thank you for joining us on the call today. I will now turn the call over to our CFO, Tim Adams, to share additional detail on our financial results and outlook. Tim? Thank you, Corey, and good afternoon, everyone, and thank you for joining us on the call today. Before I turn to the results, a quick reminder that except for revenue, all financial results we will discuss today are non-GAAP financial measures, unless otherwise stated. Additionally, reconciliations between our GAAP and non-GAAP results can be found in our earnings press release. Rapid7 ended the year with ARR of $714 million, growing 19% year-over-year. Growth was led by our detection and response in cloud security solutions, areas where customers continue to prioritize projects despite navigating a more difficult budget environment. As Corey mentioned earlier, we saw growth moderate within our mid-market customer segment in the fourth quarter as these customers navigate more on certain macroeconomic picture. This drove a moderation in new ARR bookings in this segment alongside a modest headwind to retention rates in international markets. We continue to see a mix of growth coming from both new and existing customers with a growing bias towards existing customers in this environment. Our customer base grew 6% year-over-year to end 2022 with over 10,900 customers globally. ARR per customer grew 12% over the prior year to $65,400 at year-end as customers continue to expand and use more of our Insight platform. Full year revenue of $685 million grew 28% over the prior year and exceeded the high end of our guidance range. Product revenue grew 29% over the prior year to $648 million. Our commitment to profitable growth was evident in our results, which exceeded our outlook on all of our profitability metrics. In 2022, we made a number of critical company-wide improvements on how we manage spending decisions, including more robust ROI analysis and shared financial accountability throughout the organization. These actions and process improvements were priorities when I joined the company a year ago, and we increased this focus as the macroeconomic environment shifted in the second half of the year. All in all, we drove $30 million of operating income in 2022, which represents margin expansion of 300 basis points and is consistent with our stated profitability framework and we generated $41 million of free cash flow. Now turning to our fourth quarter results. Total Q4 revenue of $184 million was up 22% over the prior year and above the high end of our guidance. Product revenue grew 22% year-over-year to $173 million. Our international revenue grew 25% and represented 21% of total revenue for the fourth quarter, while North America revenue grew 21% over the prior year and represented 79% of total revenue. Product gross margin was 77% in the quarter, higher than the prior year as we continue to drive scale efficiencies. Total gross margin for the quarter was 74% near the high end of our range of expectations. We continue to expect product gross margin to trend in the mid-70s and overall gross margin to be in the low 70s. We managed operating expenses closely in the fourth quarter as we executed against our profitability framework. Sales and marketing expense grew 4% year-over-year and represented 38% of revenue, down from 44% in the prior year. R&D expense was slightly lower than the prior year and represented 18% of revenue, down from 22% while G&A represented 8% of revenue, roughly in line with the prior year. Fourth quarter operating income of $19 million was better than our guidance. Our adjusted EBITDA was $25 million in the quarter and net income per share was $0.35. Moving to our balance sheet and cash flow. We ended the year with cash, cash equivalents and investments of $301 million compared to $268 million at the end of Q3 2022. We delivered better-than-expected fourth quarter cash from operations on higher operating profitability, which drove $28 million of free cash flow for the quarter. This brings us to our guidance for this year. As Corey shared, the three largest drivers of our ARR growth performance this year will be related to traction on executional improvement, both in terms of better sales enablement and success around consolidation offerings as well as how the broader macroeconomic environment impacts customer buying behavior. Our guidance range reflects a modest level of deterioration from current levels, particularly in the mid-market, and we are not assuming any macroeconomic improvement in the back half of this year, although we do expect to see continued executional improvements by then. Given the dynamic macroeconomic backdrop this year, we donât anticipate updating our ARR outlook until we see stabilizing trends in the spending environment. With that in mind, for the full year 2023 we expect ending total ARR of $815 million to $825 million, which represents growth of 14% to 16%. This range implies a net new ARR decline for the year, which we believe is appropriately cautious given the current macroeconomic trends and the limited visibility into 2023 customer budget dynamics at this stage in the year. As part of the macroeconomic deterioration embedded in our full year ARR outlook, we continue to see customers going through a Q1 budget setting process that is more tentative than in prior years. As such, while we do not typically guide to quarterly ARR targets in this unique environment, we believe itâs appropriate to share directional context for Q1. Specifically, as customers reconcile their spending plans, we anticipate a more muted net new ARR in Q1, driving ARR growth in the range of approximately 16% year-over-year, with the expectation that we will begin to see stabilization in our net new ARR performance in Q2 as customer budgets settle with steady improvement through the second half of the year as our execution improvements take hold. We expect total revenue for the full year to be in the range of $771 million to $778 million, representing growth of 13% to 14% with high single-digit growth contribution from professional services revenue. On profitability measures, we anticipate operating income to be in the range of $57 million to $62 million for the full year, which implies operating margin expansion of 300 basis points or greater. We expect net income per share in the range of $0.81 to $0.88 based on an estimated 67.4 million diluted weighted average shares outstanding. For full year 2023, we expect to double free cash flow generating approximately $80 million from expanding operating cash flow as well as lower capital expenditures. This represents at least 400 basis points of free cash flow margin expansion. In terms of free cash flow seasonality, we expect negative cash flow in the first quarter as the number of cash expenses are concentrated early in the year, including FY 2022 bonus payments and timing of tax payments and capital expenditures. We would then anticipate a notable ramp in free cash flow in the second quarter with continued improvement through the balance of the year. Moving to quarterly guidance. For the first quarter of 2023, we expect total revenue in the range of $180 million to $182 million, representing year-over-year growth of 14% to 16%. We expect non-GAAP operating income in the first quarter in the range of $5 million to $7 million and non-GAAP net income per share of $0.07 to $0.10, which is based on 66.4 million diluted weighted average shares outstanding. We are firmly focused on driving growth as the vendor of choice for security operations and enterprise-wide risk visibility and analytics supporting both on-prem and cloud environments. As we navigate uncertainty around the current spending environment, our strategy is supported by our commitment to providing a strong value proposition for customers as a platform consolidator, refining our go-to-market motion and improving sales productivity and driving durable growth and margin expansion consistent with our profitability framework. Thank you for taking the time to join us on the call today. And with that, we will open the call for questions. Operator? Okay. Great. Hey guys. Thanks for taking my question here. Corey, maybe just to get a housekeeping question out of the way, just given itâs topical, and I expect itâs a tough question to answer, but I want to make sure itâs asked in an open forum. Is there any comment that youâd like to make just in the reports that Rapid7 has hired advisers to explore sort of options down the road? Well, thanks, Saket. Well, first and foremost, we have a pretty massive opportunity in front of us, and weâre executing well against this. In that context, itâs not a shocker that people will talk about us, because we have both a good opportunity, and weâre well positioned to actually capture that opportunity in the broader market. That said, we just have a policy [Audio Gap] on numerous speculation and weâre going to continue that. Absolutely. If youâll allow me a business question here, Corey, for you. Iâd love, if you could talk about the couple of bundles that you mentioned in the call, threat complete and threat risk complete, particularly how the pricing there for the vulnerability management part works, and how that might be a differentiator? Yes. Look, what we found is that, especially in this environment, customers are really looking to how they actually do two things, one, how they improve their security and secure not just their past environment, but their increasingly strategic cloud assets. And thatâs two core components. One, they have to manage the risk profile and visibility of that environment, and they actually have to be able to monitor and stop and detect attacks in their environment. Our strategy is pretty straightforward. As we are taking a cloud-first because thatâs what strategic assets are as we go forward, and a holistic risk view and a holistic threat view of the environment. In that context, vulnerability management is strategic. We have people working on that. We have teams who are dedicated to it. But it is a feature and component of our platform. We are a SecOps cloud-first company that actually offer vulnerability management as a part of our platform that allows people to have the visibility that they need to manage our overall security. As part of that overall strategy, it is just a part of our offering is included in the price point. By the way, as you saw from the early deal momentum, the price points are larger, the deals are larger, and weâre succeeding in our consolidation strategy. Saket [indiscernible] sneaking two questions in. So, Iâll see what I can do to ask one, but really ask two. Wanted to touch on churn in the current environment. And I guess, what you guys are seeing from both the customer perspective, and you talked about some weakness in the mid-market. But I guess also within your own employee base, if you will, kind of where youâre at? What your thought process is moving forward in terms of hiring? Thanks. Yes. Iâll take that. First on the employees, weâre actually seeing very good â after a couple of years of a very tight market. The labor market is still tight, but weâre seeing our employees double down and focus on our customers, and we retain very healthy employee retention rates. As it relates to broader â I think customers sort of like retention overall, Tim commented on his script. What I would say is that if you look North America, we see very consistent retention of customers. And the performance is actually quite healthy and quite good. We are seeing some incremental pressure in Europe, and we are focused on that, and thatâs primarily tied to budget pressures, and we think weâre addressing that by being proactive and going out to those international, specifically mid-market customers with consolidation offers that allow them to save money. So again, overall, North America, fairly healthy international market, weâve seen a little bit of incremental pressure there. Thanks for taking my question. On the â sort of the more clear sales motion that you guys have around the two product categories. Iâm curious if youâve seen any improvements around the ability to enable your sales force to sell that broader platform? And are you assuming any improvement in sales productivity throughout the year in your guidance? Thank you. No, itâs a great question. And so one, we are seeing improvements in our overall sales force efforts there. Thatâs part of what actually gave us the confidence. We just rolled that out more broadly. So the way to think about it is that when you introduce something new, which we introduced exiting the year, you actually rolled it out sort of like in ways â as you would expect. And as we start rolling it out as we actually kicked off, we actually saw good momentum on both the pipe build side and itâs just also just the sales receptivity. Part of it you actually just get used to doing and say, like, whatâs the feedback you get from your sales team. And our sales team have incredible confidence in the consolidation offers that weâre actually rolling out executing. Now as far as our assumptions actually go, consistent with the feedback that we actually gave you last time, we expect the sort of productivity to improve over the course the year, and weâre seeing us tracking well towards that progress. Now the productivity goals are not sort of like aspirational. Itâs actually steady productivity increases in line with what we think about as a more pressured economic environment. Yes. Hamza, itâs Tim. I would just say that, look, when we â we had many discussions about the guidance for this year, and there certainly is this macroeconomic environment that is challenging for everyone. And you clearly see that in the mid-market. So, weâre not assuming that, that really improves for us. And Corey talked a lot in the prepared comments and just now about the consolidation packages that we are bringing to market that weâre very optimistic about. We think it solves a lot of challenges for customers who are budget constrained, who had too many vendors. And our sales team is really getting behind this with a lot of enthusiasm. So, we think that coupled is going to help us in the second half of the year. Hi good afternoon. Thank you for taking my questions. Corey, this oneâs for you. Just going back to the pricing and packaging reconstitution that youâve now formally undertaken and now completed in the form of making more digestible and more intuitive bundles that will resonate in this environment. Can you talk to us about what type of uplift youâre seeing relative to maybe predecessor configurations of the solutions that youâre now newly bundling? Iâd love to get a better sense of that, if youâre seeing better yield, whether itâs in terms of price or being able to cover a larger environment, which means it would give you a higher TCV or ACV [ph]. And then just as a sneaky follow-up for Tim, just on the guidance, where should we see most of the leverage from a long item basis coming next year, just kind of given the strength of the operating profitability outlook? And thatâs it for me. Thank you. Yes, Iâll start off and then Tim will pick up on the guidance question. So as far as the pricing strategy, one, we are seeing sort of both larger deal sizes, I think I talked about sort of like for the 10% â which was actually exceeded our expectations of the momentum that we saw in the â over 10%, to be clear that we saw in the quarter of our consolidation offerings. The size of the deals was actually much larger, I think I represent my script up with the 4X. That said as I wouldn't apply that as an average because, again, we did see a little bit more traction in those areas in our enterprise space in general. But what I would say is, weâre seeing uplift on ASPs, weâre seeing more covers in general, and weâre seeing more share of wallet. I think that the specific like multiple of the uplift will actually come in a little bit later as we continue to grow our adoption, but weâre trading quite well. Yes. Fatima, on the leverage, weâre really looking at everything. When you look across the P&L, itâs everything that weâre investing our dollars in. And our focus has been â and this started early in 2022, and it really continues and the team is really engaged to assist on this journey that we just want to be more efficient at everything we do. We look at cost to sale, we look at cost to serve, we look at gross margins, all the E to R ratios, and it is across the board that weâre just trying to really optimize our cost structure and drive more efficiencies. So, I think youâll see pretty broad strokes of leverage. Thanks for taking the question. Iâm going to ask a follow-up to Fatimaâs question about the goals around free cash flow and margin expansion, which are pretty impressive. So thanks for that. Just in terms of how youâre going to continue to hire or whatâs the hiring plans in that environment? Or what does that contemplate? So as you come out and get more traction from the sales force that you can reaccelerate the growth when the macro improves, just to understand how thatâs going to flow? Thanks Tim. Yes. Joe, one of the opportunities we have. As you know, we have locations across the globe. And we do have some lower cost locations, and weâre seeing that particularly in the R&D area, where we saw a little leverage recently, where you can still attract the right type of talent that you want and you can find some of these lower-cost [Audio Gap]. So thatâs going to be one piece of how we try to drive more of the leverage. Yes. We are hiring this year. We donât disclose the exact numbers, but we are still focused on driving growth overall with the company, and we are going to add to the headcount overall this year. it will be more modest, but we are still hiring. Yes. Just to follow up on that, itâs a more modest headcount. But because we actually have a pretty strong employee base coming into the year with a good setup in terms of their ability to contribute. We hope very strongly that with a targeted hiring model, we can actually keep our performance start. Okay. Tim, I want to continue the conversation on operational improvement. Just ask if thereâs any way we could think about a ceiling on that? And I ask it in light of youâve got a competitor in the core VM space that has probability margin on EBITDA line, 30%, 40%. I know you do a lot more outsourcing to low-cost countries. It sounds like youâre starting to do that as well. So â maybe you could just tackle how you think about the ceiling longer term, any structural differences between you and that main competitor? How we can think about this runway to profitability longer term? Thanks. Yes. Adam, we feel very confident, as you can see in the guidance for this year and the improvements we made in 2022 that we can continue to drive attractive profitability. And you have to look at everything across the board. It is the type of labor, the sourcing of labor. We use AWS as part of the platform. Weâve renegotiated that contract. We have a team that really focuses on how we optimize the efficiency of utilizing that platform. So it really is very broad across the company. We have an opportunity to continue to focus and drive gross margins. Weâve made some improvement there, and we will continue on that effort. But it really does go, I think itâs very broad across the company where our focus is. Yes. And the thing I would reiterate is that one; we had a plan that started last year on really driving efficiencies. We â the customer feedback that weâve gotten is that weâve brought the platform in a way that we think is relevant to customers over the next five years. And so we are sitting in, I think a pretty good situation where weâre into. I would still say the early days of our efficiency curve. And so we actually have gains to doing profitability. But we actually have a platform that actually has strategic relevance for a modern cloud world thatâs actually focused on all the aspects of security operations. And that allows us to actually as the and again half of our business is mid-market so thatâs a little bit more pressure this year. But what it allows us to do is to have an increasing profit profile even as we have sort of like mid and long-term global growth outside of the economics sort of like pressure in the global economy right now. Thank you for taking the question. Good afternoon guys. Corey, it may just speak too early, and obviously, sales cycles are longer for pretty much everyone these days, but have you seen any progress with regard to the frequency with which youâre getting in front of C-level executives? And then maybe a quick one for Tim last quarter, I think the comment was that the approach behind the initial preliminary guidance of slightly below 20% ARR growth for 2023 was to derisk the macro. Todayâs ARR guidance is obviously quite a bit lower than that. And so Iâm wondering if you could speak to the latest assumptions, and specifically, if itâs solely due to a tougher-than-expected mid-market business in terms of the delta or if youâre assuming a weaker enterprise business as well? Thank you. Yes. It might be quick yes, we actually do see, again, as we look at more of the Southeast Asian [ph] offers, we see sort of both larger deals that are in front of the CISOs more, especially in this budgetary environment. And part of that is just the CISOs are having to do more work with their procurement and finance partners. But yes, we actually are selling more to CISOs because now weâre a strategic partner for them. Yes. And Gregg, I would just reiterate some of the comments that both Corey and I made earlier. We are seeing a challenging environment out there, certainly in the mid-market and we do not expect that is going to improve through the course of 2023. In fact, we think it probably gets modestly a little bit worse than where we are today. And so, that is really the driver of, what we said three months ago to where we are right now. And again, I think weâre taking an appropriately cautious view to the year when we give guidance. But we are seeing economic challenges that are out there in the customer base in that mid-market segment. Hi, good afternoon. Just one quick one for me. I guess, relative to your 2023 ARR guide, how should we maybe think about the breakdown between new customer acquisition and ARR per customer? Are the ratio â itâs going to remain somewhat consistent with prior periods or any sort of shift here in terms of the makeup of that incremental ARR? Thank you. Yes, thanks Jonathan. Look, we have an increased focus with our consolidation offerings on our installed base across the company one, as you can actually imagine. But also in our sales team, so we would expect and we do expect internally to see a much heavier weighting towards ARR per customer versus new customer adds because we have a pretty good installed base is actually looking to actually consolidate that we have great relationships with, and is looking to be oriented towards the future thatâs actually more cloud-based. And so thatâs our focus for this year. Itâs not necessarily a primary focus. Weâll add customer in the future. But right now, weâre heavily focused on ARR per customer. Yes. Thank you. Good afternoon. Thank you for taking the question. I guess more of a topic, but my one question, kind of around Corey, what youâre seeing from the spending side within your customers and specifically in regards to how you see them kind of pivoting spend. I think I saw one survey that indicated less 39% of security budgets are staff and compensation. So I guess on that side, vendor consolidation obviously makes a lot of sense. Anything on the automation front, are you starting to see it any kind of draw in from budgets outside the CISO level? And kind of maybe a little color, what youâre seeing and there, could there be levers with the way your portfolio is positioned to kind of gain some incremental upside when those or if those budgets pivot? Yes. So â one, yes, I do think that there is upside. Again, we have to actually just respond and make our assumptions about what we see today. And as Tim indicated with the mid-market and others, weâre a bit more thoughtful about how we approach it. Let me just give a breakdown of sort of like the â how we see the overall spend environment. The first thing is I think weâre in a short-term period where people are trying to figure out what the right budgets are. And that was exiting the year. And I think going into a little bit of Q1, one of the dominate themes that we hear from a lot of our customers, itâs security â especially in the midsize market, even a little bit in the enterprise, especially in the mid-market, is that security is a big priority, but theyâre trying to figure out the overall health of their business, what their budgets are and whatâs the shape of their budgets. And so you see not a budget freeze, but I would just say a budget rationalization of what people are trying to determine what the budgets are. We expect security projects to be green coming out of that, which is why weâre not pessimistic, but we are cautious and actually doubtful about it. So thatâs just one overall dynamic that we just see lots of security teams in their finance counterparts actually just going through a budget planning process, thatâs a little bit more intensive because theyâre trying to figure out their own assumptions for their own business. The second thing, that I would say that we actually see is though, every organization is trying to figure out how to get a handle on spending. It really comes down to sort of like two big things. As you said, security is one of the bigger wage inflationary areas. So theyâre actually trying to figure out how to actually think about managing the fact that they got a lot of overheads and an expensive talent market, so how to manage that. And thereâs lots of actually security tools that require a lot of manual interaction. We actually tackle both of those which is why we believe that we actually have lots of leverage over the mid and the long-term is from a core platform perspective, we built a broad platform, but we have the core capabilities that mostly we have a heavy automation focus thatâs really focused on driving the productivity of our customers and security operations across vulnerability management, across cloud security and a cost detection and response. The second thing is that we actually focus heavily on expertise, both directly and through our partners to execute customers manage their security costs more leanly. And what I mean by that is customers can actually deploy the resource they need and us and our partner ecosystem to actually provide core securities customer resource to them cost effectively. Those two things together, the automation focus, the consolidation enabled budget and pricing, plus the expertise for us in our ecosystem are things that we actually think give us both durability and give us upside. Hey guys, good afternoon. This is Daniel on for Mike. Thanks for taking my question. So you spoke about some of the weakness of the mid-market. Just curious if you could just provide some color on how the traction has been within your larger enterprise accounts. Are the macro headwinds still impacting this segment of your business as well? Or has it been a bit more steady? Yes. The large enterprise has been a bit more steady. We have better visibility. We have healthy pipeline there. We are seeing some deal delays but theyâre episodic. And so Iâd say the impact has been larger in the midsized enterprise. Lots of the consolidation stuff that we actually talked about and the momentum is happening in the larger accounts. I think theyâll apply to the midsize enterprise. Weâre very optimistic about the midsize enterprise. Itâs just that the economy focus is going to impact those organizations differently. And we anticipate long-term that thereâll be a core strategic healthy part of business. But right now, you see actually more budget and more spend in the larger enterprise space. And we think our teams are executing well against that Great. Thanks for taking the question. Yes, I may have missed it in the prepared remarks, but did you guys call out growth in the security transformation line? And is that something youâre still going to disclosed? And then just how should we think about the split there this year between translation and that VMand other category that you used to give? Yes. As we actually execute our platform consolidation offers, it just doesnât make sense to break it out, mostly because it will just be an allocation of some like backroom allocation. Because, again, VM is part of the core offerings are both the risk complete and threat complete going forward. And as that has gotten more momentum than we expected out of the gate. Weâre not going to be breaking that out going forward. And again, VM will be a core capability of all of our solutions, but itâs actually sold on a less stand-alone basis. Yes. Corey, the metric, I think that we pay attention to and I think investors will as well as the ARR per customer because these packages are driving more wallet share from customers than youâll see in the ARR per customer. But we just wonât have that exact breakout. Great. Thanks for taking my questions guys. Some of your competitors have called out pricing pressure in the space recently. I guess Iâm just curious, in this product package, itâs good to see 10% of new ARR coming from those two packages. But just whatâs the level of discounting youâre throwing in there versus list price for the products individually? And then is there anything more tangible you could share around the improvement youâve seen thus far in sales force productivity. I donât know if you track the percentage of reps selling the full portfolio or those packages in the quarter. But anything more tangible there would be great, too. Yes. Look, weâll talk about some of that later. Right now, weâre rolling it out. So we have good momentum, but itâs a week-by-week increase. And I would say our goal is sort of by the end of Q1, all of our reps are actually selling it. I proficient and I think theyâre tracking quite well towards that. And so as far as the rep onboarding part of why weâre excited for the momentum is that one, we actually had higher sales attainment of the packages and the platform consolidation offers than we expected. And two, both the rep feedbacking and ramping is actually going ahead of schedule. So thatâs what we can actually say there. The other part of the question â what was the other part of the question? On pricing. Look, itâs too premature. Look, itâs very compelling in general, but itâs too premature to do it because, again, it was only 10% of the sales in the quarter. What I would say from a core pricing strategy is that weâre at over $60,000 ARR per customer, but our total potential is sort of like $520,000-ish roughly. And the way that I look at it is that, look, whatâs the velocity that we actually get to a $120,000 ARR per customer and then $180,000 ARR per customer. And then, yes, Iâll share that upside with the customers. So if it turns out that actually change our total ARR per customer on average from $520,000 to $350,000, but we accelerate our velocity to get a $180,000 per customer, I would actually make that trade all day long in consolidating. So we have lots of room to play there. And again, what weâre focused on is share of wallet and customer economics, which drives total profitability. Itâs how do we actually have more profitable customers that are building their security operations and help us. And we think we have momentum in the strategy to do that. And thatâs what weâre focused on. Hi, this is Rob Galvin on for Brad Reback. Thanks for taking the question. A couple of quarters ago, you had mentioned that you were oversubscribed for the backlog of partners to get onboarded on Rapid7 for MDR. I want to know how Rapid7 has worked through the backlog of partners. Have you seen an inflection in MDR growth or if thereâs been some delays in customer deployments? Thank you. Yes, itâs a good question. I would say weâre still working through that. I mean, last time it had to do with â as you can imagine, weâve built a very good brand around our detection and response and our security operations offerings. And so the partners want to use our brand, and so we have to put some â weâll continuing to have their infrastructure in place to make sure that those partners are certified and available and they have the right quality level. And so weâre continuing that effort. So it will be a steadily expanding number of partners in our ecosystem. And we think that, that is a mid-term sort of like tailwind to the overall business. Great. Thanks for taking my questions guys. Iâll just bundle two together here. First of all, Corey, can you talk â you mentioned some of the mid-market weakness, but how did the quarter progress in terms of like linearity? Did things sort of deteriorate? Did you see maybe a little bit of budget flush? And maybe how has that trended into 1Q? And then maybe secondarily, any thoughts on your CRO position? Yes, great question. So as the quarter progressed, things did actually â again, one, not a lot of budget flush. And I think when I talked on the last call, we didnât anticipate lots of it. But I would say if quarters progressed and especially in the mid-markets people heard more economic needs, part of you just have the economic buzz, itâs an economic buzz and some economic pessimism. But there were also concerns about their own business. You saw things start to slow down as we exited the quarter, which is why it look and that was in our range of outcomes. I would say that basically that got progressively more challenging over the course of the quarter, and that was factored into our assumptions about 2023, that continues to, frankly, get a little bit more deteriorating from that perspective. Now, I do think that customers or going to come to some conclusion about what the overall budget profile is. And we think a little bit of that will lighten but we are expecting a more pressured environment, especially in the mid-market, entering this year based on the exit rate as we exit last year. CRO search, listen weâre seeing great candidates. Weâre a good platform for folks, and Iâm very optimistic about it, and weâll update you when itâs time to update you. Hey guys, thanks for sneaking me in here. Just a simple one for me. It sounds like the guidance assumes that things get worse for your mid-market customers. Is there any reason why you guys wouldnât assume that it gets worse for the enterprise customers as well? Yes. So itâs a great point. So yes, we actually are presuming that the macroeconomic environment is slightly worse. Itâs just that the degrees of impact are just different between them. So itâs not that weâre actually saying that like enterprise is completely unaffected. Itâs just that itâs not impacting the same degree as the midsized enterprise. So I just want to be clear about that. We did make some presumptions there. And we did our outlook, we factored in, frankly, higher coverage ratios across the board. And so thatâs just one of our outlooks. This is like, A, the pipeline looks very healthy, but we have to actually look at higher coverage ratios because you have things like deal pushes, delays and other things. So thatâs â we did factor that in. And that does conclude todayâs question-and-answer session. Iâll now turn the call back over to Corey Thomas, CEO, for any additional or closing remarks.
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EarningCall_726
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Hello, everyone, and welcome to the Johnson Outdoors First Quarter 2023 Earnings Conference Call. Today's call will be led by Helen Johnson-Leipold, Johnson Outdoors Chairman and Chief Executive Officer. Also on the call is David Johnson, Vice President and Chief Financial Officer. Prior to the question-and-answer session, all participants will be placed in a listen only mode. After the prepared remarks, the question-and-answer session will begin. [Operator Instructions] This call is being recorded. Your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line. I would now like to turn the call over to Pat Penman from Johnson Outdoors. Please go ahead, Ms. Penman. Ms. Penman might be on mute. Ms. Penman your line is off mute. Please go ahead. Hey. Thank you. Good morning, everyone. Thank you for joining us for our discussion of Johnson Outdoors results for the 2023 fiscal first quarter. If you need a copy of today's news release, it is available on our website at johnsonoutdoors.com under Investor Relations. I also need to remind you that this conference call may contain forward-looking statements. These statements are made on the basis of our current views and assumptions and are not guarantees of future performance. Actual events may differ materially from those statements due to a number of factors, many beyond Johnson Outdoors' control. These risks and uncertainties include those listed in our press release and filings with the Securities and Exchange Commission. If you have additional questions following the call, please contact Dave Johnson or myself. Thanks, Pat. Good morning, and thank you for joining us. I'll begin with an overview of the quarter, and then I'll share perspective on the performance and outlook for our businesses. Dave will review financial highlights, and then we'll take your questions. Sales in our first fiscal quarter ending December 2022 rose 16% to $178.3 million compared to $153.5 million in prior year first quarter. Net income for the quarter was $5.9 million or $0.57 per diluted share versus $10.9 million or $1.07 per diluted share in the previous year's first quarter. Operating profit decreased 60% to $5.5 million versus $13.8 million in the prior fiscal year first quarter, with increases in inventory costs significantly impacting profitability. We've been working hard to manage the challenging supply chain environment, while evaluating all avenues to mitigate cost pressures, including price strategies and cost reduction efforts. In our Fishing business, supply and component availability continued to ease, allowing us to fill more customer orders. We still have a solid pipeline of orders that we're working through and continuing to manage supply chain challenges remains our priority. In guiding, we continued to see momentum as the market rebounds from depressed pandemic levels, and we continue to benefit from our SCUBAPRO equity as the most trusted dive brands in the world. In our Camping and Watercraft recreation businesses, we are seeing some softening in market demand and higher inventory levels at retail. The good news is that we continue to have strong brand positions, especially in Old Town and Jetboil. Innovation continues to be critically important to our growth and success of our brands. The last few years have brought new participants into outdoor recreation, which is a good thing for us. Our ongoing investment into understanding both new and existing consumers' evolving needs and translating back into new product success remains our focus. In all of our businesses, we're working on exciting pipeline of new products. While it's still too early to tell how the season will end up, we're monitoring consumer buying behavior and focused on filling customer orders and supporting our brands as we head into our primary selling season. As always, our team takes a long-term view positioning our brands and business for long-term growth. Thank you, Helen. Good morning, everyone. I want to highlight a few items from the quarter. As Helen mentioned, we're seeing supply availability continue to improve, allowing us to fill more customer orders, especially in Fishing. Quarter's gross margin of 39.5% is down 4.3 points from last year's first quarter due primarily to the increased cost of sales due to high material and freight costs that are in inventory. We're starting to see our costs eased somewhat, but we expect margins to continue to be challenged in the coming months as we work through our higher cost inventory. Inflation remains a concern. And as Helen mentioned, we continue to evaluate all options to improve profitability. Operating expenses in the first quarter increased $10.4 million versus the prior year first quarter. Higher sales volume driven expenses drove some of the increase. We also experienced higher compensation expense, an increase in health care costs and higher professional services costs between the quarters. Profit before income taxes was $8.2 million versus $14.6 million in the prior year quarter, driven by the lower gross margin and increased operating expenses. Net income for the first quarter was $5.9 million, down 46% from the prior fiscal first quarter. The effective tax rate was 28% compared to the prior year first quarter rate of 25.6%. It felt too early to tell how the season will shake out, but we're focused on monitoring demand and proactively managing our inventory levels. We continue to have no debt on the balance sheet and our cash position enabled us to invest in opportunities to strengthen the business. We remain confident in our ability to deliver long-term value and consistently pay out cash dividends to our shareholders. Thank you. [Operator Instructions] Our first question will come from the line of Anthony Lebiedzinski from Sidoti. Your line is open. Good morning, and thank you for taking the questions. So first, could you guys expand about the pipeline of unfulfilled orders maybe directionally, can you just talk about where it is now versus your fiscal year end or versus a year ago? It sounds like it's mostly -- the backlog is mostly for Fishing, but maybe if you could just give us additional color, that would be very helpful. Yeah. We've got a continuing pipeline in Fishing, as you know, we are working on our supply availability and as that supply comes in, we're able to continue to meet those orders. It's good momentum, but as far as the season goes going forward, we're still in the pre-season mode, but there good solid orders in there that we feel are going to continue to be there as we move forward. So good shape on that end of it. Okay. And as far as -- are you seeing any order cancellations or maybe some retailers may be postponing their orders? What are you seeing thus far? I know it's early still in the season. Obviously, you are tied to warm weather outdoor recreation. So I guess, on the consumer side, it's probably too early to tell, but just wondering as far as what you're hearing from your retailers? Well, I think all retailers are being cautious right now and trying to predict the season is a tough one. So there's cautious. On their side, I think even Watercraft and Camping the demand has slowed and they've got a pretty solid inventory at retail. So that's waiting for the season to come in, and then we can get a read. But I think there's caution out there. Okay. Understood. So yeah, so it sounds like Fishing and Diving are in better shape versus the two smaller segments. Okay. And then I think you talked about the price increases as well. Can you just talk about how much pricing contributed to reported revenue in the quarter and whether or not you have any plans for additional price increases? Yeah. I mean the price increase, we've taken a few tranches of price increases over the last 18 months or so. So I don't have the number for the total price increase effect on this quarter versus last quarter. But we did see unit volume up, obviously, significantly for the quarter, just to point that out. And as we said, I mean, we'll look at everything going forward to get our margins back to where we'd like it to be, and that would include pricing strategies as well as cost reductions. Got it. Okay. And then in terms of your inventory, do you think we're now at the peak inventory position? And at what point would you be able to say when you're able to work through the high cost inventory? Yeah. We expect inventory to start to go down -- starting with our the key selling season that may start in April with our inventory numbers. But we're working to get those down back to more balanced normal levels. We'll start to see -- unless we see costs start to increase even further, and they have moderated, we'll start to see our gross margin start to incrementally improve in the coming quarters. So that will be -- that will probably take the whole fiscal year to get through, but we'll start to see improvement going into the next quarter. Okay. That's good to hear. And then on your operating expense side, you talked about higher health insurance and professional services fees and so on. Just wondering how much did that contribute to the overall increase in expenses in the quarter? And going forward, if you back out the sales driven volume expenses, how should we think about your expense growth for the rest of the fiscal year? Yeah. I mean we'll see some moderate increases in the balance of the year in our expenses. I wouldn't expect anything significant. Yeah, in this quarter, a good portion, almost half of that increase in operating uses volume related. So we're not talking big numbers here for the quarter, but it's -- and the compensation expenses, they will probably be incrementally higher this year versus last year just due to headcount and merit and that kind of thing. And I'm not showing any further questions in the queue. I'd like to turn the call back over to Helen Johnson-Leipold for any closing remarks.
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EarningCall_727
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Good morning, ladies and gentlemen and welcome to the BCE Q4 2022 Results and 2023 Guidance Conference Call. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, sir. Thank you, Mode. Good morning, everybody and thank you for joining our call at this unusually, but unavoidable early start time. With me here today are Mirko Bibic, BCEâs President and CEO and our CFO, Glen LeBlanc. You can find all our Q4 disclosure documents, including our Safe Harbor notice concerning forward-looking statements for 2023 on the Investor Relations page on bce.ca website, which we posted earlier this morning. We have lot of material to get through this morning on this call. However, before we begin, I want to draw your attention to our Safe Harbor statement on Slide 2 of the presentation. Thank you, Thane and good morning everyone. Our 2022 accomplishments are anchored to the operational priorities we set back in 2020 and the Bell teamâs unwavering commitment to all our stakeholders. These priorities remain the foundation for Bellâs future success. With a strategic roadmap, including a historic multiyear transformational accelerate CapEx program that is well advanced and already paying off with subscriber loadings and improved end-to-end customer experience, leading self-serve apps and consistently strong execution, the Bell team delivered great results across all operating segments this past year. In terms of overall financial performance for 2022, we essentially achieved the midpoint of guidance for both revenue and EBITDA growth despite unprecedented cost pressures from inflation and record storms an expensive and highly competitive Black Friday and media advertising softness. Normalizing for $87 million in largely unplanned inflation and storm-related costs this year, EBITDA growth was actually 4%. We are making massive investments to build the highest quality networks and they are consistently being recognized by third-parties such as PCMag, Ookla and OpenSignal as being the fastest. Our customer value proposition is to offer the best networks at affordable prices. And we are loading these networks profitably while maintaining margin stable in a highly competitive marketplace. Itâs a notable achievement. Since 2020, we have accelerated CapEx, investing more than $14 billion, the highest ever over a 3-year period by Canadian Communications company and we are doing it to forge ahead aggressively on constructing the broadest fiber footprint in North America, opening up Wireless Home Internet to 1 million rural homes in rural communities and building our mobile 5G networks faster. In the past 3 years alone, we have delivered over 2.6 million new customer-ready broadband Internet locations, including a record 854,000 direct fiber connections in 2022. We have expanded mobile 5G coverage to 82% of Canadians and we have secured a $2.1 billion worth of critical 3.5 gigahertz mid-band spectrum, with which we deployed a standalone 5G plus network. In our Wireless segment, we continued growing our base of high-value mobile phone subscribers, increasing our cross-sell penetration of wireless and Internet households and managing customer churn. Total mobile phone net adds in 2022 were up 66% to $490,000, driving both service revenue and EBITDA growth of more than 7%. With only 41% of postpaid customers currently on 5G-capable devices as well as accelerating immigration levels and a sharp focus on bundling wireless and consumer Internet service, we see good runway for continued growth. On the wireline front, fueled by our biggest annual fiber build-out ever, we added 201 762,000 new net retail Internet customers in 2022. That was up 33% over 2021 and our best result in 16 years. That drove strong residential Internet revenue growth of 8%. In fact, we capped off 2022 with our best annual residential RGU performance and our first year of positive net adds since 2005. These results are a testament to the power of fiber-based Internet service that provides the fastest dedicated symmetrical speed that cable just canât match. By the end of this month, multi-gig symmetrical internet speeds of 3 gigs per second or higher will be available in 5 million locations and 1 million of these will have access to 8 gigabits per second. And our acquisitions of EBOX and Distributel also further strengthened our competitive position and support our Internet growth strategy with more service options for value-conscious residential and SMB customers. Despite a challenging macroeconomic backdrop for advertising, our Media segment performed better than expected driven by continued strong digital revenue growth, which is up 54% in 2022 and now comprises 29% of total Bell Media revenue compared to 20% in 2021. Underpinning this performance was Crave, which grew direct streaming subscribers by 26% in 2022 on the back of market-leading content as well as rapid growth of our SAM TV sales tool, which nearly tripled sales revenue for a second consecutive year. We are also developing a strong customer-first culture. Investments in our people and in the tools they need to support our customers as well as investments in digital functionality, AI and machine learning capabilities, together with the unmatched quality and reliability of our networks, as I have mentioned, all of that is leading to higher NPS scores, lower customer churn and meaningful CCTS performance improvement. On the ESG front, the Bell for Better initiative, which highlights our leadership in mental health, environmental sustainability and workplace engagement also made notable progress in 2022. We were named by Corporate Knights, the top telecom company and number four in Canada overall on the Best 50 Corporate Citizens list as well as the inaugural Greenhouse Gas Reductions Champion by Clean 50, a National Sustainability organization. And reflecting our ongoing efforts to engage and invest in our people, Bell was named one of Canadaâs top 100 employers for the eighth consecutive year by Mediacorp. This latest recognition reflects our success in key areas, including employee benefits, training and skills development and community involvement. And just last week, we proudly launched a new era of Bell Letâs Talk in response to the growing need for mental health services in Canada. We are committing an additional $10 million towards our goal of $155 million in funding for Canadian mental health programs, replacing the $0.05 per interaction donations made in previous years. Exceeding any previous Bell Letâs Talk Day donation, this funding will help support vitally important mental health projects all year round and it will allow us to put more emphasis on the practical ways we can all make positive change on Bell Letâs Talk Day and throughout the year. Let me turn now to Slide 6. Starting with Bell Wireless, Iâll give you an overview of some key operating segments. We are very pleased with our postpaid wireless loadings. We had a record quarter of gross activations that drove 155,000 new net subscribers and thatâs up 41% over 2021 and 148% higher than Q4 2019. This strong result was achieved even with a higher number of switchers, reflecting aggressive offers from our competitors that we chose to match selectively. For the first time since 2019, Q4 retail foot traffic and shopping activity was unrestricted and back to pre-pandemic levels of competition, particularly during Black Friday â that whole Black Friday period actually, which was very promotional intense in 2022 of Q4 â Q4 of 2022. That said, all the work we do on cost and the strength of our balance sheet and liquidity position prepared us financially to load the subscribers that we did despite a level of promotional activity that was higher than any of us would have desired. ARPU was up 0.5%, which is our seventh consecutive quarter of growth. This was supported by higher roaming revenue that was at 112% of pre-COVID levels and our continued focus on higher value subscriber loadings even as higher transaction intensity moderated ARPU growth due to the financial impact of the shift to installment plans. For mobile connected devices, net adds will increase an impressive 168% over last year to $104,000 driven by continued strong demand for all Bell IoT solutions. Letâs turn to wireline, another strong RGU quarter. In fact, we have now delivered positive retail residential net customer adds, including satellite TV and local phone in four of the last six quarters, and I have already mentioned our performance for the full year 2022. Bell Internet added 63,466 new net retail subscribers and thatâs 33% higher than 2021, driven by strong growth in every region. This was our best Q4 performance in 18 years. Notably, 70% of consumer fiber activations in Q4 were on gigabit or higher speeds, bringing our base of gigabit or higher customers to approximately $1 million or 43% of total fiber subscribers at the end of 2022. And it was another great quarter for Bell IPTV with our best quarterly result in almost 7 years as we leveraged our multi-brand customer segmentation approach to drive 40,209 net adds, up 38% versus 2021. At Bell Media, as I said, advertising sales were better than we feared going into the quarter. Q4 ad revenue was up 3.8% over the previous year buoyed by strong demand for the FIFA World Cup, demonstrating the massive popularity and the value that advertisers place on premium sporting events. This helped TSN and RDS assume they are ranking as the top English and French language sports channels in Q4 and they are also off to a good strong start in 2023, thanks to the World Juniors and the NFL playoffs. Crave also continued to deliver with total subs up 6% over last year, surpassing $3.1 million. This, together with the increased adoption of our advanced advertising platforms and expanded AVOD offerings, contributed to a robust 46% growth in digital revenues in Q4. And our Quebec media strategy continues to hunt as we led all competitors in Q4 in the French language specialty market and that includes news and sports. Let me turn now to Slide 7. Our 2023 business plan is anchored to our strategic framework to build, to execute and to transform. Itâs a prudent plan designed to mitigate the effects of a potential recession, to maintain the generational investments in our networks and in our services and to support our dividend growth model. Although we canât accurately predict the severity and magnitude of an economic downturn, we know our business is resilient and that our financial position is rock solid to weather potential impacts. As a result, we remain optimistic about our business outlook as you see reflected in our financial guidance targets for 2023. As I said last February, so February 2022, in line with our accelerated capital investment program, CapEx will begin to decrease in 2023 from what we clearly stated would be a peak spend year 2022. We plan to invest around $4.8 billion in 2023 and thatâs to support the expansion of our pure fiber footprint to another 650,000 homes and businesses. Approximately, 85% of our planned broadband build-out program will be done. That comprises approximately 10 million total combined fiber and wireless home Internet locations. By the end of the year, we will have 4 million homes that will be able to access symmetrical Internet speeds of 8 gigabits per second. We will also grow our 5G wireless footprint in 2023 to cover 85% of the national population and will enable low-latency standalone 5G service for 46% of Canadians or 71% of the addressable population. We plan to continue to win the home by leveraging our symmetrical Internet speed advantage over cable, delivering the best WiFi with WiFi 6E and our GigaHub modem and will drive greater cross-sell penetration of higher value, lower churn wireless and Internet households. In wireless now, we plan to grow mobile phone net adds by capitalizing on our network leadership an accelerating 5G upgrade cycle and higher immigration levels. And building on our retail distribution leadership, you will have seen that earlier this week, we announced an exclusive multiyear distribution agreement with Staples, Canada to sell Bell consumer and small and medium business services and more than 300 of their stores across the country. In our B2B sector, our objective is to build on our improved results from last year. In fact, 2022 represented our best SMB financial performance in over 15 years and we expect to maintain this momentum in 2023 by expanding in key channels and leveraging our fiber footprint. In the large enterprise space, we will continue to put in place the foundation for our advanced products and services portfolio that will drive growth in the medium to long-term. And at the same time, we are carefully managing our legacy portfolio through a combination of cost discipline and a focus on key legacy products. And at Bell Media, we will continue to drive advanced advertising and digital products like Crave and the CTV and Noovo apps to help offset some of the recessionary pressures we are seeing in advertising, particularly expected in the first half of 2023. Lastly, with respect to our work â with respect to our transform work stream, we will continue to focus on end-to-end customer experience improvements that make it easier for customers to do business in south and we will do this by investing in digital self-serve and high-touch interaction. We also intend to drive operational efficiencies through enterprise architecture and agile development, automation tools, product and process simplification, integration of central billing systems and an ongoing attention to our cost structure in order to maintain a stable margin even in the face of a potential recession. Now, let me turn to my last slide, which is Slide 8 and our dividend announcement from this morning. The financial pillars of our 2023 plan enabled us to execute on BCEâs dividend growth objective, which is a top capital markets priority as you all know. We are increasing the BCE common share dividend by 5.2% for 2023. Itâs our 15th uninterrupted year of a 5% or higher increase and my fourth as CEO. Although CapEx will be lower in 2023, it will remain elevated compared to pre-2020 baseline spending and this is why our dividend payout ratio will remain above our historical free cash flow target range of 65% to 75%. We are delivering on the strategic initiatives that we transparently laid out for you 3 years ago. And I am so pleased with how far we have come in such a short period of time, the future-proof this great company competitively in a changing world and this will position us for continued success. Our unmatched collection of assets, including the best networks and the most innovative products, our digital transformation journey and our customer-first approach will serve as the springboard to deliver the operating metrics and the financial results that all of you and all of our shareholders have come to expect from us. Thank you, Mirko and good morning everyone. Q4 marked another quarter of consistent and focused execution with a 3.7% increase in consolidated revenues that was driven by year-over-year growth at all Bell operating segments despite economic conditions that continue to pressure media advertising and our B2B sector. I am quite pleased that we delivered positive EBITDA growth this quarter even while absorbing $26 million in incremental storm recovery and inflationary cost pressures, higher media programming costs and a very expensive and highly competitive Black Friday period. If I take a wider lens view of 2022, the accelerated CapEx investments we are making are paying off with some of the highest wireless Internet and TV subscriber loadings we have enjoyed in over a decade. That said, all of the work we do on cost and the strength of our balance sheet prepared us financially to be able to afford the subscribers that we acquired. And despite a step-up in competitive intensity, exceptional cost pressures and other economic challenges impacting our business, we still landed 2022 with a stable margin. Why? Because no one is better at managing costs. That core competency will continue to serve us well as we go forward. Net earnings and statutory EPS in Q4 were down year-over-year due to non-cash asset impairment charges, mainly for Bell Mediaâs French language TV properties to reflect market conditions economic-related pressures on current advertising. Although adjusted EPS was up 5% for the full year, it was down this quarter, decreasing 6.6% to $0.71, due mainly to increased interest expense because of higher rates. And despite a historical year for CapEx with total spending in excess of $5.1 billion, free cash flow was up 2.9%. Notably, our reported CapEx number includes cash amounts received upfront from the Quebec provincial government as a subsidy for the build-out of high-speed fiber in rural communities, which, as per IFRS rules, must be accounted for as a non-cash increase in capital expenditures. Letâs turn now to Wireless on Slide 11. Overall, a very good set of financial results this quarter. Total revenue up 7.7%, fueled by robust postpaid subscriber growth and a higher proportion of customers on higher-value 5G unlimited plans, strong demand for Bell IoT services, continued roaming improvement and higher year-over-year mobile phone sales transactions that drove an 11.7% increase in product revenue. Mirko has already pointed out, it was an expensive quarter for postpaid subscriber acquisition. This had a direct impact on EBITDA growth, which increased a solid 4.1% in the quarter. Letâs turn to Slide 12 on Wireline. The second consecutive quarter of positive top line growth with total revenue up 0.5%. This was led by continued strong residential Internet revenue growth of around 9%, higher year-over-year SMB revenue and 17.2% increase in product revenue. A good result given the ongoing legacy declines global data equipment shortages and richer promotional residential bundle offers. Further, to this last point, given our industry-leading wireline margins, broad geographic scale and fiber superior cost structure, we have room to compete on price as multi-product bundling helps drive lower churn and greater customer lifetime value. Notwithstanding higher revenue, wireline EBITDA was down 0.6% due to $23 million in storm recovery costs and inflationary pressures absorbed in this quarter. Normalized for these costs, underlying EBITDA growth was quite respectable this quarter, increasing 1.1%. Slide 13 on Bell Media, against the backdrop of challenging economic conditions, but contrary to our North American media peers, Bell Media delivered revenue growth of 4.7% in the quarter. Despite soft overall TV and radio advertiser demand, total advertising revenue was still up 3.8%, and this was driven by record sales for the 2022 FIFA World Cup and continued strong out-of-home and digital growth. Subscriber revenue grew 5.4% on the back of strong Crave and TSN direct-to-consumer streaming growth. These results are a testament to our programming strength, diversified mix of media assets and focused execution of our digital-first strategy. Similar to previous quarter, EBITDA was down 15.7%. This result was anticipated given the broadcast rights cost of the FIFA World Cup and the ongoing normalization of TV â of entertainment TV content deliveries. This â that does it for the quarterly results. I want to move on and talk about the new reporting segment structure. I want to bring your attention to an important change that weâre making to our segment reporting structure starting this year. As highlighted on Slide 15, beginning with Q1 2023 results, our previous wireless and wireline operating segments are being combined into a single segment called Communications and Technology Services, or CTS. Bell Media remains a distinct operating segment. Consolidated BCE financial results are unaffected. The reason for this modification is to align with organizational changes we made in calendar â22 and to reflect the increasing strategic focus on multi-product sales and our digital transformation. Wireless and wireline service and product revenues will continue to be reported separately, and there will be no change to subscriber-related operating metrics disclosure. However, adjusted EBITDA will now only be reported for the combined Bell CTS operating segment with no split for wireless and wireline. For comparative purposes, we have provided you with our quarterly 2022 segmented results on the new basis of reporting. Slide 16 provides some perspective on our revenue and adjusted EBITDA outlook for 2023. Guidance ranges are the same as in 2022, with consolidated revenue growth of 1.5%, adjusted EBITDA growth of 2.5%. Given this outlook, we project BCEâs margins to remain stable in the coming year. Based on the latest economic forecasts, we must plan for a potential recession. While we canât accurately predict the timing and the pace of that economic downturn, the fact that we are maintaining, the same target guidance ranges as last year shows the confidence we have in our business outlook and the strength of our franchise to execute under any circumstances. Underpinning this steady growth is a strong financial contribution from Bell CTS, reflecting continued wireless subscriber momentum driven by 5G acceleration, fast immigration growth and a sharp focus on the multi-product cross-sell. Further, but more moderate, year-over-year rolling revenue growth and a continued consumer wireline performance as we leverage our fiber and our product leadership in the home as well as our recent acquisitions of EBOX and Distributel to drive a high market share of Internet and TV net additions and revenue. We also expect an improving performance trajectory of our Bell business markets predicated on higher product sales and a resumption of project spending by large enterprise customers as supply constraints ease. Against that backdrop, we will be maintaining a close eye on costs to mitigate the financial impact of ongoing legacy erosion, which continues to slow and of course, macroeconomic pressures. At Bell Media, although we continue to experience soft TV and radio advertising demand in the early stages of â23 as the economy impacts advertising budgets. We do expect a recovery as the year progresses. We also expect to benefit from the continued growth in Crave and out-of-home advertising while also leveraging Bell Mediaâs advanced advertising platforms and digital capabilities to grow our market share of digital ad spend. Taking all of this into account, we expect to generate positive revenue growth in â23 â despite the non-recurrence of FIFA World Cup advertising revenue and the one-time retroactive adjustment to subscriber revenue that we recorded in Q1 of â22. Lastly, despite a resetting of the cost structure in â22 that brought TV and programming and production costs closer to pre-COVID levels, we will be absorbing even higher spending in â23. This is due to higher costs for sports rights and other premium contact as well as further program volume normalization, which will weigh on Bell Mediaâs EBITDA growth this year. Letâs turn to Slide 17. The funded status of BCEâs defined benefit pension plan remains strong with a weighted average solvency ratio of 117% at the end of â22. Our pension plan was in the solvency surplus position when interest rates were at historical lows. Now that rates have increased, it has further strengthened that value duration position. With every DB pension plan now above the required 105% threshold, we will be able to monetize a full contribution holiday in 2023, resulting in cash savings of approximately $230 million versus the $145 million we enjoyed in â22. This level of annual cash funding reduction is expected to continue well into the foreseeable future, as we project the solvency ratio to remain above 105%. In fact, with a substantial solvency surplus of $3.3 billion that has a very low sensitivity to interest rate changes, there is little risk that our pension plan ever goes back into a deficit position. Moving to our tax outlook on Slide 18, the statutory tax rate for â23 will remain unchanged at $26.8 million. Our effective tax rate for accounting purposes is also projected to be essentially around that level, reflecting no tax adjustments this year compared to $0.10 per share in 2022. We expect a step-up in cash taxes for â23, increasing to a range of $800 million to $900 million, up from $749 million this year, and this is due mainly to higher taxable income projected for the year. Slide 19, despite positive EBITDA growth and lower pension financing costs, we project adjusted EPS to be between 1.10 â excuse me, 3.10 and 3.25 per share for calendar â23 or 3% to 7% lower compared to â22. The year-over-year decline is a direct result of the $0.10 per share year-over-year decrease in tax adjustments that I just referred to. An approximate $200 million increase in depreciation and amortization expense and a further step-up in interest expense due to higher rates and the higher level of debt outstanding. Over to Slide 20. Slide 20 summarizes our free cash flow outlook, which we project will grow again by 2% to 10% in â23. Similar to last yearâs growth range and reflects the strong flow-through of our higher EBITDA, lower year-over-year pension funding and an approximate $300 million decrease in CapEx that will drive a lower capital intensity ratio of 19% to 20%. BCEâs free cash flow generation is strong, reliable and well protected from macroeconomic uncertainty due to the recession-resistant nature of the majority of our revenue streams, providing strong support for the 5.2% dividend increase we have announced this morning. Letâs turn to our balance sheet. Iâll make a few brief comments on Slide 21. We have access to $3.5 billion of liquidity as we begin the year and a balance sheet that provides good overall financial flexibility to execute on the business plan and the strategic priorities of â23. Our net debt leverage ratio, while elevated at 3.3x adjusted EBITDA due to several years of generational CapEx spending and critical spectrum investments, is manageable and projected to remain relatively unchanged this year. Our debt capital structure remains very well structured with an average term to maturity of around 13 years, a low after-tax cost of debt of just $2.9 million and a relatively high proportion of fixed rate debt. Additionally, we have no material refinancing requirements this year as $1.1 billion of the 23 maturities was prefinanced and early redeemed in â22. This permits us to be opportunistic in assessing the â accessing debt markets this year to further strengthen our liquidity position and extend durations and maturities ahead of the anticipated C-band spectrum auction. Finally, to conclude BCEâs fundamentals and competitive position are strong as ever as evidenced by our 2022 operating results and consistent financial guidance target of â23. In 2023, we intend to build on operating momentum underpinned by our proven ability to execute under any competitive or economic conditions and our set of industry-leading assets that will continue growth for years to come. Thanks, Glen. So given the volume of information we presented this morning, Iâm sensitive to the time we have left for Q&A. And usually, this quarter, one of our peers is hosting I will call 8 a.m., so respecting all of your time in that of our competitors. [Operator Instructions] Yes, good morning. I know itâs early. So we appreciate the help that you guys are going to have both companies called run different â on different times. I wanted to maybe start by asking you, Mirko, about the guidance that you provided for â23, one to five on revenue, two to five on EBITDA exactly the same as you had in â22, which is quite impressive, given all the macroeconomic changes that weâre seeing right now. But I wanted to ask you whatâs underpinning that guidance when it comes to macroeconomic view as well as competitiveness in the marketplace in case we see a large transaction close during â23, which a lot of people, investors are wondering what it can or canât do to the competitive intensity in the market? And maybe if I can, just a follow-up on the regulatory side, we have seen a new change at the CRTC level. Whatâs your take in terms of what we should expect from regulatory body that is looking more and more on improving prices for Canadians as discussed in the media recently? Could that change the environment for you and participants in the industry? Thank you. Thanks, Maher. Good morning and good questions. So what Iâll do â Glen, maybe you can unpack the guidance. I might have a few things to add on the guidance question, and then Iâll continue with the regulatory question. Absolutely. Good morning, Maher. As I said in my opening remarks, I mean our guidance speaks volumes to the confidence we have in our business and the resiliency of our business. When we â absolutely, we expect there to be a recession, albeit I personally believe it will be short and shallow. The guidance we provided here takes into consideration that recession. We havenât seen any changes at this time to consumer demand. The market remains active and healthy and proof points are in our results, record postpaid mobile phone, gross activations, best Internet ads in 16 years, a strong wireless service and residential Internet revenue growth. And in fact, consumers are upgrading to higher service tiers rather than downgrading. On a B2B front, there is been no indications of pause in new orders or customers looking to cut spend. So I think when we look at the health of our business and some of the challenges we face in calendar â22, Mirko mentioned $87 million, $44 million in inflationary pressures that we experience this year and $43 million of costs â or excuse me, storm costs. A typical year, a good year, maybe a $5 million in storm costs with changing weather patterns. Thatâs probably been closer to $10 million in recent history. $43 million is extraordinary, and I knock on wood, something we donât repeat. And although I donât think we are out of the woods completely on inflation. Of the $44 million, about $21 million of thatâs labor, $16 million fuel and about $7 million utilities. The labor started really in the back half. So, I would suspect that, that type of pressure continues into â22 as we have another half year before we start lapping that, but I donât anticipate the same pressure on fuel or utilities. So all-in-all, I think the 2022 results were pretty strong considering we had that. And with those headwinds behind us, I am very confident in the guidance we provide. Thanks. Mirko, you are going to make some comments? Yes. Just â I am not going to repeat any of that because that was very good. I will just add the following. So, at the highest level, Maher, I think the investors â our investors should have confidence like we have a clear strategy, we have articulated that strategy, and we are funding it and executing against it. So, we have a diversified revenue streams and our fiber strategy is working. We have good wireless momentum. And while the media industry is pressured right now, we are taking share because our digital strategy has traction. And then you alluded to â so thatâs a bit of a summation, what Glen said, you alluded to price competition as well, and we kind of see some of that â we saw some of that during the Black Friday period and you foreshadow potentially more of that for 2023. On that, I will say the following. We have the room to compete on price if anyone wants to take us there. And we have the room because we are really good at managing costs and because of the scale of our fiber network, which â and then the bundling strategy. And all of thatâs delivering lower churn, lower cost structure, higher lifetime value of our subscribers. Look, we have invested billions and billions to build North American leading networks. We are going to load those networks, and we can compete on price if we are taken there. And then that kind of segues into the regulatory question that you asked me. And look, itâs a bit early, like we are looking forward to sharing our thoughts with the new CRTC leadership on how competitive our industry is, and we shared those thoughts on these calls, obviously, quarter-after-quarter, but there is new CRTC leadership. So, we are looking forward to those conversations. And in particular, really looking forward to highlight and reiterate the importance of the massive investments that need to be made in communications networks to drive the country forward. So, a couple of other things just on that prices are declining. Itâs actually undeniable. And communications networks are pretty central to everything we want to accomplish as a country in terms of economic growth and productivity and maybe I will leave it with this last point. Does everyone in the country want better networks, yes. Do we want more coverage, yes. Do we want prices that keep declining, of course. Does local TV content matter, yes, it does. Do we want better customer experience, yes we do. Do we want more innovation, more jobs, yes, yes and yes. But there is one common element that underpins all of those and its investment. So, we canât lose sight of that. And I will leave it there. Hi. Good morning. For 2023, fiber homes decreased from 900,000 to a plan of 650,000, but CapEx stayed relatively elevated at $4.8 billion. Just curious about the other buckets of investment besides the mid-band and fiber that you are looking at? And maybe related, how do you think about a longer term view and what a more normalized run rate could look like for CapEx as you ramp down fiber initiatives? Yes. So, on that, we have been â I have tried to consistently articulate where we were going with this, right. Starting in February 2021, we said we are going to start elevating CapEx to accelerate fiber and 5G build, and we are doing that. We said 2022 was going to be the peak year, and you can see that $5.1 billion spent in 2022 is $300 million higher than the guidance we are giving you for 2023. So, we did say that each year after 2022 CapEx would start to glide down for â â23 lower than â22, â24 lower than â23, etcetera, until we get to the end of 2025. And then you will â you should expect CapEx to get closer to what you were used to seeing from us in terms of capital intensity ratio prior to COVID. 650,000, the reason we dropped CapEx by $300 million from â23 to â22 is because we are going from 854,000 locations passed on fiber to 650,000, and thatâs the bulk of the reason for the decline. Hi. Thanks. Thanks for taking my question. Can you talk a bit about 5G plus? We have in mind that maybe this could mean a bit of dilution for the 5G brand overall, but at the same time I understand you want to maintain a differentiation. And then the second one, I think itâs fair to say that you have been using promotions in a different way than in the past recently, would you say that itâs a new way of doing business overall, or this is more something that is done to rapidly ramp up your market share on newly deployed fiber? Thank you. I will take the fiber question first. We â actually, on the fiber â look, what we are doing here is we â like I said, we spend â we are spending billions of dollars to build the best networks, and we have an undeniable structural product superiority advantage. So, the telco network traditionally was structurally disadvantaged from a technology point of view, with copper in years past. Now, the telco advantage is structurally â there is a structural telco advantage with fiber. So, you have a structural technology advantage, you have product superiority and differentiation, and you spend billions of dollars to get that. The next step is to load the network and we are taking share. And frankly, we are resetting the benchmark for what consumers believe broadband should be. Thatâs a key thing. Itâs a competitive differentiator thatâs going to last for a few years, in my view, resetting the benchmark for what consumers believe broadband should be. If you look at our sales in Q4, 70% of our Internet activations on fiber, we are on speeds at a gig or above. And 38% of our fiber Internet base is now in speed of a gig and above. So, we are loading the network, and we are shielding our customer base by resetting that broadband benchmark. And itâs a potent combination, right. You have fiber with symmetrical upload and download speeds that competitors canât match, a gigabit modem with WiFi 6E, and we have a new Android powered TV service, basically the new evolution of 5TV, which is pretty powerful. On wireless and on 5G, we are just kind of â I am really pleased that industry-wide, actually, the 5G pricing structure has remained intact where we were â we have delineated, there is clear demarcation between 5G and 5G plus and 4G and other services with the pricing that comes with it. And so far, frankly, thatâs held. And as I mentioned in my opening remarks, 41% of our subscriber base is on 5G devices. 5G customers continue to use more and spend more and there is room for growth there. And then I might add on both our wireless loadings and our market share gains on fiber, we are doing that despite some promotional intensity, we are doing that while maintaining margins stable, which is quite an accomplishment. And the reason we are able to do that, one of the big reasons is with the fiber scale, our cost structure comes down. Thanks Mirko. Can we follow-up on that discussion on your fiber leadership and talk about what you are seeing in the marketplace? And you have mentioned that your â you have the ability to match costs. I am just wondering how that plays out in the wireline market. And with respect to your â as you say, the competitive advantage you have with products. Could you just talk a little bit about the dynamics you are seeing in the marketplace there? Thanks. Yes. So, we are seeing â I mean essentially, the short story, Tim, is you see I mean you see the pretty â our loadings are quite strong, right. And we are at best TV results in 7 years on overall wireline, our consumer RGUs, best results in 2005. And best Internet, and thatâs in 18 years. I think again, those â so when we talk about the fiber advantage, but they are just not idle words because you are seeing the results follow what we are seeing, right. And just to give you another data point, so we had 63,500 Internet nets or thereabouts, but we had 78,000 Internet nets and fiber territory. So, I mean I have been pretty transparent about this too. We do lose Internet customers where we donât have fiber, we are gaining big share where we do have fiber. And I think thatâs the key thing. 80% of our target broadband build is done, we will be at 85% done. I have shared in my opening remarks, the vast footprint that we will have that has 3 gigabit or 8 gigabit speeds, like those are phenomenal speeds. And as we reset what the benchmark is for acceptable broadband and we reset the bar to a gig or above, that becomes a powerful competitive proposition. Yes. And Tim and as you have heard us say time and time again, the gift that keeps on giving is fiber, not only does it allow us to deliver a superior product to our customers, a superior product over our competitors, but itâs a network that allows â itâs cheaper to operate. And itâs reducing our cost of operating, which â you see in our margins, despite the challenges I spoke about earlier, we are maintaining stable margins and a big part of that is the cost advantage that fiber gives us. Great. Thank you. As you look at your new reporting structure, do you anticipate more cost rationalization when you combine the wireline and wireless expense buckets, or has that already been aligned last year? And from here on, it will be more business as usual cost efficiencies? And you did mention some incremental spending this year. Is there a way to quantify them or the timing on when they will show up? Thank you. I will attack the first part of your question. I am not sure what your last part was referring to. Look, we combined our internal structure for wireless and wireline this year, and we did enjoy cost efficiencies in doing so. And as I have said in my opening remarks, itâs become a core competency of Bell. We are always attacking costs and looking for more effective and efficient ways to deliver service, and thatâs not going to change. And again, to the opening remarks that Maher made about how are you able to deliver stable guidance over 2022, and thatâs part of it. Itâs focusing on our cost, finding efficiencies, leveraging the ability that fiber gives us for taking costs. So, on the second part of your question, I am not sure. I think you mentioned that you would like to make some internal investments this year to digitize some capabilities and some efficiencies. So, I was wondering if there is sort of a quantification or the pacing of that or is it also more sort of business as usual investments? Itâs â yes, so we wonât unpack that specifically. But since 2020, particularly since we got completely shutdown in 2020 during COVID, we have made a concerted effort to improve our digital capabilities, both those that are customer-facing and continue to automate some of the processes in the operations of our business. And thatâs continuing because itâs important and itâs driving better customer experience and lower cost structure. So, we are going to keep doing that, and thatâs within the CapEx, the guidance that you see. Yes. Thanks very much. Just a comment first, look, I am just not happy about getting rid of the segmented EBITDA, it makes our lives very difficult. I am sure you have internal ideas as to what wireline versus wireless is and you are not going to change based on what I say. But I want to get that on record, but itâs not helpful to us. My question is on the guidance. The range is reasonably wide at 2% to 5% on EBITDA, Glen. And as you have articulated, competition seems to be escalating. You seem to be willing to lean in and load up your new networks and fight on price if you have to. I am just wondering how the high end of the range is possible. What kind of factors would you need to see some sort of big economic improvement or some sort of improvement in the competitive environment versus the current pacing? Maybe you can talk a bit about the pros and cons â or the gives and takes at the high end versus low end of the guidance? Well, first of all, Vince, the â how wide the range is, itâs the same range as in â22. And we are now approaching $25 billion revenue company and north of $10 billion in EBITDA. And I donât feel that range is all that wide when you consider the size of our organization. Yes, we provide a range because there are all kinds of uncertainties that can happen in our business. We have talked a number of times on this call about recession. And I think that, that although I personally believe will be short and shallow, I certainly could be wrong, and many people on this call probably have a different opinion than I. Barring recessionary impacts, the continued momentum we have in our fiber and our 5G strategy, recovery in our media business. Those are the type of things that I think drive us towards the higher end or past the midpoint of our guidance range. I mean, for me to be able to give you insights on what drives you to the high end, you know it as well as I do, low promotion activity, continuing to load the network, avoiding a recession, recovery of advertising advancement of our digital-first strategy and media, those are the things that weâre focused on. But I believe the guidance range is prudent. I think it takes into consideration the potential challenges plus the upside and it is not inconsistent to what you have seen from us before. But thanks for your question, Vince, and duly noted on segment reporting. Great. Thank you very much. Good morning. Glen, I wonder if we could talk about roaming revenue. You have obviously, had a very nice recovery during 2022, but you are pointing to a further recovery in â23. Perhaps just help us understand where we are in the recovery cycle and what sort of benefit are you anticipating in your guidance next year on a year-over-year basis versus this year? And when do we get to sort of a new run rate? Certainly, Simon. Mirko mentioned that we are at 112% of what pre-pandemic roaming revenue is. And to unpack that for you about â on a volume basis, we are pretty much flat. We are back to pre-pandemic. So, the additional 12% is all related to price, so your P versus Q. I said in our opening remarks, one of us said that we donât anticipate the same tailwind on roaming that we enjoyed this year. Naturally, this was a year of true recovery as I think Canadians and we are starting to gain confidence to move again post the challenge of this pandemic. I would say some of the price increases that we implemented in calendar 2022, were done through the year. So, we get to enjoy the half year of those, coupled with â I think you are starting to see Canadian confidence continue on moving around again and enjoying the ability to travel. So, I think the short answer is the improvement from â21 to â22 will not repeat itself, but there is still a bit of a tailwind there for â22 to â23. Great. Thank you very much. So, as usual, I will be available throughout the day to take your follow-up questions and for any clarifications. So, you have a few minutes to get ready for your next call. So, have a great day, everybody. Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
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Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly earnings call. Today's call is being recorded. At this time, all participants are in a listen only mode. After managementâs prepared remarks, you will receive instructions for participating in the question-and-answer session. Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; and Kevin Crummy, our CIO; and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our Web site. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences maybe material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our Web site. When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up. Good morning, everyone. Thank you for joining us. For Douglas Emmett, 2022 was a year of real accomplishments in the face of notable challenges. In our markets, during the first three quarters, the impacts of COVID dissipated, we leased 3 million square feet and office utilization rates rebounded to over 80%. During the fourth quarter, as economic concerns grew, we saw a slowdown in new and renewal demand from large tenants. Fortunately, we continue to see good activity from the small tenants who dominate our markets and leased 770,000 square feet during the quarter. Overall, our absorption was slightly negative for the year. Given the macroeconomic climate, we believe it is prudent for our guidance to assume no meaningful recovery in office occupancy during this year. During 2022, the value of both our residential and commercial leases increased. Our straight line office rates were up 5.8% and our residential rents increased an average of 7.8%. In addition, our two multifamily development projects added 505 units to our portfolio. The current state of the national economy is challenging for all of us, but remote work, oversupply, the reliance on large tenants and concerns about reduced urban appeal seem to pose additional obstacles for some office CBDs. Fortunately, our markets, supply constraints, smaller tenants, short commutes and low reliance on public transit have supported relatively high leasing volume and utilization during the pandemic. This recent experience, combined with our industry diversification and strong operating platform, gives us confidence in the long term prospects for our markets. Thanks, Jordan, and good morning, everyone. Our multifamily development projects continue to exceed pro forma. In April, we delivered Landmark, Los Angeles, a new 376 unit residential high-rise in Brentwood, and have already leased over 60% of the units. In addition, we have now delivered and leased over 350 of our eventual 493 units at Bishop Place in Honolulu, and we expect to substantially complete the conversion by year end. Asset sales in our markets have remained slow, but we continue to search for opportunities. Regarding our balance sheet. We have no outstanding debt maturing until December of 2024, and almost half of our office portfolio remains unencumbered. Thanks, Kevin. Good morning, everyone. We did a substantial amount of leasing this quarter, primarily driven by the small tenants that support our markets. We signed 218 office leases, covering 772,000 square feet, consisting of 244,000 square feet of new leases and 528,000 square feet of renewal leases. For all of 2022, we signed 924 office leases, covering 3.7 million square feet, including 1.3 million square feet of new leases and 2.4 million square feet of renewals. Nonetheless, during 2022, our leased rate declined by 53 basis points to 87% and our occupied rate declined 83.7%, driven mostly by the slowdown in activity during the fourth quarter and recapturing space from nonpaying commercial tenants as local moratoriums expired. Our leasing spreads during the fourth quarter were positive 1.8% for straight line and negative 9.9% for cash. As I've been saying in recent quarters, we remain focused on occupancy at this point in the cycle and expect rent spreads to remain choppy until our lease rate climbs back near 90%. Our leasing costs this quarter of $5.80 per square foot per year in line with our recent trends and well below average for other REITs in our benchmark group. Our multifamily portfolio remains essentially full at 99.4% leased. We saw continued strength in rent growth during Q4 with average rent roll up for new tenants over 5%. We assume that extraordinary 7.8% increase in multifamily rents during 2022 will moderate somewhat in 2023. We are pleased that the residential rent moratoriums in our markets are ending, although the payback periods have been extended into 2024 for some of our residential tenants. Thanks, Stuart. Good morning, everyone. Turning to our results. Compared to the fourth quarter of 2021, revenues increased by 6.4%, FFO increased by 7.2% to $0.51 per share. AFFO decreased 11.1% to $81.2 million, reflecting more tenant improvement expenditures as a result of our robust leasing in Q2 and Q3. And same property cash NOI increased by 1.4%, primarily as a result of higher rental revenue and parking, partly offset by inflationary impacts on expenses and lower office occupancy. For all of 2022, FFO increased by 9.4% over the previous year. Our G&A remains very low relative to our benchmark group at only 4.4% of revenues. Turning to guidance. As Jordan said, our guidance assumes that office occupancy growth may not start in 2023. We elected to allow interest on one loan to float when the related interest rate swap expired on January 1st. Our guidance also assumes we will do the same when two other swaps expire in March. Due to increasing interest rates, expiring swaps and the new residential acquisition loan, we expect interest expense in 2023 to be between $192 million and $196 million. Overall, we expect FFO to be between $1.87 and $1.93 per share with higher NOI more than offset by approximately $0.16 per share of additional interest expense in 2023. For information on assumptions underlying our guidance, please refer to the schedule in the earnings package. As usual, our guidance does not assume the impact of future acquisitions, dispositions or financings. Just starting with guidance, can you guys provide the assumptions for retention in 2023 and rent spreads on executed leases during the year, if possible? Blaine, we have never given guidance on those particular items. I think for retention, our retention rates have historically stayed in a pretty tight band in kind of mid 60s. So I think you could assume that this year we'll probably be like most years before it. And trying to predict rent spreads, it's been impossible. We've tried that in the past we were not very good at predicting them ourselves, and it's nothing we've ever provided guidance on. As I said, we're focused on retaining occupancy and growing occupancy. So I think you should expect spreads to be kind of how they've been, but it's hard for us to make predictions quarter-to-quarter on how they're going to play out. Second question, Jordan, I think you've been pretty focused on getting your development team working on some new projects now that Landmark is done and Bishop is wrapping up. Is there anything you can talk about on that side of your initiatives, have you identified the next project or projects? And does the increase in cost of capital make you any less likely to move forward with development projects at this point? So the next big thing I think we're going to be focused on is construction at Barrington Plaza, where some years ago, we had a fire, we've gone through a lot with the city, trying to get it worked. We have a lot we're going through and have gone through with the city on insurance and -- with insurance companies and with the city to get positioned to be able to start work there and do all the work that we need to do, including putting in fire sprinklers. And so that's probably the next big step there. Although, I will say, this may not be the exact right time to do this, but some changes in state law have made it much easier for many of our sites, very good sites that we have in Wilshire -- whether Wilshire, Beverly Hills and in the Valley, to made it more cost effective, less time consuming in terms of entitlements. I mean it just fixed a lot of stuff. But those changes to make sure we really understand their impact. We're waiting -- we were waiting -- we thought we were actually going to get some guidance like this month or next in terms of how it's actually going to be executed, but then we heard we weren't going to get any guidance until June or July, sort of waiting to hear that. But there's no version of guidance isn't going to come out pretty positive for us on some of those sites. I wanted to ask on the Warner Bros Discovery leases expiring over here in '23 and '24. Just curious the demand that you're tracking on that space. I know the lion's share expires in 2024. Is there a sense that that's weighted toward the first or the second half of '24 for that? And any other color you can provide would be helpful. So I think there's only two leases and one of them is a whole building, which is the 3400 Riverside Drive. And that building is about 450,000 and the lease expires in the second half of '24. And as I know -- I mean, everybody thinks just to know what they're going to do, I'm anxious to know what they're going to do. I mean, I'm not -- I'll tell you I'm not optimistic considering what's going on with the economy today when you talk about the economy two years from now, and I don't know what they will do or will want to do, they don't have any more options. But of course, I don't think they even know what they want to do at this point. I mean the real estate group that we made the original deals with, which I think did have an expectation of keeping the building, all of them are gone. I mean -- so we don't even have a good way to get us -- I mean, we're reading the same stuff youâre reading, they're cutting expenses, and I know that, but I don't know where they'll be in two years. Then I wanted to turn to your thoughts just on capital allocation for '23. Obviously, with the announced dividend, reduction in share reauthorization program at the end of last quarter. I mean could we potentially see you being more acquisitive if the right opportunities came about, be they for either office or multifamily or do you think it's more pragmatic to stick to potential share buybacks? Well, just a general answer because share buybacks, multifamily as points are all being acquisitive, I guess, acquiring. And I think it's a good time to acquire. I think we're well organized to acquire. Certainly, the dividend cut gave us even more firepower to do that. We have unleveraged buildings, cash. I mean we have a whole list of things. And my goal is not to allow the opportunities in any particular recession, particularly one that's this extreme to pass it out us taking advantage of it, and I want to do that. So two questions. First, just going back to the Barrington fire, the project. Jordan, you and I have discussed this on the last call, but just -- so I understand how it impacts FFO. Is any of that project in the guidance that you laid out for this year, or just based on timing, it's probably not something that would really impact FFO until next year? No, there's some in the FFO guidance for this year. But it's hard depending on the pace at which we work things out with the city and with insurance, it's hard to know how much will impact this year, and I suspect the largest impact will be next year. Even if everyone says like open, do it everyone, everyone do whatever you want, you have a lot of groundwork to do in terms of installing core equipment that may not impact units as much before we can go in and start impacting the buildings. So it's in guidance, but the bulk of the impact is really a 2024 event, that's the way to understand it? Yes. And even that, yes, that should be true. But this all relies on like what kind of deals we make also with insurance and the pace at which we move people out, and those are like giant numbers, right? I mean we make a deal of insurance vis-a-vis the revenue, that's one thing, that maybe you guys have never seen an impact and then, of course, the speed at which we move people outside. So if I'm guessing now, yes, '24. Second question, appreciate your comments on the changes from the state level. Always good to hear positive things for landlords. But obviously, LA passed their good cause eviction recently. So as you see the groundwork for your potential apartment pipeline in -- which I think is mostly LA and Santa Monica, net-net, between the advantage that the state gave you versus the negative from LA's recent regulation change. Overall, does it change any of your underwriting one way or the other, does it make it a little tougher, make it a little better or is it sort of a wash when you figure those two policy changes? I mean, I don't like any limits on rent or any of the rest of it. But quite frankly, the good cause eviction stuff, I don't think runs a foul of any of our habits. I mean someone is less than a month to link with, we collect the money -- I mean we don't keep -- or if you're telling me raising rent on someone that's in their unit, more than 10%. I mean anybody -- and certainly anybody institutional, it's been the apartment business for a long time, that's smart enough not to do that anyway. And I don't think I'm getting ready to pro forma more than 10% of your rent growth, and I'm trying to figure out or Iâm going to buy something. So I mean, I don't think you can -- yes, I don't like what the city passed. I'm not sure it's going to have a big impact on us or any impact, quite frankly. But I mentioned the stuff at the state level, because it's like a giant impact on. I think it's -- I went from telling you guys it's years to get anything in title to potentially, if this thing goes right that we could just kind of go at our own pace. I mean, it's a crazy change. I'm surprised it even passed. Well, if they had known that, they wouldn't have passed it because there's no love for developers in Sacramento, but that's done. Jordan, I know that you guys were guiding to sort of average office occupancy. But within that range of 82 to 84, could you maybe just give us a little color on what you expect for new leasing volumes in '23? I know the fourth quarter was probably the lowest quarterly volume on new leasing in about two years. So just any thoughts on the pace of new leasing and the pipeline that you're seeing today? Well, we've really been whipsawed by the changes in people's sort of economic outlook. I mean, I was really surprised going into the fourth quarter that things shifted so quickly as kind of attitudes went towards -- and I think you saw that in a lot of people, attitudes went towards we're going to go into a recession and how quickly the leasing shifted. And one side of absorption and leasing is obviously roll and we give you that for every quarter what the roll looks like. The other side has been so sensitive to people's kind of point of view on the economy. I mean three incredible quarters and all of a sudden the news turns negative, and we drop off 25%. I mean that's wild, right? And so guessing about what next year is going to be. I mean, I'm feeling a little burn. So we didn't try and decide -- we didn't try and say people are going to regain confidence in the economy and the leases are going to pick up again. And we also said for ourselves, we're probably kind of where we're going to be. The fourth quarter has kind of given us an example of where we're going to be or an idea, but I think there will be changes next year. And so it was a very hard number to put out, quite frankly, because there's still -- you're talking about something where there still is -- I mean even that rough fourth quarter, still a lot of activity, over 700,000 feet. And Stuart, I know you sort of guided broadly to interest expense. I know you have a couple of swaps that are coming up, the debts not due, but the swaps are burning off at relatively low rate fee, and I think they're burning off relatively soon, one in March and one in April. So do you have a sense given where the market is today on kind of where that debt would reprice today? So Steve, no, we're not super excited about swapping in the current environment. And we think that when you look at the forward curves that things are going to start coming down. And so we're monitoring the market every day and when we find the right opportunity we'll swap. We set up our debt specifically for this where we have a two year runway to refinance an asset. And we're entering that with these where we've got 24 months to figure out and replace the loan. The same loan, so it's not repricing, but it's just -- we're just doing standing you could do, which is you just look at the forward curve on floating rate, and we just put that in our model. I just wanted to clarify. You're just going to let them float for the time being, and so they'll just go to the SOFR curve plus their spread. Yes, I mean it's not -- there's a lot of insecurity right now around where rates are going. And so there's just too big of a margin to be paid in terms of swapping to cover people's kind of conservativeness. And so I think even though it's painful and expensive for a little bit to be unswapped, I think this is the right thing, at least to watch for another little bit of time. Following up on your occupancy outlook from another angle. Relative to the amount of expiries you have coming due this year, the midpoint of your occupancy guidance isn't really implying a steep drop off, which I assume is partially supported by the leases that have not yet commenced. So just curious, like what are you seeing on the demand side that gives you comfort here that occupancy doesn't trend below these levels? So the demand side is driven by the -- it's our quarterly leasing. And I think as I -- I mean we're always guessing a little bit about demand. But I think as we warned you guys going into the fourth quarter, during that call, we said, hey, while we're seeing a real change in the pipeline in terms of leasing -- it's never nothing. I mean, there's always a lot of activity, but we're not a company that tracks individual leases, everything we do around this issue has to do with flow more than to do with an individual deal. And so as we saw the flow slow down, and as you saw, moderated about 25%, that is noticeable to us. Now we're looking at the activity and we're going, okay, well, we seem to be at that level at the moment and we're looking at that and that's the information we're giving you in this guidance. And more specifically, thank you for the update on Warner Bros. Are you able to provide any comment or indication on the UCLA lease that's coming due and their likelihood to renew there? So I think UCLA has like 25 or 26 leases with us. They're all different departments at the university, different functions, they don't act in a coordinated manner. So we'll literally have quarters where theyâll sign a new lease with us and then give back some other space. So those are a bunch of smaller leases. We don't have specific guidance on any of them, but they're not -- it doesn't act like a large tenant. First question is just in terms of various reports, everything we hear about the downtown LA office market being very weak and firms considering moving out of that area. I guess I'm just wondering if you're seeing any impact to your portfolio, realizing that's maybe more of a larger tenant issue, but law firms or others looking to, let's say, move back to Century City, Beverly Hills, or any benefit you're seeing from a leasing demand standpoint from that? Well, Nick, I mean, you know the issue incredibly well for a guy in New York. So yes, people seem to be kind of finishing moving out, it's larger tenants and they're finishing moving out or they're moving out of downtown. I think the primary beneficiary of that move to date has been Century City. There might be a little bit of activity in Beverly Hills. But the hope would be that we could pick some of that also up in -- Westwood and Century City have been the two markets that have like catered to those larger institutional type tenants. But Century City, I mean, has been an overwhelmingly happy beneficiary of that move. I can't -- we don't -- I mean, I don't even know that we have space in the portfolio that could accommodate some of those more high profile moves that have been in the press recently. And then I guess just a second question is going back to the buyback, Jordan, maybe just talk a little bit about how the Board is thinking about deploying that? I mean, it doesn't look like there's anything assumed in the guidance or really anything that was done so far unless I'm missing something. But how you're thinking about that? Are you waiting to find a JV sale or some source of funds that would go towards that buyback? And presumably, you think the stock is cheap because you put the buyback in place. So any thoughts on that would be helpful. Well, the buyback is one of a number of options. They all use some type of capital, you have access to capital. So that's probably not really that much of an issue. But we just have to look at a variety of things and it's on the list. I think while it's compelling, I mean, we obviously would rather lean towards making some great real estate deals because that sticks with the company -- that adds a great piece of real estate forever, which is always very valuable. But it's hard to ignore the stock buy, so everything is on the list. I mean, that's where we're at. I wanted to get your updated views on resi conversion opportunities. If there are any assets or maybe some markets contemplating offering incentives that would make it more economically viable for you to pursue the change of use of the building? It's funny because residential conversion is basically a matter of looking at the spread between office and resi rents and then you can get down to as particular of a single building. And you would say, well, resi rents are way up and office rents are suffering. But we're not in markets where they're suffering extraordinarily. So maybe there could be something but it's not very obvious, and it's not something where you can walk into a market the way we did when we were looking in Hawaii and just say, this is obvious, we should do this as one of the fill. It's going to be a little more -- it's much more nuanced than that. But it's great that we had that experience and a great job was done, pat on the back of that. That team, both the construction, the lease up and everything of the 1132 Bishop building. So that gives us a lot of confidence around that area. But you need to convince yourself or be convinced that the economics are right and the buildingâs right, it's not simple like the Hawaii deal. I was thinking more like a market like Warner Center, which you've mentioned in the past was perhaps a noncore market for you, and it sits today at⦠Yes. And although Warner Center -- the rents are -- I mean, the market there has not been destroyed. As a matter of fact, there's so much new development is in that area. I probably put on my list of a good -- starting to show whole another round of great promise. Remember, there are buildings being pulled out of that market right now for other reasons, right? I mean one guy for the [Rams] just bought a site that had $500,000 of billing, that's not going to be an off selling or he's building practice fields, right? So that's out of the mix. I think there's some buildings there that are going to be out of the mix. And frankly, you might end up at a market that's back to where it was before the LNR project was built, which in any normal economy, that was one of the best markets in LA. It was only until LNR added 25%, 30% to the size of the market that, that market started suffering. So if we do this reversal, everything else about that market if you were just sort of evaluating it for office or residential investment would be a big plus. It's got some -- the most residential is being built there and the rents are held extremely well, and all those projects are leased up. And then in terms of amenity base, they've seen -- one of the more dramatic conversions, their big mall has been broken up with two pieces of the mall that was there having been sold to [Crocky] as well as just other sites that I was talking about. One mall that -- I think, is going to run two pieces, two other full size blocks that he's building this Rams practice field and kind of sports center, right, for visitors and stuff. So there's like a lot of amenities, a lot of housing all going in at once. So it's a pretty good bet. My second question is a follow-up to Michael's question on retained cash flow from your dividend cut and the use of proceeds. You talked about buybacks as an opportunity, multifamily, but you didn't mention the office. And I was wondering if you⦠I didn't -- not mention office, whether itâd be office, residential, I mean, all of those are opportunities. And I think the opportunity -- and I think there's actually a reasonable chance that opportunity could be better in office than residential. I guess -- just acquiring. I probably definitely put off on the list and I definitely -- maybe residential, definitely office, but remember, residential has held up better, and stock on everything as almost. I guess just sort of on that acquisition piece. When you look at it or in your discussions with JV partners, are they interested in deploying capital in today's environment? Yes, they are. We've been in contact with all of our partners and explained the situation and explained to them what's going on in our leasing pipeline and why we're bullish on LA. And we consistently get a positive response, it's great. If you find an interesting opportunity, please show it to us. I think they had confidence in the fact that -- we put a lot of money to the deals, and they go, well, if you like it, we like it, basically. Thank you for the earlier comments about Warner Bros. Just curious for some of the larger -- other larger leases are expiring starting in 2023 into '24, like UCLA and also William Morris, kind of some initial thoughts on those. So we really only have two big leases in the portfolio, it's Warner Bros. and then William Morris that you mentioned the act like large tenants. The rest of that list is multiple leases. I already spoke about UCLA. I think they have over 20 leases with us. They don't act as a single entity or unit. But it's Warner Bros. Jordan already kind of gave you his thoughts on prospects for that. William Morris has a bunch of years left. So I don't think there's anything to talk about with them for a while. And then everything else, like I said, all the other tenants on the list act like smaller tenants, they aren't super material, it's a bunch of leases. And then also from a leasing perspective, again with your tenants, anything changing in terms of type of terms they're looking for, is it taking longer for them to make decisions. Can you just kind of talk a little bit about just kind of what you're seeing in that respect? I think the notable change that we already talked about was that the average lease size for the Q4 results that we just published was down. It was smaller tenants that really held up our activity in Q4. We saw larger tenants not as active, not surprising given kind of what's going on with the economy. Our tenants tend to generally zero in on a five year lease because they're smaller and most of them are personally guaranteeing the leases, they don't tend to feel comfortable going longer than that. Usually, what happens in a cycle is when the economy is down, they're nervous and they tend to go a little shorter term. And then when the economy is doing well and they're feeling good about their prospects, they're a little comfortable going a little longer. But we're almost always still zeroing in around that five year average, and that's still what we saw last quarter. And I mean since smaller tenants, they're using more of your prebuilt product or are they actually building out space on their own? We always prefer to build space for them. We're very good at it. We do a lot of prebuilt suites, wwe call it our spec suite program. So we'll go in and make a suite totally move-in ready. We've had a lot of success with that product. So that's something we continue to ramp up on. But yes, these are small tenants, they don't have real estate departments. So as much as we can help them with the process, make it easy for them and get the space built for them, that's a much better turn out. So we do that as much as possible and the tenants appreciate it. And they also don't have large TI demands. So our TI costs are substantially lower than when you lease into large tenants. Maybe one question for me. Just in terms of the evictions, the tenants that haven't been paying. I know last quarter, you were down to the last handful, maybe 100,000 square feet or so of tenants that you were still working through. Can you just give us an update on where you are there? How much of an impact you're anticipating maybe to occupancy and where most of those blend and extend kind of done by the end of the year? Just so we can kind of think about the run rate for that group of tenants. That group is done, it's in the numbers, it's dealt with. So there's no more people that weren't paying are out and the other people are paying. There's money still owed to us by some people that are paying, and we work out deals that they pay over time. But in terms of occupancy, you have this strange impact on occupancy of people that were in occupancy, but they weren't paying. So that was weird, right, you're used to if they're in, they're paying. And that's what COVID and the moratoriums did, and that's resolved [Multiple Speakers] residential, itâll be resolved by the end of March. Jordan, just circling back to the state legislation that opened up residential zoning in certain areas in LA. I guess, do you think that change is going to trigger a lot of additional supply in the market? And have you seen any projects announced as a direct result of that legislation or is it just too early to tell? I hate to say that I don't think it's going to open a lot of new supply simply because they sort of -- we happen to be a developer that happens to own a lot of land in those areas. I don't think a lot for infill type product weâre aware from that perspective. They didn't make it cheaper, right? If you want to -- if you just went, I liked that rule, now I'm going to go buy a piece of land because I know about that rule. I don't think that they need to make that land any cheaper, probably going to be more expensive. They just kind of enhance the value of our land because so we can now kind of develop it as residential without having going through as many hurdles. So at least in the areas where we own all this property, I don't -- I mean, say this to them, I don't want them to repeal it, but I don't think it really did anything other than for someone like us that happen to have so many sites. They didn't do much to boost the production of apartments. And then last one from me. There were some reports that came out earlier this year that Regal Cinema was looking to close the Sherman Oaks location there, I think, leasing from you. Can you just comment on that situation, the potential earnings impact and any plans you may have for that space? Well, I don't want to talk about individual tenants. And it's true, we saw that too. I don't know in the end whether that's what happens there or not. But I don't want to -- I mean, we don't talk about individual tenants. So I was intrigued by your comment in the call here, Jordan, where you thought that there was more opportunity, I think I heard you right, more opportunity in office than there was in residential. First of all, did I catch that comment correctly? And then -- so the answer to the question is why? I mean like when we're in a world where hybrid office is sort of the thing, it's not a need based situation, but a want based in some cases, whereas residential is quite different, you have a very unique residential platform. What is it that's making it more interesting on the office side from an investment standpoint from your line of sight? Well, I'll tell you, I spend -- we had this one paragraph in my prepared remarks that was at the end of my prepared remarks. And Ted called it the overwork paragraph, which you said you overlook some more, because I just want to get it right so much. But basically, what that paragraph said, which was trying to give people a feel for why I'm so positive on office in our markets is while we have gone into for real estate, at least a recessionary economy, the things that you just mentioned and the things that I'll reiterate for you, which is whether itâd be work from home or people not being so interested in urban office or commutes or public transit, all those things that seem to be additional obstacles for people that own office buildings across the markets, I just don't see them being here. They're not here. And so when COVID finally lightened up a year ago, you saw our leasing booming. I mean we were in full recovery, and I was extremely optimistic. But not optimistic because I'm just optimistic guy, optimistic because we have like some of our strongest leasing quarters of our company's history, and we have multiple of them in a row in new and in total. So when you go that's happening, you certainly posted time that these discussions about these other items are there. I go, okay, that gives me a lot of confidence. That's number one, okay? So put that as a giant number one, though, because I don't think that those are issues our markets are dealing with. And then add to that, for number two, which is we're one of the only big gateway markets that has true diversity around the tenant base, right? We're not just tech, just entertainment, or just finance like New York or whatever, just cards like Detroit, whatever you want to talk about, we really have a lot of industries that drive demand here. And then that is the last thing is that all through this pandemic period and plus-plus and probably our whole careers for me and Ken, we've been strengthening our operating platform. And now our operating platform, I mean, to say it has no equal is an understatement. I mean, it's really an understatement I mean in our market, in our market. So I just feel like that platform, the diversity of tenants, the fact that these larger issues that I'm not sure they're even going to be correct for other markets, but I know 100% they're not correct right now for our market, okay? That those issues are living, that's creating probably a buying opportunity against a backdrop where I am totally confident long term in the performance of our office portfolio for the reasons I just said. So that's why right now apartments, which people still have a lot of confidence around apartments, so maybe they're not going to be discounted as much, but there's a lot less confidence around office. So I suppose with the confidence I just told you I have, which is that over rework paragraph that I had said in my speech, makes me go, that's probably where there's going to be more opportunities. And so kind of related to that, you had a couple or three quarters in 2022 where things were moving along nicely and then you had this hiccup in the fourth quarter, and that experience kind of did a lot to inform you about 2023 guidance and the flat occupancy scenario and so on. So that seems like a really kind of sensitive topic in the sense that it could turn back on pretty quickly, right? Like if the Fed gets it right⦠That's my point. So maybe the very fact that it moves so quickly in one direction, is your confidence behind office, and I guess I'm kind of parodying what you just said, but so setting flat occupancy is the absolute probably worst case scenario and more likely, you probably see occupancy lift as the year goes on as long as we kind of get the macro right and we don't have like a really disruptive economic scenario from Fed activity and so on. Is that the way you're thinking about it, setting a floor? Well, one thing -- so real estate is not designed to be judged quarter-to-quarter. I know that's the word we've bought into and that's what we're doing. So that's what people probably more care about. As I just said -- which you just said so we both said, so both in agreement. In the long term, I'm very optimistic about our market. I'm not so optimistic, if you're bringing your point of view back to the quarter-to-quarter view to where the economy is going and that the Fed is going to be so quick that we're like, okay, we're done and wipe off the hands and move off the table. So we have to see how this year plays out and probably a lot of our guidance. Our guidance is not trying to give you messaging around what we think of the long term prospects for our market or our ability to lease up our buildings. It's giving you messaging around -- we don't have a good idea to how much the Fed is going to keep increasing rates and keep tamping down. I actually think the fact that the employment numbers came in so strong and all the rest of that probably means that's going to be unless even harder. And the beating from the Fed is certainly having a much bigger impact on real estate than some other industries. Maybe it's also beaten down on tech. But somebody is doing a bunch of hiring and growing, some are out there, and therefore, that's probably going to give them confidence to beat on us even more, and that's what concerns me. So you're ready to start acquiring, if you can, sooner rather than later before there is any sort of recovery when entering more competition and so on, right? Like you want to get moving before all that starts to happen again. When we do something, it has much more to do with the opportunity that's presented than my time line in my mind. I mean, I need a good opportunity. Look, everything on -- first of all, it's not a public call and secondly, it's no secret that people donât own office building. If you own an ounce building in West LA, you're not sitting there going Iâm dead forever, because you're seeing activity. So we need the right opportunity to come up. This concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.
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Welcome, everyone. This is Ben Suh from Investor Relations. Thank you for joining Samsung Electronics' Fourth Quarter 2022 Earnings Call. For additional details regarding our quarterly results, please refer to our earnings presentation which is available on our IR website at www.samsung.com/global/ir. On today's earnings call, other than for Display, I am joined by new representatives from each business unit due to our reorg at the end of last year. We have EVP Jaejune Kim representing memory; VP Hyeokman Kwon for System LSI; EVP Gibong Jeong for Foundry; EVP KC Choi for Samsung Display Corporation, which I will refer to as Display during today's call; VP Daniel Araujo for Mobile eXperience; and VP KL Rho for Visual Display. I want to remind you that some of the statements we will be making today are forward looking based on the environment as we currently see it and are subject to certain risks and uncertainties that may cause our actual results to be materially different from those expressed in today's discussion. I will start with the results for the fourth quarter of 2022. The business environment deteriorated significantly in the fourth quarter, showing weak demand amid an economic slowdown triggered by global macro and geopolitical issues. As a result, our consolidated quarterly revenue declined sequentially by 8.2% to KRW 70.5 trillion. However, we delivered a second straight record for annual revenue, thanks to our performance in this year's first 3 quarters. Gross profit decreased by KRW 6.9 trillion sequentially to KRW 21.8 trillion, mainly due to the impact of a significant price decline and an inventory valuation loss in Memory, coupled with weak sales of smartphones. Gross margin also decreased by 6.4 percentage points to 31%. SG&A expenses declined by KRW 0.3 trillion quarter-on-quarter to KRW 17.5 trillion primarily due to reduced advertising and promotional spending. However, as a percentage of sales, they increased by 1.6 percentage points. R&D expenses reached a record high as we continue to invest in the future. Operating profit declined KRW 6.5 trillion sequentially to KRW 4.3 trillion, as Memory profit dropped significantly due to the aforementioned issues and as MX profit decreased due to softened new product effects. Operating margin also fell 8 percentage points to 6.1%. I will now briefly review the results of each business unit. Please note that all results mentioned refer to sequential quarter-on-quarter changes unless otherwise specified. For the DS division, in Memory, results were down sharply due to a large ASP decline as customers continue to adjust inventory and there was also a significant inventory valuation loss. In System LSI, earnings decreased as sales of key products were weighed down by customers' inventory adjustments. Foundry delivered record high quarterly revenue thanks to increased sales to its major customers. Profit increased year-on-year based on expanded advanced node capacity as well as a diversification of the customer base and application areas. For Display, the mobile panel business earnings declined due to reduced demand from smartphones. Nonetheless, the business delivered unrivaled results among industry peers through its strategic focus on the high-end segment. Large panel business narrowed its losses as sales of QD-OLED for TV grew amid strong year-end seasonality and as the business fully depleted its LCD inventory. For the MX business, both revenue and profit declined due to the waning launch effects of new products and weak demand in the mid- to low-end segment. The Network business recorded revenue growth led by domestic demand for 5G installations and business expansion overseas, including in North America. In VD, both revenue and operating profit grew as we actively addressed year-end seasonal demand and increased sales centering on premium products, including Neo QLED and super big TVs. In Digital Appliances, profit decreased as market conditions further deteriorated, while material and shipping costs remained high and competition intensified. Harman delivered a record-high quarterly profit for the second consecutive quarter, driven by increased revenue in the automotive business and solid sales of consumer audio products. Regarding currency effects against the Korean won in the fourth quarter, the positive impacts of a strong U.S. dollar on our component businesses had the effect of a company-wide gain of approximately KRW 0.5 trillion in operating profit when compared to the previous quarter. Regarding our corporate tax rate, Korea recently reformed several tax measures, including the introduction of dividends received exclusion for dividends from subsidiaries. Under this new exclusion measure, our corporate tax for the fourth quarter decreased, resulting in a net income of KRW 23.8 trillion for the fourth quarter. Previously, the company conservatively deferred corporate tax liabilities under the assumption that the entire earnings of our subsidiaries would repatriate in the form of dividends. The recent reform that prevents the double taxation on subsidiaries' dividends eliminated the need for such deferrals. As a result, the corporate tax rate expense for the fourth quarter became a negative number under the Korean International Financial Reporting Standards. Please note this is a onetime consequence of the recent tax law changes. It does not mean that the company received a corporate tax refund nor is it related to the company's actual tax payments. Next, I would like to share an overview of our business outlooks. In the first quarter, we expect global IT demand in the memory market to remain weak. DS will minimize adverse impacts by addressing the demand for high-end products, such as DDR5 and LPDDR5X and 200-megapixel sensors. However, concerns over continued customer inventory adjustments do persist. Display will actively engage to meet the demand for our major customers' new products, and DX will increase revenue and profits by expanding our leadership in the premium segment via Galaxy S23, for example, and improving operational efficiency. I will now brief you on the outlook for businesses that are not covered by separate speeches as those will follow shortly. Network will focus on expanding our domestic and overseas businesses, including North America and address new opportunities. Digital appliances aims to increase sales in the premium segments by launching new models such as Bespoke Infinite Line despite continued earnings pressure due to the poor economic conditions. For Harman, we expect earnings to decrease, mainly affected by weak seasonality for consumer audio products. Now let's move on to our outlook for 2023. Although macro uncertainties are expected to remain high, we anticipate demand to start to recover in the second half, following continued weakness in the short term. DS will further reinforce its market and technology leadership as we optimize our line operations to strengthen future competitiveness while also expanding the proportion of its advanced nodes and products such as DDR5, LPDDR5X and Gate-All-Around technology. Display's mobile panel business is expected to deliver solid earnings based on its competitiveness. In the large panel business, we'll focus on growing the QD-OLED business and improving profitability. DX will enhance its competitiveness by leveraging our technology leadership to strengthen the premium lineups, and the division will further expand the SmartThings ecosystem based on differentiated technologies and diverse partnerships that will provide customized hyperconnected experiences. As for the businesses not covered later, network will sustain revenue growth momentum by actively responding to major opportunities, particularly in our overseas business. And we will reinforce our technology leadership in 5G core chips and virtualized radio access networks. For Digital Appliances, we will continue to lead the market in providing hyperconnected experiences by further enabling our products with SmartThings. And at the same time, we will enhance the competitive edge of our premium products centered on Bespoke. Moreover, we will accelerate the growth of high-margin products such as system air conditioners and expand B2B and online sales in order to promote revenue growth. For Harman, both the automotive and consumer audio markets are projected to grow slightly in 2023. The audio business will strive to increase both on and off-line sales based on the competitiveness of our differentiated products and brands, and the automotive business will push to increase its sales in digital cockpits and car audio products. Turning to capital expenditures. CapEx in the fourth quarter was KRW 20.2 trillion, of which KRW 18.8 trillion was invested in the DS division and KRW 0.4 trillion in Display. Memory CapEx concentrated on preparations for advanced technologies, which included investing in P3 and P4 infrastructure to provide readiness for mid- to long-term bit supply as well as in EUV to further bolster future competitiveness. We also invested in securing infrastructure for future generation R&D. Foundry investments focused on expanding the production capacity of advanced nodes at our Pyeongtaek site as well as on initial capacity for 3-nanometer and infrastructure for our Taylor site to address future demand. Display investments covered flexible display production capacity expansion as well as facility improvements in infrastructure. The annual CapEx was KRW 53.1 trillion, with KRW 47.9 trillion invested in DS and KRW 2.5 trillion in Display. Although the CapEx plan for 2023 has not been finalized, I can share some high-level directions. In Memory, we will continue to invest for the mid- to long term to prepare for future demand and further enhance technology leadership. In addition to continuing with our EUV differentiation, our midterm plan includes investments for the transition to advanced technology nodes to address the markets for high-performance, high-density DDR5, LPDDR5X products, which are expected to be in high demand starting in the second half of 2023. For the longer term, we will also invest in infrastructure for P4 in multiple R&D capabilities, including a new dedicated semiconductor R&D fab as well as in capacity for the development of future generation processes. Foundry investments will continue to center on expanding the production capability at our Taylor and Pyeongtaek sites to address the demand for advanced processes, which is in line with our Shell-First strategy that enables us to respond swiftly and flexibly to customer demand. Next, I would like to address shareholder returns. Today, the Board of Directors approved a quarterly dividend of KRW 361 per share for common stock and KRW 362 per share for preferred stock. Based on the annual dividend payout under the current dividend policy, the total quarterly dividend payout is KRW 2.45 trillion, and it will be paid after final approval at the Annual General Meeting of Shareholders. As we close out the results for 2022, I would also like to share that the annual free cash flow was KRW 9.8 trillion and the shareholder return pool at 50% of the free cash flow is approximately KRW 4.9 trillion. Considering the projected annual dividend for 2022 is KRW 9.8 trillion, there was no additional pool for an earlier return. In 2023, as we set out to implement large investments for our future growth and differentiation, amid a challenging business environment, we will be especially more conscious about continuing to enhance our capital management efficiency. Next, I would like to share some of our key activities in sustainability management. First, as we recently showcased at CES 2023, we are committed to enhancing resource circularity throughout our product's life cycle and improving their energy efficiency such that using Samsung products contributes to a low-carbon and sustainable future. As prime examples of everyday sustainability, our SmartThings energy service allows users to effectively manage the energy use of all devices linked through this service. And through collaboration with Patagonia, we have developed and introduced a laundry cycle that can reduce microplastic released by up to 54% based on results from the European market. Finally, we applied innovative technologies to transform discarded fishing nets into recycled plastic components for use in our smartphones. Through these recycling efforts, we were honored with the SEAL Sustainable Product Award in acknowledgment of our commitment to a sustainable future. Moreover, we are joining forces with like-minded global partners to create ecosystems that enhance sustainability. For example, we are working together with Carbon Trust and other industry leaders to establish an industry standard to measure and reduce carbon emissions in the use stage of connected devices. Moreover, as part of our advocacy efforts to increase the supply of renewable energy in Asia, we are participating in the Asia Clean Energy Coalition as a member of the steering committee. Last but not least, to address the challenges faced by the semiconductor industry, we have joined the Semiconductor Climate Consortium as one of its founding members and have also been elected as a member of the governance -- the governing committee. Furthermore, Samsung Global Goals, an application on Galaxy smartphones, raised more than $10 million to contribute to the United Nations' development programs efforts to implement the Sustainable Development Goals. Meanwhile, Samsung ranked fifth for the third consecutive year in Interbrand's Best Global Brands, achieving the highest growth in ranking among non-U.S. companies. We will continue our efforts to enhance sustainability in all aspects of our businesses going forward. I will now turn the conference call over to the representatives from each business unit to present fourth quarter performance and outlooks for the respective business segments in more detail. We will start with EVP, Jaejune Kim of the Memory business. Thank you. Good morning. This is Jaejune Kim from the Memory Global Sales and Marketing. For the memory market in the fourth quarter, demand weakened as customers continue to adjust inventory under increased uncertainties in the external environment. Our bit growth outgrew the market by expanding sales focusing on several applications aided by the base effect of coming in under market last quarter. However, memory price fell further as deepening macro issues eroded customer -- consumer incentive. Additionally, with the impact of meaningful loss from the valuation of inventory, our results decreased significantly compared to the previous quarter. In DRAM, for server, as you know, is that component supply issues gradually eased. However, demand growth was limited because of our decline in Set build caused by economic uncertainties and customer stance to maintain their inventory adjustments. Mobile and PC, it seems that our demand was muted because of continued inventory adjustment at major customers and a reduction in Set builds, amidst shrink consumer sentiment coming from concerns of economic slowdown. While decline in demand was steepening across the overall industry, we expand the portion of cutting-edge node by optimizing our product portfolio. In addition, we actively responded to demand for high-density products focusing on major data centers and several OEM customers and our quarter-on-quarter bit growth exceeded market. Next, I will talk about the NAND market. For server SSD, despite continued growth in our contents per box, customers continue to delay purchases because of their inventory adjustments and demand was somewhat stagnant. As for mobile, while consumer sentiment remained weak due to the economic slowdown, demand was sluggish, especially in China because of Zero-COVID policy until early December and production disruption at some customers. Also for client SSD with reduction of Set build at some customers, the burden of inventory adjustment increased and demand for memory purchase somewhat slowed. As demand continued to weaken due to macro issues, we actively addressed demand for high-density products across all applications and diversify our product and customer portfolios. As a result, Q-o-Q bit growth exceeded market. Now let's move to the outlook for the first quarter. For DRAM, in server, as economic uncertainties continue, our customers have maintained their stance on inventory adjustment so far. Thus, under concerns over weakening momentum for a demand recovery in the short term, we should monitor if demand will improve in accordance with macro variables such as interest rate policies. And for mobile and PC, under the effect of slow seasonality and weakened consumer sentiment due to concerns of deepening economic slowdown down, there is a possibility that demand will shrink. However, we need to keep watching for signs of demand recovery along with developments in China's COVID-19 recovery situation and economic stimulus packages. As a new CPU launches, we will work to prepare for our expected fast-growing DDR5 demand for server and PC. And in mobile application, we will actively address demand for high-density LPDDR5X for high-end products. For NAND, in server SSD, there is a possibility that demand will drop significantly -- slightly compared to previous quarter as customers continue to adjust their inventory due to Set build constraint under concerns overall deepening economic slowdown. However, considering the hybrid cloud trends of enterprise area can positively influence demand and we need to monitor [retail] impacts. For mobile, although we expect continued high-density trends based on price elasticity, we expect demand to be weak as customer sentiment continue to be sluggish because of inflation and interest rate hikes. Also for client SSD, even though demand for high-density products is expected to increase steadily, our purchase activities are projected to be delayed as OEM customers deplete accumulated Set inventories. Based on our cost competitiveness, we plan to expand the sales portion of high value-added products by addressing demand for high-density server SSDs. Also we will actively accommodate the high-density trends of smartphone and PCs to strengthen our market leadership. Now let's move on to the outlook for 2023. While the industry's overall inventory level has increased due to the lowest ever demand bit growth last year, our customers are likely to maintain their stance on inventory adjustment in the near term. We expect customer purchasing sentiment to recover after inventory of those months are complete, but it's necessary to monitor whether change in economic conditions and consumer sentiment result in improved demand. Looking at by each application. First of all, for server, for the time being, our customers are expected to keep adjusting inventories due to economic uncertainties. However, we expect fundamental demand to remain solid given the investment in core infrastructure such as for AI and machine learning. In particular, demand for DDR5 is projected to increase in [earnings] in the second half of the year, thanks to increasing contents per box and the launch of new CPUs. For mobile, consumer sentiment is likely to keep muted due to various macro issues. However, demand may recover relatively in the second half of the year, thanks to the high-density trends and the spread of new competitors in smartphones. Considering our numerous barriers affecting demands, such as inflation and interest rate trends as well as China's easing COVID-19 policy and economic stimulus packages, we will continue to observe market conditions for variable scenarios. For PC, similar to mobile, the surge in sales induced by COVID-19 is likely to cause the replacement cycle to take some times, and shipment are focused to weaken for the time being. However, we will continue to watch for factors that positively affect demand, such as launch of new CPUs and increased adoption of high-density products. While actively addressing to the demand for DDR5 with the rising adoption of new CPUs, we will respond to demand growth in a timely manner, focusing on high-density products for server and mobile by optimizing our product mix. Moreover, to strengthen our future competitiveness, we are going to optimize line operations. In addition, we will increase the portion of essential R&D investments, including the expansion of engineering [land] for further process stabilization, and we believe that it will bring us enhanced market and technology leadership. Furthermore, under the market uncertainties, we will carefully keep monitoring the market demand changes from both short and mid- to long-term perspective. Thank you. Good morning. This is Hyeokman Kwon from the Systems LSI business. In the fourth quarter, System LSI earning declined due to sluggish sales caused by inventory adjustment in the industry and a decrease in sales for major components. However, even under difficult conditions, the mobile Soc business achieved its highest still ever full year revenues, and it has continued to increase market share by expanding sales over volume zone products. Furthermore, the automotive SoC business has solidified its mid- to long-term growth base by supplying initial sample on schedule for a European premium OEM and by signing an MOU for product development with autonomous driving solution company in the U.S. Additionally, our fingerprint authentication card product won the Best of Innovation Award at CES 2023. In the first quarter, impact of sluggish demand and inventory adjustments are expected to continue for the time being. And it may be difficult to avoid weak sense of major component such as SoCs and sensors. In order to minimize the drop in earnings, we will strive to expand the sales of low to mid-priced volume zone SoCs and 200-megapixel image sensors. And for automotive SoCs, we will try to sustain growth momentum through additional orders from European premium OEMs and for self-driving products. For 2023, we expect the impact of the economic downturns to continue for the time being. However, analysis over smartphone purchase patterns suggest that demand will continue to polarize between premium and low-priced mobile phones. In order to respond to this divided market for SoCs, we will expand the sales in the volume zone while also reinforcing the position of our product for flagship devices. Furthermore, we will ensure our major smartphone OEM customers successfully launch flagship models by smoothly supplying and expanding the line of our differentiated 200-megapixel sensors. Thank you. Good morning, and good evening. This is Gibong Jeong from the Foundry business unit. The Foundry business in the fourth quarter once again set a new record for quarterly revenue. Our full year sales also reached an all-time high. This was thanks to increased contribution from the advanced nodes, an increased portion from the HP sector and the continuous evolution of our mature processes. Nonetheless, our capacity utilization started to decline in relation to inventory adjustment at the customer side. In the mobile and HP sectors, customers' interest in our next-generation Gate-All-Around, GAA, processes has increased meaningfully. Regarding GAA processes, the 3-nanometer first-generation process is currently being mass produced with stable yield. The development of this 3-nanometer second-generation process is progressing rapidly based on our first-generation mass production experience. In the automotive sector, we started to develop 4-nanometer process following the mass production of the 5-nanometer for our future growth in advanced nodes. In the first quarter of 2023, we expect our capacity utilization to decrease and our earnings decline accordingly. It is due to weak demand amid slowing global economic growth, inventory adjustment of customers. In 2023, on the whole, demand may fall temporarily in the first half of the year due to the economic slowdown and inventory adjustment by customers. In the second half, however, we expect market demand to recover in the HPC and automotive sectors. Customer interest in multi-sourcing is ever growing amid geopolitical uncertainty. To address such demand, we aim to invest in advanced processes and outperform market growth. Based on the competitiveness of our GAA processes, we will win new customers for the 3-nanometer second-generation process. We will strengthen technological leadership by focusing on the development of the first-generation 2-nanometer process. In addition, we will continue to develop specialty and mature processes in order to increase share in automotive and IoT sectors. Finally, we have established an advanced packaging business team within the DS division. It is reflecting the rising importance of next-generation packaging technology in the HPC and mobile markets. This will expand our package business and bolster synergies between business units. We will strengthen our end-to-end advanced packaging processes from development to mass production, testing and shipments. And we will strive to preemptively address future demand and expand our advanced packaging business in this newly growing area. Thank you. Good morning. I'm KC Choi from the Corporate Strategy team at Samsung Display. I will now summarize our results for the fourth quarter of 2022. For the Mobile Display business, the market demand continued to contract due to continued global unfavorable factors despite the peak season, but we have achieved solid results by focusing on high-end smartphone products. For the Large Display business, sales improved due to increased TV sales during the year-end peak season. The deficit has also eased. In addition, inventory was exhausted, and the company switched to a full flagship security center business. Overall, 2022 can be said to be a year in which we achieved a tangible result from preemptive business restructuring, such as all the exit from LCDs, strengthening portfolios focused on high-end smartphones and conversion to large-sized securities. Next, let me share the outlook for the first quarter of 2023. For the Mobile Display business, smartphone demand is expected to show negative growth compared to the previous year due to economic slowdown in major regions as well as the off-season effect. We continue to maintain our strategy in performance by actively responding to the launch of major customer flagship products. For the Large Display business, we will secure additional demand and promote and only ramp up by introducing a new item of both the large TVs and large size monitors. Finally, I will share our outlook for the display market and display business strategies for 2023. Although a difficult business condition environment is expected due to unstable market conditions such as inflation and tight monetary policy and at the entry of competitors in [Indiscernible]. We plan to strengthen our market dominance by taking advantage of the technological performance gap in the relatively solid high-end smartphone market. In addition, we will actively utilize market changes that accelerate to the transition to OLED to maintain our leadership in the market with cost competitiveness, which is a result of preemptive investment. Demand for large size panel is expected to be decreased, continued -- due to continued economic uncertainty, but we will continue to improve profitability by strengthening our sales base in the premium market base on stable yields. Thank you. Hello, everybody. This is Daniel Araujo from the MX division. I'd like to share our Q4 results and the outlook for the MX business. In Q4, demand for smartphones remained sluggish, with the mass market contracting sharply due to continued inflation and geopolitical instability. The MX business sales and profit fell sequentially, due to speeding, new product effects of flagship models and the drop in smartphone sales and weak demand stemming from the economic slowdown. In particular, the impact of the decline in sales of mass market smartphones was greater than previously expected, but our flagship sales held up well relative to market projections despite the difficult macro situation. Next, let me share the Q1 outlook. In Q1, we expect demand across all smartphone segments to decrease Q-on-Q due to the continuing economic slowdown and other lingering factors contributing to macroeconomic instability. For the MX division, we will push to expand flagship sales with the successful launch of the S23, which we prepared thoroughly and will be in dealed at Samsung Galaxy impact tomorrow. With smooth supply in place to confidently respond to initial demand will actively promote our maximized competitiveness in areas like camera and gaming performance and expand revenue centered on sales of flagship products through a variety of sales programs tailored to regional characteristics. As for Galaxy ecosystem devices, such as premium tablets and wearables, we will continue marketing activities that are linked to our smartphones in order to expand sales. In addition, as competition in the market intensifies and the economic downturn persists, our continued efforts and effective resource management will help secure solid profitability. Now I'd like to discuss the outlook for 2023. Amid prolonging geopolitical issues, continued inflation and the continued global economic slowdown, we expect the smartphone market to contract in 2023, with the mass market impacted the most. Although we expect the overall tablet market to stay similar year-on-year, the consumer preference for premium tablets and smartphones should remain solid. As for the wearables market, growth is forecast to decelerate. To press ahead with the high growth of foldables and revenue expansion of the S series, MX will further enhance the completeness of our flagship experience, based on actual user experiences by focusing our technology capabilities on strengthening the competitiveness of flagship products. With these efforts, we will further expand our premium customer base and thereby improve the sales mix and sales growth. In addition, based on the strength of our collaborations with mobile carriers, we will actively facilitate a variety of sales programs to expand sales of 5G smartphones in the mass market segment in order to overcome negative market growth. For tablets, we will continue to pursue sales growth by strengthening our lineup of premium products in line with a large screen trend and by upgrading experiences through features such as the S Pen. In wearables, we will expand sales by strengthening product competitiveness through an improved multi-device experience. Through these efforts, we will achieve sales growth in 2023 and with continued progress on operational efficiencies in response to the macroeconomic instability, we will secure solid profitability. Thank you. Good morning. This is Kyungle Rho from the sales and marketing team of Visual Display. First, I would like to review the market conditions and our performance in the fourth quarter of 2022. TV market demand increased quarter-on-quarter, thanks to year-end peak seasonality, but it contracted year-on-year, led mainly by declines in developed market due to a global economic downturn. For Samsung, we improved our performance quarter-on-quarter by proactively addressing regional peak season demand such as Black Friday and by expanding sales centering on high value-added products including NAND strategy and lifestyle promoters. However, our performance declined year-on-year due to a contraction of consumer sentiment caused by high interest rate and inflation and also impact from currency movement. Now let's look at the outlook for first quarter and 2023. Market demand in the first quarter is expected to decline both quarter-on-quarter and year-on-year due to seasonality and continued impact of global economic downturn. Samsung will capture premium demand utilizing our 2023 NAND strategy, which provide a richer and more valuable user experience. We have enhanced device-to-device connectivity on top of its high definition, high performance. To this end, we will strengthen partnership with major channel partners by region and maximize the performance of various marketing promotions for each country by utilizing strategic products. At the same time, we plan to focus on securing profitability by continuing to optimize operation and manage its cost. Regarding the TV market in 2023, along with various external uncertainties that are expected to continue in 2023. Overall TV demand is likely to remain stagnant, but demand for premium products, including QLED, OLED and Super Big TV should keep growing. We will continue to lead the ultra large screen market with our 98-inch NAND strategy, and we plan to release Micro LED models in various sizes so that more consumers can enjoy what appears is the world's best picture quality and screen experience. For OLED TV, we will provide consumers with a wide range of options by adding 77-inch models to the current 55-inch and 65-inch models in our line. And we will continue innovation in premium products, including the release of 57-inch and 49-inch OLED gaming monitors. At the same time, we will continue to strengthen sustainable, eco-friendly management throughout the life cycle of all our products and provide a new consumer experience that connects screen and other products or to product solidify our position as an industry leader. Thank you. Thank you. That sums up the fourth quarter results presentation. Before we move on to the Q&A session, I would like to share several data points in key business areas. Considering the continuing macro uncertainties, we will not be providing annual guidance at this time. Comparative figures are on a quarter-to-quarter sequential basis. For DRAM, in the fourth quarter, our bit growth increased by a percentage in the high single digits and ASP declined by a percentage in the early 30% range. For the first quarter of 2023, we expect market bit growth to decrease by a low single-digit percentage and our bit growth should be similar. For NAND, in the last quarter, our bit growth increased by a percentage just into the double digits. Our ASP fell by a percentage in the high 20%. In the current quarter, we expect market bit growth to decrease by mid-single digit, and our bit growth should slightly outperform the market. For Display in the fourth quarter, the OLED portion of revenue was a percentage in the mid-90s, and OLED sales volume increased by a high single-digit percentage. For mobile in the October quarter, shipments were approximately 58 million units for smartphones and 8 million units for tablets. Smartphone ASP was USD 240. For the first quarter of this year, we expect smartphone shipments and ASP to rise but shipments of tablets to decline. For TVs, sales volume of LCD TVs in the fourth quarter increased by a percentage in the high teens. For the current quarter, we expect sales volume to contract by a percentage in the low to mid-teens. My first question is about the Memory business. There is quite a lot of concern in the market about memory demand. I think the expectation is that the shipments at the set level will remain weak. However, I think one upside that we can look forward to is that perhaps the significant drop in prices that has been continuing since second half of last year may continue to drive increase in content per box. And so in that context, could you share with us your outlook in content per box increase by application? Second question is about the digital appliance side, overall logistics as well as raw material prices have been coming down and stabilizing. What kind of impact do you think that would have on your digital appliance profitability this year? And in connection with that, what kind of strategy is the company planning to secure better profitability in its DA business. To answer your question about content per box by application, it is true that we are also observing a trend of increasing content per box mainly driven by price electricity, especially around consumer devices, such as smartphones and PCs. Especially in the case of mobile, we expect this increase in content -- memory content to continue driven by price elasticity. We're actually seeing an increase of competition around memory specifications, especially around the high-end smartphones. With all of that considered, we are currently expecting that this year, memory content growth rate would be around 10% year-over-year for DRAM and around high-teen growth for NAND. On the other hand, for the server side, the upside from price elasticity would be relatively more limited. However, what we can look forward to on the server is the demand that will happen from the conversion, the switching over to the new platform. The new platform that will be launched this year has more number of cores. And therefore, we think that the rate of high-density memory adoption will increase by around 20% year-over-year for both DRAM and NAND, and also, at the same time, we think that the adoption of DDR or migration to DDR5 will happen at the same time. Especially this conversion to DDR5, there are things to keep in mind, for example, because of the chip size penalty, bit productivity decrease is expected also because this is an initial new product, market inventory levels are currently low. And so initially, we can expect there to be build demand. And on top of that, demand to secure initial inventory. And so actual purchasing demand may pick up faster than expected. To answer your question about the digital appliance and impact of logistics cost and raw material prices. As you mentioned, raw material prices overall have been on a declining trend in second half of last year. But with the increase in raw material demand tied to China's reopening and also expectations of a possible recovery of global economic sentiment, raw material prices recently have been rebounding. And so considering that the amount of decrease we can expect may not be as large as expected. Our ocean freight has definitely been decreasing since second half of last year, but still compared to pre-COVID levels, it is relatively high. And so while these factors would have a positive impact on profitability this year, overall situation remains fluid. And so it is too early for us to make any definitive calls. And that is why the focus of our profitability strategy is, number one, minimizing the impact of any market volatility and changes by strengthening our production hub competitiveness for better cost savings and also to leverage the long-term supply contracts that we enter with raw material companies at attractive terms. Also, on the sales side, we're focusing on expanding our premium sales, such as the Bespoke Infinite Line and also expanding our B2B and online channel sales. I only have one question, and that's about your memory supply plan, which I'm sure many people on the call are interested about. Given the fact that market environment is worsening and continuing to stay weak, does the company have any plans of reducing or delaying its equipment investment plans or any plans of reducing its production through line adjustments or adjustment of its utilization rate? Yes, I'll answer that question about our investment and production plans for this year in connection with this year's market situation. As you mentioned, with recent inflation, higher interest rates, consumer sentiment remains soft, also due to concerns of a weak economy going forward, even businesses, companies are placing top priority on maintaining their financial soundness, and this has resulted in a prolonged inventory adjustment cycle by customers that started from second half of last year. While this situation is not immediately favorable for our business performance, on the flip side, this is a great opportunity for us to prepare for the future. And our CapEx approach this year is to continue to make the infrastructure investments that are necessary to respond to mid- to long-term demand and to make the -- and to secure the essential clean rooms that we would need to do that. So in conclusion, this year's CapEx plan is expected to be similar to previous year. Now at the same time, in order to secure best quality and also line operation optimization. We have strengthened our production line maintenance efforts and are going through some equipment layout adjustments, which and also we are efficiently pursuing the migration to future cutting-edge nodes. Also, in order to increase our process technology competitiveness and also to stabilize our process technology early on, we have been increasing the share of engineering runs and as a result of that, within our total CapEx, the R&D-related portion is expected to increase versus previous years. And so in the process of carrying out these initiatives, we think that impact on our bit at a meaningful scale in the near term would be inevitable. However, if you look at the long term, these are all essential activities that are necessary to enhance our competitiveness and responsiveness to the market. And that's why we will be carrying these activities out at a brisk pace as part of our preparations for future growth. Lastly, market uncertainty, including geopolitical issues, is a given. And therefore, we will continue to carefully monitor any changes in the mid- to short term or mid- to long-term market demand. My one question is about the display side, the smartphone OLED display, with market competition becoming more intense in that segment, there are concerns in the market that Samsung displays market share in the mobile OLED segment may decrease. Can you share with us your starting on how to respond to this intensive market competition? To answer your question about our smartphone OLED, which does account for a large share of our both revenue and profitability, the company has always -- already been aware of the possibility of competition becoming more intense in the mobile OLED market. While on one side, the smartphone device demand is weak with economic recession and Chinese market demand remaining sluggish, the competitors in the OLED supply side have been increasing their utilization. However, actually, the -- because the competitors' capacity has surpassed market demand some time ago, the risk of overheated competition in this segment has always existed. So despite this very intensive and difficult competitive environment, we have been able to respond very effectively during the recent several years. And I think that's explained by several factors. The most important being our development capabilities, especially our time-to-market capability, which is critical in the smartphone market, which has a shorter replacement cycle versus other IT or TV devices, for example. We have more than 10 years of mass production experience and leveraging that, we have been able to continuously be the first to market with products that have more superior characteristics. And we think that this edge that we have in competition will remain effective this year. One thing we are watching carefully is how customers are demanding for differentiating technology. And in order to keep that demand for differentiating technology strong, we are actively preparing new technologies, such as UPC, the under-panel camera, or extreme narrow bezels or low -- ultra-low-power display that actually appeal to consumers, and we'll continue to very carefully and closely cooperate with our Handset OEMs. I have a question about the mobile side. If our information is correct, the new flagship that will be launched this year would be using a third-party AP and the extreme nodes would not be used on the flagship to be launched this year. On the other hand, we're also hearing news that an application solution development team has been created under the MX division. And so can you just clarify what that implies in terms of where the AP development effort will happen going forward within Samsung Electronics, would it belong under MX? Or with the AP solution development belong under System LSI? I think also what we can read from that is that the extreme nodes then would mainly be used on the volume zone, would it be possible to share with us what kind of percentage within the volume zone the extreme nodes would have as a share? Sure. So for each of our products, we select the AP chipset with the most appropriate price and performance for that product. And going forward, we will continue to maintain an open stance on procurement based, of course, on the competitiveness of VJP. We release every product only after undergoing thorough verification and all APs are optimized for each device in order to give customers an exceptional user experience and performance. And in the future, we will continue to select the best AP for each model after considering factors like market demand, release timing and regional needs. So the AP is a highly important component that determines product performance as well as the customer experience. So taking that into account, in December of last year, we set up the AP solution R&D team, who is in charge of AP optimization and next-generation advanced research. This AP solution R&D team will work on developing AP solutions that are more optimized for Galaxy products in collaboration with our chip side partners. And through this, we will continue to strengthen not only our product competitiveness, but also Galaxy's differentiated user experience. My first question is about the Memory business, especially the Xi'an fab. The U.S. government is continuing to heighten its sanctions against China. And in that context, even though the company received a 1-year grace period from the Department of Commerce for the Xi'an fab, can you share with us what the company plans to do in terms of how to operate the Xi'an fab going forward on a longer-term basis? And what kind of impact do you expect? Looking from outside, you also have, for example, a base in Taylor, even though that is a foundry. Would the company be considering any plans of establishing memory capacity at sites within the U.S. such as Taylor in response to that? Second question is about the Foundry business. I think looking at the Foundry, 2 key items going forward for you would be the development of your 3-nano second-generation GAA and also the new fab in Taylor that's being built. Can you give us updates on both the second-generation 3-nano development status, order win status as well as an update on Taylor? To answer your question about Xi'an, as you know, we have put in quite a lot of time, effort and investments to bring the Xi'an fab into a level of stable operation. And so in terms of deciding our plans going forward, we need to be carefully considering various factors, including the long-term market outlook, global customer demand, economics and profitability. And our focus is on finding the plan that would enable us to provide optimized customer response. You've also asked about whether we're considering memory capacity in places such as Taylor. In the near term, the plan that we have for Taylor is around Foundry capacity. And so I'm not able to give you a clear answer on that specific question at this point. Now that said, regarding securing any new production bases, whether it is in Korea, overseas, we are planning to take into account various factors, with open possibilities and under various conditions. To answer your question, first of all, our 3-nano GAA, second generation, to give you an update on the development, we're currently on schedule with targeted mass production in 2024. Also, you talked about the order situation. Currently, we are in collaboration. We're talking to a large number of mobile as well as HPC customers, they are showing quite a lot of interest. I think best way for me to explain our second-generation GAA 3-nano is to explain the technology, the MBCFET technology. That is why customers are highly interested in this new technology, and we also have a track record of mass producing this generation -- Gen 1 3-nano with MBCFET technology first in the world. And so our second-generation technology will offer gains in terms of size, performance, power efficiency and our development is actually making quite good pace based on our mass production experience of Gen 1. Now regarding the update on Taylor, we are on schedule for 4-nano mass production during second half of 2024 in Taylor. My first question is about memory. Actually, the impact to memory demand that we can expect from the increase of various AI technology, especially ChatGPT recently is attracting a lot of attention. Is there's a wider adoption of ChatGPT and other AI-based natural language processing technology in the market? What kind of implications do you think that would have on overall memory demand? Second question is about the display side. I think last year during occasions, including the earnings conference call, you mentioned that Samsung Display will be strengthening its IP. Can you give us any update where -- are there any visible achievements since then? To answer your question about impact on memory demand by these AI natural language processing technology, we also agree that the increase of the natural language-based, conversation, style, AI services would have a positive impact on future memory demand I think especially meaningful with the adoption of ChatGPT is that now these large-scale language models have finally reached a level where it can be now commercially used. In order for these AI-based models to train and also infer, there needs to be, number one, high-performance processors that can actually do large-scale computation, and also combined with this processor, you need high-performance, high-density memory to support that. And therefore, we think that with the wider adoption of large-scale language model AI-based services, there will also be an increase in hardware demand. More specifically, the areas within the memory that we can expect there to be long-term demand growth would be the high-performance HBM that provides data directly to GPUs and AI accelerators as well as the high-density server DRAM, such as the 128 gigabyte and plus that would support the CPUs that process the AI learning data. And that is why we are planning to actively capture the increase in demand related with AI services by developing high-performance, high-density memory products. To answer your question about the efforts to strengthen our IP, intellectual property, at Samsung Display level, Samsung Display considers is widely practiced patent infringement within the Display industry. It's a serious problem. And since last year through various channels, including, for example, IR events, we have mentioned that the company is preparing various response strategies. Within the smartphone ecosystem, it's very important that technology use fairly and that its value is protected. However, what we are seeing, for example, out in the market, is just quite concerning. For example, the Diamond Pixel, which is one of our signature technology patents, we're finding products being sold online that latently infringed upon this technology. When we looked into the details, it was even unclear where this product was being manufactured. And that is why we filed a complaint against a total of 17 U.S. component wholesalers against the U.S. International Trade Commission. This is the start, and we will continue to actively fight to protect our intellectual property. Finally, we will answer questions that were submitted online in advance. We have been accepting questions via our website in advance of an earnings release as part of our efforts to strengthen communication with individual investors and enhanced understanding of the company. And we received a wide variety of questions again this quarter. I believe a majority of the submitted questions were sufficiently answered during the Q&A session, but we will answer one more question on a topic that garnered a high level of interest from our shareholders but were not addressed during the Q&A session. The question is as follows. What are the major innovation points of the new S series product in terms of performance and design? And what are the marketing strategies to boost the sale? This question will be answered by VP Daniel Araujo, representing the Mobile Experience division. Sure. So the S23 series, which will be viewed at Samsung Galaxy impact tomorrow or the day after, is a product that combines the best in features and performance. And we believe we'll establish a new standard for smartphones that consumers can trust and use for a long time. In order to solidify best in the industry positioning, we'll focus on appealing to consumers with the best camera and gaming performance centered on the ultra-model, which inherits the user experience of the Galaxy Note. We will also continue to carry out privacy campaigns, make ESG advances like applying more eco-friendly materials to our products. And we're also strengthening marketing of the Galaxy's unique experience, especially via the social channels that are linked to our customers' daily lives. And considering that many consumers' disposable income is decreasing during this difficult time, we plan to expand programs like Samsung Trade-in that reduce the purchase burden of our products. So with all this thorough preparation from securing sufficient volume for our product launch, all the way to the go-to-market strategy, we'll strive to expand sales of flagship products. I would like to thank everybody who share their valuable opinion and we will be sure to refer to them in our decision-making process. That completes our conference call for this quarter. We wish all of you and those close to you stay strong and in good health. Thank you very much.
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We will now start the Z Holdings Fiscal '22 Q3 Meeting on Business Results. Thank you very much for participating today. And we apologize that the starting time of the business results meeting has been delayed. We apologize for the inconvenience. We will use the material that's available on the website regarding Q3 business results. Today with us, we have from Z Holdings, the Representative Director and President, Co-CEO, Kentaro Kawabe; we also have Representative Director, Co-CEO, in charge of Marketing and Sales, who is the CPO, Takeshi Idezawa; Director, GCPO, Group Chief Product Officer, Jungho Shin; Corporate Director, Senior Managing Corporate Officer, e-commerce CEO, Kentaro Kawabe; Senior Managing Corporate Officer, CTIO, Global Business CPO, In Joon Hwang; Senior Managing Corporate Officer, GCFO, Ryosuke Sakaue. First of all, from Kawabe and Sakaue, the fiscal '22 Q3 results will be explained and after, we will take any questions that you may have. Overall, we are planning 1.5 hours for this meeting. Also, this call is being live streamed as well. [Operator Instructions] Now without further ado, we would like to start the presentation. Hello. This is Sakaue of Z Holdings. Thank you very much for joining us today for the briefing on business results for the fiscal year '22 third quarter. I will now explain the overview of Q3 business results. Please turn to the next page. Here are the topics. Revenue reached JPY 453.6 billion, a new quarterly high, partly due to the consolidation of PayPay. For this quarter, as we focused on profit and managing the company, adjusted EBITDA achieved approximately 79% of the lower end of our full year guidance. As explained at the time of Q2 results cost optimization efforts to select and concentrator steadily underway. And adjusted EBITDA, excluding PayPay on a nonconsolidated basis increased. PP is growing steadily with more than 54 million registered users and GMV exceeding JPY 2 trillion in the quarter. With PayPay now a consolidated subsidiary of the Holdings Group, we will accelerate growth even further. That's what we will strive to do. On the other hand, in light of the deterioration of the ad market, adjusted EBITDA guidance has been revised down to the lower range. Finally, in order to speed up the decision-making process for group management, we have decided to merge our company, Yahoo! Mr. Kawabe will explain the details later. Please turn to the next slide. From here on, I'll explain on the order of the agenda. Please turn to the next page. First, I will explain the consolidated results. Please turn to the next page. This is a summary of the company's census performance due to the fact of making PayPay a subsidiary from Q3. Consolidated results as well as results excluding PayPay on a nonconsolidated basis or provided here. Even excluding PayPay's nonconsolidated sales revenue, quarterly sales revenue reached a record high. We've consolidated PayPay, which was loss-making, but we maintained adjusted EBITDA margin of approximately 20% by simultaneously promoting company-wide cost optimization and business selection and concentration. Please turn to the next page. Here is the consolidated guidance for fiscal '22. Company-wide adjusted EBITDA has been revised from the previous range of JPY 331.5 billion to JPY 340 billion to the lower end of the range of JPY 331.5 billion. There are no changes in other items. We aim to achieve the revised company-wide EBITDA guidance of JPY 331.5 billion by absorbing changes in the macro environment in the media business, and the decrease in profit due to the impact of PayPay's consolidation through cost optimization and business selection and concentration. Please turn to the next page. I'd like to explain our progress in responding to changes in market conditions, including cost optimization and business selection and concentration, which we are currently working on the most. We are proceeding with cost optimization, focusing on promotion expenses to the extent that it does not impair medium- to long-term growth. In addition, the hiring restraint has been in full swing since the second half of the fiscal year and is expected to contribute to profit from next fiscal year onward. In addition to the projects listed here, we are considering the closure or downsizing of about 10 services. On the very right, although there is no impact on adjusted EBITDA, equity and earnings of affiliates, which has been pointed out by investors, it is also improving due to progress in monetization and cost optimization. Please turn to the next page. The following is an explanation of the changes in the financial indicators and guidance. Due to the consolidation of PayPay, the finance business is becoming a greater component of the group's financials. Therefore, we've changed our financial indicators and guidance to ensure financial soundness in accordance with the characteristics of each business in the form of financial services excluded and financial services. We will also revise the definition of net leverage ratio from excluding banking business to excluding financial business, and maintain the leverage ratio below 3x to maintain both investment and financial soundness. Please turn to the next page. Next, here are the topics and results by segment. Please turn the page. I'd like to explain our media business. Please turn the page. This is the performance trend of the media business. In Q3, in addition to the deterioration of the advertising market, the impact of the renewal of LINE VOOM and the revenue growth effect of products launched in the previous fiscal year ran their course, resulting in a year-on-year decline. Leveraging the strength of Z Holding's uniqueness in account adds and search, the segment's adjusted EBITDA margin recovered from Q2 to 42%. Please turn to the next page. This is company-wide advertising-related revenue. I'll explain the situation by product. First, Yahoo! display ads. Programmatic as excluding commerce, remained at the same level as the same period of the previous year. On the other hand, demand in the overall market, like it has been, is shifting to programmatic advertisements and the number of placements for the reservation type as continued to decline and impacted our performance. And we'll touch on this later. But in addition, due to cost optimization in commerce, sales of commerce ads, which is linked to Yahoo! Shopping GMV also declined. LINE's display advertising revenues was it impacted by the market but due to the impact of the renewal of LINE VOOM revenues decreased. On the other hand, account adds and search, which are Z Holdings' unique strength are less susceptible to changes in market conditions and continue to grow steadily. Please turn the page. Regarding LINE official accounts, the number of paid accounts continues to steadily increase, regardless of industry or size as important as the CRM tool grows even amid changing market conditions. Also, for accounts that continue to increase the number of funds through ongoing utilization unit prices increased, contributing to top line growth. We'll continue to maximize user contact points through functional enhancements to promote continued use. Next page, the video -- strengthening the short feeder business as the video AD market expands, we intend to strengthen the short video business selection and focus. The LINE VOOM line was renewed last year, and main view was shifted from those in their 30s and 40s to the teens. And the service KPIs are steadily `expanding. As already announced, Gao in LINE Life will be terminated at the end of March this year. we will equip the know-how and human resources cultivated in these 2 services into LINE VOOM, and that will strengthen our competitive edge in the video content. The combined cost reduction from the termination of the 2 will be about JPY 3 billion per year for the year. Next page, please. a new promotion solutions for manufacturers. We announced sales promotion solutions for manufacturers to maximize the blank LTV last December. The first is the LINE, Yahoo! Japan and PayPay milage program. The second is PayPay's product-specific coupons. The first one, the milage offered by the 3 companies allow customers to accumulate mileage for purchasing specific products and receive rewards according to the milage they had accumulated. In addition, by linking the LINE official account messages based on the purchase history can be delivered to enhance users' continuous and brand loyalty. Also, the second one, the PayPay users can acquire a product-specific coupon, which will be applied automatically for the payment of the product and they get points. This allows for flexible spot marketing such as promotion of new products. These new solutions will allow manufacturers to visualize who has purchased their products and where. With these, we are fully committed to developing the digital promotion market. Next slide, please. Next is Commerce Business. Next slide, please. This shows Commerce Business performance. Through cost optimization, including promotion costs and the fundamental reinforcement of business platform, such as integration of Yahoo! Shopping and PayPay Mall, we try to improve the balance between growth and profitability. As a result, we achieved increased revenue and profit. Going forward, by expanding PayPay's ecosystem and through new e-commerce initiatives we will lead to expand Japan's EC market and to achieve our long-term growth. Next slide please. This shows e-commerce transaction value performance mainly due to progress in cost optimization group EC transaction value achieved JPY 1.1 trillion, in line with the plan. Next slide, please. This is domestic merchandise transaction value -- this is a repeat by the shopping business, along with the fundamental strengthening of products and cost optimization progress through changes in campaign plans and resulted in JPY 471.2 billion, in line with our expectation, although this was down from last year. For reuse business, it continued to grow steadily, mainly driven by PayPay free market, which grew 8% from last year. Next slide, please. This shows the status after integration of sales platforms including fixed point provision expenses, cost optimization made good progress and impact on transaction value from the sales platform integration was within expectations, thanks to improved advertisement take rate and efficient promotions, gross margin improved by 8 points. We will continue to operate by monitoring the balance of transaction value growth and profitability rebuilt the base reward campaign for data used to take route and with transaction value increase compared to the period before the change. Ratio of Blue Ribbon delivery also steadily increased, along with the integration of the platform. We will further drive fundamental improvement of products to achieve sustainable growth. Next page, please. Next is Strategic Business. Next please. This is the Strategic Business of our performance. Thanks to the PayPay consolidation in this quarter, we achieved a significant revenue increase. Excluding PayPay stand-alone adjusted EBITDA deficit got smaller. Going forward, we will improve profitability through growth in PayPay cost optimization and review or termination of loss generating businesses. Next slide, please. This shows a business overview of PayPay, the registered user number of PayPay partly thanks to Japanese government's promotion of individual number card system hit 54 million as of December 2022, and it continues to grow, along with the expansion of users, average spend and number of transaction increase leading to a high growth in transaction volume and sales revenue and steady improvement of EBITDA, as you can see. Going forward, we will drive integrated operation with PayPay card provides seamless payment experience with smartphone apps and we will accelerate efforts for market layer business expansion. Next slide, please. This shows PayPay and PayPay Card initiatives and current situation. We launched PayPay Card Gold in November when the major so that the PayPay Card will be a first choice credit card. So far, we noticed that the unit spending by new gold card users trends higher than regular PayPay card users, about 2.2x more. Thanks to collaboration with PayPay, programs such as Atobarai or deferred payment, overall transaction volume went up 26.4% from last year, very steady growth. Next page, please. This shows the other domestic financial business KPIs. PayPay Card revolving balance showed a steady increase PayPay Bank loan balance also increased from last year, thanks to expansion of personal loans. As for LINE Financial Business, thanks to the product offering utilizing the line user base especially -- the loan balance significantly increased, particularly the LINE pocket money. I'm Kawabe, Representative Director and Co-CEO, will explain from here on. To date, at Z Holdings, the advertising business had drove profits. However, ever since the latter half of fiscal '22, business conditions have suddenly deteriorated. Regarding the main reason for the market iteration, partly it is due to the competitiveness of Z Holding's media products relative to competition, and we are feeling a strong sense of crisis. In light of the market changes, Z Holdings' ad revenue has declined mainly around display as the difference against the beginning of the year guidance is substantial, and Q3 has been showing negative growth. Next page, please. In order to break through this situation, we felt that we need to carry out bold and drastic measures. In order to generate revenue and adjusted EBITDA as well as secured funds for medium- to long-term investments, and to make a breakthrough, the management at Z Holdings decided to make a big decision. Next page, please. The Holdings Corporation decided to launch with core operations, LINE Corporation, and Yahoo! Japan Corporation, we decided on the policy of margin by around end of FY '23. This will expedite decision on group management, and we can control costs, the elimination or consolidation of overlapping functions. In March '21, we integrated with LINE. And at the time, we mentioned adjusted EBITDA of JPY 390 billion as the midterm goal for FY '23. When I became president, that we try to achieve by -- in early 2020 to be #1 domestic EC merchandise transaction value driver and we try to achieve that as the group. However, external conditions change as market worsened than we had thought, we decided to revise the goal. The guidance for FY '23 will be explained in detail in the next earnings meeting for further cost optimization, and that should -- we hope to achieve year-on-year an increase of 10% going forward. And we -- from domestic EC transaction value, we seek growth and profits through maximum usage of group asset instead of point provision and sales promotion. Along with merger, we will be shifted to product first management structure. April this first this year, shift from co-CEO to a single CEO structure and the new representative Director, will welcome Shin Jungho, who is a Group Chief Product Officer. I, Kawabe, will be a chairperson so that the revised goals will be more clear. And the new President, Idezawa, and in the new Representative Director will be supported by me. And for the structure after merger, that is not clearly defined, but we will introduce company system device authority to promote service development and allocate an autonomous growth. I have 2 questions. The first one is regarding towards the core and your thoughts on revenue. The Commerce Business and the Media Business in Q3, revenue has decelerated. You have been suppressing the sales promotion cost for commerce or for shopping. Are we going to expect a turnaround and positive growth? And for media, with LINE VOOM and the migration, if you think that the migration is going to run its course, are we going to see better momentum in Q4 compared to Q3? So the first question was about revenue. So second question is about the merger. Regarding costs and synergies, I presume that you haven't yet been able to come up with an estimate, but what are your thoughts around it? For ID linkage, things have been delayed somewhat, but are you going to be accelerating your efforts? From a revenue standpoint, cost standpoint, growth standpoint, what are your expectations around benefits? So can you take a deeper dive into that? Mr. Maeda, regarding your first question. I would like to take your question. This is Sakai. And if we're media and commerce, if there's any add-on comments, Ozawa-san and Idezawa-san may answer. So I'll take the first question. First of all, regarding the fourth quarter revenue and our thoughts around it, we are not going to disclose our actual outlook. But for the media business, our account adds like Q3, we are expecting continued robust growth and for search. We are expecting similar levels. On the other hand, for display, trends like Q3 are likely to be ongoing. So on a Y-o-Y basis, Q4 may be similar to what we saw in Q3, meaning it may be a tough quarter. Of course, VOOM is going to run its course. But overall, that is the underlying trend. Next, regarding commerce. In March, last year as well as 2 years ago, we had to PayPay -- Ultra-PayPay festival and for this fiscal year, we will be having it, but the scale of it is likely to become smaller from a cost point of view. Of course, we will build a lot of energy around it, but cost price is going to be lower. So for revenue, for Yahoo! Shopping or Commerce, Q4 may be a little tough. From an EBITDA standpoint, we are going to make sales promotion cost efficient so that should be better on a year-over-year basis. That will be my answer for your first question. For media and commerce, do any of the other people have anything to add? They were saying no. So that's it for the first question. For the second question regarding cost synergies. In light of the merger, for the details, we would like to provide more color at the end of the fiscal year when we have the results briefing, including strategies as well. And also regarding the merger, we were saying somewhere around fiscal '23. So at this point in time, it is really hard to answer your question. But as Mr. Kawabe said, next fiscal year is also going to be a year where advertising revenue is presumably going to be tough. That is our outlook internally. On top of that, also based on that, we are going to strive for double-digit or 10% earnings growth, and that is going to be through the cost optimization in edifices that are currently underway and also by merging overlapping businesses and functions can be made more efficient from a cost standpoint. So that is how we would like to achieve double-digit growth. So that is the overall direction we're working on. Regarding the scale, we hope we can give you more color when we have the full year business results meeting. That's all for myself. Thank you. For Shopping, I have an additional question. The time being, you're going to be focusing on EBITDA? And how about GMV growth, it seems that you're not going to focus on GMV growth for a while. Is that the case? Number one, in commerce in Japan, you have decided to revise that target. Yes, I will answer that question. So for the Shopping Mall business' GMV growth, we would like to do whatever we can within the realms of cost control. For e-commerce as a business in the Holdings as a whole, if I may give you a little bit more explanation, there -- it can be divided into 2 large ways. First is margins as well as rolling out the financial businesses in association with that. Regarding the spreads of the Shopping Business, it's very low. So internally, we have [indiscernible] and we have the [indiscernible] business and Yahoo! that we would like to grow. And for Mall, we are going to control and suppress the points provision. And Mall GMV, however can lead to PayPay and credit card growth, which has been our track record. So we'll focus on that. So it doesn't mean that we need to continue to strive to become #1 in the Mall business, per se, meaning the goal of becoming GMV #1, is that our priority was the question we posed. And like Mr. Kawabe explained earlier, it's more about growing PayPay or developing new financial businesses. So it's about leveraging group assets, and it's about drastically changing our group strategy that we are currently in the middle of considering. But from April onwards, when Yahoo! and LINE merges together, we will need to strategize 1 more time by considering the user profile. So it's not just about growing the Mall business going forward. So your perception is correct. I have 2 questions. There is an overlap to the question from Maeda regarding the change in management structure and the merger Three represented directors is going to support the modern broaden responsibility of those, the management structure. Can you explain in-depth what's going to change? It's not very clear to me. Can you explain that? And also regarding cost reduction effect as of today, it's not disclosed. But as Sakaue-san commented and this is a confirmation, next year EBIT growth of 10%, it's about JPY 30 billion and top line actually for advertisement business, it could be a negative growth, and you can achieve cost reduction that can drive increased profit? Is that what you're thinking? So that's the first question. Regarding the second question for ad revenue sales and the condition is rather tough. And as Kawabe-san mentioned, it's not just market condition one the -- and specifically regarding LINE VOOM, Idezawa-san and Shin-san, can you answer VOOM? Would it be successful? Otherwise, LINE service as a whole can be impacted. That's my concern. On the other hand, YouTube shows and TikTok are able to catch up from this level now. It's not clear to me. And therefore, creator and you and TikTok and YouTube shows and what are the designs for the incentives that they move to VOOM? Maybe there are some actions you have already taken but high time stands here growth? How do you achieve that? Thank you for the question. Regarding cost reduction, Sakaue will answer. And for the growth responsibility of the 3, representative Kawabe will answer. And for revenues, especially VOOM will be answered by Shin. First regarding cost reduction continuation from the first question, as for the ad account ad and search ads and especially account ads, not so severe decrease. But for display ad, the current situation is rather tough. So my answer is that we should be covered by cost optimization, cost reduction and consolidation or elimination of businesses, and we achieved a 10% increase in EBITDA close to JPY 30 billion. So that's the question to the first -- second part of the question. This is Kawabe speaking. So the merger and management structure after merger. So you need to consider 2 aspects. Intention of the merger is at the holdings and the 2 companies, LINE and Yahoo! Japan. And they tend to look at their own operation there to optimize. That's the summary from the past 2 years. So important decisions made and the group overall optimization needs to be achieved. And for that, the core company's line Yahoo! Japan holdings need to be on to make the decisions so that we can have a streamlined decision and we can have faster decision, and that is very important for our future growth. In the past 2 years, we have accelerated mutual understanding, data protection, and this has been very significant and meaningful. But going forward, we need to move to the next phase. So merger should help. And after merger, the structure and also from April 1, maybe before merger, we have a new structure and Chief Product Officer Shin becomes represented a director. So the services of core companies and the product owner will be his responsibility and the services overall optimization will be achieved and also its respective service optimization should be also achieved for product, we will exercise strong leadership to achieve overall optimization and the services. And since leadership can be improved or could be surprises and others, and that should be put into profit and revenues. And Idezawa, after our CEO, he will be CEO and President and the decision-making will be streamlined, and we have a rapid decision process and the strong leadership. So those 2 will drive businesses in that sense the drivers. I am the chairperson, representative chairperson, I will be supporting them from the backside. That's what I want to do. And for the holdings and the services in the society should be well accepted, and we want to show presence in various themes and external activity so that our activities will be better understand and the customer now that show and also the government-related areas and also broadly in the society, our services should be well understood because we should be playing a very important platform. And we hope -- I will be supporting for that kind of understanding to prepare. So Service by Shin, and business by Idezawa, I will support those. So from CO-CEO, CPO, compared to that, we have a clear definition of roles and responsibility and decision-making will be more clear. And VOOM and TikTok, how are you going to win in competition? What's the merit for the users, how do you achieve merit? This is Shin, I'll answer to the question going forward, how do we fight and achieve results service function, differentiated, and that needs to be strengthened all the time. And also VOOM, LINE, we are driving big changes and the service KPIs are achieved -- KPIs are achieved including the number of reviews and replace and maybe new ad frameworks so it should be achieved so new ad space should be created. Regarding the competitors, what differentiating point was a competitive edge. Our first user base including LINE, we have broader line of customer base and protect and TikTok is bus, but creators in the extra users and in terms of the skill of users, there is much room for growth and VOOM we'll be able to appeal to various age groups, and that is the strength of the VOOM our user base can be leveraged. And in terms of content procurement, some we had broad-based. So some may enter as creators and through entertainment companies, we can provide or procure new content. That is our focus. The new contents that other competitors cannot procure and that appeal to the users, and we want to strengthen content. That's my third point of what we can do. Just one point and incentive reward system started depending on how often they review and that is very popular, the creators are delivering their contents to them what you see or local other services are also available, we want to collaborate those services into our service menu. That is all for the question. Regarding the VOOM, just one more. TikTok do not really had good format of ads. It seems to me, but for the VOOM, you are making progress about your products and how timing soon, you would be able to actively introduce ads and place ads. Thank you for the question. Regarding monetized efficiency, well, ad format being designed, including added features, and we had better efficiency now. But compared to the conventional feed ad, unit price is still low, and we try to improve that now. So as of now, it's 100% achieved and we're ready. It's not -- we are not there yet. Well, regarding LINE VOOM, service growth and monetization what we are trying to achieve. So regarding the sales revenue, we are not bullish yet. We try to provide good services, creating good base. And also with that VOOM what happens, you mentioned, but the LINE ad including news and to head views and therefore the news, time line type shift is being prepared now for the net header, we are testing some ideas and both are showing good numbers. So all those together as display as we hope to achieve recovery. This Munakata. I have 2 questions as well. First of all is regarding strengthening your competitiveness. In your explanation, you were talking about a decline having a sense of crisis around it, on that is why you're going to be merging your core subsidiaries in the quote from a product point of view, and strengthening its competitiveness. I think it goes back to R&D and the approach towards services by merging together, do you think that we should expect some changes. So I'm an amateur on this, but for example, maybe the expertise that each of the business companies have is going to be shared. And because we're going to be able to make the tensions faster, you'll be able to capture the trends. That was what I was imagining. But can you give us more color on that? That's my first question. And the other question is regarding your mid- to long-term earnings target, revenue target. Next year, you're going to be shifting to the new management structure through the merger. So you're probably going to be solidifying the foundation next year. That's the way I perceived it. And I may be jumping to conclusions. But when you look 2 years ahead, originally, you were aiming for JPY 390 billion. Should we have an image that you're going to be aiming for that level? Or are you going to be aiming higher? Or this time around because you are changing direction in a drastic way, and internal structures are going to be changing, do you think you're going to need more time? And for ID linkage, should we expect this to be delayed even more? Well, for the first question, regarding strengthening the competitiveness of the products and what's going to happen in light of the merger, our CPO, Mr. Shin will answer that question. And for medium to long-term earnings targets, I will take that question. Mr. Shin? This is Shin speaking. For the merger, one of the measure aims is to go beyond the barriers, getting rid of the barriers and to generate synergies in the areas where we weren't able to in the past. Expectations would be, for example, like you said, R&D from an AI point of view, instead of doing R&D on an individual basis, we should be able to share more, so doing joint development and also developing trend newer-new services, our capabilities will become 2x or 3x greater. So from a services point of view, we will be able to speed up development of functions and so forth. So organizationally as well as product-wise, we will be able to reinforce our efforts and the speed of launching new services probably can be expedited. Regarding your second question, regarding medium- to long-term earnings targets. At the end of the fiscal year, when we explain our strategy for the new fiscal year, we will talk about our thinking around growth strategies. And for ID linkage, like we've been communicating from the past, 2023 and beyond is a plan we have in place for ID linkage. So if there are any changes, we will communicate accordingly. That's all for me. I have one follow-up question regarding my first question. Thank you for your commentary. I understood it very well. But during next fiscal year, I'm thinking about that you're going to be merging next fiscal year. getting rid of foundries and generating synergies, I guess, is going to start to take place in a fiscal year's time. Well, we have decided on the merger as a direction. So of course, it may take some time, but as a policy, but I think we can head towards that direction. And as we already know that, and I think things will be delivered -- some will be delivered over the short term. Some will probably take more time. Thank you very much. My first question is for single CEO, Idezawa-san, my question is for you. So you will be a CEO top line may decline or does not grow and cost reduction is what you would have to deal with first? You don't have to explain details. But what would be different from the past? From Easy point of view of what opportunities going forward? Can you explain your thoughts on this, please? The second question is a bit technical question. For the next year, EBITDA because of ad revenue numbers, you have changed your numbers and cash flow or other forecast would be changed for impairment test, I think you are doing by segment, but when would be the timing and what do you check for impairment test? And this change for the midterm change midterm goals? So in a challenging situation, what we find are opportunities. That's your question. Yes, we are facing a difficult situation next year or this year and onwards. Ad revenue recovery is rather difficult to see good visibility. So efficiency is streamlining. That would be the basic approach for us. So far in the past 2 years, we worked with Kawabe as co-CEO, we have various discussions and overlapping functions or businesses. Regarding those, we have had good discussion. And by this merger of 3 companies, but we have discussed would be implemented in the execution. We will speed up to make efficient review or rearrangement of overlapping functions. And we execute that, and that is 1 of the opportunities. And also, collaboration among the group members would be much easier than before. So service collaboration would lead to service growth and sales collaboration will lead to top line growth that we can achieve. I will answer the second question. and some explanation included currently in integration, goodwill and others CGU group in media. That's a major part of that. Some are financial, but most of that is in media CGU. And relating the impairment test in media, Yahoo! Display ad and search ad is included to look at overall profitability going forward as the group. And we do that once a year to added risk of impairment. That's what we do. And for FY '23 outlook in Advertisement Business is challenging, but EBIT margin is over 40%. So number-wise, we maintain good profit. So regarding the midyear impairment risk for FY '23 EBITDA change. Even with that, it's not going to be a big risk for us. Just one or two follow-up questions. You mentioned some numbers, Sakaue-san. In your presentation, you mentioned 10% of elimination or consolidation of businesses. And that -- how can that impact cost reduction and highly hiring fees would be placed and there will be some natural attenuation -- and how would that impact in terms of cost reduction, if you can disclose in information, please? Sorry, I may not have been clear. I said about 10 services may be closed going forward. It's not a percentage. It's the number of services or business I was mentioning -- and the second put is hiring freeze. And there is some natural attrition and how much of that is included in the cost reduction? Can you be more specific on that? I will not go into detailed numbers, but to a certain extent, in this front, there is not shown attrition, but this is a Japanese company. In April 1, we will have hundreds of new hires and so overall, there will be a bit of decrease for FY '23. This is Okamura from Okasan Securities. I also have 2 questions. The first one is about line display ad results Revenue declined by approximately 10%. And according to your presentation, you were saying VOOM renewal impact led to lower CPM. And for LINE, this revenue also declining. So if it's possible, can you give us more color on the ups and downs of revenue by product? So that's my first question. Second question is around the merger between LINE and Yahoo!, based off this policy. Going forward, for the listed subsidiaries and optimal capital ratio, what are you -- what are your views on that? Because last year, you had the integration of the Mall platform, and there were some subsidiaries that were impacted in a negative way and reality. So for ZOZO, and value commerce that still remain should also absorb them or sell them? More than before is management discussing these affairs? So as much as possible, can you share with us your views? Those are my 2 questions. Thank you for your questions. Both of the questions will be answered by me. For this lay ad and the breakdown. As explained in the presentation, the big reason for the decline in revenue was mainly due to LINE VOOM. For LINE News or Talk Head View, on a year-over-year basis, was slightly below last year levels. However, on the other hand, regarding new [indiscernible], we were able to offset the decline through other areas like the home screen. Regarding for the second question around listed subsidiaries, we do understand that we own listed subsidiaries. So of course, a variety of options are at times being discussed internally. But at this point in time, we haven't decided on doing anything nor are we deliberating anything. That's it for me. I just want to confirm one thing about the second part. We're optimizing the equity ratio. It might be hard to explain in a quantitative way. But for the current ownership ratio and maintaining it. According to your explanation, you believe that the current balance is optimal. Yes, as you rightly said, we believe that the ratio currently we have is optimal. Of course, in making additional investments, we are going to expect increased return. So we'll need to think about it from that standpoint. Of course, we might be able to capture more net profit. But in any way, we'll have to think about the overall balance by looking at return. Thank you very much. I have 2 questions. First is Media Business. Second is Commerce Business. First, as for Media Business, fundamental challenges. What are they? According to your assessment, for example, for Yahoo! Japan, [indiscernible] proportion is rather low. And going forward, reopening may further decrease that number. So what should be changed? Can you explain more on that? The second question is about commerce business. 8% growth is actually reuse business. commerce as all is about 9%, but reuse profitability how much is that especially PayPay flea market, when you look at take rate is low against competition. Going forward, cost is your priority and including take rate, what is going to be the change in terms of profitability. Regarding the first question, Media Business, media service included, Idezawa with answer. And the second question, including profit, Sakaue will answer and Ozawa will add comments. Idezawa for the first question. Fundamental challenges in media business. Well, you mentioned the search business. Display ad is where we are struggling. As for search business, there is growth year-on-year and the 10% an growth and so the display challenges rather significant. So demand is low as the basic assumption and the budget is very difficult to get. And the video associated media is scarce we need inventory of video. We don't have many video inventories. That is a structural issue and a challenge for us. And LINE VOOM in that sense, we made on investments in VOOM and also distribution accuracy and capability, we do have some good aspect, but still in some areas, we need improvement and that would be the challenge for us. On the other hand, including integration at related systems and products, they should be upgraded in a comprehensive manner by integration, including. So that's one of the purposes of mergers, and we need a good approach for our challenges. The second question is about reuse, take rate and also promotion, we need to have good margin as we operate for PayPay flea market down number is over 15 million as the project, it is received as good quality, so we enjoy good growth. And also, if you look at the numbers, and maybe you mentioned, so let me ask transaction value for us was up 8%. Good growth for the revenue you may think it is decreasing, and it is true. And as for that number for revenue from this year, and we have the change in accounting, and we are not retrospective in that. So promotion expenses are deducted from sales, and that is from this year. So GMV and sales revenue may have some gaps. But it's not disclosed, but this reuse business profit can cancel all that, and we are achieving good growth. Yes, let me comment regarding to service and flea market in Yahoo! Auction, you need to look at those 2 together structurally users increasing in free market and we capture new customers and take rate is high for Yahoo! Auction and the customers will be referred, then we can have very good profit. So you need to consider those 2 pack or set. Competition is strong, yes, but for free market and against the competitors, we have good cycle by having for the market. And for Yahoo! Auction, including competitors, users, reuse, buyers and sellers are increasing. So we have a virtual cycle and that can improve growth of Yahoo! Auction. That is the situation in the recently. So in terms of EC portfolio, Reuse is a treasure for us going forward. Of course, rather than cost reduction in EC business selection and focus. And this is an area where we should make investment. I have 2 questions. First of all, regarding numbers and PK in the presentation you were seeing JPY 33.8 billion of revenue and adjusted EBITDA, minus 4.4%. And in the appendix, Page 37, it said JPY 36.6 million revenue and JPY 3.8 billion adjusted EBITDA. So with these 2 revenue numbers, which is correct? can you give us some commentary on that? And for EBITDA and adjusted EBITDA, is that the difference between 4.4% and 3.8% this is also in my first question, but in expenses, due to the PayPay consolidation, commissions have been growing? And also for advertising cost and sales promotion costs for PayPay portion, is it mainly under advertising costs? Or and are they not included in sales promotion cost? So that's another confirmation point in Q1. The second question is a simple question. For the integration of the 3 companies, what is going to happen to the company then -- you have LINE and Yahoo!, that respectively have strong branding. But what is going to happen to the corporate name? For PayPay, you asked 2 questions, and Investor Relations will give you additional comments but there is a footnote here. For IFRS and the stand-alone PayPay numbers is based on JGAAP. That is why there has been some adjustments made, which is a difference between 3.8% and 4.4%. And for revenue, some of the expenses have been deducted. So Investor Relations will follow up on that. In addition to that, regarding advertising cost and sales promotion costs. I think it's sales promotion costs, but we will get back to you through IR. Thirdly, regarding the company name at this point in time, it is still to be. So once that's decided, we would like to disclose. I have two questions. The first question, you said you have a crisis in media. I hope you will be proactive before you have a crisis in e-commerce. If we look at China, it seems quite obvious that short video e-commerce is taking a lot of market share from the old merchant e-commerce model. So how are you preparing for that in Japan? Are you planning to link Zoom to e-commerce? How about linking VOOM to ZOZO? And why is there no ZOZO button on the top page of PayPay? That's my first question. Second question, for new management, who will be responsible for revenue and who will be responsible for costs? So regarding boom linkage in commerce, we have been looking at examples in China, and we have been making deliberations and considering and we have been testing as well. On the other hand, we also believe that it's not going to pick up right away. So we would like to determine the right timing as we go ahead with this. But essentially, in commerce, it's going to be really important to come up with a new strategy. Therefore, currently, it's going to be about growth and striking a balance between growth and efficiency. And when we come up with the new policies, we would like to announce them in April when we announced our new strategies. And cost and revenue, the person who is responsible under the new management structure will be myself, Idezawa. I will be responsible for executing our strategies there. Just to clarify, so you are working on a new e-commerce strategy overall right now, and you will tell us more in April, correct? I have 2 questions related to PayPay actual EBITDA. I think you are seeing better efficiency and PayPay and Atobarai coordination or gold cards collaboration. And why is it possible to make this efficient operation? Can you explain the background of this piece for PayPay? It's may be a bit away from the merger, but you have the card and PayPay and Gold Card was announced and the larger scale service may be what you announced that in the previous meeting. And I wonder how that's going to evolve. So can you explain more about mid to long term? Regarding the first question, Atorabarai payment and Gold Card, Ozawa will answer to that question. And the second question card and PayPay is integrated in operation way. And regarding the card or financial businesses, what is assessment for the mid and long term, Ozawa will answer to the best question. Regarding the first question, the big trend is PayPay has really rooted in people's everyday life. So natural increase of month, the KPIs of usage is growing very well. And additionally, promotion has been covered by PayPay, but stores manufacturers provides some funding for that, and that percentage has increased. Their beneficiaries they can receive customers and their products are selling. And the out of promotion costs the manufacturers would pay, and that is also the revenue for PayPay, which is very ideal. So this is a good synergy coming from this cycle. We have had the cost structure, but that is shifting in that way going forward. And the gold cost and other sales promotion requires is required for new launch of services. So to a certain extent, there would be some expenses for promotions. Regarding the second question, so just clarify among ourselves internally. Thank you for waiting. PayPay card PayPay, this year, they integrated and we see synergy effects. So Atobarai deferred payment included card transaction numbers increased. And in December, Gold Card was launched, card, PayPay together the payment value is what we monitor. Why do we monitor both depending our stores, cards only can be used, not PayPay, maybe it's not introduced. So high-end products users want to pay with credit cards. That is often the idea for the customers or users. We hope that the user will use both. But until the behavior change happens, maybe it doesn't change at all. So we have card and PayPay. In the back, we had the payment or the Atobarai payment and the system may be integrated and whichever is used, they are reflected in royalty run. And so the total point will increase. So the points are often operated in a common manner. So cashing may be the right business out of that, and we have continuous business from that while gold card may be announced and Atobarai is announced. And little by little, those are put into reality. Thanks for clarification, according to what you are explaining noncontinuous effort will be made for both in the card. But this is what you have incorporated in your plan and design of the model? Yes, continuous or noncontinuous it may depend on definition. But from PayPay card, PayPay users is huge. And with that, the number of users may expand and also transaction value is increasing. That is what we see. So continuous non-continues, we will push both. I have a question about e-commerce. I just want to check my understanding. So it looks like you cut the promotions by about 8 percentage points and the GMV was growing about kind of high single digits and now drop to negative. So are you getting some kind of correlation between the promotion spend and GMV growth? What kind of learnings have you had reducing the promotion points. This is Ozawa. I will take your question. Well, for Yahoo! Shopping or the mall business, I think your question is associated with the mall business. But for Yahoo! Shopping and the mall, the points that we give to users and the sales promotion cost we spent is extremely correlated with GMV growth. So last point means that GMV will be affected negatively by a certain degree. And on a holding basis and sales promotion cost control by spending sales promotion on high-margin business is what we're doing, and we're holding back and spending on the mall business. So the shopping mall business GMV goes down. However, e-commerce as a business overall is healthier due to our cost control. We haven't set forth any specific targets, but the EBITDA margins, we will focus on maintaining it and we'll be mindful of the profits generated by GMV growth. I have one question. Since LINE was acquired, you've been working to integrate or work with it and Yahoo! together. Can you give an example of what didn't work in the last year or so? And hence, why you think the full merger of the 2 companies is needed, please? I will answer your question. So what didn't. It's not about what didn't work out well. It's about making things work better. That is why we opted to go ahead with the complete merger. In the past 2 years, respective services culture was being mutually understood, and we had exchange at the talent level, and we did data production at the same time and providing the linkage of services. So that was what we had been doing, but we want to accelerate our efforts. And we thought that in order to do so, we need to become one organization and make the decision-making process more simple and have more linkage between our services. So that's our thought process. So there were 3 different companies, basically. So each of the companies try to optimize individually. So I think that's one aspect we have been observing. So I guess that's pretty much the answer to your question. So basically, individual optimization is what we would like to break through, so that we could generate new synergies under the new organization. And Mr. Shin will be in charge of products and for our business and revenue or earnings, Idezawa-san will be in charge so that we could generate good results. As a follow-up, what is the difference in culture between the 3 companies then currently, and currently which obviously you want to unify? Well, first of all, for Z Holdings, it's a holdings company basically and it only has been several years since it's been set up. So there is no really unique culture. So it's more about the culture at Yahoo! as well as LINE. My comprehension, and I think Idezawa-san should also should answer this question as well. But what's common between the 2 companies is a priority on product, priority on users and through the services we want to contribute to society. So we have a lot of young employees that are managing the business. That's common. So it's all about service. Based on that, it's been 25 years since Yahoo! was established. So as a company, it's more mature. In LINE, relatively has a more challenging spirit and also on a relative basis, LINE has more of a bottom-up approach, trying to do things what's happening at the job site. And for Yahoo!, in recent years, myself, Mr. Ozawa has been part of management and there has been some maturity in our services. So a lot of transformation has been happening top down. So I think that is some of the differences. Yes. I think, Kawabe-san rightly pretty much said what I wanted to say. But Yahoo! was mainly engaged in businesses in Japan and for LINE. Even for the services as well as the development basis, it mainly was engaging in business in Asia. While the closing time is approaching so we would take the last question. Tsuruo-san from Citi Group, please ask your question. Just one question. It's a bit technical, but this is the first time I attended this in Appendix, PayPay financial statement is on the right-hand side. Net working capital is negative in this company, it looks. And as business expands, there may be some asset capital. This is the first time an attending a families this kind of business so free cash flow or cash flow in your business expansion, what kind of best demand or what kind -- what are the needs for the capital? Thank you for the questions. Maybe you use this, but for paper, we are strengthening deferred payment or a cable but users mainly use after charging that's the majority of the users. So cash JPY 470.4 million is the cash charge by the users and the payments are made to stores or merchants, but we have received a charge from the users, and that will be paid to the store. That's the cash flow. Going forward for market for our business expansion, as of now, this is operating very well at the moment. Araki-san has a question, and this is regarding the second point, advertisement costs and the promotion cost pay. That was the question. And much that was the promotion cost, and that is how it is mentioned in our P&L on Page 3 was JPY 7.4 billion. That is increase of promotion cost is mainly because of PayPay in footnote line and Yahoo! reduced promotion expenses. So this part is because of the consolidation of the PayPay. And for ad and promotion, there is an increase, and that is PayPay's consolidation effect and there's a Japanese government travel incentive and ICU had a large promotion in the third quarter, and that is why there is an increase in the sales promotion -- sorry, advertisement. Kawabe speaking. Thank you very much for attending this earnings meeting. This is a very important turning point. We announced very important points. And personally, midterm plan revision was made feel responsible for that. And in terms of the management, and I should be the supporter for the new management with the renewed management, some goals would be revised, but our visions and mid term or long-term profit and the new management, we want to achieve those goals, and I will be a part of the management in that sense. I hope you will continue to support us going forward. For 5 years, I led the business. Many things I could achieve and not achieved, but I did my best, and I hope that you will provide your support to the new management of the new -- renewed Z Holdings. Thank you very much. With this, we close the third quarter earnings report meeting for FY '23 of Z Holdings. Thank you very much for your participation.
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EarningCall_731
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Hello, everyone, and welcome to Splitit's Q4 Financial Year 2022 Investor Webinar. [Operator Instructions] For your information, the call is being recorded. Thank you. Good morning from beautiful Melbourne. It is my pleasure and honor to be in Australia to give you the readout of our Q4 2022 results. This meeting will be co-chaired by myself and our Chief Financial Officer, Ben Malone. The market reaction to our embedded white label installment solution has been very positive. On the back of this change or pivot, we have recorded our strongest MSV quarter in history. The future is bright for Splitit. Our focus and our energies are targeting the execution of the strategy that was then unfolded in 2022. Some key financial highlights. Our Q4 MSV was $141 million with a revenue, registered revenue of $3.1 million. Our net transaction margin was 1.3%, an increase over last year. Our operating expense was $4.7 million, a $2.7 million reduction year-over-year. And cash on hand is just a tad under $30 million, with $19.2 million available for operating activities. A quick business update. We've had a very strong quarter in terms of delivering on our mission to attract large partners and large merchants or enterprise merchants to our platform. Number one, we executed on a global partnership, a distribution partnership with Checkout.com, one of the fastest-growing payments platforms in the world. This is a global deal that will allow us to be embedded within the Checkout sales organization as a value-added service. But more interestingly, on the back of this deal and within 60 days, we closed AliExpress, one of the largest e-commerce marketplaces in the world. This is a testament to our ability to convert partnership relationships into actual merchant traction and MSV traction to follow. Number three, we signed a North America partnership with Worldline. Worldline is one of the largest payment processors in the world, doing about $460 million in -- $460 billion in sales volume across their different regions. This will be an embedded solution where we will technically integrate to the Worldline platforms starting off with North America. On the back of the success that we've had in Japan, we expanded our Google relationship to include 3 further markets. We believe that this will give us exponential growth compared to the MSV that Google is driving with us today. Tabby, one of the largest buy now, pay later payment platforms or payment wallets in the Middle East, has implemented our white label solution as a means to service some of the largest brands in the world that operate in the Middle East. That relationship alone accrued $12 million in MSV in December, the largest month that they've had since they became a client. We continue to add to our management team and our leadership. We just added Colin Mellon as our Chief Commercial Officer. Colin comes where the over 20 years of experience in fintech and payments, having worked at First Data, Fiserv and Payspan. In a transition year where we self-churned merchants that were unprofitable and high-risk merchants to the tune of about $50 million to $60 million in annualized MSV, we came in and closed the year at $231 million in MSV, which is 9% growth year-over-year. From a product standpoint and an innovation standpoint, we launched a very creative pay after delivery service in partnership with Checkout, which will be implemented at AliExpress. We believe that this is a highly accretive product, a very unique installment solution that has been productized and will be sold to other relevant merchants. Number two, we launched an embedded third-party experience for Shopify, allowing Shopify merchants to experience our white label solution. And with the anticipation of the growth, especially with some of the larger merchants and larger partners that we've closed in quarter, we continue to scale our back office and our compliance framework. With that said, I'm going to hand it off to Ben Malone to provide additional detail on our financials. Ben, over to you. Thanks, Nandan. Okay. So overall, when looking at Q4's top line metrics on screen right now, be in MSV and revenue, we've delivered solid year-on-year growth in what has been a transition year, as Nandan stated. As we mentioned previously, Q4 delivered our highest quarterly MSV and revenue, with 9% MSV and 6% revenue year-on-year growth. And more importantly, as we look to the top -- to the right-hand side of the screen, we see a very significant incremental MSV opportunity over the next 3 years with $2 billion to $4 billion through a combination of merchant expansion, new merchant growth and partner growth. And some recent examples of that Nandan is going to talk about shortly. At 1.4% net transaction margin, which is our full year 2022 number, this would translate to $28 million to $56 million of incremental transaction margin for the business. So if we just move to the -- thank you. So as we move past the top line, we focus on unit economics on this slide. The key theme here is a year of significant improvement and paving a pathway to profitability. So our Q4 net transaction margins came in at 1.3%, and this was 50% -- over 50% year-on-year growth. And this was delivered through a reduction in year-over-year funding costs as well as an enhanced focus on profitable merchants, as Nandan mentioned earlier. Now being shielded from the defaults that are impacting the rest of the industry and having over 30% of our portfolio on a nonfunded product, it provides us with a structural advantage to maintain these numbers. You will have a note that the Q4 margins had softened slightly compared to previous quarters, as the effect of some recent interest rates came through. But in the longer term, we remain very confident that as the portfolio expands and diversifies with new merchants on both funded and nonfunded products that our transaction margins will longer term remain in line with what we've delivered throughout this year. And finally, from an OpEx perspective, you'll note the continuation of the rebased cost base that we executed on throughout the first half of the year and we've continued in Q4, in line with prior quarter, which we expect going forward as well. So that's enough for me on the financials, and I'm going to hand back to Nandan now to talk a little bit more about some partnerships. Thank you very much, Ben. The reason why I'm really excited about a partnership like Checkout.com is the fact that very soon after executing our contract with Checkout, we were able to score one of the largest marketplaces in the world, in AliExpress and Alipay company. Now we believe that just in a couple of years, this particular relationship could be over $600 million in MSV. As we go through the year and as we generate more activity from Checkout, we will be able to further refine the expected value from this relationship, but I do believe that this relationship will accrue yield over many years to come. The flexibility of our technology and our ability to be plugged in to a payment platform's API infrastructure gives us a huge advantage because we have the ability to be turned on and turned off by existing merchants that are using Checkout.com today. Finally, we've shown that we can co-collaborate and innovate with one of the fastest-growing and largest unicorns in the world in delivering a pay after delivery service. We believe that this pay after delivery service, which is really a 1 to 2 installment service, gives us a very interesting opportunity [pay markets], which are dominated by cash on delivery or merchants such as the furniture segment that are dependent on delayed shipment. Next slide, please. Just like Checkout.com, Worldline provides an incredible opportunity not just for e-commerce, but also for point of sale. If you're not familiar with Worldline, 19,000 employees serving over 1 million merchants in 100 countries, and they are the largest merchant acquirer in Europe. And if you look into the details, they do over $460 billion in MSV across the company. Worldline will be embedding our service into their North America API stack, allowing us to be toggled on and toggled off not with -- not just with direct merchants, but also with ISOs and ISVs, giving us the opportunity to play beyond just the direct merchant category. We believe that this opportunity in the next 2 to 3 years could be worth up to $1 billion in MSV for us. As the year goes on, I'll give you much better clarity in how we're doing against those numbers. Next slide, please. So I wanted to make sure that I gave you my scorecard. If you remember back in November, we committed to delivering on some very specific goals. Goal number one was to secure 3 large enterprise merchants in 2023. We delivered Google as the first merchant, and we will continue to strive for adding more merchants to this list. Number two was to secure 2 large distribution partners. Checkout is one of the largest that was on our list, very fortunate to have secured them. We've got 2 additional distribution partnerships that we're working on, and we hope to announce 1 or 2 of those in the coming quarters. The next was to secure 2 merchant acquirers, one large, one small. I believe that in addition to Worldline, which is a large acquirer, we will probably be announcing in the next couple of quarters, another acquirer of the same size, if not larger. And last but not least, we are still working on our network partnerships to enable our solution not only to merchants, but also to issuers. So as we think about this, and we try to offer a little bit of an outlook and what this means, we believe that the deals that we closed so far, the backlog that we have within implementations will project out to an MSV run rate on target to be $700 million to $800 million by the end of 2023. And as I stated earlier, we'll have greater certainty on the year as we progress through the quarters, and I'll give you a more precise number to focus on as we go through the year. Next slide, please. So in summary, I think a very good end to the year. I'm very confident about the future prospects of Splitit. And in a year where I've been on the clock for 11 months, I think we've achieved a lot as a team. However, we have a lot more work to do. We've delivered on some of the aspirations that we have in terms of large partnerships with the likes of a Checkout and Worldline. We have extended our relationship with Google, showcasing the successes that we've had in Japan. We have a strong base of merchants and partners in our pipeline, and you will see more announcements during 2023, as we close more direct merchants and more partners. We continue to innovate where such things as pay on delivery. Again, you'll see some sizable innovations coming out of us in the coming quarters. We have an excellent product innovation and technology team that has the ability to be agile and has the ability to focus on quality. Our Q1 focus on implementing existing partners and merchants while securing new clients to drive 2023 growth is really what we're going to hold in on within the first half of the year. With improved unit economics, we see a clear pathway to profitability. And for the first time in a few quarters, we're giving you a little bit more of an outlook in terms of our annualized run rate, which we're targeting to be $700 million to $800 million by 2023 -- by the end of 2023. Now please remember that the deals that we closed need to be implemented, need to mature. So much of the MSV, the growth of MSV will come in second half of the year, but we'll work tirelessly to ensure that the implementations and the onboarding gets done to drive these numbers in the first 2 quarters of 2023. I want to thank you for your confidence in us. I want to thank you for your support, and I want to say it again, the future is bright for Splitit. Back to you, Catherine. [Operator Instructions] Our first question relates to a financial question for Nandan and Ben. Could you give us any indication on your time frame or your pathway to profitability? Sure. Thanks, Nandan. So look, I think what we've always said, we've never given a prescribed sort of time frame. But what I will point to is that our unit economics have clearly turned this year, and we expect them to continue to do so. And then we expect, basically, the time line really is going to be dictated by the implementation and the pace of onboarding, as Nandan sort of outlined, and we'll know a lot more about that over the coming quarters. Once we hit that maturity level of around sort of $1.5 billion to $2 billion of MSV, then we see that, that is a real achievement that we can be achieving profitability by that point. Thanks, Ben. And there is one more question at this stage. How is the business performing into the new quarter so far? Any color on how that's progressing? So on the back of a very strong quarter, the first quarter tends to be a little softer. We're seeing a similar trend for the first quarter of 2023. However, with that said, we've got a few fairly sizable implementations around the corner. So we're very hopeful that we start the first quarter in a very positive manner. As you look beyond the first quarter and you look at Q2, we're very hopeful that we'll start to see top line growth at scale in Q2, going into Q3, and Q4, where I think we'll see the crescendo for the year in terms of top line growth. Thanks, Nandan. The next question is from [Thomas]. He asks Amazon's deal with a firm is ending. Do you have any plans to go after that opening? Look, we're always in discussions with the largest brands in the world. Amazon's deal with a firm actually charge the consumer and the dynamics in the ROI of that deal, I'm fairly familiar with. And our goal would not be to replicate that deal. Our goal would be to enable an infrastructure play for Amazon where they can enable installments on a white label basis across some of their largest markets in the -- at some of their largest markets in the world. As you know, it takes a lot of time and energy to secure a merchant of that size. But rest assured, we are working on securing the largest merchants and the largest brands such as AliExpress, and we're very hopeful that you'll see some results from that work that we're engaged on in the coming quarters. Next question is, does Splitit have plans to develop a mobile app in the future to manage the cash flows and help users navigate Splitit easily? Look, we have a portal today where consumers can go to, to manage the card that's being used, to manage the installments and to gain communication. At this stage, we have no plans to have an app for consumers to manage their particular plans through us. However, we do have plans of white labeling a portal that merchants can use for their consumers. So for example, a merchant X, Y, Z, if they have their consumers, they want those consumers to have an end-to-end experience that is with their particular brand. So we're actually in the throes of white labeling our consumer portal, and we hope to deliver on that in the coming quarters. Our next question is from James Lennon from Petra Capital. Can you please provide a bit more detail regarding Splitit's installment as a service conversion rate, share of MSV relative to other payment options like buy now, pay later? Sure. Our typical conversion rates are anywhere between 80% to 95%. They're in line with credit card approval rates. And in terms of share of Checkout, meaning what volume of a merchant's online sales can we touch, we've gone as high as 35%. So if you look at the ROI for the merchant and compare some of the publicly available information, therefore legacy buy now, pay laters where at 3% to 4% share of checkout is deemed to be success and conversion rates of 25% to 30%, and those conversion rates suffer an average ticket of, say, $250, and those conversion rates actually go down as the average ticket goes up. I think you can read between the lines and ascertain that the ROI that we bring to the merchant in terms of being a white label embedded solution, providing the highest conversion rates in the industry and eclipsing the share of Checkout that's available through the legacy buy now, pay later lenders is allowing us to break away from the pack. Thank you very much. The next question is from [Thomas Cummins . Are there any plans to be present and grow through bricks-and-mortar stores? A fantastic question. I think there is a tremendous opportunity for face-to-face commerce and to split it to participate within face-to-face commerce, because if you look at the numbers in most countries or most markets, point-of-sale commerce is still 75% to 80% of all commerce within that market. I'm very interested in developing into this segment. I think we get a brand-new TAM by moving into this segment. And I firmly believe that no other provider can offer the frictionless solution that we can in terms of a one-click installment plan. So all I'm going to say is hold that thought and we will provide additional information on how we plan to deliver against that opportunity in the coming quarters. Thank you very much, Nandan and Ben. That was our last question. As there are no further questions, I'll just hand back to you, Nandan, for some closing remarks before we complete the webinar. Look, I really appreciate you joining, if you have joined live. We very much are in a privileged position to be in a place to serve our shareholders. I want you to know that we're working tirelessly as a team to ensure that we register growth. No longer is this a strategy question, it's an execution question, and we're going to focus on executing on our strategy. Thank you very much for joining, and have a good rest of the day.
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EarningCall_732
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Good morning, and thank you for joining the Regus Second Quarter 2023 Earnings Release Conference Call. I'm your host, Biz McShane, Vice President and Corporate Controller. All participants are in a listen-only mode. The prepared remarks by our President and Chief Executive Officer, Matthew Doctor; and Executive Vice President and Chief Financial Officer, Kersten Zupfer; are accompanied by slides to help participants follow along. After the prepared remarks, we will have time for questions. Please use the chat feature or raise your hand feature to ask a question. Please note, this conference is being recorded. I would like to remind everyone that the language on forward-looking statements included in our earnings release and 8-K filing also apply to our comments made on the call today. These documents, along with our presentation today can be found on our website at regiscorp.com/investorrelations along with any reconciliation of any non-GAAP financial measures mentioned on today's call with the corresponding GAAP measures. Today's slides are located in the Investor Presentation & Supplemental Financial section of the Investor site. For today's call, I will highlight our second quarter fiscal 2023 results and reiterate our strategy and the priorities we have for the business as we enter the second half of our fiscal 2023 year. I am pleased to report continued business progress that resulted in a strong quarter for Regis and our best start to a fiscal year in quite some time. We have built upon our positive start to the fiscal year by delivering further sales and EBITDA growth with Q2 2023 adjusted EBITDA of $8 million dollars more than double our adjusted EBITDA of $4 million that we reported last quarter. These results come just 18 months after we reported an adjusted EBITDA loss of $77 million for our full fiscal year 2021. In the last two quarters, we have reported adjusted EBITDA of $12 million, which is a testament to the progress made by the Regis team and our franchisees. It is worth mentioning again, as I have on previous calls that I am proud of the progress we are continuing to make in a relatively short period of time. Coming out of fiscal 2021, we utilized 2022 as a year to stabilize Regis through the winding down of our legacy businesses, streamlining our G&A, selling our technology platform and amending and extending our credit agreement while simultaneously aligning on a go-forward strategy with our franchisees to drive our business forward, all of which required a tremendous amount of work and execution and that work continues to come through in our results. And not only having turned the corner on profitability from an adjusted EBITDA perspective, but also accelerating it. We will continue to focus and execute against our strategic initiatives of stylist retention and recruitment, customer retention and traffic-driving and the rollout of our technology partners Zenoti salon management platform in an effort to grow top line sales and franchisee profitability, which will in turn drive Regis sales and profitability. While we have come a long way, we still have a ways to go and work to be done, but I continue to remain excited and encouraged by the strides we have been making in our business and the future of our scaled fully franchised platform. I will now speak to some of the highlights of our second quarter and year-to-date results. Kersten will be diving deeper into the results in her section. And I think it is important to note the details and nuances Kersten will mention, as there are a number of onetime items that had an impact on the quarter. That being said, the overall theme of progress and strong results continues to hold regardless of the onetime impacts. For the quarter, same-store sales rose 4.5% versus the prior year's second quarter. Adjusted Q2 '23 EBITDA on a consolidated basis was $8 million compared to $3 million in the prior year's quarter, a $5 million improvement. Adjusted EBITDA on a six month year-to-date basis improved by $14 million year-over-year at $12 million versus a loss of $2 million a year ago. Our franchise segment EBITDA was $8 million for the quarter, increasing $2 million as compared to the second quarter of fiscal 2022. On a year-to-date basis, our franchise segment EBITDA is up over $10 million versus a year a year ago, a $12.5 million year-to-date versus $2 million during the prior year period. We reported our second quarter in a row of positive operating income of $1 million versus an operating loss of $0.5 million in Q2 fiscal '22. Operating income on a year-to-date basis has improved by almost $9 million versus the prior year at $3 for the six months ended December 31, 2022, versus a loss of $5 million during the prior year period. And finally, from a cash perspective, we continue to make strong progress in decreasing our cash use as we've come a long way from the cash use over the past two to three years and are getting closer to cash flow breakeven. Our liquidity position and capital structure remain healthy as we ended the quarter with total liquidity of close to $44 million, providing us ample runway to continue investing in and improving the business. Turning now to our business initiatives. Much of what I will be talking about will be a reiteration of the strategies and priorities I have mentioned on previous calls as they remain the same, and they will continue to remain the same for the foreseeable future. All of these items, we view as foundational to our business and our plays for the long term. Given the velocity of our business, with customer visitation cycles generally will see between one to two months combined with how important increasing our franchisee stylist workforce is, these are not factors that will change overnight, but rather require the repeated investment of time and effort in addition to testing and learning. We are confident that our areas of focus are the right ones, and we will continue to bring the right balance of urgency, discipline and patience as we execute on our business initiatives to move the needle on sales and franchisee profitability. Now regarding our Regis specific business items, our team continues to do a great job of tightly managing G&A and winding down our company-owned salons. These actions remain instrumental in continuing to provide us the runway need to drive the turnaround and position for Regis for growth as we implement our sales-driving initiatives. From a G&A perspective, over the last several quarters, we provided revised guidance to a range of go-forward G&A. And during this quarter, we have continued to make improvements. We are pleased with our efforts here. And Kersten will be providing another update on a revised range during this call. I also want to make it clear that while we have been optimizing G&A to match our current business model, it is not affecting the manner in which we support our business and our franchisees. In fact, we're actually increasing our field level support and the programs our franchisees have access to and will continue to do so as we are on the path of being a strong franchisor. In regards to our company-owned segment, we ended the quarter with 75 company-owned salons while our company-owned segment was positive for the quarter on an EBITDA basis, largely due to a one-time COVID relief payment that Kersten will touch on. This is an area continues to provide a drag on our profitability. And due to the hard work of the team, we now have clear line of sight over the next 12 months to wind down another 55 to 60 salons. And with those rolling off, we will have mitigated the majority of a negative contribution these salons have on our business by this time next year. Now as we move ahead, will continue to monitor our G&A and our company-owned portfolio very closely. Moving on to, our salon level initiatives of technology stylist retention and recruitment the customer marketing. On the technology side, our key initiative here remains consolidating our system onto a singular point-of-sale software system. Through the sale of our open salon - software platform in June of 2022, we have partnered with Zenoti as our main technology partner. And as of December 31, 2022, we've had over 500 salons actively using the product and many more signed up to migrate. Currently, the main priority for us in Zenoti is to engage with and stay close with our migrated user base to ensure the experience and functionality meets the unique needs of our brands, our franchisees and stylists. We are listening intently to the feedback, and we're deploying the requisite resources to address any issues raised in short order with the goal of accelerating sign-ups and migration when our franchisees needs have been met. We believe the product is close to being properly tailored for all of our brands, and we look forward to tapping into the many benefits the Zenoti platform will provide. We believe having Zenoti rolled out across our franchisee base will allow us to better engage with customers and connect deeper to digital channels. We also be able to drive the many initiatives we have around life cycle marketing and loyalty, which should further unlock the benefits of our size of scale as well as being - and bring greater uniformity to our brand promotions. Zenoti will also provide us and our franchisees the ability to make an even more personal approach to getting to know our customers, their preferences and ultimately provide a better service experience across our salons in addition to increased stylist productivity. On stylist retention and recruitment, I've spoken on previous calls about the labor challenges, which has been putting pressure on our sales recovery. We are constantly thinking through with our franchisees how they can invest attract, hire, train and retain stylists. We are working on refining each of our brands' unique employer value propositions to ensure we have impactful reasons why stylish should join one of our Regis brands. Not only is it important that we have clear messages, but another key initiative will be ensuring that the message gets out to, meet the stylists where they are. This includes us and our franchisees taking time to cultivate and build relationships at beauty schools as well being active on social and digital channels. In addition, we have spoken at length about our increased investment in education as a tool to attract and retain given the importance of ongoing education to stylists. I am very pleased at the foundation we have been building through our various programs that include our in-house artistic directors and field-based technical trainers. We want to build the largest and most impactful educational platform in industry. And we have grown our collective training team significantly over the course of past year to over 1,000 trainers across our system versus less than 150 at this time a year ago. Given the recent exponential growth, we have only scratched the surface regarding the impact this team can have on elevating the technique of stylists, driving the latest trends and ensuring customers are receiving the quality services that they are seeking. We have ramped up the number of in salon crisis across all of our brands as well the digital trading support we are providing to our trainers and stylists. We believe this will go a long way in keeping stylists engage and is a critical touch point that we uniquely provide. In addition, we're about to launch salon leader and manager training this month to build soft skills on the non-technical side. And looking at data from the past few months, early findings suggest that those salons that have a dedicated technical trainer are outperforming the rest of the system on a sales basis. We look forward to not only rolling this out further, but also developing programs to fully optimize the use of this valuable team and resource. We have also brought back in-person advanced education award trips in a big way. With our most recent one having just taking place in Las Vegas for the Supercuts brand in early January. The entire leadership team, along with many other Regis employees and franchisees, attended this event that hosted around 850 trainers, managers and stylists. As events like this are differentiators and will be, key to rewarding top performers, drive further engagement and retaining our franchisees' top talent. These events are also critical to enhancing brand culture and providing stylists the sense that they are part of a community versus an individual salon. Taken together, we believe all of these components will truly differentiate our brands and set us apart as a destination to work for both stylists that are looking to start their careers as well as those with experience. On marketing, we continue to prioritize retention and building further loyalty to our brands. I've previously mentioned the shift in media spend, which we are continuing to make to optimize those channels, providing the highest ROI. We have test campaigns out in market with various lifecycle and CRM messaging, and we will seek to expand on the ones that are driving the most traffic. Our loyalty programs are getting closer to being piloted and refreshed brand campaigns are in the works. We are finding the right balance between performance-based traffic driving initiatives and overall brand strategy as it is important that neither one of these get lost. The goal of all this is to create a stronger relationship through more communication with our customers, and I am encouraged as we test and learn new tactics utilizing the rich data we have and we'll continue to gather and I look forward to gaining further insights and landing on high-impact programs to drive traffic and awareness to our salons. I will wrap up our initiatives here. And while this was not exhaustive of what we were doing, I wanted to provide you some examples and insights into the work streams we have in place and how they can impact our business across the entire system. As we look forward to the third quarter and beyond, I want to ensure that I set the proper expectations of what our results may look like. And I want to give the impression that our Q2 results are the new benchmark for a quarterly run rate from an EBITDA perspective, at least not at this stage of our turnaround, given that there were some one-time items and timing that contributed to the quarter. That said, I want to be very clear that our results thus far have been in line with where we have expected them to be and that nothing has been a surprise to us. Staying with the theme of expectations and no surprises, given the timing of certain expenses such as the Supercuts education event that took place in January, as well as the seasonality of sales, we expect the next few quarters to come in below Q1, '23 adjusted EBITDA, which still represents continued year-over-year improvement. I want to not only give you that visibility, but also let you know in advance that from our perspective, a dip over the next few quarters does not signal a step back, but rather what is fully expected and planned for, given the timing of investments that we will be making. Taken in totality with our first two fiscal 2023 quarters, we are on track to deliver significant EBITDA growth over the course of fiscal 2023 versus our prior years. I would like to close by reiterating the excitement for the future of Regis. We have all the elements in place to continue building on the momentum we are gaining. We have strong conviction around the industry that we are in, our positioning within the industry, our revamped and more streamlined business model, the stabilization we have achieved for our platform, the positive results we are delivering and the strategy we have in place to address the challenges our business faces in order to drive sales and franchisee profitability. I am proud of all of our team members, our franchise owners and business partners for their resilience, passion and dedication to Regis. This is an exciting time for us, and I want to again thank the entire region system for their contribution to our results, and thank you for your continued interest in our company. We are pleased to speak with you to share our second quarter and first half fiscal 2023 performance. The quarter marked our start to a fiscal year in five years when measured by GAAP operating income and demonstrates the future of Regis as an asset-light franchisor. Our operating income improvement is driven by our focus on controlling G&A, the wind-down of last generating company-owned salons and our distribution centers and to a lesser extent, the benefit some onetime items, which were partially offset by onetime costs. Reviewing the second quarter in more detail and beginning with the income statement. On a GAAP basis, total second quarter revenues were $60 million and declined $9 million from the prior year. This revenue decline was expected and relates primarily to a reduction in franchise rental income and the wind down of our company-owned salons. Franchise rental income flows through both revenue and expense therefore, has no impact on profitability. We believe a better reflection of our revenue performance is system-wide same-store sales, which grew 4.5% in the quarter. We continue to believe our initiatives to drive stylist hours and customer traffic will support continued improvement in system-wide same-store sales. As I mentioned, we posted another quarter of GAAP operating profit and a strong start to the year. The increase in operating profit was driven by the wind down of loss-generating company-owned salons and our continued focus on managing G&A. Additionally, I'd like to call your attention to onetime expenses and benefits in our GAAP operating income for the quarter. On expense side, we had a $2.6 million depreciation charge driven by the consolidation of our office space and a $1.2 million inventory reserve charge. As it relates to benefits, we had positive insurance adjustments, which lowered G&A in the quarter by $600,000. Now let's turn to our adjusted results, which eliminates the noise in the reported results. On an adjusted basis, second quarter consolidated adjusted EBITDA was $8 million compared to $3 million in the prior year's quarter. The $5 million improvement was driven by our lower G&A which included a $600,000 positive actuarial insurance adjustment, the wind down of loss-generating company-owned salons and a $1.1 million grant from the State of North Carolina related to COVID-19 relief. Our core franchise business achieved adjusted EBITDA of $8 million in the quarter, a $2 million improvement compared to $6 million in the prior year quarter. On an adjusted EBITDA basis, our company-owned segment was just above breakeven for the quarter and improved $3 million from the second quarter last year. The improvement is driven by the $1.1 million grant from the State of North Carolina related to COVID-19 relief and having fewer loss-generating company-owned stores in the current period as we are closing stores at the lease end and negotiating early buyouts where appropriate. For the first half of fiscal 2023, revenues were $122 million compared to $146 million in the first half of fiscal year 2022, similar to the second quarter revenue decline, this decline was expected and relates primarily to a reduction in franchise rental income and the wind down of our corporate-owned salons, as well lower product sales to franchisees. Adjusted EBITDA for the first half of the year was $12 million, a $14 million improvement compared to a $2 million loss in the first half of fiscal year 2022. Adjusted EBITDA improved primarily due to our lower G&A, the wind down of loss-generating corporate-owned salons and a $1.1 million grant from the State of North Carolina. Breaking this down further, adjusted G&A was $25 million for the first half of the year. This is lower than our expected run rate in the second half of the year due to our investment spend on training, recruiting and retention, which will increase as we accelerate these initiatives in the second half of the year. As Matt mentioned, we continue to optimize our G&A spend. And last quarter, revised our expected normalized G&A spend to $57 million to $60 million from $60 million $63 million. Even with the planned strategic spend in the back half of fiscal year 2023, we are now reducing our G&A outlook further and expect G&A to normalize between $54 million and $57 million annually with fiscal '23 trending towards the low end of that range. Turning to liquidity. As of December 31, we had $44 million of liquidity, including $34 million of available revolver capacity and $9 million of cash. In the first half of the year, we used $7 million of cash from operations, of which $5 million was used in Q1 and $2 million was used in Q2. On a year-over-year basis, cash used in the first half of 2023 improved $17 million from the prior year. The $2 million cash used in the second quarter includes $2.5 million of deferred social security payments and another $500,000 in payments to complete our obligations related to our transition services agreement with our former point-of-sale provider. These cash uses were offset by the $1.1 million of cash received, as I mentioned earlier. Adjusting for these cash uses, second quarter cash used in operations was flat. We expect to use more cash in the back half of fiscal 2023 as we further invest in training, recruitment and retention. With the sale of OSP, our capital expenditures have decreased by approximately $3 million this year which is in addition to the cash saved on G&A. Given our working capital and modest capital expenditure requirements, we believe we have ample liquidity. This concludes my prepared remarks. I'd like to thank you again for your continued support and interest in Regis. With that, I will turn it back to Biz who will lead us through the Q&A. Thank you, Kersten. Please remember to use the chat feature or raise your hand feature to ask a question. The first question we have is through the chat. Kersten, this is for you. Please give an update on the NYSE compliance. Great question. We are currently in compliance with the New York Stock Exchange stock price requirement as well as the market cap requirement, we're just awaiting the final compliance letter from the exchange. Thank you. All right. On the line, we have Eric Beder from Small Cap Consumer Research. Eric, please remember to unmute your line. You guys made a lot of progress - when do you see the potential to start adding more - salons to the franchise mix? Obviously, you spent a lot of time cleaning the base up. When do you look at it going forward to potentially start adding to the mix? Yes. Eric it's, Matt and good morning and thanks for the question. I think you had mentioned a lot of time cleaning the base up. I think from our standpoint, we're just continuing to focus on executing on - business and all the initiatives we just mentioned. That's really where it starts and ends right now on just continuing to move this business forward, continuing to continuing to bring stylists back into the equation, continuing to drive our customer traffic. Because that's really where the conversation starts getting a lot easier amongst franchisees and even folks on the outside who have shown have shown interest in growing. But our focus right now is ensuring that franchisee profitability is optimized to ensure we have the right business case, that is ongoing, and I see that to probably be the case or call it the next year. So we're really going to really continue to focus on the turnaround, which again, we'll unlock those conversations, make it easier for the franchisees who have expressed that interest. We do have interest from the outside, but really just want to focus on business model as much as possible right now. And kind of as we mentioned on calls in the past, along with that cleaning up is coming with some cleanup of the footprint. I mentioned on the previous call and I'll say it again, right now, what we're seeing is a bit of a cleanup of salons - of underperforming salons, which has been a drain on resources and time. And I think that has a benefit to the system as well. So as we continue with kind of winding down those that are underperforming, we're going to start putting our focus back on getting into growth modes. No you talked about - you talk obviously about the franchisees. You had this event last month in Las Vegas. What was the feedback you were getting from the franchisees in terms of what they're looking to see going forward how they are feeling of what's going on in the world? Yes, no absolutely. It was a fantastic event. I can't speak to that enough. And by everyone who is in conjunction with putting that on that came through a big collaboration with our franchisees actually. They even concept of the idea of that event came out of our regional road shows we did last year, and we asked how can we better ensure that we're engaging and retaining our stylists, rewarding top talent, ensuring that we have some more essence of the brand culture, excitement, bringing that back amongst the stylist community. And this is something that we aligned on with them as being a key tool as part of that initiative. So it was awesome to see that was a conversation that happened beginning middle of next year and for that to come to fruition around six months later after that, and to have an event where 850-plus stylist managers, trainers, franchisees, vendors came was pretty incredible. So it was an awesome event from that standpoint, stylists and managers left super engaged. We also had an owner track to your point on we use it as an opportunity of further touch base with them to get to the latest feedback on, hey, here's what's going on from a recruitment marketing perspective? What are your views on that? Here's what's going on from the latest brand campaign, revamped that we're going through, showing some previews, what are your views on that? Here's the latest with Zenoti, give us some feedback on what you're seeing and what can do to improve that platform. So really, it was a time of a ton of constructive dialogue on the heels of engagement with them in an event that we came together to really put on in conjunction with the franchisees. So overall, it's a great sense of collaboration on what the - feedback on our key priorities, which we're going to take into account. So it was very productive from that standpoint. And I think the approach of trying and making a more concerted effort to bring them in to those major decisions and the major things affecting our business are greatly appreciated even in the face of some - as we're looking to get the business back on track. Yes, thank you. When you step back, we've gone through COVID. We've gone through now people coming back to work. What are you seeing - what your franchisees seeing in terms of the customer? How often they're coming? Is this - business with customer resistance or economic slowdown resistance? How should we be thinking about the changes that have happened or really in the customer base being affected and flowing through into your business? Yes, no, absolutely. It's a good question. And yes, we are seeing some stretching of visitation. Things are different, right? I think I kind of mentioned people ask of the dynamic, it's just different. And even so, I would say, regardless of that factor, there's still a ton of opportunity. I mean, what gets me excited is the fact that everything that we've just talked about, the momentum we're gaining, the progress we're making. They're largely coming without the effects of the strategic initiatives that we're talking about fully taking hold. And what I mean by that. Now a lot of the work has been done to this point on those to get us in the position to execute - customer data cleanup, foundational groundwork research, talking with our franchisees, piloting various messages, testing and learning various channels, I mean we're getting smarter every day on what's going on now. So from my perspective, we haven't even scratched the surface regarding the impacts we can have on these yet are still moving forward. So given that, I think the incrementality of those initiatives can have there's, plenty of customers out there. There's plenty of opportunity for us to increase our relationship with our customers, drive further retention, drive traffic. And you kind of mentioned a little bit about the industry, and I mentioned that as a highlight. This is kind of the most subscription like model without being an official subscription due to the fact that haircare is more of a need versus a want and people look to get their haircut and colored, whatever have you, and they prefer to do that with training professionals. So regardless of the time, regardless of customer behavior, I think there's really a lot of space for us given that dynamic, and I really like our positioning and prospects to capitalize that. Given our scale, convenience, value for money, quality of service are salons suffice at attractive price points, what I think this will be resilient through all economic cycles and the incrementality of these initiatives can have regardless on stretching out of cycles here. There's, a lot of customers to go after attract keep and retain and build loyalty to our brands. And the last question here. I know this is longer term look, where do you want to be longer - you've obviously made great progress on cash flow. Where do you want to be longer term with the debt in terms of potential on ratios or levels? How should we be thinking obviously, as I don't think this is a fiscal '23 question, but how should we think the longer term in terms of where the right level of debt should be here? Yes, no it's a good question. And I think it comes back to kind of what I said on earlier, what we're focused on, just what's going to bring us back to growth. What's going to end up leading to debt paydown is ultimately, well its two things. The first and foremost, this continued execution on the business. As we look to increase our top line, as we look to continue to drive profitability, a lot of - and generate cash flow. A lot of that will go down to paying debt that is a big piece of the value equation here, unlocking further value for stakeholders. So that is ultimately a place that we're looking to get through in the way that we get there is ultimately continuing on the path we're on - continue to grow that top line and essentially be able to get in the position to start paying that down. The other piece that comes along with this as well, that I don't want to lose sight of that may be a bit of a '23 thing is the payment stream that we could be getting from Zenoti as part of our earnouts from migration. So that is something that will come in, hopefully, over the course of '23, probably towards more towards the back half, just a little bit of a color on how that works. So we received an upfront payment from Zenoti and that kind of covers off the first ex amount of salons, and then after a number of salons migrate, we start getting payments for the rest of incremental migration beyond, call it, what that increment - that first payment covered. So as you start to see additional salons migrate over we'll start to be able to get proceeds from that, which will go directly towards debt paydown. So between that, which could be a '23 thing and the execution of our business, which, to your point, is a little bit longer term, those things will help us delever. In terms of a target we're looking to reach. We haven't put that out there at this point yet, but maybe that's something we'll consider in the future. Perfect well, thank you for taking my question. So my first question was just around the labor market and stylist retention and recruitment. Where do stylist count levels fall relative to where they were pre-COVID. And then I'm just curious on any early reads or feedback you have from the stylist recruitment initiatives? Sure, thanks this is Matt. So I appreciate the question where they fall versus pre-COVID - it's pretty interesting. I think you've talked about this at late it kind of matches up pretty much with kind of traffic declines that we're seeing. So this is around 20% down from an hour's work perspective versus pre-COVID. And again, that is something that recently has been fairly stable and any incrementality of just increasing those hours works even just one hour, 1.5 hour per salon per day can have some significant impact on our franchisees' profitability on top line. So the various factors that have been moving this in a positive direction where we see it, a lot of different things, franchisee pay plans, commission structure, salon culture, access to training, all the things that we've hear and we've seen, which is why this is where we're putting so much of our focus in to: one, get the story out there; two, ensure our training leaders and managers are trained on the soft skills to provide a great culture. So we know how important managers are. So when we talk about salon training and education, we really felt this was really a very important place to put some time and effort even we know like a lot of industries. [indiscernible] to bad managers. So we can't overlook that piece of the education side, and so we're excited to start rolling that piece out and other things regarding the technical trainers that get hands on in our salons. I had mentioned some early findings that those salons and technical trainers are outperforming the system. I'll add some more figures and context around that. And some of the data that I'm quoting is November and December results just given, it's been early days since we've scaled that up so fast. But from a level of sales outperformance on an overall brand perspective, we're seeing that range from salons that have these trainers and them from anywhere from 4% above the rest of the system in one brand, up to 14% in another. And we're also seeing that requisite outperformance in styled hours and 90-day retention for those who have those design team members. Some are retaining 4% better from a 90-day retention side and even up to 7% more stylist hours work. So these are things early figures, encouraged that they're seem to be working on the right path regarding that investment, and we're going to continue to do so in an effort to move the needle on that recruitment and retention side. Got it. That's helpful. And then just another one kind of on the customer wait time. So I think you'd called it out as one to two months. So just curious like what your target time is. And then if you're seeing any shifts in spend per visit, curious on any color there. Yes. I think it's less so on target how often we're getting folks to visit. I think we're going to be okay with stretching cycles out as long as we're increasing our traffic base. So -- and that's between two things. One, just keeping those who are coming in whatever cycle they're coming in at a better rate which I think we have a ton of opportunity to do and probably the highest ROI and focus we can have right now. We have a lot of traffic coming through our system. Let's just keep them better. And that will go a long, long way and something that's in our control through the development of, as I mentioned, CRM and loyalty, bring in that stickiness, that's going to go a long way from the traffic we already have, regardless of how often and the various reasons are coming through. And then obviously, there's the opportunity to drive additional. So we can drive additional folks, and I'll just add to that pool, which will go a long way into effectuating that traffic number kind of regardless of where that cycle is. In terms of spend, yes, spend has been up, and that's just been a product of price increases that franchisees and our system has been taking, which has been quite in line with other industries and retail and what have you. So kind of we're seeing anywhere from 20% to 25% higher tickets versus a pre-COVID level due to the price that has been taken here. Got it. That's helpful. And then just my last question is just about the same-store sales up 4.5% and the trends that you're seeing there. And then how those maybe vary by region and concept. Yes. I would say probably more so by concept than region. And I'd point you to our press release where you can have kind of the breakdown of the various brands. So you can see supercuts and portfolio of brands being up anywhere from 6 to 7-plus percent. And that's really kind of in those couple groupings of buckets and then the SmartStyle brand is actually down on a year-over-year perspective. So I will say, disparity is really kind of driven by those brand perspectives. Regionally within the brands, we actually see fairly uniform performance, which actually that means that we can effectuate on kind of an overall layer across the brand, so really taking more of a brand approach than having to take a regional approach. All right. We're going to go now to a question from the chat. Matt talk about the health of the franchise system and where we see our franchise system going? Yes. No, it's a good question. I appreciate you asking. As I mentioned, this comes back to just continuing on the recovery. The franchisees have gone through a couple of years of a difficult time given what's happened through COVID and we're just focused on getting that business back on track. I mentioned stylist hours worked per a previous question, about 20% down. So we have a lot of opportunity to drive our sales, to drive franchisee traffic, to drive franchisee profitability through increasing that workforce to making them more productive. I think that will go a long way for franchisees businesses. And really kind of everything we're doing here, every program that we're looking to roll out from a technology platform perspective, as I mentioned, from our efforts around recruiting and retention perspective, from our customer marketing and 90-day retention for that, that is all in an effort to look to increase franchisee sales and franchisee profitability, which we know is the most important thing right now.
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EarningCall_733
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Good afternoon, everyone, and thank you for joining the PetMed Express Third Quarter Earnings Conference Call. My name is Doug, the operator for today's call. I would now like to pass the conference over to our host, Mr. Brian Prenoveau, Investor Relations. Sir, the floor is yours now. Thank you, operator, and I'd like to welcome everybody here today to the PetMed Express fiscal third quarter earnings call. Iâd also like to remind everyone that the first portion of this conference call will be listen-only, until the question-and-answer session, which will be later in the call. Also, certain information that will be included during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act 1934, as amended, that may involve a number of risks and uncertainties. These statements are based on our beliefs as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions. Actual results could differ materially from those projected. There can be no assurance that any forward-looking results will occur or be realized, and nothing contained in this presentation is or should be relied upon as a representation or warranty as to any future matter, including any matter in respect to the operations or business or financial condition of PetMed. PetMed undertakes no obligation to update publicly these forward-looking statements based on subsequent events except as may be required by applicable law, regulation or other competent legal authority. We have identified various risk factors associated with our operations in our most recent annual report and other filings with the Securities and Exchange Commission. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release we issued this afternoon. Thank you, Brian. Thank you for making the time today to participate in our earnings call. For anyone new to the PetMed Express company and story, PetMed is a company that delivers prescription and non-prescription medications, food, supplements, supplies and vet services direct to the consumer. Our expert online pharmacy is an established and trusted brand, as evidenced by the fact that we have served over 11 million pet parent customers over our company's 26 year operating history. PetMed is a leading pet retailer for both prescription and non-prescription medication. We have a loyal customer base of pet parents that value our brand, service and quality. However, we believe our company and this industry can be more to the millions of pet parents across the country, and our goal is to be the market leader in pet wellness and health care or as we like to say, be the trusted pet health experts. Because we believe every pet deserves to live a long, happy and healthy life, we will be walking through the following components in today's earnings call: one, an update on our strategic road map, including our recent agreement to acquire PetCareRx; two, a detailed review of our full year Q3 earnings; and three, an overview of our go-forward thoughts related to our capital allocation strategy. From management's perspective, we are pleased with our results this quarter as well as the progress we have made on the company transformation. Next slide, please. Over this last year, PetMed has been in a rebuilding mode with a new and experienced management team and updated strategy and a revised overall approach to the market as we transition to a growth-oriented business. I will provide an overview of our third quarter results and then our CFO, Christine Chambers, will go into greater depth later in the presentation on our financial performance. Third quarter sales were $58.9 million compared to sales of $60.7 million for the same period of the prior year. While this equates to a decrease in sales of 3% year-over-year compared to a double-digit decline in fiscal year 2022. One of the reasons that we are pleased with the quarter was that we saw an increase in net new customers of 9% year-over-year. This is an important milestone for the company. since we have not seen an increase in net new customers since Q1 of 2021. Most importantly, we achieved this while staying disciplined in terms of our customer acquisition efficiency metrics. Our new customer count for the quarter was approximately 72,000 compared to 66,000 in the prior year, and our LTV to CAC for the quarter was 1.6. Our average order value was $88, relatively flat to last year and last quarter. We also saw continued growth in the recurring revenue side of our business. Our AutoShip and Save program continues to grow and expand, and approximately 42% of our revenue was recurring revenue derived from our AutoShip subscription program during the second quarter. This part of our business increased 8% on a sequential basis and doubled year-over-year. AutoShip continues to be an important strategic lever for PetMed, especially considering that the focus of PetMed's business has historically been solely focused on the prescription refills business. Later in this presentation, we will walk through in detail our product catalog expansion strategy, especially as it relates to our agreement to acquire PetCareRx. We believe that there are clear expansion opportunities for more customer engagement in the non-medication space, which will increase our pet parent wallet share, generate more recurring revenues and lead to an increase in customer lifetime value. Simply put, with a broader catalog assortment, we see an opportunity to attract new customers while selling more to our existing customers. We have previously discussed what the company's strategy has been historically and what it will be going forward. PetMed is shifting from being simply a leading pet medication retailer to being the pet health experts, a market leader in pet health care expertise. We want to be every pet parent's go-to destination for holistic health and wellness from nose to tail and be that go-to destination over a pet's entire life cycle. On that journey to becoming trusted pet health experts, we believe the strong relationships we've established with pet parents through pet medication prescriptions is an entry way to providing them with further goods and services, including prescription food, TeleVet services, supplements and soon, pet insurance. The four points of our top plan are medication, care, nutrition and wellness. We view these points as being key to building a differentiated brand and experienced to pet parents everywhere. We recognize the shifts that are occurring in the regulatory landscape, which led us to our first big investment, pet telemedicine. Our investment in and partnership with Vetster enabled PetMed to become what we believe to be the first pet retailer to offer pet telemedicine at scale. That live, our new co-branded offering with Vetster, connects pet parents to thousands of licensed veterinarians, providing quality online vet services through video chat appointments 24/7 and is exclusive to the PetMed platform. We see the virtualization of vet services as being a key pillar of the pets business and a differentiator in the pet space. So vet live is a strategic advantage that will continue to develop as regulation changes and as consumer education and awareness develops. The pending acquisition of PetCareRx represents a significant opportunity to expand our PetMedâs catalog with a broader set of consumable products and nutrition. PetcareRx's catalog offerings include over 13,000 of the best non-medication health and wellness products, including food, supplements and other similar products. They also bring us an incremental distribution center capability outside of our core medication distribution. We have been rapidly filling in the strategic pieces of our strategy to take advantage of a growing industry, which is the topic of our next slide. As we have covered in our previous earnings calls, PetMed operates in a growing addressable market. Because of our pending acquisition, partnerships and core improvements in the PetMed business, PetMed is now able to actively participate in a broader addressable market across the pet wellness space. With our investments in vet care and a broader product selection, we are in an enviable position to gain market share and expand our relationship with our customers. Over time, we expect our revenues to be more diversified as we address a broader range of pet parentsâ needs. Management is excited about how we have positioned PetMedâs to be a growth company. The pet space has proven to be a resilient vertical even in recessionary times. Pet parents see their pets as an extension of their own families and increasingly demand premium pet care options. There are some reasons why management is excited about PetMed's growth opportunities from a macro perspective. One, pet parents are less likely to reduce their pet purchasing budget, especially in the consumable and medication categories. Two, U.S. household pet ownership has increased over time, and today, 70% of U.S. households now own a pet. Those pet parents will need and seek health and wellness care provided by a trusted brand. Three, consumers also now expect everything to be real time, fast and digital, a trend impacting every industry. The e-commerce channel continues to expand rapidly. We expect the pet vertical to follow this expansion, just like we have seen in other digital e-commerce verticals. Today, our addressable market is largely dominated by offline sales, but we see the growing trend to purchase online as an opportunity, which would be very favorable for us. Four, we also see a real trend towards the digitization of pet health care just like we have in human health. Pet parents are thinking through the entire spectrum of their pet care from diet to veterinary services, from infancy through old age, and they're examining the channels through which they access those products and services. We believe PetMed is uniquely positioned to take advantage of these trends. By focusing on total wellness, we can offer products and services to pet parents that are diet and health focus in the areas of pet medication, premium prescription and non-prescription food, supplements and TeleVet services. Before we dive into the quarterly financial results, I want to remind our stakeholders of several important achievements that signaled the beginning of the transformation of PetMed into a growth business. Net new customer growth. Year-over-year customer growth shows the vitality of any growing business, and we shared good news on this front on today's earnings call. As we expand our product catalog over the longer term, we anticipate that PetMed Express will benefit from having a higher LTV and more operating leverage to acquire customers at scale. More subscription revenue. We have seen substantial progress here, and we'll continue to see more recurring business that enables PetMed's to be a more predictable business model with higher LTV and increased loyalty. Sell more non-medication products. The expansion of our product catalog and services has been a key initiative for us. We decided to turbocharge this effort through the pending acquisition of PetCareRx. PetMedâs will benefit by having more recurring sales, increased regular visits, thus delivering a higher LTV. Our customers desire a wider selection from us, and we look forward to working with the PetCareRx team once we close the transaction to work towards these expansion opportunities. Unique and differentiated services via digital-based health care services. Our goal is to continue to move more health and wellness services online with our long-term perspective that this will be driven by pet medications and veterinary care. Our next slide summarizes how these products and services are tied together. PetMed is uniquely positioned at the starting point with a highly regulated and complex pharmaceutical segment of the pet industry. Last month, we announced the agreement to acquire PetCareRx, a leading supplier of pet medications, premium food and supplies. The combination of the two long operating companies will greatly impact the longevity and happiness of pets on a larger scale. PetCareRx has been operating as a privately owned pet health and wellness company for over 20 years. The acquisition is intended to provide the following advantages: a greatly expanded addressable market beyond our current pet medication market, immediate revenue and customer growth, and greater non-medication sales for the core PetMed business. We are confident that we will see similar expansion of buying behavior with our PetMed customers and will rapidly move the supplier relationships and products from the PetCareRx portfolio over to PetMeds over the next several quarters. Once the transaction closes, PetMedâs will be working towards integrating the PetCareRx brands and catalog under the PetMeds e-commerce platform. Longer term, the win for pet parents and our stakeholders is that PetMeds will now be able to service a wider range of products and services for what we like to refer to as from nose to tail. Offering an expanded catalog to our recurring customers is a great place to start, but that alone doesn't create an adequate moat around the PetMed's business. As a result of consumer demand, we believe strongly that pet health services will become more digitally enabled, a trend that we have already seen in human health. We are very excited about our strategic relationship and minority ownership stake, investor, our exclusive partner that accelerated our entry into the virtual telehealth and telemedicine space. We also believe pet telemedicine is going to be a huge trend over time, not unlike what we have seen with other services like online and mobile food and delivery services. There are a slew of innovations that you can expect to see from PetMed, as we integrate the technology from our various partnerships in unique, differentiated and bespoke ways. And all of these efforts are designed to provide high efficacy outcomes for pets to live healthier and happier lives. Expect to see more innovations and product catalog extensions over the coming quarters that will deepen the benefit of our strategic pillars. I would like to now turn the call over to Christine to walk you through our Q3 financial performance and the company fundamentals. Christine? Thank you, Matt. PetMed has a strong set of core assets and capabilities that we plan on leveraging to spur growth in the PetMed's business. PetMed maintains a strong balance sheet of over $102 million of unrestricted cash as at December 31, 2022. Our brand is widely known and trusted. Our market research indicates that 55% of U.S. pet parents are aware of the PetMeds brand. Having a strong brand takes years to develop, and our customers tell us, they look at PetMed as their trusted pharmacy and pet medication expert. We have one of the largest direct-to-consumer vet networks in the online retail space with over 70,000 veterinarians that we've worked with over the company's history. Because of our industry-leading service relationships with vet, our prescription medication authorization rates are the highest they've ever been, which speaks volumes to the level of veterinary cooperation that we receive on a daily basis. Our customers love our brand and our service. Our NPS score is over 80, which puts us in the upper quartile alongside some of the most beloved brands in the world. We provide a 100% satisfaction guarantee to our customers, and we go the extra mile with genuine, empathic and expert service. As Matt previously mentioned, our order ship program continues to grow and expand. Approximately 42% of our revenue was recurring revenue derived from our AutoShip subscription program during the third quarter. This is an 8% increase on a sequential basis. I also want to say that I'm really excited with the speed at which we've begun to see business improvements. Investment in G&A has provided greater transparency, smarter decision making and better analytics. Let me turn to our financial results for the quarter ending December 31, 2022, our third fiscal quarter 2023. My remarks will compare this year's quarterly results to the same quarter last year. Third quarter revenue was $58.9 million compared to revenue of $60.7 million in the same period last year. While this is a decrease of 3%, there's an important milestone to highlight, net new customer growth. We welcomed approximately 72,000 new pet parents this quarter compared to 61,000 in the prior quarter and 66,000 in the prior year. This represents growth of over 9% year-over-year and an increase of 18% sequentially. We have actively targeted acquisition of lapsed customers through competitive promotions in the quarter to drive new customer acquisition. Repeat sales of $53 million for the quarter decreased 4% compared to repeat sales of $55 million in the same period last year. Gross profit as a percentage of sales was 25.9% compared to 29.2% in the same quarter last year and 28.2% in the prior quarter. The decline in gross profit was primarily due to higher seasonal promotions during the quarter as consistent throughout the industry. Our promotional activity, however, was specifically focused on reactivating our large base of lapsed customers. With a more modern marketing stack and refreshed marketing team, we will lean into optimizing this customer base and fully expect to cross-sell additional catalog to these customers in the future. While we're always evaluating our promotional strategies, we don't expect to repeat the deep promotions that we offered this past quarter to reengage the specific customer set. G&A increased $2.9 million year-over-year, but when normalized for non-operating costs relating to the pending PetCareRx transaction, G&A increased $2.3 million year-over-year. This is due to an increase of $1.4 million related to payroll expenses, which includes $400,000 related to stock compensation. $500,000 related to the third-party resources and some increases in software expenses and other G&A. With the exclusion of no-operating items, we do not expect G&A to continue to increase at the same rate next fiscal year. We believe the right team is largely in place now and the G&A will be fairly flat exiting fiscal year 2023 and going forward. Please note that as we push to close the acquisition in the fourth quarter, we will expect to see additional acquisition-related expenses. We received and accrued for a sales tax assessment in the second quarter of fiscal year 2023. Based on the assessment received, the company initiated a process to evaluate the potential for further sales tax contingency. The result of this evaluation could have a material impact on the company's financial statements. We expect to complete the review in the quarter ending March 31, 2023, and we will provide a further update after we complete our full analysis. Net income was breakeven for the third quarter and $0.00 per diluted share and includes $500,000 or $0.02 per diluted share for items not indicative of our ongoing operations. This is compared to $4.3 million or $0.21 per diluted share for the same quarter last year. Adjusted EBITDA for the quarter was $2.7 million compared to $7.6 million in the same quarter last year. The year-over-year decline reflects a decline in gross margin and targeted increases in G&A. As we look forward, we'll be primarily focused on closing and integrating the pending acquisition and driving returns on the recent investments. Management believes that the organic and inorganic investments that we've made over the last year in the business are sufficient to drive long-term sustainable growth going forward. Therefore, being focused on operating execution and integration is paramount in order to realize those future returns. Now I'd like to talk about the pending PetCareRx acquisition. We've covered some of this material in our Analyst Day in January, but we'd like to reiterate the structure and strategic rationale for the transaction. Total consideration of $36 million, trailing 12-month revenue of $42 million, 200,000 customers, more than 10,000 brands and product SKUs, around 80 employees and are headquarters in distribution center located in Long Island, New York and gross margins approximately the same as PetMeds. As mentioned, we expect the deal to close this quarter. While the PetCareRx brand will continue to operate independently as part of the PetMed's wellness and consumables business, it's expected to immediately deliver top line revenue growth. Over time, we expect it to be bottom line accretive as we leverage synergies and streamline infrastructure. Now I'd like to discuss our capital allocation. As we transform the PetMed's business, the acquisition of PetCareRx is the first catalyst that provides immediate growth as well as the ability to spend more in variable marketing as we work to sell more products to our customer base. Over the long run, management remains committed to driving total shareholder return. As such, for the third quarter, we will pay a dividend at the same rates as we have in prior quarters at $0.30 per share. Consistent with prior practice, the Board will evaluate the declaration of dividends on a quarterly basis as part of our normal quarterly business cycle. In addition, management strongly believes that investors will see a higher return over the long term through stock appreciation with a growing company in a growing market. Thanks, Christine. Again, management is very encouraged by the performance of the business this quarter as well as the impressive acceleration in the long-term business drivers. We announced today that PetMed is poised for growth. As we have stated over the last several quarters, PetMed is pursuing a vertical specialty retailer strategy. We aim to be pet parents trusted pet health experts. We have been sharing our strategy with you for a little over a year, and we have substantially filled in the pieces to build an enduring, profitable and growing pet health company. To be crystal clear on the measures for success, net new customer growth, more subscription revenue. We have seen rapid progress here, and we'll continue to see more recurring business that enables PetMeds to be a more predictable business model. Sell more nonmedication products via product catalog expansion. Unique and differentiated services via digital-based health care services and veterinary care. We will continue to add more virtual care and wellness services that will contribute to greater loyalty or less customer churn and uniqueness in the market. With over 2 million unique customers, we are a well-known and trusted brand, and we operate in a market that is resilient to economic headwinds. We have a strong balance sheet that provides us with the financial flexibility to take advantage of a large and growing market. We are excited to welcome our new pet members, PetCareRx. PetMed's job is certainly not done. We will be working hard to integrate, execute and go-to-market with these new assets and initiatives. Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Erin Wright with Morgan Stanley. Please proceed with your question. Great. Thanks for taking my questions. First, how should we be thinking about -- and congrats on the new customer growth, but how should we be thinking about new customer growth in the coming quarters? Do you think that we've hit an inflection point here or are there any other factors that we should be thinking about in terms of that quarterly progression? Thanks. Thanks for the question, Erin. I'll take that one. Yeah. We're pretty excited that we saw net new customer growth for the first time in 2.5 years. What -- a couple of things are going on behind that number. One is -- and one of the interesting things about PetMeds versus an early-stage business is that we've got a huge database of customers that up until recently, we really didn't have a lot to talk to about. So we've done a much better job of reengaging lapsed customers. As you may recall, we changed the definition of our new customers to anyone that's purchased with us in the last three years. And so we're doing more specific targeted offers to our lapsed customer base, which we have found largely as being very CAC efficient, customer acquisition efficiency. So that's kind of one theme in the future, Erin, that you'll see from us. The second theme is a little bit of what you heard around the thesis around PetCareRx and the expansion of our non-medication catalog is while CAC overall in our space as generally flattened in terms of trends, in terms of tax trends. We do see an opportunity to increase lifetime value as we start selling more products to both the net new customers that we are bringing on, but also existing. So I think the trends that you'll see from us are probably less in terms of gross margin hit related to reuniting lapsed customers, but more focused on getting those customers to purchase more from us. And so on a go-forward basis, we are leaning more optimistic about our ability to grow our customer base. I hope that answers your question. Great. Yeah. No. Thanks. That was great color. And then also looking at just underlying demand trends across your customer base whether it's dynamics around the upcoming flea and tick season, what you're seeing in terms of consumer behavior around trade down dynamics? What are you seeing in this sort of macro environment just from an underlying demand perspective? Yeah. It's a great question, Erin, and that's such an important question for us. As you know, we are a seasonally driven business, highly weighted towards the flea and tick season. I think it's not -- I think this season is going to be very different than last season. I think last season was very abnormal on many different vectors. It was very unseasonably cold. We are looking very carefully at what we're seeing in the vet channel and also macroeconomically with our supplier partners. We are cautiously optimistic that the flea and tick season will be much better than it was last year. I think it would be very difficult to say, it would be worse, but it's too early to tell. But I don't think you're going to see as colder temperatures as we did last year, but we're staying very attuned to all the macro data. In terms of trade downs, we are not seeing trade down behavior in our business. As you know, we are very medication focused and very prescription focused in terms of the weighting in our business. And those customers, particularly diet and health-focused customers, generally will stick with the brands that they love, whether they're a favorite Flea & Tick brand or if it's a skin brand. Whatever it is, we don't see consumers wanting to trade down, which is good news for us. And I would say that trend will likely continue. And we're relatively recessionary resilient, and we haven't seen a lot of train down behavior. So in terms of the macro, we're going to stay very focused. Obviously, as we get into March, that's when sales historically have increased for flea and tick, and we'll be watching very carefully around seasonality around temperatures. Hi. Thanks for taking my question. I wanted to follow up on that and just talk about other factors that impact customer growth. So we've seen vet industry visits down over the past year and this is kind of a seasonally weak quarter for flea and tick. So you added customers by activating lapsed customers. Maybe you can talk about what you're seeing in the market in terms of like customer intent, and how you're thinking about trends that might impact customer growth over the next year? Thanks. That's a great question. In terms of the rig night (ph) of the existing lapsed customers, really, that's a new conversation. That's why we changed the definition. We have a huge opportunity in what we've got, and there's a lot of interesting net new data around what those customers want from a brand like what PetMeds. And so it's almost the way we think about it as having a completely new conversation. Some of those customers actually have a strong affinity, obviously, to the brand, but they haven't really been introduced to us in a while. And so we're treating them like they're new customers because they are new customers. And those customers that are new seem to want a one-stop shop, one place to get more of their products versus just one item. That could be in this speculation related to inflationary concerns. It could be pre-recessionary concerns. But going to one place to get all of your needs is a developing theme, and we've seen this in other e-commerce retailers. In terms of the net new components to the strategy for both the existing customers as well as new, it's hard to predict the customer acquisition trends. It's a dynamic marketplace, but we've certainly seen those trends flatten in terms of increase in overall customer acquisition. Our customer acquisition costs on an absolute basis have been relatively flat. But we see a lot of interesting demand, which is the thesis for PetCareRx to add more premium products like prescription food and premium food to the mix. And so longer term, we see an opportunity to potentially lead into customer acquisition costs and expand our customers more rapidly, but again, we are not in a position to comment on that yet. We haven't closed PetCareRx, and we'll focus very much on digesting the acquisition of working with that team and executing. Corey, did I answer your question? Yeah, you did. That's really helpful. For my follow-up, I wanted to just get some more color on gross margin. So you talked about going forward, focusing less on promos and more on cross-selling, but how should we think about gross margin for Q4 and into next year? Thanks. Yeah. Thanks, Corey for the question. So as I mentioned on the call, our gross margin in the quarter was really impacted by the targeted acquisition of those lapsed customers, and we really did lean into that with some of the sort of one-time promotions. That was an intentional move on our part to acquire those customers because of the opportunity that we see with cross-selling products and expanding the sort of portion of that customer's basket going forward. As I mentioned, there was -- there's that, and also, I would say that there was some -- we have a co-op rebates that hit our cost of goods sold, and those can vary from quarter-to-quarter. Now both of those things negatively impacted gross margin. This quarter, we really don't expect those to repeat to that extent going forward. And so we do expect to see our gross margin more in line with kind of the historic trends that we've seen in the past. Good afternoon and thank you for taking the questions. So it's really nice to see new order sales growth in the quarter here. Your repeat sales or reorder sales were down about 4%. So kind of going forward, I mean did you expect -- I mean, obviously, your repeat sales drive around 90% of your total revenue. So how are you thinking about maintaining that repeat base of customers? Do you expect to perhaps be more promotion to those customers or how are you just broadly thinking about that, making sure that you're at least able to maintain those repeat customers? Yeah. Hey, Christine -- Anthony, thank you for that question. Christine, why don't you answer the overall returning revenue trends, and then I'll follow up with maybe a strategy answer. Yeah. That sounds great. Hey, Anthony. Great question. So as we look at the returning customers, you're right, we did see that 4% decline year-over-year. If you look at that contextually within the last six quarters, that's the lowest decline that we've seen year-over-year than we've seen, like I say, over the last six quarters. So we really do see some of the trends starting to change there and actually, starting to see less of a decline in that customer base. And then, of course, as we're thinking about the new customer acquisition and building sort of the top of the funnel and then having a repeat -- having the repeatability with our AutoShip program as well as that expanded catalog, we really see that opportunity to drive greater stickiness. I'll hand back to Matt because I know he'll have some additional comments here. Thanks, Christine. No, you answered -- you actually added a couple of elements that I was going to add, Anthony. I would say that, we don't have a lot of shots on goal with our customers today, meaning primarily, our customer engagement is over a year around prescription refills. And so that gives ample opportunity for customers to not engage with us and not have reengagement and likely either go to another retailer or actually forget that they're on some type of program with us. And so we're looking to get more engagement with those customers through AutoShip, but also through selling more products. We think selling more products in AutoShip is kind of a one two punch to answer that question because there is more competition in the market, but also our customers want more products from us. And so we think the advent of those two things will really help bolster and stabilize the returning base over time. And then as I've mentioned, more speculative investments that we've made on pet telemedicine, I think, are going to be really interesting to see how, over the long term, the regulatory environment changes, but also how customers view PetMeds as not just a place to get your meds, but it's also a place to get all your other services that you'd expect to get. And our customers are very much aligned with how they think about their vet, and so which is why we really focus on pet telemedicine and connecting with that through our vet live service. So over time, we think differentiation through services is going to be another ability for us to lower churn and provide a more meaningful experience for our customers. Got it. Yeah. Thanks for that. And then your advertising spending was up 7%. Just wondering, are you seeing any changes in ad rates, given kind of where the economy is right now? I just wanted to get your thoughts on that. Yeah. I'll take that one, Christine, Anthony. Good question. Yeah. When I say relatively flat, obviously, there was a little bit of an increase. No, largely, the fluctuations that we've seen are how we get incented from our supplier partners, which adds some variance. So we feel like overall, from what we see inside our marketing spend that we've been relatively flat. There can be some variances based on the amount of discounts that flow through the P&L from our supplier partners, but overall, when we look at the industry, whether it's CPCs or CPMs, we're not seeing a lot of fluctuation in price right now. That can change and it has changed significantly quarter-over-quarter base usually on the macro environment, but it has somewhat stabilized in terms of our customer acquisition costs, and we're not super concerned about that. Thank you for joining our call today. I'm confident that the future we envision for PetMeds along with the foundation that we've been laying will meet the market opportunity in unique and innovative ways and will lead to improved operating results and increase shareholder value. PetMed's brand expertise and reputation are unparalleled. We have greatly accelerated our operating roadmap, and we look forward to sharing our progress in positively changing the lives of our pet parents and pets. Thank you for your continued support. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
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EarningCall_734
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Hello, everyone, and welcome to the presentation of ASSA ABLOY's 2022 Year End Report. My name is Bjorn Tibell, I'm heading Investor Relations. And joining me here are ASSA ABLOY's CEO, Nico Delvaux; and our CFO, Erik Pieder. We will stick to the normal format today and start now with a summary of the report before we open up for your questions. Thank you, Bjorn, and also good morning from my side. We can report a very good Q4, a very good end to, I think, a very good 2022 for Assa Abloy. We had a strong organic growth of 9% in the quarter with all divisions contributing in a strong way, with the exception of APAC, wherein APAC, it's mainly Greater China where we continue to see challenging market conditions, COVID-19 related and, of course, construction market crisis in general related. Also good complementary growth through acquisitions of 5% in the quarter. A strong EBIT margin of 15.7% and a strong EBIT improvement. Very active in the quarter when it comes to acquisitions with eight acquisitions signed in the quarter. And then a strong cash flow, almost double of a year ago at SEK6.6 billion. So if we look in the numbers, top line close to SEK33 billion, 28% up, 9% organic, 5% acquisition and then also helped by currency in an important way. An EBIT margin of 15.7%, on the same level as the same quarter a year ago. And then an EBIT of almost SEK5.2 billion, 28% up. And our earnings per share 23% up. If you look a little bit into the different regions, a continued very strong North America with an organic growth of 19%, where we continue to see good market conditions on the commercial side, but I would say also on the residential side. It's true that newbuild residential is down. But as you know, we are not so affected by newbuild residential in North America. It affects a little bit our garage door business in Entrance Systems. It also affects a little bit our OEM business in general and our window hardware business in particular. But we still see very strong momentum on the residential side aftermarket and like I said, on the commercial side. So I would say for North America, the market is perhaps not our biggest concern. It's perhaps more the high comparison with a year ago. If I go to South America, minus 9%. If you look at our core businesses, our core markets there, it was only down very low-single digit and that was against a very difficult comparison a year ago. You know that in South America, we were growing very high double-digit now for many quarters, a couple of years in a row. So at a certain moment, it becomes difficult to further grow against that high comparison. Then of course, we have some challenges, political challenges in Brazil, in Peru, but the minus 9% was mainly because of a high comparison with a high -- or a big HID project in Brazil a year ago. Europe, plus 3%. I think a good quarter in Europe. Perhaps market conditions are a bit less clear than in North America. We still see very good strong momentum on the commercial side. Also with our spec business still up double-digit, whereon the residential side, it's a little bit more fluctuating. Africa plus 5%. Oceania plus 3%, despite all the floods and all the challenges in Australia and New Zealand. And then Asia, the only one -- or the other one negative, minus 5%. And like I mentioned, mainly because of a continued challenging situation in Greater China by COVID-19 was still very much around in Q4 where the construction market continues to be very depressed. We also had some challenges in the quarter in Southeast Asia, but that was mainly because of a very high comparison with a year ago in Southeast Asia. Some market highlights for the people that were interested in the FIFA World Cup. Erik, I know that your country was not there, and we were back home very fast, the Belgians. But we provided all the paper tickets for the World Cup, more than 2 million paper tickets. It's now the third time in a row that we do that service. So definitely a very high profile type of a project. An important critical infrastructure win for our electromechanical CLIQ solutions for a European gas network. And then some energy saving solutions from Entrance Systems for a global multinational for its manufacturing plants in Mexico. It's also good to see that our R&D effort continues to be rewarded in the market. Our Yale Unity Screen Door Lock won the Good Design Award in Australia. And then also this quarter, several new products around green sustainability, this ThermaGuard glass for our entrance system product, increasing energy efficiency in the doors. And then we further extended our Incedo Cloud offering where we now integrated also the battery less PULSE digital cylinders on that platform. So now eight consecutive quarters with strong organic growth, and the last couple of quarters also complemented with very strong growth to acquisition. So you could say an acceleration of our top line. Our margin still below the band which we aim for in the quarter at 15.7%, for the year at 15.3%. So working hard to get it back within that 16% to 17% bandwidth. So stable operating margin accelerated top line, therefore, also accelerated operating profit. Record profit in the quarter, for the first time above SEK5 billion. Very active quarter when it comes to acquisitions with eight acquisitions signed in the quarter. 21 acquisitions completed for the full year. That's also a record. And those 21 acquisitions represent an annualized sales of around SEK7 billion. An update on HHI, we are still preparing for the court case, which will take place in April this year. And as part of mitigating the concerns DOJ has raised, we then also came to an agreement to conditionally sell our Emtek and Smart Residential business in the U.S. and Canada to Fortune Brands, of course, conditionally based on closing the HHI transaction. Zooming in on two interesting acquisitions: D&D Technologies in Australia, a gate hardware manufacturer with sales of around SEK475 million; and then Janam, a leading provider of handheld mobile computers and readers. They used those readers also at the FIFA World Cup to control people entering a perimeter around the stadiums and making sure that people have the right ticket. They have a sales of around SEK200 million in 2021. If I then zoom in into the different divisions, starting with EMEIA, an organic sales of 2% with very strong sales growth in Middle East, Africa and India, the more emerging part of EMEIA. Strong growth in Benelux, good sales in East Europe, U.K., DACH and Scandinavia, but then a sales decline in Finland, South Europe and France. An operating margin of 15% with a very strong operating leverage, dilution of FX because of the weak SEK and also a stronger dilution of M&A, mainly linked to acquisition costs, integration costs for two important acquisitions in EMEIA for Door Bird and Arran Isle. We then go to Americas, another very strong quarter and, I would say, a very good excellent year for Americas. Organic sales in the quarter of 11% with all business areas, all regions contributing in a strong way, with the exception of a small sales decline in Latin America, like I mentioned earlier, and then sales decline in Electromechanical Solutions, mainly linked to some shortages on electronic chips and also a very high comparison with a year ago. An operating margin of 21.3%, very strong operating leverage 200 basis points, FX neutral. And also here, M&A, strongly dilutive, 90 basis points, that's related to acquisition costs for HHI, which amounted to SEK90 million in the quarter. We then go to Asia-Pacific division, the more challenging division, with an organic sales decline of 10%. Good growth in South Korea, slight sales decline in Pacific and then a significant sales decline in Southeast Asia because of a difficult comparison with a year ago and also in China because of continued very difficult market conditions. We had a higher double-digit negative growth in Greater China. And yeah, therefore, we don't have the necessary volume mainly in Greater China. We also posted an operating margin of minus 4.7% with a negative operating leverage, again, because lack of volume mainly in Greater China. And then FX, slightly positive; M&A, slightly negative, and that's linked to integration costs for bigger acquisitions with it in Australia, Caldwell and D&D Technologies. We then go to the Global division, starting with Global Technologies, a very good quarter, strong end of the year, organic sales of 24% where I would say all business areas and as well HID and Global Solutions were contributing in a strong way with the exception of Extended Access, where we were also able to further reduce the backlog buildup on Physical Access Control because we get now the chips in for our redesigned products, and we are working away that backlog. We also saw a good return of the travel related businesses and Hospitality in particular. An operating margin of 17.1%, that's a level where we want to be, what we aim for. Good volume leverage 140 basis points helped by FX 50 basis points, because of the stronger dollar, and then 50 basis points dilution also here mainly because of acquisition and integrated related costs. And then last but not least, Entrance Systems. Also here, a strong end of a strong year with an organic sales of plus 10% with three of the four segments contributing in a strong way, Residential, Industrial and Pedestrian; and a sales decline in Perimeter Security against a very high comparison a year ago. Also very strong double-digit growth in service where we deliver on our ambition to grow the service business high-single digit. An operating margin at 16.5%. Good operating leverage 30 basis points, slight help of FX and an M&A dilutive 40 basis points. Thank you, Nico. And also from my side, a very good Friday morning. As you all know, our target is to reach SEK150 billion by 2026 in sales. And if you look on the full year, I think that we have done good progress in order to reach that target. The full year ended at almost SEK121 billion. Yes, we are helped by currency, but you can also see that the organic as well as the acquisition growth was 14%. The 14% is similar to what we had in the quarter. It's a different mix where the organic piece was 9% and the acquired part was 5%. And the operating income, as previously explained by Nico, was record high above the SEK5 billion and increased with 28%. Income before tax, you see that one is slightly lower with an increase of 25% and that is that we also experienced the higher interest rate cost that is now all over the world. One of the highlights, operational cash flow almost doubled from an okay -- or rather weak Q4 last year, but still is the best cash flow that we have had in the quarter ever. And then I would say also another highlight is the return on capital employed, which almost reached 17% for the full year of 2022. If we then dissect it a bit and look on the bridge. Price of the 9% is 5%, volume is 4%. We have a good operating leverage of 22.3%. If you take into account that we still have supply chain issues still, I mean, we are suffering from higher inflation as well as higher energy costs, but we have been able to mitigate that by operational efficiencies. And like, for instance, the Manufacturing Footprint Program had a saving in the quarter of SEK200 million. We will now -- in Q1, we will launch the ninth program with a total restructuring cost of SEK1.2 billion and have an annual saving at the end of the program of SEK700 million. The payback period is about two years. On the currency, we are helped a bit by the stronger dollar. So that's a 20 basis points improvement. And acquisitions, I think -- I mean there, you've heard Nico talk about acquisitions and integration costs for HHI, it's SEK90 million. But if we also would add the other ones, the dilutive impact would have been 30 basis points instead of the 80 basis points that you see here on the slide. On the cost breakdown, it is we see that the direct material is improving with 40 basis points. The 40 basis points is mainly -- it's related to the mix where we have a stronger Global Technologies and a weaker APAC. But over the full quarter, the cost versus price or the material cost was actually flat. On the conversion side, we were up with -- or let's say, we had a better performance of 70 basis points where, I mean, I talked before about the operational efficiencies and also the higher volumes have helped us there. On the SG&A, slightly lower, 40 basis points there. Yes, we have higher inflation. We have continued to invest in R&D, but we have been able to offset this by efficiencies within our sales and admin cost. As I said before, this is, once again, one of the highlights of the report, the operational cash flow, almost SEK6.6 billion, where we had, I mean, we had high EBIT and an EBITDA, but also we have also been able to manage our working capital with a reduction in receivables as well as in inventory. The cash conversion on the quarter was 138%. We have seen especially good performance within Entrance and Americas in the quarter. The gearing and net debt to EBITDA is now at 1.4 versus 1.5 last year. The net debt to equity is also down from 39% to 37%. In the quarter, we increased the debt with roughly SEK1.1 billion. Yes, we have been quite active on the acquisition front as well as we have paid dividend. If you look on the full year 2021 versus 2022, we're up with -- we have increased the debt with SEK4.6 billion. But out of that, SEK3.4 billion is related to currencies. And then, yes, we have also done 21 acquisitions during the year. But all in all -- yeah, you can flip the slides. It's no problem. Yeah, all-in-all, I think that we have a very solid balance sheet, and therefore, we are ready to absorb the HHI acquisition as well as continue our acquisition strategy. Now you can flip the slide, Nico. Thank you. And earnings per share ended at SEK3.36 for the quarter and is up as, you've seen before on the slide, with 23%. So as a conclusion, a strong quarter, strong end of a good year for us and an organic sales up 9%, complemented in a good way, strong way with growth toward acquisitions of 5%, a strong EBIT margin of 15.7% and an operating profit up 28%. Record cash flow, almost double compared to a year ago. So overall, financially good result. And it's clear that we live in an uncertain economic climate. As you heard me talking before, we are still quite optimistic of what we see in the market. But as you know, we should be ready for whatever economic situation comes to us. We have our decentralized organization that has helped us in the past to be very agile, which will help us also now this time to be very agile, even when a possible downturn would come. But the agility will also help us to continue to profit from those markets where we see a strong momentum. And then last but not least, the Board proposes a dividend of SEK4.8 per share, split, like in recent years, in two equal payments. Thank you very much, Nico. It's time to open up for Q&A now. I know that there are many in the queue, so please remember to restrict yourself to one question and a follow-up. Operator, this means that we are ready to kick-off the Q&A session. Please go ahead. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Lars Brorson from Barclays. Please go ahead. Thank you. Good morning. Nico, if I can maybe start with Europe and EMEIA that you're calling out commercial strong specs, up double-digit that's obviously encouraging. I wonder whether you can talk a bit about what you see in the European residential market. I noticed that you have seen strong growth in Benelux and good growth in the UK, organically at least. I presume that might also mean stable volumes, but those were two of the three markets you called out, I think, in the third quarter as a concern together with France. So maybe you could talk about what you see there and the exit rate perhaps versus the 2% organic in Q4 overall for EMEIA. And specifically, if I can, sorry, just on the contingency plans that you initiated in the third quarter, have they indeed been executed or are they ongoing? Thank you. Yeah, Lars. I can reconfirm that we continue to see good momentum on the commercial side. I would say no, no slowdown. Also translated in the level of our spec quotations, like I mentioned, still up double-digit. On the residential side, most probably we must make a distinction between newbuild and R&R, so aftermarket. On the aftermarket, also there, we still see good momentum, a little bit similar like in North America, but where definitely newbuild is more challenging. We see that a little bit in our OEM channel where we see things slowing down. And of course, you always get, and also there, the double effect because if you want people start to destock and the market goes down, you have this double dip. When it comes specifically to the markets you asked, yes, Benelux, we have seen growth, but that was mainly against a very weak comparison a year ago. So I would say that Benelux, the situation is still similar, as I explained in Q3, like it is for France because we saw negative growth in France. Then it's true that the channel to market can only destock so much. After a couple of months, that destocking is over because there's nothing left to destock. I think we are on that level now. So it will be now more in line with how the market evolves. And like I said earlier, it's very difficult or more difficult to read in Europe than in U.S. But also in Europe, perhaps we are a little bit more positive than what you read in the newspapers or what you hear on the news. Thank you. Helpful color. My follow-up, if I can, briefly, just on Global Tech operating margins. I think I heard you say where we want to be. If I'm blunt, that sounds a bit unambitious to me. I mean you're calling out very strong operating leverage in the quarter. That's true, but that's obviously on a very depressed comparison from last year on low volumes and high components cost back then. Maybe you can help us a little bit with your thoughts on 2023 with Global Tech margins. There should be better operating leverage coming through mix, particularly as PACs recover, price cost tailwinds, decent volumes. I'm hoping we can do better than what we saw in the fourth quarter. Yeah, I know that some of you were dreaming, hoping of EBIT margins closer to 20%. I think I've always said that, that is not the case, that, that is not realistic for Global Technologies. I've always said that Global Technologies should have margins above the 17%, in that 17%, 18% range. So we consider this as a good level then. Again, judge if it's ambitious or not. I think what is important for good margins in Global Technologies is that PACs is on a good level in the mix, which definitely is again the case today as they are working away their backlog. And then what is also important is that our Hospitality business is on a good level. And although Hospitality is coming back and showing a good double-digit growth, they are still lower than the levels we experienced prior to 2019. So that definitely brings it down. And then the other aspect is that we see a very good strong growth on the other verticals in Global Solutions, but those verticals are still smaller. I would say there, we have to grow volume in order to make them margin accretive on the division level. So this margin is above 17%, in that 17%, perhaps 18% level that is something you should consider going forward. Hi. Good morning. Thank you for taking the question. I wanted to start out just with pricing trends and what have you done with pricing list in the beginning of the year and sort of what is the plan and the trend you're seeing in the market, given we have the offsetting moves, I guess, of raw materials and labor costs. And then just a follow-up from that, if you can talk through how big the potential tailwind from cost inflation coming down in things like raw materials. Is that enough to get you, ex the HHI deal, into the 16% to 17% margin range this year, do you think? Yeah. So like we said in Q3, we were a little bit afraid with steel prices going down that, that would come more strong pressure on prices and eventually negative pricing for everything what is steel related. So it's good to see that steel is up again in the last six weeks or so. As a matter of fact, if you look at steel price today in the U.S., they are still 100% above the steel prices two years ago. And that's good because that means that we can keep prices for our steel related products on a solid level. Apart from that, we have continued to increase prices in Q4 and now also in Q1 because we also see other materials going up. Again, if you take copper, nickel, zinc, you name it, they are also still 40% or so higher than two years ago. And next to material inflation, we have, of course, general inflation, energy inflation, logistics inflation and labor inflation, in particular, where we see -- where we have seen higher labor inflation last year, however, we see definitely higher labor inflation this year as well. So we continue to increase prices, I would say, on an ongoing basis. That's also why in Q4, we were perhaps a little bit earlier than anticipated neutral cost versus price because for the Q4, we were on zero level, no accretion, no dilution. And so it's good to consider, I would say, a tailwind now going into Q1 this year. And that tailwind should continue under the condition that markets stay where they are, indexes stay where they are. So that should definitely help us also on the bottom line and our ambition to bring our bottom line as soon as possible back within that 16% to 17% bandwidth. Good morning. Thank you very much for taking my question. Could we talk about Asia Pac? And I wonder if you could quantify at all how much of that kind of drop-off in performance in Q4 was due to China specifically and that kind of J-curve effect of the lockdowns where I'm sure you had some impact from absenteeism as the country went through the kind of pandemic. If we could start with that, please? Yeah. Perhaps if we start top line, we had high double-digit negative growth in Greater China. But you have seen in the deck also that the sales performance for the rest of the division top line wise was not so good. If you take Australia and New Zealand, we had, of course, continued problems with floods, disturbing a little bit the market. And then as we have illustrated also, window hardware business to OEMs, I also explained in the presentation that we have seen there a negative trend. We also have Southeast Asia, which had a challenging quarter. And that translates, obviously, in the bottom line. I've always said that you should take it back two parts: you should take Greater China with, in the good old days, very low-single digit positive margins; and then the rest of APAC margins in line, you could say, with EMEIA. As we had lower volumes on the rest of the division, obviously that had a negative effect on the overall margin for the division. But I would say the biggest contributor was definitely Greater China where we are, you could say, subcritical today and where we had a higher negative margin -- double-digit negative margin for the quarter. And we have chosen there not to further cut into the muscle because we see good opportunities to deliver on our strategy and grow that business again once the market condition turns. We are a little bit more positive now because COVID-19 is clearly also behind in Greater China. They have changed their policy in a very important way. Construction market is still, in a way, depressed. But also there, there is some early positive signs. Too early to see strong improvement now in Q1 because Q1 is the Chinese New Year quarter. But definitely going into the second half of the year, we believe we should see improvement on the Greater China market conditions and, therefore, definitely also on our results. I think you should see the bottom line where we are today as really low for that division. We are confident that from now, we should see improvement. That's helpful. Thank you. Yeah, I was just trying to get an idea of how much of that sort of one-off effect is in there, but I think we can work with what you said on the high double-digit negative margin in China. And a follow-up, if I may, just on the North America or Americas division, could you give us an idea of how your specified activity is trending in North America or across the division? Yeah. Our spec business in North America was only low-single digit up. You know that it was higher-single digit up for many quarters. So it was also a very difficult comparison. But like I said earlier, I'm not so concerned with that as an indicator. I'm also not so concerned with ABI indexes now down for a couple of months. I think what it does, it perhaps reduced a little bit the backlog on projects we have. What I think is important is that those indexes in the coming months start to go up again and then activity can and will remain strong on the commercial side. Our biggest concern -- or our biggest challenge in the U.S. is definitely our very high comparison now in Q1 compared to Q1 a year ago. Thanks very much, everyone. Good morning. I just want to follow up on Lars' question around the channel. So we talked about destocking in areas like Benelux in Q3. In terms of the bigger picture globally, are you concerned with where channel inventories are or do you see any signs of overstocking? Thank you. Well, obviously, if a slowdown then happens, you will see that in the OEM channel, where the OEM customers will start to destock, postpone orders, and that comes on top of then the slowdown that they see in the market. So definitely, the OEM channel is something to watch out for. That's something we have seen a little bit in Q4, like I mentioned earlier, in the U.S., mainly for window hardware a bit for garage doors because they also sell that hardware or there's garage doors for newbuild. But like I explained on the R&R side, on the aftermarket side, we still see very good strong momentum. Apart from that, I mean, we don't see it as a big concern. Everything depends, of course, if the market would turn and how fast that market would turn, but that we have seen in France, Benelux and the UK. But again, I think in France, Benelux, UK, we are through that destocking cycle now. Thank you. Good morning, everyone. Can I start with China? Where are you exactly on the journey to move away from residential more into commercial and from newbuild more into renovation, from big projects more into smaller ones? I mean can you provide a bit more granularity on the mix in China today? Of course, we are still very much exposed to residential. Our commercial part is still relatively small. And we are still too much exposed to newbuild. That's also why you see that higher double-digit negative growth on the top line. But if you look underlying, I think we see very good results on our underlying strategy. We see a move from newbuilds to more replacement retail on our Pan business where both are down, but where our retail business is definitely much less down than the market. So we see that shift. And we see definitely also a good momentum on the commercial side where we have positive growth despite the market being down. Unfortunately, those positive signs are, in the bigger picture too small to compensate for what we lose on newbuild residential, one, because of the market; but two, also because of a conscious decision that with some of those customers, we have decided not to do business with anymore because at the end of the day, the aim of doing business is to get paid sooner or later. Also from what you saw, we believe that the risk is too high with some of those bigger contracts. And therefore, you have a double negative effect, I would say, on the top line, one, because of the market; and two, because of our conscious decision not to work with some of them. Okay. Thank you for this. Can I switch to Entrance Systems? I mean it appears that the organic growth there decelerated pretty sharply this quarter from Q3 to Q4. So I wondered if this was only due to Perimeter Security declining or if you've started to see a sequential deceleration in some of the other segments as well. And then on Perimeter Security itself, does the drop in revenue come from volumes or prices or actually both? I would say Entrance Systems has had very high growth for seven, eight quarters in a row now, so the comparison becomes more challenging. We have seen still good growth in Residential, in Industrial and in Pedestrian. We had indeed seen negative growth in Perimeter. That's not because of price. We were able to keep price. We were not obviously able to further increase price, but we were able to keep price. In Perimeter, it's two things: it's a comparison with very high double-digit growth a year ago; and two, some slowdown on the residential side because we also still make the more commodity type of fences on the residential side, and that is clearly down because that is also newbuild residential. The other downward trend we have seen is on residential garage doors for newbuild, like I explained earlier. I think everything what is newbuild residential is it became more of a challenge. I think everything that is aftermarket residential is still good momentum in the U.S. And then in Europe, yes, it's also a more difficult comparison. I think we still see a good momentum, I would say, in line with what you see about in industrial manufacturing in Europe. But you -- would you agree that, I mean with the kind of comps you're facing now going into Q1 '23 and with the exit rate that we can see right now in Q4, I mean Entrance Systems will likely start the year in negative territory when it comes to growth? Yeah. We don't like the word negative. So I'm optimistic that also in Entrance Systems, we will continue to see a positive development. That's definitely our ambition. But it's definitely a good assumption that -- to assume that the percentages of growth will slow down in the first place because of the difficult comparison and, in the second place, also because some weaker market conditions, yes. Thank you. Could you please quantify how much of the Global Tech sales in the quarter related to the pent-up backlog impact from the earlier chip issues? And also how much is left of this backlog, please? Yeah. It's a bit difficult to estimate, but I think a rough number, SEK400 million of the backlog that we recovered. So I would say that we are two-thirds to three-fourth done in the backlog. So there's still some backlog available now most probably in Q1. That's very clear. A second one, I'm going to try this, but it's still early days. So if you could give some color on what you're seeing so far into 2023, it would be very helpful. I can say that, of course, January had one working day more. So we should take that in consideration. But January had -- if you compare with the year ago, January growth rates that were very similar to Q4 on group level. Hi. Good morning, Nico, Erik. Thanks for taking my question. The first one is around cash flow, and obviously, very impressive performance in the fourth quarter. I wonder if you can talk about what's been the main driver of that. I think you mentioned that Americas and Entrance were also very good in terms of cash flow, but it seems like every single division also performed very strongly. So one is, what was the main driver of that cash performance? If you can break that down a little bit. And the second would be, do you think there's still some catch-up to do in terms of improving working capital terms? I'm just trying to think about the conversion going forward from here. That would be the first one. Thank you. Yes. I mean, as I mentioned before, I think that we had a good EBIT performance, and that was then helped by good efficiencies done on receivables and also inventory, which sort of -- that made sort of that we had a very strong cash flow. I mentioned specifically, because they stand out, Entrance and Americas. But you're absolutely right, we can also see it in a number of the other divisions. I think that we have momentum on the working capital, especially when we talk about inventory also going forward. But of course, remember that we're also seasonal here, which means that we always have a stronger half year and especially then in Q4 during the year. That's helpful. Thank you. And the second question is just picking up on some of the comments you were making on Global Solutions and the travel related segment. I think, Nico, you mentioned that that's still below prior levels. I wonder if you can give us a hint of how much we led or how further below you are relative to pre-COVID levels in that travel related business within Global Solutions. Well, we don't comment individually the different business areas, but you could say that we still have some way to go on Hospitality to be back at pre-COVID-19 levels. Same is true for Citizen ID. Same is not true for marine business where we are back and above 2019 levels. Hello, everyone. [indiscernible] Thanks for taking the question. I have two. One is on momentum in China. I understand what's happening with the reopening, and there's a lot of absenteeism going on, and we're seeing it across many companies. Obviously, it's difficult to uncouple that from general market weakness. But have you noticed, in January, improving sequential daily rates of revenue with less absenteeism? That's the first question. And the second one is a hypothetical question, really, which is if your steel index, which is double the pre-COVID, were to drop all the way back down, do you think you can hold on to prices or do you think you'd have to lower prices? On China, the answer is no because everybody was on vacation in January. As you know, it was Chinese New Year. Then it's true that if you take some of our factories at a given moment in time, we had 70% of our people or more of our people at home because they had COVID or their relatives had COVID. But January is a holiday month, so it's too early to come to different conclusions for China. When it comes to steel, I think it's a very hypothetical question. We are convinced steel will never go back to the levels of two years ago. But it's clear if steel would drop 100% of where we are today, that there will always be people in the market that see an opportunity to do better by reducing prices. So then the risk is definitely there that we would have to reduce prices for things like fences or garage doors or specialty doors. But again, this is a hypothetical question. The fact that steel went up again, even 20% in the last six weeks or so, gives us again good buffer, a good argument to keep prices up. Also because, like I mentioned earlier, it's not only the steel inflation, we have strong labor inflation in general, definitely also in the U.S., and we have a strong general inflation still. Just a couple of clarification ones, really. I wondered if you could just run through or clarify exactly how much pricing was in the quarter. Maybe I just completely missed, apologies if I have, but actual pricing contribution would be really helpful. And then I wondered, is the World Cup impact in Q4 in GT growth, is it -- how much of it was in the number of that very strong 24% growth you printed? Can you break that out for us? Thank you. Sure. Erik showed it in one of his slides. So price was 5%, volume was 4% in the quarter. And like we said earlier, two divisions that are above the 5% is Entrance Systems and Americas, and the other ones are then, therefore, below because the 5% is the average. When it comes to the FIFA contract, I would say that it's a little bit spread in invoicing over a wider period. And it's, I would say, not significant in the result of Q4 for Global Technologies. Like I mentioned earlier, the main drivers are the PACs and definitely the working away part of the backlog and then Hospitality, which had a nice, strong double-digit growth in the quarter. Thank you and good morning. I would also like to ask on pricing. I want to understand what the pricing impact could be in 2023. I think we will have a carryover effect from price increases that you have done in 2022 of around 1%. And you mentioned that you have increased prices in December and January. Do you plan to raise prices further throughout 2023? And is it fair to assume that the incremental price increases will add another 1 percentage points to 2 percentage points to the carryover effect or is that far too conservative in this inflationary environment and pricing will be even higher than 2%, 3% for the full year? So as we continue also to increase prices, like I mentioned, in Q4, we believe our carryover will be a little bit higher than the 1% you mentioned. It will be more around 2%, around that level. And then definitely, we have the ambition to further increase prices. I would say for everything that is not strong steel-related, we still we -- we'll be happy if we can keep the prices, like I mentioned in Q3. But the rest, we have the ambition to further increase prices. So yes, our price effect this year should be higher than that 2% carryover. How much higher? Let's see. Let's see how much price we can realize and where indexes and inflation goes now in the first quarters of this year. Hi. Yes. I hope, you can hear me. I have one question regarding the bridge that you showed in terms of the -- I think you showed SEK1.3 billion in sales contribution from acquisition and roughly SEK30 million negative on EBIT from those acquisitions. And could you elaborate a bit on the HHI impact? And then also what one should expect in terms of profitability from the acquired companies that came in during this quarter? Yeah. So like Erik mentioned or like I mentioned before, we booked SEK90 million acquisition related costs to -- for HHI. But we were very active, as you have seen, in the quarter. So we had a lot of other acquisition and integration related, you could call it one-time off costs. We had the D&D acquisition, we have Arran Isle. We had... Door Bird. I mean -- Caldwell. We had many acquisitions, some of them also a bit bigger. And normally, the big acquisitions have also a little bit higher acquisition integration-related costs. So if you dissect a little bit 80 basis point dilution we have in the acquisition column, you could say that around 50% -- 50 basis points, sorry, is related to this, you could say, one-off costs and HHI, and then around 30 basis points would be the dilution of the underlying business. Well, in that case, it's time to round up this conference, and we hope it has been helpful. If you have more questions, going forward, feel welcome to reach out to Carl or myself at Investor Relations. So we would, in that case, like to thank you for your interest and participation. And we look forward to speaking and seeing many of you in the coming weeks. Thank you.
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EarningCall_735
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Good afternoon, and welcome to Paylocity's earnings results call for the second quarter of fiscal '23, which ended on December 31, 2022. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp and Toby Williams, co-CEOs of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab. Before beginning, we must caution you that today's remarks, including statements made during the question-and-answer session, contain forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business, and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to the directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. In regard to our upcoming conference schedule, I will be attending the Stifel Executive Summit in Florida on March 6 and the Raymond James Institutional Investor Conference in Orlando on March 7 and Toby will be attending the JMP Tech Conference in San Francisco also on March 7. Please let me know if you'd like to schedule time with us at any of these events. Thank you, Ryan, and thanks to all of you for joining us on our second quarter fiscal '23 earnings call. Our differentiated value proposition of providing the most modern software in the industry, coupled with continued strong execution, resulted in excellent Q2 results and increased full year guidance. Total revenue was $273 million or 39.3% growth over Q2 of last year and exceeded the top end of our guidance by $12 million. Our continued strong sales momentum is the result of ongoing investments in product innovation, including leveraging last year's acquisition of Cloudsnap, a flexible low-code solution for integrating disparate business applications. We have fully integrated Cloudsnap into the Paylocity suite and are leveraging this technology to provide the most modern software in the industry to accelerate the role of new integrations and use cases to better serve our clients and their employees. To date, we developed nearly 2 dozen next-gen integrations across ERP, point-of-sale, time and labor and expense-related software that allow our clients to experience better data consistency by sharing employee benefits, financial and other key data elements more readily across their HR and other critical business systems. In addition, Cloudsnap's low-code integration capabilities has accelerated the extensibility of the Paylocity platform, helping to drive differentiation and incremental value to clients by positioning employee data and the Paylocity platform at the center of their application ecosystem. We continue to see strong attach rates in our modern workforce solutions as clients realize the value in creating a unique employee experience and engaging culture for remote, hybrid and in-office teams. Community and premium video whose new features centered on creating and sharing files, automating team groups and centralizing video management have allowed our clients and their employees to use our application in ways that stretch beyond traditional HCM functionality. This dynamic is reflected in our utilization metrics, where community monthly active users post and announcements continue to demonstrate strong growth on a year-over-year basis. Similarly, the number of videos created and played within our premium video offering continue to grow faster than the overall business as clients look to increasingly connect and engage with their employees through mediums that are more engaging than traditional e-mail. Our continued success in the market and commitment to product innovation continues to be recognized by third parties as Paylocity was recently named an overall leader in all 12 HRIS product categories in G2's Winter 2023 Grid report, including the number 1 overall leader in several categories, such as core HR, HR management systems, performance management and learning management. Similarly, the strong culture at Paylocity continues to be recognized externally as we receive the 2023 Built-in Best Places to Work award. Thanks, Steve. Our focus on driving higher employee engagement, collaboration and connection once again contributed to strong results in Q2 as these underlying tenets of our modern workforce solutions have continued to drive increasing utilization of these products as we exit the pandemic. This dynamic was evident in Q2 across a wide range of clients, including an auto dealer with 1,200 employees across 22 locations that has seen employee survey participation increased to more than 70% since the rollout of Paylocity surveys, which directly led to updates on their fringe benefit policies and higher employee engagement. Similarly, an outdoor furniture manufacturer with over 1,800 employees has seen over 90% of its employees engage with the Paylocity mobile app to communicate, collaborate and recognize their peers. Combined with the ongoing investments we are making across our broader product suite, this commitment to innovating and building the most modern software platform in the industry contributed to strong sales execution in Q2 and helped set us up for a strong second half of fiscal '23. Consistent with the prior quarter, interest income on client funds continues to rise as a result of sustained interest rate increases from the Federal Reserve. Given the large market opportunity in front of us, we continue reinvesting a portion of this upside back into key areas of the business to help drive future growth. In addition to continuing our investments in digital marketing and our channel initiatives, which once again, delivered more than 25% of our new business in Q2, we will continue to incrementally invest across our product suite to further innovate and deliver the most modern software platform in the industry. This is also a very busy time of year for our operations teams as they work closely with clients on year-end processing of payrolls, W-2s, 1095s and annual tax form filings to federal, state and local agencies and the implementation of new clients. I want to thank all of our employees for their hard work and dedication to our clients during this very, very busy time of year. I'd now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal '23 guidance. Thanks, Toby. Total revenue for the second quarter was $273 million, an increase of 39.3% with recurring and other revenues up 31.4% from the same period last year and $14 million ahead of our guidance midpoint. Our adjusted gross profit was 72.4% for Q2 versus 68.7% in Q2 of last fiscal, representing 370 basis points of leverage as we continue to focus on scaling our operational costs, while maintaining industry-leading service levels. We continue to make significant investments in research and development and to understand our overall investment in R&D is important to combine both what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 38.4% when compared to the second quarter of fiscal '22 and we remain focused on making incremental investments in R&D throughout fiscal '23 as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regards to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 23.7% of revenue in the second quarter, and we remain focused on making incremental investments in this area of the business in fiscal '23 to drive continued growth. On a non-GAAP basis, G&A costs were 11.3% of revenue in the second quarter versus 13.3% in the same period last year, and we remain focused on consistently leveraging our G&A expenses on an annual basis. Our adjusted EBITDA for the second quarter was $77.4 million or 28.3% margin and exceeded the top end of our guidance by $10.9 million and represented 450 basis points of leverage versus Q2 of fiscal '22. We continue to be pleased by our ability to drive increased profitability through leverage and adjusted gross margin, adjusted EBITDA and free cash flow while also maintaining strong revenue growth. Briefly covering our GAAP results. For Q2, gross profit was $182.9 million, operating income was $18.2 million and net income was $15.6 million. In regards to the balance sheet, we ended the quarter with cash and cash equivalents of $120.1 million and no debt outstanding. In regard to client-held funds and interest income, our average daily balance of client funds was $2.3 billion in Q2. We are estimating the average daily balance will be approximately $2.7 billion in Q3 with an average annual yield of approximately 320 basis points. On a full year basis, we are estimating the average daily balance will be $2.4 billion with an average yield of approximately 280 basis points. Additionally, please note that our guidance includes the impact of this week's 25 basis point interest rate increase and also assumes an increase of up to 25 basis points in March. In regards to client workforce levels, the number of client employees on the platform was flat in October, November, December and January on a sequential basis in each month, and as a reminder, was up only modestly on a sequential basis in Q1. Our guidance assumes client workforce levels to be flat for the remainder of the fiscal year. Finally, I'd like to provide our financial guidance for Q3 and full fiscal '23, which assumes no further changes in client workforce levels in the back half of this fiscal year. For the third quarter of fiscal '23, total revenue is expected to be in the range of $330.5 million to $334.5 million or approximately 35% growth over third quarter fiscal '22 total revenue. And adjusted EBITDA is expected to be in the range of $121.5 million to $124.5 million. And for fiscal year '23, total revenue is expected to be in the range of $1.156 billion to $1.161 billion or approximately 36% growth over fiscal '22, and adjusted EBITDA is expected to be in the range of $358.5 million to $362.5 million, which represents 320 basis points of leverage over fiscal '22. In conclusion, we are pleased with our Q2 results and the strong momentum we have carried in the back half of fiscal '23. With our fiscal '23 guidance of approximately 36% revenue growth at the midpoint and adjusted EBITDA margins of 31%, we are firmly above the rule of 60 in fiscal '23. We remain committed to continuing our history of driving profitable revenue growth while also increasing adjusted gross margin, adjusted EBITDA and free cash flow on an annual basis. I've got two here. We're seeing a little bit of weakness from some other SMB companies or software vendors focused on market a little bit. Any color in terms of what you're seeing around customer adds in the last quarter, maybe relative to your expectations year-to-date? Yes. Sure, Scott. So we had a really good first half of the year overall. And I think even Toby mentioned talking about some of the sales momentum that we've had in our busy selling season and that allowed us to significantly raise the year. I think we have an advantage being the HCM business, payroll is something that every single company has to do. For us, it all starts with payroll and using the data from being payroll to be able to connect to the rest of the suite and obviously sell a much broader solution today. And so we've had continued success in terms of adding new units, and we've also had success in terms of selling more product and also even more success upmarket as we kind of called out over the last couple of calls. Got it. Helpful. And then from a follow-up question, I know Ryan had mentioned that your R&D expense is up roughly 38% year-over-year. That's faster than your revenue growth right now. And I've called out many times, so I think your product innovation is driving your -- at least what I think there's some preseason win rate improvements over the last 2 years for the company. But how should we think about R&D investments going forward? Do you continue to step on the accelerator in a similar manner as you have been recently? Or is that an opportunity to maybe gain some financial leverage over because you're starting to, I don't know, hit as much product as you need to say. Yes. I think, Scott, our point has always been a combination of adding new units, landing those customers and then expanding the number of products that we've got. I think we have been fairly consistent being close to our revenue growth in terms of our investments in product and technology. We never viewed that as a big leverage point, we look for leverage elsewhere. We see big opportunity to add more modern capabilities to the suite additional products and revenue opportunities to the suite. And we certainly have not signaled any intention to be looking for leverage there, we think there's a fair amount of natural leverage in the business model in many other places as we scale. So I think the same approach as we've taken historically. Steve, as you talked about sort of customers using the product in new use cases, is there an opportunity for new ways to monetize going forward beyond just per employee per month? Yes. I think that's a great question, Brad. We called out the Cloudsnap acquisition, the ability for us to integrate in our marketplace. We really view the data that we have about people to be really valuable to our customers, both from an automation perspective. But as we integrate with their broader suite of software that they're using to run their business, there certainly could be additional monetization opportunities. We are seeing that a little bit in the marketplace. We're at very early stages of continuing to expand the number of providers and leveraging the data that we have. So I don't think that -- all of our revenue has to be PPM, I think most of our revenue will continue to be PPM. But there's some opportunity for us to be able to leverage marketplace to potentially drive some referral revenue back to Paylocity as well. That's great. And then one quick follow-up. I know it's still really early in sort of the adoption curve across a lot of these newer products. But do you have any appreciable data yet on higher retention rates for customers that are consuming more of these nontraditional HCM products? Yes. I would say that higher utilization, both in terms of the number of products that they use and then how much frequency their employees are logging in does translate to higher retention. It is a small difference. Quite frankly, there's a lot that goes into retention, right? The service elements are really important as well. But overall, we have historically segmented the customers based on utilization and number of products, and we've seen the customers who take advantage of the broader suite staying with us a little bit longer. This is actually Jared Levine on for Bryan. In terms of the demand environment, was there any change in 2Q or through January in terms of the pace of prospective client decision-making. Yes. I can start with that, see if anyone else wants to add color. I think we were really happy with our sales results for the first half of the year and into our very busy January selling season. That's obviously what allowed us to be able to raise the year and so both top-of-funnel activity in the larger end of the market, our core marketplace and even down market has been pretty strong. We definitely are seeing the modern suite the newer capabilities, the video product, community, survey, LMS, all really resonating even in a post-COVID environment where -- our clients are dealing with hybrid workforces. They're dealing with the demand more flexibility. Gen Z continues to grow in the marketplace. And so we would certainly credit to the combination of service and differentiated product as to our success that we've had so far. Okay. Great. And then in terms of your client conversations, has the ROI and the payback period of your offerings increasingly become a focus with prospective client conversations? And how do you generally view the typical payback period with the average client? Yes. I think -- so maybe a couple of different points on this. I mean, there's no doubt that with the type of product, the type of software that we're offering in the market, there is an appreciable ROI that comes from both modernization and automating what would otherwise be manual tasks for folks. I think though, the core of the value prop that we're really focused on from a client or from a prospect pitch standpoint is really around the breadth of the platform, focusing on the fact that we do have the most modern platform in the industry and talking to people about what we can deliver from a value proposition standpoint that is certainly with the core of payroll, certainly with the core of the HCM suite, but really getting into all the things that we're offering that really go beyond the traditional HCM suite, whether that's things like community or what we're doing with the modern workforce index as we continue to expand the product set with things like Community Plus, what we're doing with video surveys and LMS really getting towards engaging with employees and giving clients the ability to engage with their employees in a more modern and differentiated way. So I think that's really the core beyond an ROI conversation of how we're having those types of client or prospect conversations in the market. I have a question and then a follow-up. And dangerously I guess my creative juices are flowing. You all help the idea of a modern platform and clearly, payroll, core HR and then talent management, you've got a lot of those capabilities, you keep adding more R&D. But what I'm curious about is I've been hearing software companies talked for a number of quarters now about this aspirational glove vendor consolidation, and that will benefit their business. So whether it's a premium video community, surveys, LMS or just talent management bundles, I'm not suggesting you're going to shift from trying to go after new logos, but is there an incremental opportunity to almost have kind of a tactical selling effort back to the base to really drive kind of a vendor consolidation playbook? Terry. Yes, so I mean, I think the main part of our motion from a go-to-market perspective has certainly been in terms of landing new units. No doubt about that. And I think what we're seeing as we do that is new clients onto the platform have tended to take a broader part of the suite, which we feel good about. I think though -- to your question, we have also had a distinct motion going back into the customer base as we've expanded the product set going from $200 for the full product set at the time of the IPO to where we sit over $400 today, [440]. I mean we have an opportunity to sell product back into the customer base, and we do have a dedicated team that does that. So I think what you've seen from us is, over the course of the last 4 years primarily set up and I think invest more in that back-to-base motion. And I think we've seen a reasonable amount of success with that. Well, I think just given the relatively low sort of share of a relatively large market that we have, I think we have put the bulk of our go-to-market motion in terms of landing new logos and new units. And I think that just reflects the size of the opportunity that's out there in front of us. Yes. Yes. Sounds good. And I guess the follow-up question is up on the upmarket. I always like hearing examples of the auto dealership and then the furniture manufacturer. As you continue to iterate on your platform and you have more capabilities, whether itâs 1,000 employees plus or do you feel like you could keep getting pulled higher up in the market? Or what could you share a little bit strategically how you think about that kind of upmarket opportunity over the next 2 to 3 years? Yes, sure. Itâs a good question. Weâve always focused on as we build new products, we build the capabilities that we think our average sized customer a little more than 100 employees we really need. And then what happens is as we get more customers, we see more demand from our customers and we really kind of live in product and technology on the ID of customers of cocreator. And so they request features and we continue to enhance the product. We keep teams in an agile fashion, constantly building on top of that product and the product gets richer in terms of the feature set. And that starts to appeal to larger customers. And so what youâve seen over time is as our talent modules have matured, as weâve added some of these newer modern capabilities, we are starting to see differentiation even upmarket where they are starting to think about how do they engage employees and going beyond automation. We donât think that, that goes to the moon, quite frankly. Weâve just increased the target market about a year ago or so, and weâre having success in that marketplace. So itâs possible that, that stretches a little bit over time, but I would be more focused on what Toby just said, which is weâve got a really big opportunity in the market that weâre in very low market share. And so we plan on focusing on capturing many customers in our existing target market is possible. Congratulations on a strong quarter. Steve, Toby, you talked a little bit about CloudSnap just in terms of prepared remarks and in the press release. Can you add a little bit more dimensionality with regards to how that's helping in terms of getting new clients? What are you seeing from a sales productivity perspective? And what are some of the integrations that are the most common that you're seeing that you weren't able to do before that you can do now and that's really adding to the sales momentum. Sure, sure. So Mark, we've had kind of a marketplace where our clients can connect disparate applications to the employee data that we have. And certainly, we can do that in a real-time fashion from an API perspective. And we do that with some of our larger providers that get asked more frequently. On the flip side, you've also got customers who may have vertical market applications or whose applications may not be quite ready for real-time API capabilities. And then it takes a while to build those integrations, and we've got a team with technical services team who's been doing this for years. Cloudsnap really enables that team to operate so much faster using the low-code capabilities that they bring to the table. And so we can configure integrations so much faster, and they also become much more scalable on a go-forward basis using that technology. And so for us, it really opens up the landscape of number of providers that we can integrate with and it also gives us increased speed to market for those integration and longer-term scalability. All the way across. Certainly, upmarket clients are definitely demanding integration into their disparate system. But even if you've got 35 employees, you'd love that connection into your accounting system as well. And so the scalability portion really helps downmarket in terms of us to be able to scale that to a broader set of customers. Upmarket, we may find vertical market applications that don't necessarily have horizontal penetration across all of our markets. Using Cloudsnap, we can get those vertical market application, ERP integrations up relatively quickly as well. So I think it's really helpful across the entire target market. Yes. So I think broadly speaking, ERP applications would be one of the most common areas and certainly, the accounting portion of that is a key integration. But if you think about it, employee data ends up being kind of at the center of many workflows and processes at an organization we know when people are hired. They know in the term, they know the supervisory changes. We know a lot of information about the employees that, from a workflow perspective, you can power into other applications and create even more automation for clients. So although we're seeing a fair amount of demand in ERP, point-of-sale systems is another great example, vertical market applications, another great example. And so we're seeing a fair amount of demand, and we're excited about fill that demand with Cloudsnap capabilities. Okay. Great. And then my follow-up is, just on the float, the effective yield, you didn't give the effective yield for the second quarter. I'm assuming it's somewhere around 290 basis points. Is that right? And can you remind us what it was during the first quarter in terms of the sequential increase. And you did give us the float expectation for the for the third quarter. I'm just wondering to what extent that seems a little on the conservative side. Sure, Mark. I can take that one. So first quarter average daily balance was about $2.1 billion, and the annual yield was 1.5% or 150 basis points. Second quarter, you had it right, about 290 basis points of yield. So you saw that big step up following the September and November Fed rate increases. Third quarter, as we outlined in the prepared remarks, a $2.7 billion plant held fund balance average there, 320 basis points of annual yield and I think if you do the math in the fourth quarter, we're expecting about $2.6 billion of client funds in the fourth quarter with about 3.4% to 3.5% annual yield. Maybe first one, just around the numbers themselves. If I think about the F 3Q guidance, it kind of gives us an early peek into F 4Q and I know the world is changing right underneath our feet at all times, but it implies kind of a low 20s recurring revenue growth rate. You guys have been growing well above that. And we're big fans and there's a lot of momentum behind the business. I'm just kind of thinking, should we expect growth to -- is that conservative because of macro? Or is that just the comps get tougher? Or is that just -- how should we think about that, especially in the context of where the business momentum has been and where it was prior to COVID? So I guess the way I would think about this is if you go back to the fiscal year prior to COVID, we were in that sort of mid-20s-ish performance range from a recurring revenue growth perspective. And at that point in time, we were guiding in the low 20s. And I don't think our guidance philosophy has changed from then until now. And what we had talked about at that point in time was continuing to operate the business and drive the business and invest in the business to be able to come out the other side of everything that was pandemic related with similar growth profile. And I think that's what we've talked about over the course of the last handful of quarters is as you start to get clear of some of the noise in the comps which we thought would be the back half of this fiscal year and in particular Q4, you would start to see more normalized growth rates that probably start to look a lot like they did pre-COVID, certainly in a much bigger business. But -- and I think that's what we're starting to see. I mean if you sort of unpack some of the dynamics there, Ryan called out that we are seeing really flat performance from an employee on the platform perspective. We have continued -- so that has been a tailwind starting to comp some of those increases and so that starts to flatten out. I think you also -- from a demand perspective, Steve made some of these comments, we have continued to see a reasonably strong demand environment. The sales execution has been good, which we feel good about. I don't think you're seeing any -- I don't think we're any -- displaying any particular conservatism as it relates to the macro. We're certainly aware of the macro concerns. But from a performance perspective, have continued to see a strong demand environment. I think you're just starting to see us normalizing in Q4 back to pre-pandemic level of growth rates as we get through some of the noise that was in the comps, which is pretty consistent with how we've talked about things over the last handful of quarters. Great. And then maybe a follow-up for you, Steve. As I just think about the company's evolution and some of the questions you've gotten before this. Are you getting both a -- obviously, your primary advocates turn out to be the HR department, but are you getting more in different buyers inside of the organization. Is that giving you access to maybe more dollars or budget that may not have been previously thought of going through that department? Or is that they're able to allocate to you? How should we think about that? It's an interesting question. I think the buyers for the most part, have stayed very much the same, meaning it's typically your Head of HR and also your CFO as part of that decision-making process. Historically, we would involve CEOs at times, but it would probably be more from an approval perspective. I would tell you that we've had better CEO conversations when we start talking about how you engage employees like you drive retention, how you're driving productivity in employees with things like LMS, how you're gathering feedback and making changes based off that feedback. So this engagement concept really does appeal to a CEO. You think people are the most important asset of any company. And so the ability to onboard new employees to drive productivity to make sure that retention is high to attract talent, I think we definitely -- although the HR and CFO buyer are still the key buyers, I think we've extended the value proposition such that we've got more conversations and access to the actual CEO. This is Alex Sklar for Brian. I know the current quarter rents normally a big hiring quarter. Just want to see if there's any change at the margin to your hiring plans relative to what you had laid out the last couple of quarters. Yes. I would say it's a little bit different by department. But if you think of sales, it's really post year-end. So as we start to hit the spring time frame. So this month in February and March that things really ramp up and we start to put our planning process for next fiscal year and start ramping up sales headcount. So we're fairly early in that, we sometimes get off to a little bit of a head start when we can, and we always do that opportunistically, but the hiring season is really ahead of us. I think really good success from a product and technology perspective, great retention in that group. You can see we've had pretty good year-over-year increase in investments there. We're excited about the pipeline to that organization. And we went into the year-end, really fully staffed just from an operations perspective because it's a really important time here to be there for our customers and to be able to deliver the service that they need. So overall, we feel really good about the staffing levels and the employee value proposition that we're selling in the market, a growth company in the software space that's not looking to reduce expenses, but looking to develop talent and promote people and continue to grow really resonate. So we've been really happy with our ability to attract and retain talent. And I also want to follow up on Terry's market question earlier. So I'm curious, can you help frame kind of the percentage of your pipeline? I don't know, either in terms of MRR or if you have a different preferred metric, but that's coming from those upmarket opportunities now versus a year ago? Due to annual recurring revenue, we don't necessarily break that apart by any specific segment. But if you think of our historically our [indiscernible] kind of 30, 40 employees to 500 employees, that's where we still get the majority of our new recurring revenue. The larger end of the market certainly is growing really nicely. We've called that out really over the last several quarters that continues to be success. And we continue to get traction down market as customers are starting to look for those new capabilities. So think about the majority of our revenue still coming from the core market that we focused on, really from the beginning. Okay. Great. Just one. I wanted to ask on the employee growth within your customer base and the comments that, that was flat and expected to be flat. Anything to read into that in terms of the health of your customer base? Or is this just sort of a more return to what you would see in a normal labor environment? Sure, Matt. I can take that one. I think if you think about the guidance philosophy we've had all the way back to the start of the pandemic, Obviously, there's been a lot of uncertainty over that period of time. And I think the approach that we've taken is we've guided to what's in front of us, and we've done that here again this quarter. As I outlined in the prepared remarks, workforce levels have effectively been flat since August and up modestly in July, and that's our expectation for the balance of the fiscal year. To the extent things get a little bit tighter, we see some expansion in the other way. I think that's sort of the movement within the guidance range. But sitting here today, coming off of a really strong selling season and a great January, I think we feel good about where the overall revenue guidance sits and obviously watching the macro closely but have not seen any impact within the client base. And likewise, from a sales perspective, continue to feel really good about the demand environment. My guess is that at this point, Blue Marvel is probably pretty well integrated into the platform. You've got Cloudsnap now out there. I guess it frees up potentially some bandwidth internally for inorganic growth opportunities. So Steve, Toby, would love to kind of hear how you're thinking about inorganic in the year ahead. Dan, yes, I mean, I think just in terms of those two, I think the press release that we put out certainly feel really good about what we're doing with Cloudsnap. Steve made some comments earlier just around what the capabilities that, that's giving us from an integration platform perspective. And so really happy with how that's worked out and the value that's been able to add in the process. I think Steve made the comments on the last quarter call that we're still in the process of fully integrating the Blue Marble capabilities into the platform. And I think that's typical of how we would sort of approach any acquisition that we do, the processes that we bring something in and we'll then spend the time which could take anywhere between 12 and 24 months to fully bake capabilities into our platform in a seamless way from a user experience perspective, from a data flow perspective. And so the teams are still working on that and feel good about the progress so far. Certainly, we continue to have the overall bandwidth to look at acquisitions that might be interesting. I think our point of view historically remains the case today. We would prefer to always develop the next capability that we want to push out from a product perspective. But I think we've also taken advantage of, in certain instances, the ability to accelerate things that might be really strategic to us, that it might be on the product road map by way of what's largely been, I would characterize as smaller product-oriented or technology-oriented tuck-in acquisitions. And I think that strategy and that viewpoint remains the case. Got you. That's helpful. And then -- maybe just a quick one on the integration. What percent of your customers actually have an integration today connected through Paylocity? Just wondering to kind of see what the overall penetration and how that could actually look over time. Yes. I don't know that off the top of my head, quite frankly. A lot of our customers have integrations for a wide variety of things. So 401(k) integration, as an example, Benefits integration would be another point of integration. And then you get into all this stuff, I mentioned prior ERPs and so on and so forth. So I think there's an opportunity to expand the number of integrations to the way I think about it. I would imagine we would have to see a future where every client has at least 1 integration. And over time, we want to actually drive the number of integrations so that they can really leverage the people data that we have. And in a real time, workflow capability. They know when something changes about that person, that will then enable 1 of their processes to create automation and create an opportunity to have higher levels of engagement. And so our viewpoint is clients, we want to integrate with all of the systems that they use to run their business that lever people data. That's the goal and objective. Good set of results. My first question is really about this kind of investments you have made over the past few years on making your HCM solution more employees intact and driving engagement. You're certainly collecting a lot of data. Are you able to sort of feed back some of the data to your clients? Are they seeing value in it. And down the road, do you expect that may drive some revenue growth in the longer term? Yes, it's a great question. We've been investing for several years now kind of in machine learning, artificial intelligence capabilities. You see that surfacing our product already in a few different places, and we do see many more opportunities as well. So one is our modern workforce index, where we look across our clients, and we score customers based off how engaged they are in our platform. And we know the higher the score, the more employee retention they have. And we do that even by vertical markets. So we compare hospitality to other hospitality. And then as they start to use more of the product, they see their score's going up, so the recommendation engine behind that starts to give them ideas on how they can get more value out of the product. We also will surface recommendations even to employees around people that they might want to connect with, that they might want to communicate, that they might want to follow a community that's certainly another place. And then lastly, I would just say our dashboards and insights is another place that we try to surface that. But as technology continues to advance, we see this being another opportunity to modernize our suite in pretty much every single module, leveraging newer technologies and artificial intelligence and machine learning. Perfect. And does this like sort of help your win rates? Or is it at this stage? And do you think it could drive like revenue growth? Like are you able to [indiscernible] for this at the data point. It's a good question. I think today, it's largely driving win rates and it's creating differentiation in the marketplace. And I think, as Toby mentioned earlier, when you've got such a huge TAM in front of you and a market opportunity, that's really important to have differentiation. I think that capability can be a component of new offerings that we have. I'm not sure we see at least in the immediate future that we would charge for a separate SKU on some of these capabilities. But as we launch new products, being able to incorporate things like recommendation engine, leveraging all the data that we have across the organization, get our clients to see best practices and implement new more modern capabilities. That's where we see the more immediate opportunity than maybe a separate monetizable products. Yes, having followed Paylocity for several years now. I know even in 2018, '19, when you introduce community, it was free and then I appreciate your patience on trying to monetize first introduced brain adoption, I monetize I think that's a good approach. Just a couple of quick other questions. One is on this kind of employment levels, I mean, are you able to quantify how much of your growth comes from basically increased employment at existing clients? I know in the past, you have kind of outlined rate increases offset any sort of employment pressures. But are you able to quantify like over the last couple of years, how much of your growth has come from employee expansion at existing clients? Sure, Arv. I can take that one. I think if you think about in a normalized environment with a growing GDP, you may get 1 point, maybe 2 in a normal period with client workforce levels. Obviously, over the last 3 years or so, you've seen significant movements both ways. I think if you anchor back to the pandemic, we talked about up to a double-digit impact on recurring revenue in fiscal '20 that bled over into fiscal '21. And then again, I think if you look at where we were from a spring of '21 all the way towards the summer of 2022, we saw nearly every single month sequential improvements. And as we talked about each of those quarters, that has been a reasonable tailwind and you've seen outsized recurring and total revenue growth over that period of time. To Toby's point earlier, as you think about the back half of the fiscal year, year-over-year, there's still a little bit of a tailwind here in the third quarter. As you get to the fourth quarter, I think we've really fully anniversaried all of the client workforce levels improvements that we've seen over the last handful of years. And you get back to that kind of low 20s or so recurring revenue growth. And as we sit here and think about fiscal '24, continue to have a lot of confidence around go-to-market motion and our ability to continue to drive 20% plus as we get back to that more normalized employment environment. A lot of them have been asked, but I guess one of the constant questions we get from investors, and I'm sure you get too is you look at the headlines, you look at commentary, particularly about white collar recession or employment levels at some point, starting to kind of tick in the other direction from the record strength we've had here. Samad kind of asked this question about your Q4 numbers, around conservatism. It sounds like you're not seeing any change in employment levels in your customers, you're not even really seeing any change in sales cycle times in your customer base for new logos. I guess, how -- is there a reason that you guys have been able to decipher as to why that is or when you would be anticipating seeing that impact from the macro economy? Or is there just a level of resiliency either from a share market perspective or type of client perspective that you serve that gives you that resiliency on the recurring revenue line. And maybe it's also just the mix of SMB versus larger customers that you're serving in your business. But would love to get some -- just further clarity on that. Sure. So obviously, been in this industry, really my whole career, and I've seen the different cycles. But the interesting part, I think, to me about this cycle is you still have relatively low unemployment levels. And certainly, the headline news, there are people reducing their workforces, but there are still a number of jobs out there, and we're still in a growth environment. There's been a lot of lumpiness post COVID. The other thing I would say is hybrid work, people moving from 1 industry to the next, there's a lot of resilience in terms of being able to move from 1 job to the next, being able to work from home anywhere in the country. And so I think the labor force can react relatively quickly as we've seen these maybe shifts in demand, as you said, from white-collar jobs. And overall, when I look at the longer-term history is GDP is growing a little bit, employment usually trails at a little bit from a percentage basis. If it's declining a little bit, it's also going to decline trailing GDP. And sometimes unemployment numbers can take a couple of months before you see it all the way through. But if you think of all those headlines, we've been flat for several months in terms of employment levels. And that, frankly, makes sense to me based on what I've seen historically. Now that doesn't mean that, that's certainly going to continue. We have forecasted kind of a flat environment on our guidance for the rest of the year. But I think there's a fair amount of resilience in this type of employment environment where people can move from one job to the next relatively quickly because of the rise remote work. That's actually a really unique and great explanation. It's super simple and super interesting that the labor mobility, effectively if one of your clients loses somebody they'll pop right up at 1 of your other clients. I guess 1 other question I have is, as I look at the OpEx umbrella, it does look like for the first kind of -- this quarter specifically, your growth in sales and marketing is meaningfully ahead of the recurring revenue growth on a year-over-year basis, which I guess, to some extent, makes sense because it's aligned with your total revenue growth, what do we -- when you think about your ability to kind of almost not overinvest, but invest ahead at a level that maybe you haven't been able to invest in the last couple of years, what are you -- if we think about the reaping the rewards of that kind of front-loaded sales and marketing investment that you're able to make in the first half of this year, is it -- do you anticipate it kind of driving greater growth durability, greater growth rate when -- particularly when we start anniversary-ing some of those tougher comps. Yes. I mean I think what you've heard us say over -- pretty consistently over the last handful of quarters is we felt very good about the demand environment. We continue to. We felt really good about the growth opportunity in front of us based on having relatively low share of a very large market. I think what the message has been is we would continue to invest in -- certainly in sales and marketing, in sales headcount and in marketing and in channels, a lot of that being in the form of digital marketing, support for our channel initiatives, which continue to drive 25% plus of new business to us. And I think what you're seeing in the first half of this year is the continued progress and the continued sort of motion against that strategy. And I think we came into this fiscal year feeling really good about our staffing levels from a sales headcount perspective, and I think our strategy on an ongoing basis has been to continue to add talent in those areas where we can, given that from an overall business perspective, sales and marketing is certainly along with product, one of the big growth-driving areas of the business. And so I think you've just seen us continue to incrementally invest there in the first half of the year, pretty consistent with how we've described it historically. And Alex, I'd just add there, if you think about our financial playbook, so to speak, is -- and we've talked about this over several years, we've talked about consistently investing where we can in what Toby just referenced. Sales and marketing to drive continued revenue growth or R&D, which you also see this fiscal year. And offsetting that, you're seeing the scale and leverage across the areas that we focused on historically and continue to do so. So really strong gross margin leverage this quarter, year-to-date, really strong G&A leverage this quarter and year-to-date. And I think if you add all that together, it allows us to drive in this quarter, over 400 basis points of of leverage from an adjusted EBITDA perspective while investing incrementally, both in sales and marketing and R&D. So I feel really good about that combination in addition to the strong revenue growth we're driving. So you talked about employee growth within your platform. So when you look at the incremental recurring revenue, what percentage of that incremental revenue come from new customer versus cross-selling new products like increasing PEPM within your installed base? The vast majority of what you see from a revenue growth perspective is attributable to new logo acquisition. So it's the result of selling new clients. We do -- as we've talked about, see certainly the opportunity to sell back into the customer base, that is, on a relative basis, still a smaller part of our overall revenue, still a smaller part of new sales and that continues to be the case through the first half of the year and certainly in this quarter. It's important to us. We certainly continue to invest in it. And the more that we have introduced new products over time, certainly the bigger that opportunity has gotten, and we've pursued it for sure but still had the go-to-market motion and the bigger part of it is new logo acquisition. Great. And then a follow-up to earlier questions in terms of employee client employment growth. You have exposure to multiple vertical industry, including tech and financial services, some of this white collar industries. So what's your mix? Like what's your exposure to tech and white collar industry? Yes, Siti, I think as you think about our 30,000-plus clients, no client representing nearly anywhere close to 1% of revenue. And to your point, I think the breadth of our clients across various industries is pretty significant. There's nothing particular I'd call out as far as being over under-indexed to tech or any other particular sector. I think our average client having 100-plus employees, that composition would look pretty similar to the SMB space across the U.S. There's nothing that I'd call out that is of particular note. I was wondering if you talk about client retention. How has that held up so far this year? And what have you built into your fiscal year guidance? Yes. So far, our retention rates have continued to be strong. I mean we have talked over the last few quarters consistent with other sort of data points in the industry about us seeing the highest retention rate really that we've seen over the last handful of years, that continues to be the case. And I think overall, I would say January is the busiest time in the industry. It's the busiest time for us as a company, and I think we're really happy with how we came through January from an overall operations and an overall service perspective. And I think the high level of client service that we've provided through the course of a pretty difficult time for our clients during the pandemic has been a huge factor in us differentiating on service and being able to serve our clients effectively when they needed it. And I think that's been a key contributor to us still being able to see record-high retention rates from a last 5-year period perspective. If I were to kind of summarize things, it sounds like the demand environment is still pretty strong. You're executing really well. I know you guide to kind of what's in front of you. But when we think about visibility how would you say your visibility is today and how it's changed versus maybe pre-COVID? Sorry, Toby, I jumped ahead of you there. Let me start. I would just start by saying from a visibility perspective, our model being recurring revenue and the fact that a big part of our revenue is retaining the existing customers. And then you overlay new customers and new recurring revenue as the year goes along. So think about it as we go along in that year, we get greater visibility to only 2 quarters left. Obviously, January being a huge part of our selling season. At this stage, we have better visibility than we certainly did last quarter and significant visibility because we know what our retention rates are and we've got pretty decent look into the pipeline of new business. And so it's just 1 of the benefits, I think, of this business model that we've got. I don't think, though, like at the size and scale that we're at now, versus maybe 3 or 4 years ago pre-COVID, there's a different level of visibility. I think it's just more inherent in the business model and where we're driving the revenue from. Ladies and gentlemen, that concludes our Q&A session. I would now like to turn the call back to Steve for closing remarks. Yes. I just want to take a quick moment to thank everyone at Paylocity for all their hard work and effort over a very busy year-end. And of course, thank all of you for your interest in Paylocity. Everyone, have a great evening.
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EarningCall_736
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Good day, and welcome to Camden National Corporation's Fourth Quarter 2022 Earnings Conference Call. My name is [Fouram] and I will be your operator for today's call. [Operator Instructions] Please note that this presentation contains forward-looking statements, which involve significant risks and uncertainties that may cause actual results to vary materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in such forward-looking statements are described in the company's earnings press release, the company's 2021 annual report on Form 10-K and other filings with the SEC. The company does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the forward-looking statements are made. Any references in today's presentation to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in your press release. Today's presenters are Greg Dufour, President and Chief Executive Officer; and Mike Archer, Executive Vice President and Chief Financial Officer. Please note that this event is being recorded. Thank you, and welcome everyone to Camden National Corporation's Fourth Quarter 2022 Earnings Call. For the fourth quarter of 2022, we reported net income of $15.4 million or earnings per diluted share of $1.05, which was 8% better than the third quarter of â22. This resulted in total annual earnings for 2022 of $61.4 million, an 11% decrease from our record earnings of $69 million recorded in 2021 and a 9% decrease in diluted earnings per share over the same period. We were pleased with our fourth quarter performance in several areas. Non-interest income, excluding a $903,000 pre-tax security loss was $10.7 million and was on the higher end of our expectations. The security loss record in the fourth quarter is part of a balance sheet restructuring that Mike described during his comments. Operating expenses of $27 million in the quarter was as we expected, and resulted in a 56.4% non-GAAP efficiency ratio. Finally, our provision for credit losses was $466,000, down from $2.8 million recorded in the third quarter. At our earnings call last quarter, we signaled we could see our allowance from provision levels begin to stabilize should asset quality remain strong and no significant changes in the economic outlook occurring during the fourth quarter. We're pleased to see this materialize as asset quality remained very strong by all measures to close the year. We ended the year with an allowance to total loans of 0.92%, 92 basis points and our reserve levels covering non-performing assets 7.2 times. We feel that we are well positioned at those levels on our current loan portfolio. We also continue to see the negative impact of the significant and prolonged inverted yield curve, which contributed to a 2.76% net interest margin for the fourth quarter, down 12 basis points for the prior quarter. You'll recall at last quarter's conference call we indicated our expectation for margin was to remain relatively flat to slightly down during the fourth quarter, which did not materialize. Mike will provide a more detailed explanation during his comments. What I'd like to share at this point is where our strategic focus will be for the coming quarters. First, we are focused on net interest income and net interest margin through several strategies. First and foremost, we are focused on pricing on both loans and deposits. As of year end, our deposit beta through the cycle so far was just over 20% and our total funding beta was 21%, while our earning asset beta was just over 18%. As you've seen us do in the past, the primary objective will be on strengthening our existing relationships and developing new ones versus chasing transactions for both loans and deposits. Secondly, we have pursued and will continue to pursue opportunities to logically reposition our balance sheet based on both the current and future interest rate cycle. We'll analyze opportunities that make long term sense as well as those that fit into our risk profile, such as the restructuring that was done in the fourth quarter. Finally, we recognize that we're operating in a hyper competitive environment and we see loan deals on prices, which we're not comfortable with. Accordingly, we anticipate loan growth to be on the lower side of our mid single digits for the year, and we'll accept that in order to focus on the long term. Turning to asset quality. It continues to be a major focus of ours. While strong today, we do not take it for granted. Today, we are enjoying the benefits of our strong underwriting but we complement that with our risk management structure to look for potential signs of weakness. Those efforts may include analysis such as migration of FICO scores, all the way to swiftly working with customers at the first sign of distress. Another focus area is our expense structure. While we're operating within our expected parameters, our previous investments and process automation have helped make many areas more efficient and productive. For example, I previously shared our efforts to streamline our small business and commercial loan processing efforts. That effort hit its stride in the fourth quarter and we're already seeing processing efficiency improvements ranging from 30% to 35% efficiency, and our overall efficiency ratio for the total organization is within our target range of 55% to 58%. Finally, as we always have been, we are focused on our capital, and our 2022 earnings of $61.4 million provides us ample resources to grow capital as we reward shareholders, including our 5% dividend increase announce in December. Thank you, Greg, and good afternoon, everyone. Earlier today, we reported net income for the year ended 2022 of $61.4 million and diluted EPS of $4.17 and down from last year's record earnings, we're certainly pleased with these annual results, particularly in light of the significant change in market dynamics between years. On a non-GAAP pretax pre-provision basis, the company recorded earnings of $81.5 million for the year, down 2% from last year. In addition, adjusting for SBA PPP loan income, earnings totaled $80.3 million, a 7% increase over last year. These core results make us confident in navigating today's short term challenges while remaining focused on the long term. We continue to focus on generating shareholder returns through strong sustainable core earnings and strategies and deploying capital to organically grow the franchise. We also continue to prudently return capital to shareholders for a mix of dividends and share repurchases. Our dividend pay ratio for the year ended 2022 was 39%, which included a $0.02 or 5% increase in our quarterly dividend that we announced in the fourth quarter, and we repurchased 225,245 shares of our common stock throughout the year. On a linked quarter basis, we reported net income of $15.4 million and diluted EPS of $1.05 for the fourth quarter, each an increase of 8% over the last quarter. Many of our key financial metrics that we track remain solid for the fourth quarter, including a return on average assets of 1.09%, a return on average tangible equity of 18.2% and an efficiency ratio of 56.4%. On a non-GAAP basis, pre-tax pre-provision earnings for the fourth quarter were $19.8 million, a 4% percent decrease from the third quarter. Not unlike other banks, we too have felt the impact of the inverted yield curve with short term rates rising quickly throughout 2022. Net interest income for the fourth quarter decreased 2% from the third quarter despite average interest earning assets growing 2% as net interest margin compressed 12 basis points on a linked quarter basis. Our interest earning asset yield grew 27 basis points during the fourth quarter to 3.67% as we continue to see our loan and investment yields increase. Generally, we continue to leverage investment cash flow to fund loan growth and anticipate continuing to do so over the coming quarters. As Greg mentioned in his comments, we anticipate loan growth to moderate in 2023 and the current environment as we manage our net interest margin and protect long term franchise value. To that end, we have seen our loan pipelines drop considerably from the end of the third quarter. More recently committed residential mortgage and commercial loan pipelines have been hovering around $50 million each and have weighted average rates in these portfolios ranging from 6.4% to 6.7%. In the fourth quarter, we put into portfolio 84% of our residential mortgage production. Through strategies and actions taken our current residential mortgage pipeline designated for sale has grown to 30%. In the fourth quarter, deposit cost grew 39 basis points to 0.84%, representing a deposit beta of 29%. While our deposit cost grew at a faster rate during the fourth quarter than it had in previous quarters, it was not unexpected as the Fed raise rates another 125 basis points during the quarter and deposit competition throughout our markets continues to heat up. We have considered and continue to look at other alternative borrowing strategies. During the quarter, we entered into a laddered broker CD strategy that stretches over 12 months. Doing so allowed us to lock in approximately $100 million of funding and based on current short term rate forecast should benefit us over coming quarters. Overall for the year ended 2022, our deposit beta was 20.2% and our all in funding beta was 21%, which continued to be within our target. We do anticipate further interest margin compression the first quarter of â23 as we are in the peak of normal seasonal outflows combined with expected further rate hikes by the Fed in the first quarter. We have and continue to review strategies to optimize net interest income and net interest margin. Recently, we've executed on the following strategies. In the fourth quarter, we completed an investment restructure whereby we sold approximately $28 million of securities at a loss of $903,000 and repurchased approximately $28 million securities with higher yields. The expected earn back is about one year and expected to provide 1 basis points to 2 basis points of net interest margin lift with a full quarter benefit. Last week, we executed on two interest rate swap strategies, swapping $200 million of fixed rate cash flows on loans for variable rate cash flows tied to Fed funds rate. Based on the current swap curve, these swaps provide additional interest income immediately and is anticipated to provide additional benefit over the year based on the market's current expectations of Fed funds. We currently estimated a full quarter net interest margin lift of 4 basis points to 5 basis points should market expectation on Fed funds hold true. For the fourth quarter of 2022, we provisioned $466,000 of expense for expected credit losses, which is a decrease of $2.3 million compared to last quarter. Our credit portfolio remains in pristine conditions supported by non-performing loans of 0.13% of total loans at December 31, 2022 consistent with last quarter minimal net charge off and delinquent loans totaling 6 basis points of total loans at December 31, 2022 compared to 12 basis points last quarter. We continue to actively monitor and assess our loan portfolios for signs of distress based on current and forecasted market conditions. However, we've not identified any such trends to date. At December 31, 2022 our allowance to total loans ratio stood at 0.92%, down 3 basis points from last quarter. We believe this reserve level is appropriate given the strength of our credit [losses] and knowing it provides us with 7.2 times coverage over total non-performing loans at December 31, 2022, which is consistent with last quarter. Non-interest income for the fourth quarter of 2022 totaled $9.8 million, including the $903,000 loss on the investment trade discussed earlier. On a linked quarter basis, non-interest income was down 2%. But excluding the investment trade loss, non-interest income would've been 7% higher. In the fourth quarter each year, we recognized our annual debit card volume based incentive. This year, that incentive was $806,000 and drove the increase in debit card income between quarters. Mortgage banking income also increased in the fourth quarter compared to last quarter. The increase was a result of the change in the fair value on our [lot] saleable residential loan pipeline between quarters. Otherwise, mortgage banking income would've decreased between quarters as residential mortgage production for the fourth quarter was down 28% and our [sold] production was down 45% compared to last quarter. Our non-interest income forecast for next quarter is $9 million to $9.5 million. Non-interest expense for the fourth quarter totaled $27 million, slightly down from last quarter. Our non-GAAP efficiency ratio for the quarter was 56.4%, and was also consistent with last quarter. We estimate our first quarter of 2023 expenses will tick up 2% to 3% factoring the impact of the FDIC assessment increase that takes effect for all insured banks and partial quarter impact to normal merit increases. The company's regulatory capital ratios continue to be well in excess of regulatory capital requirements as of December 31, 2022, supporting the strength of our core capital position. Tangible book value per share increased to $1.40 or 6% during the fourth quarter to $24.37 at December 31, 2022 and our tangible common equity ratio increased 24 basis points in the quarter to 6.37% at December 31st. Thanks, Mike. Before opening the call up for questions, I'd like to point out a few closing thoughts here. Mike described some strategies we've executed, including investment portfolio, restructure and swap strategy. We're equally, if not more so, focused on organic strategies to improve our positioning in this environment. Some of those have demonstrated in the yields in our loan pipelines that are above 6.5%, which is strong considering we're routinely competing against pricing in the low 5% range, if not lower. Our loan to deposit ratio of 83% demonstrates our franchise value along with growing core deposit 6% in 2022. Also, as we mentioned, our efficiency ratio is within our normal operating range of 56% and from our risk perspective, we're also well positioned. Tangible common equity ratio is 6.37% and is complemented by an ACL to total loan ratio of 92 basis points and 7 times coverage on non-performing assets. With that as a backdrop, we'll open it up for questions please. Maybe just start off on the margin here. Just kind of curious how you guys are thinking about, any updated thoughts you may have around deposit pricing as we go through the cycle here. And maybe if the Fed goes to 5 and holds throughout the rest of the year, just kind of how you're thinking about the margin? I think in terms of the deposit side, we're expecting, particularly in the first quarter, Fed continues to hike, we'll continue to see the deposit beta probably in the 30%, 35% range. Let's call it close to where we were, maybe slightly up. I think the other factor there, certainly on the deposit side is just the competition. And I think both myself and Greg alluded to just in our comments, we are certainly seeing that pick up. We have seen that over the last quarter as local market competitors and others are certainly looking for liquidity in the current market. But overall from a margin perspective, we are and I think I mentioned in my comments, expecting that to see some compression likely for the first quarter. Overall, we're thinking -- and I would say it's heavily caveated by a lot of factors that we all know in terms of what the Fed actually does as well some of the market competition, but also some of the strategies that we put into place. But all in, we're thinking that that margin would probably be around 265, plus or minus 2 to 3 basis points on either end. From there, I would just, again, probably not in a spot to give forward guidance after first quarter just all the factors at play here. But thinking that from there with normal seasonal inflows starting to come in as well as the hopes that the Fed starts to stabilize and slowdown on rates and loans continuing to reprice. And as Greg mentioned, too, is just a strong loan pipelines that we have in terms of rates, we anticipate that margin from there would start to rebound. And maybe just in terms of the loan demand you guys are seeing these days. Just curious on how you're thinking about what parts of the portfolio you expect to drive growth in 2023? What I'd say is that we're seeing a shift really. Previously, obviously, residential is driving it. That market is lower, partly because of, call it, just the overall real estate market. But our pricing, we're pricing higher than competitors. So we're seeing and experiencing really the shift over the commercial and small business side. And within the commercial, that's where our balance sheet size for the markets that we're in, our ability to structure helps us and helps justify a higher rate. And on the small business side, really, that's been a great start up product that is ramping up for us and they tend to run higher balances. And that leverages the reengineering that we did and new software that we have especially on the small business side. So now we can instant decision, depending on collateral close within a few days, which is really serving the customer need and helps us command a higher yield on that. So I just wanted to get a little perspective here on the outlook for provision. You noted that at 92 basis points, you feel pretty good about that reserve level. It's over 7 times covering NPLs, I believe. So with the expectation of loan growth slowing, and the health of the portfolio remaining intact as of today. Would you expect a similar level of provisioning like we saw in the fourth quarter as we start off in '23 for at least the first half of the year? So I guess in terms of -- maybe the way I would talk about it is, so we're at 92 basis points right now, we feel pretty good about that. Again, I think in part, it's going to depend on the economics and the economic outlook if that should change. But assuming we stand and kind of hold to where we are and as we mentioned, no signs of credit issues ahead. But assuming everything holds constant, I would say that 92, 95, somewhere in there, we could continue to hover. And then could you just go back to the two steps you took to try to preserve the margin here? The first, you mentioned the little repositioning with the $28 million. You said you sold $28 million of securities and then you reinvested those proceeds. Is that correct? That's right, yes. So we essentially -- I think those yields on those securities were around [260], and then we essentially purchased another $28 million with around a 6% yield. So we did $200 million notional in total, it was $150 million three year, I always have to think about this, get this right, received pay fixed, receive variable. I think the pay amount on that was -- the payout on that was $371 million and then we did another $50 million for a five year swap and the pay amount on that was $334 million, and both of those are receiving Fed fund OIS. And then I guess on the expense outlook, you said 2% to 3% from the fourth quarter into the first. Overall, do you expect 2% to 3% for the entire year or is that just like from the first quarter and then another lift after that? So that guidance was generally for the first quarter. I listed a couple of factors in there in the FDIC fees and just normal merit. So call it, I would say that's about $27.5 million, so about half million. The one item I would just highlight is, historically, we've continued to manage within our efficiency ratio range of call it, 55% to 58%, and we'll certainly do that throughout the year and that's our expectation. Just thinking about the overall NIM forecast. Within that, I was curious where do you have demand deposits going down to in this quarter, end of the year at 24%. Pre-COVID, think it was at 16%. If you go further back, Camden was operating in kind of a 10% to 15% range pre great financial crisis. So just curious where do you think this figure goes during this tightening cycle, and what structurally keeps you around your estimates? So we're trying to pull that number, Matt. But I would just comment that we have seen some pressure in terms of some of the bigger commercial -- sophisticated commercial customers looking for interest. So we've seen some mix shift, if you will, from DDA over to now or interest checking. So we've seen some of that shift occur. I think that's become more common. Certainly, we're managing that internally, having the proactive conversations with our -- primarily our business customers. But certainly, there is more pressure on that. Do you expect deposit growth in '23? If so, what areas? And maybe you could comment on further reliance on broker deposits? So we haven't executed. We are looking at some broker deposits, additional $90 million to $100 million we are looking at right now just to supplement funding and having it be more cost effective, particularly as we anticipate Fed funds is going to continue to move higher. So we are looking at that. We'll likely look at a laddered CD like we just spoke about kind of stretching out over 12 months there. And I apologize, what was the first part of your question there? And I would say, strategically, Matt, to keep in mind a couple of things is that we still have a very strong retail franchise, and that gets back into my comment of focusing on relationships. The team has done a great job. Although deposits have always been a focus of ours, as you know, through incentives, through internal promotions, external promotions, strengthening that at this time to build the relationship side. The other thing within our deposit focus is what has ramped up more over the past few years is on the treasury management side that we have, and Mike alluded to some of the big commercial depositors that we have. So that's another lever set of tools that we have. We have a great team within that, that we are very much focused on deposit growth. And with that said, call it, from a sales management perspective, that's where we're focused on. And more we can drive down that rate or stabilize that rate, it just gives us more flexibility on the lending side. With all of that said, I'll note that in our markets, we are seeing, I think I even said hypercompetitive markets on the deposit side and the loan side. But that's our focus and we'll do it prudently. And then just assisting with loan growth for the year, Iâd assume we continue to see securities growth. Michael, you had mentioned that in your remarks. What is the monthly kind of cash flow from the securities portfolio at this point? It's generally $9 million to $10 million on average we're seeing on the cash flow. I think realistically, Matt, we'll probably redeploy those investment cash flows into either offsetting funding or call it, overnight funding borrowings or into fund loan growth realistically, just based on current yields, but something we'll continue to monitor throughout the year. Last one for me is just on the renewed repurchase authorization, I think it was 750,000 shares. You've been pretty active recently at these levels. Is that something we should expect you to continue to execute on? That's just our annual renewal to make sure that we have that capability on the shelf to use. Right now, as always, we kind of balance out capital needs as well as use of capital. I believe I feel our position right now is we want to make sure that we're focused on building capital, especially on the TCE. That's more, call it, from a of what if economic potential factor recession coming up, I'd rather be building capital than deploying it right now. So I wouldn't put a lot on that lever for us. There are no further questions leading at this time [Operator Instructions]. As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Greg Dufour for any closing remarks. Great. Thank you. I want to just thank, obviously, our analysts that are following our stock as well as all the other callers that are taking an interest into Camden National. Rest assured and hopefully you will have the feeling that we're as always focused on long term growth, long term franchise value. And we appreciate your interest and wish you a good day. Goodbye.
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EarningCall_737
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Hello, and welcome to the Globe Life Fourth Quarter 2022 Earnings Call. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded, and for duration of the call your lines will be in a listen-only mode. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions] I'd now like to hand the call over to your host today, Mr. Stephen Mota, Investor Relations Director. Please go ahead, sir. Joining the call today are Frank Svoboda and Matt Darden, our Co-Chief Executive Officers; Tom Kalmbach, our Chief Financial Officer; Mike Majors, our Chief Strategy Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release, 2021 10-K and any subsequent Forms 10-Q on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for a discussion of these terms and reconciliations to GAAP measures. Before getting started, I want to let you know that due to the ice storms in the DFW area, we are doing this call from multiple locations. So, if there are any issues with connections, please bear with us. Then, Matt and I would like to quickly take this opportunity to thank Gary Coleman and Larry Hutchison once again and acknowledge their accomplishments as Globe Life's co-CEOs over the last 10 years, including 2022, another good year for Globe Life. Now to the results of the quarter. In the fourth quarter, net income was $212 million, or $2.14 per share compared to $178 million or $1.76 per share a year ago. Net operating income for the quarter was $221 million or $2.24 per share, an increase of 32% from a year ago. On a GAAP reported basis, return on equity was 12.3%, and book value per share was $49.65. Excluding unrealized losses on fixed maturities, return on equity for the full year was 13.4%, and book value per share as of December 31 was $64.01, up 9% from a year ago. It is encouraging that our return on equity, excluding unrealized gains and losses for the fourth quarter, was 14.3%, reflecting the lessening impact of excess life claims on our operations. In the life insurance operations, premium revenue for the fourth quarter increased 3% from the year ago quarter to $754 million. For the full year 2022, premium income grew 4%. Growth in premium income was challenged due to the lower sales growth we've seen this year, primarily in our direct-to-consumer channel in addition to the impact of foreign exchange rates on our Canadian premiums at American Income. In 2023, we expect life premium to grow around 4%. Life underwriting margin was $212 million, up 45% from a year ago. The increase in margin is due primarily to improved claim experience. With respect to anticipated underwriting income, as we've talked about on prior calls, underwriting margin will be calculated differently under the new LDTI accounting rules and is expected to be substantially higher due to the changes required by the new accounting standards. Tom will discuss the expected impact of LDTI in his comments. In health insurance, premium grew 4% to $324 million, and health underwriting margin was up 1% to $82 million. For the full year 2022, premium grew 6%. In 2023, we expect health premium revenue to grow around 3%, lower than 2022 due to lower premium growth in our United American and General Agency operations. Administrative expenses were $78 million for the quarter, up 12% from a year ago. As a percentage of premium, administrative expenses were 7.2% compared to 6.7% a year ago. For the year, administrative expenses were 7% of premium compared to 6.6% a year ago. In 2023, we expect administrative expenses to be up approximately 3%, and be around 6.9% of premium due primarily to higher IT and information security costs. Higher labor costs are expected to be offset by a decline in pension-related employee benefit costs. First up is American Income Life. The American Income Life life premiums were up 5% over the year ago quarter to $381 million, and life underwriting margin was up 27% to $130 million. The higher underwriting margin is primarily due to improved claims experience and higher premium. In the fourth quarter of 2022, net life sales were $70 million, down 6% from a year ago quarter. The decline in sales resulted from reduced agent count and agent productivity. The average producing agent count for the fourth quarter was 9,243, down 3% from the year ago quarter and down 2% from the third quarter. The decline from the third quarter to the fourth quarter is consistent with typical seasonal trends. The decline in average agent count from a year ago is due to higher-than-expected attrition throughout 2022, as we have previously discussed. While the agent count declined from a year ago, I am encouraged as we have seen positive recruiting momentum over the latter part of the fourth quarter into the beginning of this year. We've also started to have some success with our new retention efforts. I believe the agency compensation adjustments we have made to emphasize recruiting and retention will help continue this momentum. I am optimistic regarding the long-term growth potential of this agency division. At Liberty National, life premiums were up 4% over the year ago quarter to $82 million, and life underwriting margin was up 74% to $21 million. The increase in the underwriting margin is primarily due to improved claims experience. Net life sales increased 24% to $23 million, and net health sales were $9 million, up 14% from the year ago quarter due mainly to increased productivity and agent count. The average producing agent count for the fourth quarter was 2,946, up 8% from the year ago quarter and up 6% compared to the third quarter. Liberty continues to build on the momentum that's been generated over the past year and is well positioned for future growth. At Family Heritage, health premiums increased 7% over the year ago quarter to $94 million, and health underwriting margin increased 2% to $26 million. Net health sales were up 21% to $22 million due to increased agent count and agent productivity. The average producing agent count for the fourth quarter was 1,334, up 12% from the year ago quarter and up 8% compared to the third quarter. As we've discussed before, there was a shift in emphasis last year to recruiting and middle management development. This has paid off nicely as we continue to see positive trends at Family Heritage. In our Direct to Consumer Division at Globe Life, life premiums were flat over the year ago quarter to $238 million, but life underwriting margin increased from $12 million to $39 million. The increase in underwriting margin is primarily due to improved claims experience. Net life sales were $31 million, down 9% from the year ago quarter due to declines in circulation and response rate. This sales decline is consistent with our expectations. As we have mentioned in previous calls, direct-to-consumer marketing is one facet of our business that has been impacted by the current inflationary environment. We've had to pull back somewhat on circulation and mailings as increases in postage and paper costs impede our ability to achieve satisfactory return on our investment for specific marketing campaigns. There is an offset to this as we continue to generate more Internet activity, which has lower acquisition costs than our direct mail marketing. Today, electronics sales are approximately 70% of our business compared to 54% in 2019. I am also encouraged to see some resiliency here as the average premium per issued policy has increased each year for the last several years and was 16% higher in 2022 than in 2019. At United American General Agency, health premiums increased 5% over the year ago quarter to $137 million and health underwriting margin increased 1% to $20 million. Net health sales were $20 million, down 25% compared to the year ago quarter, and this decline is due primarily to the market dynamics we saw throughout 2022, including aggressive pricing by competitors on certain Medicare supplement products and a consumer movement to Medicare Advantage. Projections: Now based on the trends that we are seeing and our experience with our business, we expect the average producing agent count trends for 2023 to be as follows: American Income Life, high single-digit growth; Liberty National, low double-digit growth; Family Heritage, high single-digit growth. Net life sales trends for the full year 2023 are expected to be as follows: American Income Life, relatively flat; Liberty National, high single-digit to low double-digit growth; Direct to Consumer, relatively flat. Net health sales trends for 2023 are expected to be as follows: Liberty National, a high single digit to the low double-digit increase; Family Heritage, a high single-digit increase; United American General Agency, low single-digit growth. We'll now turn to the investment operations. Excess investment income, which for 2022, we defined as net investment income, less required interest on net policy liabilities and debt, was $63 million, up 7% from the year ago quarter. On a per share basis, reflecting the impact of our share repurchase program, excess investment income was up 10%. Net investment income was $254 million, up 6% from the year ago quarter. On a per share basis, net investment income was up [90%] (ph). With the adoption of LDTI in 2023, we will begin viewing excess investment income as net investment income less only required interest. For the full year 2023, we expect net investment income to grow approximately 5% as a result of the favorable rate environment. With respect to required interest, it will be substantially higher than reported in 2022 as a result of changes related to the adoption of LDTI. As mentioned previously, Tom will further discuss LDTI in his comments. Now regarding investment yield. In the fourth quarter, we invested $239 million in investment-grade fixed maturities, primarily in the financial, municipal and industrial sectors. We invested at an average yield of 6.10%, an average rating of A, and an average life of 21 years. We also invested $104 million in commercial mortgage loans and limited partnerships that have debt-like characteristics. These investments are expected to produce additional yield and are in line with our conservative investment philosophy. For the entire fixed maturity portfolio, the fourth quarter yield was 5.18%, up 1 basis point from the fourth quarter of 2021 and up 1 basis point from the third quarter. As of December 31, the portfolio yield was 5.19%. Now regarding the investment portfolio. Invested assets are $20 billion, including $18.3 billion of fixed maturities at amortized cost. Of the fixed maturities, $17.8 billion are investment grade with an average rating of A-minus. Overall, the total portfolio is rated A-minus, same as a year ago. Our investment portfolio has a net unrealized loss position of approximately $1.8 billion due to the high -- higher current market rates on our holdings than book yields. We are not concerned by the unrealized loss position and it is mostly interest rate driven. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB are 51% of the fixed maturity portfolio, down from 54% from a year ago. While this ratio is in line with the overall bond market, it is relative -- high relative to our peers. However, we have little or no exposure to higher-risk assets such as derivatives, equities, residential mortgages, CLOs and other asset-backed securities. We believe that the BBB securities that we acquire provide the best risk-adjusted, capital-adjusted returns due in large part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. Low investment grade bonds are $542 million compared to $702 million a year ago. The percentage of below investment-grade bonds to fixed maturities is 3%. This is as low as this ratio had been for more than 20 years. In addition, below investment-grade bonds plus bond rated BBB are 54% of fixed maturities, the lowest ratio it has been in eight years. Overall, we are comfortable with the quality of our portfolio, because we primarily invest long. A key criterion utilized in our investment process is that an issuer must have the ability to survive multiple cycles. During 2022, we executed some repositioning of the fixed maturity portfolio to improve yield and quality. Over the course of last year, we sold approximately $359 million of fixed maturities with an average rating of BBB and reinvested the proceeds in higher-yielding securities with an average rating of A-plus. Overall, we believe we are well positioned not only to withstand a market downturn, but also to be opportunistic and purchase higher-yielding securities in such a scenario. I would also mention that we have no direct investments in Ukraine or Russia and do not expect any material impact to our investments in multinational companies that have exposure to these countries. At the midpoint of our guidance, for the full year 2023, we expect to invest approximately $940 million in fixed maturities at an average yield of 5.5% and approximately $310 million in commercial mortgage loans and limited partnership investments with debt-like characteristics at an average cash yield of 7% to 8%. As we've said before, we are pleased to see higher interest rates as this has a positive impact on operating income by driving up net investment income with no impact on our future policy benefits, since they are not interest sensitive. So, in the fourth quarter, the company purchased 490,000 shares of Global Life Inc. common stock for a total cost of $56 million at an average share price of $115.1, and ended the fourth quarter with liquid assets of approximately $91 million. For the full year, we spent approximately $335 million to purchase 3.3 million shares at an average price of $100.90. The total amount spent on repurchases included $55 million of parent company liquidity. In addition to the liquid assets of the parent, the parent company will generate additional excess cash flows during 2023. The company's excess cash flow, as we define it, results primarily from the dividends received by the parent from its subsidiaries, less the interest paid on debt. We anticipate the parent company's excess cash flow for the full year will be approximately $410 million to $450 million and is available to return to its shareholders in the form of dividends and through share repurchases. This amount is higher than 2022, primarily due to lower COVID life losses incurred in '22, which will result in higher statutory income in '22 as compared to 2021, thus providing higher dividends to the parent in 2023 that were received in 2022. As previously noted, we had approximately $91 million of liquid assets -- $91 million in liquid assets as compared to the $50 million or $60 million of liquid assets we have historically targeted. With the $91 million of liquid assets plus $410 million to $450 million of excess cash flows expected to be generated in 2023, we anticipate having $500 million to $540 million of assets available to the parent in 2023, of which we anticipate distributing approximately $80 million to $85 million to our shareholders in the form of dividend payments. As noted on previous calls, we will use our cash as efficiently as possible. We still believe that share repurchases provide the best return or yield to our shareholders over other available alternatives. Thus, we anticipate share repurchases will continue to be the primary use of parent's excess cash flow after the payment of shareholder dividends. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made substantial investments during the year to issue new insurance policies, expand and modernization of our information technology and other operational capabilities, as well as to acquire new long-duration assets to fund their future cash needs. The remaining amount is sufficient to support the targeted capital levels within our insurance operations and maintain the share repurchase program for 2023. Now with regard to capital levels at our insurance subsidiaries. Our goal is to maintain our capital levels necessary to support current ratings. Global Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. For 2022, since our statutory financial statements are not yet finalized, our consolidated RBC ratio is not yet known. However, we anticipate the final 2022 RBC ratio will be near the midpoint of this range without any additional capital contributions. As noted on the previous call, the new NAIC factors became effective in 2022 related to mortality risk, also known as C2. Given the consistent generation of strong statutory gains from insurance operations and given our product portfolio, these new factors will simply result in even stronger capital adequacy at our target RBC ratios. Now I'd like to provide you a few comments related to the impact of excess policy obligations on fourth quarter results. Overall, fourth quarter excess policy obligations were in line with our expectations. In the fourth quarter, the company incurred approximately $5 million of COVID life claims related to approximately 31,000 U.S. COVID deaths occurring in the quarter as reported by the CDC and was in line with expectations. We also incurred excess deaths as compared to those expected based on pre-pandemic levels from non-COVID causes, including deaths due to lung disorders, heart and circulatory issues and neurological disorders. We believe the higher level of mortality we have seen is due in large part to the effects of the pandemic. So, as the number of COVID deaths had moderated, so has the number of deaths from other causes. In the fourth quarter, the impact of excess non-COVID policy -- life policy obligations were generally in line with our expectations at about $6 million. For the full year, the company incurred approximately $49 million of COVID life policy obligations related to approximately 243,000 U.S. COVID deaths, an average of $2 million per 10,000 U.S. deaths. In addition, we estimate non-COVID claims resulted in approximately $69 million of higher policy obligations for the full year. The $118 million combined impact of COVID and higher non-COVID policy obligations was around 4% of total life premium in 2022, down from approximately 6% in 2021. Based on the data we currently have available, we estimate incurring approximately $45 million of total excess life policy obligations from both COVID and non-COVID claims in 2023. We estimate that the total reported U.S. deaths from COVID will be approximately 105,000 at the midpoint of our guidance. Finally, with respect to earnings guidance for 2023. As noted on prior calls, the new accounting standard related to long-duration contracts is effective January 1, 2023. From this point forward, we report 2023 results and guidance under the new accounting requirements. I will do my best to bridge the gap as there are many changes with these new requirements. So, we are projecting net operating income per share will be in the range of $10.20 to $10.50 per diluted common share for the year ending December 31, 2023. The $10.35 midpoint of our guidance is lower than what we had indicated last quarter when including the impact of LDTI adoption. The reduction is primarily due to a reduction in the expected impact from the adoption of LDTI as we get more information and have refined our assumptions and estimates impacting both 2022 and 2023. In addition to the lower LDPI impact, we anticipate slightly lower premiums, higher customer lead and agency expenses, as well as higher financing costs, which are reflective of higher short-term yields than previously anticipated. We estimate the after-tax impact of implementing the new accounting standard results in an increase in 2023 net operating income in the range of $105 million to $115 million. We are still in the process of determining the full 2022 results under the new standard. Once finalized, it could affect the 2022 -- 2023 estimated results. Going forward, fluctuations in experience and changes in assumptions will result in changes in both future policy obligations and the amortization of DAC as a percent of premium. The largest driver of the increase is lower amortization of deferred acquisition costs, or DAC, than under the prior accounting standard due to the changes in the treatment of renewal commissions, the elimination of interest on DAC balances, the updating of certain assumptions and the methods of amortizing DAC. Due to the treatment of deferred renewal commissions on amortization in our captive agency channels, we do expect that acquisition costs as a percent of premium will increase slightly over the next few years. In addition to the changes affecting the amortization of DAC, the new accounting standard changes how policy obligations are determined under the new standard, life policy up -- life policyholder benefits reported in 2021 and 2022 will be required to be restated to reflect the new requirements and will include the impact of unlocking and updating prior assumptions. For 2023, absent any assumption changes, we expect the following impacts. Life obligations as a percent of premium will be in the range of 40.5% to 42.5%. This is consistent with the average life policy obligation ratio over the last five years. Health obligations as a percent of health premium will be in the range of 50% to 52%. This is about 3% to 4.5% lower than the average health policy obligation percentage over the last five years. For the life and health lines combined, commissions, amortization and non-deferred acquisition costs as a percent of premium will be in the range of 20% to 21.5%, approximately 8% to 9.5% lower than the recent five-year averages. The resulting life underwriting margin as a percent of premium are expected to be in the range of 37% to 38%, and health underwriting margins as a percent of premium in the range of 28% to 29%. So, offsetting the increases in underwriting income will be a reduction to excess investment income to the elimination of interest accruals on DAC balances that historically have reduced net required interest. In 2022, interest on DAC balances was approximately $260 million. In 2023, this will be zero under the new standards as compared to between $275 million and $285 million of interest accruals on DAC under historical GAAP, that we would have anticipated. In addition, required interest will change due to the changes in reserve balances at transition and restated balances in 2021 and 2022 under the new requirements. We anticipate that required interest in 2023 will be in the range of $910 million to $920 million. With respect to changes in AOCI, we noted in the past few quarters that under the new accounting standard, there is a requirement to remeasure the company's future policy benefits each quarter, utilizing a discount rate that reflects the upper medium grade fixed income instrument yield and affects the changes -- with the effects of the change to be recognized in AOCI, a component of shareholders' equity. The upper medium grade fixed income yields generally consist of single A-rated fixed income instruments at a relative -- reflective of the currency and tenor of the insurance liability cash flows. As of year-end 2022, had the new accounting standard been in place, we anticipate the after-tax impact on AOCI would have decreased reported equity in the range of $1.3 billion to $1.4 billion. While the GAAP accounting changes will be significant, it's very important to keep in mind that the changes impact the timing of when future profits will be recognized, and that none of the changes will impact our premium rates, the amount of premium we collect or the amount of claims we ultimately pay. Furthermore, it has no impact on the statutory earnings -- statutory capital we're required to maintain for regulatory purposes or the parent company's excess cash flows nor will it cause us to make any changes in the products we offer. Thank you very much, sir. [Operator Instructions] Our first question is coming from Jimmy Bhullar from J.P. Morgan. Please go ahead, sir. Hey, good morning. So, I had a question first on direct response sales. They've been weak for the last several quarters. Wondering how much of it is a reduction in your part on mailings and circulations versus just weak consumer demand with higher inflation? Yes. It's really on the distribution side. As we've talked about in the past, scaling back our mailings and other print media that's associated with the higher cost these days of the postage in paper. What we're seeing on the consumer side, as I mentioned in my comments, is actually the sale amount on a per policy basis, the premium amount for each sale is actually going up slightly. So that would indicate to me that it's really more of a reduction of that cost in the amount of things that we're distributing, because we are really going to make sure that each one of those mailings and all of our campaigns are profitable. And that's what the benefit is of switching more of our distribution over time to more of the electronic media side versus the sales side. But I do want to remind everyone that the -- all of these channels work together and with the mail does support and drive activity to our other channels such as the call center as well as just online. Okay. And then, maybe with the economy and inflation overall, there had been concerns about policy retention. And it seems like lapses are now close to historical levels, but do you expect that they'll go up above where they were pre pandemic? Yes, Jimmy, I think with respect to last level, I mean, you're right, the fourth quarter did really trend favorably versus the third quarter, while they're still higher than 2021. We're actually back to in the fourth quarter around the lapses, the persistency levels pretty much where they were in the fourth quarter of 2019. So, looking forward, I think for the most part, we do think they'll trend back here to pre-pandemic levels during 2023. Probably Direct to Consumer would probably see those maybe sticking around at slightly higher lapse rates than what we've had pre-pandemic, but not that significantly. And Liberty for the most past of first year lasted back to pre-pandemic levels as well. Okay. Thanks. And if I could just ask one more on LDTI, obviously, it's affecting the timing of income, GAAP income, it doesn't really change the underlying economics. But do you -- and I'm assuming had you not been growing -- if you don't grow the business at some point in the next several years, it would actually have a negative impact on your results. But how do you think about with normal growth, could you reach a point where LDTI goes from being a tailwind to a drag on your results? Do you see that happening in the next like three, four, five years or so? Yes. Jimmy, we did take a look. I think this is the same question you had asked last year or the last quarter as well... And did take a look at that. And actually, for that amortization to turn around, it takes -- it's 20, 30 years out there in the future before we end up actually where it's the amortization under the LDTI ends up being greater than what we would have anticipated under historical GAAP. So, it's actually a long ways out there. Hi, thank you. So, it looks like recruitings turned nicely at Liberty and Family Heritage, and you're starting to see the growth in the agent count there, but it hasn't come through American Income yet. And I realize the fourth quarter can have some noise with the holidays. I was hoping you just talk more about the trends you're seeing in both recruiting and retention and what steps you're taking to improve those at American Income in 2023. Yes. As we had mentioned in the past, there's been some adjustments to the incentive side of the compensation at American Income. Those went in very late in the year and then obviously, is going to continue through 2023. We are seeing -- it's in the early stages, but we are seeing some positive development there. We had, as a reminder, a significant increase in our agent count during the pandemic, went from approximately 7,500 agents to over 10,000. And so, our attrition has been a little bit higher here in the recent quarters than what we would like. And these programs that we've put in place seem to be working. We've got some -- while it's still early, early indications that there's been a turnaround in our retention as well as recruiting efforts at American Income. So, we're positive where that's headed from a 2023 perspective. And as was noted, really feel like that is in our control, because we do have strong agent growth at our two other agencies. And so not really impacted by environmental factors, but really believe this is in our control to maintain. Thank you. And then, I appreciate all of the color you gave on the LDTI impacts. Just a quick question. When do you expect to release an updated financial supplement with recast financials? Got it. So, I guess we shouldn't expect that in advance, so we should kind of model based off of the numbers you walked through on the call? Exactly. Yes. When we -- talk again after first quarter, we'll have quite a bit of detail around the impact on the various distribution channels and lines of business. So, that will be the time to talk more about those details. One of the things, Erik, we have to be a little bit careful about is we can't be releasing some of the numbers on the restated '21 and '22 until it's actually get audited. So, we get into a little bit of a timing, especially around the first quarter. So, as Tom said, that -- we really tend to be able to provide more of the detail on that, as we said later on. Hi, thanks. Good morning. I guess, I appreciate all the LDTI guidance. My first question is actually ex LDTI. I think last quarter's guidance, which was ex LDTI, had a $9.35 midpoint. If we back out the LDTI impact this quarter, it looks like it's -- the midpoint is more like $9.20. So, just curious if you can give us any perspective on kind of why that ex LDTI guidance seemed to come down a little bit? Hey, Ryan, it's Tom. I would say that the midpoint, more like $9.25, so it dropped by about $0.10. And really, the main drivers there are the lower premium growth that we had previously -- that we mentioned. And then, we are seeing a little bit higher lead costs and agency expenses impacted by inflation. As travel starts increasing and as meetings start increasing, and we have some additional training and recruiting costs that were incurred, we just had that pick up a bit. And then, as I mentioned also higher cost on debt given the higher cost for commercial paper, just the rates are a bit higher. And then, given the share repurchase program, just a slightly higher share count than what we had previously estimated in our prior guidance work. I'll just say one thing I'd just add on that is with the higher share count, the -- wasn't from the amount that we were anticipating, but just a higher -- with the higher share price that we're at this current time versus where we were back at the time of the last call, obviously, we're just getting fewer shares purchased with the same amount of dollars. Good. And then, on the free cash flow guidance of $410 million to $450 million, is there some drag in that still from COVID and non-COVID excess claims that occurred in 2022? I'm trying to think about if there would be a further bounce back as we go beyond 2023 to a more normalized level? Yes. The way that we think about that is last year, we had combined -- in 2022, we had combined COVID non-COVID about $118 million. And in '23, we expect about $45 million. So, kind of the difference between those two should result in higher statutory earnings in 2023, which would, therefore, lead to higher dividends to the parent in 2024. Okay. So, the difference between those two and then tax affected would be basically additive to free cash flow in '24? Thank you very much. My question is around Direct to Consumer and the mailings. Seems like increased postage and paper cost is more of a secular trend. Are there areas that can be developed beyond just mailings that can be incorporated into the Direct to Consumer marketing efforts? Yes. And as I'd mentioned, we're really focused on growing our Internet and electronic media inquiries in -- which results in additional applications and sales. And so that's been the offset is that, as I mentioned in my comments, continue to grow and is much more a significant part of the business than it was just even three or four years ago. So really, that's the offset as we've declined based on profitability in our models, the direct mail operation, we've offset that with an increase on the electronics side. So, overall, those dynamics are going on. But if inflation, depending on how that market dynamic plays out over the next several quarters, we will continue to adjust throughout the year based on the returns that we're seeing in the profitability. So, overall, we want to make sure that we're maintaining our profitability targets on each of these campaigns and we're flexible enough that we can adjust that throughout the year as market conditions warrant. Great. Thank you. And a follow-up question. I know the indirect mortality is in the COVID estimate. Is that -- you anticipate tapered over the year or is present an equal level throughout the year? Just trying to dimension if further away that from the pandemic portion of that degrades. Yes. So, for 2023, for the -- we expect a little bit higher COVID deaths in the first quarter than we would for the third -- second, third and fourth quarter. So that's -- we do kind of think that will be front-loaded a little bit during the course of '23. Thank you very much, sir. Next question will come from Mr. Andrew Kligerman calling from Credit Suisse. Please go ahead, sir. Your line is open. Good morning. First question is around American Income. And completely understand kind of 2023 being kind of a digestion period of having 10,000 producers. As you go into this new incentive strategy, just different initiatives, do you think in 2024, and I know it's early for guidance, but is there a reason to believe you'll kind of get back on track to that kind of mid-single-digit producer growth, maybe mid-upper single-digit sales growth? I mean, is there any reason to believe you can't get there in '24 that maybe it will take longer? No, that's a great question as we do believe we can get back there. As a reminder, agent count and average agent count for the quarters is a leading indicator, and it takes time to get these new agents onboarded, trained and producing. And then, obviously, the longer they've been here, the more effective they are from a production perspective. And so, that's why you'll see in our guidance as we have growth projected on the agent count side, but the sales are lagging that a little bit and more toward flat. We do believe that we can get to middle management growth in 2023 that will drive that longer term growth in -- on the sales side in '24. We also anticipate opening three to five offices in American Income over this next year, and that too will set us up for good growth in 2024. And I also wanted to just clarify, when we talk about compensation adjustments, there's two primary components to the compensation for agents. One is just the base commission on sales. And then, we also have incentive-based compensation that's targeted at specific behavior. And we do that throughout our history. So, when we talk about changing the compensation we're really not changing the total amount of compensation that is in our overall pricing and profitability targets, but really, we're targeting two specific activities and behavior that we're trying to influence. So, I just wanted to clarify that overall, our compensation and acquisition costs are going to be consistent with what we've experienced in the past. Super helpful. Shifting over to the health lines, particularly United American with sales down 25%, and I think that was due to pressures not only in MedSup, but also like Med Advantage gaining share. We look at a number of companies, the online players, some of them are subs of the other insurers we cover. And many of them seem to be pulling back in that kind of online Medicare Advantage product. And so, as I look at United American down in the agency channel, I'm wondering, a, where is the competition coming from? And -- yes, I guess, it's just where is the competition coming from as I kind of think the players seem to be getting more disciplined? Yes. I'll say what we saw throughout 2022 was just more aggressive pricing by certain competitors. And we're focused on maintaining our profitability targets and underwriting margins in this area, and we're really not going to chase the sales, so to speak. But -- and we are also seeing and experiencing a movement toward Medicare Advantage plans as well. I'll say that we've been in this business since the program started, and we've seen these market dynamics happen over time. And so, we anticipate that some of that will abate as we move forward. Yes. I think while there may have been some that have pulled back, I mean, overall, we are seeing movement into Medicare Advantage plans. And in this line of business, there's big carriers or small carriers. The cost of entry is low, because it's not a capital-intensive business. So, I couldn't speak to which are particularly pulling back or not. But overall, there is a move on the group side and individual side, Medicare Advantage plans. I think the current economic environment contribute to that. I would assume that people are more willing now to give up the benefits of a Medicare supplement plan that doesn't have provider network [indiscernible] or referral requirements to go to a cheaper managed care. And as Matt said, we've been in this business since Medicare started in the '60s. We've seen these swings back and forth over the years. So, it's not really unusual or surprising. We're going to maintain that distant approach. That said, it's to protect our margins. It's also to protect our customers. We want to avoid having higher than necessary renewal rate increases. We've never been the lowest cost provider here. We think that's fair to the customer to have the right price and have reasonable rate increases. And the other thing to remember is that price of this business -- the price we have in our new business is the same as our renewals. So, it's not like we can go in and have lower new business prices because if we were to do that, that would impact the profitability of our in-force block, which is the United American [Technical Difficulty] around $500 million. So, again, it's something that we've seen before and again, not particularly surprising. And just to kind of a little further clarification on this, so you're seeing the competition across agencies and online. And is there any interest [Technical Difficulty] in terms of kind of transitioning to more Medicare Advantage products as opposed MedSup? Absolutely. So, in terms of distribution competitors, is it pretty much across agency and online? And then, with that, is Globe likely to pivot more to Med Advantage as opposed to historically being in the MedSub area? Let me start. I'll say we don't have plans to pivot into the Medicare Advantage area. I think the competition is coming from all pass. We do have a little bit of our sales that are online as well. So, we do see the competition in the pricing, in the agency and online channels. A bulk of our sales are in the agency [Technical Difficulty] business. Sure. I think the Medicare Advantage, we don't use networks for one and that would be something that -- that'd be a big change for us. And it's just -- it's not a line of business that we've been in, and I know we considered a long time ago. At one time, we were in the Part D plan, which is similar, and we exited that. And it's something that we wouldn't want to do. It's really, I think, harder for smaller players to do that and to get involved with the Medicare Advantage and Part D. I don't think that undertaking would make sense for us. Thank you very much, sir. We'll now take a question from Mr. Mark Hughes calling from Truist. Please go ahead, sir. Yes, thank you. Excuse me, good morning. I don't know if you touched on the [Technical Difficulty] Is there anything about the LDTI accounting standard that impacts your growth on a go-forward basis? You, obviously, got a nice EPS benefit this year. But just the timing and the emergence of profitability, is it changed over time so that there's a natural acceleration or deceleration perhaps as time goes by, that will impact your kind of trend line growth rate in future years? Yes, I'll answer that one. Probably the one thing as we think about the implementation of LDTI is the treatment of future deferrals of renewal commissions. So, to the extent that a portion of renewal commissions are deferred, the new rules require us now to -- in historical gap, we would look at all anticipated future renewal commissions and determine an amortization rate, that was an average that was needed to amortize both the first year capitalized expenses as well as future renewal capitalized expenses. Under the new method, we're only allowed to -- as we capitalize, we're only -- we are forced to change the amortization rate upon each additional capitalization. And so, for our AIL line of business, we do have some renewal commissions that we capitalize. And we had kind of talked last quarter that for the block, we'd expect kind of a 50 basis point increase in amortization. That's really driven by two things. One is, we have a mix of business where -- we don't have any DAC on some of the business. And on the other business we have DAC that is being amortized. So, as the block that we don't have any DAC on where we fully amortize it with as that runs off, the average amortization rate goes up. But the other is that as we get new renewals, commissions that are deferred on AIL, we'll see the amortization rate tick up a little bit. In aggregate, we'd see probably that amortization rate tick up around 20 basis points to 30 basis points over the next few years and then kind of even out and that increase would diminish over time as we put new business on the books. And Mark, the one thing I would just add to that is, I think, really other than that, and other than assumption changes that might come through from time to time, I would expect once it kind of gets reset, then that the general level of growth rate should be somewhat similar. Thank you, Mr. Hughes. [Operator Instructions] We do not appear to have any further questions at this time, gentlemen. I'd like to turn the call back over to you, Mr. Mota, for any additional or closing remarks. All right. Thank you for joining us this morning. Those were our comments, and we'll talk to you again next quarter Ladies and gentlemen, that will conclude this conference. Thank you very much for your participation. You may now disconnect. Have a good day, and goodbye.
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EarningCall_738
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Good morning, and welcome to the Bunge Fourth Quarter 2022 Earnings Release and Conference Call. All participants will be in listen-only mode [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Ruth Ann Wisener, Vice President of Investor Relations. Please go ahead. Thank you, Drew [ph], and thank you for joining us this morning for our fourth quarter earnings call. Before we get started, I want to let you know that we have slides to accompany our discussion. These can be found in the Investors section of our website at bunge.com under Events and Presentations. Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are posted on our website as well. I'd like to direct you to Slide two and remind you that today's presentation includes forward-looking statements that reflect Bunge's current view with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Bunge has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation, and we encourage you to review these factors. On the call this morning are Greg Heckman, Bunge's Chief Executive Officer; and John Neppl, Chief Financial Officer. I'll now turn the call over to Greg. Thank you, Ruth Ann, and good morning, everyone. We capped off another exceptional year for Bunge with a solid fourth quarter performance. Our continued strong results speak to the flexibility of our platform and team, which, as I've said before, are built to adjust and even excel in volatile times. In this year that had more than its share of ups and downs, our team proved their ability to help our customers, both farmers and end users globally, manage risks and navigate food security issues against the backdrop of regional conflict, weather impacts and many other factors. I want to thank the team for their continued dedication to strong execution, which allowed us to build on our positive momentum and deliver our fourth consecutive year of earnings growth. We're focused on our mission and it shows in our financial results. Looking at the fourth quarter numbers. Adjusted core segment EBIT came in above last year's results, largely driven by strong performance across all regions in Refined and Specialty Oils. John will go into our results in more detail, but I want to note our performance reflects our rigorous and disciplined approach to the business, including our focus on operating costs and the returns on capital we're investing. Looking ahead to 2023, we expect the market environment to be similar to 2022, with many of the same drivers still in place, that includes a globally tight crop supply, strong demand for our core protein meal and vegetable oil products and the continued impact to global trade of commodity price volatility and supply chain disruptions. We also expect to see global demand for feedstocks and related services for renewable fuels continue to grow. Based on what we see in the market and the forward curves today, we expect full year adjusted EPS of at least $11 per share for 2023. And with that, I'll hand the call over to John to walk through the results and the outlook in more detail. Thanks, Greg, and good morning, everyone. Let's turn to the earnings highlights on Slide five. Our reported fourth quarter earnings per share was $2.21 compared to $1.52 in the fourth quarter of 2021. Our reported results included a negative mark-to-market timing difference of $0.56 per share and a negative impact of $0.47 per share related to onetime items. Adjusted EPS was $3.24 in the fourth quarter versus $3.49 in the prior year. Full year results for 2022 were $10.51 versus $13.64 in 2021. Adjusted full year EPS was $13.91 versus $12.93 in the prior year, an increase of nearly $1 per share. Adjusted core segment earnings before interest and taxes, or EBIT, was $804 million in the quarter versus $766 million last year. Agribusiness finished with an outstanding year with another strong quarter that was in line with last year. In processing, results were primarily driven by North America, which benefited from the combination of large soy and canola crops and strong meal and oil demand. Partially offsetting this strong performance were lower results in Europe and South America. Europe was negatively impacted by higher energy costs and lower volume that included increased planned downtime and the idling of our operations in Ukraine. In South America, tight bean supplies reduced margins. In merchandising, higher results in global grains were more than offset by lower results in global oils marketing, which had a particularly strong prior year. Refined and Specialty Oils finished another record year with strong fourth quarter results of $222 million, up $68 million compared to last year. All regions performed well in the fourth quarter, benefiting from strong food and renewable fuel demand with notable year-over-year improvements in Europe, Asia and South America. In Milling, the loss in the quarter was primarily driven by lower origination volume and high supply chain costs, reflecting the small Argentine wheat crop that negatively impacted our merchandising operations. Results in the prior year benefited from contributions from our Mexico wheat mills, which we sold in the third quarter of 2022. Corporate and Other was in line with last year. A decrease in corporate expense is primarily related to the timing of performance-based compensation accruals, was offset by results in our captive insurance program and lower results in Bunge Ventures. Improved results in our noncore Sugar & Bioenergy joint venture were primarily driven by higher sugar prices, which more than offset lower ethanol margins. For the quarter, reported income tax expense was $131 million compared to $64 million for the prior year. The increase was due to higher pretax income and a year-to-date adjustment in actual geographic earnings mix. Adjusting for notable items and mark-to-market timing, the effective tax rate for the full year was 17% compared to approximately 16% for the prior year. Net interest expense of $76 million in the quarter was up compared to last year due to higher interest rates, partially offset by lower average debt levels. Also impacting the quarter were foreign currency borrowings in certain countries where interest rates were high. However, the incrementally higher borrowing costs were fully offset with currency hedges reported in gross margin. Let's turn to Slide six, where you can see our positive EPS and EBIT trends adjusted for notable items and timing differences over the past five years. This not only demonstrates the power of our global asset networking capabilities, but also the continued outstanding performance by our team. Each of these years brought a different set of rapidly changing circumstances and the team successfully navigated through them, while also executing on numerous company initiatives. As shown on Slide seven, our full year addressable SG&A increased modestly year-over-year, reflecting a resumption of more normal business activities as well as increasing investments to strengthen our capabilities and to drive growth, particularly in technology. We expect higher SG&A in 2023 related to these initiatives, which we have considered in our outlook. Slide eight details our capital allocation of the approximately $2.4 billion of adjusted funds from operations that we generated in 2022. After allocating $306 million to sustaining CapEx, which includes maintenance, environmental, health and safety and $8 million to preferred dividends on shares now converted to common equity, we had approximately $2 billion of discretionary cash flow available. Of this amount, we paid $341 million in common dividends, invested $249 million in growth and productivity CapEx and repurchased $200 million of common shares. The approximately $1.3 billion of retained cash flow was invested in additional working capital and toward reducing debt. As we laid out in our earnings growth framework in the second quarter of last year, we expect to repurchase about $250 million of stock each year, but actual amounts could vary. During 2023, we expect to deplete the remaining $300 million of our existing $500 million program which was announced in October 2021 and approve an additional share repurchase program. Moving to Slide nine. We finished 2022 with a total CapEx spend of $555 million, which was about $50 million lower than we expected in our Q3 forecast. The primary drivers of the reduction were supply chain delays on long lead time equipment as well as additional project planning time, as we look more closely for opportunities to offset inflationary pressures. We expect continued delays in 2023, which are reflected in our current outlook. Lead times for simpler equipment and parts are showing signs of normalizing. However, due to increased project costs, we are reassessing the scope and timing of certain discretionary investments. As shown on Slide 10, at year-end, readily marketable inventories, or RMI, exceeded our net debt by approximately $3.2 billion. This reflects our use of retained cash flow and proceeds from portfolio actions to fund working capital while reducing debt. Slide 11 highlights our liquidity position. At year-end, all $6.7 billion of our committed credit facilities was unused and available. This provides us ample liquidity to manage our ongoing capital needs. Please turn to Slide 12. For the trailing 12 months, adjusted ROIC was 21.6%, well above our RMI adjusted weighted average cost of capital of 6.6%. ROIC was 15%, also well above our weighted average cost of capital of 6%. The spread between ROIC and adjusted ROIC reflects how we use RMI in our operations as a tool to generate incremental profit. Moving to Slide 13. For the year, we produced discretionary cash flow of approximately $2.1 billion and a cash flow yield of 20%. Please turn to Slide 14 and our 2023 outlook. As Greg mentioned in his remarks, taking into account the current margin environment and forward curves, we expect full year 2023 adjusted EPS of at least $11 per share. In Agribusiness, full year results that are forecasted to be down from last year as slightly higher results in processing are more than offset by lower results in merchandising, which had a very strong prior year. While we are not forecasting the same magnitude of margin-enhancing opportunities that we captured in the past year, we do see potential upside to our outlook if strong demand and tight commodity supplies continue throughout the year. In Refined and Specialty Oils, we expect a favorable environment to continue in 2023. However, we expect segment results to be modestly down from 2022's record year, which reflect very strong results in all regions. In Milling, full year results are expected to be down from last year, but in line with historical performance. In Corporate and Other, results are expected to be in line with last year. In Non-core, full year results in our Sugar & Bioenergy joint venture are expected to be in line with last year. Additionally, the company expects the following for 2023: an adjusted annual effective tax rate in the range of 20% to 24%. However, note that this will ultimately be driven by geographic earnings mix of the company. Net interest expense in the range of $380 million to $410 million. Capital expenditures in the range of $800 million to $1 billion, down slightly from our earlier expectation of just over $1 billion due to the reasons discussed earlier, and depreciation and amortization of approximately $415 million. Thanks, John. Before turning to Q&A, I want to offer a few closing thoughts. This past year demonstrated the critical role we play in global food security and maintaining flows of crops from farmers to consumers. To ensure we can continue to deliver, we further strengthened our core business and built relationships with partners whose capabilities complement Bunge's. For example, our Origeo joint venture with UPL began operating in the fourth quarter, providing end-to-end solutions to farmers in Brazil. We also announced a partnership with BZ Group in France to strengthen our global platform by connecting with BZ's network of independent farmers to bring more opportunities and flexible solutions to them and end users globally. During 2022, we made great progress on our commitment to finding innovative, sustainable solutions in the renewable space, including our JV with Chevron, our partnership with CoverCress, and our JV with Olleco. We continue to innovating and investing in plant-based lipids and proteins at our R&D and innovation facilities, our team is working alongside customers as they create unique solutions with plant-based ingredients. We continued investing in data science and technology to better connect farmers and consumers by making our operations even more efficient in delivering real-time insights to help us manage our business. And science and technology are also key, as we continue to make great strides in our sustainability efforts. Thanks to expanding satellite monitoring, we were able to announce this week that through the Bunge sustainable partnership, we have now achieved traceability and monitoring for 80% of our indirect supply chain in the Brazilian Cerrado. This is in addition to our ability to trace 100% of direct purchases in the priority regions of South America. Improving traceability through our indirect sources of product is a critical step in meeting our industry-leading goal of achieving deforestation-free supply chains in 2025. While we're proud of the progress we've made, a more sustainable tomorrow requires everyone across the value chain to work together. Bunge's approach will continue to be grounded in solid science, proven technologies, incredible methodologies. With our critical place in the global food supply chain, we look forward to continuing to engage with other companies and organizations in the food and agricultural sectors to find new solutions, and importantly, connect with tens of thousands of farmers around the world on these critical issues. Hi, thanks. Good morning, everyone. So Greg, John, I guess the first question is really on capital allocation. And I just -- company didn't buy back any stock in the quarter. The kind of net debt is half your readily marketable inventories or about nearly half of your readily marketable inventories. CapEx is actually taking longer to kind of to ramp. And so I just would love to get your thoughts on kind of what -- kind of where the dry powder -- why the dry powder is just sitting there? And the context of where you see risk-adjusted returns that could be higher than buying back your own stock at kind of the levels of where it's been trading at for the last few months? Yes, I think, Adam, as we look forward and kind of back to my comments, we do expect to -- we didn't get all of the $250 million bought last year that we kind of laid out in our strategic plan. But we absolutely expect to be caught up on that this year and seek authorization for an additional plan. We are committed to share buyback. As I said, we didn't -- obviously, didn't get it done last year at the 250 level. But that is going to continue to be an important part of our allocation, and we do expect to make up some ground here in 2023. Okay. All right. I think that's helpful. I think I guess I would still just push back or maybe get your further thoughts. I mean how you think about your balance sheet capacity at this juncture? It would seem like there's a -- has there been acquisition opportunities that may have may or may not have kind of not have come through as you might have hoped for at some point in 2022? I'm just trying to get a sense of with the balance sheet where it is, kind of seems like the cash is there? Yes. Well, we're always looking at opportunities and have been for a number of years. And I think as we were in fourth quarter, looking at a lot of opportunities, we just thought it was prudent not to step into the market at that point. But again, I mean, going forward, I agree with you, we think our balance sheet is extremely strong, and we're well positioned to get more aggressive on the buyback side. And I'd just add, we're looking at a bigger portfolio of opportunities than we've seen in a long time. And yes, some of them are going to happen and some of them aren't, but we're going to stay disciplined. I think that's the point I wanted to make. Okay. Maybe just on the outlook for 2023 and just you talked about potential sources of upside in Agribusiness if commodity markets kind of remain tight. Can you just give us some framework on certainly the processing side and kind of where you see kind of crush margins around the world, as we sit here today? And kind of particular geographies that you think will be are the areas that are more likely sources of upside at this juncture? Sure. Yes, let me start here. Yes, if you look at the outlook of at least $11, that's up $1.50 from the call we made at the same time last year. And so I think if we frame that up, it's the favorable environment that we saw in '22 is carrying in with continued strong demand for both meal and oil. We continue to see tight S&Ds, and we expect the volatility to continue here this year. So the other thing is we've continued to get more reps in our operating model, right? We continue to improve the data transparency. And what we've got with the tight Argentine crop with the dryness there, that crop is probably going to be in the mid-30s versus 44 last years and that tightness will continue all year and the curves are reflecting that. And so as you know, in the outlook, we're always looking at the curves, and so they've given us more visibility this year because of the Argentine situation. And then we've got more done in our RSO book in both food and fuel than we did a year ago. So I think that's the visibility versus a year ago that gave us the confidence to call the at least 11 at this point. Perfect. Thank you very much. Good morning, Greg, John. So actually, just following up on that on the guidance. Obviously, impressive on RPO, what you were able to deliver in '22 and the outlook is definitely encouraging for '23. Fair to assume better than '21. But help us understand what has changed so much in RPO versus your baseline guidance from just a few months ago where you basically looked into a significantly lower level were basically a double here. So what is it in the market that's been driving it so much higher? And how do you actually think of this environment going forward also in light of what you published back in July, August when it came to the baseline update? Yes. The RS&O segment continues to be very strong. And what we saw was really driven by all regions globally. Now North America, of course, has been the big driver with what we're seeing in the renewable green diesel. But really biofuels globally continue to grow, and I think that's why we saw improvement from all regions. So the food demand has stayed strong and that is even without -- China coming out of COVID, we're starting to see a little bit of improvement in oil demand there that could improve throughout the year from a global S&D. But know, the teams continue to do a very nice job. And even on the food side, where there's been some inflation, you think about our tech services people working with customers as they reformulate to try to work with inflation. So there's just a lot going on there, both with the food and the fuel demand. But I would add, Ben, that our call down next year right now is principally outside the U.S. And I think we feel very good about the S&D in the U.S. It's -- we had an exceptional year in 2022 globally. And we're not calling maybe the same level outside the U.S. is what we saw this year. And then relative back to the -- our strategic financial plan, we knew RSO, the whole Refined and Specialty Oils business was going to over perform or perform very well here in the near term. But over time, we modeled in, in our baseline that refining premiums would decline eventually. Now what we're seeing is projects taking longer to happen and possibly a longer runway on the strong margins that we built in ultimately. So we feel pretty good about where we are now, and we'll just watch long-term what happens with refining capacity. Perfect. Very clear. Thank you very much. And then second question is really just about the general flex, obviously, that we're going to have within the guidance. And one of that is that if you could elaborate maybe a little more detail on the tax rate, which obviously is a relatively wide range, but also significantly higher than in the last two years. Is that all geographic mix or what's behind that higher, call it, midpoint 5% to 6% higher tax rate that you're seeing for this year versus the last two years? Yes. The biggest single driver is our assumption around geographic mix. We do expect in Brazil, for example, taxable income to be much higher in 2023, and that's one of our highest-rated jurisdictions in terms of tax rate. We also had, over the last couple of years, as we've cleared off some historical audits, we've had some onetime valuation releases that impacted our effective tax rate. But it is a wide range at this point because of the mix of geography, it's sometimes a little difficult early in the year to predict, but we'll fine-tune that as we move through the year. So I just have 1 quick question. On December 15, you made an announcement that you are looking to invest in a new protein concentrate facility. I think $550 million was the CapEx. Help us understand why this investment? Why is it a good strategic fit? And then what kind of earnings uplift can you expect from this investment? And I'll turn it off over after that. Yes. I'll start on the strategy, and I'll let John talk to the numbers. But no, look, we continue to see growth in the plant protein space. We're already serving customers with the lipids, which are the specialty fats and oils that give the taste and the mouth feel and the bite to a lot of those products. And we are on the plant protein side, we are a commodity supplier today of many of those products. So this is a natural adjacency. This is a natural valuing up of our commodity streams similar to what we're doing in [indiscernible] and some other areas. So we're a natural. We have a right to win. We can be in a cost competitive position. And frankly, we've got our customers asking for us to be there as a supplier and they want to work with us. And that's why we already did last year a multimillion dollar improvement in our innovation and R&D facility, and we're already working with customers, putting our lipids with plant proteins and developing new and different products. So we're excited about this. We've also seen as that space continues to develop, I don't think of it as not just all meats, it's all plant protein opportunities, whether it's nondairy, whether it's plant butters and that trend is in place, and it's up to the ripe. And the other thing I think we've seen shake out in the last two years is that soy is going to be the winner. And soy is going to be the winner from a cost basis, from a taste, from a functionality and frankly, that's a good outcome for Bunge. Yes. And in terms of returns, any projects like this, we look for a minimum of 12% to 15% return. So you can kind of model that in. But this project won't be completed until roughly sometime in 2025. So it's going to take a bit of time from a development standpoint, getting that all wrapped up and then getting the construction actually completed. Thanks and good morning. I wanted to ask on just the expected cadence of earnings in '23. Does the outlook you kind of lay out assume stronger earnings, for instance, in the first half of the year and then some erosion in the back half? Are there segments where earnings might be more lumpy than in others? Yes. I would say the way we're looking at it right now, Tom, is when we look at the -- at least $11, I'd say our bias is a little bit skewed toward the first half of the year and then within the first half a little bit toward the first quarter. So that's kind of how I think about it, if I was laying it out. And obviously, where we think the biggest opportunity is going to be is in merchandising, and that's always difficult to predict the timing and the magnitude, but that could very well be realized a little lumpier or could be over the year kind of evenly. It's just going to depend on opportunities. But at this time, I'd bias a little toward the first half and a little bit toward first quarter inside the first half. But we will be in our first quarter will be lower than last year. We had an extremely strong last year first quarter, I think, north of $4 a share. Okay. Thank you for finding that. And then I just wanted to maybe ask on the CapEx piece. So the presentation and then your comments, you noted the reassessment of scope and timing of some projects due to a recent spike in costs. A couple of quarters ago, you laid out this longer-term CapEx -- I guess it's combined CapEx and M&A ultimately of $3.3 billion. Is that number still intact? Does that need to have moving pieces where the M&A component maybe is less? I'm just trying to understand if that longer-term investment is also adjusted given that reference spike in costs? Yes, we have not yet canceled any project that we had on that list. The timing is -- we're assessing timing. We're also assessing the design of some of those projects, given the inflationary pressures, looking for value engineering ways to make it more efficient. But ultimately, that plan is still pretty much intact. I think we still feel pretty good about the timing on the commissioning down the road. So we haven't yet adjusted our long-term view on those. So at this point, we're still holding to what we had, but we'll see as we go forward. And I think the other thing you want to keep in mind, I don't think it's specific to Bunge or even specific to this industry. It's more expensive to build things, whether it's the labor or the equipment and the interest cost or and it's taking longer to build things. But what that has done for our installed asset base, right, is keeping margins higher and it's keeping the environment stronger for a longer period of time. So I think that allows us to have the discipline, do these projects the right way and still build them. So it's probably pushed out the amount of time that we're able to kind of over earn versus the model because of the environment and then the projects will just come in a little bit later. Yes. Maybe one other thing to add, Tom, would be that we've been able to keep largely on track with our maintenance-type projects. And when you're in a margin environment like we are right now globally, it's important to keep your assets running smoothly. So we're pretty pleased, at least, that we've been able to stay on track and on time with all of our key maintenance projects. Yes. Thank you very much, Greg and John. So my first question is on the Argentinian drought and you didn't mention the impact on crush margins. So I'm just wondering a little bit if you can provide some more details on this impact, both in Latin America crush margins, but also how it is impacting globally margins and meal and oil prices? And also, if you can comment a little bit on what you're seeing on trade flows there? Because we've been reading that recently Argentina is starting to actually importing soybeans from Brazil to start making use of its spare crushing capacity. Thank you very much. Sure. No, you're exactly right. You've got to look at the entire global setup. And I think that's one of the things that's allowed us to perform in a variety of different situations the last few years is the great diversification and it's the best risk management is the geographical footprint of Bunge. So as we look at Argentina, you're right, the curves are going to be much lower it's going to be very stressed from a crush margins and volumes are going to be lower because of the weather, right? That crop is small all year. To your comment, you're hearing some beans moving into Argentina. We've heard those rumors as well that some people getting positioned when it's close, that they're securing supplies for safety. So I think that's how tight people think the S&Ds are going to be. What that means to the rest of the world is that we see soy margins in total going to be about the same in '23 as is in '22. We think the U.S. could be down slightly. The curve is currently down, right, versus last year, but that will continue to play out. China was a very tough last year with the COVID zero policy, and as it started to come out of COVID, we've seen a little better oil demand. We've seen the curves start to improve as well as the spot margins. So we'll watch that. That will be a key one to watch how that demand accelerates here for the balance of the year as they come out of COVID, but it definitely looks better than last year. Brazil is up versus last year, very big bean crop coming in there. And then in the EU, the curve looks better than last year. Part of that is less soybean meal imports, of course, coming out of South America and the other is we had a warm winter luckily, and we've got lower energy prices. And that will not only benefit soy, but that lower energy costs will benefit soft as well. And if you look at soft why we're thinking about it on a year-over-year, those margins will be up versus '22 in both North America and Europe on seed supply and then on better energy outlook in Europe. So a pretty good setup really for the Bunge portfolio here as we look at '23. Perfect. Thank you. And just as a second question. We spoke -- you spoke about the CapEx. I'm just wondering on the sustaining side. I think your guidance implies a 20% to 30% increase in -- actually more 20% to 45% increase in sustaining CapEx. And I'm wondering why is that? Is it just inflation or anything else that has changed this year? Yes. It's certainly inflation is playing into just about everything on the CapEx side. But it's also because of the timing of some of these bigger projects and our decision to reassess some of those, it's given us an opportunity to maybe accelerate some of the maintenance work that we would have maybe pushed off for another year or two. Hi, and thanks for taking my question. Just wanted to ask kind of going back to some of the delays on the CapEx side of things. If you have any color on whether some of the potential RD customers are also seeing some delays in some of the projects that they're planning to ramp up in the near future as well? Yes. We haven't heard, our conversations with industry participants is, we haven't heard of anything around delaying projects specifically. Certainly, there have been, in the past year, some slowdowns in terms of the build, primarily driven more by the margins on the oil and gas side. But as far as we can see from our side, everybody is still committed with moving forward, as I've discussed before. Okay. And then maybe just a quick second question, if I can, on maybe any updated thoughts on how you're thinking about the sugar JV and plans to take strategic action there? Yes. Look, we're pleased with the way it's been operating. But as we said before, we still don't expect to hold that long term, and we continue to look at our options there. And we -- hopefully, at some point down the road here, we have something to announce, but again, in the meantime, we're focused on running it. Hi. Good morning. Everything has been really asked, but maybe just one modeling question on the interest expense. It's obviously a lot higher in '23. Can I assume that, that will also, in '23, be offset by your FX hedges on the gross margin side similar to Q4 or are they just not -- or they're not related to each other? And you're talking about overall interest expense increase, I didn't catch the first part? But yes, some of it will be, not all of it. I mean some of that is just indicative of -- when we went into 2022, three-month LIBOR was less than 0.5% and now it's hovering around 4%-or-so. So, we're starting the year on much higher rates, and so that will have an impact. There will be some higher rates in countries where we're borrowing where we're hedging against that. So, part of that will be offset in margin, but not all of it. Some of it will just be a symptom of starting out with higher rates this year. Okay. Maybe a follow-up on refined oil. You said that international results in refined oil will probably be down year-over-year. Is there any specific reason for that? Like obviously, the U.S. is doing well. Is there any more color you can provide? Yes, I think, look, it's a reasonably modest decline from what was a really strong record year. And I think, I wouldn't say we don't believe there's a way we could get back there. I think we're just not -- we're not forecasting it at this point. We have a little bit better visibility into the U.S. S&Ds, and we feel stronger about that remaining strong. The rest of it, we'll see. I mean we'll certainly take the opportunity if it's there, but it's just hard to forecast that at this point. Yes, we definitely got less visibility into the markets outside of North America. We've got a bigger book on there with food and fuel both in North America. Great. Thanks for taking my question. And all the detail here. Just a question on the JV with Chevron. Could you just talk a little bit about any kind of requirements for capacity offtakes? I think you probably already said this before, but just the ACAP [ph] firm agreements on the offtake. And then has anything changed in your plans with the JV based on the IRA and whether renewable diesel incentives there or SAF incentives there? Thank you. You Bet. Yes, Ben, when we started this JV, it was principally focused initially around the two assets, [indiscernible] that went into the joint venture. And those are performing pretty well. And -- but that was really a first step in looking at a number of opportunities for Chevron that we continue to look at. It takes time from a development standpoint to expand beyond that. But we're very actively engaged with them. I'd say it's been a great partnership. And I think we see a lot of opportunity down the road to continue to build on that. And we do supply them in the commercial relationship from our entire system, not just those two assets. We were supplying them even before the JV. And so, it's a very holistic relationship. Okay. And maybe just a follow-up on -- just on the IRA and any kind of benefit to you or the JV or how we should think about that impacting you guys? Well, I think in total that you've got a new industry that's developing, right? And net-net, it's more demand. It's positive, the renewable green diesel. We don't think it's going to be a straight line. And I think some of the things around the IRA, everyone's trying to understand where there's leverage there for a number of things and not just around renewable green diesel, but around lower carbon opportunities because ultimately, with all of our customers in feed, food and fuel are looking for lower carbon intensity products, and we've got to find that value and drive that back to the farm gate to the producer to the farmer, the one who's ultimately going to have to make that happen with those farmer-grown crops. Yes, I would say -- I would just add on, I think two things we're looking at as well, we expect to develop in the relationship with Chevron and others is low CI feedstocks is going to be something that we think there's some opportunity down the road. And then, of course, long-term SAF is going to be an important component of that relationship. Thanks. Good morning everybody. I want to revisit kind of the architecture of the guidance for this year. You make a comment on your Agribusiness segment that there could be potential upside if the current S&D holds throughout the year. Is it that right now you have visibility into the first half of this year because of kind of what's going on in South America and Argentina? And perhaps as we get to like a trend line yield in the back half of this year, you might see loosening in S&D? Or is it just, hey, this is how we've typically done things in the last few years, we guide as far out as we can see on the curves. And then we'll just reassess as we get to midyear. I kind of want to understand what's explicitly in the guide versus maybe less explicitly? Yes. Look, let me start by -- yes, we're forecasting the same way we have been, right? It's what we can see, it's what the curve show. And as we talk about calling at $1.5 higher than we did a year ago, because we do have more visibility with what's booked on the RSO side for feed and fuel as well as with the tight Argentine crop, the curves are reflecting that. And so that's given us the confidence for -- and to feel really good about the at least $11. And I think the question really is going to be around what's the size of the plus? And there are a number of moving pieces. But you look, meal and oil demand, those drivers continue to be intact, right? You've got good global poultry and pork numbers, and there's good food and fuel demand for oil. So that's in place. The sources of upside, of course, are the merchandising, right, which is always the toughest one to call. It's when we have the least visibility to. And I think that one is most driven by dislocations, tight S&Ds globally and volatility. And so that's one where we talked there is opportunity and upside for that, and that's kind of always the case in the merch, even if you remember how we talk about it in the model and how we've talked about it in the outlooks in the past. And then you've got China, right? The improved demand coming from China. We're starting to see just a little bit of that on the oil demand side, but that will be key to watch. And I think there's a lot of belief that, could come back maybe faster and stronger than some thought. And then the dislocation is not only matter to the merch business, but they matter to the crush margins, right, as we have to turn crush on to meet the customer demands in different parts of the world, and it looks right now like our crush is going to run really hard outside of everywhere, except Argentina. And then as John said, we're seeing the capital be deployed in the RD space. So, it looks like that demand will be coming online in the second half of the year in North America. And then we've got a really large Brazil crop setting up on the bean crop as well as a good corn crop. And then you've got what we believe will be a gradual build back to B15 in Brazil. So that demand coming probably starting in April and building as they kind of try to match versus inflation. So, we think the dollars are going to be there. Exactly which value chain they're going to fall in or exactly which quarter they're going to fall in, that's always different in this business. What I do have the confidence is with our geographic platform our team is that we'll capture that and that's what we've tried to continue to prove that we can do. And as I said earlier, this is a good setup for Bunge globally. We like how it's set up, and we've got to watch the crops in North America to develop and watch things continue to play out. Okay. Very helpful. Thank you, Greg. My second question is going back to capital allocation, following up on Adam's question around the buyback. And I hate to beat you up on this, Greg and John. But it seems as though you could do both. You could pursue your capital allocation program that you have -- your capital expenditure program that you have and with the leverage profile of the business, buyback the stock because I think you would agree that the stock is a pretty good value here. Is the conservatism that you referenced, John, is that just, "Hey, that's in your DNA?" Or is it -- we've got so many other opportunities that haven't come to fruition that we need to stay conservative to remain opportunistic, kind of more broadly than just the buyback? I just want to understand a little bit more specifically what that comment meant? Yes. I think -- look, the answer is we're going to do both going forward. I think we've had a lot of opportunities that we've been assessing including share buyback. But I think we're very committed to share buyback as part of the program. And I think we're highly confident we'll get the remaining $300 million done this year in our current program and get a new program in place and as we move forward, we fully intend on doing a mix of both growth -- mix of all growth, M&A and our share buyback. This concludes our question-and-answer session. I would like to turn the conference back over to Greg Heckman, for any closing remarks. Thank you. So, thanks again for joining us today and for your interest in Bunge. We're really proud of the team and the performance we've delivered in 2022 and our call for '23, and we're absolutely committed to continuously improving Bunge and serving our customers. So, we look forward to speaking with you again soon.
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EarningCall_739
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Good day, and welcome to the Brinker International Q2 F2023 Earnings Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, Vice President of Finance and Investor Relations. Ma'am, the floor is yours. Thank you, Holly, and good morning, everyone, and thank you for participating on today's call. Joining me today are Kevin Hochman, our Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer. As we always do, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our Safe Harbor regarding forward-looking statements. During our call, management may discuss certain items, which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. Thanks, Mika, and good morning, everyone, and thank you for joining us as we share insights on the momentum we're seeing in the business, progress against our strategy, and plans to maintain that momentum. I'll start with Maggiano's, which delivered a very strong second quarter sales and margin growth as some of the business model changes have had accelerated recovery. We expected Maggiano's performance to exceed pre-COVID levels during the quarter and the team delivered. Comp sales were up 21% year-over-year and margins improved significantly. One of the big drivers of growth during the quarter was the off-premise business, which delivered an 82% increase versus pre-pandemic levels. Maggiano's off-premise sales are highly incremental. Customer insights are telling us that off-premise sales, which are meals consumed at home are at different occasion than the dining get-togethers and celebrations that Maggiano's is known for. And Maggiano's guests who visit us for everyday home that replace it visit more often than the dining guest. So off-premise for Maggiano's drives two things that we really like incrementality and frequency. The solid recovery of the core business plus the incrementality of the fast growing off-premise channel coupled with an improved business model, makes us very excited about the future of Maggiano's. Now for Chili's. At Chili's, we've made solid progress strengthening the core business and generating momentum in our results. Second quarter same-store sales were up 8%. We've returned to profitability and were steadily improving the guest and team member experience. As you recall during our last call, last quarter, I shared we were starting to implement our longer-term strategy to sustainably grow the core business by focusing on the key areas that will differentiate and best position Chili's in the marketplace. While there's still a lot of work ahead of us, I am encouraged by the progress our team has made across four pillars of our strategy. The first pillar is team members with the goal of making their jobs easier, more fun, and more rewarding, which we believe will lower turnover, increase engagement, and ultimately lead to better team member and guest experience at Chili's. We continue to make meaningful progress simplifying both our menu and operational procedures in our heart-of-house. As I mentioned last quarter, simplification is not a one-time event, but an ongoing commitment to our team. Our leadership team and I continue to host listening tours all around the country. And as managers and team members see changes happening, they are feeling heard and understand that we have -- they have a direct say in the future of their operation. These changing beliefs are now resulting in both significantly improved employee engagement scores and lower turnover, especially at the manager level, which is now below pre-pandemic levels. We still have work to do on the hourly front as we claw back from staffing challenges, but the hourly turnover numbers are now also trending in the right direction. Hospitality is our second pillar. We're in the process of evolving our service model to provide better service for both dine-in and off-premise guests. Servers now have more support as we staff key positions to make sure shifts are more manageable and guests feel welcome and cared for. As a result of these changes, our restaurant teams are telling us they feel more supported than ever. In fact, a few weeks ago I was in our Florida market and all of the managers told me this is the first holiday seasoning years that the restaurant felt completely manageable with a lot less stress on their teams. These first two pillars are working together to improve team member engagement and turnover, as well as driving significant improvements to our guest satisfaction metrics. When you see team member engagement turnover and guest satisfaction all trending in the right direction, it's typically a good sign for the business. And I'm excited to see this happening because it's a confirmation that we're making inroads in the things that really matter. The third pillar is atmosphere. We're ensuring our buildings and our equipment are well maintained and we're bringing more energy and vibrancy back to our restaurants. It's a big focus for us this year to ensure that all of our equipment is in working order and that the restaurants look great. In addition to the labor changes should improve both the team member and the guest experience. We're encouraged by the progress here too, but given the levels of deferred maintenance during COVID; we still have work ahead of us. And our final pillar is food and drink. And we're committed to winning on the four core equities that sell Chili's apart: burgers, crispers, fajitas, and margaritas. Our Raise the Bar program, the Happy Hour offering, and new bar menu we launched in the first quarter, delivered impressive increases to alcohol sales, PPA and mix during the second quarter. And now we're building on the success with an updated bar menu that features more premium drink offerings to delight our guests and grow the business. This menu highlights our breadth of classic Margaritas along with some new products including the Sangria-Rita and the Henrietta. The Sangria-Rita is taking a very popular southwestern favorite, a frozen margarita swirled with Sangria and bringing it to our customers nationwide. And the Henrietta is a re-imagined Chili's favorite. The last time we launched a margarita made with Hennessy, it was wildly popular as we promoted as the margarita of the month. Now we've re-imagined this as a higher quality premium margarita that will price reflect this premium positioning. This is just the first wave of robust bar innovation pipeline the team has developed. We'll launch these updated bar offerings later this month in time for the NCAA basketball tournaments, the final month of the NBA regular season, and the start of our internal Margarita Madness program, which is a fun check driving contest we know is a huge engagement driver for our team members and translates to a more vibrant atmosphere increased sales. We'll have significantly more margarita innovation coming to the permanent menu later this year, as well as an all new CRISPRs platform that's running through our new innovation stage-gate process and is currently in test market that we're very encouraged by. We look forward to sharing more details on both platform upgrades during the June Investor Day meeting. Now let's talk about traffic at Chili's. During the first half of the fiscal year, we reset pricing strategy and reduced the amount of checks on deal as well as the frequency and depth of couponing in order to work some less profitable traffic out of our system. Now with a stronger foundation driving our improved performance, we're able to manage our investments more effectively to build incremental traffic into the business. This quarter we'll start reinvesting some of our dollars we saved from less discounting to get back on TV with a Three for Me value platform. We're excited about being on air, which will be the first time in over three years that we'll be on TV. At a time when consumers are seeing record restaurant prices in smaller portions, we're coming in with industry-leading abundant and complete meal at a sharp price point. The Three for Me platform also includes more variety than many other bundles in the marketplace. And for just $10.99 the guests gets a full size entree with unlimited chips, unlimited salsa, and a bottomless soft drink. For the business, the platform encourages trade up to more premium and margin decretive offerings at $13.99 and $15.99, which will merchandise in the restaurant. In fact, the majority of Three for Me volume moves at the $13.99 and the $15.99 price point. And now with the addition of out-of-restaurant advertising, Three for Me will play the role of traffic driver in our business. We believe promoting this platform through national media as well as the opportunity to reboot our loyalty offers will help us drive incremental traffic and win market share regardless of the macroeconomic condition. Lastly, I want to spend a little time talking about additions to our Chili's executive team that will strengthen the leadership of our organization. I'm excited to share that Jesse Johnson, a senior leader at the world class advertising agency, Wieden and Kennedy has joined our marketing team as VP of Marketing, working for our Chief Marketing Officer, George Felix. Jesse is an accomplished marketing and advertising leader who has worked on some of the world's most iconic brands, creating news and excitement to everything he touches. And most importantly, he brings an energy and a passion for our Chili's brand. Jesse has already embraced -- has already been embraced by the team as they work to develop a robust strategy to drive traffic in the near-term and strengthen the brand over time. I'm also excited to welcome James Butler as our new Senior Vice President of Supply Chain. James is a well-respected highly strategic supply chain leader who recently served as SVP leading supply chain co-op of a very large multi-unit restaurant concept. Having worked with James in the past, I know he will bring a high-level of fresh thinking and leadership to our business that will not only help make progress in our supply chain, but will help accelerate the advancement of our strategy. We believe with a world-class leadership team, stronger Maggiano's business and executing on Chili's four strategic pillars, we're making the right choices for our business, improving the experience for our guests and team members, and driving our four wall economics will help our business regardless of the macro environment. With this focus on the core business, Maggiano's will unlock its growth potential and Chili's will be a stronger more competitive brand. And that's why I'm encouraged about our future at Brinker. The fiscal second quarter operating results reported this morning represent a nice move forward for the business. Sales benefited from continued consumer demand, our ability to price more appropriately and strong mixed results. Our in restaurant economics started to recover and improving commodity environment became more evident, and importantly, guest feedback improved in response to our initiatives. For the second quarter of fiscal year 2023, Brinker reported total revenues of $1.019 billion, a restaurant operating margin of 11.6%, and adjusted earnings of $0.76 per share, an increase of $0.05 from prior year. At the brand level, Chili's comp store sales increased 8%. We executed incremental pricing actions in the quarter both on the menu and in third-party delivery channels resulting in year-over-year pricing of 10%. Even with this more elevated price structure, we feel comfortable with our overall price and value positioning relative to the competition. As we mentioned last quarter, an important part of our sales strategy is our concerted effort to move away from higher unnecessary levels of discounting. This, coupled with our October menu restructure of the Three for Me platform, resulted in positive quarterly mix of 5.6% for the brand. Negative traffic at Chili's of 7.6% was in line with our expectations and was clearly more than offset with the ability to incrementally price and drive mix. Maggiano's had an outstanding quarter fueled by a great holiday season. The brand reported positive comp sales of 21.2%, driven by traffic of 8.4%, price of 7.7% and favorable mix. Digging deeper, Maggiano's realized improved traffic in all revenue channels, dine-in, banquet, and off-premise, with their overall business now exceeding pre-pandemic levels. Our restaurant operating margin for the second quarter was 11.6%, representing a decent beginning to establishing stronger double-digit margins on a consolidated basis. Let me make some specific comments as to the components of our ROM. Food and beverage costs were unfavorable 110 basis points year-over-year with commodity inflation coming in around 19%, down from 24% in the first quarter. Cost increases for the quarter were largely driven by inflation in poultry and beef and recent spikes in produce related to weather and yields. While we anticipate inflationary pressure for the balance of this fiscal year, we expect these pressures to moderate each quarter, moving below 10% in Q3 and further down to the mid-single-digit range by Q4. Labor costs were 130 basis points favorable versus prior year, benefiting from sales leverage, partially offset by increased hourly wage rates, and a higher quarterly manager bonus payout due to the improved performance. Wage rate inflation for the quarter was approximately 5%. As Kevin mentioned, we are in the process of updating our labor model to improve the work environment for our team members and the dining experience for our guests. The changes to the model started late in the second quarter, and were more broadly worked their way into the system over the course of the fiscal year. We are working to fine tune the number of labor hours needed to deliver the improved experiences for our team members and guests. Early results have driven positive guest metrics and better sales flow through during peak hours, as well as contributing to improving turnover rates at both the hourly and managerial levels. Importantly, we now believe we can generate the desired improvements, while investing a bit less in the model than originally anticipated. Restaurant expense for the quarter was elevated 70 basis points versus prior year due to overall inflationary costs in several expense areas and an increase in investment for repair and maintenance. The R&M expense increase reflects our work to improve the overall condition and cleanliness of our restaurants and to catch-up on deferred maintenance as supply chain issues and labor normalize. Additional momentum for Chili's is evidenced in the performance of the brand's new restaurant development. Through Q2, four new restaurants were added to the fleet, and three more came online in January. All are opening at very strong levels, some above a $100,000 a week, as communities such as San Juan, Texas, Inverness, Florida, and Owensboro, Kentucky embrace the brand. We have seven more openings planned for the back half of this fiscal year and look forward to sharing those incremental results on future calls. At the halfway point in our fiscal year, we are taking the opportunity to update our annual guidance. This update incorporates various investments we are making into operations and assumes the continuation of the current economic environment with no material downturn. We are raising our fiscal 2023 full-year guidance to include the following. Revenue is now anticipated in the range of $4.05 billion to $4.15 billion. EPS is anticipated in the range of $2.60 to $2.90, and CapEx is expected to be between $170 million and $180 million for the fiscal year. In closing, we believe our strategic initiatives, operational investments, and heightened team member focus is moving our business in the right direction. We're excited to now reengage key traffic driving opportunities to build further momentum in our performance while understanding the short-term potential impacts from macroeconomic conditions. The heightened engagement of our restaurant teams around the direction we are taking is exciting to see, and we are highly appreciative of their efforts every day to bring the Chili's and Maggiano's experience to life for our guests. It is through them, we will see our success. Now with our comments complete, let's open the call for questions. And Holly, I'll turn it back over to you to moderate the Q&A. Hi, thanks for taking the question. My first one, I was just curious on the traffic cadence to the quarter, if you could speak to that. I know last quarter you said you had some early softness with the menu change, so I'm just curious how that evolved since that time and obviously the industry data in January's been quite strong. So anything you can say about whether or not that's continued or any color would be great. Yes, Andrew, good morning. The traffic cadence throughout the quarter was actually relatively consistent. Not a huge variation as we moved through the second quarter. And actually we were strengthening as you kind of headed through December. December was a good month until you got to right at the end where you had an impact of weather. They really hit the kind of tail end of December. I think you probably saw that in some of the industry numbers you looked at. And we were not immune. But very consistent to the quarter results that that you saw. And I think the dynamics of traffic are definitely carrying forward into January. As you might expect with the COVID lap, we have seen a acceleration on the comp side of the equation very similar to what you're seeing from the industry trends. But I think the underlying dynamics that have been driving the business are still in place as we move into the first part of the calendar year. January's going to be unique with its COVID lap. Also you're seeing as I said looking at my window at the frozen tundra of Dallas, you're seeing some weather moves as you kind of work throughout January. So I look forward to thawing out and keep moving forward. Got it. Okay. That's helpful. And then I just wanted to ask you about the investments that you made you referenced late in the quarter on the labor model. What exactly have you done so far? You referenced some improvements in metrics. If you could speak to those a little bit and how are you thinking about maybe the next round of labor investments and the timing of that. Thanks. Yes. Just so this is Kevin, just so you understand how we designed the program. So Mika Ware has been leading a team both field leadership as well as folks in our restaurant support center at our home office to best understand if we were going to put labor investments back into the business, where would it make the biggest impact. And so the first round of those changes from that team we rolled out towards the tail end of December, it's not an on/off switch, so it takes some time to get the hours and the bodies back into the building. But the focus areas were one, on giving servers more time to focus on fewer tables so that they could better serve those tables; two, adding additional runner/buster position to try to keep tables cleaner during service more frequently in restaurants with high bar traffic we added or had the option to add a second bartender to manage that traffic, not just at the bar, but obviously the tables that was in the bar area. And then we added an expeditor position who is managing the heart-of-the-house. And that really frees up the manager to stop doing that team member task and actually do leadership things and coaching and all the things that you want a highly paid manager to do. So that's kind of the changes that we deployed in round one. Round two is still being worked on and tested, so I don't have the details to give you that until we're ready to go. The metrics that we've seen improve, so guest experiencing a problem, which is like our number one guest metric that we look at daily, has improved pretty significantly throughout the quarter. So we feel really good about that. I shared at our last call our team member engagement had significant bumps increases both in the field as well as at our RSC. So we're seeing the changes in the field having a meaningful impact on manager turnover. We were pleased to report in our prepared comments that manager turnover is now beneath where it was pre-pandemic. So we feel like we've made huge strides there and we're starting to see hourly turnover now improve too. But obviously there's some more work to do to get to pre-pandemic levels on that. So when we talk about metrics, we're talking about team member engagement, manager engagement and then obviously whether the guest is having a better experience and we're seeing all those things improve. The other thing that we're seeing is our food grade scores. We had some of the best food grade scores that we've had a long, long time. And so as you think about the team members having a better experience, having more labor in the restaurants, they can make better food. And then if they make better food and provide better service, then the guest has a better experience. And so we're seeing all those things trend in the right direction. I don't want to say that victory is accomplished and there's not a lot more work to do. But as I said in previous calls, as long as we continue to make progress every quarter, we know that we're making the right moves. We're heading the right direction. Great. Thank you. First I wanted to ask about pricing levels and what you're seeing with respect to any pushback from the customer. It sounds like the customer satisfaction levels are improving and traffic was largely consistent with your expectations, which is encouraging, but any additional commentary on what you're seeing as it relates to pricing levels and how the customer's digesting that? Yes, I'll start and then I'll see if Joe has anything to add. So we have seen the low end customer tail off. And we saw that before we took incremental pricing. So the low end customer was coming less frequently before we even started the new strategy and that is continued. We haven't seen a change in that trend one way or the other. For the guests that are coming they are willing to spend considerably more. So we're seeing mix shifts pretty significant. So we had a 10% price increase effectively on a -- on the stack, right? And we had a 5% mix increase that is a result at the end of the quarter. And so what's happening is the folks that are not buying Three for Me, they're moving the à la carte items that are priced higher, but they're also buying more appetizers and more non-alcoholic soft drinks because they're not included in the à la carte, right? So just some of the data we have 24% less Three for Me meals that are being purchased per day. Our per check average on Three for Me purchase is up $1.38. And as I said in my prepared comments over more than half of the Three for Me menu is actually moving at higher price points, the $13.99 and the $15.99 price points. In fact, over two-thirds are moving at that. So net what we're seeing is the customers that continue to come are accepting the price increases. And the good news is our value scores this quarter actually ticked up, which would be surprising given the price increases. And we think that's because the service levels have improved, right? The idea of value is not just price point, but it's also what you get and how consistent it is. So that's how we've been seeing the guests, the guests that continue to come are willing to spend more. And the -- both the service levels have improved as well as our value scores. Dennis, the only thing I'd -- the only thing I'd add to that Dennis would be a little insight as to what the menu price increase. You're looking at obviously year-over-year numbers at that 10% range. The actual menu increase that we took in October was about 4.25. So again, it's the sequencing and frankly, I'm not sure that a lot of guests look back a year what did -- a lot of them are looking to what did I see on my prior experience. And I think that 4.25 is probably more actionable. If you wanted to think about how they might react and so far the reaction has all been pretty favorable. That's very helpful. Thanks, Joe. Just one more, Kevin, you spoke to driving -- focus on driving traffic share gains with Three for Me and the advertising coming up. Just curious if you could speak to what you've seen maybe what you saw in the quarter or even in January from a market share perspective. I don't know, also if it -- if you're kind of able to frame up the importance of driving market share relative to profitability, and perhaps you can get both, but just any comment there would be great. Thank you. Yes. I can speak at a very high-level. I don't have like switching data in front of me, but from a high-level, we grew -- during the quarter, we believe we grew dollar share. So the amount of dollars versus the market based on what we see in black box to map, we believe we lost a little bit of traffic share. And as we said in the prepared comments, and we've talked about this is the shedding of some of that unprofitable traffic and we're going to continue to monitor as obviously we don't want to lose traffic. But it is something that we expected to happen, especially as we got out of some of the deep discounting coupons that we mail via e-mail. We know those customers were getting freebies in addition to layering on our lowest price point on Three for Me. And as we've shedded those customers or some of those customers, we have dragged a little bit behind the industry on traffic, but from a dollar standpoint, we believe we're growing versus the industry right now. And Kevin, I would say relative to the competition, our positioning improved as we went through the quarter in discussing our relative position with the folks that kind of monitor the overall industry, both brands really performed in December at the top of the heat. They were two of the highest performing brands in the competitive sec for that, that period. So nice relative performance as we move through the quarter. Hi, thank you so much. I wanted to talk about capital allocation and priorities. I mean, this is a business historically that's obviously generated a lot of cash and obviously COVID and a number of different things kind of made that -- maybe gave that some interruptions or maybe some changes in the priorities. But how are you guys thinking about maybe medium-term CapEx obviously this year at $170 million to $180 million was kind of at the higher end maybe of where we thought that was going to be. So what's the direction of that going forward? Might that go up because of new units, might that go up because you really want to do more remodels and refits at the store level that benefit your customer and employees. And if I can, Joe, I apologize for the way I'm asking this question as I'm asking it, but as we think about debt to EBITDA and other things, I mean are -- do -- should we get there through paying down debt or are you just going to basically let those ratios improve as your EBITDA grow? I just obviously I'm trying to catch the inflection point here to where a decent chunk of money can go back to shareholders. Thanks. Yes, and let me kind of take them in reverse. I think we will continue to absolutely pay down debt. The ratio will also we anticipate improve from EBITDA growth as we move forward. So we'll go at it from both of those. And again, as we've talked, we'd like to get the overall ratio down below 2.5x. So let's just say 2x to 2.5x on a debt to EBITDA basis. And we see ourselves moving nicely in that direction as we kind of go through the rest of this fiscal year. The -- as far as deploying incremental capital expenditures, I think yes, there's going to be those opportunities and we'll look at that, whether it's new restaurant development, we want to make sure again, we're effectively caught up as we kind of move forward with R&M investments. So I think as Kevin indicated still work to do there. So we spent about 25% more in the R&M space this last quarter is if you look at the restaurant expense side of the equation, we'll invest there. And there's also some capital opportunities as we kind of move forward. So there'll be a pacing of that. But also we'll look at some new opportunities. There's some nice kitchen equipment improvements we think that we'll be bringing into the equation as we move through the next couple of years. So that could sequence it's -- we'll determine those and obviously lay them out once we get what the actual numbers are going to be. But it wouldn't surprise me at all to see a period of time where CapEx ticks up above where moves up above where it is right now. But we'll give you great line of sight as to the why's and where that, that money's going to go. As you indicate the business can generate a lot of cash and as we improve the base operations and again lots of rationale on why to do that, but one of the clear opportunities is to generate that incremental cash flow that then we have the optionality of looking at is that going back into the business directly from a return standpoint or is there an opportunity to return some to shareholders. And I think it's just going to be a ongoing evolution, John, over probably the next 6 to 12 months as we think through all those different pieces of the equation. I think it's KeyBanc, but, hi, good morning. My question about labor during the quarter, the labor cost was pretty low at about 30 -- low 33%, which is a big step down and I believe the lowest in several years that period. I'm just wondering about that reclassification revenue. Maybe you can quantify if that was a driver there, but also talk about some of the drivers that margin from an operational perspective. Did you maybe underspend due to staffing environment? And then just related to that on the investments, is there any way you can quantify that? I know you said it'd be less than you previously expected, but what sort of impact should we see in the current quarter and what type of runway should we expect before those investments pay off? Yes. And good to see you're still where you're at, Eric, but, no, I think yes, labor did -- labor really benefited from the sales leverage side of the equation and as we indicated some of the "investment back", the incremental hours that we will be putting back into the system didn't have as much of an impact in the second quarter because they were late dated when we really started that piece of the equation. So you'll see more of that as we kind of move through the rest of the fiscal year. We also were able to pay a very hefty manager bonus, so it's good to see the ability to make those team member related payments for the performance that they delivered and still deliver as a percentage of sales a nice labor positioning. There's all kinds of puts and takes as you go through the labor model. We had some benefit in there year-over-year on things like team member related insurance was a good guy and you do have a labor model that remember drives off of traffic. So there was a little benefit from the lower traffic generating less labor hour necessary relative to those volumes. But as you kind of move forward, I expect as we move through the next couple of quarters, you'll see labor as a percentage of sales tick up something -- somewhat. I think you'll probably see something in the let's say 40 to 60 basis points increase from where we were in the second quarter. Obviously a lot of that's predicated on what you do on the top-line. There is a nice leverage ability piece of the labor stories. So our ability to top -- drive top-line again can create some sales leverage as you think about labor. But again, so I don't think the delta, when you think about labor as a percentage of company's sales is going to be very out of line. I think you'll see it kind of in that 40 to 60 basis points range. Yes. Second quarter. Okay. And then on the -- just on the to-go mix, maybe you could talk about what that was in the quarter. I apologize if I missed that, but also I know you took some price on the delivery channel, so maybe you can quantify that, but I was wondering if you're seeing any pushback on that channel particularly is it -- it's very expensive relative to carry out to the extent that the delivery mix is held up. Why do you think that's the case given the huge price differential and what seemingly deteriorating macro environment? And I'm wondering how much of that is just the aggregators being aggressive in customer acquisition or if there's any sustainability to that channel. Yes. I -- one I think the delivery channel is again, it is proving to have resiliency and it is relates to people. I think the need stayed related to that consumer is a little different. I think the demographics using that is probably skews towards the higher economic side of the equation. So right now the resiliency and the willingness to continue to use the delivery channel is still in place. Overall, we pretty similar percentages. You're really seeing to go off-premise can remain in that 30% to 35% range for the quarter. I think that it seems to have a steady state. The nice thing on Maggiano's is again, they've introduced a whole another level of guests to their off-premise capabilities. So you've seen a very meaningful little over 80% year-over-year improvement in their off-premise side of the equation. So that that's a nice new robust channel for them to continue to grow, which we kind of move forward. Hi, good morning, guys. I had a follow-up question, Kevin, related to Chili's pricing and discounts. I'm just wondering how the company's determined what the impact of the pricing and discount removals will be on traffic, because I would think the company would need to conduct either a test or at least evaluate the impact over several months just given the frequency of Chili's guest. Yes. So that's a great question and even someone asked me that the last call and candidly, I didn't think we could wait to do a pricing test. We typically would do something like that. In order to understand the impact, I think we were so far behind on pricing versus the balance of the industry. I thought we needed to lean forward so that we could start investing in the things that are going to improve the experience of the restaurant. I will say we are adamant about protecting an opening price point for the guests that would otherwise not be able to afford Chili's or casual dining. This is why we've protected $10.99 and that's why we're going to be advertising that later this quarter and really shout the abundant value as well as the quality of the food that you get. And you think about $10.99 price point for a complete meal with a unlimited chips and salsa, a full size entrée, and a bottomless drink and compare that to even fast food or QSR that's pretty unbeatable. So as I think as long as we make sure that we are honest about protecting the price points for that guest that really needs it in order to come in, I think we're generally going to be okay. And I think that's why we've seen the mix in Three for Me. A lot of the folks that we're coming in either have gravitated back to the à la carte menu when we remove the favorites out of that menu. Or they've gone ahead and traded up based on the variety that's available there. If they want steak or they want shrimp, they can still get it within Three for Me. So we'll continue to monitor it. Obviously the big question mark that everybody has and we're not immune to it either, right, is what's going to happen with the economy and maybe we relate to pricing, but we still have a pretty big delta between where our competitors are, where we are. So we feel pretty good positioned within the context of casual dining pricing. And then as long as we maintain those opening price points that we feel are really, really aggressive, regardless of the dining channel that you're in, we feel confident that we'll stay close within that one to two point delta versus the industry on traffic. If we can do that, we'll continue to grow dollar share. Chris, I was just going to add too, remember that this is not -- this has not been a one-time event rolling out some of these changes. We actually started a lot of the discount removal back in the first quarter. That really started coming to together in kind of the August kind of timeframe. And we also then reintroduced shortly after that at the beginning of September, the new bar menu, which also took discounting out of that piece of the equation. So this has been kind of a rolling effort over the course of really the first half of the fiscal year. So many of those moves have actually been in place, and we've been watching very closely over the course of three, four months. And we can see the impact particularly, and when you look at something like the bar and the discounting that came out of that, you're seeing a really nice response and improvement on the bar side of the equation that it's exceeding our planned expectations there. So you're exactly right. You have to continue to watch for the leg effect of that, but I think a lot of the -- these moves are starting to age themselves very well. And we're not seeing any of the concerning dislocation that you might otherwise be worried about. Could you help level set our expectations for what impact the return to TV advertising could have on traffic? I'm just wondering if was fiscal 2Q expecting to be or do you expect it to be the worst in terms of traffic performance and then sequentially improve from there? Well, I don't think we want to give you guidance on what we expect from the advertising. What I can share with you is it'll be about abundant value at a sharp price point. We are going to have sufficient weights that we believe it will meaningfully move the business. But I can't share with you how long that advertising will be on and when will it start for competitive reasons. But I hope either at the next earnings call or at the June investors meeting to share all of that detail with you. Thanks. Question on dining room traffic. Could you talk about what your dining room traffic trend was year-over-year and how those traffic levels compare to 2019? And just generally speaking, how you think dining room traffic will trend the rest of the year? Yes. We have actually -- we're actually seeing the dining room business obviously continue to grow and that's thinking through the entire comp dynamic, traffic is down a little bit relative to that pre-pandemic dining room. Obviously, when you eliminate some of the discounting that that impacts obviously your largest piece of the equation, which would be the dining rooms. And particularly when you think about some of the stuff we've done on bar. But it's not, again the business is in totality is moving in the right direction. So I think again, similar to what we talk about in the overall business, the trade within the dining room standpoint is -- has been very favorable. Kevin kind of walked through some of the things we see on the Three for Me platform. A lot of that takes place obviously within the dining rooms the reinvigoration of the margarita program. Those kinds of things obviously are going to skew more to the dining room side. So similar give up some traffic, but gain more than adequate offset on the price and mix side of the equation. I thought that your traffic in the dining room was down double-digits versus pre-COVID, something like that. And I mean assuming I -- is that right? And I also wanted to ask about your labor hour growth. You talked about dialing that up a bit. Where do you think you are now versus pre-COVID in terms of labor hours, and where do you think you'll end up? I'm just really curious about the proportions of labor versus sort of that in dining room traffic. Yes, again, we're starting the process of dialing that up, that really started in later December. So we'll continue to fine tune that as we go forward. I'm not as focused on pre-pandemic versus current. I think again, we're focused on how do we drive the better guest experiences and the metrics that that show that the guest is responding to better service, better food, better atmosphere. So we're going to keep, I think some of that analysis more in the current environment as opposed to looking back three years in that regard. Yes, I think your traffic at low point in the dining room is in the range that, that you're thinking. I think that's not an inappropriate way to think about it, but again, well offset by all the other moves we're making. If I kind of struck out on that question, but if I could just ask, was the traffic decline 7%, 7.5% or so for Chili's decline, was that roughly what you would've have expected in terms of the trade-offs, the natural trade-offs you're making the business, including the pricing? And I'm wondering obviously the January is a weird month, but down the road summertime, for example, the -- maybe the comparisons become more normal. Is there a traffic trade-off that becomes not acceptable? Is there a level where you feel like maybe you have to make some adjustments? Like what -- how should we think about -- how you are thinking about traffic from here? Thanks. So how we're thinking about is as long as we're moving in the right direction on the total business both in terms of sales and profitability, we feel pretty good about the moves. Now, obviously, if things start to get closer to where that's not true, we're not going to wait for that to not be true. We're going to make some interventions, right? So we're going to look at it very closely. Our belief is that as long as we keep a barbell strategy where we protect opening price points but then allow price points to flow through on some other items, and then be able to reinvest back into the experience, we think that will allow us to continue to grow the business. If that -- if those beliefs are untrue, especially with a macro headed in the wrong direction and we've got to revisit that we will, and we might have to go a little bit back to a little bit more discounting, or we might decide to protect some pricing. But at this point, we haven't seen anything that would lead us to believe we've got to change that strategy. And as long as we run, a couple of points away from the industry on traffic, the equation looks really good for our business and then allows us to plow back investments that we hope will then grow traffic over time, whether it's advertising improved service levels or better food. So that's our belief. We'll continue to monitor it. We reserve the right to -- we look at that strategy if the things that the data that we're seeing changes significantly, but we haven't seen it so far. Hi, thanks and -- thanks for taking my questions and good morning. Kevin, you mentioned the low-end consumer not coming as much, and I think you said that was the case even before the changes on pricing in Three for Me. And perhaps that's somewhat due to the macro, but I'm curious how much of that you think could be due to reduced awareness since you were off air during the pandemic? And do you have any data or studies on that that you could share as we try to think about the potential benefit as you bring advertising back online? Yes. We -- the only data that we have on it, we haven't done any like specific studies. The data that we have is a top of mind awareness. So in marketing terms, top of mind awareness, especially in the restaurant industry is really important because you're always in the market for food. Like you're always -- you always got to eat, right? And then in this new world where a third of our businesses transacted digitally, you're literally always in the market, you could always buy Chili's, whether you're at home or you're out shopping or you're at a restaurant, right? So top of mind awareness in other words, when I'm hungry and I think about the restaurant that I'm going to dine at, it's critically important that Chili's is a part of that consideration set because if you're not then you have no chance of actually closing that, that guest, right? The top of mind awareness is what we're going to be driving for when we think about the advertising that we're going to put on TV. And that's why we're focused on; we think it's a relevant message of abundant great value at a great price point. In addition to making sure that that advertising is unmistakably Chili's using some of the things from our past as well as the things that are unmistakably Chili's like our logo and some of the jingles and things like that, right? So what I would tell you is, we have seen dramatic declines in top of mind awareness throughout the pandemic as we went dark. We would expect those trends to start moving in the right direction. It takes some time for the advertising to take hold and you just start seeing a move in those in that data points. As far as like using that data to give you an estimate of the traffic lift, it'd be very difficult to do that right now just because we've been off air for so long. Once we have more data on what the TRP is mean in terms of incremental traffic, we'll have a better idea of the impact of putting an advertising back on. Is it reason or fair to assume that that Chili's top of mind awareness has dropped relative to peers more than others is a lot of brands have come off air except for one large one that, that I'm aware of in terms of national chain. So is -- has it -- has Chili's underperformed or come down more on that metric? Can you tell us versus 2019 anything along those lines? Yes. I mean, well, we will -- our top of mind awareness, this is publicly accessible data with the right research companies. Our top of mind awareness has declined versus pre-pandemic. And we'll share some of that detail with you at the June Investor Day as we talk about our marketing and advertising strategy. But it's clearly the biggest opportunity for this business and from an advertising standpoint is just to get back in the consideration set in top of mind for customers so that we're part of their consideration set of where they're going to eat. Okay. Got it. Thank you. Joe, I wanted to just circle back on your labor comment a couple of questions I've got. I think you said, in that up 40 bps to 60 bps versus what you just saw in the second quarter. And just a quick skim of historical pre-COVID, it would seem that your second half labor cost ratio is typically a little lower than Q2 or even the first half just on higher seasonal sales volume. So I just wanted to clarify, is that 40 to 60 kind of trying to hone in on the actual investment that, that we need to think about other dynamics around seasonality or perhaps that's an all-in expectation, call it that, that you'll be kind of in the mid-33s embedded in your second half guidance. I just want to clarify that. Yes, Brian, I put it in the latter piece of the equation. It's kind of the all-in, obviously yes, you would expect to see some sales leverage benefiting that area if you had a normalized set of hours going into the system. Obviously we're going to be putting some more hours in as we go through the rest of the fiscal year. We're also anticipating it probably some higher opportunities to on the manager bonus side of the equation, things of those nature. There's all kinds of puts and takes in that line. But the guidance I kind of gave you relates to the all-in effect of what else would expect to see coming on the labor side. Okay. Okay. Thank you for that. And then also, Joe, while I have you, can we just drill down on the other OpEx line for a second? And I know there's a lot of moving pieces, R&M, utilities, and now thinking about bringing advertising back, just to name a few. And are there certain categories, you talked about advertising going up in the second half of the fiscal year, but are there certain categories that are expected to decline and help offset those dollar increases? Or should we expect that other OpEx dollar line to be moving higher than the high-260s it's been in recent quarters? I think as we -- as you kind of move forward and talking absolute dollars, I would expect it to move up. Again, you cited one of the key drivers will be the advertising piece of the equation as you build that advertising accrual that goes through the OpEx line. So that's where we'll see that. I think generally speaking, R&M expense, I expect to be at a little more elevated level than you might have typically seen it as we continue to move forward on improving the condition and cleanliness of the restaurants are some of the investments you make back in such as janitorial costs flow through that line as opposed to labor. So where you might have thought that something might be going to labor, it's actually going into OpEx as it relates to more hours for the janitorial side of the equation. And again, you just have a number of things in there that are still kind of in an inflationary environment. I think most of those will start to normalize and mitigate as we move through the year. But you have to build some expectation of continued inflation when you think about things year-over-year. So yes, so I think you'll see the absolute dollars tick up over what you just cited. There's also very good chance of that's where sales leverage also starts to hit some of those items too. So on a percentage basis; I think it should be a fairly stable to possibly slightly improving on a percentage basis of sales. But we'll make the right calls as it relates to some of the expenses that are kind of run through that as it relates to advertising and R&M as we kind of move forward. Okay. Okay, great. And then just two quick housekeeping items. Do you have the percent of sales that was off-premise for each brand in this second quarter? I don't, Mika, do you have that? I don't have that sitting right in front of me right now where -- Chili's was just over 30% and Maggiano's was -- sorry, I'm looking at Maggiano's didn't have it memorized right here. Maggiano's -- 27%, Maggiano's. Okay. And last one for me, sorry to keep going so long, but the tax rate Joe, embedded in your guidance. Great. Thank you very much. Two questions, just the first one, speaking to the broader macro one of the largest QSR players yesterday spoke about an assumption for a mild U.S. recession, presumably a downturn from here. I think you mentioned not assuming a downturn. So I'm just wondering what -- what impact do you think would come from a mild recession on your business? And how would you respond in terms of maybe a change in strategy if need be? And then I had one follow-up. Yes. Let me start with just how we think about like where we're positioned and then I'll talk to you about what I think how the customer's going to change based on if the macros were to worsen. So number one, I'd like where we're positioned on value even with the recent price increases that we've taken, we're playing catch-up versus the industry, and so there's still a pretty large gap versus where our pricing is versus our competitors. So I feel good about that. Our value scores have actually improved since we took the pricing in October on the everyday menu. I think that's a function of improved service levels. The other thing that we have that we didn't have in the recession back in 2008 several others have too, but we have 12 million loyalty members and we have a direct way to talk to them. And so we can target value a little bit sharper than we could back then. So I think it's a huge opportunity for us, because then you can go a little sharper if you need to go sharper with the guests that would need a better value than the one that doesn't, right, versus the -- before you had that capability, you had to advertise it to everyone. So you could be more laser-focused on value. And then lastly, the fact that we're getting back on air with advertising with a -- what I think is unbeatable in the restaurant industry at $10.99. I think we'll have a nice impact on traffic. From a customer standpoint, if the -- if that recession or if the macros continue to get worse, what you see them do is they can't afford to have a bad experience. And so because dollars are tighter, and so what'll happen is they're going to gravitate to the places that they think they can get consistent value, not necessarily the lowest price, but things that they can count on and trust. And so regardless of whether the recession or not, the idea of the strategy of improving service levels, improving food and being a more consistent concept, that's going to help us whether the macros get worse or not. And so my direction to the team is we got to stay focused on that. That might slow down our investments because we can't be as aggressive if we're -- we don't have a tailwind on the macros. But the things that we're doing to fix the labor model and to provide better service levels to make sure that the restaurants look great and that our food is consistently perfect. Those are all really important things that we need to do regardless of what happens with the macro. As far as like the changes that we would make if things did get worse, I think one, we'd get a lot sharper with some of our CRM value and our loyalty value against the guests that we know need it because we'll be able to see if they pull back on their trips. So we instead of just having blasting out a value to everybody. I think the second thing is that we've got to continue to accelerate our simplification and get to a place where we're making a fewer items, we're making them a whole lot better, and that's going to improve margins and as well as allow us to invest some of that back into the business. And then I think the third thing is I think we got to try to stay on advertising on a hot price point, because that's going to obviously mitigate the traffic headwinds that you're going to get from a macro. I think those are the things that we would then tweak, but I don't see us like a major reverse course of our strategy. I do think you'd see the pendulum swing back a little bit more to the center in terms of balancing the long-term investments with some of the short-term traffic drivers. Understood. And then just the follow-up, for full-year fiscal 2023 looks like at the mid-point you raised your EPS guidance by I guess $0.10, but it looks like at least versus consensus that you beat the second quarter by $0.25. So I'm just wondering if you can maybe prioritize whether or not you think your guidance is still conservatism or perhaps the second quarter beat relative to internal expectation was more modest than maybe consensus or perhaps as you mentioned earlier, maybe you're factoring in the incremental labor and advertising and R&M and whatnot. Just trying to prioritize what led the pretty significant second quarter beat relative to the more modest increase in the full-year EPS. Thank you. Yes. Jeff, again, as it relates to the beat relative to the consensus, I mean that -- I'm not going to get too caught up in what the consensus and how they might have arrived at some of those numbers. The -- it was a quarter that exceeded our expectations internally too, but there might have been a differential between those two numbers. And again, you're thinking about what are the -- what's the prudent level to get to as we kind of see momentum in the business, but understand some of the macros that are sitting out there also. And it does incorporate the investments we're talking about. So they're -- we really have the opportunity in some cases as we move into the second half of the year to move even a little quicker on some of those investments. If the -- again assuming the macro stays up, we want to be able to make the moves as quickly as we can. So we're thinking through all this different pieces of the equation with the weariness of the macro that you see everybody talking about that we don't need to get out over our skis on that piece of the equation either. Yes. Good morning. Thank you. Maybe I'll just ask about the mix piece of your comps. Is that something that you actually expect to kind of pick up from here? Because obviously the reduction of discounting was kind of the most immediate impact, but what have you started to see so far from the bar initiative or some of the product changes? Yes. I mean a big part of our strategy on what we call core four, which is CRISPRs, margaritas, burgers and fajitas. The idea is to -- how do we bring some innovation to those properties and platforms in order to drive both pricing and mix? And so like the CRISPRs test that we have currently today so for this is like an example so you can understand how we're thinking about mix. So today, we sell we have three different offers on CRISPR or two -- now it's two because we reduced one, but they're all the same size, right? So there's no opportunity to buy a bigger piece count. And so that's not really the way the guest wants to buy chicken tenders, if you see competitive concepts, they have multiple sizes. People want bigger eats and not everybody wants the smallest size. And so we're testing three, four, five. We're testing a four, five, six count. We're testing with additional sauces that we're taking from the virtual brands. We're testing upgraded sides. And what we expect to see as a result of that test would be significant moves in mix within CRISPRs and then more importantly, overall PPA and check gains from making that move because obviously if people are trading down in the CRISPRs even if it's a bigger mix, it's not going to help us, right? So that's why we test it versus just rolling. And so far as the test, we're really encouraged about what we've seen. It's clear that guests, if you solve for their -- whatever their needs are and do it in a meaningful and valuable way; they're going to be willing to spend more with you. And so I think you're going to see that show up in the bar. I think you're going to see that show up in fajitas over time. The challenge for us is we just can't do everything at once, right? The restaurants and our RSC can only handle so much change and do it in a quality high fashion manner, right? And so we are -- we've literally just gone through this exercise with our leadership team of like as we think about evolving the menu and driving mix through innovation, how do we pace and sequence it so that both the restaurant support team as well as the field teams can handle all that change, right? So that's why you're not seeing it all at once within a 12-month period. But that's how we're thinking about mix. We think that could be a meaningful source of growth for us as we think about not just having the lowest price point in the industry, but how do we create the best value for the guests. Okay. Great. Thank you. And then just on menu pricing, you said what the number was in 2Q and I think you had previously expected it to roll down kind of closer to 7% as we end the year. Is that still the case? Like is your cost outlook still kind of supportive of that pricing level, or do you think you might add some more as the year ends? Hey, we'll continue to take a look at different, I don't anticipate necessarily adding any incremental price on the menu this fiscal year. I do think there's some as we think about our next menu, and Kevin just outlined some of the mix opportunities there. We may look at some off menu pricing opportunities at a lower level based on where we're currently at and how we expect things to work through 2023, I would expect to exit kind of in the 8% range. As we get to that that kind of that June period, you will start to see that 10% move down now as we kind of move forward with the rest of the year and lapse some of the prior year moves ending. And again probably on an exit rate somewhere around 8%. All right. So that concludes our call for today. We appreciate everyone joining us and look forward to updating you on our third quarter results in April. Thank you, everyone. Thank you. This concludes today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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EarningCall_740
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Good afternoon. Thank you for attending todayâs Fourth Quarter and Full Year 2022 Gilead Sciences Earnings Conference Call. My name is Henna, and I will be your moderator for todayâs call. [Operator Instructions] Just after market close today, we issued a press release with earnings results for the fourth quarter and full year 2022. The press release slides and supplementary data are available on the investors section of our website at gilead.com. The speakers on todayâs call will be our Chairman and Chief Executive Officer, Daniel O'Day, our Chief Commercial Officer, Johanna Mercier, our Chief Medical Officer, Merdad Parsey, and our Chief Financial Officer, Andrew Dickinson. After that, weâll open up the call to Q&A, where the team will be joined by Christi Shaw, the Chief Executive Officer of Kite. Before we get started, let me remind you that we will be making forwardâlooking statements, including those related to Gileadâs business, financial condition and results of operations; plans and expectations with respect to products, product candidates, corporate strategy, business and operations, financial projections and the use of capital; and 2023 financial guidance, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in the earnings press release and our latest SEC disclosure documents. All forwardâlooking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forwardâlooking statements. NonâGAAP financial measures will be used to help you understand the Companyâs underlying business performance. The GAAP to nonâGAAP reconciliations are provided in the earnings press release, in our supplementary data sheet, as well as on the Gilead website. Thank you, Jacquie, and good afternoon, everyone. We had the opportunity to connect with many of you a few weeks ago in San Francisco. And Iâm excited to be able to reconnect now to share our strong fourth quarter and full year results for 2022 in addition to our guidance for 2023. These show the tangible impact of our business transformation, notably the growth trajectory for HIV portfolio and our fast-growing oncology business. The team will take you through our quarterly results in detail, but I am very pleased to highlight on Slide 4 the strongest full year growth in our base business since 2015 when growth was driven by the peak of HCV sales. Full year 2022 sales of Biktarvy grew 20% year-over-year to $10.4 billion, exceeding $10 billion for the first time. Excluding Biktarvy, our base business in 2022 grew 8% year-over-year and Iâm pleased to share that our initial 2023 guidance points the base business growth between 4% and 6%. Andy will share our revenue guidance in detail, but I do want to take this opportunity to recognize the Gilead team for the progress we made in returning to growth. Thanks to their commitment to improving the health of people and communities around the world, Gilead is now poised to extend its reach to more patients and more challenging disesases and conditions than ever before. Beyond our financial results, our clinical progress in 2022 reinforces how far weâve come. At the end of the year, Sunlenca received its first approval in the U.S. for heavily treatment-experienced adults with multi drug-resistant HIV infection. This follows a European approval in the third quarter. Sunlenca is the first six monthly subcutaneous medicines to be approved and we believe it represents the most exciting innovation in HIV therapeutics in recent years, with significant potential across prevention and treatment. We look forward to partnering with the HIV community to increase awareness of Sunlenca and to advancing our portfolio of long acting options. We are anticipating an another potential approval any day now with the upcoming PDUFA date for Trodelvy in pre-treated HR-positive/HER2-negative metastatic breast cancer. We also expect to hear from European regulators later this year. In the meantime, Trodelvyâs commercial momentum is building, with full year 2022 sales growth of 79%. In cell therapy, we continue to reinforce our leadership and to execute on plans to broaden availability, with Yescarta most recently approved in Japan for a second-line relapsed refractory large B cell lymphoma. Merdad will take you through our pipeline updates and key milestones in a few moments. For now, I'll simply note the significant expansion in our clinical programs, which are more than doubled in the last four years. We continue to add further programs, including our new preclinical candidates to partner with lenacapavir for a long-acting HIV treatment programs, the new Phase III OAK CRE study for a Novel Oral COVID-19 nucleoside, and the five Phase III trials that we expect to initiate this year. Before I hand over to Johanna, I want to briefly review the clinical goals we shared with you a year ago. The Gilead and Kite teams have done a terrific job in both delivering as plan and acting with agility in response to changing circumstances. We had an impressive year of discipline and determine execution in 2022 and fully expect to further strengthen our track record of execution in 2023 and beyond. Thanks, Dan, and good afternoon, everyone. Before discussing our commercial results, I want to acknowledge our Gilead team for delivering another outstanding quarter and closing out a very successful year. 2022 was an exceptional year for Gilead with our virology franchise well positioned to continue its leadership for years to come. And significant progress in executing our oncology strategy and bringing new medicines to improve the lives of more patients all around the world. Starting on Slide 7, we had a very strong quarter, delivering a total product sales excluding Veklury at $6.3 billion, up 9% year-over-year, or 12%, excluding the impact of FX and the loss of exclusivity of Truvada and Atripla. With solid growth in each of our core franchises and growth across all geographies, once again, led by HIV and oncology. Quarter-over-quarter sales grew 5%, driven by HIV, Trodelvy and cell therapy, partially offset by HCV. For the full year, total product sales, excluding Veklury, were $23.1 billion, up 8% year-over-year, or 11%, excluding the impact of FX and the Truvada Atripla LOE, driven by HIV and oncology. As expected, full year Veklury sales were down meaningfully in 2022 compared to 2021. That said, Vekluryâs performance has been more sustainable than we previously expected. And it's clear that it continues to play an essential role for hospitalized patients treated for COVID-19. In 2022, Veklury delivered $3.9 billion, including $1 billion in the fourth quarter. Overall, full year total product sales of $27 billion was flat compared to 2021, as growth in our base business was offset by the decline in Veklury sales. On Slide 8, HIV sales for the fourth quarter were $4.8 billion, a 5% year-over-year, driven by higher demand as well as favorable pricing dynamics. This was offset in part by a smaller than usual inventory build in the fourth quarter, reflecting our early efforts on seasonal inventory management. Sequentially, HIV sales in the fourth quarter were up 6%, primarily driven by favorable pricing and inventory dynamics as well as higher demand. For the full year, HIV sales of $17.2 billion were up 5% year-over-year due to higher demand primarily related to the continued strength of Biktarvy, in addition to channel mix, leading to higher average realized price. This was partially offset by inventory dynamics and FX. Overall, the HIV treatment market in the fourth quarter grew 1.5% year-over-year in the U.S. and over 2% in Europe. On an annual basis, the market has grown in line with our expectations of 2% to 3%. Moving to Prevention, the U.S. PrEP market grew 18% year-over-year and 3% sequentially in the fourth quarter of 2022, reflecting growing awareness. Descovy sales for the fourth quarter were $537 million, up 13% year-over-year and 7% sequentially. Notably, despite generics and other entrants, demand for Descovy for PrEP continues to increase up more than 20% for the full year, in addition to maintaining a stable market share of over 40%. With these trends and the TAF IP settlement last year, Descovyâs position in the growing PrEP market has only strengthened. Overall, this provides a strong foundation as we look to the potential launch of lenacapavir for PrEP as a true long acting every six months regimen in the middle part of the decade. Moving to Biktarvy on Slide 9, sales for the quarter were $2.9 billion, up 15% year-over-year, primarily driven by higher demand, as well as favorable pricing dynamics, offset in part by lower channel inventory. Quarter-over-quarter, sales were up 6%, similarly driven by higher demand, as well as favorable pricing and inventory dynamics. In every quarter since our launch, we've seen Biktarvy continue to gain market share, and the fourth quarter was no exception, getting more than 3 percentage points in share year-over-year. This continued momentum is a testament to Biktarvyâs differentiated clinical profile, reinforced by the long-term five-year data we presented last year. Notably in U.S., Europe and other major markets, Biktarvy remains the number one regimen for new starts in addition to its number one position in treatments, which is across most of the major markets, including the U.S. At the end of 2022, there were almost 1 million people managing their HIV with Biktarvy worldwide. Taken all together, this has led Biktarvy for the first time to achieve full year sales of over $10 billion in 2022. Looking ahead, we're confident Biktarvy will remain the leading medicine for the treatment of HIV in U.S., Europe and other major markets for years to come. Now looking ahead for the first quarter of 2023 for HIV, a few points I just wanted to call out. First, with respect to pricing dynamics as we enter the New Year, we expect a typical first quarter reset in patient co-pay and deductibles. As always, these will have an unfavorable impact on average realized price in the first quarter. Second, a reminder that we've historically seen inventory build-up in Q4 that has led to notable drawdowns by wholesalers in Q1. While we've implemented new processes to better manage inventory dynamics from the fourth quarter into the first quarter, we continue to expect an inventory drawdown to occur in Q1, albeit at more modest levels compared to prior year. So with this in mind, we expect HIV sales for the first quarter to decline by low teens sequentially from the fourth quarter. This compares to the 18% sequential decline we reported in the first quarter of 2022. For the full year 2023, I'd like to remind you that some of our HIV performance in 2022 was driven by shifts in channel mix that had a favorable impact on average realized price, contributing in part to the 5% year-over-year revenue growth we reported in 2022. We expect channel mix in 2023 to be relatively similar to last year, and therefore do not expect HIV growth to benefit from changes in average realized price like we saw in 2022. As a result, we continue to expect HIV to grow in 2023, albeit at a modestly lower growth rate than 2022. As we think about the future of the HIV market, Gilead is well positioned to provide many people living with HIV and those at risk of HIV with multiple options for care. To that end, we're excited about the recent approvals for Sunlenca in U.S. and Europe for heavily treatment experienced adults with multi drug resistant HIV infection. This first indication represents only 1% to 2% of people living with HIV. There's a huge unmet medical need. These individuals have cycled through multiple antiretroviral regimen, and until now have had very few if any, effective options left available. Sunlenca is now approved in the U.S., U.K. and European markets and we're working as quickly as possible with regulators and reimbursement bodies to make Sunlenca available in many more countries. We believe that first launch of Sunlenca represents a key milestone for Gilead and looking forward in the treatment and potential prevention of HIV. With Sunlenca, a true long acting regimen is a reality as awareness and familiarity of Sunlenca every six months subcutaneous administration grow among health care providers, community groups and people living with and at risk of HIV, we believe Sunlenca is well positioned for the future. Turning to HCV on Slide 10, sales for the fourth quarter were $439 million up 12% year-over-year, reflecting timing of Department of Corrections or DOC purchases, and favorable pricing dynamics in the U.S. Quarter-over-quarter HCV sales were down 16% primarily due to resolution of a rebate claim in Europe in the third quarter of 2022 that did not repeat, as well as other pricing dynamics in the U.S. offset in part by timing of DOC purchases. Going forward, we continue to expect new starts to decline, but are encouraged that our market share remains over 50% in both U.S. and Europe. Sales of HPV and HDD for the fourth quarter were $255 million as shown on slide 11. Sales were down 4% year-over-year and down 3% sequentially, primarily due to lower than ready demand and pricing dynamics outside of the U.S. Moving to Veklury on slide 12, sales the fourth quarter $1 billion with a full year totaling $3.9 billion. It's clear that the pandemic has evolved Vekluryâs role in the treatment of COVID-19 has remained unchanged as a key part of the standard-of-care for hospitalized patients. In fact, Veklury is still the only antiviral approved and it's setting and in the U.S. Veklury continues to be used in over 50% of hospitalized patients who are being treated for COVID-19. We're excited to continue to work on our oral COVID-19 nucleoside which Merdad will discuss shortly. Moving to oncology, and beginning with Trodelvy on Slide 13. Sales of $195 million in the fourth quarter grew 65% year-over-year, and 8% sequentially. For the full year Trodelvy's sales were $680 million up 79% year-over-year. As we continue to broaden access to Trodelvy around the world, we're encouraged by the growing demand and existing market. Trodelvy is now reimbursed across the major European markets. And in the U.S. demand was up 13% quarter-over-quarter, a growth rate almost doubled from the prior quarter, reflecting the solid contribution of our expanded field force and growing awareness. We're also excited by the expected decision from the FDA later this month, which could expand Trodelvyâs potentially clinically meaningful benefits into the pre-treated HR-positive/HER2-negative metastatic breast cancer setting. We estimate this represents at least 6000 addressable patients in the U.S. and our U.S. field force has just wrapped up its launch meeting and is energized for the upcoming approval. The opportunity for Trodelvy to benefit patients with pre-treated HR-positive/HER2-negative metastatic disease is supported by the recent NCCN Category 1 preferred recommendation for Trodelvy based on the TROPiCS-02 data. Additionally, the European Medicines Agency recently validated our marketing authorization application for Trodelvy in HR-positive/HER2-negative and we look forward to a decision later this year. Now on to Slide 14 and on behalf of Christi and the Kite team Cell Therapy sales in the fourth quarter were $490 million up 75% year-over-year and 5% sequentially. Full year Cell Therapy sales were $1.5 billion up 68% year-over-year. The growth in the fourth quarter and full year were driven by continued uptake of Yescarta in large B cell lymphoma, notably in the U.S. Growing physician familiarity with Yescarta data and Kite industry leading manufacturing continue to be key growth drivers. Yescarta sales was $337 million up 85% compared to the fourth quarter of 2021 and 6% sequentially. We're pleased to see not only strong momentum and second line LBCL in the U.S., but also continued uptake in third line LBCL in both the U.S. and across European market. Yescarta sales were $82 million in the fourth quarter up 2% quarter-over-quarter with growing volume demand in both mantle cell lymphoma and adult acute lymphoblastic leukemia. Year-over-year Yescarta sales were up 44%. We're pleased to see the building momentum of CAR-T Cell Therapy as a treatment class with curative potential and Yescarta and Tecartus as the leading cell therapies of choice globally. More patients are getting access due to Kiteâs industry leading reliable manufacturing capabilities and the team's expanding footprint of authorized treatment centers around the world. And just last week, U.Kâs National Institute for Health and Care Excellence or NICE, recommended Yescarta for routine use in third line large B cell lymphoma. This makes Yescarta the first party available for commissioning in England. Approvals and reimbursement into additional indications that are currently available in the U.S. and other markets is expected to continue over the next year. Yescarta was recently approved for second-line LBCL in Japan, which has the potential to be the second largest cell therapy market outside of the U.S. And we look forward to the transfer of the marketing authorization to Gilead and Kite later this year. In the interim, other still early days, we'll continue to work with our partner Daiichi Sankyo to make Yescarta available to approximately 7000 patients in the second line plus setting. Kite will begin manufacturing supplies for the Japanese market through our El Segundo, California, facility. Thanks, Johanna. I'm pleased to be starting 2023 with all the momentum and 2022 behind us. The positive data readouts for Trodelvy and domvanalimab and the recent approvals for lenacapavir the team is really excited to progress our programs in 2023 and beyond. Starting with Brage [ph] on slide 16 and as I just mentioned, Lenacapavir received its first U.S. FDA approval for people living with multi drug resistant HIV in combination with other anti retrovirals. Marketed as Sunlenca, Lenacapavir is the first and only twice yearly subcutaneous HIV treatment, bringing much needed option for people living with multi-drug resistant HIV, that until now had limited alternatives. Combined with the approval from the European Commission, the FDA approval is an important validation, while we continue to progress our other Lenacapavir based treatment and prevention programs. For HIV treatment, we currently have 10 partner agents for Lenacapavir in various stages of development, including two new integrase inhibitors or INSTI in the pre-IND space. We expect to share data this year from the Phase 1/b proof-of-concept study for Lenacapavir and two broadly neutralizing antibodies or bNAb directed at HIV. And in PrEP, our clinical development of Lenacapavir as a monotherapy for HIV prevention continues to progress with two trials underway, and two additional trials expected to achieve FPI in the second half of 2023. Moving to slide 17, we continue to progress our novel oral nucleoside for COVID-19 GS-5245. Treatments such as Gilead Veklury and vaccinations have improved the outlook for patients with COVID-19. But there's still a significant need for effective and convenient oral treatment options. We've been working with the FDA and other global regulators to launch a clinical development program that could enable global filings. We've initiated a Phase III [ph] Birch trial in high risk patients defined as unvaccinated patients with one or more risk factors, or vaccinated patients with two or more risk factors. The Phase III Oaktree trial will evaluate standard risk patients, which includes people aged 12 and older with no CDC defined risk factors. We expect this trial to enroll its first patients in the U.S. in the first quarter. And we'll share progress when we can just depends in part on the prevalence of COVID-19 year study sites. Moving to oncology on slide 18, and starting with Trodelvy, we continue to build on the momentum of our TOPiCS-02 data. And we announced the European Medicines agency's validation of our marketing authorization application for pre-treated HR-positive/HER2-negative metastatic breast cancer in early January. As Johanna noted, we expect a regulatory decision of our sBLA in the U.S. later this month, and a decision Europe in the latter part of the year. Trodelvy has already changed the standard-of-care for many patients with metastatic TNBC and advanced bladder cancer. And we expect that these regulatory approvals will be an important step forward in bringing this potentially practice changing therapy to certain HR-positive/HER2-negative metastatic breast cancer patients. Moreover, recently presented data demonstrated Trodelvy's PFS and OS benefit was consistent across a range of tumor Trop-2 expression levels. This late breaking post-hoc analysis presented at the San Antonio Breast Cancer Symposium was consistent with Trodelvy's data in metastatic triple-negative breast cancer, where baseline Trop-2 expression was not associated with treatment response. Moving on to slide 19, we were pleased to share data from the fourth interim analysis of the ARC-7 trial with our partner Arcus in December, as presented at the ASCO Plenary session. ARC-7 is a randomized Phase II proof-of-concept study that enrolled 150 patients, the largest dataset in anti-digit studies released today with more than 100 patients across the 2-DOM containing arms. We were pleased to see both DOM containing arms demonstrate clinically meaningful differentiation compared to ZIM monotherapy across all efficacy measures evaluated, clearly establishing that the addition of Domvanalimab improved the clinical responses to anti PD-1 therapy in this population. We were also encouraged by the consistency of the safety data in the DOM containing treatment arms, which showed no unexpected safety signals. This is an on-going trial, and we look forward to sharing updated data at ASCO 2023. While these efficacy and safety data will mature over time, this fourth interim analysis fully supports our joint DOMâs in-clinical development program, and the importance of interrupting the TIGIT pathway. Based on the totality of the data seen today, we're very confident that DOM with an Fc-silent design has the potential to be differentiated compared to other anti-TIGIT molecules in this space. The on-going Phase III trials of DOM added to anti PD-1 treatments in non-small cell lung cancer will provide the opportunity to confirm this activity. We're moving very quickly with our partners in both proof-of-concept studies, as well as late stage trials, including the 4 on-going Phase III trials. Moving to magrolimab, our anti-CD47 therapeutics on Slide 20, we have three on-going pivotal trials, and six proof-of-concept studies across six solid tumor indications. As we shared last month, the independent data monitoring committee met to review data from the first interim analysis from the enhanced study in first line high risk MDS. I'm pleased to share that there were no new safety signals, and the study continues unchanged. As a reminder, based on previous discussions with the FDA, we are now pursuing mature OS data for filing. The study is powered for the final OS analysis and Gilead remains blinded to the data to preserve study integrity. We will update you again in the second half of 2023 after the second interim analysis, noting that these interim analyses are event driven so timing is provisional. Moving on to slide 21, and on behalf of Christi and the Kite team, I'm pleased to share details of another strong quarter of clinical progress in our cell therapy programs. At ASH, Kite had more than 25 data presentations, further demonstrating the transformative impact of cell therapies, including three year follow up data from ZUMA-5 showing that 52% of patients with indolent lymphomas treated with Yescarta continued to respond. Following the compelling ZUMA-12 data on Yescarta in frontline LBCL, shared at ASH in 2021, we expect to achieve FPI in our Phase III ZUMA-23 trial and Frontline high risk LBCL in the first half of the year. We are also progressing our Phase II ZUMA-24 outpatient study in second line LBCL and look forward to sharing interim safety data in the first half of this year. While there's still so much we can explore with the Yescarta and Tecartus, we are also building out the pipeline to ensure the Kite will extend its leadership into new indications and next generation cell therapy technologies. In December, we announced the strategic collaboration with Arcellx for the late-stage product candidate, CART-ddBCMA, which is currently being evaluated for the treatment of multiple myeloma. If approved, together with our industry leading manufacturing capabilities, we believe we can reliably and consistently deliver much needed therapy to patients. Additionally, we announced the pending acquisition of Tmunity Therapeutics, which adds an armored CAR T platform and rapid manufacturing technology to Kite. The Arcellx transaction closed earlier this week and Tmunity is expected to close later this quarter. Both highlight Kiteâs continued leadership in cell therapy, and our commitment to building a robust and exciting pipeline in cell therapies. Wrapping up on slide 22, we are sharing the key pipeline milestones that we expect in 2023 which as you can see, spans FPI, data readouts, updates and regulatory approvals across oncology and neurology. This highlights the progress that Gilead has made on its transformation journey with 59 clinical programs that are well diversified across indications in stage. As the clinical pipeline has grown, our focus on execution has intensified, and we look forward to updating you on our programs as we progress through 2023. Thank you, Merdad, and good afternoon, everyone. Gilead closed out the year with a strong fourth quarter, driven by Biktarvy, Veklury and oncology. For the full year, our sales, excluding Veklury, grew 8%, which is by far the strongest full year growth rate Gilead has reported since HCV sales peaked in 2015. Of note, and excluding the impact of the Atripla and Truvada LOEs, HIV grew 8% year-over-year, driven by continued strong performance of Biktarvy, which grew 20% from 2021 to $10.4 billion. Biktarvy continues to demonstrate strong potential for further growth in 2023 and beyond. Oncology full year revenues exceeded $2 billion for the first time and grew 71% from 2021. Moving to our quarterly results starting on Slide 24. The fourth quarter demonstrated another strong performance across our business. Total product sales, excluding Veklury, grew 9% year-over-year despite an approximately $130 million headwind from FX. If we exclude FX in addition to the impact of HIV LOEs, total underlying sales growth for the fourth quarter was 12% compared with the prior year. Moving to Slide 25. Veklury was down as expected, year-over-year although it grew 8% on a sequential basis from the third quarter, highlighting that Veklury will continue to play an important role even as COVID-19 progresses into its endemic phase. Non-GAAP product gross margin was 86.8%, up more than 16 percentage points from last year, primarily due to a $1.25 billion charge related to a legal settlement recorded in COGS in the fourth quarter of 2021. Non-GAAP R&D expenses for the fourth quarter 2022 were $1.5 billion compared to $1.3 billion in the same period in 2021. Higher R&D expenses were driven by timing of clinical investments, mainly in oncology in addition to the impact of inflation on expenses. Fourth quarter acquired IP R&D was $158 million, primarily reflecting the MacroGenics collaboration and the license amendment with Jounce. And lower than prior year due to the $625 million charge related to the exercise of opt-in rights for Arcus assets in the fourth quarter of 2021. Non-GAAP SG&A was $2 billion, up 23% year-over-year, primarily reflecting a charge of $406 million associated with the termination of the Trodelvy collaboration with Everest Medicines. This $406 million charge includes the $280 million that we agreed to pay Everest to acquire the development and commercial rights to Trodelvy in China and other Asian territories in addition to some other termination-related expenses. Excluding this Everest impact, SG&A was down 2% year-over-year. Fourth quarter non-GAAP operating margin was 37%, down sequentially due to the factors referenced earlier, including the $406 million Everest charge and up year-over-year. Excluding the Everest charge, non-GAAP operating margin was 42%. Non-GAAP effective tax rate in the fourth quarter was 16.8%, lower than the prior year, driven by discrete tax charges recorded in the fourth quarter of 2021. Overall, our non-GAAP diluted earnings per share was $1.67 in the fourth quarter compared to $0.69 in the fourth quarter of 2021. Of note, the Everest contract termination impacted non-GAAP diluted EPS by $0.25 a share. This was not reflected in the guidance we shared back in October. Moving to the full year on Slide 26. Total product sales were $27 billion. Excluding Veklury, total product sales were $23.1 billion, up 8% compared to 2021, primarily driven by Biktarvy and oncology. Excluding around $380 million of FX headwinds and the $350 million impact of the Truvada and Atripla LOEs, total product sales, excluding Veklury, were up 11% as compared to 2021. I touched on the main P&L impacts in the overview, but we'll highlight on Slide 27 that our non-GAAP effective tax rate for 2022 was 19.3% and non-GAAP diluted EPS was $7.26 per share compared to $7.18 per share reported in 2021. I'll move now to guidance on Slide 28. We recognize that the macro environment continues to be uncertain. Our initial 2023 guidance assumes an overall stable macro environment and relatively stable FX at current rates. While inflation is expected to moderate, our 2023 guidance reflects a full year of higher expenses experienced in 2022 associated with inflation. With that in mind, we expect total product sales in the range of $26 billion to $26.5 billion. For total product sales, excluding Veklury, we expect sales in the range of $24 billion to $24.5 billion, representing growth of 4% to 6% for our base business year-over-year. And we expect Biktarvy sales of approximately $2 billion. As always, Biktarvy sales will continue to track hospitalization rates and will remain highly variable depending on the frequency and severity of surges. Notably, we have seen a decline in hospitalization rates in recent weeks, and we'll continue to monitor the landscape carefully. As a result and similar to last year, we will update you on our Biktarvy expectations on a quarterly basis. Moving to the rest of the P&L. We expect our non-GAAP product gross margin to be approximately 86%, just slightly below our 2022 results and primarily reflecting the growing contribution from oncology. For non-GAAP operating expenses, we expect R&D to increase by a high single-digit percentage compared to 2022 levels, reflecting our on-going investment in strategic areas of growth and an increase in activity from later-stage trials. As a reminder, we had 8 Phase III trials start in 2022, and we expect to have 23 active Phase III trials by the end of 2023. Looking ahead, we expect R&D growth to moderate although we will step up investments as needed to support promising programs based on clinical data. Acquired IP R&D includes previously announced payments for our SELEX community and milestone payments for existing collaborations. Consistent with our approach in 2022, we will continue to share our expected acquired IP R&D expenses as we announced additional transactions. Finally, we expect SG&A to decrease by a low single-digit percentage compared to 2022. However, this is primarily due to some expenses reported in 2022 that we don't expect to repeat in 2023. If we normalize the 2022 SG&A expense for these items, we expect full year 2023 SG&A expense to increase by a mid-single-digit percentage on a basis of approximately $5.1 billion in 2022. Altogether, we expect our non-GAAP operating income for 2023 to be $11 billion to $11.6 billion. Our non-GAAP effective tax rate is expected to be approximately 20% again this year. And finally, we expect our non-GAAP diluted EPS to be between $6.60 and $7 for the full year and GAAP diluted EPS to be between $5.30 and $5.70 per share. Moving to capital allocation on Slide 29. Our priorities have not changed. In 2022, we returned over $5 billion to shareholders. This included dividend payments and $1.4 billion in share repurchases. Fourth quarter share repurchases were approximately $800 million. For 2023, we have announced today a 2.7% increase in our quarterly cash dividend to $0.75 per share and remain committed to growing our dividend over time in line with earnings growth. You can also expect to see continued judicious investments in our business, both internally and externally through select partnerships and business development transactions. Finally, we will continue to use share repurchases to offset equity dilution as well as additional repurchases on an opportunistic basis. Hey, guys, thanks very much for the questions. It's great to see yet another impressive quarter of performance from the core business. At the midpoint, guidance assumes 5% year-over-year growth for product sales, excluding Veklury, yet non-GAAP EPS guidance assumes a decline of 6%. So should we expect roughly flat earnings for the next 2 to 3 years as you continue to invest aggressively in the pipeline to set up earnings growth for the second half of the decade? Or is that too conservative? And what levers do you have to increase earnings in the near to midterm? Hey Tyler, it's Andy. Thanks for the question. We appreciate it. Look, what we've said and obviously, we don't provide longer-term guidance, but I'll reiterate that the -- as you highlighted, the base business is performing very well. We had another good year with Veklury, but we expect, as you heard in our prepared comments that the COVID-19 market will continue to be dynamic. And again, this year, you saw -- if you look at our EPS, the growth of the base business offset the decline in Veklury despite the increase in expenses. Going forward, again, a lot of our shareholders, as you know, focus on non-GAAP EPS, excluding Veklury, based on their assumptions. We expect using kind of that metric for our EPS to grow and for that growth to accelerate over the longer run as our products continue to deliver with additional commercial approvals, expanded indications, new products entering the market, et cetera. So again, I think what you're highlighting is the difficulty of looking through the impact of Veklury. When we look at the base business, we have a lot of confidence in terms of the health of the business and the growth it's going to deliver over time, both on the top line and the bottom line. Afternoon, guys. Thanks so much for the question. I will keep it just to one. When you look at lenacapavir in the U.S., just help us with maybe the expected kind of loss dynamics following the recent approval and just with consideration of the hurdles with regard to payer access. And obviously, you guys had a long history here, but wondering if the environment is different today versus sort of pre-pandemic. Thank you. Thanks, Geoff, for your question. It's Johanna. I think that we're super excited with Sunlenca approval. Do remember, though, it's really for a very specific patient population for the heavily treatment experienced multi-drug resistant population. And so that's about 1% to 2% of people living without HIV. That's about 5,000 patients or so in the U.S. So just to give you a little bit of a perspective on it. The â thatâs one piece of the puzzle. So far, so we just launched. So it's still early days and we're excited about it. And I think physicians' response has been very strong as well. The -- I think they really see the innovation of having something every 6 months coming in and also the promise of what it could mean in future with prevention indication as well as treatment combination. So more to come on that one. I think it's an incredible opportunity for us to gain awareness for Sunlenca. How to use it the reimbursement systems. And as to your point about pre-COVID to COVID, I think that actually, we've really normalized the market. I think we're back on track, when it comes to HIV, both screening, diagnosis, et cetera, and treatment. So we do believe that, that's probably not in play as we go forward in 2023. But again, small revenue, huge unmet medical need, and an incredible opportunity for patients to have something to ensure that they don't proceed to more like Aids disease versus just saying HIV positive. Hey thanks for the question. Maybe a question for Merdad. On Trop-2, the competitor AstraZeneca Daiichi continues to be quite bullish and actually as a Phase III lung cancer study readout and -- the Street is quite bullish on Trop-2. Can you explain your thoughts around your differentiation? Appreciating your study readout, I think in 2024, and what we should appreciate as to how you will compete there or differentiate and maybe its safety, but maybe walk me through that and help us understand Trop-2 for versus your competitor? Thank you. Yes. Thanks, Michael. This is Merdad. You're absolutely right. We do think that there are a couple of things that we think about when we think about differentiation. The first is that -- we've now been on the market and have several approvals under our belt with Trodelvy. And I think that is an important factor for having now been on the market in important indications. To your point, with lung, we will be somewhat behind where our competition is we do think that the data will have to evolve for us and for them. And I think so far, we have been fortunate to not see ILD in our development program so far. And so we are going to continue advancing our program forward aggressively. We've had a lot of success so far -- and I think our plan is to keep going ahead with the differentiated clinical development program so we can get into the broadest population as possible. Hi thanks for taking my question. And congrats on the quarter. Keeping it on Trodelvy. Merdad, I was hoping if you could provide a little more detail on 7 in pre-chemo HR-positive, HER2-negative breast cancer that you're initiating later this year. Just what that study design would look like? And how did you come to conclude that this was the next best study for this population. Yes, hi thanks, that's an excellent question. And I think we haven't really talked about the design yet. In large part, we are working through both with investigators and regulators on what the best approach is going to be in that patient population. We do think that there is an important need in a large population there. And we want to make sure that we navigate that pathway carefully. So I think as we develop that program as a protocol gets developed, we'll be able to share more detail over time. Good afternoon and congrats on all the progress. Maybe one on TIGIT and dompenanumab. The -- just what is it that gives you the confidence that the Fc silent construct is the right approach when I think at least the animal data suggest that this may not be preferred. And then as you think about the upcoming study, ARC-7, could you talk about the frequency of scanter [ph] because this has come up as a point of at least discussion with regards to the comparator trials and the frequency of scans. Thank you. Sure. This is Merdad again. Excellent question. Thank you for that. We -- in terms of our confidence, I think to your point, look, I think there was a lot of debate a couple of years ago. We shared in that debate, with what the preclinical data was showing. And as you know, the data they were conflicting preclinical data, including some data that suggested maybe an FC-silent may not work. But which is why we ran the studies the way we did and very importantly, why we ran ARC-7. The objective there was really to establish whether an FC-silent now would demonstrate a benefit relative to FC-active molecule. Part of the hypothesis there is what happens in the periphery and whether depleting effector cells with TIGIT could actually be harmful with FC-competent molecule relative to an FC-nonmolecule. And our confidence really comes from our ARC-7 data. I think the ARC-7 data really answered that question. We clearly show a benefit when added on to a PD-1. The PFS data exceed our bar for moving forward. And so we really think that we've answered that question in the clinic as to whether the FC-now matters. Hi, great. Thanks so much. Just a question on the COVID business. I know it's volatile, and I know at the same time, the Street doesn't seem to model much of a tail for Veklury or GS-5245 at all in numbers beyond this year. We've got Pfizer's and others, then talking about more sustainable COVID businesses, I guess, off of 2023 level. So I just missing your thoughts on just how you're thinking about the business longer term? And is this a meaningful franchise for you over time? Or are you really thinking of this continuing to fade down beyond this year? Thank you. Sure, Chris. It's Johanna. Yes. So definitely, we've changed a little bit. Our position on this one has evolved from 2020 to where we are today, obviously. I think we do truly believe that the Veklury business is much more sustainable than we've ever seen before, let alone as we think about kind of where we're going with COVID-19, including the oral that Merdad can speak to. The one piece that we've seen is -- it's maybe a little bit different than some of the orals that you're referring to is One is Veklury has been part of a commercial model since October of 2020. So we haven't had such big inventory lows at the government level like some others have had. So really, what you see probably 85% to 90% of revenues in 2022 are truly reflecting the demand for Veklury in 2022. And so therefore, coming into 2023, we feel very strongly that Veklury, because it's still the only antiviral indicated at the hospital level at this point in time because of the fact that in many countries around the world, it is the treatment of choice when they decide to treat hospitalized patients. I think there's really an incredible continuing opportunity for us to ensure that Veklury has is accessible to all these patients. And so that's why we think the model is quite sustainable moving forward. I would also just add that our label has broadened over the last year in some. We have a very strong body of evidence, including mortality as well as we have guidelines endorsement with the NIH as well as the WHO. So all of those people all of those pieces together actually make for a strong Veklury color position in 2023, but actually and beyond. And maybe I'll just pass it over to Merdad to talk a little bit to how we're thinking about COVID-19 as a whole with the oral. Yes. Just 2 seconds. I think you're right to point out the uncertainties that we all have and that we've seen with outpatient COVID. And we have a lot of confidence in the mechanism of 5245 given what our expertise in the molecule itself and how well behaved it is. And we are going to push forward and do our best with both the high-risk and standard risk study and the uncertainties in terms of the pandemic will really determine what happens from here. So we will definitely keep you updated as to how that goes from here on out. Hey good afternoon. And congrats on the quarter, and thanks for taking my question. Maybe continuing on the COVID theme on 5245, the Oaktree study. Can you talk a little bit more about the assumptions you've made in powering the primary endpoint here for the standard risk patients? And then help us understand how Oaktree and Birch might fit together to support U.S. and ex-U.S. approvals across the 2 populations you're studying? Thanks. Sure. Very briefly. The -- to your point, one is in the high-risk population, right? So I think that's important. Those are people who have risk factors, whether or not they've been vaccinated and then the standard risk, which is people without risk factors. And -- those are very different populations. The end points are different in terms of what we're looking for and the high risk we're going to be looking for the ability to prevent things like hospitalization. And the standard risk, it would be looking for things like symptom improvement. And I think, again, I'll just reiterate that I think the uncertainties in terms of those factors and importantly, the underlying event rate is real. And so we've made a number of assumptions around what that background rate will be. And we've built into the trials, checkpoints to make sure that our assumptions are correct. And we have the ability to modify our program based on what the underlying event rates are. So that sort of helps mitigate the risks and the uncertainties. So we've gone in fairly eyes open to that. Great. Thanks for taking my question and congrats on the progress. Maybe if you could comment on your overall market share in HIV space and how it has been progressing. What I want to understand is that is there a scenario where your entire business growth could be better than the market growth as you gain share at this point? Thank you. Sure. Hi, Mohit, it's Johanna. I think as we look at HIV as a whole, we're looking at about a 5% year-on-year growth. And of course, that's mostly driven by demand, namely Biktarvy. And so it's probably important to talk about the share there. So our total Gilead share is still in the low 70s, and we've been quite stable at that level. We saw a little bit of the dip when we got the Truvada, Atripla LOEs, and that's the only decline that we've seen there and really held steady, where you see nice growth, of course, is Biktarvy. Our year-on-year growth for Biktarvy is 20% in 50-year post launch. And I think that's the piece of the puzzle that's really driving the overall HIV business. In addition, to what's going on in PrEP with Descovy. To your point about the market growth, we've seen market growth around 2% to 3% year-on-year, both in the U.S. as well as in Europe, and we've assumed that we're kind of assuming that for some years to come. And I do think there's still enormous opportunity for continued growth in that market. And one of the main reasons why is there's still an opportunity for increasing treatment rates so from diagnosis to treatment, but also further penetration in underserved patient populations. And so at this point in time, with United Nations goal at 95,95,95 for testing, treatment and virologic suppression we're only about 70%, 75%. So if we were to get to those goals, you're looking at over 350,000 more patients into the system. So I think you're absolutely right. I think there's a great opportunity for us to continue to grow Biktarvy and our HIV business at Gilead. Hi guys. I have a question on the model today. I feel like consensus models have a lot of operating leverage in the long-term estimates for Gilead. And don't -- consensus doesn't carry more than low single-digit OpEx growth across SG&A and R&D. So with SG&A growing mid-single digits this year after the onetimers and R&D growing high single digits, I guess, should we assume that given all the collaborations and recent acquisitions that you really do need to be growing R&D meaningfully from current levels? I'm just trying to understand where the OpEx is heading longer term. Hey Omar, it's Andy. Thanks for the question. maybe a couple of things. First, I'd highlight that as you'd expect, we are mindful of expenses and don't expect R&D or SG&A to grow indefinitely. That said, we're going to continue to invest thoughtfully in the pipeline, and you're already seeing, I'd highlight the tangible benefits of doing that. So that's a really important point. We started on the R&D side. As you know, we started 8 Phase III trials this year. We're going to -- as you heard, start at least another 5 in 2023. So we are in an investment cycle. Over the longer run, and maybe one other thing before I kind of talk about the long-run picture to your question, again, when you benchmark us relative to competitors, as you know, historically, for both SG&A and R&D we underspent. And it's partly why we didn't have the pipeline that would drive the top quartile sustainable growth, that we aspire to, and we think we're on track to achieve today. So we're going to continue to invest. As you've heard and especially in these late Phase III trials that have started, we'll continue to do BD not at the same pace or level that we have over the last 4 or 5 years as we've rebuilt the pipeline. But our percent, our R&D as a percent of revenue this past year was below industry averages, I think, right around 19%. Same thing is true for SG&A as a percent of revenue. And even our guide suggests, I think, reasonable spend levels relative to comps. In the longer run, to your point, so we think about things over a longer cycle, we will not -- we do not expect to grow R&D or SG&A above the rate of earnings growth. And there is a lot of leverage in the model, we expect over the long run. So we're getting to the point where you're starting to see that play through, especially at the top line and then over the coming years, we expect that you'll really see that play through on the bottom line as well. So thanks for the question. Hey good afternoon guys. Thank you for the question. What's the latest thinking with respect to the regulatory path forward for magrolimab? I guess the question really is, could we see survival data from that ENHANCE interim later this year that's actually mature enough to file on? And is there anything beyond OS benefit that FDA has pointed to for a complete submission package? Thank you. Hi, Olivia, this is Merdad. Yes. I think maybe it's good to step back and just clarify in the sense of -- how we're approaching interim analysis for our studies. So the pivotal macro study is powered for events at the final analysis. And of course, we run interim analyses, I think, as is norm for the industry to evaluate things like safety, but also we spend a little bit of alpha in case there is a dramatic improvement in the primary endpoint and offer ourselves the opportunity to start early to benefit patients. So the OS data continue to mature. The next interim this year dependent on events, of course, is not the final analysis. So it really depends on how big the magnitude of improvement is in OS, whether that leads to a stop in the study or an unblinding in the study. Our expectation is that we go to the final OS analysis. Of course, we always hope an upside surprise at one of the earlier interim analysis. And then in terms of approval, I think we really need to have OS. We initially had hoped that we could get, for example, an accelerated approval with CR rates alone. We think we need to do both now to have both a complete response rate, but primarily be driven -- not primarily be driven but importantly, have OS data as well in order to support a file. Thank you. First on [indiscernible] on the NICE recommendation. Clearly, that's good from a U.K. perspective, but it's the case that NICE recommendations are closely followed by a much larger range of countries. So I just wondered if this does indeed have a spill over benefit beyond the U.K. for Yescarta. How important is this approval in the U.K.? Hey there Simon, it's Christi. Thank you for the question. So we think it's very important because first of all, it's the number of patients is still very similar at 450, but the process by which patients get approved, obviously should be much smoother and really giving access to -- this recommendation really helps patients get access much more quickly. And so to your point, we do think as you see this approval that this hopefully, will have an influence on other countries, just like we saw with reimbursement as we look at the reimbursement of Yescarta in over 20 countries, it was one at a time. And as certain countries starting to improve. We saw the other countries also do the same. So based on the second-line ZUMA-7 trial as well, that will be our next step, too to continue to provide the data that giving a patient a onetime treatment can really help the health care system and improve patient outcomes. So yes, we're very hopeful that it could have some influence. Good afternoon, and thanks for taking the question. This is Nicole on for Robyn. Are you seeing any safety signals in a sense for NFLSC [Ph] with Trodelvy and pembro? Like are the safety probes comparable to both populations? And if so, would this hamper uptake in the first line? Hi, Nicole, this is Merdad. We haven't really disclosed anything on the safety. Those studies have really just gotten underway. So I don't think we have anything to share yet. We'll, of course, be following that to see if anything emerges. Your question is exactly the one that we want to make sure we address as we move forward. But I don't -- we don't have enough data at this point to make a comment one way or the other. Hi guys, thanks for taking my question. One for Christi. You're annualizing well above $1 billion for cell therapy products. Can you talk about the recent work you've done to expand manufacturing and how you could think that could support further growth this year and beyond? Thank you. Sure. So that was our focus and has been our focus is really on the supply side and being able to ensure that we have the capacity to provide for patients. I think that's what you're seeing is our industry-leading manufacturing piece. And if you look at GCFO3 here in California, adding the new site to TCFO-4 in Amsterdam and in TCFO-5 in Maryland, we're really able to leverage that footprint to grow not only in the assets that we have today, but in future pipeline, especially as we look at the partnership we have now with our select to multiple myeloma. So we're very confident about our ability to supply and the capacity that we've built and today and for tomorrow. And really the next focus for us is we've had some really good gains on our margin improvements. But as we look at our operational -- our optimization of our manufacturing footprint. Yes, we need to continue to ensure the capacity, which we feel like we've really done. And now we're able to put a big focus too on the optimization piece, which we've made progress on but we have several levers there to pull as well. So I hope you're hearing from me a big confidence in our ability to deliver for patients from a capacity standpoint. Thank you. That concludes today's question-and-answer session. I will now turn the call over to the management team for any closing remarks. Great. This is Dan. I just want to do a couple of things here. First of all, thank you all for joining and your on-going interest and questions for Gilead. As usual, if we didn't get to all of your questions, please reach out to Investor Relations. As you know, we're very happy to answer those on an on-going basis. Now let me just close by emphasizing that Gilead is in a very different place than it was a few years ago, thanks to the work the team has done to transform the company. We're going into 2023 in a very strong position with our current medicines performing well and tremendous growth potential in our neuro therapies as well as those in development. So what you can expect to see next is quarter-on-quarter execution and even faster progress and greater impact in the future. Thank you very much for your time today, and we look forward to speaking to you again soon.
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EarningCall_741
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Good morning, and welcome to the Aflac Incorporated Fourth Quarter 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 this event is being recorded. I would now like to turn the conference over to David Young, Vice President of Investor and Ratings Agency Relations and ESG. Please go ahead. Thank you, Andrea. Good morning, and welcome to Aflac Incorporated's fourth quarter earnings call. This morning, we will be hearing remarks about the quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated. Fred Crawford, President and COO of Aflac Incorporated, who is joining us from Japan, will then touch briefly on conditions in the quarter and discuss key initiatives. Yesterday, after the close, we posted our earnings release and financial supplement to investors.aflac.com, along with a video for Max Broden, Executive Vice President and CFO of Aflac Incorporated, who provided an update on our quarterly financial results and current capital and liquidity. Max will be joining us for the Q&A segment of the call, along with other members of our executive management; Virgil Miller, President of Aflac U.S,; Brad Dyslin, Global Chief Investment Officer and President of Aflac Global Investments; Al Roziere, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac U.S. We are also joined by members of our executive management team at Aflac Life Insurance Japan; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO; and Koichiro Yoshizumi, Executive Vice President and Director of Sales and Marketing and Alliance Strategy. Before we begin, some statements in this teleconference are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurances that they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. And we encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results. As I mentioned earlier, the earnings release is available on investors.aflac.com, and includes reconciliations of certain non-GAAP U.S. measures. Please also note that after we file our 10-K, we plan to post, on our investor site, a recast quarterly financial supplement, showing the effects of the new long-duration targeted improvement accounting standard had it been applied to the 2022 and 2021 fiscal years. Thank you, David, and good morning. Thank you for joining us. Reflecting on 2022, our management team, employees and sales distribution have continued to be resilient stewards of our business, being there for the policyholders when they need us most, just as we promise. From an overall standpoint, pandemic conditions impacted operations in Japan, especially in the first half of 2022. But they are gradually improving. Meanwhile, pandemic conditions in the U.S. have largely subsided. Turning to our financials, when adjusting for material weakening in the yen, the Company delivered another quarter of solid earnings results that rounded out a year of overall strong performance, as Max addressed in this quarterly video update. For 2022, Aflac Incorporated reported adjusted earnings per diluted share, excluding the impact of foreign currency, of $5.67, which was the Company's second best year in the history following a record 2021. Aflac Japan generated solid overall financial results in 2022, with an extremely strong profit margin of 24.9%. One of the consistent key contributors to Aflac Japan's strong financial results is its persistency, which was 94.1% in 2022. As anticipated, our benefit ratio returned to a more normal level in the fourth quarter after seeing a spike due to the practice of deemed hospitalizations, the scope of which was narrowed last September. Throughout the year, we continued to navigate the waves of COVID in Japan. We expected sales would pick up in the second half of the year, especially in the quarter, and that's exactly what we saw happen. Sales in Japan rose 10.8% in the second half of the year, including an 11. 4% increase in the fourth quarter, which led to a full year sales coming in essentially flat. These results reflected the August launch through Associates of Wings, our new cancer insurance products. They also reflected our first sector product updates in the fourth quarter that better positioned Aflac Japan for future long-term sales opportunities. Recently, Prime Minister, Kishida announced that COVID would be downgraded to the same level as seasonal flu starting in mid-May. While we're encouraged by this announcement as a sign of daily life in Japan returning to pre-pandemic conditions, we will see how this evolves, but look to continue building on our sales momentum in 2023. In April, Aflac Japan will begin selling through Japan Post Group, our new cancer insurance product, and subject to FSA approval, [indiscernible] for serious diseases, which was developed in collaboration with Japan Post Group. We expect this close collaboration to produce continued gradual improvement of Aflac cancer insurance sales over the intermediate term and to further position the companies for long-term growth. Another element of our growth strategy is our intense focus on being there where consumers want to buy insurance. Our broad network of distribution channels, including agencies, alliance partners and banks continually optimized on opportunities to help provide financial protection to Japanese consumers and we are working hard to support each channel. Turning to the U.S., for 2022, we saw a solid profit margin of 20.4% in the fourth quarter. This result was driven by lower incurred benefits and higher adjusted net income, particularly offset by higher adjusted expenses. I'm pleased with the 17.4% sales increase in the fourth quarter, which reflected the largest amount of quarterly premium in the history of Aflac U.S. and continued to a 16.1% sales increase for the year. This reflects continued improvement in the productivity of our agents and brokers as well as contributions from the build-out of our acquired platforms, namely dental and vision, group life and disability. These are relatively small parts of our sales, but key elements of our growth strategy to sell in our core supplemental health policies. I'm encouraged by the continued improvement in the productivity of our sales associates and brokers. We are seeing success in our efforts to reengage veteran sales associates. And at a time, we're seeing strong growth through brokers. These results reflect continued adaptation to the pandemic conditions, growth in the core products and our investment and build-out of growth initiatives. I believe that the need for the products we offer is strong or stronger than ever before in both Japan and the United States. At the same time, we know consumers' habits and buying preferences have been evolving. We also know that our products are sold, not bought. As we communicate the value of our products, we know that a strong brand alone is not enough. We must paint a better picture of how our products help. In the latest commercial featuring the Aflac Duck and the Gap Goat, the goat personifies the gap that people face when they get medical treatment. Fortunately, the Aflac Duck is the hero who helps overcome the problem. I know this helps demonstrate the need for our products, thus helping our sales opportunities. We continue to work toward reinforcing our leading position and building on the momentum into 2023. Related to capital deployment, we placed significant importance on achieving strong capital ratios in the United States and Japan on behalf of our policyholders and shareholders. In addition, we have taken proactive steps in recent years to defend cash flows and deployable capital against the weakening yen. We pursue value creation through our balanced actions, including growth investments, stable dividend growth and disciplined tactical stock repurchase. With the fourth quarter's declaration, 2022 marks the 40th consecutive year of dividend increases. We treasure our track record of dividend growth and remain committed to extending it supported by the strength of our capital and cash flows. Additionally, the board reiterated its first quarter dividend increase of 5%. Our dividend track record is supported by the strength of our capital and cash flows. At the same time, we have remained tactical in our approach to share repurchase, deploying $2.4 billion in capital to repurchase 39.2 million shares in 2022. Combined with dividends, this means we delivered $3.4 billion back to the shareholders in 2022. Keep in mind, in addition, we have among the highest return on capital and the lowest cost of capital in the industry. We have also focused on integrating the growth investments we made in our platform. We also believe in the underlying strengths of our business and our potential for continued growth in Japan and the United States, two of the largest life insurance markets in the world. We are well positioned as we work toward achieving long-term growth, while also ensuring we deliver on our promise to our policyholders. I'm proud of what we've accomplished in terms of both our social purpose and financial results, which have ultimately translated into strong long-term shareholder return. Before I turn it over to Fred, you may recall that the financial analyst briefing in November that I mentioned how Fred would be increasing his focus on Japan and spending more time over there to delve deeper into learning about the operations there. As David mentioned, he is joining us today from Japan where he's on assignment for the better part of 2023. As President and Chief Operating Officer, he is also continuing to focus on Aflac U.S. as well. Thank you, Dan. I'm joined here in Tokyo by our Aflac Japan leadership team led by Masatoshi Koide, President of Aflac Japan. Let me begin by saying 2022 was an important year of operational and strategic progress across the organization. Our U.S. growth platforms, dental and vision, group life and disability and consumer markets have moved from integration to full production, with comprehensive product portfolios that are broadly filed and marketed across the U.S. under the Aflac brand. These businesses have modernized operating platforms built to support the scale we anticipate in the future and are now fully contributing to sales and earned premium growth. In Japan, our refreshed cancer product is now further enhanced with the launch of our new [Yuriso] consulting support model after nearly a year of successful testing. We launched a revised and tactical approach to the sale of our WAYS and child endowment products, leveraging the strengthened product appeal to promote third sector cross-sell. While navigating difficult COVID conditions, we were proactive in addressing our expense structure, defending strong margins in the face of revenue pressure. From a corporate perspective, we remain focused on risk management and capital efficiency. Two areas of focus included our approach to hedging the U. S. dollar portfolio in Japan and efforts to improve enterprise return on equity and Japan product competitiveness with the launch of Aflac Re, our Bermuda-based reinsurer. Finally, across the organization, we launched a coordinated effort to address the balancing act of investing in and delivering on growth, reducing expenses simplifying our business model and improving overall customer experience. This includes comprehensive project governance, a network of agile teams and regular reporting up to the Board level. The financial goal is simple: to deliver on the outlook provided at this year's investor conference with respect to growth and margins in the U. S. and Japan. We're proud of our efforts, but it's clear from our results that we have worked to do in a few key areas. This includes addressing weak premium persistency in the U.S. and revitalizing our production platform in Japan. Furthermore, we need to address these issues while continuing to advance our technology and associated process improvement across the organization. With that quick review, let's turn to current conditions and what we're focused on in 2023, starting with Aflac Japan. As Dan noted, claims recovered in the fourth quarter, as did the benefit ratio, on January 20th, Prime Minister Kishida announced plans to downgrade under the law COVID-19 to the same level of seasonal influenza, which will be enacted in mid-May. Importantly, this removes the immediate option to implement quarantine and other restrictive measures, such as state of emergency orders. We believe this move is designed to signal and encourage a return to normal, including business activity. While claims processing volumes remain high, this is driven by a natural lag in reporting of claims generated during Japan's seventh wave of COVID under the old deemed hospitalization rules. You can think of this as working the IBNR claims that were financially recognized in the third quarter. Despite continued waves of COVID, we expect our team in Japan to improve on the performance in 2022 as COVID, like the common flu, appears destined to become a way of life in Japan and elsewhere. In that regard, we're focused on the following: First, in terms of distribution recovery and productivity across our channels, our powerful associates channel requires aggressive approach to training and development to drive new customers. Separately, we are working with Japan Post on a campaign surrounding the introduction of the new cancer product in the second quarter. As Dan noted, we have strong commitment at the top of Japan Post, and we are cooperating at levels throughout the organization. It should be noted late this January we also introduced the new cancer product in our Dai-Ichi alliance as well as the financial institutions channel, both of which have performed below our expectations in recent periods. Turning to core product refreshment, our new cancer product will add a critical illness lump sum benefit rider in April, available on old and new cancer products and through Japan Post Group and our associates channels. Cancer ecosystem development is moving from launch to expansion. When analyzing current call volume, over 50% of the calls that are coming into our consulted related service platform relate to treatment, thus suggesting a value proposition beyond the pure financial benefit of paying a claim. Our 2022 refreshed approach to first sector savings is yielding expected results, with approximately 80% of all sales representing customers who are under the age of 49 and approximately 50% of all new first sector customers purchasing a third sector product which is twice our target of 25% cross-sell. Finally, in the face of increased competition and focus on selling the new cancer product, we have seen our medical sales decline and have plans to refresh our product in the fourth quarter. When stepping back to consider these activities, we are and have been taking broad action across product and distribution with an eye towards returning to an ¥80 billion production platform in the 2025 and 2026 period. The path to that level of production will build over time. But as we look towards 2023, we expect the continuation of our experience in the second half of 2022, where we generated consistent growth in production. Meeting our long-term targets will require strong execution on all fronts, as well as supportive market conditions and the cooperation of third-party alliances and partners to aid in driving productivity improvement. Finally, while we have made progress, we seek further advancement in digitizing paper and manual processes for greater operating efficiency. This is not entirely an Aflac Japan issue. It's a Japan financial service industry issue. In recent years, we have moved from 30% to approximately 50% of our applications submitted in digital form, with only 10% of claims processed digitally. Over time, we seek to drive digital applications to 80% and digital claims processed to over 40%. This will allow us to take additional cost out of our operations, but requires the commitment of our distribution partners, their agents and customers to drive adoption. I'm here in Japan in part, recognizing this is an important time for Aflac Japan. We are engaged in transformative activities that have long-term franchise implications as we seek to leverage our financial strength and leading third sector position. My focus will be partnering with our leadership team in revitalizing our distribution, incubating new product end markets and digital adoption to drive down expenses and improve customer experience. Turning to the U.S., as Dan noted in his comments, we continue to deliver a balanced attack to the marketplace. Split by product class, group benefits were up 28%, individual benefits up 8%. Split by channel, agent sales were up 7% and broker up 25%. With respect to our expansion businesses, network dental and vision and premier life and disability sales were up 98% and 75%, respectively, for the full year. The underlying signs of momentum are encouraging. For example, in our agent small business franchise, average weekly producers are up 3%, the second consecutive year of growth after a period of steady decline. Dental and vision is proving out our thesis of cross-sell as roughly $0.80 of supplemental health and life products are sold with every dollar of dental and vision. Our life and disability platform, not only has strong sales, but a successful renewal year, and recorded 97% premium persistency. Now fully integrated and expanding, we see 2023 as a year of leveraging this platform to both defend and grow voluntary group business. While it was a difficult year industry-wide for direct-to-consumer sales, we are encouraged by consumer markets 5% increase in sales in the fourth quarter with new alliances coming online. Finally, it was a challenging year for persistency in the U.S. Persistency has stabilized in our individual business. However, weakness earlier in the year continues to impact our trailing 12-month metric. Group Voluntary, a smaller contributor to earned premium, drove most of the 260-basis-point decline in overall persistency. Account persistency across the organization has remained relatively flat, but we lost a few very large accounts during the year. The industry has experienced weakness in voluntary persistency, which tells us there are also labor force dynamics contributing. We have stepped up our focus on persistency, establishing a dedicated office to drive and oversee a series of efforts, including product development, client service, technology solutions and incentive designs. Turning to investment results, investment income in the quarter was stable, with strength from higher yields on floating rate portfolios offset by increased hedge costs and anticipated weakness in alternative investment income. As expected and discussed last quarter, our alternative investment portfolio remained under pressure, posting a loss of $21 million in the quarter. By comparison, last year's quarter enjoyed $127 million in gains. This decline was anticipated given the natural correlation to the public equity markets and the lag in private equity reporting. Despite losses in the quarter, year-to-date, the alternative portfolio generated $103 million in income following an exceptional 2021. Throughout the year, we have refined our hedging strategy, reducing $2 billion in notional currency forwards in exchange for options that reduced hedge costs while protecting capital against material moves in the yen. Overall, as we look at 2023, we are staying the course with respect to our strategic and tactical asset allocations as we watch closely the risk of economic slowdown driven by Fed action to fight inflation. We are also watching the Bank of Japan as they introduce a new governor this spring which many believe could lead to a change in policy. Before turning the call back to David, it's worth following up on Max's recorded comments to reinforce how we are positioned with respect to potential for a period of U.S. or global weakness. Our morbidity-based insurance model is defensive in nature, with relative stability in sales, earned premium and profit margins through economic cycles. Among traditional life insurance peers, we maintain low asset leverage as defined by the ratio of general account assets to regulatory capital, particularly if you exclude our concentration in JGBs. We believe our portfolio is well positioned to weather the current economic uncertainty, recognizing we would anticipate some pressure on our $12 billion loan portfolios. We work closely with our external managers for middle market and real estate loans and have conducted a comprehensive stress test designed to apply recessionary pressure to these portfolios. Our approach included a moderate and severe recession, applying loss rates consistent with past economic cycles. Both scenarios resulted in elevated, but manageable losses, with no immediate need to change our disciplined approach to these asset classes and putting new money to work. When looking at the impact of core capital ratios, we developed a market pricing, ratings migration and loss scenario that falls in between a mild and severe recession and includes the entirety of our general account assets. When applying these stress tests, our core ratios of RBC, SMR and ESR all came out the other side well above are minimum thresholds. While it is wide to proceed with caution -- wise is to proceed with caution, we do not see recessionary conditions as disruptive to our capital deployment plans. Thank you, Fred. Now we are ready to take your questions. But first, let me ask you to please limit yourself to one initial question followed by a related question. And then get back in the queue to allow other participants an opportunity to ask a question. We'll now take the first question, Andrea? We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jimmy Bhullar of JP Morgan Securities. Please go ahead. So I had a question for Fred on long-term Japan sales outlook. I think you mentioned ¥80 billion in the '25 period. If we look back historically, that's still -- while it's up a lot from here, it's still consistent with what you had in 2019 and a lower number than '18. So is it that the market opportunity is less than it was before? Or do you think -- or should we assume that your market share has declined? I think really -- so first of all, over the long run that is beyond 2025 and '26 we obviously would expect to continue some level of growth pattern. We simply stopped the timing around that time frame as a reasonable forecasting period. But there's no doubt, in the short run, meaning the next three to four years, that one of the shortfall compared to pre-pandemic levels was strength in the Japan Post distribution platform, including some very strong years of introducing new cancer in that platform. And it's clear to us at this point in time that while that platform is recovering, it's going to recover in a more linear fashion over time as opposed to a step function with dramatic increases. And that's because Japan Post is under a very diligent program of improving and investing in their platform, retraining their sales force and recovering from effectively halting and being out of the market for a period of time, as you know. So I think it's more of that gradual approach to the build that we expect that is playing on the slower growth rate. Now having said that, we're doing a lot of different things, as you know, we're refreshing our cancer product. We're adding to that cancer product competitiveness with our [Yuriso] consulting practice. We're also adding lump sum critical illness benefits, and we continue to focus on our other product development, including refreshing our medical product, particularly with an eye towards competing better in non-exclusive channels that are very competitive on the medical product, and we need to compete better there and build share. And then we're excited actually about the developments with WAYS and child endowment, particularly with WAYS. While it is not as high a return product as our other third sector, we're very pleased with the cross-sell activity, and it's also serving to build a little bit of momentum back in our core associate channel who needs more product to generate more commission and have more opportunity to recruit and build the sales force. So, so far, it's very early in that program. We're only a few months into reviving the WAYS product, but so far, the data is very supportive of the halo effect, if you will, particularly cross-sell. So we're doing a lot of different things here in Japan. But ultimately, the reason you see muted recovery is when we look at the throughput of these new products and capabilities, meaning the throughput through agents at Japan Post, agents at Dai-Ichi, agents and agencies in our associate channel, they're busy recovering from COVID, getting back out into the marketplace with face-to-face meetings. And of course, Japan Post is going through their own dynamics of recovery. So it's really the recovery in those third-party platforms that's causing us to be more cautious. Okay. And then on the change in classification of COVID as a seasonal flu beginning, I think, you said mid-May, how should we think about the impact of that on your claims and potentially sales? I think from a claims perspective, you're seeing the recovery already, and that is we're expecting it to recover back to previous traditional levels of claims activity. I think I mentioned to you last quarter, a normal week in Japan for us is processing something in the neighborhood of 30,000 claims in our operating center. That rose to north of 90, 000 claims a week during the deemed hospitalization period and seventh wave of COVID. So we've seen that dramatically come back down to normal levels with the exception of working the backlog that I mentioned in my comments. So I think the idea is to return back down to normal levels of benefit ratios, and that's the answer there. In terms of new sales, we have Yoshizumi-san here and Koide-san and they can add their commentary. I think the trickier thing is, when you're talking about thousands of agents, some of whom were forced into quarantine conditions during COVID, the issue becomes not only are more agents out there able to produce and share numbers undisrupted by COVID, but will there be a recovery in face-to-face activity, which is more effective. This is still an extremely cautious society here. As we sit here today, we are all wearing masks on the way into work, on the way home from work, while at work and while walking the streets of Tokyo. So there's still some time to take place to recover the full normal activity. Yoshizumi-san, I don't know if you feel differently or have anything to add about COVID conditions. First of all, this COVID environment last year in the first quarter between January and March, sales have been severely impacted. And following that, the next peak, or the largest peak was between July and August, and many of the sales offices and branches were forced to shut down. And as you've seen in our sales results, you can see that our new cancer insurance sales, is increasing and there's been a great momentum in sales as a result. And also, our product strategy really was successful. For example, we were able to propose to customers more comprehensively of our products using WAYS. And as we enter this year, the COVID situation has been improving. And as a result, the agency's activities are even more active. And we are seeing that we now are gaining really good momentum with our strategies related to products plus the channel strategy in this new environment and in this environment with living with COVID. So what I am thinking now is that we are starting to really see an environment where we would like to be aiming for ¥80 billion in 2025 or 2026 time frame. That's all from me. My question is around the paperless initiatives that have been moved to digital and claims. You mentioned, I think it was 10% of claims digitally now moving higher, I think. Can you maybe talk about how this may impact benefits ratios over time for maybe a one-day pay style approach to digital? Well, I think the primary benefit, there is certainly an ease -- customer ease element to moving to digital. But the primary motivation of moving to digital is increased agent productivity, yes, ease of doing business with the customer and the agent. There is, in fact, speed of processing claims that would pick up. For example, imagine paper-based claims processing when your claims went from 30,000 to over 90,000 a week during the last seventh wave of COVID. Had we been -- frankly, as an industry, this is not an Aflac thing. Had the industry been far more digitized in the level of claims they process digitally, you would have had much greater speed of claims adjudication. Normally, we'll pay a claim on average in around three days or so in Japan, sometimes four days. It had gone up to around 12 days during that peak level. It's now come down to around five days, so we've recovered quite a bit. But if you are in a digital environment, there's no doubt, John that you could speed that up and also protect against elevated claims periods to keep the speed and turnaround time faster. But I will tell you, a big motivation on our part to move to paperless is taking cost out of our structure. So when you're dealing with paper applications and paper claims processing and a heavy call volume related to customer service activities, all of that adds to cost structure. And in order for us to get that cost structure down, we've got to move it to digital, and that's what we're on a path to doing. Okay. That's fantastic. And then my follow-up question, if we can stick with expenses. You had talked about a joint work with Japan Post for cancer launch. And then you talked about that backlog of claims from that seventh wave being the review mirror. But with that joint work on the cancer launch, are there any planned onetime expenses we should be thinking about? Not materially. I'm looking at Todd Daniel's here, our CFO, and no, we wouldn't expect that. It's not unusual, however, when we launch a new cancer product in general and then launch in a major system that there is, in fact, a level of marketing expense that comes into play and launch expense. But quite candidly, while you may see it have modest implications to your expenses and expense ratio, it's not material and it's nothing I would characterize as a onetime thing that would pop out on our financials. It's just sort of normal way of doing business and normal business activity. So I wouldn't anticipate that, John. I just wanted to get an updated view on just capital management and capital management priorities. Just looking at even just in the U.S., I mean, how strong the RBC ratio is, I mean I think there's companies that run with around half of your RBC level. There's seemingly a lot of excess capital around the organization. So, I was just interested in your views on that and how that's evolving? Thank you, Alex. So, we have, obviously, throughout the COVID times, we made an active decision to hold capital in the subsidiaries given that we initially didn't know exactly where our benefit ratios and underlying profitability were going to go. So we opted to hold capital at a high level, both in Japan and in our U.S. subsidiaries. Coming out of COVID obviously, realizing that we are now operating at a high level, especially in the U.S. with an RBC ratio, on a combined basis, north of 60%, we do agree that, that's an excess capital position and that, over time, we would expect to operate our U.S. entities closer to 400%. That means that there will be capital coming out of those entities over the next couple of years. But we will do it when we sort of need it, and we will hold capital where we think it makes the most sense. There are times when it makes more sense to hold the capital centrally at the holding company, and other times when it makes more sense to holding at the subsidiary level. And we will, over time, optimize that. Got it. And then the second question I had, I think it was mentioned earlier that Fred was going to be in Japan for some time. And I'd just be interested in sort of what the focus is for you, Fred, as you're over there? It sounded like maybe a year or something. What is your focus? What are your key objectives as you spent some time over there? Sure. Yes, this is the result of Dan and I sitting down in the few months or so leading up to the year-end, and why Dan signaled that fab that I'd be shifting a bit of my weight to focus a bit on Japan. To be clear, I'm spending effectively 2023 in Japan. It started mid-January and will run through mid-December. There'll be times where I'll be back in the States for critical activities and other Board-related activities, et cetera, in the U.S. So I won't be here entirely. And very importantly, I haven't changed any of my job description. And so a s Dan mentioned, I remain actively involved in driving U.S. activities. But the main reason I'm here in Japan is that it's a recognition that, at Aflac, this is very different in how we operate Japan is not a subsidiary in what you would consider to be a normal global corporate company. Japan is intertwined in the fabric of the entirety of Aflac. There's extremely coordinated and close activities shared governance committees, shared intellectual capital around technology, digitization, product development techniques of going to market. We're really, in many respects, one company despite being 13, now 14 time zones away from each other. And so in order for me to do my job effectively, that is being President and Chief Operating Officer of this company, you've got to immerse yourself in understanding the Japan marketplace, our business model and the unique dynamics that drive this business. And you really -- you can do some of that making four to six trips a year for one week at a time or two weeks at a time, which I've done for seven years, eight years -- coming on eight years now. But it's entirely different when you immerse yourself in living here and working day-to-day with the groups. And where my focus is, is real simple. It's where you would expect when you look at our results. Number one, it's partnering with Koide-san and Yoshizumi-san to help revitalize the distribution platform of this company. We need to make a leg up. We need to address certain parts of the distribution, and we're going to have to execute and deliver to bring back that path to ¥80 billion. I think we have a wonderful opportunity to leverage the brand, our scale, being in one in four households where we can drive some of the new products and capabilities that we have been incubating in recent years. And so, I'll be focused on that. And then this move to digital, realize this is a significant effort. This is not as simple as looking at your operations and moving away from paper and moving to digital. This is really not about the technology. The technology is in place. This is about partnering with third-party distribution partners, everything from Japan Post and Dai-Ichi to our associate channel to banks to move them towards more digital adoption through campaigns and programs that increase that adoption. You have to realize this is not an Aflac issue. This is quite literally no different than what the rest of the financial service industry is trying to do. And so when we talk about moving from 10% to 40% of claims or 50% to 80% of applications, that's not just an Aflac issue to handle, it is attempting to move forward and beyond the rest of the industry that is plagued by paper. You don't realize this, but many insurance companies in Japan quite literally never went remote in their operating platforms because they couldn't during COVID. They had to keep bringing their people back in because they were tied to paper and processing. That was not our situation. We were able to go to 50% remote, but even 50% remote was a bit high -- a bit low, if you will, high in terms of bringing people in. So, there's a real need to do this, and it's transformative. So anytime you use the word transformation on distribution and transformation on operations, it's very important for somebody like me and my capacity to be here on the ground spending time in Japan. This is Dan. I want to make a comment is that actually, I wanted Fred to go in 2020. And of all things, as you know, that was the year he got promoted to Chief Operating Officer and then COVID. So the year really is behind because I just thought -- it was actually his idea to stay there. My idea was to go there and live three months. And so that just shows how committed he is to the Company and doing well, and at the same time, working with the U.S. So I'm very pleased with Fred being over there. And that knowledge you cannot buy. It takes being over there, either the way I've been going for 40 -- over 40 years of the Fred's doing in the last seven. So thank you, Fred, and... David? On the Japan sales, can you give a sense of how much of those sales represent to the lapse and reissue -- and when we think about the sales metric that you show in your supplement, is that a sort of a gross number? Or is that a net number when we think about policies that may be lapsing? When you look at sales, it's a gross number. So it includes the sale of policies to new customers or customers without the policies and replacement policies. At the same time, a replacement policy also counts towards lapsation. So in other words, yes, it counts as a sale on a gross basis, but also a replacement policy is considered a lapsed policy as well. So you end up having higher lapse rates and higher sales when you have replacement activity. That's why, in fact, you see our amortization expense pop up in the fourth quarter when we launch a new cancer product or a new medical product because you effectively have a greater level of lapsation. But there's nothing wrong with a replacement policy. It's really nothing more than going out to a customer and saying, you may benefit from an upgraded structure of benefits and pricing and other additive writers, et cetera., and there's nothing wrong with that. The issue isn't the lapse and replacement policy. The issue is when it's too much of what you sell, meaning you want to be driving more new customers and have the proportion of your lapsed and reissued or replacement policies be a lower percentage of your overall sales. That's why you're seeing what we're doing, developing coming back out with WAYS, which attracts a younger, as I mentioned, and newer cohort of investors. Creating products like the disability or income products that are sold and now small businesses to employees who lack that type of coverage, and elderly care product, which is a growing market, albeit a slow growing market. All of this is designed to try to attract and develop new customers. And we believe we can make progress on that. But right now, the lapse reissue is naturally higher when you launch a new cancer product. And that's really typical of what we've seen in the past. And just to add, Suneet, to how this impacts our P&L, it obviously impacts our benefit ratio and expense ratio as well. The benefit ratio was lower by about 90 basis points in the quarter from increased lapse and reissue activity, and our expense ratio was roughly 50 basis points higher because of higher DAC monetization that Fred referenced. Got it. I think last quarter, you had said that the lapse reissue is over 50%. Is that kind of still where it's running in Japan? Yes, Suneet, this is Todd. It's still running around that rate. We saw it a little higher in the third quarter when we launched. And naturally, that rate starts to come down. So I think as a whole, over the first six months or so, we anticipate being around 50%. Could you talk a little bit more about what you saw in terms of the elevated U. S. lab activity in the fourth quarter? And then, also if you can provide any commentary on if that's continued into January or is settled down? I commented in my script, this is Fred, about the lapse rates in the U.S., and it really mimics what I said. And there's really two categories to look at it. One is our individual products. You can think of these as our traditional products sold to small businesses, the largest portion of our in-force and sales. And that lapse rate was down around 1% and, honestly, down 1.5-or-so early in the year and then slowly recovered to where, by the fourth quarter, it was down more modestly. Yes, I would just add that Fred's script and talking points were spot on. We did see account lapses in the fourth quarter, particularly in our group business. not attributable to anything specific or systemic. We do have -- we did experience some large account lapses. We did pick up, as Fred highlighted, in the third quarter, some large accounts through the last half of the year. But net-net, we were down through the last half of the year at group. I would just add that looking forward into 2023, we are going to -- we have this office on persistency where we're going to approach this experience that we had in 2022 through product development, client service, technology solutions and incentive designs, but moderating that or modifying that to how the economy performs in 2023. That's an important thing for us to make sure that we use data to drive our actions in 2023 to get persistency back online. Yes. We certainly expect the continued decent velocity of the labor force and so that will continue to be there. But at the same time, we do expect the recovery overall in our persistency going into 2023 relative to 2022. I think you have to put it in perspective, too. This was largely focused on large accounts, the loss of large accounts, which will happen from time to time in the group business and the group business represents 15% of our earned premium. So in other words, look at our earned premium. It was down 0.2% in the fourth quarter. It was down 0.8% or less than 1% for the full year. That's not what we want. We want growth in earned premium. But we can recover from periods of week persistency. We have to focus on it. We have to bring it back. But the largest lapse rates were in the group business, which currently represents a smaller portion of our earned premium and is the fastest-growing part of our company so generated tremendous sales, which helps make up for some of that lapse rate. So we're trying to hold the line on earned premium, which is the most important component to manage. And then just one question on the critical illness rider that you're going to be operating in Japan. Can you help frame how big of an opportunity that is? And it seems like trying -- I know that Japan Post is in a gradual recovery mode, but it seems like that would be a fairly meaningful opportunity given that you can add it to the existing policies. This is Yishizumi. I will cover your question. We are currently planning to launch this lump-sum serious disease rider in April in Atria. But then that assumes that this product will be approved by the SSA, This product responds to customers' needs of having to want to prepare against, not only cancer, but also for cerebral vascular diseases as well as heart diseases. And the Japan Post Group as well as with Aflac, we are trying to fully prepare to launch this product. And as you know, the Japan Post sales is gradually recovering. And what we are expecting is that this new rider will also help accelerate sales and recovery of the Japan Post. So let me just add a little bit here. This is Koide. And this new rider that is to be attached to cancer product was jointly developed by Aflac and the Japan Post Group as part of our strategic alliance collaboration. That's all from me. Excuse me, let me just make one other comment. I don't think the rider is going to be that much premium. But what it does is it gives an opportunity to get with the salespeople and go back to everyone telling them what we've got, which will ultimately help sales of the cancer policy as well. So I would look at it that way. Now that's just my viewpoint. Thanks. This is Wilma. Maybe you could give us some color on how modestly higher interest rates in Japan will impact Aflac in the longer run. Wilma, thanks for the question. We are expecting to see a little bit of volatility in rates in first quarter. As you're probably aware, there is an expected change in the governorship scheduled for February. And there is a lot of expectation that, that could lead to a policy change -- we saw a bit of a move in December when they widened the range on the 10-year JGBs by 25 basis points. So the magnitude of the opportunity is really going to depend on how much rates move. Remember, we are still at very low levels. And while a 25- or 50-basis-point move is certainly welcome, it's unlikely to result in a very big left or right turn on our asset allocation. But of course, yen assets are very important to us for the obvious asset liability management reasons, and we'll be keeping a close look as well as any opportunities to swap JGBs into higher-yielding yen credit assets. And Rima, just a reminder in terms of the impact on our capital ratios, our SMR sensitivity to 100 basis points shift in the yen yield curve is 35-point -- negative 35 points on our SMR. Our ESR, more importantly, goes the other way. And obviously, higher yen rates are positive to our ESR. So a 100-basis-point shift in the gain yield curve would increase our ESR by 34 points. And I guess could you give us a more specific examples of the lapses in the U.S. and some of the things you're doing to address it address those? I'm sorry -- this is Virgil Miller, coming off mute. So Steve talked a little bit about it, let me give a little bit more color though. At the end of the day, when Steve and Fred both mentioned the office of persistency, what we're really looking at is, how do we drive utilization so that people understand the benefits they even acquired? When we're looking at selling our products, we do so making sure that our products are benefit-rich and -- but also that they're being utilized, so some of the things you'll hear us talk about is activity to make sure people have a knowledge and education around the benefits of how do we partner with our brokers, how we partner with our agents out there, and then with the employer to help drive utilization. We know that when they actually use the benefits, they have more of a tendency to keep it. And so you'll hear us talk a little bit of share more results around activities like that. This concludes our question-and-answer session. I would like to turn the conference back over to David Young for any closing remarks. Thank you all for joining our call this morning. And I just want to say, if you have any questions, please feel free to reach out to the investor and rating agency relations team.
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EarningCall_742
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Hello. And welcome to the last Report for 2022, the Q4 and Full and Year Report. With me -- Fred Wester and⦠Good to have you with us. So we are going to walk you through a couple of other things that happened in the quarter. Thatâs my name by the way. If you click⦠So we are going to walk you through the most important events of Q4 and we are going to walk you -- I am going to do that and then Alex will take you through the numbers as well with a few comments, maybe from me, if I have anything to add there. So we are looking back at a good year, and by no means, perfect. But we have a great line up, strong sales and we canât really deny that the weak Swedish krona has helped us a bit with some FX tailwinds. We have -- but we have also done some organizational changes leading to lower cost of goods, and most importantly, maybe not most importantly, but important for the EBIT and the profit margin is that we had very low write-downs, almost no write-offs at all -- write-downs at all on game. So we have done -- throughout the year, we have had progress, we have been working with organizational realignment, and to first and foremost strength and quality of the releases also to get better cost control, mostly on the marketing side, but throughout the whole organization. And we have also, on the development side, worked a lot to get the release cadence up. So we can get more content out there properly. Obviously, quarter four was dominated by the release of Victoria 3. That has done -- in our opinion, it has done really well and some mixed reviews. But we have to remember that Victoria is also the smallest of our grand strategy franchises. So, all-in-all, itâs a good release with fairly happy community, I would say. And going through, again, I come back Victoria 3âs big picture here on the left and we also released during the quarter, one of the DLCs for Crusader Kings III: Northern Lords on Console, Airport Simulator on Mobile and a couple of different things on the simulation and city building side with Cities: Skylines, Surviving the Aftermath and Prison Architect. Itâs worth mentioning that Cities: Skylines did a bit better than expected in Q4 as well really helping the results. And we also released the title the space colony builders, Stardeus through Paradox Arc in this quarter. When it comes to community, we have always said that we have 5 million active users and now we are happy to say its 5 million to 6 million users, right? So itâs a bit above 5 million. We donât dare saying 6 million yet, because we want to see a strict trend line where we know we can say, for sure, that we are going to be over 6 million, but we are approaching 6 million monthly active users on a steady basis, which is a healthy growth on the playerâs side. Obviously, the core focus on the marketing and sales side is to engage our community more and work more together with our players and make sure that we meet the people in the channels, where they want to communicate. So itâs more forward leaning community engagement activities to be expected in the future as well. After the end of the quarter, we -- as you know, we announced Age of Wonders 4. That was a really positive announcement as well, met by a lot of praise from the fans so far. Itâs going to be released in May 2nd, which is next quarter from now. We went into Early Access with Surviving the Abyss from Paradox Arc and we announced First Contact, a new DLC for Stellaris. Thank you very much. As always, letâs dig into the numbers. Record revenues in the fourth quarter and last quarter SEK580 million, compared to SEK391 million fourth quarter of 2021. So thatâs a healthy 49% increase. Itâs the first time that we are above SEK0.5 billion in one quarter. Last record was Q3 2020. ⦠CK III. So this is the first time we are above a billion -- SEK0.5 billion and itâs with a good margin. So very good. As always, itâs what we released in the quarter that drives our revenue and in Q4 2022, it was mainly Victoria 3. Thatâs made a big difference. We said -- I think we went out to the press release after a month and said that we had already sold in 0.5 million units of the base game. So quite successful. And as you mentioned Fred, Cities: Skylines was a big contributor in the fourth quarter as well, Financial Districts, the DLC released and⦠They probably are. And as Fred mentioned, a few DLC releases on some of smaller games Surviving the Aftermath, Prison Architect, Stardeus we released and the new mobile game as well⦠As we have seen in many quarters in 2022, we have had good benefits from the weaken SEK. So I think the dollar is up some 20% plus year-over-year. Euro not that much, but 8%, I think and British pound 5% and these are our biggest currencies in terms of revenues, so of course, when these currencies goes up, our revenue goes up as well. Yeah, top five contributors are not the five years aspects, of course, because we have a new game, Victoria 3, and we hope that we will start to say six years or so aspects in the future when we report revenues that Victoria 3 will establish itself as a long-term main revenue generating title. Profit, operating profit SEK244 million, compared to SEK148 million in the fourth quarter the year before, so that is up 65%. A new record profit wise as well and thatâs the fourth quarter in a row that we break the profit record. Q1 was a record, Q2 new record, Q3 new, and now finally, Q4 fourth record It is -- and as we said also a record in terms of revenue. Profit after financial items or profit before tax SEK244 million as well, compared to SEK147 million last year and profit after tax, SEK194 million, compared to SEK116 million last year -- last yearâs Q4. Profit margin 42%, itâs up compared to 38% last yearâs Q4. Itâs down a bit if you compare to the quarters we have had earlier this year. We had, I think, 45%, 46% in Q1, Q2 and then fantastically 48% in Q3. And why are we down? Well, the most profitable thing we can do, we have said this many times, but that is to come out with the DLCs on our successful games. And Q3 was a great example of that, when we had DLCs on all our top five games and then we had 48% profit margin. When we release a new game like we did in Q4, of course, the revenues becomes very high, but it comes with a lot of cost, especially amortization or development cost. So, therefore, we donât see the same profitability even though we are successful with the game release. So why do we release new games? Well, 42%, itâs not bad, itâs a decent margin, but our goal with game like Victoria 3 and with almost all our game -- new game releases is that, some of them will establish themselves as a long-term game that can leave on for five year, six years, seven years, eight years, nine years. Exactly. And when it does so, it can -- just as we have seen with Stellaris, with Crusader Kings, with Beverly Hills, then they can start to turn out DLCs with very, very high profitability. So thatâs the target. What more equity through asset ratio is increasing shows on our solid finances, employees at the end of the period 656. We were at our peak, when we ended Q3 in 2021, so five quarters ago, I think, we were at 742. Then we decreased roughly 90 back to, letâs say, end of Q2, so half year ago. Since then we have been very stable. I think we have increased with two or something like that. So I think that we are at a good level today. Letâs move on. So this chart -- this shows three lines revenue in green and our three main cost items in yellow, blue and red. The green shows very clearly what we have said. Itâs a record quarter almost SEK600 million in revenues. The cost of goods sold, selling expenses and admin expenses, all-in-all, SEK321 million, compared to SEK261 million Q4 2021. So itâs up SEK60 million and that is almost entirely driven by the release of Victoria 3 and especially the amortization of the development cost. But letâs dig into it a bit more. Cost of goods sold, as you know, if you have listened to the streams before, this is the cost for our nine internal development studios, cost for our external development, royalties that we paid to external studios. We amortize licenses and brands when we have acquired studios and IPs. We amortize that every quarter and this also contains the development cost that we have for our risk projects, for example, that we run under our new games streams. And also some of the development cost that we have, we have some tech development in our publishing business, which -- that is not really game development, but still technical development. This is all under COGS. And in Q4 2022 COGS was SEK253 million, compared to SEK196 million in Q4 of 2021. So itâs up significantly. And this is, as I said, itâs amortization of Victoria 3. Amortization -- the amortization part of the COGS is SEK119 million, compared to SEK60 million the same quarter a year before. So itâs SEK59 million up. So we have released Victoria 3 and as we have done with the several other games released during the last years, we have this digressive amortization method, where we take one-third of the development costs in month one and another third spread out during months two to six. So that means in Q4, we released the game in October. So then we took one-third and then November, December, we took another two-fifth -- of another one-third. So if you add one-third with two-fifth of one more third, that is, I have done the math before. I am not⦠⦠46% of the entire Victoria 3 development cost up until release has been taken as cost in Q4, so therefore amortization in COGS goes up. Another part of COGS is what Fred talked about write-downs or write-offs due to game cancellations, we had zero in Q4 of that compared to SEK26 million in Q4 of 2021 and this is now the fourth quarter in a row, where we donât have any write-offs or write-downs on game development projects. We used to have this roughly 1.5% to 2% of the capitalized development was being written down every quarter due to game cancellations. But a year and a half ago, we did a big kind of a cleanup project, where we decided to cancel several game projects, where we were not happy with the risk reward ratio, you can say. And we also changed the approach how to develop high risk games, where we let our new games team run them, they invest much less at the beginning during the riskier phases of the game development and during those phases we donât capitalize. And clearly, this method has paid off, because we have now for fourth quarter in a row hadnât had one single write-down due to cancellation. This new games team still counts us quite a lot of games. I would say, in the same pace as we have done all the ways, but it doesnât show up, because we have already taken the test cost. What else is part of the COGS? Well, SEK23 million is because we are -- every quarter we are amortizing on our acquired businesses, so like Harebrained Schemes, Playrion, Prison Architect, The World of Darkness brands everything we -- every quarter we amortize. What else is part of the COGS, royalty is one. Royalty has gone up, SEK31 million in Q4, compared to SEK16 million the same quarter a year before. And revenues up in this quarter because Cities: Skylines did a good quarter and thatâs -- there we pay royalties to the developer. And we have also had not huge, but still significant revenues from Across the Obelisk and Stardeus. These are two core publishing deals, which means that, we take the full revenue into our books, but then we share a significant royalty with the developer. So, therefore, you can see the royalty going up in Q4 of 2022 compared to the previous year. Also -- then we have a part left on COGS, which is non-capitalized development and tech cost from the publishing business, that part has gone up from SEK66 million in Q4 2021 to SEK87 million in Q4 2022 and this is what we have talked about the increase comes from these new games teams, the game development. So when we develop high risk projects, we take them as cost directly and that ends up as a higher COGS directly. Selling expenses SEK45 million, compared to SEK43 million the year before. Perhaps, some of you have had expected this to be higher, because we have released Victoria 3. We have had significant cost due to no marketing Victoria 3, but compared to a year ago, we have also done good efficiency activities within marketing and sales, so that we are seeing the fruits of now. Admin expenses -- and regarding selling expenses, I think, itâs worth pointing out, yes, we did the market a new game Victoria 3, but this is -- itâs a game in the middle of our core. We know the players. We have the players to large extent. So itâs very efficient marketing we can do. When we will release games that are completely new franchises, we wonât be able to do that with the same efficiency. So we will need to spend some more money on marketing when they come. Letâs move on. Revenues quarter-by-quarter and profit quarter-by-quarter, you can see here again that we are breaking the record is very clear here in terms of both the revenue and profit. You can also see -- if you look towards the left of the chart, you can see that itâs very choppy, especially in terms of profit. If you look to the right, it has been very steady for four quarters in a row. But I would want to point out that that -- this steadiness is more of an abnormity for Paradox. Our normality is more that the profit and revenue changes a lot from quarter to quarter, because itâs so tightly connected with what we release and normally we donât have a smooth release space. We can have some quarters where we release a lot and then one quarter where we donât release pretty much anything. Yeah. But you should expect like you have seen this graph to -- us to grow over time as well. So even if quarters go up and down, the long-term effect and the long-term idea is that, we continue to grow and we see no end to that growth as we look at the moment, but we take a step-by-step. Yeah. And I think you can see that, if you move to the next chart, where we have lumped four quarters together. The trend -- you see a clear trend here. If you kind of take out the big peak in the mid, in Q3, Q2 2020 and if you would remove the drop in one year afterwards of Q2, Q3 2021, it is fairly steady trend line trending upwards, both in terms of revenue and in terms of profits. So that is, of course, very good. We had 12-month revenue SEK1.973 billion. Itâs a bit annoying that we didnât reach SEK2 billion, but⦠â¦itâs close. And the operating profit for 12 months is SEK887 million. Itâs almost up 3 times compared to the full year profit of last year. Cash flow, very strong cash from our operating activities, SEK344 million. Great, not the record, but very strong. If we look at the cash flow from our last four quarters, so our last year, cash flow from operating activities is SEK1.085 billion, and as always, we invest a lot of that cash flow into new game development, SEK251 million was invested in game development in the fourth quarter. And looking at the full 2022, we have invested SEK807 million in game development, so quite a lot. So now if we look at the full year 2022, despite that we have invested SEK800 million in game development and paying off SEK106 million as dividends to the shareholders, so in total more than SEK900 million has gone out. We have still increased our cash position with SEK137 million. So we have accumulated a substantial amount of cash and itâs more than we need at the moment. So, therefore, the Board has, as you have seen in the report, has proposed to the Annual Shareholders Meeting that we increase the dividend from SEK1 per share to SEK2 per share. Yeah, I think, this is the final slide before we have the questions. So total equity is steadily going up and itâs -- how much is it? Itâs worth mentioning, I think, itâs almost all of these equity comes from our profit, SEK60,000 of -- I think itâs SEK2.3 billion, SEK60,000 of that is comes from other things. The rest is profit minus dividends. So I think we are in a very strong position balance sheet wise. And if you look on the yellow bar, total non-current assets SEK2 billion. There are the largest part is capitalized development. So this is games that are -- that we are waiting to announce and release. So let me thank you for sending those questions in and make sure to do it on time and next time as well. So we can take some time to reply to them. Yeah. Well, letâs see what we can manage to answer. The first one is for you, I think, Fred, with all the hype around generative artificial intelligence tools coming to the market, what long-term impact you see for Paradox? I have said it before in an interview that, I have never seen anything that will impact our whole business, and I am not only talking Paradox, I am talking about the computer games business as a whole as much as AI and itâs everything from how you develop code to how develop written content to how you develop graphics. That being said, I mean, at the moment, we are prototyping, we are testing new things, we are seeing how itâs going to impact us. And that being said, I think, in the future, we are probably going to be able to do things faster and smarter with the help of AI. I am not thinking first and foremost that AI is replacing anything that we are doing at the moment or people that we have employee at the moment. Itâs -- but itâs going to -- for sure, going to be a great tool for us to use. So we are looking forward to digging deeper into what AI can offer. And then why I think, like I say, itâs a groundbreaking change that is about to happen to the whole industry and its super exciting to see. Well, itâs difficult to say. Of course, I think, global recession hits everyone. So we need to be prepared and mindful, and have respect for that going forward as well, of course. But if we look historically, we can clearly say, what impacts our financials more than anything is the content we release. If we manage to release ex-DLCs or ex plus one DLCs, that difference makes much more impact than any financial sentiment on a global scale I think. We also know that our players are very loyal. They spend quite a lot of time in the games. So if you split up the DLCs that we released in a year on your favorite game, the cost per hour of entertainment is very low regardless with -- regardless what you compare it with. So we think we are in a strong position. What else can be said about the recession? Well, itâs -- we are in a strong position financially. We have a good cash flow. No real debt on the balance sheet. So this also puts us in a position where we can act opportunistically if good opportunities come up. We have for a couple of years been looking at IPs, studios that we would think would fit in greatly with Paradox. But, historically, we think the price on those assets have been high. Now itâs probable that the prices are coming down. We have already seen that come down. So maybe that can open up some interesting opportunities for us. Those of you who have followed us for a longer period of time know that we are not very prudent to make a lot of acquisitions of studios or -- that being said, we have acquired a handful studios and we also acquired, for example, World of Darkness even before we listed the company. So we are more opportunity based on this, and if you invest in Paradox, like, you know that our main source of growth is not going to be from M&A activities. Itâs going to be from us growing our business organically and thatâs going to be the goal going forward as well. That being said, if we see something of an opportunity for an IP, a studio, a game that is worth looking into for us, we might do something. We would like -- Alex mentioned that, we are in a good financial position. We have money in the bank. We have no loans. So we are in a good position to do M&As. But itâs not whatâs going to make this company fly in the coming two years. There are other things that will help us do that. Good question. So in 2021, but also in 2022, we have seen significant increase in turnover. Many good reasons for it I think. The work-from-home situation was one. We could see that increase not only ours, but other companyâs staff turnover. A year and a half ago, we started to cancel several projects. With that, of course, came people involved in those projects leaving and we have been very conservative in rehiring, not only for those projects, but in general. Now, we are -- so I mentioned earlier that we have decreased our staff from 742 to 6 -- I think it was 656 or 665 at the end of the year. I think we are at a level which is very good now. So I am satisfied in that sense with our ability to retain employees, but even though I am happy with the level of staff, I would be even happy if the turnover was slightly lower. We are suffering sometimes from having to train new employees. It takes a lot of time, not only before they can become productive, but it only -- also takes productivity away from our existing employees. Yeah. And if we could get that down a bit, I think, we would be helped. But then, of course, some turnover is unavoidable and I think itâs even good to have a certain level of turnover. Fred, Victoria 3, you were experimenting with new design elements, not always welcomed by the fans. A few months after the release, what is your opinion on the games performance with the players? Well, yeah, Victoria 3 released a bit of mixed reviews and it was a mix between different things, some game design decisions, for example, and overall, I am happy with the gameâs release. I think we are all happy here at Paradox. But if you by happy mean totally satisfied and we are not going to do any improvements in the game, thatâs not the case. So we are constantly working to improve all our titles. I mean, basically if you want to look at it very specifically, the release version of the game is always the worst version that players ever going to see, from there we are going make the game better. So we are listening to the community. We are developing the things according to certain guidelines that we think is going to make the game better and we are constantly improving on things that we think is going to make the game better. So we are happy now, we are going to be even happier in a year and itâs going to grow into a great -- even greater product. That being said, I mean, Victoria is one of our more niche experiences in the ground strategy portfolio, meaning that the target audience historically has always been a bit smaller as well. So it might be that some people who are expecting a more open like or broader approach, while I think, the core audience has been quite happy from the start, maybe to stretch to say that, but I dare to say. If we look back to CK III, we did a similar announcement, six weeks to seven weeks after release when we have sold 1 million copies. So, Alex, can you talk about the investment that went into Age of Wonders 4? Are they comparables of Victoria 3 or are they smaller or they larger? Whatâs deal -- whatâs the deal? Whatâs the deal? So I can say, in general, our investments both in our own games, but also in our -- in games developed by external studios are constantly increasing. They have been for the last five years, six years, seven years, eight years and I think they will continue for some while to do so. So even though Victoria 3 was, you could say, a smaller game than CK III, itâs still cost a little bit more to do, because it came two years later. Age of Wonders 4 developed by Triumph in the Netherlands, I would say, one of our most cost efficient studios. Yeah. Yeah. Yeah. But normally we donât disclose numbers, well, just as a general rule of thumb. I just spoke to Lennart actually, the -- from Triumph friend. He said that, we concluded that by the end of next week, I am going to start playing Age of Wonders 4 as well. I always wait until the game is like almost finish -- like on the finish line. So you donât have to experience too many bucks. Fred, with the shorter timeframe between the announcement and release for Age of Wonders 4, can we expect a shorter announcement to release timeframes for future project as well? In general, I would say, yes, to that question. A shorter timeframe between announcement and release is the way we are going to work in general. Age of Wonders 4, specifically, we think will gain from a shorter marketing cycle. There might be some that have a bit of a longer marketing cycle, but in general, itâs going to be shorter than it has been historically with Paradox, because we donât want to announce anything and then having to postpone the game time after time. So when we know the release quarter, we will announce the game, and sometimes we will tell you what quarter we announce that in, sometimes we will tell you what date, like we did with Age of Wonders 4, which is May 2nd this year. I think we and the players are very happy with the current model, which is the DLC model, where we come out with new content and the players that wants to play that content pays for it. But we have also since almost four years now we have been exploring with subscriptions. First Game Pass, I think they launched in June 2019 on the PC version. We have been there from the start with several of our big games. We have also experimented with our own subscription models. We have, I said, CK II, Iron IV and EU IV that we have subscription offer, where you pay $5 per month and can get all the DLCs. Yeah. On Steam. So this is something we do also to learn how the player behavior is. But with monetization model it goes as with anything, I think, we want to make our games available to our players in the way they want to play them and consume them. So if they would in the future prefer a different way to pay for the content, I am sure that we are happy to move towards that way whatever that is. But for now, I think, we and the players are very happy with the DLC model. Two questions in one. How many games are -- is Arc going to release? It -- I can promise you a handful. So itâs anything between three and six, I donât know, somewhere around those numbers. We have a super interesting line up of a wide variety of different games. We are working on at the moment. We normally take all the investments as direct costs as we go along and sometimes we offer upfront payment. Yes, sometimes the developers have already developed the game in such a way that we can publish it together. So the model on how to finance is different from game-to-game and depends on developer-to-developer as well. I have a couple of favorites already in this portfolio, but I canât wait to tell you more about that, itâs amazing. We have little chat group on one of the games, which goes wild every lunch hour. So and thatâs always a sign that something is brilliant. More questions. Alex, should we expect the 30% dividend payout ratio to continue to go forward or could it be higher given the excess cash? Itâs -- it will be a new decision each year. So 30% payout ratio, I think, it refers to that itâs 30% of the after tax profit that is being paid out. That is similar to -- that is what it is now, if we are going to go through to SEK as the Board has proposed and I think itâs close to 30% last year as well. So maybe itâs a good level, but itâs not the only thing that the Board and the shareholders will look at when deciding historic profit, of course, is kind of a limitation or as setting the frame. But we also look at the current cash position and what we expect the cash flow needs and the incoming cash as well what is going to be for the upcoming years. So, at this point, we think 30% or SEK2 per share is a decent level. Next year we will see where we are at that point I think. More questions. Yes. What should we expect in terms of number of new game releases in 2023 and new game announcements? Yeah. This question keeps coming back. So we can never provide like a big number of announcements that we make every year. But since I said, we also tend to announce closer to the game release now. However, it should be a couple, right? Can we say that much? Free cash flow, of course, free cash flow coming up. You have SEK750 million of cash. Why are you only paying SEK2 per share, if you are not going to use the cash, why not return it to the shareholders? Well, I think, as any company, at the end of the day, you should pay out everything, all the profit should go to the shareholders. But we are keeping most of the profits, because we think that we can capitalize on it and invest it with high returns, and we have been in a growth situation for a long time and we will continue to be in a growth stage going forward as well. So during those stages, the majority of the profit will be reinvested in the company. Yeah. We will see going forward. But I think and the Board seems to think that SEK2 is the right amount this year and probably the shareholders think that as well. But the short answer is, we are not giving out more, because we think that we can use the cash for better. And if you have more questions, if we missed to answer anything, we will go through the email and I will try to answer them during the day or later in the week. And if you come up with new questions, send them in. You have the mail address. Otherwise, see you in, I think, its end of April, where we will announce the Q1 results. Sounds good.
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EarningCall_743
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Good morning, ladies and gentlemen and welcome to Spirit AeroSystems Holdings Inc.'s Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Glenn, and I will be your coordinator today. [Operator Instructions] Thank you, Glenn, and good morning, everyone. Welcome to Spiritâs fourth quarter and full year 2022 results call. I am Aaron Hunt, Director of Investor Relations; and with me today are Spiritâs President and Chief Executive Officer, Tom Gentile; Senior Vice President and Chief Financial Officer, Mark Suchinski; Executive Vice President and President of Defense & Space Division, Duane Hawkins; and Spirit's Executive Vice President and Chief Operating Officer and President of Commercial Division, Sam Marnick. After opening comments by Tom, Duane, and Mark regarding our performance and outlook, we will take your questions. Before we begin, I need to remind you that any projections or goals we may include in our discussion today are likely to involve risks, including those detailed in our earnings release, in our SEC filings, and the forward-looking statement at the end of this web presentation and referenced in our call today. In addition, we refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures we use when discussing our results. And as a reminder, you can follow todayâs broadcast and slide presentation on our website at spiritaero.com. Thank you, Aaron and good morning everyone. Welcome to Spiritâs fourth quarter and full year 2022 results call. Last year, we saw domestic travel continue to recover across the globe. The US was the best performing market, where air traffic was 2% below the 2019 level. And in China, we are encouraged to see some travel restrictions lifted in the 737 MAX return to service. Domestic air travel favors narrowbody aircraft like the A320 and the 737 MAX, both of which logged several significant new orders during the year. The orders and additional backlog provides support to Airbus and Boeing's plans to increase narrowbody production rates further. We are encouraged by the continued demand, which we expect will benefit Spirit since 85% of our backlog is tied to narrowbody aircraft. While demand remains robust, we experienced a number of challenges as we increased production rates during 2022. We had to hire a significant number of new employees who are taking time to reach the same level of proficiency as the workers we had prior to the pandemic. We also experienced higher levels of attrition with the new employees we hired. In addition, our suppliers encountered similar challenges, which resulted in higher levels of part shortages throughout the year. We also encountered higher levels of inflation. Despite these challenges, we managed to increase our production rates across several major programs by 27% overall. On the 737 program, we managed through the challenges as production increased from 162 units in 2021 to 281 units in 2022, a 73% increase. To support the recovery and the expected higher level of production in 2023, we began hiring additional headcount in the fourth quarter, which drove additional cost, but is an investment to get ready for the production rate increases in 2023. While we expect to see ongoing supply chain challenges and issues, as we stabilize production, our December 737 production was 40 units, demonstrating our capability to produce at higher rates. In 2023, we plan to produce about 420 737 shipsets which includes the units behind schedule from 2022. In January, we delivered 33 737 units. Turning to our wide-body programs, the 787 program navigated through challenges last year, and we delivered 20 units to our customer. Our 787 production resumed with a new build process to address the fit and finish requirements applicable to all the partners on the program. After completing a few units with the new process, we have found more labor per unit is needed than originally expected, which is one of the reasons driving an additional forward loss on future units this quarter. It is also taking us longer than we expected to rework the stored 787 units. We now believe we have incorporated what is needed for the 787 fit and finish requirements in the new-build process and rework. On our A350 program, we continue to see disruption, driving increased cost pressure. During the year, we saw continued disruptions from the supply chain. The transfer of parts and the ramp-up of production put the program behind schedule. We have initiated our recovery plan. However, recovery costs included expedited shipping of components to support our customers' production are resulting in additional forward loss. Mark will walk you through the details of the forward losses on these two programs in his section. We continue to support Airbus on their narrowbody programs. Our production was in line with demand from Airbus, and we expect to continue to produce to remain in sync with their production plans. In 2023, we plan to produce between 650 and 680 A320 units and about 80 A220 units. In looking at our wide-body programs for 2023, we will support our customers as they increase their production rates to support the international traffic recovery. On the 787 program, we expect to produce between 40 and 45 787 shipsets. On the A350 program, we plan to remain in sync with Boeing -- or excuse me, with Airbus production as they increase from five to six aircraft per month and plan to produce about 60 units on the A350. Now, let's turn to our Defense and Aftermarket businesses. On Defense & Space, our segment President, Duane Hawkins is retiring from his current role in just a few weeks and will hand off the segment to Mark Miklos. Duane and the team have done a great job in building Spirits' Defense & Space segment, and we wanted to give him an opportunity to take you through some of the many highlights from 2022. Duane? Thanks Tom. In 2022, the Defense & Space team did a really good job, executing on existing programs and winning some new ones. Across our five growth areas, hypersonics, UAS, next-generation effects, next-generation aircraft, and space, we expanded relationships with current customers and created some new ones. The Defense & Space segment revenues were up a little over 11% from 2022 to $650 million with approximately 11.2% margin. We had solid contributions from the P8 and KC-46 programs. On the CH-53K program, we began preparing for full rate production by developing our rate production tooling and manufacturing build plan, while also delivering LRIP units. And in December, we had the opportunity to attend the B-21 unveiling to celebrate the team's contributions to this important new defense platform. Spirit is one of the seven partners on the B-21 program. We have a strong pipeline of Defense & Space opportunities that we continue to pursue. In 2022, the team won multiple classified and unclassified programs that could eventually result in significant revenue for Spirit. One of the first in the year was a win for the B-52 commercial engine replacement program, where Spirit will build the struts and nacelles for approximately 78 aircraft that are in service. We were also selected to support the KC-135 horizontal stabilizer program, which will help extend the life of an aircraft we often see racing the skies here in Wichita. Another win in the year was the strategic partnership agreement for the Sierra Space Shooting Star Cargo module. In addition to the Shooting Stars, Sierra Space and Spirit will work together to advance a family of cargo modules and service modules. And finally, we are closely monitoring the protest of the Army FLRAA award to our partner, Bell Helicopter and look forward to supporting them on this exciting new program. Spirit is proud to be a member of Team Valor. In addition to the NDPC, we have continued to repurpose some of our excess wide-body capacity to defense applications. So far, approximately 1.2 million square feet in Wichita has been transitioned to our Defense &Space business. This includes the establishment of our defense manufacturing center, which we'll provide significant classified machining capability with full-size determinate assembly accuracy. The ability of our team to be involved from the initial concept design to production is critical to optimizing how we can support customers on future programs. We closed out the year with the acquisition of [Indiscernible], a small company in Rhode Island that has a great set of technologies that complements our capabilities. The 100,000 square foot facility and the 35 talented individuals brings some unique 3D composite weaving technology and equipment to enhance our portfolio that will support hypersonic weapon development as well as other new product development opportunities. I'm proud of the Defense & Space business that we've been building at Spirit. It's on track to our target of $1 billion in Defense & Space revenue by 2025 with 12% to 14% segment margins. And I look forward to working with our new Spirit Defense & Space leader, Mark Miklos as he takes over on April 1. Back to you, Tom. Thanks Duane. Our Aftermarket business also had a strong year with revenue growth of 30% at 19% margins. The aftermarket team continued to build out our strategy to expand our MRO capabilities in key geographic regions. In Asia, we established multiple ways to support customers in that region. In April, we signed an agreement with GAMECO to be the Spirit authorized repair center in China. Then in September, we formed a joint venture with Evergreen Technologies Corporation in Taiwan and signed an MOU with Malaysia Airlines Berhad to establish repair services for nacelles and flight control surfaces. We also signed a partnership with Boeing to provide repair services for the MAX on flight control surfaces, nacelles, and thrust reversers. We closed out the year with an MOU with Joramco, the engineering arm of Dubai Aerospace Enterprise to explore how to bring a range of composite and metallic aerostructure repairs and services to customers in the Mideast region. We continue to target $500 million of revenue for our Aftermarket business with margins in excess of 20% by2025. Thank you, Tom and good morning everyone. We experienced significant pressure in 2022 due to production schedule volatility of constrained supply chain, ongoing inflation, and labor pressures, including shortages, high levels of attrition and increased training for our new hires. These challenges have resulted in higher than anticipated costs and disruptions in our factories. We expect some of these pressures to continue into 2023, particularly those related to the supply chain and training new employees. We enter 2023 strongly focused on execution and getting our factories and people in place to stabilize and support higher production rates. Now, let me take you through the details of our 2022 financial results. Let's start with revenue on slide two. Revenue for the year was $5 billion, up 27% from 2021. This improvement was primarily due to higher production on the 737, A320, and A220 programs, as well as increased Aftermarket and Defense & Space revenue, partially offset by lower production on the 747 and 787programs. The Defense & Space segment had a strong year with topline growth of 11%, increasing revenue by about $65 million. Aftermarket also displayed strong execution with revenue growth of 30% over 2021 levels. Turning to deliveries. Overall, narrowbody deliveries in 2022 were 37% higher than 2021. We delivered 119 more 737units and 124 more A320 units compared to 2021. Alternatively, wide-body program deliveries were down 6% compared to 2021, mainly driven by 17 less 787 units in 2022. Overall, 2022 deliveries increased 27% year-over-year. Now, let's turn to earnings per share on slide three. We reported earnings per share of negative $5.21 compared to negative $5.19 in 2021. Excluding certain items, adjusted EPS was negative $2.81 compared to negative $3.46 in the prior year. Operating margin was negative 6% compared to negative 12% in 2021. The improvement over 2021 is due to higher production rates, specifically on the 737 program, partially offset by continued disruption in our factories, resulting from part shortages and labor challenges, which led to out-of-sequence work and operational instability. Full year forward losses totaled $250 million and unfavorable cumulative catch-up adjustments were $28 million. This compared to $242 million of forward losses and $5 million of unfavorable cumulative catch-up adjustments in 2021. Specifically related to the fourth quarter of 2022, we incurred $114 million of forward losses, which were primarily driven by the 787 and A350 programs. The 787 forward loss of $38 million recorded in the fourth quarter was largely driven by higher cost estimates related to restarting the factory in ramping production as well as new build requirements on each unit resulting from the fit and finish issues. We forecast the cash impact from this loss to occur over the next four years. The A350 charge of $67 million in the fourth quarter of 2022 was a result of additional costs related to labor and part shortages, manufacturing quality issues, and additional freight to support our customer deliveries. In addition, during the fourth quarter, we experienced disruption resulting from transferring the production of parts from a supplier into our Kinston facility. This resulted in additional disruptions to our factory and we have now initiated a recovery plan, which will result in additional costs. Approximately $40 million of that forward loss will have an impact to cash in 2023. Additionally, in the fourth quarter of 2022, we recognized unfavorable cumulative catch-up adjustments of $59 million, primarily driven by the 737 and A320 programs. On the 737 program, we experienced disruptions due to labor inefficiencies and continued part shortages, which exacerbated the behind schedule hours and our out-of-sequence work. To catch up and prepare for the next rate break, we've made the decision to accelerate the hiring and training of employees to support a rate of 42 aircraft per month. This investment has a near-term impact on the program's profitability and cash flow, but we believe it is important to improve Spirit's production efficiencies as well as prepare for higher production rates in the future. The A320 program's unfavorable adjustment was driven by operational and supply chain disruptions and increased costs related to material, freight, and labor. 2022 earnings also included $157 million of excess capacity costs, a decrease of $60 million over 2021. Other expense was $14 million compared to other income of $147 million in 2021. This variance was primarily due to pension plan termination activities that were undertaken separately in each of the years. 2021 included a curtailment gain of $61 million resulting from the closure of the defined benefit plans acquired as part of the Bombardier acquisition. And in 2022, we terminated the frozen US Pension Value Plan A, which resulted in non-cash charges of $108 million. We anticipate additional pretax noncash charge in the first quarter of 2023 for the final settlement accounting as well as tax-related charges for the income and excise taxes, which we expect to conclude no later than the second quarter. Now, turning to free cash flow on slide four. Free cash flow usage for the year was $516 million, in line with the range we communicated on our third quarter call. Free cash flow in both years were impacted by several large one-time cash items, including a $300 million tax refund received in 2021, a payment of $154 million to the Belfast pension plan in 2021, as well as the repayment in 2022 of $123 million Boeing 737 advance that we received in 2019. In addition, 2022 free cash flow was negatively impacted by production schedule changes; the Ukraine, Russian conflict; headwinds from forward losses; labor constraints; supply chain part shortages, and inflationary pressures. There were also several other cash items in 2022 that will not recur going forward, including $38 million of a grant received from the AMJP program and $27 million of net pension-related benefits from the termination of the Pension Value Plan B. Looking to 2023, we plan to deliver approximately 420 737 units and 650 to 680 A320s during the year, which will be the largest driver of cash flow improvement. Additionally, 2023 will be positively impacted by $120 million to $140 million of surplus cash from the termination of the Pension Value Plan A, partially offset by higher interest payments and a previously reserved litigation payment, which has been appealed. Incorporating all items, including the pension surplus cash, we are targeting 2023 free cash flow to be better than breakeven, reflected estimated capital expenditures in the range of $125 million to $150 million. We anticipate the first quarter free cash flow to be the weakest and cash flow improving throughout the last three quarters of the year, partially due to normal seasonality of our cash flows. With that, let's now turn to our cash and debt balances on slide five. We ended the year with $659 million of cash and $3.9 billion of debt. These balances reflect items I previously listed as drivers to free cash flow in addition to the $319 million payment to settle the repayable investment agreement in the first half of 2022 and the refinancing activity we completed during the fourth quarter of 2022, including refinancing and extending maturities on $800 million of existing debt and upsizing by $100 million. Now let's discuss our segment performance, starting with the Commercial segment on slide six. In 2022, Commercial revenue was $4.1 billion, an increase of 30% compared to 2021, primarily due to higher production volumes on the 737, A220, and A320 programs, partially offset by lower production on the 747 and 787 programs. As I previously mentioned, the changes in estimates during the year included forward losses of $244 million and unfavorable cumulative catch-up adjustments of $30 million. In comparison, during 2021, the segment recorded $227 million of forward losses and $6 million of unfavorable cumulative catch-ups. The segment had excess cost of $150 million compared to $207 million in 2021. Additionally, the segment recognized $38million of charges related to the Russian sanctions, which had an impact during 2022. Now, let's turn to the Defense & Space segment on slide seven. Defense & Space revenue grew to $650 million or 11% higher than 2021 due to higher development program activity and increased P-8 production. Operating margin for the year increased to 11% compared to 8% in 2021. The improvement was due to higher classified program profit and the absence of non-recurring charges taken into 2021. In 2022, the segment recorded forward losses of $6 million and excess capacity cost of $8 million compared to forward losses of $14 million and excess capacity cost of $11 million in 2021. For our Aftermarket segment results, let's turn to slide eight. Aftermarket revenues were $311 million, up 30%compared to 2021, primarily due to higher spare part sales as well as higher maintenance, repair, and overall activity. Operating margin for the year increased to 19% compared to 21% in 2021 due to one-time inventory adjustment charges as well as losses of $4.2 million related to the Russian sanction. 2022 was a more challenging year than we expected, production schedule volatility, a disrupted supply chain, labor constraints, and ongoing inflation resulted in increased costs, forward loss charges, and instability in our factories. Despite the many challenges during the year, there were several things that went right. Many of our financial metrics have reflected continued improvement over the last two years, and I expect the recovery to continue going forward. We have announced wins in our Defense & Space and aftermarket segments, and we have restructured our debt, including executing on refinancing activity, which has extended our maturities and settled a repayable investment agreement. As we enter 2023, we are working with our suppliers and our internal teams to stabilize production and position ourselves for higher production rates. The focus on operational execution as well as optimizing our costs should enable us to improve profitability and cash flow as we move throughout2023. Thanks Mark. Demand remains strong in the global aerospace industry. However, it was a challenging year to navigate the supply chain and other challenges we faced. We worked hard to make progress to stabilize at higher production rates, and we were pleased to close the year with some positive results, which will provide strong foundation for 2023. As we enter 2023, we expect free cash flow to be positive as we benefit from increased narrowbody production rates and continue to work on improving our labor productivity and stabilizing our supply chain. We have seen some improvements from the depths of the pandemic but expect that there will still be some volatility as the recovery continues. After 4 challenging years since the first MAX crash in 2018, we see some positive trends in the market that will benefit Spirit. Domestic traffic has recovered to 98% of what it was compared to 2019 levels, which will benefit narrowbody aircraft production. And 85% of Spirit's backlog is narrowbody aircraft. Boeing has said that they do not want to develop a new aircraft until 2035, which is good news for Spirit since the MAX and all of our other Boeing programs will continue for many years to come. China has started to fly the MAX again. Both China Southern and Hainan have both made flights, which is very good news for that program and offers upside as China brings the stored MAX aircraft out of storage starts taking deliveries again and then eventually places new orders. Boeing just announced that they're starting a fourth 737 MAX production line in Everett, which highlights their commitment to increasing rates on the MAX and that Spirit's biggest and most profitable program. And organic diversification in our Defense & Space segments and Aftermarket is progressing well. We also have some good growth opportunities in commercial including freighters for Airbus and Boeing eVTOL opportunities and other machining opportunities. For 2023, our three primary objectives will be what we are calling the three Rs. First, we must realize the production rate increases across all of our programs, while maintaining a safe workplace and improving quality. Second, we have to reduce structural costs to position Spirit to be profitable and cash flow positive even if production rates do not go up as fast as currently projected. We have assigned a senior executive and team of leaders to our cost optimization project focused in three areas; operations, infrastructure, and supply chain. In the infrastructure area, our target is to reduce 1,000 indirect positions from our 2023 headcount plan through a combination of reductions, attrition, and closing open hiring requisitions. Third, we want to reenergize our workforce so that we are ready to meet the challenges ahead as fast as we can as we face the fastest growing rates in the history of the aviation industry. Free cash flow, so I guess prior to today, you were seeing better than breakeven without the pension cash gain, now you're seeing kind of better than breakeven, but including that, I guess what changed in terms of your forecast? Because it looks like now 420 on the MAX would be better than what you were talking about before, which I think was 31 a month. So, if you can just help us reconcile what changed now versus your prior free cash flow guidance? Thanks. Yes. So -- thanks David. A lot of things have changed really since we made some of those forecasts. We have seen higher costs across the board in things like freight, utilities, and logistics, as well as labor. In addition, as we are looking at the -- just the overall cost for production, those are going up. So, we mentioned that we've, for example, hired now up to 42 aircraft per month on the MAX program. That's in advance of any rate increases to that level. And the reason we did that was to prepare ourselves for higher rates in the future. That means it's a higher investment now. And so those are the types of pressures and headwinds that make us to conservatively estimate that we'll be breakeven now, including the pension benefit of $120 million to $150 million. Mark, anything else to add? David, I think Tom summarized it right, we continue to see instability in our factories. We're bringing in much higher headcount to support our 737 production, and that is going to have a negative impact on 2023 cost and cash flow. And so that is the first headwind and investment we need to make to drive stability in the factory and meet our delivery commitments to our customer. Secondly, I had mentioned some challenges in our Kinston facility, and we took an additional $60 plus million forward loss. And I had mentioned that that recovery is going to require us to hire more people, expedite shipments, and incur some additional costs to support our customer requirements and indicated that that cash impact will be $40 million, which was not incorporated in our last overall discussion. And then I'll also tell you, as we think about the supply chain that we have here, I think it's going to put a little bit of pressure on our working capital. We're needing to bring in additional inventory, provide some buffers ahead of the rate breaks, probably more so than we anticipated as the stability continues here. So, at this point in time, it's early in the year. We've just started. We want to make sure that we're providing you with some information that we can meet and we'll continue to update you as we progress throughout the year. Yes. Thanks so much. So, the pattern of cash flow throughout the year, maybe give us some color there. Is it all three quarters of red ink and then one quarter of black ink, if you just breakeven? And then related to that, you delivered 33 737s in January. Is that a sustainable rate? Or is that just -- they were sort of pretty much done in the fourth quarter? And -- because the inventory bulge and now they're just getting out the door. So, that's kind of tough to build so that we're not going to get a huge benefit from delivering planes in the first quarter. Thank you. So, Cai, as we said a little bit earlier, cash flow in Q1 is going to be our toughest quarter. And then the cashflow in Q2, Q3, and Q4 should be positive. That's the pattern that we are anticipating. Normally, the Q1 is our hardest because of several one-time cash payments that happen just in the first quarter from a seasonality standpoint. In terms of the production level for January, 33% is a run rate projection. As we said, we're going to produce about 420 MAX units for 2023. The plan for Q1 is about 105. So, it's just basically right on schedule throughout the year. We do expect some rate breaks in the back half of the year. But the total, again, is 420 units with 105 in Q1, and we started off the year with 33 in January. If you mentioned the one-timers in the first quarter, could you give us some color on what those are because interest basically is -- gets hit in the second and fourth quarter. Thank you. Yes. Sure Cai. I mean the first quarter always is typically from a seasonality standpoint, our worst cash flow. A lot of that has to do with shutting down production at the end of the year. And so what happens is, we start off the year, we pay bills but we go the first week or two without any cash receipts from all of our customers. Last seven to 10 days of the year, we don't make any deliveries. And therefore, it takes a couple of weeks for us to start delivering units and starting to get paid. And so cash receipts are always the lowest in the first quarter, but you still have 13 payment cycles in the first quarter, and therefore, that's what puts overall pressure on our cash flow. There's some incentive-related type compensated related things that get paid out in the first quarter that don't repeat. But you're correct. As it relates to the big headwinds on cash as it relates to interest is going to occur in the second and fourth quarters. Hi, thank you. So, I just wanted to ask us -- thanks guys. How are you thinking about the cash burn on the 787 just given the forward losses and what the contribution is in 2023, given the target to deliver between 40 and 45 shipsets. Can you hear me? Yes. So, as we've said -- yes, 787 cash burn. 787 right now still continues to burn cash on a per unit basis. Part of it is related to Boeing advance from several years ago that we send with each shipset. So, it's about $450,000 per unit. And then on top of that, as I mentioned, with this new fit and finish, the set of requirements in the build process, is resulting in some more hours, which is creating some further drag in terms of the overall 787 program. We've reflected that in the forward loss that we announced in this quarter. But the 787 does continue to be a challenging program. We do have a price step-up at line unit 1405, where we go up to a higher price with Boeing. But until then, the program is going to continue to be negative as we continue to work our cost reduction programs. Sheila, I would just add, I think you're going here. If you think about -- as Tom said, we're in a forward loss. So, everybody understands that our costs are higher than the price and 787 consumes cash. So, when you think about 2022, for most of the year, for a big portion of the year, production was stopped. And so we were incurring costs at the end of the day, you couldn't completely shut down the place, you still had to pay bills and some of the employees. So, our cost per unit at the lower production in 2022 was significantly higher. As we move into 2023, we are going to double production, which will help from a fixed cost standpoint and help reduce our cost per unit. And so when we think about cash flow, the consumption that we had in 2022 versus 2023, typically, as you build more units, that would put more pressure on your cash flow year-over-year. But with the doubling of production, when we think about the cash consumption in 2022 on 787, how much cash we consumed at delivering 20 units versus how much cash we're going to consume at 45 units, I would say there's a little bit of pressure on cash flow in 2023 compared to 2022, but that's how things shape up. We're going to bring the cost per unit down. Production starts back up. We're still losing money on it. Just a little less than what we lost in 2022. If that helps provide a little bit more clarity. Mark or Tom, I just wanted to see if you could clarify. It sounds like on a per unit basis on the 737, you talked in the past about breakeven at 31 a month, looks like that number is just creeping up with obviously the incremental cost around staffing and supply chain disruptions. Can you level set us now on how we should think about that for the 737, maybe sort of where we are today and where you expect it to be at the end of the year? Great. Well, can I think -- it is true that we are seeing higher levels of cost on the 737 program right now, in particular, because we've overstaffed it to get ready for higher rate breaks. And we've also seen some increases in cost in things like utilities and logistics and even some labor costs as well as supply chain. So, we said that in the past that once we got to 31 aircraft per month, that would be breakeven. This year, we're going to -- basically, we started the year off at 31%, and we're going to continue. We have a couple of rate breaks later in the year, and we're saying that we're going to be breakeven. So, we do have some additional units in this year, but we'll see how everything flows out in terms of how much better we can do. But I would say that -- we said that 31 aircraft per month, we get back to breakeven. This year, we're going to be consistently at 31 aircraft per month plus some at the back end of the year, and we will be breakeven. All that said, as I said, there are some higher costs, no doubt about it in the system, which is putting pressure and we're working to offset those. What will help, though, is as we continue to go up in rate, we'll absorb more of the fixed cost, and we will naturally improve the margin as the rate goes up. Yes, Ken, I would just say that the single biggest driver in the difference between being breakeven and the situation we're in now is the instability in the factory. Once we get to stable, we get the out-of-sequence work built down and behind schedule within the control limits will be right back to our previous expectations of being breakeven at 31%, but there's a lot of cost at this point in time an investment that we're making to drive the instability down in the factory to get the factory back within its control limits. And that's why we're making the investment now here in the first quarter to get that cost down so that we're in a good position to generate positive cash flow going forward and to make sure that we're more than well-prepared for the next breaks that happened in the back half of the year, right? So, the headcount we're investing in right now is to make us capable of 42 and that's where we expect to end the year. So, by having those individuals in place now, they've got their training, they get experience on the job, and we'll be ready for those breaks as they happen. Great. Thank you. Just one quick follow-up. Is the instability in the factory? It sounds like it's predominantly rate related to just the surge in hiring you're having to do to support rate down the road. But are you still seeing issues with supplier disruption and delays? Or is it predominantly just labor and the ramp-up and training associated with that? No, it's both, Ken. Certainly, bringing all the new labor on and getting them trained is a factor, and we have seen higher levels of attrition. And it just -- it takes time for people to get up to the levels of productivity that we were at back in 2018 and 2019. They're getting there. It's just taking some time. But there's no doubt that there's also still supply chain disruption. We're seeing shortages probably two or three times higher than when the factory is in steady state. And when you have those kind of supply chain shortages, it creates traveled work, it creates disruption in the factory, it exacerbates all the other issues. So, it really is both things. It's the labor, but it's also the supply chain shortages. I would say though that the supply chain situation is under better control than we were last year. There are still challenges, but it's definitely improving. We can see that, but we just got to stay laser-focused on it. I was wondering if you could talk a little bit about the guidance for 737 this year, the deliveries in the past, there have been plans for rate breaks later in the year that haven't really materialized, and that's left you guys in a tougher position in terms of kind of what you've told the investor community. So, can you talk a little bit about your level of confidence in the rate breaks for later this year versus in the past? Well, you're right, the schedules have been more volatile over the past couple of years, but we've worked very closely with our customer Boeing in this case, to establish what the production rates are going to be for2023. And they've been very firm and committed to saying that that's what they will take from us. And by now, their own production rates may vary, but we know fairly well at this point that will deliver in the 420 units and that Boeing is committed to take those. And that's going to involve two rate breaks later in the year to achieve it. But we're staffing for it now so that we can make it. So, I would say there has been more volatility, but we're further along in the process and post-pandemic. And we do expect, with a fairly high degree of certainty at this point, that the projections that we have right now for the 420 units is what we'll deliver this year. Inventory was up $80 million in the fourth quarter from the third. Is that all pretty much due to the 19 737 deliveries that we missed? George, as always, you're very -- you're intuitive as it relates to the numbers, you know our numbers very well. I would say, for the most part, we had expected to make those deliveries and burn that inventory down. We brought the parts in to support 300 shipsets on the 737. A lot of them are pretty well down the road by the end of the year, but we just -- with the disruption and some shortages, we just couldn't push those out the door. So, the biggest driver to that growth in inventory between the third and fourth quarter was due to the fact that we didn't make those additional 20 deliveries by the end of the year. Okay. And a follow-up, Mark, given the negative catches on the 320 and the 737, how much -- does that start to impact what you've said in the past that at 42 rate, you'd be able to get back to the 16% margins that you made in 2018? I would say this, George, and we've talked about it the last couple of calls and in some of the earnings or some of the conferences that we've gone to. The 16.5% was a good proxy back in 2016. But I would tell you today, in 2023, when you think about the macroeconomic environment, when you think about the inflationary pressures overall from a cost standpoint, we're going to have to evaluate that at this point in time. I think that all of those things that I just talked about are going to put pressure on our ability to achieve the 16.5% margin. We're not backing off our goals to improve our segment margins and get back to the types of cashflow that you saw in 2019 and 2018. But there are a lot of things that are outside of our control at this point in time that are putting pressure on overall margins. We know that our pricing is fixed with our customer. And so the way we have to drive those margins is to manage our costs and take advantage of the higher production rates in front of us. But we'll continue to -- as we move throughout the year, we tackle these higher production rates. First things first, we've got to get our factories stable, we've got to get ourselves to cash flow positive. And that's what we're really focused on here in 2023 and then improving on that as we move into 2024. And we'll dialogue with you guys every call on our progress to those plans. But at this point in time, there's a lot that has taken place between when we had those conversations now. But our goals are continuing to stretch ourselves to improve our overall profitability and make sure that we're providing great value to our investors. Hey guys, good morning. On the 420 737 MAX production this year, can you guys talk about how you think about the inventory burndown that Boeing already had? Is that factored in? So, could we see true production rate and final assembly be higher than the 420 for the year that you have? Great. Well, we have taken into account the inventory and the buffers. The 420 is what we will produce and deliver to Boeing and get paid for. Now, we still have roughly 90 units or so in buffer in Wichita. Those will continue to get burned down over time. But in the meantime, they also provide a cushion to the production system as rates go up. And honestly, it's quite a useful thing to have that buffer in place. Over the next two years, that buffer will get smaller at different times as Boeing's production rate exceeds Spirit's. But for right now, that buffer is in place and it's serving a very useful purpose to cushion the production system. And Kristine, I would just add. For clarity and what we're focused on is the 420, it's about 20 units that we didn't deliver in 2022 we'll carry over. And so we're planning on new production of 400 units. And that's what we expect to put and ship in place and to be paid for. What Boeing delivers to their customers is we have no purview, that's on the Boeing side. We're just trying to communicate to you what contract schedules we have and what we expect to produce internally and what we expect to ship the Boeing and to get paid for. And so again, I think you have to separate our production from what Boeing delivers because they have a production line, they have stored units. And we can't really opine on what Boeing is going to deliver to the customers. What we do know is we have contractual commitments to deliver to our customer, and that's what our production rates are-- And just to clarify, the production for the year is going to be 420 units, which includes 20 that carried over from last year. So, total units production this year and deliveries to Boeing is 420. Thanks guys. And if I could do a follow-up question on margins. So, I mean before it was three per month, it's breakeven, now with your guide for 420 per year, if we just average that, that's 35 per month for breakeven. I mean when we get out to 42, how should we think about the margin progression? And also for when you get to the mid-40s, I mean it sounded like you guys are walking back the 16.5% segment margin. So, can you give us an idea of the magnitude of change and where margins could be when you get to that mid-40s rate and stable there? Yes, well, what I would say is as production rates increase, margins will improve. We've certainly seen a lot of headwinds in terms of labor costs, inflation in utilities and freight and logistics and other things in terms of supply chain. And as the production rates increase, the margins will improve. Now at this point, there's been so much change in volatility is we're not making projections in terms of where we'll be at specific times, but they will certainly improve as the production rates increase. Hey, good morning. You have [Indiscernible] on for Myles. Just a couple of quick cleanups here. Can you guys size the inventory charge in aftermarket in the fourth quarter? Sure. It was small. It was -- we had some excess and obsolete inventory that we had to dispose of in the fourth quarter. It was a couple of million dollars, $2 million, $3 million. If you think about aftermarket, it's $360 million of revenue. We did about $73 million in the fourth quarter. So $2 million or $3 million could have a pretty big impact on the overall profitability. That probably -- excluding that inventory reduction or charge that we took; aftermarket margins would have been in excess of 20%. All right. Great. Thank you, Mark. And then just you mentioned there's going to be a pension charge in the first quarter, any way to guess size that as well? At this point in time, we're finalizing that with our actuaries. We're probably thinking somewhere between $70 million and $100 million, but we're working through the final impacts of that. Again, that is the non-cash component of it. And then we'll also have some tax and excise that we'll have to deal with as part of that closure. Okay, great. And then just last one, I guess with all the talk about the cash impact and the margins going forward, I believe you guys have an IAM agreement that expires in June. How, if at all, are you taking that into account for the guidance for this year? And just how do we think about that going forward, given potential cost increases on that? Right. Well, our IAM agreement does expire on June 23rd and we have taken into account any potential impact in our projections that we've provided today. So, we naturally have seen several other agreements that the IAM has concluded with Boeing in St. Louis with Lockheed; with Pratt & Whitney; ULA, and so forth. So, we've taken into account that potential impact in our projections today. Hey, good morning guys. Thanks for taking the question. So, I guess just thinking about the production versus deliveries. It sounds like at 400, the implied rate's 33%, but I thought you said there were going to be potentially two rate breaks. It doesn't really imply too much of a step function increase in production. I mean, is that how we should look at that? Or are you guys anticipating higher monthly production rates in the second half of the year? Well, the production rates will go up in the second half of the year. So, we'll have a break to 38, and then we'll have a break to 42. And we've taken that into account in the terms of the total number that we're going to produce this year is 420. But that's -- we'll have a production rate break. We'll go to 38 in August and 42 in October. That's the plan. And when you add it out -- and I think it's important always to focus not on the rates, but on the total numbers of deliveries. The rate break is what you're cycling at, at any given point, but what really matters, obviously, is the total number of deliveries in a period. Michael, I would just add that the second rate break happens very late in the year. And so there is some investment in capital -- Working capital that we'll have, but that rate break has very little impact on deliveries. The benefit of deliveries will really mostly take effect in 2024. Got it. That makes sense. And then just another one. I mean, do you guys have any opportunities to renegotiate these contracts? I mean we keep hearing most of the suppliers out there passing through cost, getting price increases. I mean, you guys seem to be structurally stuck here as a price taker. I mean you mentioned the 787 pricing that line unit 1405. I mean, is there anything on the 37 with new blocks? Or are you just here for the long haul at these prices or with these contracts? Well, we're always in discussions with our customers about the current market environment and the pressures that we're facing. The 737 contract, the pricing on that is set all the way out to 2033. And it's indexed to rate as we've said in the past. But on all the programs, we're always in constant discussions with all of our customers in terms of the current market conditions. Hey good morning everybody. Just going to stay on that MAX discussion. Just want to confirm what you're saying is there are rate breaks going on in the system on the MAX to that 38 and that 42, but one, because you're doing them late in the year; and then two, you kind of get your system there, you break there before you're actually sustainably delivering there that those don't really generate a significant amount of units for you this year? Is that correct? Okay. And I mean, I know there's always a little bit of interesting or difficult -- I don't know the right word, but a dynamic of you don't want to get ahead of Boeing, but you physically produce ahead of Boeing and Boeing wants to be conservative and cautious and everybody is still trying to figure out the health of the supply chain. But I guess I'll just ask it anyway. I mean, how do I foot what you're saying there on MAX rate breaks and when they occur compared to the latest from Boeing is sort of there's still a scenario that they're at 31 a month through this entire year. And if supply chain is a little better, maybe they can break into the high 30s sometime in the back half of the year? Right. Well, what we've given you is the production schedule that we have from our customer. What they determine is their production rate and how they -- you'll have to talk to them. But what we wanted to do here is give you what we have -- I mean these schedules have to be put in place for us long in advance. And that's a schedule that we have right now is to produce 420 units and to have two rate breaks in the back half of the year. So, we just wanted to give you clarity and transparency into what our production schedule is. No, I would also think of it this way. Boeing has said by in 2025, they're going to go to 52 aircraft per month. So, that's -- we're getting close to 18 months away from that time frame. So, at some point in time, in order to hit 52 aircraft per month, there's going to have to be rate breaks. All of that can happen in 2024. So again, I think, again, what Boeing is saying they're delivering to their customers, that's what they do. We're focused on what do we have to do to meet our contractual commitments to deliver to Boeing and what they pull from us is their decision at this point in time. But again, Tom talked about two rate breaks. One of them will help us get to the 420 deliveries this year, the other one will bring people in and working capital, but the real benefit from a delivery standpoint really doesn't take place until 2024. Okay. And maybe just one more on the topic. Is supply chain actually better? Are the bottlenecks coming to you, coming to Boeing saying, hey, we're now ready to go? Or is it you and Boeing and those that aren't bottlenecks are saying, let's just start gunning for it and that will help pull the bottlenecks along? No, the supply chain is better. The way I would measure it is just shortages -- part shortages. And our shortages are still elevated, as I said, two or three times higher than what they would be at steady state, but they're less than half of what they were at some point in 2022. So, we've definitely seen improvement in the supply chain. Now that said, there's always about a dozen suppliers that are in deep distress that we're having to work with. And often, by the way, we're working closely with Boeing on those suppliers. We actually have right now about 70 people out in the field, Spirit People as well as contractors, working with individual suppliers on the rate deliveries. And in addition to that, we are working on bringing some work in. We have our fab unit, which can help cover, and we also move work to other suppliers that have capacity to level load the system. But the shortages are still higher than they should be, but they're less than half of what they were and so that's why I can say there's been some improvement in the supply chain. Thanks so much. Hey Tom, just quickly, just on the rate breaks going to 38 and then eventually 42, historically, we've always kind of understood that kind of they've done a little more methodically kind of at least six-month increments. It seems like August and October pretty close. Just maybe if you want to highlight how you're thinking about that or whether I'm wrong in my assumption on those rate break increments? It's closer than we -- yes thanks, Peter. It is closer than we would normally do. But that's why we've made the investment now in getting up to the 42 headcount so that we can practice cycling there essentially all year, that will help us do the 38 break in August and then to go to 42 in October. So, it's a little closer, but because we have the 42 heads now which is well in advance of when we would normally have them, we were confident that we could do that, and we discussed it in a lot of detail with Boeing, and we both agreed that, that was the right plan. Thank you. We have no further questions on the line. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
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EarningCall_744
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At this time, all participants are in a listen-only mode until the Q&A session of todayâs conference. This call will be recorded. If you have any objections, please disconnect at this time. Welcome to the fourth quarter conference call for 2022. Our Chief Financial Officer, Jack McGinnis is with me today, and for your convenience, we have included our prepared remarks within the Investor Relations section of our website at manpowergroup.com. Iâll start by going through some of the highlights of the quarter, then Jack will go through the fourth quarter results and guidance for the first quarter of 2023. I will then share some concluding thoughts before we start our Q&A session. Good morning everyone. This conference call includes forward-looking statements, including statements concerning economic and geopolitical uncertainty which are subject to known and unknown risks and uncertainties. These statements are based on managementâs current expectations or beliefs. Actual results might differ materially from those projected in the forward-looking statements. We assume no obligation to update or revise any forward-looking statements. Slide 2 of our earnings release presentation further identifies forward-looking statements made in this call and factors that may cause our actual results to differ materially, and information regarding reconciliation of non-GAAP measures. Over the last three weeks, I spent time with our leadership teams across the world for our annual strategic road shows, as well as with clients in Europe before attending the World Economic Forum annual meeting in Davos, Switzerland. From these conversations with our teams, our clients and global leaders, we get insights on the current environment and near term outlook. This complements our own real time business data on the current environment and forward-looking research. The economic headwinds and increased caution by employers due to an uncertain economic outlook are resulting in softening hiring behaviors. We see this through extended recruiting and sales cycles and softer order flow with employers in certain sectors as they are exercising more caution in their demand for contingent and permanent recruitment of talent. That said, they are also focused on holding on to business critical talent while adding headcount for in demand skills, whether that is supply chain workers or highly skilled professional talent, and as a result, labor markets remain strong overall and we still see good order flow and opportunities in various markets and brands. Turning to our financial results, in the fourth quarter revenue was $4.8 billion, down 1% year-over-year in constant currency. Our reported EBITA for the quarter was $110 million. Adjusting for the U.S. acquisition integration costs, restructuring costs and other special items which we will cover in the financial review, EBITA was $167 million, representing a flat trend in constant currency year-over-year. Reported EBITA margin was 2.3% and adjusted EBITA margin was 3.5%. Earnings per diluted share was $0.95 on a reported basis and $2.08 on an adjusted basis. Adjusted earnings per share increased 8% year-over-year in constant currency. Turning to the full year results for a few moments, reported earnings per share for the year was $7.08. As adjusted, earnings per share was $8.52 and represented a constant currency increase of 31%. Revenues for the year increased 5% in constant currency to $19.8 billion and reported EBITA was $619 million. As adjusted, EBITA was $698 million, which represented a 22% constant currency increase year-over-year. In the fourth quarter we experienced softening in demand in some sectors and markets, especially in the US and Europe. Our own quarterly forward-looking ManpowerGroup Employment Outlook Survey of approximately 40,000 employers in more than 40 countries, which was conducted in November, indicates that good hiring momentum is expected to continue for Q1 2023 especially in IT, finance, energy and life sciences, with softening hiring intent emerging in Europe and to a lesser extent in the U.S., both weaker in hiring intent quarter-over-quarter and year-over-year. While the headlines may be dominated by tech company layoffs, we see this more as a recalibration of their workforces as a result of bullish hiring post pandemic. In the wider spectrum of all industries, we are seeing more companies begin to tap the brakes while others have their foot hovering above the brake pedal, and even in this more cautious environment, there remain areas of good demand for our services, such as IT skills within our Experis business, higher margin skills within our Manpower business, RPO, MSP and right management, and we are focused on delivering into these market opportunities. Going back to the quarterly results on Slide 3, revenues in the fourth quarter came in at the low end of our constant currency guidance range. Gross profit margin came in at the midpoint of our guidance range. As adjusted, EBITA was $167 million, flat in constant currency compared to the prior year period. As adjusted, EBITA margin was 3.5% and came in just below our guidance range and was flat year-over-year. Due to the strengthening of the dollar, year-over-year foreign currency movements continued to have a significant impact on our results. It is important to note that our businesses operate in local currencies and as a result, foreign currency translation does not impact cash flow activity within our businesses and is largely an accounting item based on reporting translation into U.S. dollars. Foreign currency translation drove a 10% swing between the U.S. dollar reported revenue trend and the constant currency related growth rate. After adjusting for the negative impact of foreign exchange rates, our constant currency revenue decreased 1%. Due to the impact of net dispositions decreasing revenue about half a percent and fewer billing days, organic days-adjusted revenue was flat in the quarter compared to our guidance of plus-2% at the midpoint. The lower revenue trend reflected a deteriorating environment during the fourth quarter, particularly across Europe and North America. Turning to the EPS bridge on Slide 5, reported earnings per share was $0.95, which included $1.13 related to restructuring costs, final integration costs from the U.S. Experis acquisition, and other special items consisting of a loss on the sale of our Hungary business and non-cash charges consisting of goodwill impairment and pension settlement costs. Excluding the restructuring costs and other special items, adjusted EPS was $2.08. Walking from our guidance midpoint, our results included a softer operational performance of $0.19, slightly lower weighted average shares due to share repurchases in the quarter which had a positive impact of $0.01, a lower effective tax rate which had a positive impact of $0.02, a foreign currency impact that was $0.08 better than our guidance due to the strengthening of the euro and the pound during the quarter, and other expenses had a positive $0.01 impact. Next, letâs review our revenue by business line. Year-over-year on an organic constant currency basis, the Manpower brand reported revenue decline of 1%, the Experis brand was flat, and the Talent Solutions brand reported revenue growth of 7%. Within Talent Solutions, we continue to see year-over-year revenue growth in RPO as permanent hiring trends remained solid across our key markets during the quarter. Our MSP business saw a modest revenue decline in the quarter as we reduced certain lower margin activity, while Right Management experienced a double-digit percentage revenue increase on higher outplacement volumes in the quarter compared to the extremely low levels in the prior year. Looking at our gross profit margin in detail, our gross margin came in at 18.2%. Staffing margin contributed a 30 basis point increase driven by our Manpower businesses. Permanent recruitment, including Talent Solutions RPO, contributed a 20 basis point GP margin improvement as hiring activity contributed to high single digit increases in gross profit year-over-year. Project and other solutions-related services within Experis resulted in a 20 basis point margin increase. Right Management career transition and MSP within Talent Solutions contributed 20 basis points of improvement, and other items represented a positive 10 basis points. Moving onto our gross profit by business line, during the quarter the Manpower brand comprised 57% of gross profit, our Experis professional business comprised 26%, and Talent Solutions comprised 17%. During the quarter, our consolidated gross profit grew by 3% on an organic constant currency basis year-over-year. Our Manpower brand reported an organic gross profit increase of 2% in constant currency year-over-year. Organic gross profit in our Experis brand increased 3% in constant currency year-over-year. This reflects strong growth in higher margin solutions as well as growth in permanent recruitment. Organic gross profit in Talent Solutions increased 11% in constant currency year-over-year. This was driven by double digit GP percentage growth in both RPO and Right Management. MSP experienced solid GP growth and significant margin improvement as we improved the mix of business during the quarter. Reported SG&A expense in the quarter was $775 million. Excluding restructuring costs and other special items, SG&A was 4% higher year-over-year on an organic constant currency basis, which is down from the 9% growth in the third quarter on the same basis. This reflects a balance of cost reductions in areas of slowing demand while we continue to invest in growth opportunities, most notably in Experis, Talent Solutions, and specialty skills in Manpower. The underlying increases consisted of operational costs of $31 million, incremental costs related to net acquisitions and dispositions of businesses of $2 million offset by currency changes of $62 million. Adjusted SG&A expenses as a percentage of revenue represented 14.6% in constant currency in the fourth quarter. Iâll discuss goodwill impairment as part of Northern Europe segment review. Integration costs, a small loss on sale and modest restructuring costs totaled $7 million. The Americas segment comprised 25% of consolidated revenue. Revenue in the quarter was $1.2 billion, flat compared to the prior year period on a constant currency basis. Reported OUP was $58 million and includes $4 million of final acquisition integration costs on the completion of the U.S. acquisition integration, as well as some small restructuring costs. As adjusted, OUP was $62 million and OUP margin was 5.3%. The U.S. is the largest country in the Americas segment, comprising 69% of segment revenues. Revenue in the U.S. was $819 million during the quarter, representing a 3% days-adjusted decrease compared to the prior year. As adjusted to exclude acquisition integration and restructuring costs, OUP for our U.S. business was $45 million in the quarter, representing a decrease of 15%. As adjusted, OUP margin was 5.5%. Within the U.S., the Manpower brand comprised 25% of gross profit during the quarter. Revenue for the Manpower brand in the U.S. decreased 8% on a days-adjusted basis during the quarter, representing a decline from the 3% growth rate in the third quarter. Manufacturing PMI in the U.S. steadily decreased during the fourth quarter from above 50 in October to the 48 range in December. Our U.S. Manpower business experienced a progressive pull back in demand during the course of the quarter. The Experis brand in the U.S. comprised 46% of gross profit in the quarter. Within Experis in the U.S., IT skills comprised approximately 90% of revenues. Experis U.S. revenue growth on a days-adjusted basis represented 1% as we anniversaried very strong growth in the year-ago period. The integration activities for our acquired U.S. Experis business were successfully completed during the quarter. Talent Solutions in the U.S. contributed 29% of gross profit and experienced a revenue decline of 4% in the quarter. This was driven by a decrease in RPO revenues in the U.S. as permanent hiring programs softened in the fourth quarter and we anniversaried dramatic growth in the prior year. Although RPO programs are slowing in the current environment, fourth quarter RPO revenues were well above pre-pandemic levels. The U.S. MSP business saw a modest revenue decline as we reduced some lower margin activity, while outplacement activity within our Right Management business drove significant revenue increases. In the first quarter of 2023, we expect a slightly higher rate of year-over-year revenue decline as compared to the fourth quarter trend in the U.S. which reflects the current environment and represents some further softening across Manpower, Experis and RPO. Southern Europe revenue comprised 43% of consolidated revenue in the quarter. Revenue in Southern Europe came in at $2.1 billion, representing a 2% decrease in organic constant currency. Reported OUP for the Southern Europe business was $106 million in the quarter. As adjusted, OUP margin was 5.1%. France revenue comprised 57% of the Southern Europe segment in the quarter and increased 2% in days-adjusted organic constant currency. As adjusted, OUP for our France business was $59 million in the quarter, representing an organic increase of 3%. As adjusted, OUP margin was 4.9%. The business in France continues to operate in a very low growth environment based on supply chain impacts from the ongoing Russia-Ukraine war and broader inflationary pressures. Activity in January 2023 indicates further softening. We are estimating the year-over-year constant currency revenue growth rate in the first quarter for France to be slight growth to flat based on January activity trends. Revenue in Italy equaled $413 million in the quarter, reflecting an increase of 1% on a days-adjusted constant currency basis. OUP equaled $29 million and OUP margin was 7.1%. As we continue to anniversary significant revenue growth in the prior year period, we estimate that Italy will have a slightly lower constant currency year-over-year revenue trend in the first quarter compared to the fourth quarter. Our Northern Europe segment comprised 20% of consolidated revenue in the quarter. Revenue of $973 million represented a 3% decline in organic constant currency. OUP represented $16 million and adjusted OUP margin was 1.7%. Our largest market in the Northern Europe segment is the U.K., which represented 36% of segment revenues in the quarter. During the quarter, U.K. revenues decreased 6% on a days-adjusted constant currency basis. This reflects a slightly higher rate of decline from the third quarter trend. We expect a similar year-over-year revenue trend in the first quarter compared to the fourth quarter. In Germany, revenues decreased 3% in days-adjusted constant currency in the fourth quarter, a significant improvement from the third quarter trend. We continue to take actions to improve our Germany business and have progressed various initiatives focused on business mix and operational improvements. Overall, in the first quarter we are expecting a slightly improved year-over-year revenue trend compared to the fourth quarter trend. The Netherlands is one of our smaller businesses in Northern Europe. The revenue decrease in the fourth quarter of 5% days-adjusted constant currency was a slight improvement from the third quarter trend on this same basis. Based on the prolonged decline in revenues in the Netherlands, increased interest rates and the worsening economic conditions, we updated our goodwill impairment assessment at year end which concluded in a non-cash impairment charge of $50 million. Having said that, we have taken various actions in the Netherlands which have recently improved profitability and we expect further improvement in 2023. The Asia Pacific Middle East segment comprises 12% of total company revenue. In the quarter, revenue grew 8% in constant currency to $579 million. OUP was $23 million and OUP margin as adjusted was 4%. Our largest market in the APME segment is Japan, which represented 46% of segment revenues in the quarter. Revenue in Japan grew 11% in constant currency, or 12% on a days-adjusted basis. We remain very pleased with the consistent performance of our Japan business and we expect continued strong revenue growth in the first quarter. In full year 2022, free cash flow equaled $348 million compared to $581 million in the prior year. In the fourth quarter, free cash flow represented $115 million compared to $238 million in the prior year. At year end, days sales outstanding increased about half a day to 56 days. During the fourth quarter we repurchased 376,000 shares of stock for $25 million. As of December 31, we have 2 million shares remaining for repurchase under the share program approved in August of 2021. Our balance sheet ended the quarter with cash of $639 million and total debt of $987 million. Net debt equaled $348 million at quarter end. Our debt ratios at quarter end reflect total adjusted gross debt to trailing 12-months adjusted EBITDA of 1.32 and total debt to total capitalization at 29%. Our debt and credit facilities remained unchanged during the quarter. After successfully lengthening our debt duration profile with the euro note executed in mid-2022, we enter 2023 with a very strong balance sheet. Based on trends in the fourth quarter and January activity to date, our forecast is cautious and anticipates that the challenging environment will continue through the first quarter. We are forecasting underlying earnings per share for the first quarter to be in the range of $1.61 to $1.71, which includes an unfavorable foreign currency impact of $0.15 per share. We have disclosed our foreign currency translation rate estimates at the bottom of the guidance slide. Our constant currency revenue guidance range is between a decrease of 3% and an increase of 1% that at the midpoint represents a 1% decrease. There is no meaningful impact for acquisitions and dispositions, but there is an increase in billing days year-over-year bringing the days-adjusted constant currency decrease to 2.5% at the midpoint. This represents a decrease from the flat fourth quarter revenue trend on this same basis. We expect our EBITA margin during the first quarter to be down 30 basis points at the midpoint compared to the prior year. We estimate that the effective tax rate for the first quarter to be 29.5% and for the full year of 2023 to be 29%. This reflects the enacted decrease in the French business tax that I mentioned last quarter and our latest estimate of mix of country earnings. As usual, our guidance does not incorporate restructuring charges or additional share repurchases, and we estimate our weighted average shares to be 51.5 million. As we wrap up our reporting of 2022 and begin 2023, I would like to provide an update on our DDI strategy - diversification, digitization and innovation, and acceleration plans which together with continued investments in our technology roadmap, are strengthening our capabilities to capture higher margin opportunities and create long term sustainable value. On diversification, weâre making excellent progress shifting our mix to higher margin businesses within and across all of our brands, ensuring our clients have the talent and workforce strategy to adapt quickly to market shifts as they happen. We are also very pleased with the completion of our rapid and successful integration of our ettain acquisition into our Experis business, and we are starting 2023 with a very strong position in the U.S. IT professional resourcing and services market. We also see strength in the Experis brand globally, positioning us to capitalize on the growing global professional IT resourcing market. Our industry leadership and star performer status in both Experis and Talent Solutions RPO and MSP offerings has also been recognized in 2022 by Everest Group, as discussed in the recent quarters. On digitization, we continue to make excellent industry-leading progress on our technology roadmap. Last year, I communicated that we had completed PowerSuite cloud-enabled front office implementations in 22 markets. I am pleased to report that in 2022, we have implemented PowerSuite in 11 additional markets and are in flight in six more markets as we speak. By the end of 2023, we will have substantially all of our major businesses on this leading platform. During 2022 we have further strengthened our mobile app leadership position in France and advanced our Associate app in various other key markets, with more countries being added in 2023. Our global enterprise data lake is in place for our top three markets, France, U.S. and Italy, further strengthening our business insights to clients and improving our candidate experience, all of which is a critical to our B2C â business to candidate - strategy at a time when talent shortages remain high. Our back office cloud-enabled infrastructure projects are also driving efficiencies and improving our processes. On innovation, our engine for growth, we are making great progress on leveraging our PowerSuite technology stack here too and are accelerating the deployment and adoption of our AI-based recruitment tools and machine learning to enhance recruiter productivity to be more data and insight-driven to find the best talent match quickly and focus on activities that create the most value for our candidates, associates and clients. As we continue to differentiate our higher value services, we are increasingly focused on being creators of talent at scale by expanding our talent engine offerings across our brands and for our internal employees and associates. Our talent academy is recruiting and training our own and new talent to be experts in key skills and industry verticals, including IT. Our Experis Academy, now active across 14 markets, is providing intensive role-ready tech training and coaching for our Experis consultants, especially in cloud and infrastructure, business transformation services and digital workspace specialist skills, so we can find or create the best talent which our clients need, and our Manpower MyPath has boosted the employability of almost 200,000 temporary associates in 15 markets, increasing recruiter productivity, achieving higher reassignment rates, stronger Net Promoter Scores, and driving higher GP margin across specializations. In addition to this, we engage in many more training initiatives at a local country level as well. We are also making excellent progress with our Working to Change the World ESG plans, recognized in 2022 for our impact across planet, people and prosperity, and principles of governance. ESG is increasingly important to our clients, associates and employees as they choose with whom to work or be associated with. We earned an A-minus rating in this yearâs Carbon Disclosure Project survey, driven by our science-based target initiative validated emission reduction targets. We maintained our industry-leading Sustainalytics score, were included on the Dow Jones Sustainability Index for the 14th year, recognized by Newsweek as one of Americaâs Most Responsible Companies for the fourth year, and ranked in the top half within the Wall Street Journalâs Top 250 Best Managed Companies by the Drucker Institute, scoring highly for customer satisfaction, innovation and social responsibility, all of which reinforces our reputation as a leading organization with strong performance in the areas of environment, social, and corporate governance, and our talented teams should be proud. In closing, we have seen the broader economic environment soften over the past months. This has translated into lower demand for our services in some markets, which we expect will continue; however, we still continue to see good demand for specific skills and industry verticals that support growth in our higher margin offerings. We are very confident in our ability to manage this dichotomy of market opportunity, as we have done many times in the past, and we will adjust our resources as we see the market evolve going forward. Longer term, we remain convinced that in this fast changing, post-pandemic landscape, our clientsâ workforce transformation needs will grow, the value of data and insights will increase, and building the right blend of people and tech will be even more critical. We are confident that our DDI strategies and excellent progress positions us to leverage these opportunities and more to accelerate profitable growth and value creation. Hi everybody. I wanted to look back at Slide 7. Despite the softening demand environment fourth quarter in terms of staff and gross margins, weâre still up 30 basis points, so Jack, just was hoping you could talk a little bit about whatâs driving that. Is there a mix factor, how are bill pay spreads doing, and how is that same figure likely to trend into the first quarter? Iâd say the big item is staffing margin, so you can see staffing margin having the biggest contribution to the year-over-year plus 100 basis points. Despite the volumes and the pressure on volumes that we talked about on the call, pricing continues to hold up very well. We see that across all of our large markets. Iâd say there is a component of that that is mix as well on the staffing side. Weâve been talking about the adjustments we have been making to the overall portfolio. Youâve seen us talk about some of the dispositions of some of the countries that were not at hurdle rates, and you saw us in this release talk about another move weâve made there in terms of divesting of one of our businesses in Europe. So mix is part of it, but Iâd say the bigger part of it is just the continued strong pricing environment that is reflected in what weâve been talking about in terms of the labor markets and the demand for talent. On an overall basis, staffing margins continue to perform very well. The other part of it is the mix as well, in terms of the brand mix, and Experis and Talent Solutions continue to be at record levels of percentage of the overall business, and thatâs having an impact as well. Iâd say in terms of spreads on an overall basis, holding fairly steady from--you know, sequentially from the third quarter to the fourth quarter. Weâre not really seeing a big change in terms of bill pay spreads and so forth, so again in line with solid pricing. Then you can see perm, although we have noted that perm is starting to slow off record levels, still having a very positive impact with year-over-year growth, and we talked about that in the prepared remarks as well at very high single digit growth in perm overall year-over-year, contributing to that GP margin improvement. The other item, Experis, weâve called out, you can see from the services side. The non-resourcing side, very good activity there, and you can see the 20 basis points in solutions statement of work, other services. Lastly, Iâd say Andrew, MSP contributed year-over-year to margin improvement, and we did Right Management outplacement activity start to rebound from record lows in the prior year, and that had a positive impact on margin as well. Thank you so much. You talked in your prepared remarks about doing cost reduction in areas of slower demand. I was wondering if we could get a little bit more color on that in terms of where that was, are these cost reductions expected to continue, and if not, what are you looking for before holding off on that? I guess the way Iâd say it, as we talked about in the prepared remarks, it is still a bit of a balance. We are still investing for growth and good opportunities, and Experis and perm in certain markets is still holding up fairly well, so there are areas where we continue to invest. But we are pulling back in areas where we are seeing softness, so when I look at--we talked a lot about SG&A year-over-year being up in the fourth quarter. Thatâs largely due to the momentum of the growth earlier in the year, when you look at year-over-year; but when we look at FTEs and headcount sequentially, weâre actually down from the end of the third quarter, so our headcount is down. If you look across the markets where weâve made some adjustments, you can see North America would be part of that based on the trends that weâre seeing. The U.S. and Canada, both down in headcount slightly. Across Europe, you would see, and weâve talked about this before, some adjustments in Germany as well, in Norway as well, so reacting to some of those sectors where weâve seen softness, like in construction in Europe, you would expect that weâre making adjustments in those parts of the business. But on an overall basis, Iâd say if you think about the quarter overall, we still grew GP dollars across all brands, so that indicates that the environment still, although itâs choppy and a bit uneven and weâre certainly seeing more pressure on the Manpower side, there continues to be very good opportunity in pockets, even in Manpower in pockets, and weâve talked about the investment in specialty. But where there has been slowing, we are making those adjustments, and to your point about going forward, you should expect that weâre going to continue to do that. Weâll do that based on the trends that weâre seeing in the key markets, and weâll continue to make those adjustments as we go forward. I did announce in the quarter that we did some slight restructuring. The restructuring dollars were very small on an overall basis, and that would reflect some very small right-sizing in the U.S., Latin America, in Mexico. As you would expect, weâve done some small right-sizing there as well. In Northern Europe, in Germany and Norway, as I mentioned earlier, some slight adjustments, and in France we made some small adjustments as well, so that would capture the small restructuring we took in the quarter, and weâll continue to monitor those trends going forward in terms of overall activity levels. Moving onto everybodyâs favorite topic, which is taxes, I know you gave us an update on the impact of the French business tax. Is that something that we should use--I know youâre not talking about 2024, but is that a good number to use, that 29%, going forward? Yes, great point. The Government of France did pass the French business tax reduction as part of the budget for 2023. Thatâs locked in, so that will take us--we did say the 29% for the full year 2023, that does have that benefit, which is about 1.5% or so. Weâve also updated the mix of country earnings, which is part of the equation as well, which takes it to 29%. Weâll see if that ends up being maybe a tad conservative. But when we go to 2024, currently they are projecting to remove the final part of the French business tax, if that gets passed, and final confirmation of that will be in the 2024 budget when itâs approved at the end of â23. That would be another 1.5% decrease, which would take us down further to about 27%, 27.5% for â24. Weâll continue to update that. Weâll watch that when the preliminary budget comes out in the fall, and certainly in the fourth quarter weâll have greater certainty around that, but that would be very good if that got passed as intended. Last quarter, if Iâm not mistaken, the commentary was indicative of seeing solid demand, little to no signs of deterioration. While increasing risks and uncertainty were acknowledged, the commentary was indicative of that solid demand, but now itâs broader economic softening, lower demand for services in some, not all markets, the uncertain economic outlook. How did that happen? Can you assess what happened in the quarter versus your expectations, even from a timing standpoint and with regards to your visibility, and how we should expect first quarter and the remainder of the year to play out in consideration of that? Sure Ronan, good morning. The risks and uncertainties we talked about in the prior call to some degree came to pass. For the first three quarters of the year, especially after the Ukraine war, we started to see Europe soften but the U.S. held on, and Q4 was really the time when we started to see the U.S. demand softening broadly across the brand, but clearly more pronounced for the Manpower brand, and that shouldnât have come as much as a surprise. As you know, for the Manpower brand, PMI is a good indicator. Both across Europe during the year and in the U.S. at this time, PMIs are all below 50 and we really could see that softening demand occurring in the Manpower brand in particular. At this point, as Jack has just spoken about, it is clearly visible across all of our brands, but having said that, we see big differentiation between the softening, with Talent Solutions still leading the way in terms of growth of GP in the fourth quarter. The same is true for Experis, holding up well, and really itâs the Manpower brand that weâre seeing having more of an impact due to the slowdown in industrial activity and across various sectors. Ronan, I would just add to that, I think when we released our third quarter results on October 20, weâd just had a couple weeks of activity in October at that point. I think if you look at some of the labor market data, particularly in the U.S., on what happened from October through December, youâll see a significant trend change in terms of what was happening with temporary workers in November and December as they ended the quarter. Certainly in France as well, you would have seen the industry data there - step down in the month of November and December, and actually our business held up fairly well compared to that industry data that went negative year-over-year in November and December. But clearly the environment changed. When we went out on October 20, we did say that we anticipated a stable environment, to your point, and what happened in November and December actually moved away from that. Then margins were touched on in response to Andrewâs question, but just for guidance for the first quarter overall, obviously it is a function of the top line and potential declines there. But what are the other puts and takes to the upside or downside to the margins as well, and then ultimately earnings? Yes, happy to talk to that. I think for the first quarter for GP margin, still holding up very well, Iâd say, so you can see at the midpoint weâre at 18.1% - thatâs still up 70 basis points year-over-year. I think based on the earlier question we had on GP margins, still anticipating and seeing good staffing margin, still solid pricing environment, and we donât see that changing. Although perm is coming off record lows and slowing on a year-over-year basis in terms of growth trends sequentially, there is still good perm activity in various markets, so we still see that contributing to the GP margin. I think on the bottom line, itâs actually pretty straightforward. We are seeing a decrease in operational leverage with the revenue trends. I mentioned in the first quarter, we ended up on a flat organic days-adjusted basis. We stepped down in the first quarter, so although at the midpoint in constant currency itâs at minus-1, as I mentioned, we have more days in the first quarter, so when you adjust for days, that takes it down to about minus-2.5%. Itâs really the lower volumes that are translating into lower GP dollars, which are falling down. We are making adjustments, but that is contributing to the EBITA margin of the minus-30 basis points year-over-year in the first quarter, really driven by the volumes. Mark, we like to talk perm overall, so that includes RPO, but also includes the perm activity thatâs happening in the staffing brands as well as Manpower and Experis. On an overall basis in the fourth quarter, our perm as a percentage of total GP is about 18.6%. Weâve talked about that in the past, youâll see that coming down from the record levels of perm that we had in the second quarter, and we expected that to happen. At that point, it was above--just slightly above 20%, and so now itâs coming down just below 19% now, and we would expect that to continue to settle in at more historical levels, somewhere in that range, maybe even a little bit lower as we go forward, as expected. Yes, and you mentioned that RPO is continuing to--grew during the fourth quarter, although it declined in the U.S. Where are you seeing the growth on the RPO side, and as you talked about it settling in a little bit more as a percentage, what range would you expect it to go to if the economy softens a little bit further on a worldwide basis if thereâs more caution? Sure, Iâd be happy to talk about that. The U.K. had very, very RPO growth in the fourth quarter. We saw very--Poland is a great operation for us in terms of supporting our global RPO - they had very strong growth as well. Japan had strong RPO growth and France had strong RPO growth as well, so those are all some of our larger markets that did very well in RPO, which took us to overall growth despite the U.S. being down in the fourth quarter. Overall RPO was up double digits in revenues, and so that would be the main drivers. I think to your point in terms of the outlook, we would expect that year-over-year growth rates for perm would continue to come down as we move forward, again as we get further away from some of the record levels of activity and we anniversaries very, very high rates in the prior year. But Iâd say as we continue, itâs hard to say. In this environment, permâs been holding up better than anyone would have ever imagined if we would have went back a number of quarters, and itâs still holding up fairly well despite some of the pressure weâre seeing in staffing volumes in some of the markets. Will that growth rate continue to edge down? Yes, but itâs hard to say if it will come down into negative territory anytime soon. Weâll just have to monitor those trends, but so far weâre very encouraged by the fact that itâs holding up in many of our key markets. Jonas, you were just in Europe, you were at Davos. Can you talk a little bit about what youâre hearing from clients and just generally speaking with regards to in the key markets - France, U.K., Italy, Germany, what youâre hearing with regards to areas that seem to be holding up a little bit better than what we here on this side of the pond would imagine as it relates to Europe, and what areas of caution are there? How are you thinking about things, not just for the next three months but over the course of the year, broadly speaking? Sure Mark. The conclusions of discussions with clients is clearly their hiring intent is softening somewhat, but despite what you read in the papers in terms of both big tech companies pulling down and other larger corporations also having workforce reductions, most of our clients are continuing to hire. They may not hire the same skill set, so they take longer to hire, the sales cycles are a bit longer, recruitment times are going up, and theyâre very specific about the skills that they feel theyâre going to be needing heading into the year. But they are continuing to hire, and that speaks exactly to this dichotomy in terms of demand. On the one side, we feel that some of the skill sets, notably in logistics, are becoming softer. Construction has been softer due to the interest rate environment. You have others, financial services and tech companies, where demand is still holding on really in Europe as well as globally, so weâre in this time where we are balancing between customers that are tapping the brakes, theyâre not hitting the brakes, theyâre tapping the brakes. Some have their foot over the brake and thinking about what they would do if they see the environment deteriorate further, to many clients saying that theyâre working through the pandemic supply chain issues and they have a big order book that they need to fulfill during 2023. Itâs quite uneven, but at the same time quite encouraging because you can tell all of this is reflected in still very strong labor markets, and whatâs not unusual, as you all know, is that our industry leads the way in a softening economy but it has yet to translate into the broader labor market. We donât know to what degree it will. We note of course the reduction in demand for some places with Manpower skills in particular as we see industrial outlooks come down, but overall itâs still a constructive environment but it is difficult to predict where itâs going. Most companies we spoke with and are speaking with still are looking to bring on talent because they have the memory of the pandemic very, very fresh. You think back over past recessions, and this may be the most pre-announced recession that we have ever experienced, be it technical or otherwise. Employers in the past really absorbed most of the slowdown in reduced productivity because they wanted to hold onto the workers, and that means we may well, as Jack has alluded to, still see reasonably good perm activity, some parts of the business feeling more of the softening and others still see very good demand. Itâs hard to predict, but weâre ready to manage this whichever way it goes, and as you can tell, we feel really good about our diversified business mix, where we feel that we have some good resilience in higher skill sets and developing more resilience in also Manpower higher skill sets. Weâll manage it as it evolves based on the trends that weâre seeing, but Iâd say the tone in Davos was more optimistic than I had expected. Thank you. Jack, you talked a little bit about competition and pricing holding up. Iâm wondering, is that across all brands? Is maybe the Manpower brand seeing some additional competition because of some of the pressures, and the other brands are holding up? Were you comments kind of overall pricing is holding up? Iâm just wondering if you look at the brand, what you think about competition currently. Yes, thanks Kartik. You know, actually itâs a very good point and I should have clarified that actually Manpower had very good staffing margin improvement in the fourth quarter, so I could understand why there would be a question, if theyâre seeing the most pressure on volumes, are they starting to see some pressure on margin, on staffing margin, and that actually is not the case. Despite volumes being down, pricing is holding up very well on the Manpower side, and when we look at that 30 basis points for staffing margin, Manpower was a big contributor to that. No, itâs holding up quite well, and Iâd say on the Experis side, margins are holding up very well as well, I think in line with the trends that weâve talked about in recent quarters. I think the good news is despite some of the pressure weâre seeing in some of the slowing environment, that is not translating into pressure on margins on the Manpower side. Then Jack and Jonas, all the conversations youâve had with your clients, and maybe your trip to Davos and Europe, and Jack, just youâre looking at business and the statistics, what would you anticipate for wage inflation? It seems like itâs come down a little bit, but itâs probably mid-single digits - if thatâs correct, and Iâm wondering kind of your outlook for the year and what you would anticipate for that. You know, as many, weâve been clearly looking at wage inflation, and just as a reminder, from our perspective, wage inflation is actually a positive effect because it translates into our business through higher bill rates. Our business model is not negatively impacted by the direction inflation or wage inflation, it actually benefits from it. Obviously from an economic perspective, high inflationary pressures are not good, and to your question, we expect wage inflation to continue to come down, as youâve seen over the last six months, although the pace of that decline is hard to gauge. But I would say this - if you speak, and we speak obviously to employers at large, their expectation is for wage inflation to come down, which is why their wage increases on average are still quite contained, so they are not responding on average to these wage demands, they are trying to manage it through one-time bonuses, hiring incentives, all kinds of one-time effects because their assumption is that wages are going to be coming down over time and they want to remain competitive in the market in their business. We would expect wage inflation to continue to come down, but based on the gradual and slow decline that weâve seen certainly over the last nine months, we think thereâs still--itâs still going to take a while. But overall, our wage inflation expectations are for it to moderate. Hey, good morning. This is Jasper Bibb on for Tobey. The gross margin guidance for the first quarter looks really strong despite some of the headwinds weâve talked about. I think historically, thatâs easily been the weakest margin quarter for the company. How should we think about the seasonal pattern of margins over the balance of the year and any impact that some of your permanent placement businesses declining might have on margins over the course of the year? Thanks Jasper. Yes, youâre right - I think traditionally, we do typically see some pressure. I think the counter to that, though, is we have stepped up margin pretty progressively sequentially over the last number of quarters, and we take that into the first quarter. The rate of increase is slowing. We were up 100 basis points in Q4 year-over-year, itâs 70 basis points, and thatâs just the comps starting to catch up a bit. No, I would say at the moment, we feel pretty good in terms of--as I mentioned earlier, in terms of pricing, staffing margin, perm continuing to contribute, and based on mix of the business as well, right? As we look out, we typically donât talk about future quarters, but I think it is fair to say that generally, the second half of the year, we typically see a bit higher GP margins. I think this year in 2023, the item that weâll definitely keep a close eye on is perm and the contribution of perm to overall market, as we mentioned earlier. If perm slows more dramatically, then that will have an impact and weâll start to see that come down. I think the good news is weâre already seeing the contribution of perm, as we talked about in previous questions, start to get back to more traditional levels as a percentage of GP, and as that continues to stabilize, that should have less volatility on GP margin as we go forward. Thanks, that makes sense. Then Europe PMI has been contracting month over month for most of the second half of â22, but your organic revenue guidance for Europe is still roughly flat year-over-year in the first quarter. Could you speak to any differences in how managers are using temp labor in this environment and are they more, I guess, reticent to let people go, given the shortages weâve seen in the past two years? Iâd say that they are definitely careful about letting their talent go. The uncertainty and the volatility in terms of the outlook and the economic conditions also mean that they prefer to have a more flexible workforce, which is helping us offset some of the demand weakness we may have seen. Employers use these workforce solutions that we provide through Manpower and, to a lesser degree in terms of economic cycle in the Experis side and Talent Solutions side to create some flexibility in their outlook and be able to quickly respond to either increases in activity or decreases in activity. I think thatâs what we see. They have definitely and continue to be influenced by the difficulties in finding talent, and they are increasingly looking to us to help them provide that talent. As youâve heard from our prepared remarks, they are also very pleased with our increasing capabilities of up-skilling and re-skilling talent that isnât available in the market. We see this as a tremendous opportunity both from a Manpower perspective as well as from an Experis perspective. As the demographic trends in Europe and in North America are clearly getting tougher over time with lower birth rates, the ability to tap into talent pools and to create skills that are missing in the market, we think is going to be a great competitive advantage for both Manpower and Experis at scale. And Jasper, just a technical item, I think your point that constant currency guidance is relatively flat compared to the minus-1% in Q4 to minus-1% in Q1, but there are more days. Days are a bigger issue than usual in the first quarter of â23, so itâs about 1.5% difference due to the more days, so when you adjust for days, we are down sequentially, so that takes it down to about 2.5% on an overall basis. In Europe, in some of those markets, we are seeing--when you adjust for days, we are seeing a slight step down in France and in Italy, as we mentioned in the prepared remarks, so thatâs just the only thing to keep in mind as you think about that. You mentioned customers are exercising more caution in their demand for both contingent and perm recruitment. Can you compare how quickly contingent trends are changing relative to perm placement trends, particularly exiting the quarter? You can see that we are still holding onto perm and that Manpower staffing is coming down quicker than perm, so it is connected to a very strong labor market and some of the volatility you see in certain industry verticals in some countries. Perm at this point is holding up better than contingent staffing, especially for Manpower. Great. You indicated that activity in France in January points to further softening from a growth perspective. Can you elaborate on what youâre seeing in France in terms of order flows, sales cycles, and various end market performance? Well, I would say that weâre tracking well to market. Youâve seen some of the prism data soften over the last couple of months and then you saw it as well recently, so. France is continuing and actually is still holding steady, but at a low level. It is one of the countries, one of the few countries where we, as well as the industry never came back to pre-pandemic levels, so I would say the same phenomenon that weâre seeing in other markets where there is a slowdown, longer sales cycles, longer times to close recruitment cycles, but still an environment that is constructive to our higher value offerings, our higher skill sets within Manpower and also some very good opportunities in workforce transformation as it relates to Talent Solutions. All of this indicates a slight step down, as Jack talked about, but still something that is manageable from our perspective. Hi, thank you for taking my questions. I was hoping you could talk a little bit about Germany. You mentioned in the prepared remarks about some of the initiatives youâre taking there to turn that business. I was hoping you could elaborate on that. Then Iâm curious about the underlying environment youâre seeing in that market. You didnât call that out as one where youâre seeing some slowing, but just curious what youâre seeing in some of those end markets. Thanks. Well, I think the overall market is still holding steady. Unemployment rates are still low, and there is a lot of work that weâre doing to make sure that our business is competing the way it should. We were pleased to see an improvement sequentially between the third quarter and the fourth quarter. We expect to continue to see an improvement. As weâve talked about in prior calls, our exposure to the automotive sector in Germany is the highest that we have across all of our countries, and thatâs really giving us a lot of work to do to diversify our business into segments that are holding up a bit better. Even if the market could go softer also in Germany in the first quarter, I think we have initiatives in place where weâre hoping to see continued improvement in our own business as we move forward, and we have a Proservia business that is also working to recover some of the lost ground. But overall, weâre pleased to see signs of improvement, but we still have a lot of work to do, Heather, to make sure that weâre competing at the right level in the German market. Thank you, and then another question, just China reopening, I know--you know, if we go back a couple of calls, there was potential risk of disruption from the lockdowns. Iâm just curious if there is any benefit with China reopening or if all of that is just non-material to your business. Well as you know, our Chinese business has managed through a listed company in Hong Kong that is covering the Chinese market, but overall I would expect that when Chinese demand improves, it will have the benefit of creating demand for products and services for the rest of the world, which will be positive, and it will probably also increase pressure in terms of demand for resources and energy costs might go up. But overall, a growing China should be beneficial for the world economy and as such, we would benefit from that evolution. Certainly on the Manpower side, that might mean that PMIs start to turn the other way and go in the right, positive direction again. From our own business perspective, not an impact, but as opposed to there might be a secondary effect of an improving economic environment to which Chinaâs growth contributes. Thank you everyone. That brings us to the end of our fourth quarter earnings call, and we look forward to speaking with you again when we catch up in April. Thanks everyone. Have a good rest of the week.
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Welcome to the Powell Industries Earnings Conference Call. [Operator Instructions]. Please also note this event is being recorded. I would like to turn the conference over to Ryan Coleman, Investor Relations. Thank you. You may begin sir. Thank you operator and good morning, everyone. Thank you for joining us for Powell Industries Conference Call today to review Fiscal Year 2023 first quarter results. With me on the call are Brett Cope, Powell's Chairman and CEO; and Mike Metcalf, Powell's CFO. There will be a replay of today's call, and it will be available via webcast by going to the company's website, powellind.com, or a telephonic replay will be available until February 08. The information on how to access the replay was provided in yesterday's earnings release. Please note that information reported on this call speaks only as of today, February 1, 2023, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of replay listening or transcript reading. This conference call includes certain statements, including statements related to the company's expectations of its future operating results that may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties and that actual results may differ materially from those projected in these forward-looking statements. These risks and uncertainties include, but are not limited to, competition and competitive pressures, sensitivity to general economic and industry conditions, international, political and economic risks, availability and price of raw materials and execution of business strategies. For more information, please refer to the company's filings with the Securities and Exchange Commission. Thanks Ryan. And good morning everyone. Thank you for joining us today to review Powellâs fiscal 2023 first quarter results. I will make a few comments and then turn the call over to Mike for more financial commentary before we take your questions. Powell delivered a great start in fiscal year as the momentum we experienced in the second half of last year from our core oil and gas and petrochemical markets carried into the start of 2023 and was further complemented by solid growth within the quarter in our utility in commercial and other industrial markets. These strong results remained the function of the team's commitment to our customers as well as our broader deliberate focus on our strategic initiatives to create a more resilient and diversified pile that will lead to stronger growth across the economic cycle. Macroeconomic factors such as elevated costs and the global supply chain certainly remain headwinds. But we are very pleased with our execution and the momentum built within the business over the past few quarters. Powell is well positioned to deliver improved revenue growth and profitability in fiscal 2023. Total revenue in the first quarter was $127 million, which was 19% higher than the prior year. By market, revenues in our petrochemical sector were higher by 31% while the oil and gas sector was roughly flat on a year-over-year basis. Our utility sector saw revenue jumped 32% compared to the prior year, while the newly broken out commercial and other industrial sector saw revenue triple. This was partially offset by the traction sector, which declined by 38% mainly the function of wrapping up a large municipal project in Canada. Order activity in the quarter was very strong as we secured $212 million in new bookings. This is the best first fiscal quarter of bookings Powell has had since Q1 of fiscal 2013. Our book-to-bill ratio in the quarter of 1.7 times was equally strong, and was the fifth straight quarter with a book-to-bill over one. I'm also pleased to report that for a second consecutive quarter, we were fortunate to book another significant industrial order to support the production of liquefied natural gas, as we continue to see favorable opportunities within LNG, gas pipeline and gas to chemical sectors. Overall activity in our core oil, gas and petrochemical markets continues to improve as bookings in these markets nearly tripled compared to the prior year. Meanwhile, project activity and associated work on new bids across our utility, traction and commercial and other industrial sectors remained favorable. Each of these sectors experienced a year-over-year growth in bookings and are largely supported by a steady volume of small to midsize project activity. Our team's delivered a gross margin in the quarter of 15.3%, which increased 270 basis points compared to the same period in the prior year. Strong project execution, favorable services mix and positive close outs helped to deliver the underlying margin growth. Moving to the bottom line, we reported net income of $1.2 million in the quarter or $0.10 per diluted share, compared to a net loss of $2.8 million, or a loss of 24% per diluted share in the prior year. Lastly, we ended the quarter with a total backlog of $680 million. This is the second consecutive quarter that we have recorded the highest backlog in Powellâs history, and represents sequential growth of 15% and a 63% higher than the end of Q1 last year. A significant increase in our backlog volume provides an extended runway for policies sustain improved revenue growth for the next few years, as we are beginning to book projects in fiscal 2025. Importantly, our project backlog remains well balanced across our seven manufacturing facilities and across the markets that we serve. Overall, from a commercial standpoint, the quarter was another step in the right direction and mark to continue return of our key end markets. We are encouraged by the current demand environment and are comfortable with our capacity to execute on our order book efficiently and on time. It is also worth noting that the solid financial results came in what is typically a softer quarter due to seasonality effects, and is our best first fiscal quarter financial performance in recent years. Turning to our operational performance, we continue working diligently to mitigate the effects of the higher cost environment. Price and availability of key engineering components remain material headwinds, and we are closely watching the price of the price action for key commodities such as steel and copper. Our teams are working hard to identify and address these price increases early enough to factor them into our bidding process and ensure they do not create significant cost overruns on current and future project activity. We also maintain and emphasize an extremely strong focus on productivity and strong project close outs to protect our merchants. Further, we continue to implement pricing initiatives to align projects to the current cost environment where and when possible. Labor also remains a challenging area to navigate. We closely monitor the cost of labor and our level of staffing across the business as we work to support the growth and timing of execution of our improved backlog. Similar to past quarters, labor issues have not yet presented material headwinds. But we remain attentive to our current capacity levels as our backlog grows to record levels. Our human resources team has been working extremely hard over the last several quarters, and have facilitated our ability to effectively navigate the difficult labor environment thus far. I also wanted to take a moment to call out that yesterday afternoon, we announced that the board has approved a 1% increase to our common stock dividend. This is an important step for Powell and underscores our growing confidence, our long term strategic direction as well as our commitment to lift to delivering value for our shareholders. The fundamentals and outlook for our business are improving, and our strong balance sheet leaves us in a very solid financial position. We remain acutely focused on executing against each of our strategic initiatives in fiscal 2023, which include growing our electrical automation platform, expanding our existing services franchise, and diversifying our product portfolio through both targeting tangential applications that complement our existing product offerings, as well as expanding the scope of our product catalogue and the new electrical technologies. We are already seeing the impact of these initiatives in our financial results. And we'll continue to share examples of our progress as appropriate. Overall, we are confident that the positive transformational steps being taken internally at the company supported by improving conditions across our core end markets will drive another strong year for Powell. Thank you, Brett and good morning, everyone. In the first quarter of fiscal 2023, we reported net revenue of $127 million compared to $107 million, or 19% [ph] higher versus the same period in the prior year. New orders booked in the first fiscal quarter of 2023 were $212 million, which included one large domestic liquefied natural gas project order. This improved orders cadence is generally favorable across most of our reported market sectors, however, was driven in large part this past quarter by the gas markets within the industrial sector, driving the total reported bookings for the first fiscal quarter to nearly a two fold increase or $104 million higher versus the same period one year ago. As a result our book-to-bill ratio was 1.7 times in the period with a record $680 million of backlog at the end of the first fiscal quarter, which was $264 million higher versus one year ago and $88 million higher sequentially. Compared to one year ago, domestic revenues were higher by 22% versus the prior year to $100 million. While international revenues were 10% higher compared to the prior year driven by higher project volume in our Canadian facility. In total, international revenues were up by $2 million to $27 million in the first fiscal quarter. From a market sector perspective versus the prior year, revenues across our petrochemical sector were higher by 31%, while the oil and gas sector was essentially flat on a year-over-year basis. In addition to this we experienced year-over-year increases in both the utility and the commercial and other industrial sectors increasing by 32% and 202%, respectively. Finally, the traction sector was lower versus the first fiscal quarter of 2022 by 38% as we wrap up a large municipal project in Canada. Gross profit in the period increased by $6 million to $20 million in the first fiscal quarter versus the same period one year ago. As a percentage of revenue, gross profit increased by 270 basis points to 15.3% versus the same period a year ago, driven largely by improved pricing on projects that are now exiting the backlog, as well as strong project execution across most of the power manufacturing and service facilities. Selling, general and administrative expenses were $17 million in the current quarter higher by $1 million versus the same period a year ago. And increased variable performance based compensation based upon the expectation for higher levels of operating performance versus the prior year. SG&A as a percentage of revenue decreased 160 basis points to 13% in the quarter on higher -- on a higher revenue base. In the first quarter of fiscal 2023, we reported net income of $1.2 million, generating $0.10 per diluted share, compared to a net loss of $2.8 million, or a loss of $0.24 per diluted share in the first quarter of fiscal 2022. During the first quarter of fiscal 2023 net cash used in operating activities was $549,000 as we continue to build working capital, and enhance our capabilities to support our growing backlog of new projects. Investments in property, plant and equipment totaled $2.7 million, as we put capital to work enhancing our fabrication capacity, and investing in additional productivity initiatives that will help our operational teams deliver for our customers throughout 2023 and beyond. At December 31 2022, we had cash and short term investments of $111 million, compared to $117 million at September 30, 2022. The company holds no long term debt. Finally, and as Brett noted, yesterday, we announced a 1% increase to our common stock dividend. This incremental step demonstrates both our prudent and conservative approach towards delivering shareholder returns, while also ensuring sufficient liquidity to fund our growing working capital requirements, as well as balancing our organic and inorganic growth objectives. Looking forward, we remain very encouraged by the continued commercial success that we've experienced across most of our core end markets, specifically in our industrial and utility end markets, and are optimistic that this momentum will continue. This combined with the level and quality of our backlog, our continued focus on accretive margin initiatives, as well as the strength of our balance sheet positions Powell to continue to deliver improved revenue and earnings throughout the remainder of fiscal 2023. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question today will be from John Franzreb with Sidoti & Company. Please go ahead. Good Morning Brett and Mike, and thanks for taking the questions. Brett, I'd like to start with one of your comments in your prepared remarks about your booking projects into fiscal 2025. That made me wonder, what does the timing of revenue recognition kind of look like today? Is this just on the backlog profile? I mean, what's the bell curve kind of looking at based on your current bookings? John, as we look at the growth in the backlog and as we look out into time on how we're plotting the revenue, no big sparks. It -- with the recovery in the core market there in the last year going from last summer and we kind of flatten these out and we look at how we're managing factor capacity labor capacity. We -- we've been able to work effectively with our clients to time it out. These are larger projects; normally have a longer burn anyway. But Iâll just take the link spikes. It's laid out pretty consistently out into time. Okay, great. And then another thing that you mentioned was about, and you just mentioned it again, the labor market. How's your staffing look today? And will you be staffing up at all anytime in the near future to kind of capitalize on the jobs that you're winning? Yes, we are. I think we talked a little bit about last quarter but, if I break it into two parts, both the factory support teams and then the front end part on engineering and project management. That's kind of the areas we constantly are looking at every week. It's kind of shifted a year ago. We had some trouble in various factories with some of the talented folks out in our in our in our factories, helping us to produce the goods and get out to our clients that, that has improved as of last summer. And as we build the backlog into the fall, we're out. We're out building some of the front end teams right now. And that's been a little bit more of a challenge, but so far I've been able to navigate it. Mike, a couple of questions. So on the on the expense ratio, obviously, you're able to leverage off the sale, the top line. But even if, and it's even more impressive, given the $1 million increase in incentive comp. How do you -- how do you see that ratio going forward, the expense ratio going forward given the leverage that we saw here in the first quarter? Yes, I think as we, as we navigate through fiscal 2023, and into 2024, we do expect volume to pick up in SG&A bucket; we manage very, very closely. It's, it's more of a fixed bucket, it's not necessarily got a lot of variability to it. It hurts us when volume is down; it will bump up to 14 plus percent as a percent of revenue. But as volume picks up, we like to see that in a 13% range. Okay. Itâs welcome. Okay. Secondly, sort of a big picture standpoint, when you look back at your history, and I know today is different than what it was back in 2012, 13, 14, when you were hitting on all cylinders, and in your operating margins were what upper single digit, something like that, and your gross margin around 20%? When you think about the business today, compared to then structurally and fundamentally, how, how different is the business today? And is there a capability of being a returning to those margins as we as we move forward here, and things begin to pick up on the top line? Yes, certainly, we aspire to get back to those, those margin rates, Jon. But if you look at the business, fundamentally, how the business was structured the footprint of the business back in in 2012, 2013, it's much different. We have a Canadian presence. Now, we didn't have one back at that point in time. We built a sizable braker facility here in Houston. So there are some differences. And we've divested we divested an automation business some time back. So we've, we've changed the mix of the business. So that's, that's one variable. The other variable is the amount of oil and gas volume, particularly offshore, was really quite high back in 2012, 2013. Price was, was very robust. And that environment hasn't necessarily returned. I don't expect it to return to those levels anytime soon. So there are some different dynamics when you compare the two points in time. Okay. Are there anything -- is there anything different sort of on a positive note, compared to today, compared to eight years ago, nine years, 10 years ago? I mean, absolutely. I think our capacity today is it's very robust. I mentioned the Canadian facility. We've penetrated the utility markets up in Canada and doing a lot of work as the oil and gas infrastructure comes back. So yes, there's a lot of positive, a lot, a lot of positives with respect to the current structure today. Yes, I guess, again, going to prepared remarks. I think Mike might have mentioned something about utility and the industrial end markets seem to offer the best near term prospects. I just wondered it's maybe some more color about the overall opportunity pipeline and how it looks today versus three to six months ago. Any kind of updated color on the puts and takes and what's driving the on-going bidding process in the near term? John, I'll take that one. Brett and I can follow up with anything he wants to add here. The core market is, as we noted, also in the December comments. I think there was a question then about, what's the outlook. I think it's going to be robust to the balance of the fiscal year is, there's a lot going on, we're these are complicated jobs. This is how policy over the last 25 years. And again, on the industrial front, these things have a life. There's a lot of people lining up. I don't think they're all going to get through over the next, three to five years, but there's, there's a lot of momentum built. And we're, we're thinking the things there. The industrial â on the utility side, I think, I think the jump in the revenue, this past quarter is really looking back in time out of COVID, sort of the return of a nice cadence to the business and the process that we've built over the last decade. So that's sort of that methodic return to the utility piece. A little bit more of a variable is this newer sector that we're reporting on now, which probably has some of the best price right now, because it's a little faster turn. And it's a little more uncertainty on how that factors into the profile of the backlog and turning on the revenue line next year to two years. But it is, it is a market that we we've always participated in, it's just become a bigger part of our pie today. And there's still a lot of activity, but I'd say higher uncertainty there. So but as of this last quarter, still pretty solid revenue one. I don't have anything to add. I mean, they the other, the other, the commercial and other industrial bucket that went up 202%. That I mentioned my prepared remarks. It's really driven by the items that Brett mentioned, data centers and things of that nature. Okay. Okay. Fair enough. And when you think about the, maybe this, this goes back to the gross margin profile, is it a, is it a bigger function of the pricing environment, the competitive landscape, the inflationary environment, or the mix that's going to keep you from hitting those higher 19%, 20% gross margins? If you kind of maybe rank them all just your thoughts about those three pieces? That's a good question. It's, it's certainly all three. The price takes time, because of the project, the way we kind of laid off the old revenue, and then the phasing of the timing of that revenue, so it has an impact. And I think at some point, we'll see it. I mean, the pricing environment, for all of our sectors is better than it was certainly, a couple of years ago, it's not, but there'll be a limit to that, as there always is another cycle. Mix, mix, to me is probably a big issue. But lately, you can't just count the inflation piece, it is really hit a year ago in Q1. On the engineer side, the steel index is back up more recently, something we're really attuned to, to watching the incoming steel prices, and how that lays out into the future piece. That that probably has as much attention for us anything on the cost side right now. We're, we're heavily [Indiscernible] in the input costs. Mike? Yes, if I could add here, John, I think both the pricing initiatives and the cost management, we've been really focused on that over the last 12, 24 months starting to see that exit the backlog. Now, when you look at the quality of the backlog with those elements in it, we're really happy with where we are. The other item that that is, can't be discounted, as you look across the facilities in the around the power landscape. Most of the plants, if not all, the plants have very healthy backlog. And with that increased volume, we should we expect to see volume, leverage productivity cost efficiencies come through the system. So again, we aspire to get up to that, that 20% level. And those are those are kind of the levers that we would look to get there. Got it. And I guess one of the parts that may get you there is I guess, maybe the service side of the business. And just a quick update on what percent of revenue is that kind of coming in at the current quarter. Any thoughts, updated thoughts about how that business is going to play out for the balance of the year? You're building on the momentum that we kind of talked about last year. The strategic initiative that embodies a service piece you have you have the kind of the stuff that tags on to the existing business, which is still the predominant part of the service revenue. The installation, transitioning parts is the kind of short term stuff. The more strategic stuff is going well and we hope that in the coming quarters weâll be able to share more as we feel confident that sustains. We're still running on average annually 15 points, 20 points against the whole revenue profile. But we're, we're optimistic that that will sustain, as we hope strategically and be able to break it out and provide some more color about it. Because there are some things that we've noted throughout last year that we're taking some steps on that front to leverage the engineering fees to, to grab more spin with the client and more service capability as well. Not just winning the job, but really expanding our, our ability to provide value to our clients. So it's going well, and if it continues throughout this year, I think we'll be in a better position, towards the end of the fiscal year to really start talking about what structurally reporting we can make on a consistent basis going forward, John. Okay, and if I may, just one last question regarding the cash uses of cash and, and potential M&A. Brett, some updated thoughts on what you're thinking about, and as far as the M&A market, you just mentioned you up the dividend as far as use of cash. But or you're out there aggressively looking, updated thoughts about maybe the size or the nature of any kind of potential acquisition? We are out in the market, looking on the non-organic side. Again, our profile pile and operationally as well as in this process with the board and the conversations will continue to be, an overly or a conservative bent to our approach. There are things that we want to do and we think we can add end. Thereâs always the question of availability and affordability, and, of course our ability to integrate if we when we get to that point. So we are out looking, meanwhile, we aren't discounting? I know, this has been a question in the past, John, on the CapEx side. We had a little pop this last quarter. We see some opportunity, productivity wise, and the teams around the company invested in the business, I feel good about that. That'd be really good capital spent for the shareholder. So, and then and then the dividend? I think it's it's a directional step strategically, as we look forward over the next couple of years to take a step. We've shared that we're going to actively continue looking at that at the board. So this is a directional step. And, and we're going to continue to evaluate that in the coming years as we build the success behind the strategies and the core business. [Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Brett Cope for any closing remarks. Thank thanks, Jed [ph]. As you've heard from Mike and me this morning, we view our first quarter as a positive indicator for the rest of the fiscal year. The outlook for our core end markets is favorable and improving. While the project funnel for our non-industrial markets remains robust. A special thank you to the Powell team for their hard work, tenacity and incredible resilience. And of course, thank you to our customers for their business and their trust in our company. Thank you for joining us this morning. We appreciate your continued interest in Powell and look forward to updating everyone next quarter.
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EarningCall_746
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Good afternoon. Thank you for attending today's Boyd Gaming Fourth Quarter Conference Call. My name is Tamia and I will be your moderator for today. All lines will be in mute during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] It is now my pleasure to pass the conference over to your host, Josh Hirsberg, Executive Vice President and Chief Financial Officer. Thank you, operator. Good afternoon, everyone, and welcome to our fourth quarter earnings conference call. Joining me on the call this afternoon is Keith Smith, our President and Chief Executive Officer. Our comments today will include statements that are forward-looking statements within the Private Securities Litigation Reform Act. All forward-looking statements in our comments are as of today's date, and we undertake no obligation to update or revise the forward-looking statements. Actual results may differ materially from those projected in any forward-looking statement. There are certain risks and uncertainties, including those disclosed in our filings with the SEC, that may impact our results. During our call today, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8-K furnished to the SEC today and both of which are available at investors.boydgaming.com. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges and certain expenses. Today's call is also being webcast live at boydgaming.com, and will be available for replay in the Investor Relations section of our website shortly after the completion of this call. Thanks Josh. Good afternoon, everyone. We began 2022 with the ambitious goal of surpassing 2021's record results. One year later, we have clearly met that challenge as we sustained the operating momentum we built throughout 2021. We once again delivered a record performance with revenues of $3.6 billion and EBITDAR of $1.4 billion in 2022. And the fourth quarter was a strong conclusion to the year with record company-wide revenues of $923 million and record EBITDAR of $360 million. We also maintained our operating efficiency with company-wide operating margins of 39% for both the fourth quarter and full year. Our results for 2022 are a tribute to our operating teams as we remain focused on growing revenues and building loyalty among our core customers while successfully managing expenses in the current environment. While 2022 was another record performance, we did experience headwinds at times during the year, and that continued in the fourth quarter with some year-over-year softness in our Midwest and South markets. However, the softness in our Midwest and South region was more than offset by strong performances from our two Nevada segments, growing contributions from online gaming and management fees from Sky River Casino. Now, let's review each segment in more detail. In Nevada, we finished the year with record fourth quarter EBITDAR performances in both our Las Vegas Locals and Downtown Las Vegas segments. Starting with the Locals segment, revenues and EBITDAR both grew 2% over last year's records with particularly strong gains in our non-gaming business, including hotel, food and beverage, and entertainment. Throughout our Locals properties, growth was strongest among out-of-town customers as we benefited from increased tourism across the Las Vegas Valley. Play from our core customers remained healthy, but was offset by declines in retail play. Our teams did an outstanding job during the quarter, delivering strong flow-through on revenue growth with margins in our Locals segment exceeding 52%. We are clearly benefiting from a strong Las Vegas economy as travel and tourism to Southern Nevada continues to increase. In 2022, nearly 39 million people visited Southern Nevada, up more than 20% from the prior year, and airport passenger counts reached all-time record levels. Convention business continued to recover as well with the convention and meeting attendance more than doubled 2021 levels. And with more than 5,000 hotel rooms in the Southern Nevada market, our company is well-positioned to capitalize on these growth trends. Looking ahead, 2023 has gotten off to a good start in our Locals segment with January performing well. We have seen no meaningful changes in our Locals business in the early part of 2023. Next, in Downtown Las Vegas, we delivered an impressive performance, beating last year's fourth quarter EBITDAR record by nearly 38%. We continue to see strong demand throughout the Downtown Las Vegas market as pedestrian traffic and guest counts increased throughout the area. At the same time, our core Hawaiian business has fully recovered and is now exceeding pre-pandemic levels. Additionally, our recent hotel remodel at the Fremont has put us in excellent position to meet growing demand, allowing us to drive further growth in hotel revenues while broadening the property's appeal. Going forward, we will also benefit from Fremont's recently opened casino expansion. This expansion includes incremental slot capacity, a FanDuel-branded sportsbook, and a new contemporary food hall. We are encouraged by the early results from this expansion with strong growth in both gaming and non-gaming volumes at the Fremont since the expansion was completed in mid-December. Next, in the Midwest and South, we achieved fourth quarter records for both revenue and EBITDAR, thanks to growing contributions from online gaming as well as management fees from Sky River. However, the performance of our land-based operations was below prior year for the quarter, partially due to December's severe winter weather and difficult year-over-year comparisons in our Louisiana and Mississippi properties. Additionally, we experienced some softness in play early in the fourth quarter, although these trends improved later in the quarter and into January. Turning to our online business. Our partnership with FanDuel, the nation's number one sports betting company, continues to deliver impressive results. We generated approximately $17 million in EBITDAR from online gaming during this quarter, up more than 100% over the prior year, as we benefited from a strong football season, new FanDuel operations in Louisiana and Kansas and contributions from Pala Interactive, which we acquired on November 1. During the quarter, we also earned $21 million in fees from our Sky River Casino management contract, including a one-time development fee of $5 million. This was Sky River's first full quarter of operation following its opening last August. With Sky River, our goal is to develop a compelling entertainment destination and build a thriving business that would allow the Wilton Rancheria Tribe to achieve their vision of self-sufficiency. Based on early results, we have clearly succeeded with extremely strong visitation levels at Sky River during its initial opening phase. We have long believed there was significant unmet demand in the market and with the high-quality entertainment experience we have created, we're starting to realize Sky River's compelling potential. As a result, we now expect Sky River will generate approximately $50 million in management fees for our company in 2023. So, in all, despite some challenges in our Midwest and South segment, our company achieved record fourth quarter and full year results. As we move into 2023, the economic uncertainty that persists today makes it difficult to predict where consumer trends are headed. However, we are cautiously optimistic about the trends we saw in January across all three segments of our business. Going forward, we believe there are additional opportunities to drive growth in our business through strategic reinvestments in our portfolio, the continued expansion of our online gaming business, and organic growth in our land-based operations. Starting with our existing portfolio, we see opportunities to drive long-term growth through selective reinvestments in our highest-performing properties and markets. A good example is the Fremont in Downtown Las Vegas, where, as mentioned earlier, we have completed work on a significant property expansion. In mid-December, we opened 10,000 square feet of new casino space, increasing Fremont's total slot count by nearly 15%, while creating a more comfortable gaming environment for our guests. We also added a FanDuel-branded Sportsbook in a food hall with six quick-serve restaurants. The expansion is already delivering growth in both gaming and non-gaming revenues at the Fremont. Going forward, this investment will further strengthen our appeal to customers throughout the downtown area, helping us build on our record results in the Downtown segment. And in Louisiana, work continues on our $100 million land-based facility at Treasure Chest Casino. Once complete in early 2024, this project will allow us to take full advantage of demand in the suburban New Orleans market by creating a more spacious single-level casino floor, expanding our non-gaming amenities and improving guest parking. In addition to these land-based growth investments, we expect our online business, including sports, casino, and social gaming, will continue to grow. We took an important step forward in our online growth strategy with our recent acquisition of Pala Interactive, which gives us the talent and technology to begin building our regional online casino business. While online casinos are now limited to just a few states, we believe in the long-term potential from iGaming. Owning and operating our own iGaming operation will allow us to leverage our nationwide portfolio and extensive customer database to create a profitable online casino business. We will start by transitioning our current Stardust Online Casinos in New Jersey and Pennsylvania to our platform over the next several months. We will also selectively target growth in the B2B segment of the business by adding new B2Bcustomers and enhancing our platform's products, features and capabilities, which will benefit both us and our partners. On the sports betting side, we remain fully committed to our successful and growing partnership with FanDuel. This partnership recently expanded into Ohio and Kansas with FanDuel launching mobile and retail sports betting in both states. Our partnership with FanDuel now includes all but one states in our Midwest and South region. In all, our online sports betting, casino and social operations generated approximately $40 million in EBITDAR in 2022. And we expect this business will continue to grow as FanDuel ramps up in Ohio and Kansas. Beyond these growing financial contributions, we will continue to benefit from our 5% equity stake in FanDuel, which grows increasingly valuable as they further strengthened their position as the nation's leading sports betting company. While the opportunities from online and land-based reinvestments are compelling, we also believe there is upside from continued organic growth in our existing operations, particularly in hotel revenues, meeting and convention business, and other non-gaming revenues. In all, our growth opportunities and our operating momentum are further strengthening our free cash flow, allowing us to return substantial capital to shareholders. We plan to continue targeting $100 million in share repurchases per quarter in 2023, supplemented by dividend payments while we pursue our ongoing growth investments. Before concluding, I wanted to note our company's continued progress on ESG initiatives as we recently received prominent national recognition for these efforts. Last month, Boyd Gaming received a five-star rating in Newsweek Magazine's Annual Listing of America's Greatest Workplaces for Diversity. We were the only gaming company to receive a perfect rating in this listing, which was compiled through anonymous employee surveys nationwide. Promoting diversity and inclusion is a central part of our company's culture, and we are honored to have our efforts recognized by Newsweek. So, in conclusion, this record quarter was yet another example of the resiliency and diversification of our portfolio and the strength of our operating model. We set new fourth quarter records for both revenue and EBITDAR, overcoming softness in our Midwest and South markets, with strong results in Nevada and contributions from new growth opportunities. We closed on the acquisition of Pala Interactive, further positioning ourselves for long-term growth in the online space. We maintained operating margins at some of the highest levels in our history as our operating teams continue to successfully manage through higher costs and economic uncertainty. And we continue to return significant capital to shareholders, while maintaining a strong balance sheet. In all, our record fourth quarter results concluded another strong year for our company as we set full year records for revenue and EBITDAR for the second year in a row. I would like to thank every member of the Boyd Gaming team for their hard work and their contributions to this outstanding performance. And while it is difficult to predict the future direction of the economy, we remain confident in our operating model and our team's proven ability to successfully manage the business. Thanks Keith. This was another very good quarter for our company with record results in the quarter and for the full year against very strong comparisons to 2021. Recall that our full year 2021 EBITDAR performance was more than 50% higher than our previous record set in 2019 and that we set quarterly EBITDAR records in every single quarter of 2021. And yet we have continued to improve on those baselines. In each of 2021and 2022, EBITDAR approximated $1.4 billion and margins were approximately 40%. And in 2022, adjusted earnings per share exceeded $6 per share. We have accomplished this by focusing on growing our core customer base and managing our business very efficiently. Our operating teams continue to do an excellent job managing our expense structure and maintaining margins. As we look ahead to 2023, we continue to see opportunities to grow our business, supported by continued focus on our core customers, expansion in our non-gaming revenues and online operations and further contributions from the investments we are making in our existing portfolio. In addition, 2023 will benefit from a full year contribution from our management contract with Sky River, which opened in August 2022. Now let's discuss a few key items from the quarter. First, our capital return program remains a priority for our company. We repurchased nearly $107 million in stock during the quarter, representing 1.8 million shares at an average price of $58.22 per share. The actual share count at the end of the year was 102.8 million shares. For full year 2022, we repurchased 9.4 million shares at an average price of $57.48 per share, representing$542 million. We have approximately $240 million remaining under our current repurchase authorization. When combined with our ongoing dividend program, we returned nearly $600 million to our shareholders during 2022. We remain committed to $100 million per quarter in share repurchases, while continuing our dividend program. At the same time that we are returning capital to shareholders, we will continue to strategically invest in our land-based portfolio. Capital expenditures in 2022 were $270 million. We expect to spend approximately $350 million in 2023 for capital expenditures. This includes $250 million in maintenance capital and $100 million in growth capital primarily related to the Treasure Chest project. Turning to the balance sheet. We finished 2022 with total leverage of 2.4 times and lease-adjusted leverage of 2.8 times. Our target leverage remains 2.5 times traditional leverage. Our balance sheet remains very strong with significant flexibility as we have low leverage, no near-term maturities and ample capacity under our credit facility. So, in all, we finished the year in great shape as a company. Thanks to our operating model and growth initiatives, we continue to produce a substantial and diversified stream of free cash flow, allowing us to balance a robust capital return program with strategic investments in our portfolio. This formula has produced strong results for our shareholders, and we are confident it will continue to create considerable value over the long-term. We will now begin the Q&A session. [Operator Instructions] Our first question comes from Chad Beynon with Macquarie. Your line is open. Hi, good afternoon. Thanks for taking my question. Josh, Keith, you guys talked about -- well, first off, congrats on a nice quarter. You talked about some selective reinvestments and the returns that you guide in the back half of 2022 and kind of what you're expecting in 2023, 2024. But given your leverage at 2.4 times, how are you thinking about the portfolio and other opportunities to maybe selectively reinvest elsewhere and get these double-digit returns that you're putting up? Thanks. Sure. Good question, Chad. So, we have kind of studied our portfolio, and we do have several other opportunities to continue to build into strong properties in what we think are growing markets or markets with strong demand. And so as future quarters go by, you'll hear us begin to talk about some of those projects. But we have studied it and we do have additional opportunities. We just don't have anything to announce today. So, you can expect to hear more in the future. I think we've talked about it in the past, and these are smaller-type projects. These are sub-$100 million-type projects, many of them in the $40 million to $60 million range. So, we're not talking about projects that are hundreds of millions of dollars. Okay. Thanks. And then in the Locals market this year, you guys have averaged roughly about $120 million of EBITDA per quarter, obviously, some exceptional strength in the fourth quarter here. I wanted to focus on some of that destination business that's coming back. With CES in January, we've seen ADRs across the strip, and I'm guessing right off the strip, up somewhere between 30% and maybe even 60%. I'm guessing you guys are benefiting from more leans. But against that average of $120 million of EBITDA per quarter, can you help us think about what is still not on the table from mainly the convention business not back to where it was mainly for 2022 and where we should see it in 2023? Thanks. Yes. So, Chad, this is Josh. I think that when we think about kind of the opportunities for our Locals business, it comes from benefiting from the broader recovery in the Las Vegas market overall. And it's really not only our Locals business that will benefit from that, but also our Downtown business. So, we look at kind of an emerging or recovering kind of strip meeting business to help drive our own meeting and convention business, our kind of occupancy in our hotel rooms as well, which we still have opportunities to do across the portfolio, again, not only in Las Vegas, but also that drives incremental visitation downtown. And we benefit from the investments we've been making with Fremont, but also the other properties that we have there as well. No, look, I think it's pretty well known that convention attendance was up significantly in 2022, more than double the prior year number, but still below 2019 levels. So as that continues to build, we can take advantage of it both at the Orleans and several other of our properties. And as Josh said, Downtown will also improve as overall visitation to Las Vegas and convention attendance improved. So, we definitely will be able to leverage off of that going forward. Hey, guys. Congratulations on great results here. Keith, I'd love to just follow up with you a little bit, maybe dig deeper onto what you attribute the difference in consumer spend or consumer behavior between Downtown Las Vegas and the Las Vegas Locals market versus the softness you saw in parts of the 4Q in the Midwest and South. I know you called out the destination business is certainly strengthening in the Locals market maybe that was slow to come back. And maybe the regional customer has recovered earlier. Where are you seeing the softness? Is it sort of at the lower end of the database, the higher end of the database? I would just love to get how you're looking at your different subsector of gaming consumer. Sure. So look, I think we've talked about some of this through our prepared comments, but look, the Locals business, once again, we've performed exceptionally well with our out-of-time guests during the quarter as convention attendance and visitation in Las Vegas continued to grow. That also helped boost the Downtown results. And so both of those are doing well. We obviously have a strong Locals component in our Locals segment. We don't get very many locals to Downtown Las Vegas. And so it's a different type of a customer. You commented, and we've long believed, that in these types of situations where you go through dislocations like we've been through with COVID, that the Midwest and South markets do recover a little quicker, we believe those markets have been recovered longer than the Las Vegas market. And therefore, they're a Littlemore mature. And so they're just maybe slowing down a bit before others. And outside of what the December weather that really impacted both the Midwest and the South, some difficult comps that we talked about in our southern properties. When you look at 2022 compared to 2021, there was just some softness. But as I said, the softness was early in the quarter. And in the second half of the quarter, it started to recover and continue to recover through the end of the quarter and into January. So, I don't think there's any real negative trend there. It was softness early in the quarter. Everyone gets started to come back. So, not much more I think I can say. Great. And when you think about this year and maybe looking at your internal forecasts or budgets, would you expect that the Las Vegas Locals market would grow in excess of the core Midwest and South net regional, net revenue portfolio? Hey Joe, this is Josh. I guess I get to take that one. I think we feel like coming into 2023, I think we step back and look at where the consensus estimates are and they're coming down about 7% or 8% from where we delivered results in 2022. And I think we feel like our business can do generally in line with that or a little better. I think that we see some opportunities for growth in really both of those segments, but that I'm not so sure we're ready to say that we're going to see growth over 2023 in Las Vegas Locals. It will be -- if it's down, it's down marginally relative to 2022. But it only goes to kind of the uncertainty of how the consumer -- what happens with the consumer as we move through the year. Thank you for taking my question. I just wanted to circle back to one of the comments, Keith, I believe you made earlier. Sky River fees were $21million, with a $5 million one-time true-up payment or something in there for the management fee, and online was $17 million. If you kind of back that out and then back out half of that $17 million in the 4Q 2020, does it more or less imply or I believe that math more or less implies like a down double-digit EBITDA results for the segment in the fourth quarter? If that's right, how much would you say, not necessarily the weather, but maybe that broader malaise that you saw early in the quarter relative to kind of where you were run rating for January of that decline, what would you -- how would you kind of parse those out? Yes. So Carlo, I'll try to take a shot at it, and it's a little bit more art than science, as you can probably imagine. I think that what we tried to communicate was we felt like there were some things that we could identify around the weather, around the more kind of robust business that we had seen in Mississippi and Louisiana last year that made the comparison a little more difficult this year. And then there was something kind of leftover that really was more relevant or more visible in the first half of the fourth quarter. And that's where we really try to dig into our customers and see what was going on. And it was really abroad-based weakness in our customer. That was largely prevalent in the first half of the quarter. It was something we really hadn't seen to any extent before. And then as we move -- and so -- and I would say a lot of the weakness was concentrated in those two markets of Mississippi and Louisiana for us. And then as we move through the quarter, we know we were able to track and see those -- that trend got better over time, sequentially improved. And then obviously, the last week of the year was very strong across the board. And as we mentioned before, we also saw kind of contributions from out-of-town business helping drive Las Vegas. So, as we kind of came into January, the trends from the late December continued. Business was really good. We recognize there's a fairly -- there was an easy comparison. So, it's a little bit like you're trying to dissect through how good should it be versus the comparison and how good is the business. What we can tell you is it doesn't feel like the customers -- the customer certainly hasn't fallen off the deep end. And the general trends of our core customer kind of regained momentum outside of Las Vegas and continue to build through the quarter, and that was encouraging to us. And Las Vegas remained very good for us, although early on, it also had some weakness in our customer base as well, primarily in October. So, it was just a quarter of a lot of different things going on. It ended up heading in the right direction for us. And I would say as we look back over quarters, earlier in the year, there'd be a soft quarter, an okay quarter and then a really strong quarter, and that's -- sorry, soft month, a good month and then a really strong month, and that's what happened in the fourth quarter as well. So, I'm not sure we're at a place where we can extrapolate a lot from the customer trends that we saw in the fourth quarter, but that's what happened from our perspective. Understood, that's helpful. And then just on the leverage point and tying that back to the buyback, you guys -- I want to say, Josh, when you look at your leverage kind of EBITDA relative to your traditional net debt, correct? So, you target the 2.5% range. It would more or less imply, and obviously, numbers moving around and whatnot, but maybe not commensurate with last year's buyback, but certainly, you would be able to do something similar to last year's buyback. And that $100 million a quarter that you guys have previously talked about, does that kind of remain the goal on any dislocation get more aggressive? Is that kind of how you're thinking about it? And then just as an aside to that, you guys, I thought, had development advances to the Tribe that were going to come in this year. I did notice there was like $14 million to $15 million of an interest payment. And I wanted to understand if those two things were linked or if you still expect cash payments at some point this year. So, Carlo, this is Keith. You're right on the share buybacks. We've been communicating for the majority of2022 that we're targeting $100 million, and we remain targeting $100 million per quarter. If there are some dislocations, given the strength of our balance sheet, strength of our cash flows, then we have the opportunity to do more than that, but we want to continue to anchor people in right around $100 million a quarter. So, we'll just kind of see how that plays out, but we don't want to set an expectation that it will be higher than that. And then on top of that, the dividends that we talked about will continue. In terms of development advances, you're right, we will start to see those being repaid this year. Probably later this year, we'll start to see those repaid. The property has been off to a great start, and we'll see that cash flow into the company second half of the year. Yes, Carlo, what you were referencing is we had reserved all of our advances that we have made to the Tribe. And so once the casino opened, the risk associated was reduced. And so part of that recovery was shown in interest in -- as interest income and the other half was shown down in, I think, the preopening line. So, that's what got picked up on that was actually out of cash payment to us. Hi, good afternoon everyone. Thanks for taking my question. Josh or Keith, just sort of one area for me was you called out the transition of some of the online gaming features, I think, moving over to your in-house platform. And I believe, Keith, you said it was in the next couple of months. Can you just talk a little bit about the economic implications there? Is that -- does that transition allow you to consolidate a material amount of incremental EBITDA? Or kind of how is that going to play through as you start to take those operations back in-house? Yes. So, we'd expect that transition to occur sometime in the next couple of months, I think midyear in terms of probably when that happens. As you think about 2023 and maybe early 2024, you'd expect -- I think what we'd ask you to expect is probably no change in the overall economics as we transition them. With any transition, there'll be some breakage as we start to move people over to our platform, slight differences and we start to grow it. So, in the first year, probably flat economics, and then it will build from there. We do expect by consolidating it and more fully using our databases that we'll be able to grow that to a higher level, but not in the near-term. Near-term should be flat. Yes guys. Good afternoon. So, I want to go back to the recovery that you've seen or that you saw in the South and the Midwest in January. And I'm not really sure how to ask this, but do you think that January recovery was real? And what I mean by that is, with December an anomaly and the January recovery was tied more to delayed or canceled trips being rebooked into January because of weather, or was January benefiting from whether it's higher social security payments. I'm just trying to figure out -- maybe you can give a little more color on that recovery in January. So, Steve, as you think about Q1 and January, in particular, look, in -- early in the quarter, frankly, the comparisons are easier because last year, in January, we were coming out of Omicron here in Nevada. We still have some mask mandates. People weren't fully coming out. And the second half of the quarter, both here in Nevada and across the MSR, the business accelerated. And so in fairness, January comps are a little easier than later in the quarter. I think what we were trying to communicate was set aside year-over-year comparisons and just look at raw customer trends and how the customer is performing, we didn't see any meaningful differences in how the customer is performing as we look at the second half of Q4 and how they performed in early January. So, kind of ignoring year-over-year comps, just looking -- think of it more sequentially is how we think about that. Okay. Understood. And then, Josh, just given the Midwest and the South segment now includes the online and management fees in there, just wondering if you could help us think about maybe how margins should trend in that segment moving forward. And if I could also ask two housekeeping questions, I'm not sure if you'll give it to us, Josh, but maybe help us with corporate expense and interest expense this year? Sure. So, in terms of the margins for us, remember, we have this enormous amount of taxes that are essentially a pass-through from FanDuel that we pay on behalf of them because we have the license in the jurisdictions that we operate, and that shows up as revenue and then 100% as an expense as well. So, that dilutes our margins pretty significantly. So, just to put it in perspective, our margins online last year were about 14%. This year, just the online piece, which is the tax pass-through, six weeks of Pala, which is now Boyd Interactive, and then the revenue share, that's all at about 18% to 20% margins. So, that's kind of how it is today. And it will all depend on how much that tax pass-through continues to grow because it will dilute our -- continue to impact those margins. I think in terms of -- so hopefully, that answers that question, but if there's other elements you want to note, feel free to ask, and we'll try to answer. I think in terms of interest expense, we would expect our debt balances -- of course, this depends on your projections of EBITDA, but I think we would expect our debt balances largely to remain fairly consistent. So, any changes in interest expense are going to be purely based on your projections of interest rates into 2023. So if you think they're going up, then our interest expense is probably going to elevate a little bit. But probably, in reality, not to be materially different than where it was in kind of the run rate of Q4. And then in terms of corporate expense, I mean, probably $1 million or $2 million higher than kind of what we saw in 2022 would be a good number to think about for 2023. So, hopefully, that's helpful. Great. Thanks. Guys, can you maybe just talk broadly about the M&A environment out there? How do you think about sale leaseback as a form of financing given where the capital markets are today? Thanks. Well, specific to your question about sale leasebacks, I think that we continue to believe, given our strong balance -- well, first of all, given our strong balance sheet and our leverage, we really don't have a need to transact or look at other forms of financing. If we did, we think they're probably cheaper forms of financing for us out there, more traditional forms of financing that are pre-payable, that we can pay down. So, we don't find ourselves kind of looking at that these days. In terms of M&A, I don't know, from my perspective, it's kind of quiet out there. But I don't know, maybe Josh has heard things I haven't. Okay, great. And just to follow-up. Nevada results, really strong. Just curious if you think you're gaining share or just benefiting from market strength. The way the state reports Locals sometimes doesn't match up exactly. So, curious if you think you're a share gainer or just sort of seeing tailwinds from the market. Yes, I think it is just the strength of the overall Las Vegas market. I don't think there's a lot of share changing going on. I think everybody has settled into where they're at. Promotional environment is relatively stable. Nothing has changed much there. So, it really is the strength of the overall Las Vegas market and increases in visitation and convention attendance. Hey, good afternoon everyone. Thanks for taking my questions. First one, Josh, I think you mentioned Louisiana and Mississippi. There's been some softness there. Has there been any change in the promotional environment? Or is that more just something going on with the customer? Yes, I'd say the promotional environment has been stable across the country, including in Las Vegas and in our Midwest and South assets. So, that's not a driver of -- really, we saw outsized performance in Q4 of last year in those assets, really even superior to what we had seen in the earlier quarters of a very strong 2021. And I just -- it's just really a comparison-related issue, could have had something to do with what was going on with weather or hurricanes, but that's really hard to kind of quantify. So, we just know that kind of sequentially through 2021, Q4 was really strong for those -- for a portion of those assets. And that's what made the setup a little bit more difficult for that region so far in the fourth quarter. Got it. And then I just wanted to clarify something. So, as I think about your growth levers for 2023, higher digital, Sky River, the Fremont return and then obviously kind of just the organic environment, and I think back to your comments on the actual overall EBITDAR for 2023 compared to 2022. I just want to clarify, so when you mentioned the Street was estimated down 7% or 8%, you thought that was overly conservative given the growth levers? Or am I misinterpreting something there? I think what I would say is that we feel good relative to where we think our business is going to trend relative to the Street's consensus just because of the uncertain environment we find ourselves. I think you adequately identified kind of the -- where we see opportunities for growth. We get a full year of Wilton. We get kind of some expansion of -- on the online side of things. And we've got -- we've had increasing demand for our non-gaming amenities, both hotel and F&B, and we feel like that will continue to be an opportunity as well as depending on how the overall gaming consumer feels and trends for the rest of the year, for 2023, we feel that's also an opportunity to continue to grow loyalty customer. But I think -- and look, I think the other thing that like is easily remiss in our business is we're making small investments that are generating really good returns that over time, we expect those to accumulate to be something meaningful for us, but we're not taking big bets. We're not committing the company to a large amount of capital in the current environment that we find ourselves. So, all of that gives us some comfort that we're going to be operating in this level of kind of performance that we've been at for the last two years, and that was kind of what we were trying to communicate in our prepared remarks. Hopefully, that makes sense. Yes, that makes sense. And just one last housekeeping one. I think in the past, you've talked about segmenting out Sky River and/or the digital stuff. Is that still a consideration? Yes. We're -- yes, we're most likely going to do it in the first quarter, give you some historical perspective as well. We plan to break out online, which will include our revenue share, our tax pass-through and what is to become Boyd Interactive with the acquisition of Pala. And then we'll have a managed and other, which will include Wilton as well as Lattner Entertainment. Hi, afternoon gentlemen and thanks for taking my question. Apologize if you touched on this in the prepared remarks, but I want to make sure as we go through our model, we reflect all the positives you've discussed so far, but also just contemplate any points of competition that are out there. Did you mention any? Or could we just touch on those for a moment? So, we didn't talk about competition more broadly. I think as we look at where we're at today and into 2023, there are probably a couple of areas. So, I think it's well known that the Horseshoe opened in Lake Charles. It's a property that had been closed for a while as it was rebuilt from some hurricane damage, opened in December. That obviously competes with our Delta Downs property. It's been open a little less than 60 days. I haven't really seen much of an impact, but it is incremental competition. In Indiana at our Blue Chip property, the four wins is opening or expanding a property in South Bend called South Winds, adding a hotel in expanded some casino space last year. We do get some business out of South Bend, so a little bit of incremental competition there. And then the HHRs in Kentucky have been impacting Belterra Park just outside of Cincinnati, Ohio. They existed there in the second half of 2022. So, we'll see a little bit of additional impact there in early 2023 from those HHRs. Other than that, no other significant competition throughout the portfolio. Hey, how is it going? You mentioned earlier, basically taking back the Stardust brand in mid-2023, I think you said in a few months in vertically integrating. How do you think about the puts and takes of retaining those customers? So, I guess what I mean is, on 1 hand, they have the wallet established with you. Obviously, the brand loyalty. On the other hand, presumably, FanDuel, who's been running that, wants those customers as well. So, just like net-net, do you have any idea at retention or care to take a shot? No, I do not care to take a shot. Expect that there will be breakage. And when I asked a little bit earlier in the conversation about kind of the economics, once we take this over, that's why we're saying, look, in the first year, expect the economics not to change. And that what we made as a revenue share with FanDuel, it will be the same thing we will make operating this 100% on our own because of breakage and ramp-up and learning the business, running it ourselves from a marketing perspective. Hopefully better, but we're expecting it to be kind of same for the first year, and then we'll ramp up from there. FanDuel will continue to exist in those markets, certainly a tough competitor, but we're -- we have a large database of customers in the markets we're going to launch in, and I think we'll do fine. That's helpful. I appreciate it. And then the management fee is going to $50 million in 2023 for Sky River. I believe the previous kind of bogey you guys have thrown out there was $30 million or $35 million, if I'm not mistaken. Did the property sequentially accelerate? Or what was the inflection that made you comfortable this is the right number? I think when we had given a $25 million to $30 million or $30 million to $35 million, I think I don't recall our last specific guidance, it was simply early. The property opened in August. We didn't have enough time under our belt. Now, that we've got a good five months under our belt, and we see where the -- kind of the opening has settled in, obviously, the opening month is extremely strong, which is what drove the significant management fees in Q4. But we kind of see where it is settling in, in December and in January. That's just our current expectation. Totally appreciate it. Thank you. And then just like the last housekeeping. Did you say that for full year 2022, digital was $40 million of EBITDA? Or did I mishear you? Hi guys. Thanks for taking my question. You covered a lot of ground already, but maybe 1 more on the consumer patterns. I guess as you think about what you saw in the first half of fourth quarter and then exiting the fourth quarter, I know you called out some markets, Louisiana, Mississippi, but have you seen a change maybe across demographic cohorts or just infrequency of visit or spend per visit as the quarter progressed? I guess are those kind of trends pretty consistent with what you've seen? Or has there been a shift in the kind of pattern of consumer behavior? John, this is Josh. So I think in the first half of the quarter, what we thought -- the reason we thought merited calling it out was that we saw a broader softness across really all customer segments. Now, that reverted in the second half to be more like what we had seen in the quarters leading up to Q4 and continued into January. So, again, that's what makes it hard to determine if like there's any relevancy to what happened in the first part of the quarter or not because the business really kind of picked back up with the best part of the quarter being the last week of the year and then just has continued into January. But I think what we saw was very concentrated weakness in the southern part of our portfolio, but also something a little bit more than that just across the entire company in like late October and into November around just a broader customer. I don't-- Yes, I think if you're asking about kind of specific components of the database, whether it be by age or worth segment, no specific shifts that occurred that are worth calling out. Right. It kind of picked back up where it left off when you kind of got into the second half of the quarter. Got it. Understood. I appreciate that. Maybe 1 easy follow-up, Josh. Should we expect Sky River gets going and then kind of your online gaming segment for the year? Any reason to expect any seasonality at Sky River? And then should we kind of assume that the online gaming seasonality would kind of mirror that of the big B2C players kind of in conjunction with the sports schedule? Yes, I think that's right. I mean we have seasonality in the revenue share that we received today. So, in that$40 million that we received this year, there was definitely seasonality, with the fourth quarter being really strong, first quarter typically being strong, and then obviously, third quarter being fairly soft. I would expect, just given you're just getting a percentage of revenue kind of what's termed in net revenues for Wilton or Sky River, that there probably won't be much seasonality to that business, I wouldn't expect. Hey good evening everybody. Thanks for taking my question. We've covered a lot of ground. Just one for me. On the Downtown segment, you noted that the Hawaii business fully recovered. I noticed also that you guys had record margins that look really high compared to all of the last three years. My question is, the full segment, do you think that, that's fully recovered outside of Hawaii? And then from the margin perspective, should we be looking at prior seasonality but benchmark to this new normal maybe that you guys are operating at currently in the fourth quarter? Well, look, with respect to Downtown, there clearly is seasonality in that business, much like the Las Vegas business. Summertime tends to be softer and the fall and winter seasons tend to be a little bit stronger. So, you should expect that seasonality to exist. The margins that we produced in Q4, we're comfortable withgoing forward, yes, significantly higher than a few years ago as we've kind of rightsized that business, have gotten out of the charter business. So, margins are probably ones getting in a good place, and there will be seasonality. Thank you. Hi Keith, Josh. Just a question on the levels of, say, core consumer spending that you saw, especially in your Las Vegas Locals and Regional segments. Can you give us those and just in terms of what you saw, given the importance of that segment? I can try to give you some color around it, Joe, and hopefully, this point you in the right direction. I think, look, I think we -- the Las Vegas Locals, as Keith said in his prepared remarks, really benefited from a strong out-of-town business as well as big demand or stronger demand for our non-gaming amenities, not necessarily opening more amenities, just a growing demand among our customer for that particular aspect of our business. We also saw not only -- well, primarily in Las Vegas, we saw kind of a strong core business, again, supported by out-of-town business from our core customer that just continue to get healthier as we move through the quarter. And that's largely continued into January as well. So, we're really focused on serving that core customer. That customer has a lot of worth with us. We watch their frequency and spend, and that's all kind of remained very consistent as we move through the quarter, if not, improving slightly as we progress through. So, hopefully, that gives you a sense of what was going on. And just final question. Obviously, just kind of like the discussion about choppiness, initial choppiness in the fourth quarter. Is it fair to say like you haven't really seen that -- maybe that level of choppiness elsewhere during 2022? Can you remind me? I would -- it's a hard question to answer. I think the -- as I alluded to earlier, in any quarter, there's going to be a soft month. And the issue you hear for us was we called out some items, but we just didn't want to say that's the whole explanation of what happened in the quarter. We had some softness early in the quarter. We don't necessarily know if that is a forbearing to something that's to come. Second half of the quarter, January seems to kind of offset that belief. But we just wanted people to be aware and investors to be aware that we did have a first soft start to the quarter, and that was something that we wanted to just highlight to folks. That's all. And I wouldn't say if you look back at each quarter of this year and even last year, largely, there was at least one month in each quarter that was soft, and then it would come back. So, anyway, I don't want to make too much out of it, but I also want to make sure people are aware of it as well. I mean we continue to -- as based on our remarks around our expected performance for next year -- we expect for 2023, we expect to be able to perform at these levels and continue to do that. But obviously, we need the consumer to kind of be there for us. So-- Thank you. There are no further questions at this time. I will now pass it back over to Josh Hirsberg foreclosing-- Thanks, Tamia. I really appreciate it, and I appreciate everyone participating in the call today with all good questions. If there's any follow-up, please feel free to reach out to the company. Thank you.
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EarningCall_747
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Good afternoon, ladies and gentlemen, and welcome to the Aurubis AG Conference Call regarding the publication of the First Quarter Results. At this time, all participants have been placed on a listen-only mode. The floor will be opened for questions following the presentation. Thank you, and a warm welcome from me as well. I'm sitting here together with our CEO, Roland Harings; and our CFO, Rainer Verhoeven, who will present the Q1 figures and current developments at the Aurubis in a moment, as well as there's my colleagues from Investor Relations. Before I hand over to Roland Harings, here's already the key combination for the Q&A session. [Operator Instructions] Okay. Thanks, Elke. Also from me, welcome to our Q1 conference call today and good afternoon to those here in Europe. Aurubis has made a successful start to the new fiscal year. Also, the comparison with the previous year shows a differentiated picture. We would like to clarify the situation once again. The previous year's quarter wasn't extraordinary good, even record quarter in the company's history. In fact, we started so well that we are going to take this opportunity to specify the forecast corridor of EUR400 million to EUR500 million operating EBT today. We expect for the current fiscal year, our operating EBT to be at the upper end of the prognosis that we have shared with you. Of course, we also confronted with higher inflation and increased energy costs in particular. However, the measures we have taken in energy management have allowed us to mitigate a larger part of this. We will come to this in course of the presentation later. If you look at our metal result, it also decreased compared to the previous year. But as you know, this always depends very much on the input materials in the respective quarter, so subject to fluctuations. Sulfuric acid was a very successful earnings driver in the past fiscal year. Although prices have fallen in the new fiscal year, they are still at a good reasonable level. Our cash flow is subject to significant fluctuations during the year. This is due to the fluctuations in working capital; the money, which is tied up in our inventories. This will even out as you have seen over the past, over the course of the fiscal year. So all-in-all, starting from a stable operating performance, and here our smelter in Pirdop deserves a special mention and promising market conditions make us very optimistic for the current fiscal year. But let's be more specific. Our revenues are largely driven by metal prices. This was also the case in this quarter. Copper prices in particular were lower than in the previous year. Gross profit was only slightly below the very good level of the previous year. The reasons were a very good operating performance at our Pirdop site as already mentioned, with concentrates throughputs at the high level of the prior year. In general, high demand for our products, for our copper products and consistently high refining charges for other recycling materials. This was offset by a lower metal result, due to the input material used, slightly lower sulfuric acid revenues due to lower sales prices and lower refining charges for copper scrap and higher costs, in particular, higher cost for energy. Fiber, last but not least, with an ROCE of 16.3%. We exceeded also this quarter our ROCE target of 15%. Looking at the market conditions, the copper price underpinned by low inventory levels and ongoing demand showed positive development during the reporting period. Copper prices increased from levels around $7,500 per ton to $8,500 per ton. Currently, copper prices range well above $9,000 per ton. Let's look at the different markets. Aurubis saw a good supply situation in Q1. Spot term conditions showed stable development around the newly set benchmark for calendar year '23. With the new benchmark set at $88 per ton and 8.8% per lib from framework contracts in calendar year '23, Aurubis will benefit from this increase. Aurubis is in line with our strategy, well supplied with concentrates into Q3 '22-'23 fiscal year, so we are maintaining this strategy of long-term commitments with our mining suppliers -- mining partners. Looking a bit at the recycling markets. During the reporting period, we have seen a stable supply of scrap materials on Aurubis sourcing markets with satisfying RCs during specifically Q1. But nevertheless, the generated RCs were at a reduced level in comparison to the very high level from the previous year for copper scrap and here specifically copper scrap number 2. CRU estimated an average RC of EUR363 per ton during the first quarter for copper scrap number 2 without logistics, slightly above the previous quarters. This is significant lower than the respective year number in previous -- in the last year's respective quarter. The RCs for more complex materials remained more stable also in comparison with previous year. Talking about sulfuric acids. The sulfuric acid markets have been a further -- have seen, sorry, a further normalization from a very high previous year's prices, which we saw well into Q3 in the past fiscal year. Given the reduced demand from the European chemical and specifically, fertilizer industry, which is with reduced capacity due to the very high energy prices, although, acid prices declined, but stabilized during the reporting period at a lower level. Given the longer term orientation of Aurubis contracts, we only participate in the spot market to a limited extent. The earnings contribution from sulfuric acid sales were slightly below the Q1 of previous year, however, remained at a decent level. Given the current market situation, we expect lower earnings contribution from asset sales for the remainder of this running fiscal year. ACP, our Aurubis copper premium has announced for this calendar year '23, we set this premium at $228 per ton, reflecting the strong demand for copper in Europe. This higher ACP will apply in Aurubis contract from Q2 onwards in our fiscal year '22-'23. The last point, US dollar, Aurubis as you well aware has a long position of approximately $500 million, also in this fiscal year '22-'23. Within the scope of our hedging strategy, we are hedged at 70% at 1.133 for this current fiscal year and at around 36% at a rate of 1.085 for the fiscal year '23-'24. Thanks, Roland, and good afternoon also from my side. Looking to the next page, talking about the gross margin, the splits for Q1 '22-'23 remains rather stable year-over-year, reflecting a balanced contribution of the different earnings sources of the group. Despite lower metal prices in the reporting period, metal gains remain a significant income component for the group. Both earnings drivers, the TC/RCs and premiums and products showed slightly positive developments year-over-year at a total gross margin slightly below last year. Total costs of the group increased by 9% to EUR457 million compared to prior year quarter, while the distribution within the costs also remains rather stable. Energy cost and other operating expenses are the biggest contributor to the groupwide cost increases year-over-year. Energy shows the biggest increase in cost with an increase of 18% from EUR62 million to EUR73 million year-over-year, we go more into detail in a minute. Personnel costs were on previous year's level at EUR139 million. The performance improvement program continues to stabilize this cost factor. Cost for consumables like chemicals and packaging material have also seen an increase, mainly due to the steep increase in prices for certain input materials. Coming to the energy, the discussion about energy price development remains one of the prevailing topics in our company. Overall, energy costs in Q1 increased by 18% year-on-year to EUR73 million, but the rise was much more moderate than in previous quarters. A main driver of the increase in costs are the gas prices compared to the previous year, we saw a peak here, especially in Q1. Gas prices are currently falling significantly. While we were hedged -- well hedged in the last fiscal year, the level of hedging in the current fiscal year is considerably lower. For electricity, we are well protected by our long-term supply contract in Germany, whose main price components are CO2 and coal. Prices for both components are also increased, but comparatively moderately. Coal prices on average for Q1 rose by 37% to $236 per ton, compared to $172 per ton on average for Q1 in the previous year. The CO2 price on average for Q1 '22-'23 increased by 13% to EUR77 compared to EUR68 on average for Q1 '21-'22. With our hedging activities, we could limit the effects on the electricity side. Just as a reminder, the figures displayed show the energy cost minus any deductions from indirect CO2, electricity compensation, as well as state refunds provided to our sites, for instance, in Bulgaria. Looking forward, we will continue to work on the further electrification of our production processes and invest in decarbonizing oil production. Secure energy supplies at reasonable prices remain very relevant topics for Aurubis in general. Looking at our KPIs, the key performance indicators continue to show a very solid and robust picture. I'd like to draw your attention in particular to our strong equity ratio of 54% and the debt coverage ratio of minus 0.3, both of which continue to be the strong foundation for our strategic growth part. Due to high inventory levels, the minus EUR64 million net cash flow in the first quarter of fiscal '22-'23 was only slightly better than the year before. Net cash flow, as already mentioned, is subject to substantial fluctuations throughout the year and will balance out over the course of the fiscal year. The increase in capital expenditures resulted mainly from investments in our new recycling plant, Aurubis Richmond, USA and the second stage of our industrial heat project here in Hamburg, as well as preparatory measures for the maintenance shutdown in Pirdop in the third quarter of our financial year. Let's have a look at the segments. Financial and production figures from the multi-metal recycling segment. All-in-all, the throughput volumes and cathode production have been in line with the previous year's first quarter. Although, the segment benefited from solid metal gains, the operating EBT at EUR35 million was well below the previous year. Please bear in mind that last year was an extraordinary year. In total, the refining charges for recycling input were moderate or let's say, below last year. In addition to the reduced income components, the profitability of the MMR segment was burdened with increased costs, especially for logistics and transportation, but also the energy costs. As a result, we showed a reduced EBT in line with a lower ROCE of 18.7% compared to last year, but still above our target rate of 15%. By the way, a quarterly breakdown of our restatements of operating EBT can be found in the appendixes to this presentation. In the Custom Smelting and Products segment, the operating EBT increased from EUR94 million to EUR108 million in the reporting period. The segment benefited significantly from higher revenues from TC/RCs for the concentrate, increased metal gains and an ongoing strong demand for copper products throughout Q1 of fiscal '22, '23. Positive market conditions combined with good concentrate throughput, especially at our primary smelter in Pirdop, led to positive earnings contributions from treating concentrate. On the product side, demand and corresponding prices for rod and shapes remains at a very high level. On the cost side, the segments were faced -- or the segment was faced with headwinds from higher energy costs and increased cost for transportation. The production volumes of flat rolled products is lower due to the parcel sale of the former FRP division, which are still included in the previous year's figures. The return on capital employed in line with the better earnings situation reached 18.9% compared to 12.6% in the last year. This is well above the target threshold of 15% despite the increase in capital employed compared to the previous year. Let's move to the market outlook for the remainder of '22, '23. Both CRU and Wood Mack anticipate the continued growth of the concentrate market from both the supply and the demand side. This anticipated growth is reflected in the new benchmark set at $88 per ton and $0.088 per pound, an increase of 35%. The current spot market developments with TC/RCs at benchmark levels show a good supply from the mining side. We are maintaining our long-term supply strategy and are already supplied well into Q3 of the fiscal year '22, '23. The markets, especially for copper scrap, and to a lesser extent for complex recycling materials remain short-term markets and are driven by influences like metal prices or collection activities from the recycling industry. We currently foresee a stable market for both copper scrap and recycling markets, raw materials for the remainder of this fiscal year. New regulations that offer the possibility of banning exports of recycling material from Europe could have a positive effect on the availability of recycling materials in Europe going forward. Our production plants are supplied with recycling materials beyond Q2 '22, '23. Sulfuric acids, ICIS and CRU both expect reduced demand from the European fertilizer and chemical industry due to high energy costs. Given the latest price expectations, we foresee a reduction of the earnings contribution from sulfuric acids. Given the longer-term contract situation, asset sales are still expected at reasonably high levels in '22, '23. Coming to the copper premium, the ACP for calendar year 2023 has been set at $228, well above the previous year level from which we expect positive earnings contributions from Q2 onwards. Coming to our copper products, rod shapes and the flat rolled business, we foresee a continued strong demand trends for copper products and expect this to continue during the fiscal year '22, '23. Only the construction sector shows a reduction in demand. All-in-all, product demand for rod shapes and the flat-rolled business is still expected at high levels for the foreseeable future. Thanks, Rainer. So talking now about the guidance for the current fiscal year. Based on our latest assumptions, we are now more optimistic about the forecast for the group result and we expect the operating EBT at the upper range of our financial guidance of EUR400 million to EUR500 million operating EBT. The operating ROCE, we do expect between 11% and 15%, also at the higher end of this range. Specifically talking about the segments, the Multimetal Recycling segment, we continue to expect an operating EBT between EUR100 million and EUR160 million and an operating ROCE between 11% and 15%. Important to mention, I will come to this in a minute, is that this anticipated ROCE is mainly also influenced by sizable investments that we are doing now in our new plant in the U.S. in Richmond. For the Custom Smelting and Products segment, we expect an operating EBT between EUR350 million and EUR410 million and an operating ROCE between 11% and 19%. Coming to Richmond, as just announced. Now let's take a look at our key strategic projects, and I'm very pleased here to share an update with you. Our most important growth project, and you see the picture is the fast growing is -- entering the fast-growing market for recycling materials in the U.S. with our new recycling site, Aurubis Richmond in Georgia. Last December, we informed you that the Supervisory Board approved the investment for the second module. Due to the very good market outlook, we decided to accelerate this investment, you will remember, and you saw the pictures that we programmed for the first module in June 2022. Our projects continues to progress well. Over the course of the year, additional contracts for the construction of the plants were completed and although, the pending regulatory approvals have been granted for Phase 1 and also and already for Phase 2. And we have consequently started with the recruitment of our teams in the U.S. Due to the high proportion of copy paste, so it's our modular design for recycling from the first module, the engineering effort for the second module will be significantly lower. Many plant areas are sufficiently dimensioned even after the expansion, for example, slack treatment casting plant to cope with the expansion from the second module. So we have invested already in anticipation and some basic infrastructure around the plant side. And I think the picture is quite impressively show the size of the operation that we are building there. The expansion of the important is integrated in our optimized material flow on the entire site and is also connected to some of the product shipments that we plan into our European smelting operation. So we are very positive and optimistic about the progress with our significant investment in the United States. Coming to Europe, we continue also similar to invest in our European side, strengthening the core and expanding our multimetal capabilities. And here, the project ASPA which stands for advanced slag processing by Aurubis at our bases in Belgium is moving ahead. We will there process and not sludge a very valuable intermediate product from the refining process. And here, we will combine the shipments from Lunen and from our Beerse plant. We pro-crowned in mid-December '22 and officially started construction on this state-of-the-art hydro-metallic recycling plant. The investment is EUR33 million, and the plant will go into operation in our fiscal year '24, '25. The new process will enable faster extraction of more precious metals such as gold and silver as well as the full recovery of tin from the energy sludge. With this project with ASPA, Aurubis is strengthening its position as the most efficient and sustainable integrated smelter network worldwide. One other aspect, which we are very actively pursuing is decarbonization. On October 21, Aurubis started a test series for the use of blue ammonia in the copper rod production. The ADNOC, the Abu Dhabi National Oil Company shipped the first 15 ton -- 13 ton, sorry, of blue ammonia required for this test series from the United -- from the Emirates -- United Emirates. This demonstrates that the creation of a blue and in the future, green ammonia value chain between Germany and the United Arab Emirates and some other countries is not just theoretically possible, but practically feasible. During the running test series, low emission ammonia will partially replace the natural gas in the rock plants. If the pilot project is successful and the first test results that we see are very encouraging, up to 4,000 ton of CO2 per year could be saved in the Aurubis plant in Hamburg alone. And to highlight, again, this highlights again our pioneering role that we play in the decarbonization of the copper industry. Looking at this footprint picture. In the area of sustainability, we have set the objective of achieving carbon-neutral production well before 2015, and we are well on our way. In just eight years, the carbon footprint of copper cathodes from Aurubis has decreased by more than 35%. Aurubis evaluated the environmental profile of our co-product, which is copper cathodes by carrying out a life cycle assessment, which was just updated recently. Here, we considered all the activities involved in the production of copper cathodes from cradle to gate such as copper ore extraction, smelting and refining, transportation, energy consumption and auxiliary materials. In a worldwide comparison, the carbon footprint of our cathodes is a full 60% below the global average of all copper smelters and refiners worldwide. Aurubis is thus making a real contribution to the global challenge of environmental and climate protection. Coming now to the overall picture of our growth strategy, which has been shared with you, so this is a reminder slide of the strategic growth of Aurubis. This is the agenda we are pursuing, and these are all projects together on one slide, as we also shared during the release of our annual report. In total, we have now EUR1 billion of approved CapEx for our growth projects in execution, like Aurubis Richmond, like CRH, the complex recycling in Hamburg, like the fleet treatment project in Olen and the ASPA project where I just shared the slide with you. The project in our medium-term planning, like better recycling are constantly developed until they reach the majority needed for the approval of the Executive Board and subsequently the Supervisory Board. We will provide an update on the growth projects and our strategic agenda later this year on a Capital Market Day in June 13. And here, I would cordially like to invite you to join us in London at the stage. But Elke will probably talk about this also later again. So looking forward for that. And finally, we are ahead of our annual meeting -- general meeting on February 16 and which is only 10 days to go. And for a change, we will, after all the COVID years, we will hold again a physical meeting in Hamburg, and we are proposing a dividend on the AGM of EUR1.8 per share, which is the highest dividend in the history of Aurubis. And with this said, after, let's say, a solid or, let's say, a good start in our first fiscal year, I would like to hand back to Elke. Thanks. Thank you, Roland, and Rainer. I would like to provide you an outlook into the next event following our Q1 publication. As Roland already mentioned, the Annual General Meeting is on February 16. And shortly after our Q2 results in May, we will follow up with the Capital Market Day in June. This event will take place in London on June 13. More information will be shared with you in due course on the website and via mail. We very much look forward to giving you an update on the strategic projects and development of our strategy. With this outlook, we would like to thank you for your attention, and I would like to ask the operator to take over for questions. Yes. Good afternoon and thank you very much for the presentation. A few questions from my side. First one on energy costs. If I look at the run rate for fiscal Q1, it's in the order of EUR300 million on an annualized basis. And if I'm not mistaken, at the full year results, you indicated [Technical Difficulty] full year energy cost in the order of EUR400 million to EUR420 million. So could you please confirm whether that's the case? And that would suggest that your implicit guidance upgrade doesn't fully reflect the energy cost tailwind. If you can provide a bit of comment here, that would be very useful. Yeah, Ioannis. It's Roland speaking. No, thanks for your question. Energy cost is a very, very interesting topic obviously. And you saw the numbers for the last quarter with EUR73 million spend. And we have hedged during although now better market conditions, a certain amount of energy, gas and also electricity. Rainer explained, and you're well aware that we have certain pricing components in our -- specifically in our German contract with Vattenfall (ph). So today, we stayed -- we are hedged for this fiscal year at a rate of about a day two-thirds where we have security and pricing security also anticipated in our forecast. However, this means one-third is still exposed to spot markets. And here, therefore, the guidance, and we are conservative, we have also taken some higher energy costs on the spot side in the next coming quarters into account. So therefore, your number of about EUR300 million, if you just multiply the first quarter by four is probably a very, I would say, ambitious number. We are more conservative on the energy side. That's very clear. Thank you very much. The second question, again, on the same topic. On the full year results, you indicated possible switch of 40% of your gas consumption in Germany to LPG fuel oil and other energy inputs. Given the decline in gas prices, is the switch really happening or are you keeping the gas consumption intensity at similar levels to last fiscal year? No. Good second question here. So we had decided for these investments because we were concerned in Germany that there might be a shortage of gas supply. This was the main driver to ensure our production. It was not mainly driven by pricing assumptions and so on. So the installations are proceeding or they are being finalized as we explained in one of our last calls. So we are ready to go. And now we are taking a more, let's say, short-term approach, what is the better source of energy, which means more cost-efficient energy. And given that LPG would also come with some higher CO2 emissions, we tend, if possible, to stay with natural gas. So it's a, let's say, cost decision and ESG decisions that we look at case by case. Okay. That's very useful. And just to clarify, on the CO2 component of LPG, there is no rebate, the way you receive it on the power side, right? Perfect. That's clear. And just a last question for me, if I may. On the Multimetal Recycling business. If I look at the numbers for fiscal Q1. It accounted for 46% of your cathode production, but only for 28% of your group EBT. Do you see this as a reasonable share of EBT contribution based on the existing footprint and ignoring the growth projects or is this business under earning in the current fiscal year? Now, I would say, hey, this is Rainer speaking. So I would say, this does not necessarily reflect earnings potential that we have with MMR. There would have been some effects that were subdued in the first quarter. So over the, let's say, the coming quarters, we expect a more reasonable share. But don't forget that the cathodes that is produced in the MMR segment is pretty much fully going to the CSP segment because we are producing rotten products from those cathodes. And there, as explained with the high ACP $228 and the, I would say, very good pricing that we could get from our products, of course, a good earnings contribution comes from that end. Okay. So just to clarify, so the cathode premium that multimetal recycling producers through the cathode volumes is that reported under recycling or under the CSP division? Good afternoon, gentlemen. Two questions, if I may. The first one was to get a bit more color around your comment that scrap collection remained fairly even during this period where clearly, industrial production in Europe was down. So I wanted to understand a little bit better whether you've diversified sourcing to procure scrap or how is it that the relationship between industrial production and scrap generation no longer hold. My second question is on First Quantum. We're experiencing challenges to say the least in Panama at the moment. Just wanted to know if they were one of your suppliers of concentrate. Thank you. Yeah. Roland speaking here. First, scrap collection. I think here, our strong flexibility, our flexibility in sourcing all kind of different scraps for our recycling activities plays out. So we had to be flexible. Some scrap, for example, shredder materials from dismantling end-of-life cars. The supply is relatively limited these days, whereas other segments are doing well. And we are also globally sourcing certain scrap qualities globally like in the U.S. market, where we have a good supply of scrap materials. So therefore, scrap collection even with some -- in some segments, lower industrial or I'd say, economic activity, scrap collection was still sufficient for our demands. And regarding mining activities and partners, you know that we are not sharing the details of where we are sourcing our materials. However, Cope Panama, I'm very convinced will find a solution with the government because there is too much at stake for both. If you see the importance and how excellent this project has been performing and that they are meeting even highest ESG standards with their operations, and they are providing 40,000 well-paid jobs to the country I would be surprised. I would be very surprised if they don't come to solution soon. And what we know, what we hear from the market is that the mine is still in full operation. There is no reduction of production whatsoever. And again, my personal take is this is also not going to change, but they will find and my Capital Solutions. Yes. Good afternoon. I have three questions, if I may. First is, can you give us the amount of energy related stake refunds for Pirdop for the first quarter and for the full year? Is that possible? The second one is, can you give us some kind of an explanation concerning the agreement with Codelco. So what can you deliver into that kind of possible joint venture or whatsoever. I will follow with the next question afterwards. Okay. Then, I'll just take the first -- the second question first, Christian. Codelco, we have signed this MOU last week, in Chile in -- with together on this delegation with our Chancellor. I think Codelco is a long-term, let's say, business partner, even if we are not really significant sourcing material from them. But clearly, we are seeing Chile as one of the key countries for the supply of copper and copper concentrates to the world. And on the other side, we have been always in very close exchange with Codelco and you might remember that we even had a joint venture in Germany until 2018 with Codelco. And they always admired and respected how excellent our environmental technology, specifically in Hamburg is. And we were, for them, as for many others, always the technical environmental benchmark. And we use this opportunity also of the visit to formalize to put something in writing that we are going to support Codelco with our latest environmental technology to make their operations, specifically on the smelting side, better and cleaner if it's regarding sulfuric acid -- sorry, SO2, sulfur dioxide and also on some other emissions. And the overall interest for us is that the whole copper industry is a better industry, is a cleaner industry and then also the support for new very important mining projects in Chile is given by the government and also by the society. So it's a bit a bigger picture in order to be a really important player and a leading player in this industry. And what we also agreed, which is, again, an interest of us and also the copper industry that most companies or all companies will certify according to the copper mark, which is the label and the kind of feel for a very responsible and sustainable copper production. So these are the elements in the corporation or in the MOU that we have written with Codelco. Okay. So that does not mean that you are investing there, but you are bringing your know-how and then you're getting fees for that, possibly? So it's not that we are going -- we have the interest that we -- that the copper industry, specifically in South America, and you know there are some political, I'd say, challenging situations in South America, especially also in Chile that the copper industry is seen as a very good citizen meeting higher standards. And here, we see our responsibility to provide this leading technology also to a player like Codelco. And there is no direct payment plan. It's really the overall interest that we are sharing here. So there will be no -- but it bluntly, there is no income combined with that. So then, Christian, to your question with regards to the Bulgarian energy, our statement in the past always was we have, in total 2 terawatt hours electric energy consumed in the group, there of roughly 1 terawatt hour abroad and you can state that almost half of it, so 500,000 megawatt hours, it is a bit less, it's, let's say, 350,000 to 400,000 megawatt hours are consumed in Pirdop. In Bulgaria, we have an energy price cap, which was in place in the last calendar year, resulting in roughly EUR140 per megawatt hour that is including all the distribution charges. Therefore, I say roughly. Now in place from January '23 onwards for the full calendar year 2023, we have a price cap of, I think, 200 Bulgarian Lev, which including the distribution charges then ends up in roughly EUR120 per megawatt hour, which can be read, let's say, pretty much on the Internet pages in Bulgaria. Okay. Perfect. Thank you. And then I have a question concerning the related metal result currently and how that fits to the decline of your metal sales volume. So there is a decline when it comes to quarter or year-on-year, first quarter year-on-year minus 18% when it comes to nickel, minus 50% zinc, and minus 36% in PMGs. So nevertheless, the metal result is only down by EUR20 million for 8%. Can you give us an idea how that works and this is despite the fact that the comparable prices are also down year-on-year. Yeah. I'll give it a try. I think that is pretty much in the machining room of Aurubis here. The amount of metals which we are selling has not necessarily something to do with the metal gains that we are earning from three metal components. That's a different thing. So we have certain metals we are paying for, and we are producing them, and selling them again. But there is metals, our metal result where we have free metals in and we digest them, so to say, and sell them. So therefore, there is not necessarily a dependence between the sold metal amounts and the free metal that we are generating. Let's put it this way, the more complex the materials that we, let's say, digest or that we process in our plants, the higher, the free metal components. So it always depends, and that's what we also said and Roland said on the complex recycling side, the more complex those metals become or the materials become, the more free metal we gain and we earn with those input materials. Of course. That makes sense. Okay. I tried it from another way in the end, a different question. When it comes to zinc for instance. So there is a constant decline more or less than the output of zinc over the last nine quarters. And we see also some kind of a decline when it comes to the output of nickel, is that some kind of a trend or can you explain that? Yeah. Roland speaking here, Christian. Specifically, zinc and you have seen this with other companies in Europe, zinc is a very energy electricity intensive production, specifically also with our tumor technology in our plant in Beerse. And here with today's electricity prices, the zinc production was reduced because it's just with the boundary conditions of energy, it's just not economically feasible to run production there. And I think we talked about this also one of our last quarterly calls that this was the area with high energy prices where we decided to reduce production output. And nickel here, this is more mix and there is no general trend. It's availability of certain concentrates, certainly input materials, certain shifts within production loading, there is definitely no trend in nickel, rather the opposite. We are investing and we are going to expand our nickel output going forward. That's what you've talked about before. And -- but when it comes to some kind of, when I look at some charts for these for zinc. Okay, you explained that for PMG and for nickel, there is some kind of a downward trend a little bit over the last nine quarters. But okay, you're investing and you try to increase the output going forward, if you understand you're right. Yeah. And again, please be careful. These are in the report. These are sold tonnage. This doesn't really mean that this is processed. As Rainer deferred to the component of which metals we have bought and sold and what is free metal and premium. So I would rather ask you to look a bit at the total year's number, a quarter might be a bit as misleading to draw these kind of conclusions. Maybe to add that, Christian, also consider what has been tied up in our net working capital. So you have seen that we have quite some elevated inventory levels at this point. There is certain reasonings behind that. And there will be further metal components coming out. So as Roland said, don't too much go quarter-on-quarter. It's not like the Swiss railway here with our metal production. But also give you one hint, perhaps one last hint. You have seen that ACP for copper went up. We also see this for other methods. So why selling just to put it bluntly, why selling and pushing something out in the last week of December if I get a better pricing in the first week of January. Hi. Good afternoon. Thanks for taking my question. I have two. The first one is, I was wondering if you could shed some light on how to start into the calendar year was? Is it fair to assume that in view of higher TC/RCs, a substantially higher copper premium and higher metal prices, you saw a sequential step-up in earnings in January versus your Q1. That's the first one. Yeah. absolutely right. The whole product -- new pricing for product business kicks in from January onwards yes, that's completely correct. Okay. Thanks. Good to hear. That being said, I have another question following the guidance and related to the current trading. So if we look at your Q1 result of EUR125 million, and we consider the IT attack and the maintenance work in Lunen, which cost you EUR7 million each, then the operating -- underlying operating performance was more in the area of, say, EUR139 million, all else equal. This means the fiscal year run rate -- operating run rate is more like EUR542 million. And if we then deduct the scheduled maintenance shutdowns in Pirdop in Lunen Q3 then we -- then you say this will probably cost you about EUR29 million in total. Then the current operating run rate stands at roughly EUR530 million. And then we have the step up you confirmed in January with the TC/RCs coming in with the higher cathode premium coming in. And we have at least currently fading energy costs. So Iâm quite -- yeah, I'm wondering why the guidance is still conservative and why you refrain from just rising the upper end of the guided range to say 550 or something. Yeah. No, thanks for Davis for your math. As I mentioned in my short introduction, we are conservative on the energy prices. Spot prices we are still exposed. We are conservative on sulfuric acid despite that we are not fully exposed to spot markets and we are living still in a very volatile world. Let's face it. The war is by no means over. We are seeing today a strong product demand, but in our forecast, as we always do, we tend to go to the conservative side. And yet, we have also announced that our guidance is at the upper limit of our range. So if you take this into calculation, you're perhaps a bit more optimistic view on certain market elements, our -- let's say, conservative view, then you see that we are not that far apart. So give us another, the running quarter, and then we have six months in the book and probably although much better visibility of the coming six months, and then I think we will be more precise. And we have also then certainly a better outlook on the sulfuric acid market, how this is going to develop. And then we'll share with you our latest view then after Q2. Okay. Thanks very much But is it fair to say that your guidance includes a worsening in the -- on the energy cost side and also probably some economic related risk? And if everything would remain as it currently is, the run rate would be higher. Is that fair? Thanks. Just two questions from me. First one, completely, can you give us an idea of sustaining CapEx in your two business units? And then second of all, how much of a headwind is the decline in sulfuric acid price has been this year? Perhaps if you could give us some kind of quantification of that. Thanks very much. Yeah. For the CapEx, we have something between EUR600 million and EUR700 million for this fiscal year. So the main topics are our big stand still in Pirdop. And -- but the big chunk for sure, will go into our recycling plant into Richmond into the U.S. Perfect. So sustaining CapEx, just -- also sustaining CapEx is at the range of about EUR200 million. This is the investment in the standstill what just Rainer mentioned, and our growth CapEx will be in the range between EUR400 million to EUR500 million. So EUR200 million and EUR400 million. So total CapEx spend, EUR600 million to EUR700 million is the range that we foresee for this fiscal year. Sorry, the second question, yeah, Cameron. As it what we always state is in a normal year or the as it results for Aurubis, they are around EUR50 million in a normal year and a bad year, it's around EUR15 million to EUR20 million. Last year, we had a very good result, which was even three digit. So that's really the area with 2.5 million tons of asset sales per year where we play. So therefore, today, we are assuming a more, let's say, normal year with some downside. So that's without disclosing your detailed numbers, just to give you an idea in which region we are playing here. Yes. Good afternoon. Thanks for taking my questions. Could you please talk about the demand dynamics which you see in the downstream businesses, please? And then maybe also remind us what the broad utilization rates in those rolled product businesses are? No, the demand for wire rod is very strong. And our, let's say, contracting period has delivered very good outcome in pricing and volumes. And if everything would continue as we see it today, but again, I make two caveats, again, volatile world and so on, we would have to introduce some extra shifts from the next quarter onwards. If this demand from our customer base really materialize as anticipated in their forecast. So we are nicely loaded today and we will need some extra production capacity, which we have, by the way. So we have spare capacity in our four redlines around Europe so that we could and can meet the demand of our customer base there. And so basically, from what you say, obviously, the market is very hot and very strong. So does it mean you basically run pretty much close to, I don't know, like 85% -- is like 85% utilization rate and you can still squeeze it up a little. Is this more or less how we should look at it? No. It's at a bit lower than that. You see we run normal shift operations. So we have typically no weekends and even have some longer standstill in summer and in periods. So we have capacity available in our system with a reasonable shift model nicely above of our today's production volume. So there is enough headroom for additional production. Okay. Perfect. And then my second question is on the primary side. It seems like there's still some capacity coming back to the market, for example, looking at what's happening at Vedanta. What is your view on that situation and the overall market balance in the primary segment now? Yeah. Just refer to, I'd say, all of the Wood McKinsey [indiscernible], the numbers that you're probably familiar with, we see a very good supply of concentrates and also new mining projects coming on stream, some of them, especially Peru and Chile, even ahead of schedule and faster than scheduled. So today, all with our long-term contract strategy, we are well supplied with the right quality and quantities going forward. There are also some very attractive new mining projects and also expansion projects of existing mines. One, I referred Codelco, why we did this MOU and why we're supporting here, in order to get them in an accelerated path. But at the foreseeable future for the next years, we don't see any shortage in the concentrate supply in the marketplace. What's then -- I know there are some statements around what could be in three, four, five years. But this is still, from a smelter point of view, still a bit too far out because projects are not decided regarding smelter expansion, specifically not in the Western world. So we are optimistic that, and what we see with our contract situation that we are well supplied also for the midterm future. Okay. Excellent. And my last question is just coming back to -- on your strategy. And obviously, when you announced your expansion plans when you obviously top those up at least the situation around the IRA in the U.S. was still pretty young. And I guess now the plans are maybe a little bit more mature. Can you please update us on whether there is any chance that you can tap the IRA via tax break or so for your U.S. expansion? Is there anything in for you? Yeah. Bastian, we took the decision to go into the U.S. because we see the excellent market opportunities with our recycling technology. We are the first complex smelting provider in the U.S. and also the feedback from our client base has encouraged us to even pull the second phase forward. IRA has not been a driver, not a reason for us to move. We've got an attractive package with the site selection in Richmond in Georgia. And today, copper is not part of the IRA agenda. However, if you look what has been incentivized, it's the production of renewable energies or the generation of renewable energies it's e-mobility with some significant incentives being put on the table. So we are very optimistic that this will have a positive say, impact on our metals on specifically on the copper demand. So therefore, you could say indirectly, IRA support us, but we are not taking any direct IRA subsidies or support into account in our business decision. Hey. Good afternoon. So I have a first question on your cash flow generation for Q1. It was relatively weak, and that followed an already quite weak performance last year, given the maintenance works at Hamburg. So what was the reason for this higher working capital variation, notably in Q1? And how do you see the cash flow shaping up in the rest of the year? So it was -- Maxim, thanks for the question. So it was a mixture of two things. On the one side, we are not really fully happy with the performance of our Hamburg smelter. We have stated that. So we had a long standstill with quite some investments, which still, let's say, need a bit of time to really come to the good operations that we had in the year before, while Pirdop is still doing fine. And if such a big smelter has a hiccup, then this immediately has an impact in the inventory levels and in our net working capital. So that's the one side. And the other side, as Roland mentioned already, if you have a chance to sell material from the January 1, 2023 onwards with an ACP of $228, you'd rather do it, which means you don't sell it in December. That's the other part of the explanation. Okay. And so if we look at the spot prices for TC/RCs you're currently significantly done from the peak in November, December. I know that most of your revenues are based on the contractual prices. But do you still see this lower spot prices as a risk to Q3 or Q4 results and therefore your guidance? Yeah. I think -- Maxim, thanks for the question. We are very consistent with our strategy of long term supply of annual contracts and we are hardly buying concentrates from the spot market. Some complementary small volumes we do. So in general, as you can imagine, we are in favor of higher spot prices of higher markets because they will be towards the end of the year, be also the reference for the next benchmark discussion. But today, the benchmark is set for this calendar year at 88 and 8.8. And that's the major reference point for our concentrate pricing, the TC/RCs we are going to receive in our equation with the domain partners as in any calendar year. So therefore exposure to spot markets is very limited on our side. Okay. And just a last question on sulfuric acid. So current market prices are really depressed, but given the fact that the end markets there are fertilizers and chemical industry should be positively impacted by lower energy prices. Do you see the market rebound, perhaps not in the current fiscal year, but rather next year? And I mean, based on your discussions with clients in that area, what's your view? I think rebound is a bit too strong at this point in time, I would say, stabilizing on a level with a slight upward strength. What we see from some of our clients is new sourcing strategies, which means ammonia is a worldwide commodity, which is the main point of -- I'd say, subject to high gas prices. So production of ammonia in Europe has been significantly reduced. However, there is also good supply from other regions of the world where natural gas is significantly cheaper, example, U.S. So we see that new supply chains, new solutions are being built up because fertilizers are needed. So they will be produced somewhere -- and assets are there, I'd say, assets, not assets, but assets are there. And so we see stabilization with, as I mentioned, a slight upward trend going forward. Okay. So at the moment, there seems to be no further questions. [Operator Instructions] And we have a question from Rochus Brauneiser. Please go ahead. Hi. Thanks for taking the question. I'd like to come back on the discussion about volumes. I think you made clear that you haven't been fully happy with the Hamburg performance. So to put this in the context with your volume guidance, I think you are seeing the throughput levels lower than last year. I think a quarter ago, you were more pointing to a flattish trend in the throughput. So what shall we read from that? Is this -- are you signaling that you are not expecting Hamburg to recover quickly to the normal levels or are there other volume-related factors which are coming here into the equation? Yeah, Rochus. Roland speaking. What you have to take into account, if you look at the overall concentrate throughput is the stance that we have in Pirdop this year, this fiscal year. And Pirdop is the larger by throughput, the larger plant in our smelter network. So therefore, our total throughput will be below last year. That's really a fact given also the size of the plant. We are -- as Rainer pointed out, we were not confident or happy with the operational performance of Hamburg. There was no major win, but it didn't run as smoothly as it should. Improvements are there. We are seeing better performance. And -- but again, given our conservative approach that we always use, also here in our financials, we have taken, let's say, a modest ramp-up of the brands. But in nutshell, concentrate throughput this fiscal year will be below last fiscal year. Okay. Understood. And how does that were together with your demand expectations? I think you clearly stated that you have even the potential to add further shifts to satisfy customer requests. So how you will -- are you planning to bridge the gap between upstream and downstream? So we will be able, with our flexibility in our system, to fill our tank houses. So the cathode production will not be impacted by any reduction on the primary smelter side, so first point. And the second point, as you know, we are also sourcing additional third-party cathodes to our footprint for logistical optimization and also for optimizing the mix. And here, we have some additional, let's say, all the flexibility in existing supply contracts for cathodes. So in case of a higher demand, we can pull those and can really meet the demand of our customer base. Okay. That makes sense. And then also on the sulfuric acid, when I read the outlook statement, it sounded a bit more careful in terms of price expectations compared to a quarter ago. But when you -- when I compare it with the statements you made earlier in the call today, it didn't sound as bad. So maybe can you help a little bit how we shall think between the current spot price readings and what you have in terms of realized contract prices? And maybe can you also remind us what the contract proportion is for this year? Yeah. No, Rochus, a fair question. I would like to repeat what I already said about the asset. Again, in a good year, I think in a normal year, it was bouncing around EUR50 million contribution, I'd say, result contribution. And in last year, we saw numbers three digit above EUR100 million, given extraordinary circumstances with some shutdowns of key plants in Europe, large maintenance of direct competitors in the supply of sulfuric acid. This is not coming back this year. So we will be in a more normal year. But again, restating, we are conservative year, we hope for the better. But give us this running quarter then we have cleared the numbers for the six months in our books, and we have a better outlook in this volatile world. What is going to happen in the demand situation and supply situation for the following six months. It's a spot market to some extent and we typically have long-term contracts in, more in Hamburg, less in Pirdop. So on the average, we stayed always around 50% of our contracts of our volume has a bit more longer-term perspective, but means with 50%, we are also exposed to spot markets. So therefore, we are taking here rather at the lower end of the spectrum in our assumptions. Okay. That makes sense. And then a more kind of technical question. I think you have started fairly low in your CapEx in the Q1. So from the EUR60 million, how shall we think about the run rate to end up with EUR600 million, EUR700 million for the whole year? Heavily in Q2? [Multiple Speakers] It will go up over the next quarter. It will go up. No, it's really -- I don't have really the focus story in more detail per quarter. But you saw some pictures about the execution of significant investment programs that the projects that we're running. So we will be in the range of EUR600 million to EUR700 million. Today, it would be let's say, too early to say exactly. Is it more EUR600 million or EUR700 million. We are pushing hard. We want to accelerate the project. We want to invest as fast as possible. And it will -- I can only, sorry for this bit of provocative free market in the beginning, but it will go up in the coming quarters, and we will end up in EUR600 million to EUR700 million for the total fiscal year. All right. And maybe finally on the working capital and cash flow. I think it's understood what the reason behind inventory is. How quickly is this resolving or turning around? And will you expect for the full year cash flow, still the same numbers as before? So numbers for the full year don't change. We have EUR450 million to EUR500 million out. And it will -- I would say, evenly spread out over the quarters to develop to that direction. Please bear in mind that we have our standstill in Pirdop, we will be considerably building up anodes on the 1 side. On the other side, we will have some relief in other inventory levels. So all in all, it will even out -- throughout the year, we will end up with EUR450 million to EUR500 million. Thank you. While we have no further questions, then we will close this analyst call, and thank you for your attention. Have a nice afternoon and good-bye.
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EarningCall_748
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Good day and thank you for standing by. Welcome to the Ensign Group, Inc. Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Thank you, and welcome, everyone, and thank you for joining us today. We filed our earnings press release yesterday, and it is available on the Investor Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. Pacific on Friday, March 3, 2023. We want to remind any listeners that may be listening to a replay of this call that all statements are made as of today, February 3, 2023, and these statements have not been or will be updated subsequent to today's call. Also, any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. In addition, the Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our wholly owned independent subsidiaries, collectively referred to as a service center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other operating subsidiaries through contractual relationships with such subsidiaries. And in addition, our wholly owned captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims made coverage to our operating companies for general and professional liability as well as for workers' compensation insurance liabilities. Ensign also owns Standard Bearer Healthcare REIT, Inc., which is a captive real estate investment trust that invest in health care properties and entered into lease agreements with certain independent subsidiaries of Ensign as well as third-party tenants that are unaffiliated with the Ensign Group. The words Ensign, company, we, our and us refer to the Ensign Group, Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the Service Center Standard Bearer Healthcare REIT and the insurance captive are operated by separate wholly owned independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities as well as use of the terms we, us, our and similar terms we may use today are not meant to imply nor should it be construed as meaning that the Ensign Group has direct operating assets, employees or revenue or that any of the subsidiaries are operated by the Ensign Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday's press release and is available in our Form 10-K. Thank you, Chad, and thank you for joining us today. We were pleased to announce yesterday another record quarter. These results demonstrate yet again that our local leaders and their teams continue to be the examples of post-acute excellence as they wade through the evolving landscape in each of their markets. They have again achieved record results in spite of the continued disruption in labor markets. Remarkably, we saw continued improvement in occupancies, skilled revenue and managed care revenues. We are particularly pleased that we achieved sequential growth in overall occupancy for the eighth consecutive quarter, with same-store transitioning operations increasing by 2.9% and 4.3%, respectively, over the prior year quarter. As of the end of the quarter, our same-store occupancy reached 77.8%, and we continue to get closer to our pre-COVID occupancy levels, which was at 80.1% in March of 2020. We are amazed by the commitment of our caregivers and their continued endurance and strength. We've also been very pleased with the progress we've made in improving our skilled mix. As those that have followed us know, growth in skilled mix only happens after our local teams demonstrate over and over that they can achieve successful outcomes for sicker patients that need more advanced care. During the quarter, our same-store operations grew their skilled mix revenue by 9.1% over the prior year quarter. Additionally, in the wake of the pandemic, there's been a lot of noise around potential shifts to home-based care or lack of support for inpatient post-acute services from hospitals and managed care providers. But when compared to pre-COVID levels, our skilled mix has remained elevated, showing just how important high-quality post-acute services are within the continuum of care. We've always been confident that our skilled mix would continue to be strong but we are very pleased to see this continuous fundamental growth and skilled mix as it demonstrates the increasing and sustainable demand for skilled post-acute services without a significant impact from COVID. We continue to be impacted by the labor environment, but we are very encouraged by the improvement in several key internal performance areas that show that these issues are stabilizing. For example, we continue to see the rate of wage inflation slowing down as we've experienced two quarters in a row of slower wage growth. In addition, while our use of agency labor is still high, higher than we'd like it to be, we are encouraged to see several markets becoming less and less reliant on agency labor. In addition, we also expect that as wage inflation moderates that our need for agency labor will also continue to decrease. Lastly, we are also very pleased to see improvements in our employee turnover due to our leaders' relentless effort to create an employee-focused culture that aligns with our collective core values. Recently, the federal government extended the state of emergency to April 2023, which keeps in place many of the regulatory and other reforms of assistance helpful to patient care. Additionally, the government has indicated that PHE will end in May of 2023. We also continue to benefit from FMAP bolstered Medicaid funding in several states, some of which will end or phase out throughout the year. However, this federally supported funding will be replaced in large part with appropriate state-based funding, ensuring a relatively smooth transition. In addition to occupancy growth and continued skilled mix improvement, one major aspect of our company's resilience has been and continues to be our local leaders' ability to acquire struggling operations and transform them into facilities of choice for their communities. This ability, combined with a strong balance sheet allow us to increase the number of acquisitions we do in times of uncertainty when many operators are choosing or being forced to exit the industry. With the 17 acquisitions that we completed on February 1, we have now added 37 affiliated operations since July 1, 2022. We remain confident that our operating model will continue to allow each operator to form their own market-specific strategy and adjust to the needs of their local medical communities, including methods for attracting new health care professionals into our workforce and retaining and developing existing staff. These transitions will take time, particularly given the higher-than-normal reliance on agency staffing prior to the acquisition. But with each new operation, we are creating new opportunities for the next generation of leaders and look forward to working together to help each operation reach its enormous clinical and financial potential. I want to speak briefly about our ability to execute on the acquisition of a larger portfolio. In November, we announced that we agreed to acquire 20 California buildings that have been operated by North American health care, which we will operate. Just two days ago, we closed the transaction, and we're very excited and encouraged with how things have gone so far. Over the last few months, we've had several investors ask us about our ability to execute on larger acquisitions while reminding us that the last larger deal we closed was the Legend transaction in Texas, which was a similar size. Those that were following us back in 2016 will remember that the Legend transaction took several quarters to produce the results we expected. We were very open about the lessons we learned that made that transition a little more challenging than we anticipated. But as we look back, we worry we haven't done a good enough job at telling the massive success story that the Legend operations have become. Those operations have been contributing a significant amount to our earnings for several years now and are currently achieving a lease to EBITDAR coverage of 2.1 times. To give an even clearer picture, the EBITDAR growth from acquisition until the end of 2022 has increased by over 160%. We certainly made some missteps early on in our approach to the Legend acquisition, but even with those short-term setbacks, we would not be as strong as we are today in Texas without them, and we'll definitely do that deal over and over again. I'd point to this example not to suggest that we expect the exact same results in this new portfolio. I do so only to underline how we look at acquisitions, including larger portfolios. We never acquire something for its short-term impact. We acquire a single building or 17, if and when we see significant opportunity to create lasting long-term value to our portfolio. For the last several months, we have been preparing for these additions and have been implementing lessons learned in 2016 and 2017. All transitions take time, and we expect these will be no different, but we are thrilled and grateful to have the opportunity to work together with our new partners in this California portfolio as well as the other geographies and look forward to the contribution they will make to this organization over the next 20 years. As we evaluate our expanding portfolio, we see more organic growth potential within our existing portfolio than ever before. As we relentlessly follow and protect the cultural fundamentals that got us here, we are confident that we will continue to consistently produce world-class clinical and financial performance. We are very humbled by what we were able to accomplish in 2022, while dealing with so many unusual challenges. But we also know we can still do much better and are excited about the potential within our portfolio as we continue to apply our proven locally driven health care model. We are issuing our annual 2023 earnings guidance of $4.60 to $4.74 per diluted share and annual revenue guidance of $3.55 billion to $3.62 billion. The midpoint of this 2023 earnings guidance represents an increase of 12.8% and over our 2022 results and a 28.3% higher than our 2021 results. We are excited about the upcoming year and are confident that our partners will continue to manage and innovate through all of the lingering challenges on the labor front. And when we consider the current health of our organization, combined with our culture, and proven local leadership strategy, we feel we are well positioned to have another outstanding year in 2023. Thank you, Barry. As we expected, we continue to add to our growing portfolio and are very excited about the 12 new operations we added during the quarter. These newly acquired operations include three skilled nursing operations in South Carolina, one skilled nursing operation in Arizona; six skilled nursing operations in Texas; and two skilled nursing operations in Colorado, totaling an additional 1,505 new operational beds. We always place the highest priority on growth opportunities within our existing footprint and are very excited about the additions to some of our most mature markets like Arizona and Colorado. Each of these operations were very carefully selected and will bolster our ability to fulfill the needs of our health care partners and geographies we didn't previously or it simply enhances our service offerings and markets we have been in for years. We are also particularly excited about completing our first set of acquisitions in South Carolina since we entered that state several years ago. As we said before, entering new states is challenging and can often take time to gain the trust of the local health care community. Each of these operations in South Carolina is off to a great start, and we hope that we will be able to continue to build the Ensign footprint in the Mid-Atlantic region. In addition, we also completed the previously announced acquisition of 20 skilled nursing operations in the state of California that have been operated by North American health care. The real estate assets are all owned by Sabra Health Care REIT and have been added to our long-term triple-net master lease with them. As we said when we announced this transaction last November, honored that Sabra will be entrusting us with the operation of this portfolio and are very excited to expand our growing relationship with them. These California operations are a perfect fit with our existing footprint in some of our strongest and most mature markets, as well as giving us an opportunity to move into the Bay Area. As we evaluated the size and scope of the 20 building portfolio, there were three operations located in the Sacramento area that were geographic outliers for us. In addition, given the size and scope of the remaining 17 operations and the amount of resources that are necessary to transition that many operations at one time, we determined that the best course of action was to partner with another like-minded operator on those three operations. So as of February 1 and with Sabra's consent, we entered into a sublease for the three Sacramento operations with Aspen Healthcare. In total, Ensign affiliates will operate 17 of the 20 buildings, adding 1,462 operational beds to Ensign's portfolio and Aspen will operate three of the 20 buildings, representing 245 operational beds. Just a side note, these subleased operations will not contribute to our overall performance. Aspen is a very reputable operator that currently operates 34 skilled nursing facilities in California. We have enormous respect for Aspen as an operator and believe that they are in a great position to build on the quality reputation these buildings already enjoy. They also have a strong balance sheet and have provided the Company level guarantee of their obligations under the sublease. As an aside, while this is not a situation where we own the real estate, as we've discussed for some time now, part of our strategy with our internal REIT is to expand our ability to take on larger acquisitions while sharing part of the portfolio with other talented operators. And preparations for future deals, Standard Bearer REIT had previously engaged in several discussions with Aspen about splitting up the portfolio in a similar way. So when this opportunity came along, the foundation that we had built with Aspen made this a very smooth process. We look forward to working with them and doing additional deals with Aspen and other operators like them. As for the 17 facilities that we will be operating, our local leaders in California with the support of the service center have been working tirelessly to prepare for this transition. While the transaction is larger than our typical tuck-ins, our locally driven approach to acquisitions allows us to rely on the dozens of CEO-caliber leaders we have in these markets to direct the transition of each operation in the same way we execute a one or two building acquisition. We are also extremely grateful to Sabra for their support during this period. We have been so impressed with the Sabra team and it's truly a pleasure to work with the real estate partners that really get it. We also want to thank North American for their cooperation during this very complicated process. Due to the uniquely public nature of this transaction, we were very grateful to be given early access to these operations during the pre-transition phase. We look forward to working together with the outstanding leaders and teams already in place in these operations to build a strong clinical and build on the strong clinical and operational reputations they have earned in their communities. As we evaluate growth from last year in cents, which including these recent California acquisitions totaled 46 new operations, we can see that our discipline is paying off. While there were literally several hundred opportunities over the last 12 to 18 months, we remain patient and we're careful to stick to our fundamental growth principles. As with any transition, it will take time for these operations to contribute to the bottom line. However, these operations are coming to us with a solid foundation of clinical and operational strength. And when combined with an infusion of Ensign cultural and operational principles, we are confident that these operations will thrive and become solid contributors to each of their markets and clusters. During the year, Standard Bearer added 10 new real estate operations, all of which will be leased to an Ensign affiliated tenant, and Ensign affiliates entered into 39 new long-term leases with third-party landlords, as this recent activity illustrates the ratio between leased and owned will vary depending on the circumstances. We are, first and foremost, focused on the operational health of all our acquisitions. So when it makes sense and pricing is right, we will opportunistically purchase the real estate. But at the same time, when attractive long-term leases come our way, we'll sign those two. And as we've shown over our 23-year history, there will be many opportunities to do both. Looking forward, we are preparing for even more growth in 2023. While we expect the pace of our closings to slow for the coming months, we continue to see a wide range of large, medium-sized and small portfolios. The past couple of years have been very difficult for skilled nursing operators, and we see evidence of that in low occupancy and high utilization of contract labor and poor clinical and financial health of the facilities that we have recently acquired. As a result, we still expect that there will be lots of opportunities that will arise throughout the year. But as we said before, we will continue to stay true to our strategy of disciplined growth. Thanks, Chad. As Barry and Chad have indicated, an important part of our story has been our local leaders' ability to acquire struggling operations and transform them into Ensign-caliber operations. Those of you who are familiar with Ensign's history now that our organization was born in challenging times, and our model has proven time and time again that industry challenges present great opportunities to innovate and thrive. While there continues to be significant growth potential in our same-store facilities, because of recent acquisition growth, the two facility highlights I want to share today are operations in our transitioning category. These examples illustrate the post-acquisition turnaround process that continues to be so fundamental to our long-term success. The first highlight is surprise rehabilitation, located in Phoenix, Arizona Metro area. This 100- bed facility was a new build that had been shuttered due to the prior owner struggles with local licensing and regulatory authorities. And when it was acquired in August of 2019, the facility had no residents and no staff. With the support of our cluster partners and the strong Bandera resource team, CEO, Brian Lorenz, COO, Heather Rucker; and Executive Director, Derek Bowen, systematically began building a team that shared their vision. Their vision attracted great health care professionals and soon their sensors and reputation were growing. The team worked relentlessly on developing high clinical standards and improving staff competency. As a result, the facility has increased its capacity to successfully treat high-acuity patients, including those needing ventilators and other respiratory care. Despite the challenging acuity, Heather and her team have attained and maintained a five-star overall rating from CMS as well as a five star score for quality measures. These clinical accomplishments have been made possible through the surprise team's commitment to creating a unique environment where people want to work. These efforts not only resulted in reduced staff turnover but also led to less reliance on agency staff despite being in an extremely competitive labor environment. This employee-centric culture also enabled surprise rehab to innovate in ways that would have been impossible for most facilities. For example, in 2021, as health care staffing challenges reached to Crescendo, the team created a CNA training school that has been recognized as a model throughout Arizona. This program has already produced over 150 new CNAs at Surprise and has been duplicated by other Ensign affiliates in Arizona to produce over 500 graduates life to date. With its strong quality outcomes and healthy culture, financial outcomes have naturally followed. For example, the facility ended 2020 at 57% occupancy. This number grew to 85% in 2021, and the facility ended 2022 averaging over 95% occupied for the entire year. With high occupancy and skilled clinical staff, the surprise team was able to fine-tune their skilled mix, and in Q4 at over 98% skilled days. And as you would expect, total revenues increased and EBIT improved 73% in Q4 2022 over prior year quarter. Growing a facility from 0% to 95% occupancy is an impressive feat in normal times. But to do it in the midst of a global pandemic and unprecedented health care staffing challenges it's truly incredible. While the surprise highlight demonstrates the incredible outcomes that are possible in a fully transitioned operation. Our second facility highlight provides a glimpse into a facility that's at an earlier stage in the transition process. The Oaks at Lakewood is an 80-bed skilled nursing and rehabilitation center located near Tacoma, Washington. Prior to acquisition in mid-2021, this facility was plagued with physical plant issues, a historically poor reputation in its community, low occupancy and was utilizing large amounts of agency nursing staff. However, Executive Director, Kasey Bradburn and DON, Erlinda Calsado saw the facility's potential and together with their cluster partners began establishing a positive culture and inspiring hope of what the facility could become. While there have been many long hard days, their diligence and their discipline and doing the right things has started to pay off. Today, the Oaks at Lakewood is rated four stars by CMS and is gaining the respect of the local provider community. Turnover is down markedly from 2021 levels. And during the last two quarters, the facility has not utilized a single shift of agency labor despite occupancy improving from 79% in Q4 of 2021 to 86% in the fourth quarter, with skilled Medicare days improving by 91% during that same period. This occupancy growth has translated to a 27% revenue increase for Q4 2022 over prior year quarter. And because of the facility's success in eliminating costly agency staff, EBIT has improved 56% over Q4 2021. While acquisitions are difficult and they require a significant investment from our local operators, these two examples demonstrate just how rewarding the work can be. We hope that these examples help illustrate some of the many different levers that our local operators are pulling in order to meet the needs of their health care continuum partners. With that, I'll turn the time over to Suzanne to provide more detail on the Company's financial performance and our guidance. Suzanne? Thank you, Spencer, and good morning, everyone. Detailed financials for the quarter and year are contained in our 10-K and press release filed yesterday. Some additional highlights include the following for the year. GAAP diluted earnings per share was $3.95, representing an increase of 15.5%, and adjusted diluted earnings per share was $4.14, an increase of 13.7%. Consolidated GAAP revenues and adjusted revenues were both $3.025 billion, an increase of 15.1%. The GAAP net income was $224.7 million, an increase of 15.4%, and adjusted net income was $235.7 million, an increase of 13.8%. For the quarter, GAAP diluted earnings per share was $1.06, an increase of 23.3%, and adjusted diluted earnings per share was $1.10, an increase of 13.4%. The GAAP net income was $60.5 million, an increase of 24.1%, and adjusted net income was $62.7 million, an increase of 14.1%. Other key metrics as of December 31 include cash and cash equivalents of $316.3 million, cash flow from operations of $272.5 million, and $593 million of availability on our revolving line of credit. We continue to provide additional disclosure on Standard Bearer, which is now comprised of 103 properties owned by the Company and are leased to 75 affiliated skilled nursing and senior living operations as well as 29, which are senior living operations that are leased to the Pennant Group. Each of these properties is subject to triple-net long-term leases and generated rental revenues of $19.4 million for the quarter, of which $15.6 million was derived from the Ensign affiliated operations. Also, Standard Bearer produced $13 million in FFO and had an EBITDA to rent coverage ratio of 2.4x. We continue to delever our portfolio, achieving a lease-adjusted net debt-to-EBITDAR ratio of 1.98 times, a decrease of 2.13 times from last year. We also own 108 assets, 84 of which are unlevered with significant equity value that provide us with even more liquidity. During the quarter, we increased our cash dividend to $0.0535 per share for the 20th consecutive annual dividend increase. Given our strength, we plan to continue our 20-year history of paying dividends into the future. We also want to address the current status of the state of emergency and reimbursement matters. Recently, HHS extended the public health emergency for another 90 days. Separately, enhanced FMAP funding was approved and will be stepped down through 2023. Additionally, the White House has made several comments that it intends to in the PHE on May 11, 2023. As Barry mentioned, we will be providing our annual earnings guidance of $4.60 to $4.74 per diluted share and annual revenue guidance of $3.55 billion to $3.62 billion. We have evaluated multiple scenarios and based on the strength in our performance and the positive momentum we've seen in occupancy and strong skilled mix as well as some additional strength in Medicaid and managed care programs, it gives us confidence that we will be able to achieve these results. Our 2023 guidance is based on diluted weighted average common shares outstanding of approximately $57.7 million, a tax rate of 25%; the inclusion of acquisitions anticipated to close in the first quarter of 2023, the inclusion of management's expectations for FMAP, grants, Medicare and Medicaid funding and reimbursement rates net of provider tax, with the primary exclusion coming from stock-based compensation. Other additional factors that could impact quarterly performance include variations in reimbursement systems, delays and changes in state budgets, seasonality in occupancy and skilled mix, the influence of the general economy and census and staffing, the short-term impact of our acquisition activities, variations in insurance goals, surges in COVID-19 and other factors. Thanks, Suzanne. We want to again thank everyone for joining us today and express our appreciation to our shareholders for their confidence and support. We know that this year will be not without some unique challenges; however, we're encouraged by our operational strength and our core business. As always, we want to recognize our talented field leaders for their heroic efforts, along with those of our nurses, therapists, and other frontline care providers who continue to provide an industry leading example of life enriching service to our residents, coworkers, and our communities. We're also appreciative to our colleagues at the service center who are working tirelessly to support our operations, enabling us to succeed in spite of the challenges we faced. Thank you for making us better every day. We'll now turn the -- turn over to the Q&A portion of our call. Carmen, can you please instruct the audience on the Q&A procedure? I just wanted to ask about your skilled mix momentum. Clearly, we're seeing evidence of your higher acuity capabilities, but also some COVID and respiratory impacts in there as well. How should we think about steady- state mix for your same-store portfolio? And then from a modeling standpoint, how should we think about skilled mix evolving through the year? Yes. I'll just -- I'll speak generally about it and let Suzanne fill you in on any other insight she has. But as we compare kind of where we are today from a skilled mix standpoint to where we were both last quarter and last year, and even pre-COVID. We are pretty confident in the strength that we're building and the momentum that we're building in our ability to continue up the acuity chain and attract sicker patients, which is ultimately, the goal to be the best resource for our hospitals and managed care partners is always at the forefront of what we're thinking and that means an evolution towards being nimble and adaptive to what their needs are and their needs include ensuring that we have the capability to care for a more acute patient. So as we look at the impact of COVID this quarter, certainly, it was a little bit higher than the same quarter last year, but comparable to kind of where we were last quarter. What we see is that even though there was more COVID activity this quarter than there was in the same quarter last year, it's not much. And so, what that indicates to us is on a steady state basis, even in quarters where we're not really impacted by COVID, we're still fundamentally higher than where we were kind of going into this pandemic. And that momentum, just it just continues. And so we're encouraged by that. Anything you want to add to that, Suzanne? No. I think you said it really well. I think one of the things that we've been noticing for the last couple of quarters is a little bit less dependent on the waivers and maybe that COVID and our skilled mix isn't as aligned. And so that, I think, as Barry mentioned, I think we're really excited for where we are and the relationships that we've made throughout the entire year with our manned care partners continue to be strong and as we continue to see that portion of the skilled mix build. Just a quick follow-up. You've noted that states have been supportive of the PHE roll off and the soft landing there. But is there any cadence -- quarterly cadence considerations we need to be thinking about as we think about the second half of the year? Yes, great question. Obviously, we have the announcement out there on the end of the PHE with the White House then leaning towards that May date. And so as we kind of look through that, we're planning on getting some additional funding through that May date from the states that have been supportive. And as we've talked on previous calls, just a reminder that was California, Arizona and Texas. I think on the last call, we talked about that California really has broken away from tying anything to the state of emergency. So, they've really said that they're going to be supportive for the remainder of the year. So, I feel great about California. Arizona has really thought through this good and well. And as they look to put the dollars in more into the rate, and so we've already started to see some of that come through in Arizona. And then Texas, I think, is the last one out there. They've kind of done a couple of things. They've looked at the PHE, but they've also done some grants that we're expecting to see come in through the year. And then as we've talked to you guys about there's that potential that we would have a hole between kind of when the state of emergency and the grants may not cover to the end of -- or beginning of September. So, we feel pretty good about how the states are lining up, what it's going to be a mix of kind of continued funding additional rate funding and then some of these grant programs that we've seen in the states put in place. Barry, what did I miss? I think that's it, Ben. I mean, ultimately, I think as our guidance indicates, we feel pretty strong about even though there are some small unknowns from state to state. Overall, I think we feel like there's a pretty clear pathway for us to not have some massive blips on the state reimbursement front as FMAP fades. Like we mentioned earlier, it doesn't really just go away. It steps down. And so even with that step down, if there were no -- like I say, it wasn't a bridge in Texas, for example, I don't think that would impact our outlook for the year at all. Congrats on closing the North American transaction. So Barry, I really appreciate the comment on the performance of the Legend portfolio. So, on the North American assets, I think Sabra has reported that their EBITDAR rent coverage for these assets have been about 1.1 times. So it sounds like this should be accretive on day one. Are these California assets different from Legend or your typical turnaround opportunities if you look at them from either occupancy, scale mix or cost-saving potential? And how long do you think it would take you to get your stabilization? And as a follow-up, could you also comment on the leadership pipeline and the current capacity to take on more assets? Yes. That's great question, Tao. We -- so this portfolio is an excellent one. It's one we've -- there was an opportunity to look at it a few years back. We're excited about them. We know these buildings. They are buildings that we have competed with in the past. They are buildings that we have relationships with some of the leaders. And so, we're really excited about this portfolio. We think it will be a great addition. I will say this, not just about North America, but about transitions we're seeing in general. Given the labor challenges just globally, most buildings and these are no exception, have high amounts of agency labor usage, and so more than obviously typical, as we're seeing ourselves. But these, in particular, have quite a bit. And so again, like with some of the recent ones we've taken on, the pathway for kind of traditional recovery is somewhat hampered there. Getting agency out of a building in an environment like now is much more difficult, as you can imagine. So that's one of the primary challenges that we're facing is just to get to where we like to be as quick as we need to be is going to be challenged by the current state of labor. That said, these buildings are in really good condition clinically and have really good culture overall. I've been able to visit a few already. I've gotten to know some of the leaders of these buildings and some of the clinicians. And given the clinical stability that exists there, I think that provides us somewhat of an advantage for us to not say, it's going to take forever. But it will take some time, regardless in spite of that. But again, like we mentioned in our prepared remarks, we take a long-term approach to these. We're not afraid of that challenge that exists. But we're going to go about it methodically and do it the right way. The other thing I'll mention, too, is just from an occupancy standpoint, the portfolio that we're taking on sits in the low 80s in terms of percentage for California, that's pretty low. So that will be another lever we're going to be focused on. And then just some other cost issues that we should be able to tackle more readily, but that all said, I don't think we're bullish enough to say these will be accretive this year, but one never knows. Hopefully, the transition goes smoother than we hope it will, but we're planning on it being in spite of all the challenges I've mentioned we're anticipating these will be kind of on our normal cadence of being successful over the next few quarters. From a leadership pipeline perspective, Tao, we have a really strong stable of we call administrators and training or CEOs and training. It's as strong as it's ever been in spite of the fact that unemployment is pretty low. And that's a really good sign. We probably will be a little more tempered in our path of growth as we digest these 35 or so buildings we've taken in the last six months as we have been in the past. But we actually, in spite of that, are geared to be able to take on many more buildings, especially in other geographies where we haven't been as acquisitive lately. So, we'll see, we'll be opportunistic, and we'll take a tempered approach to that. But we obviously will have more growth this year for sure. But it will probably come more in the latter half than in the next few months. Yes. And my second question is we noticed that the DSO ticked up a little bit sequentially. I think we also saw that in your 10-K. We updated the risk disclosure around the growth of the Medicaid managed care organizations and the potential delay or reduction in Medicare reimbursement. Just curious, if you have any general observations about the billing and collection trends, and for managed care in general, anything worth calling out there? Yes, great question and a couple of different aspects to that. Obviously, in the current quarter for Q4, we had a lot of acquisitions. And so what we talked about, and just want to remind people, during stages of heavy acquisitions are anticipated collections will be slower. That is just a normal part of doing acquisitions as we go through the change in ownership process and transfer everything over. As we kind of look for fourth quarter, it was just a little bit slower in normal and the normal basis as well. And that really had to do with a lot of managed care organizations and a couple of states paying a little bit slower than they normally do at the end of the year. With regards to the risk factor, what we added on, we did just want to highlight that there are more and more states that are changing from a direct pay system to a managed care system. So now almost all of our large states are all in managed Medicaid states. When the program goes from just a railer direct pay to managed Medicaid, the payments do come slower to us. And so our -- one of our big states, California switched in 2023 to that. And so, we just want to get people a heads up that we'd expect some slowdown in our Medicaid collections in the state of California due to that transition. Got you. And a final question, if I may. If I look at the balance sheet, right, obviously, that's under levered and you have abundant liquidity and very strong cash flow. We are forecasting somewhere around $300 million of operating cash flow and really $200 million of free cash flow for the next few years. Just curious in terms of capital allocations, what are the things that you would prioritize? I know that you have raised the dividend. You had a stock repurchase program last year. How should we think about where you would allocate capital? Yes, Tao, I can take that. This is Chad. Certainly, acquisitions would be the top of our list. We see ourselves very much in growth mode and will continue to be. And then obviously, CapEx on the physical plants is another big spend, right? And one note on the cash flows, too. When we have large or heavier periods of acquisition like we have over the last six months, that can tend to have a little bit of a drag on our cash flows and as we see AR climb a little bit with just the nature of licensing and just part of kind of the process of a transition from one operator to another. So that will actually probably impact our cash flow a little bit. I think you'll see that. But yes, I mean, as we've talked about a lot, we keep our balance sheet the way it is so that we can be ready when great opportunities arise. And as I said in my prepared part of the script, I think we expect to see additional opportunities coming up this year and next and we want to be prepared for that. So, that's how we kind of look at the balance sheet. And prepared both on the operating front as well as the Standard Bearer REIT front. So, I think as we kind of look at that multifaceted ability to acquire that would definitely be our number one use of those flows. Thank you. One moment for our next question please. And it comes from the line of Scott Fidel with Stephens. Please go ahead. Actually, just wanted to pick that right up on that last topic just around operating cash flow and maybe get a little more visibility into what you're building into your outlook for next year. You've been running in that $275 million area for the last two years. And then you've talked about in the near term, having some of these -- some of these dynamics just around the acquisitions. Is it reasonable to think about operating cash flow stepping up a bit in 2023, just given the larger revenue scale? Or are you assuming it remain relatively stable with where it's been trending the last two years? And then also what you're modeling for CapEx as well? Yes, great question, Scott. I think the one thing, when you're looking at cash flows and you kind of think through the number of acquisitions that we've done, our states can vary between four months and 18 months is the longest transition that we've ever had as they've got us on. And then so as you kind of think through where those cash flows go, we try to try to normalize it all and hope that they all come in kind of in the middle of that realm. And then after we get that licensing process done, then we have to go through the managed care process and get them re-credentialed through our new license under managed care. So that's a secondary step. And again, that can take two to six months on top of that after you've already waited. And so, it's a little bit of a waiting game. And so that's why we kind of -- as you listen to chat of use of cash, one of the things that we'll probably end up having to do is use some of that working capital to get us through those to processes. Now our hope and we have great systems and great processes that it goes very succinctly. And we're on the early end of that. But unfortunately, we are at each individual state governments processing time line a little bit here with regards to how quickly it goes through. So I think it wouldn't be unreasonable to say we would expect kind of that same flow net-net because AR will grow and... Just a little bit there. California tends to be one of the slower states too. Texas is faster than California and that's why it'll probably be a little more pronounced with this particular set of deals as well. Right. And definitely, different states have different things they turn off immediately. So Texas turns a lot more stuff off immediately. And so, we get not a dollar in the door. In California, there's a little bit we get some cash in the door quick and then we have a turn off period and then goes back on. So every state again is -- it's -- we're talking super nuance here, so a little bit up and down there. We haven't talked a whole lot very recently about Standard Bearer, but I mean, we have been preparing for this and are still thinking a great deal about opportunities for Standard Bearer. So having cash availability for deals that, again, may not fit our operating footprint, but might be good real estate opportunities or something we always want to be ready for as well, not signaling that we have anything in the works necessarily, but we have great hopes for Standard Bearer to have some opportunities as well for growth. Understood. And certainly, you have a tremendous amount of liquidity, but as we're just sort of phoning in and trying to model the operating cash flow correctly, is it -- maybe is it reasonable for us to think about that those 4Q dynamics persisting over the next quarter or two, and then you sort of get more of that cash flow normalization in the back half of the year? Or do you think that's sort of a reasonable baseline assumption? I think that a reasonable baseline yes, a reasonable baseline assumption, knowing that we did just as much in Q1 as we did in Q4. And so, I think it's a reasonable baseline. And then as we can update you guys throughout the year, as we always do, as you see the cash come in or if we see somewhat extending with regards to the timing of the licensing process, which would make it less longer or if they tighten up and they do a great job at the states and you won't see it as pronounced in the cash flows. Got it. And then just my second question. Just interested, if you can give us an update on your managed care contracting for 2023 and how you've seen your managed care rate trends sort of playing out relative to some of the inflationary dynamics? And then just interested to if you've had a chance, I'm sure you've started this for sure, to just dig into the managed care contracting at the North American facilities and whether you see opportunities to improve the managed care rates as you try to drive synergies off of those acquired properties? Another great question. I think when you think through the dynamics that we have, we do have some of our larger contracts that we feel really good about and that they have recognition that that labor has increased and overall cost has increased. And so we have at least one MCO provider who's actually recognized that I think a lot of the other MCOs are looking and still struggling with regards to our overall cost increasing. And so they're kind of at their historical rates as a starting point, anywhere between 2% and 3% as a starting point. But as we try to demonstrate to them the cost increases that we have had I think that they're -- that's the beginning of the negotiation. And so we've had some really good success with a few, there are some that are a little bit more holdout. So I think some of that progress and the negotiation time might go on a little bit longer, because where we are asking for rates to increase is higher than they've historically done. And again, we've been very successful with some of the larger ones. And remember, we don't have -- for the most part, we don't have one contract that covers the entire company, but we really have a lot of smaller contracts so that -- what happens is we'll get wind throughout the year, and then that'll kind of come in over the entire period of the year. Thank you. And with that we end our Q&A session for today. I would like to turn the conference back to Mr. Barry Port for his closing remarks.
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Good afternoon and welcome to the Charles & Colvard, Ltd. Second Quarter Fiscal Year 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] This earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things the company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. Accompanying today's call is a supporting PowerPoint slide deck, which is available in the Investor Relations section of the company's website at ir.charlesandcolvard.com/events. The company will be hosting a Q&A session at the conclusion of prepared remarks. Should you have questions you'd like to submit, please e-mail cthr@lythampartners.com. Please note, this event is being recorded. Good afternoon, everyone. Over the past few years, our focus has been to build a company that can take advantage of the longer term movement in the marketplace towards responsibly sourced gems and jewelry to capture greater market share. A recent Mackenzie report noted that consumer shopping for fine jewelry are increasingly favoring brands that act responsibly value diversity and have a compelling brand presence both online and offline. In years past, when people shot for high-end jewelry, design would be at the forefront of their mind. However, in recent years, research shows that consumers now also search for a brand that resonates with them and is socially and ethically responsible, which we believe is one of our key differentiators. Millennial customers in particular won't even consider a brand that doesn't prioritize sustainability according to Mackenzie. Since the pandemic began, the consumer buying journey has fundamentally changed, while previously customers would visit a brick and mortar store in order to try on fine jewelry items in person, the pandemic moved consumers online. Research has also shown that sustainability considerations across product categories are growing. Within high-end jewelry, the consumer cares much more about ethics than they did before the pandemic. McKenzie projects that sustainability influence purchases while account for 20% to 30% of all fine jewelry sales by 2025. Perhaps as much as $110 billion, which is more than triple the number of sustainability influence purchases in 2019. The lab grown jewelry market, which represents one of the hottest growing categories in the jewelry space and as a subset of sustainability influence purchases, is forecasted to exceed $9 billion this year. We believe that Charles & Colvard is ideally positioned with our Manotmine strategy and campaign to benefit from what McKinsey has dubbed the sustainability search, as well as our broader direct-to-consumer initiatives providing us optimism for growth opportunities for the future of the company. In order to take advantage of the movement in the market, we have undertaking key initiatives to drive long-term value in the company. This includes focusing on finished jewelry products, the utilization of one of our long-standing core strengths in the production and faceting of loose gemstones to now include lab grown diamonds. Diversifying our product offering beyond created moissanite to include lab grown diamonds and colored gemstones. Expanding our direct-to-consumer footprint, which includes our online focus, our signature showroom initiative, and some exciting opportunities we will be exploring in the coming quarters and building up branded distribution assets of our owned properties to become more self-sustaining while allowing us to leverage our infrastructure in the future. While the macroeconomic environment is certainly providing some near-term pressure to the industry right now, we have begun to take steps to diligently manage our expenses when possible, and overall inventory position. We believe the underlying results of the quarter are an indication that we are executing against our long-term initiatives while maintaining the strength of our balance sheet, positioning us well within the growing transformation that is taking place within the jewelry industry. So when I talk about execution against our key initiatives, what does that mean? First, as I mentioned, we are expanding our focus on enhancing our finished jewelry assortment and showcasing our value proposition with its core and original designs. Featuring moissanite gemstones in premium quality. In fiscal year 2021, approximately 62% of our total revenue was attributed to finished jewelry. That number was 68% in fiscal 2022, and during the most recent quarter end of December 31, 2022, it comprised 81%. Why the added focused on finished jewelry versus loose gemstones. For several years, we've worked diligently to become a globally recognized fine jewelry destination, rather than simply a single gemstone supplier in the wholesale capacity, which we believe limited our future growth opportunities and overall total achievable market or tam. Our second key focus area is broadening our footprint to capture a greater share of the lab grown diamond market. Data shows the number of engagement rings sold that featured a lab grown diamond jumped 63% from March 2021, to March of last year. While the number of engager rings sold with a mine diamond declined 25% in the same period. Lab grown diamonds comprised about 3% of the specialty diamond jewelry market in 2020, and that figure grew 7% in 2021. This is a growing market and we intend to be a major voice within the industry. In September of 2020, we launched Arcadia Lab Grown diamonds. While still a fraction of overall sales, it is clearly the fastest growing product category for us, with sales of 19% compared to last year's second quarter and year to date, we are up over 600% compared to the same period in fiscal 2021. Moissanite will continue to be a huge focus and key differentiator for us, but we intend decimally compete in the diamond space, adding to our incredible line-up of Manotmine gems and jewelry. As mentioned, another key focus for us is on expanding our direct-to-consumer focus, thereby broadening our footprint and providing the ability for our consumers to experience our product firsthand. As a report I mentioned at the beginning discussed there is increasing movement towards online and non-brick and mortar purchases. Clearly brick and mortar is not going away. In fact, we recently opened a flagship store in Research Triangle Park, North Carolina to expand our reach, but the growth especially amongst younger individuals is moving towards online. We have expanded our capabilities online over the last number of years to enhance the customer experience, while also looking to improve our advertising and marketing focus to build greater brand awareness. That said, the investment to capture the direct-to-consumer and online sales do come to cost. Digital advertising costs have increased substantially in the ROI fluctuates. Like many in the industry, we have refocused efforts to find ways to reach the consumer more effectively, strategically focusing our marketing efforts to find customers predisposed to our Manotmine product assortment. At a high level, online channels comprised 76% of our second quarter sales in fiscal 2023 compared to 66% during Q1 of fiscal 2023 and just 62% for full fiscal year 2022. Our strategic focus remains continuing to drive and elevate our direct-to-consumer presence and brand strategy, which we believe will better position us from long-term growth and help bolster against the current macroeconomic uncertainty and geopolitical unrest. We continue to make strategic investments in our direct-to-consumer initiatives, which we believe will further strengthen our moat and overall position in the market. Our goal is to leverage our assets in order to make Charles & Colvard synonymous with responsible moissanite fine jewelry and gemstones for the conscious consumer, which we believe is the largest growing category and opportunity in the jewelry space. We want to own more of our destiny and become a top destination of choice where our customers can satisfy all of their jewelry needs. Our web properties and flagship stores are examples of this. With a large portion of our capital investments funded and key personnel added in support of these strategies, we can now focus on ways to monetize these initiatives in a meaningful way. This will take some time to bear fruit, but we believe we have strengthen our resources and capabilities building upon our past successes infrastructure and brand equity to take the company to the next level. Clearly, the challenges in the economy are playing a part in our results. Domestic and global inflation and rising interest rates, coupled with ongoing fears of recession continue to erode consumer confidence and present major challenges for the global retail and jewelry industry. While American consumers spent more this holiday season to keep up with higher prices, we experience lulls during the calendar year end holiday season, and we expect that consumers will continue to feel pressured financially, particularly during the second half of fiscal 2023. This is not unique to Charles & Colvard and we are facing similar challenges of retailers in the fine jewelry space. At the same time however, these same challenges are providing us the opportunity to continue reevaluating technologies and strategies to better position us in the future. Some of these I've discussed already on this call, but another important aspect has been our ability to manage our inventory and cash flow. As you will see in the results, our cash position increased during the quarter, despite the net loss. Cash increased from $16.6 million last quarter to $17 million this quarter. Further, our cash flows from operations were also positive this quarter. We expect that our inventory levels, which were down $1.6 million from the most recent quarter, should continue to decrease in the quarters to come. We feel confident that we have taken decisive actions to align our go-forward growth and profitability strategies with the near term economic backdrop, to help maintain a strong balance sheet going forward. I would like to highlight again to everyone that we currently have $17 million cash and cash equivalents and inventory valued at $35 million, for a combined total of $52 million with only $10 million in total liabilities, including zero debt. So even if you ignore all the other assets we have, including net fixed assets and equipment, intangible assets such as our intellectual property, receivables and excluding any value for our brand equity, etcetera, and only account for cash, cash equivalents and inventory, less all liabilities. it comes to approximately $42 million compared to a current market cap of approximately $29 million. We believe this showcases our demonstrated value. As I turn it over to Clint to review our financial statement in more detail, let me just quickly summarize. Despite the challenges in the industry, we still deliver $10.4 million in revenue, a level that's only been achieved a handful of times in the company's history. We generated positive cash flow from operations this quarter. We are transitioning the business to focus on areas that create long-term value, such as focusing on finished jewelry products and allow us to capitalize on key consumer opportunities such as diversifying our offering to include lab grown diamonds and colored gemstones, while expanding our direct-to-consumer footprint. These key areas of focus outperformed the larger top line number during the quarter, which was largely impacted by non-direct consumer sales and our wholesale loose gemstone business. Clint will expand more on this shortly. We are building value in our distribution capabilities and brand equity to better control our own destiny, meeting the consumer directly where they're shopping. And finally, our balance sheet remains strong, affording us the ability to invest in areas to enact these strategic initiatives and take advantage of key opportunities in the marketplace. At this time, I'd like to turn the call over to Clint Pete, our CFO for an overview of our Q2 financials. I'll return to wrap things up after. Clint? Thanks Don. Today I'll provide a summary of key financials for the second quarter ended December 31, 2022. Additional detail can be found in our earnings press release that we issued this afternoon and our form 10-Q, which we expect to file tomorrow. Please note that all percentage comparisons are to the second quarter end December 31, 2021 unless specified otherwise. First, we'll start on Slide 11 with comparative analysis of the second quarter of fiscal 2023 compared to the same period one year ago. In total net sell for Q2 2023, total $10.4 million versus $13.8 million, a decrease of 25%, due primarily to the economic factors Don alluded to. While revenues were lowered in a quarter, the decline was slightly less than what we experienced in the first quarter when compared to the comparable prior year period. Net sales for online channel segment, which is primarily direct-to-consumer and includes charlesandcolvard.com, moissaniteoutlet.com, marketplaces, drop ship retail, another pure play outlet totaled $7.8 million for the quarter or a decrease of 16%, but now representing 76% of total net sales up from 68% one year ago. Net sales for our traditional segment, which consist of wholesale and brick and mortar customers, totaled $2.5 million for the quarter or a decrease of 43%, representing now approximately 24% of total net sales. Finished jewelry net sales decreased 20% for the quarter, but represented 81% of total sales in the quarter up from 77% of sales in the second quarter one year ago. Loose jewel net sales decreased 40% for the quarter. As we mentioned above, due impart to our shift towards finished jury and directing consumer strategies while many domestic and international distributors reduced third calendar year forecast in overall inventory due the softer economic environment. International net sales decreased 49% as certain of our distribution partners continue to face ongoing COVID-19 restrictions and closures as well as lower calendar year end holiday demand due to consumer inflation and recessionary concerns and the global geopolitical unrest. As you can see at the high levels, our areas of strategic focus including direct-to-consumer and finished jewelry, were somewhat less impacted. We want to point out changes in our online channel segment as well as in the finished jewelry as they relate to the percentage increases of these two total revenue. We have seen increases not only in the current quarters as discussed above compared to year ago quarter, but also comparable to the trends we saw in Q1 of fiscal 2023 that had similar increases when compared to the prior year period. We are also seeing these same increases when comparing Q2 2023 to Q1 2023. Accordingly, we are becoming less dependent on the distribution network in our traditional segment as we continue to shift to a more of a direct and consumer focus in which Don alluded to earlier and is by design. Moving to Slide 12 to discuss gross margin and profit, we delivered a gross margin of 41% versus 49% in the year ago quarter, delivering 4.3 million in gross profit versus $6.7 million in a year ago quarter. Most notably, the decrease in the gross margin during the quarter was related to an approximately seven percentage point impact due to our applied labor cost that are capitalized to inventory with an additional approximately three percentage point impact due to the shift and our product makes towards Lab Grove Diamond accordingly, most of the decrease in our gross margin was due to the adverse change in applied labor cost and not the result of any large scale discounting. During the period for Q2 2023, total operating expenses increased 5%, representing 53% of total net sales compared to 38% in a year ago quarter. Sales and marketing expenses increased 6% to $4.3 million in support of our growth and brand awareness initiatives and G&A expenses remained flat at $1.2 million for the quarter. We explored alternative marketing efforts to reach a broader audio with some initiatives admitted Italy falling flat of expectations. We reported in net loss for Q2 2023 of $1 million or 3 cents loss per diluted share compared with a net income of 1.2 million or 4 cents earnings per diluted share in a year ago period. Included in our net loss per Q2, 2023 is an income tax benefit of $132,000 compared to an income tax expense to $283,000 in a year ago period. Our weighted average diluted shares outstanding used in the calculation of diluted loss per share for the quarter were approximately 30.3 million shares for the period ended December 31st, 2022 compared to 31.3 million shares for the period ended December 31st, 2021. The decrease in shares outstanding is partially driven by the impact of the company's share repurchase program. Now let's move on to a snapshot of our balance sheet. As Don alluded to the liquidity and capital position remained strong as we ended the quarter with 17 million of total cash compared to 16.6 million at the end of the first quarter that ended September 30th, 2022 or can capos also strong ending at 26.3 million up from approximately $25 million at the end of the first quarter of fiscal 2023. In addition, the company continues to be debt free. We believe our capo structure remains strong and able to weather inflationary and geopolitical factors in the near term. Our cash flow provided by operations was $617,000 during the quarter compared to $3.1 million used in operating activities during the first six months of fiscal 2023 and $121,000 provided by operations in the year ago period. The improvement and the current quarter primary reflex are continued inventory management efforts. In terms of other sources of liquidity, we have access to our $5 million cash secured credit facility with JPMorgan Chase Bank, which we renewed on July 29, 2022 for one year as of December 31, 2022 and through today, we have not access funds to our credit facility agreement as Don discussed inventory as December 31, 2022, total $35 million compared to $36.6 million as of September 30, 2022, a reduction of $1.6 million whose jewels inventory was $15.9 million as of December 31, 2022 and compares to $16.6 million as of September 30, 2022, a reduction of approximately $700,000 finished jury inventory was $18.8 million compared to $19.9 million as of September 30, 2022, a reduction of $1.1 million demonstrating a solid sell through of our finished jury in the direct-to-consumer online channels, while still maintaining a high percentage of in-stock rates to meet our SLAs. As Don discussed, we plan to remain focused on prudent inventory management strategies going forward. In summary, we remain confident in our financial strength and our continued efforts to increase shareholder of value. Thanks, Clint. To wrap things up, the jewelry industry is undergoing an incredible transformation, one that I believe we are in the strong position to capitalize on in the years to come. The results of the quarter, despite the macroeconomic backdrop show that we are executing on our key initiatives that we believe are driving long-term value in the company initiatives that we believe allow us to take advantage of our branding and distribution capabilities to enable customers to find, engage and transact with us on a greater scale. And finally, I'm appreciative of the hard work and dedication of our employees and the continued support from our shareholders. Hey guys, good afternoon. Just starting out with the online channel, I guess I was just a little bit surprised with a bit of the deceleration there. If I look at it sequentially on a year-over-year basis, and just wondering if you could break out the puts and takes of the different underlying channels in online maybe at the very least, if you could just kind of call out sort of how your own site performed during the quarter relative to some of the other items like marketplace and whatnot. Yeah, hey, Matt. Appreciate the question as usual. Certainly we had some headwinds within our online segment too as well. We attributed those to a lot of various reasons. Certainly the macro, as we stated multiple times within kind of our script the advertising spend and campaigns that we ran did not generate the ROAS that it traditionally did. So if you're basing the historical ROAS that we had, cost per clicks plus the competitive landscape, plus the economy, plus the higher interest rates to purchase or finance jewelry and gemstones, we believe it just contributed to a softer holiday, much softer. Certainly it began in October for us, and then we started to increase velocity towards November and December. But to answer your question, our direct-to-consumer presence, CDC and Charles & Colvard and owned properties performed well. We had in the marketplaces, as we had a couple individual direct distributors that were very weak and really participated in a heavy sales cadence or on sale cadence, but then kind of shifted and where they had a nice steady cadence of product and sales over last year they ran toward the end of the season in a very, very heavy, strong sale cadence. So it reduced the overall revenue in those categories too as well. So it's a combination of a multiple things within that sector, but really the wholesale piece of the business is what really know of shifted for us most but I do get your question though. Yeah. Okay. Yeah, I want to address wholesale in just a moment, but just spinning back to your ROAS comment there, Don, just curious how you think about sort of, I guess, if you're not seeing the efficacy from that ad spend that and it's understandable, I guess just given where the economy sits and to your point, cost of financing and higher ticket items and stuff like that might be seeing some more pressure on the consumer discretionary front. But how do you think about the ad spend on a go-forward basis, and do you lean out of that a little bit while we go through a softer patch, or do you just redeploy the marketing dollars in a different way to try to boost that rowhouse again? Well, we started to see the softness and the conversion rates decline in the October timeframe, right when the interest rates started climbing up, right when really the tail end of discretionary started to go away. And then we said, okay, what do we need to do? What do we need to kind of refocus our ad dollars on and we tried some alternative types of marketing campaigns more top of funnel, which did not bear fruit. The results weren't as satisfactory as we were. So that's why we've got such an increased spend with less revenue there. So we did try to branch out just because basically the average cost per click was rising between even our own search terms and keywords and phrases. We were definitely digging into the analytics and into the analysis and trying to pivot the company to find other alternative ways to drive traffic. Certainly organic is really important to us. Certainly we need to do a better job on the marketing side, but the competitive landscape for our own keywords, phrases, we've even had certain top leading customers that would really go heavy handed on our own namesake and so forth. So it's always a challenge in that category, but seen the pricing go up six-fold and specifically to some of our key search words. So we have to pivot. We have to do better, and we just need to figure it out. Okay. All right. That's helpful color. And then just on the traditional channel, you mentioned sort of the distribution side of things being the real culprit here. It has been, I guess, for the better part of the last year plus maybe, maybe even longer at this point. How small a piece of the traditional channel is that distro and international piece at this point? It seems like it just should be a lot less meaningful on a go forward basis, but if you can just help us understand how to quantify that and how it, how it moves on a go forward basis to be helpful. Yeah, sure. So right now we're looking at almost three quarters of our business is online. So that's really important, and that's by design. That's literally at the base of all our initiatives moving forward. That's where our spend is going. That's where our investments are going because we believe that generates the long dollar and the highest value proposition for us as a company and a brand. So that's most critical. Going back to your question, which specific to traditional, which is now a quarter of the business, and then you would break out the brick and mortar part of that. So the wholesale business is a much smaller representation of our overall revenue. And then, going forward, we speak about other initiatives that we have in place in other areas like our signature showroom, which if I could report on the signature showroom was incredibly exciting category and a channel for us this holiday season, and it's taking shape just right now and, and really performing better than expectations. So we're pretty excited about that. So anywhere we can control our own destiny is really important to us. So we all know that the wholesale business, has different challenges, right? So our dis our distribution partners are managing their inventories differently. They're trying to practice just in time, they don't have the capital or they don't want to make the capital investments to hold inventory, especially given the economy and what's happening in the environment. So in doing so they're reducing their overall positions and exposure. So we understand that. So that's why early on we started this shift, as we stated over, the last couple years to be able to go more direct to consumer, to look for more channels to create our own owned properties multiple owned properties, and then really reach that consumer digitally and virtual whenever we can. We talked about live streaming. We talked about shopping direct response, more of a linear comment that's going to actually be monetized in the future as we become less dependent on the wholesale arm. The pricing pressure right now between the race to the bottom and lab grown diamonds is putting downward pressure to the wholesaler on our moissanite business too as well. So that's why the more we can do direct-to-consumer, we can still realize and capitalize on the higher margins and continue to do so moving forward. So we've been making it very clear, I understand that when we say this particular section or segment is down by 49% I don't want everyone to get hung up on that because ultimately, as that becomes a smaller and smaller piece of the business, certainly that percentage is going to climb and rise. But the thought is that the online business and our direct to consumer business will grow exponentially higher as these investments start to come in and take shape. Great. If I could sneak in two more just one, since you mentioned the signature showroom, just any, any metrics for success you can share on that front. I'm just really curious how that's going, and then what would be the sort of I guess the gating items for looking to open additional showrooms? Yeah, so right now we're still in for all I intents and purposes, the beta scenario related to the signature showroom, we're testing out a lot of different things specific to the store, to the consumer that's coming to the store. We're doing things that are non-traditional, like we're doing special events, we're doing corporate alliance programs, we're doing collaborative type engagements with local community. So it's -- there's just a lot of moving parts there and we can't -- we're not giving any, guidance or forward, numbers specific to that. But we can just tell you that it is performing better than anticipated and we believe that there's definitely a future there. We believe that in some shape or form we can take this model and we can position this model in key strategic areas and demographics that are performing quite well for us within different regions domestically at this point. So the timing for that still remains open for discussion. And we're still, basically we just launched in October on the signature showroom. So we've got a few months under our belt right now. We do have some holiday traffic. Valentine's Day has been pretty exciting. Matter of fact we have a, a big event scheduled for Saturday here too as well. And these events come between, 50 guests to 100 different guests come at a given moment. So, it's been pretty exciting and we're pretty pleased with, with kind of the performance there. So I believe, in the coming quarters, we'll be able to make a, a more concrete statement as to what that looks like in the future. Okay, fair enough. And just one last one on the margin the gross margins, if, if I could Clint, you referenced that a big portion of the year over year headwind, I think it sounded like 700 basis points of it was a difference in how you're applying labor costs to capitalize inventory. Can you just explain that in a little bit more detail for us so we understand it and on a go forward basis is this, this, are you going to be applying the same methodology so that we should assume all things being equal? We should be assuming somewhere in that kind of by single digit a hundred basis point headwind on a year, year basis. Yeah, so Matt, sorry about that. Let me just address that and try to simplify that just a little bit. I don't mean to, take that from Clint, but as we start to transition our business into more of a direct to consumer as opposed to the wholesale distribution company that we were in the past or a loose gemstone, we're reducing the amount of what we call whip or work in progress related to the cutting and fasting of our gemstones. So in the past, we literally had, x number of gemstones that were cutting on a quarterly basis, on a monthly basis, and therefore that was spread out over the course of, month over month within the quarter. And it would be spread out across the board over the inventory. Now that we're being mindful of that inventory and we're not actually producing as much raw material and we have finished goods and we have inventory in stock, we don't have the advantage of that applied labor as much. And Clint, you can elaborate a little more if you want to on that, but that, that's pretty much, where we're at. And I just wanted to clarify, Matt, it wasn't a change, I think it, it was just the, the, the amount of the jobs that the process as Don mentioned, related to the fabrication of the moissanite and the raw material. Okay, got it. So we should just assume that on a go for basis inventory may, you may be able to flush more inventory, just because you're not producing to demand not just to a certain set level every quarter. You're absolutely correct. One other factor that Matt, we should consider is that as lab grown diamond pricing, becomes, it's trying to find a bottom, it's trying to stabilize. So, because there's a race to the bottom. When we first got in and we first introduced lab grown diamonds, inventory was at X price. So, and basically there was a cost associated with those particular goods that we had in stock at the time. Now the pricing is literally dropped and come down, but we still had the cost associated with those original goods, that original inventory. So we had some margin pressure specific to that. We believe we've rectified that and we remedied that and we're in a good place now as we continue to go more vertical. We basically are becoming more and more competitive and we're pricing our goods in line with the market. If not, we're actually below most of the retailers and we're more competitive. But initially to get into the space, we made a capital investment and that inventory was valued at X. So we did feel some margin pressure there. We believe that we sold through almost all of those goods and now we're pretty much stabilized. So, we will be in a much better place moving forward. Yeah, so in the prepared comments, I think it might have been something that Clint said you said you guys were expecting sort of continued softness, especially in the second half. Can you elaborate on that? Are you making sort of a larger macro call here about the economy and interest rates, or are you saying specifically that you're seeing continued softness or as doesn't make sense to spend a lot of money on marketing, therefore the sales will be soft because it doesn't make sense to, to spend the dollars? I believe there's a lot of truth in what you said and how you framed it across the board. I think it's a little bit of everything. I personally feel that the global economy, although I'm not an economist and I can't, predict what's happening, kind of, and we don't give, forward looking statements specific to that. But, certainly we believe that, I mean, I guess, in today's indication, it's up today and things are up today and optimism is up and things are moving in a positive direction. But I still believe that the consumer has, an issue specific to higher interest rates, specific to financing terms related to jewelry whether they're going to purchase that particular item or they're going to pay their rent or mortgage or they're increased mortgage, whether they're on fluctuating rates. We just don't know. So, I guess it's more of a macro scenario, but certainly I will tell you specifically, you're a hundred percent correct as it relates to, marketing dollars. If you look across the board, look at some of the other, technology companies. Look at the marketing spend and the dollars and the revenue associated with the spend, we're no different. we're looking at that. If we're not getting the ROAS or the return, we're basically going to dial back in those particular areas. So, we want to strive to be profitable and we want to do things right. We're just not out for, purely top line growth and numbers. We're trying to build a real solid company and we believe we've got some really great initiatives that we can deploy capital that'll bring value to the company. And also later on, we'll be able to monetize those channels in a much greater way than perhaps burning through cash in some of these paid in social campaigns that were run previously. Right. Well, that also connects to, what you do with that cash and if investing that cash isn't attractive on advertising because of the poor ROAS, are you better off buying shares? I think I saw on the release that you bought about 450,000 shares back, which seems like a lot, but at the dollar level that it's not a lot of money relative to the $17 million. At some point, and by the way, I know in the past, people like Alan Sykes and other, and others were really buying in a big way. It's a little discouraging just not to see really any meaningful buying lately. Is that between that and perhaps not buying the shares back at a higher level? Or can we infer that you guys think this is going to be softer for a longer period? So let me answer the first part of your question. Certainly, we made the case for why we believe that we're an incredible value and we believe that we're trading way below book. And the opportunity is there. We certainly believe in the long term outlook for Charles & Colvard and what we've kind of built in the initiatives we have in place. Some, we've discussed, some we, are still to come to fruition in the coming quarters. So, there is this thing called quiet period. So, certainly insiders, myself or whatever can't purchase within these timeframes where we have material non-public information. Certainly we did lean in and buy, a half a million dollarsâ worth of stock because we believe that that was really important and we believe that the value was there. We absolutely will consider, given, the situation and downward pressure on the stock should it be something that, is meaningful to us, given what we know to come in the future and where our investments need to go and where we believe that we're going to monetize, exponentially is not at risk. We will certainly consider more buybacks. Just in December, Clint right here, he did, purchased some shares. So, we're constantly looking to see open windows when we can actually invest in ourselves and our people. So right now we're, we did come off two yearsâ worth incredible growth and upward trajectory and profitability. We said that now we've built up a lot of cash, upwards of $20 million then. And then we were going to deploy that cash, make investments in infrastructure, make investments in our distribution capabilities, make investments in our, our enterprise resource management system, make investments in our web properties. We did that moving forward. We want to continue to be the best of breed in the e-commerce space for all things made, not mined. So we'll want to have the best in place as far as our web properties and that cost money. So we'll continue to make those investments. We have some incredible things coming up that we believe that are really critical to this direct to consumer business model that we're creating rather than, as I said in my, opening comments, a single threaded moissanite and I distribution company. So, we like to believe that, we made those announcements. We know the triggers that we need to, kind of press that are going to kind of exponentially move us to another level, but we did level set that we're going to make those investments. So again, times are changing, it's a different environment what I'm saying? So, we'll certainly look at every opportunity that comes to, increase the value of our shareholders' positions certainly I'm a stakeholder in this company too as well, and I have a significant portion of shares and investment in this company myself. So, it's within my best interest to be able to drive growth and drive value within the stock, and that's what I do every day, and that's what we all do here. So, we'll, we'll do the, we'll do what we believe is the right thing for the company. Okay, fair enough. And on the direct to consumer business what do you think that we can model in, in terms of gross margins going forward? Again we've had some margin pressure given two things. So number one, pricing related specifically as I spoke before about the initial investment in the diamond goods or lab grown diamond goods, the original cost for those goods. And then now the, kind of the reduced cost and the pressure there to be competitive and sell off those goods. The other thing that will happen is as the race to the bottom goes on lab grown diamonds, we basically have to kind of see where that goes, and we want to still make sure that we're competitive. We still want to make sure that we're in the conversation and our goal is to be one of the top destinations. In order to do that, we need to be competitive. We need to build a story of why that consumer should buy from us a compelling story with the design and the aesthetic of what we're bringing to market. But certainly there may be some pressure there. So the answer specifically, I've said this a million times, that 40% margins a very, very strong business in the jewelry space. That's just my personal opinion, and I believe that's strong. We always strive to be north of 50%. So I would say somewhere between the 40 to 50% would be a model that I could absolutely, get behind. So, again, it really depends on some key factors that may come. And those key factors are, do we want to spend money and deploy capital in additional marketing areas that we haven't done in the past? Whereas if the paid and social spend is not bearing the results that we want, then maybe we try some other type of avenues that may definitely increase the expense, but not get the return. So, we're in a complex scenario that if we lean in too much, it basically affects the bottom line and it affects the margin almost immediately. So we're trying to build a company and we're trying to grow at the same time, but it's kind of a catch '22. So, to answer your question, I believe somewhere around a 45% to 47% would be the ultimate area, but there is the possibility of some pricing pressure between the lab grown diamond, which is representing a larger portion of our online direct-to-consumer business in Charles & Colvard right now. Okay. And last question, just saying on the DTC, so if it doesn't make sense to spend money on the -- on advertising right now because of the incredibly tough ROAS. How are we going to keep the DTC from falling with all the investments and actually increased investments, it's hard to see it drop by 16% in the quarter and again, totally understand the macro issues. But I just looked at Cygnet, which I know is not a great comparable, but it's the only one of the few that's public and their sales for the quarter and in December are based on their guidance, which you updated and increased is going to be down like 5%, and we dropped 25%. So obviously, again, not a perfect, comparable and much smaller company, but the bigger question is how do you -- how do you get those DTC sales back up, especially given the tough environment, especially given that it doesn't make sense to spend a lot of money on advertising right now. Yeah. So all pointed great questions, right? So let's talk about the commentary on Cygnet, right? They're a conglomerate, they're a monopoly. They pretty much own all four corners of the earth as it relates to jewelry. So a lot of their growth has come through acquisition. So certainly, their latest acquisition of Blue Niles, that revenue is starting to trigger diamonds Direct they bought. So all of that's coming into play. Also over the years prior, they were literally just beaten down. So their growth trajectory and their success, in my view, has been a little bit skewed by that and skewed by kind of the acquisitions. They pretty much own the marketing universe as it relates to Google and Facebook and everything, because they can deploy pretty much unlimited capital to be in the top rankings and to be top of mind to most consumers. So the comparison, and I appreciate you saying that may not be a direct comparison, but what we need to do is we need to figure out where is that point of diminishing re returns. We're certainly going to continue to spend in paid advertising and, and still go there, but we need to find the really that threshold where we have to stop the spend, redeploy those dollars in other areas. We also spend money with our co-op partners in brick and mortar, and they're requesting more, brand assets and collateral and co-ops. So we need to support them because brick and mortar is still a strong piece of our business. So we're doing that. And then I guess to answer your question, we need more channels to be able to distribute our product. We need more drop ship partners that we believe can just broaden our footprint, we said footprint, maybe five times within the, the prepared remarks. And, we certainly believe that that's how we're going to do it, and that's a, a much more affordable way to kind of drive revenue into the online segment because basically it's a, a percentage of play and it's not a direct spend, if that makes sense. So we as a company are looking for more strategic partners that we have in the online business where we can represent a direct to consumer presence, control the message, control our designs in that category. Then lastly there are other channels out there besides online digitally that we can utilize a lot of these assets that we built up, a lot of the infrastructure that we put in place where we can reach that consumer streaming in more of a direct response or a linear approach where we control the, the medium, we control the messaging and we control for all I intents and purposes the airtime. So the goal would be there is to build that out stronger where we can control our destiny. There is a cost associated with that. We just need to manage through that and see where the returns are greater. So we believe we've got a plan moving forward. Certainly the complexity of the environment in the universe is there, so, we'll see what we can do in the next couple quarters. Do, do you work with influencers? Much so we do, right? So I mean, recently it was with JLO and not JLO, but one of the Jersey Shore folks JW, sorry about that. we work with a couple other influencers too as well, but the goal is to be able to really understand what the value is of those influencers. We believe right now the influencers that we've approached in kind of that direction is pretty much one and done. We did the Bachelorette, we've done a lot of campaigns there, so that was successful for us. We'll continue to do that. We're better off with those type of influencer paths, right? Certainly we have affiliate programs that have an influencer base too as well, those affiliates and we're actually growing the affiliate universe right now. But we believe that kind of coordinating with designers and other types of in influential, type folks within our industry is, is more meaningful for the future. So we'll do a little bit of, a little bit of both, but if we lean in on one big influencer and that cost associated with engagement is, X number of dollars like a Super Bowl commercial, then where are we going to be with that? So we, that's the unknown, right? We don't know if a single ad or a single influencer is going to give us, that catalyst to moves us to another level, or is it going to fizzle out? It's just going to be a one-time spend and therefore just destroy us financially. So we're trying to be prudent and responsible and fiscally responsible with our shareholder's money and with our initiatives moving forward. Hi, Don and Clint. It's Adam Lowensteiner, Lithium Partners. I've got a couple questions here from investor to emailed us. As moissanite becomes a smaller portion of overall sales and perhaps declines in sales, is there a risk to the agreement with the supplier Cree regarding minimum orders over time? I mean, along those lines, what is being done to secure better pricing on supplies of lab-grown diamonds? Okay, great, thanks Adam for that. So also a great question. certainly, if you, if you kind of look at our filings, which will come out tomorrow you might take note of kind of the consumption of raw material, which is definitely present there. We're definitely being responsible and prudent with our inventory. Certainly you see the decline in the inventory quarter over quarter and sequential quarters. We anticipate that one would assume that we're going to make responsible decisions related to wilt, which is wolf speed. Now certainly they're an incredible partner and a strategic partner, and they've been with us for over 27 years, or around 27 years. So we're all aware of the business climate, we're aware of, kind of the overall requirements and the demand. So, as we progress forward, we'll, we'll make executive decisions to manage through that. We believe that we have the type of relationship certainly we did that at the onset of COVID when it first started. Certainly, that'll be a continued conversation with our partners and we'll continue to be mindful and respectful, of that relationship. But certainly take a look at the consumption and kind of, navigate through that. As it relates to, how do we secure better pricing and lab grown diamonds? I alluded to it a little bit within this conversation. Our goal is to become more vertical in this space and become an active player, whether we become the grower and then go from grown to market, that's a, a much bigger conversation. That may come in time, whether there's a partnership like a wolf speed scenario that could come to fruition where we could literally procure the rough. I can tell you that right now we're ongoing R&D and test, and we're cutting and fastening our own rough. So that is provided by a strategic growing partnership that we have. So that's going to get us more vertical. We believe that that's going to hedge against any pricing pressure. We believe that that's going to get us more competitive and we believe we'll become a bigger player, much like we are in the moissanite world, where we basically facet and cut more moissanite gemstones than anywhere in the world. So, we anticipate one day that will be a factor in that space. So I hope that answers this. Questions on that. Next question is on inventory. Is the percentage of inventory mix changing and he's talking about the increase in finished jewelry and the decrease in loose jewels? Yeah, so certainly the goal is to provide more value to our shareholders, right? So, in the past, what I've learned is, it's a very simple exercise, right? You want to be able to maximize the value of your inventory. We're fortunate that we're dealing in commodities and that commodities, albeit somebody say the fiat money system, people say different things, but gold is gold. Platinum is platinum. So the market dictates the value of that. So when you see our inventory and you look at finished jewelry and finished goods, the valuation of that inventory is exponentially higher because it has that high gold concentration or intrinsic value that's very easily calculated on a balance sheet. So look to us to continuously build out, finished, jewelry because that's where we're going more direct to consumer, and that's where we believe is the best path forward for us as a company. Also, keep in mind as we, build out our drop ship programs and our partnerships, there's certain SLAs that are in place, which are service level, agreements that are in place that we need to maintain inventory stock and everything. So we need to maintain those inventory thresholds to be able to support them. And also as we start to see the shrinking pie of wholesale distributors or the distribution of loose gemstones, because basically they're experiencing other pressures, we actually did a consolidation between our partners and our distribution partners. So there's less of them. We're actually pushing our goods into more individual pieces than selling 500, a 1,000 of a number. So look to us to decrease our loose jewels inventory too as well, and we believe that that's a good thing. Gary, I think we have one more caller. Hi, Don, just a quick question on potential acquisitions. Have you guys been approached by any larger company to be acquired just based on you guys trading about half book value? I didn't know if there was any conversations from many other company towards you guys. Thank you. Hey, Jack, great question. I mean, it's a loaded question and obviously I can't answer that question specifically. we don't discuss any matters specific to that, but I can tell you that we've got a tremendous opportunity ahead of us. We believe there's a roadmap ahead of us, whether we become the acquirer of others to be able to grow our footprint or to grow our brand, or to grow our strategy, that remains to be seen. We're looking at every, so, certainly, I have an obligation, in the chair that I sit in to be able to review and discuss and, and take into consideration any opportunity that would present itself. So we think we're a great company, we think we're, a great value. We have a good position in the market. So, we believe there's plenty of growth for us to grow our business standalone. So, I don't know if that, kind of answers your question. Well, so you completely ruling that out. Then. If a company did approach you and you thought it, it brought superior value, then the current share price, you would consider that you're not completely shooting down that just based on where you think you can grow the company three years? Absolutely not. So, we would take any consideration, anyone that comes forward with a, a legitimate bonafide offer, we take that to the board of directors. We talk about it all the time, should an opportunity present itself and it makes sense for the shareholders and myself included across the board. Absolutely. I mean, why wouldn't we? So, given, an opportunity that could or will present itself we'll, we'll kind of visit that at the time. This concludes our question and answer session. I would like to turn the conference back over to Don O'Connell for any closing remarks. So first of all, I want to thank everybody for today and on behalf everybody at Charles & Colvard, we appreciate your time and I want to thank you all for your continued support, and we look forward to things that come in the future for Charles & Colvard. The conference call will be archived for review on the company's website at http//www.charlesandcolvard.com/investor-relations/events. To access the digital replay of this conference, you may dial 1-877-344-7529, or 1-412-317-0088 beginning approximately one hour from now. You will be prompted to enter a conference number, which will be 4241796. Please record your name and company when joining.
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Ladies and gentlemen, good day and welcome to the Tata Consumer Products Limited Q3 FY '23 Earnings Conference Call hosted by ICICI Securities 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]. Please note that this conference is being recorded. I now hand the conference over to Mr. Manoj Menon from ICICI Securities Limited. Thank you and over to you sir. Hi, everyone. Really wonderful. Good morning, good afternoon and good evening to depending on part of the world you are joining this call from. Before I handover to Nidhi for the introduction of the management, just wanted to [indiscernible] our stance on product consumer. We continue to remain constructive on the business. Nidhi over to you. Hi, everyone. Welcome to the Q3 FYâ23 call. Thank you for joining us. On the call. I have Mr. Sunil D'Souza, Managing Director and CEO; Mr. L Krishna Kumar, Executive Director and Group CFO and Mr. Ajit Krishna Kumar, COO. As usual we will first spend about 15 minutes or so going through the presentation. And we will spend most of the time on Q&A. So without further ado, over to you, Sunil. For the quarter, we grew revenue 8% like it is now 10%. Just for clarification on a three-year CAGR basis, this translates to a 12% revenue growth. Consolidated EBITDA was a bit pressured. We declined 2% year-on-year. But just to highlight last year, we grew significantly on EBITDA during the same process, so recycling those numbers. But even then, year-to-date EBITDA growth was 5%. On a three-year basis, again, EBITDA is also in line with revenue at 12%. India business grew 8, while the beverage business declined 5% primarily driven by volume. On a three-year CAGR basis, the business is still up by 12% per annum. India Foods business grew at 29 with a 4% volume on a three-year CAGR, it continues to be very, very strong growth at 21%. The international business revenue was up by 4% for the quarter bringing total year-to-date revenue growth to 7. EBITDA for the India business just to reiterate, India business 8% growth, EBITDA grew 13 which means EBITDA margins expanded. However, inflationary pressures, currency and lag in pricing in the international business and more about that when I come to the detail, breakdown the consolidated EBITDA. Margins in the international business improved by about 240 bps quarter-on-quarter. The primary reason for the softness in the India business was continued stress in rural and especially in tea there is a very high factor of seasonality, especially up north. And therefore, delayed winter in our salient markets led to market share softness. However, in salt we've continued to go from strength-to-strength and despite a 33% increase in price during the year we have continued to gain market share. Our growth businesses are now a significant portion of our business where we started with a 6% in FY '20. We are up now 13% of our business despite the top-line of the overall business as I mentioned grow by 12%. So they continued to show very strong growth 53% year-on-year. Next slide. Yes, so key business snapshot India Beverages 1200 crores revenue growth, negative 5 -- volume growth negative 5. India Foods, volume growth of 4, revenue of 29 mostly driven by price increases and revenue close to 1000 crores now. U.S. coffee because we did a fair price exercise to take up price rather than taking up naked pricing. We saw an impact by volume but just to highlight that in international markets, it is revenue top-line which matters more than the volume per se. And we had a healthy volume, -- healthy revenue growth up 11% but there is a currency in that even if I strip off the currency, we grew by 1% in U.S. coffee. International tea, volume was about flat, which is actually good news given the previous quarters that we've seen and constant currency revenue growth of 2% because there is a pound to rupee impact in the total revenue which was negative 1. Tata coffee had a strong top-line growth, though volume growth was negative 9, but that was driven more by timing of sales of coffee, which happened in the last quarter and pepper which we expect in the next quarter taking advantage of price arbitrages between quarters. Consolidated all-in 3475 crores at 8% revenue growth. On a nine-month basis, overall revenue growth of negative one for India 3765 crores, India Foods up by 26, at 2700 crores, U.S. coffee revenue growth of 18% constant currency 10 not 1000 crores, international tea again constant currency growth of 2% close to 1500 crores. Tata coffee has breached 1000 crore mark very strong top-line growth, all-in the cross 10,000 crores for the nine months, our constant currency growth up 9%. In financial terms 8% revenue growth negative 2% EBITDA, 1% growth on PBT. We had an exceptional primarily on conversion of a JV into a subsidiary in South Africa which was driven group net profit up by 26. Before exceptionals The net profit is down 5%. Our cash compared to the same quarter last year is up by about 10%. For the nine months cumulative 10% which is double-digit revenue growth, crossing the 10,000-crore mark EBITDA up 5, PBT up 7, group net profit up 33 driven by this quarter exceptional coupled with previous quarters exceptional from Tata coffee. And group net profit even before exceptional items up by 10%. Now if I go to just highlight the actions that we've had on our strategic priorities, we're making consistent progress on reach. Now, we had made a commitment right in the beginning when we started off. We started out September of 2020 [thought in] [ph] 12 months we will double our numeric reach or direct outlet and in three years we will double as numeric reach. Now, just as a perspective, we are quite close to that and then we had made additional commitments through the year as we went by. We have said that March of 2023, we will be at 1.5 million outlets direct. We are close to 1.4 right now. So more or less on track to meet that number. And our target that time in September 21, when we started off was numeric of about 4 million outlets. We are about 3.6 all-in across all our categories right now. But the one issue which we are seeing is that as initially we had combined our sales force to drive efficiency, but now as we increase our portfolio, we need to release bandwidth. And therefore, we are going to split route separate for food and beverage broadly in a simplistic sense in all 10 lakh plus towns which will give us now increased depths in the outlets that we operate in, in this large urban areas. Apart from that gap in distribution is primarily in semi-urban and rural. So there'll be a significant moment from sub distributors to distributors in the next two or three months as we see to improve direct coverage in semi-urban areas. We have been making phenomenal progress on the channels of the future, if I may call it, modern trade and ecommerce has doubled as a percentage of our business over the last three years. It continues to go from strength-to-strength, we are up by 34% on revenue on ecommerce and 17% on modern trade. Next slide. We continued to focus on execution focusing on our strong brand of chakra in the south. We launched our full coffee variant. Incidentally, the Tata coffee Grand Blue Label is a coffee chicory mix, whereas up north, consumers prefer coffee and are willing to pay a premium. So we've done that long. We finished our brand harmonization part one which is putting all our value propositions under the Agni brand and continue to drive our premium variant of Tetley. Next slide, in salt apart from strengthening the Tata salt, which is what you see on the right-hand, which is continuing the questioning of A&P that we have out there in the market apart from that, we continue to look at both expanding our value-added range as well as our mass range. So our [indiscernible] has got off to a good start across the country. In addition, as you'll see, we are now looking at iron-fortified and vitamin fortified. Shuddh which is our launch down south in weaker solar salt areas. We have learned from the pilot rejigged the mix and relaunched it. Apart from that, as I mentioned earlier, 40% of the market for spices is down south. We were not serious players there. And now we have entered Karnataka and seen a very good response to our new blend offerings. Next slide. We continue the momentum on innovation; innovation from point 8% when we started is now we're targeting to exit this year at a 3% plus. We have put out a premium range of Tata premium moved into 2-in-1s and 3-in-1s in coffee with Café Specials. NourishCo, we have got the first launch of juice jelly combination in India, and this has got to a great start and the Chef Style Masala which is a sprinkling of spices in whichever format you would want. Next slide. Tata Raasa, our launch of RTEs and RTCs in the Western developed markets is off to a good start with launch. We shipped our containers in December, albeit it's been a bit slow. But now we've got started. We relaunched Tata Soulfull Ragi Bites with extra creamy fill. Apart from that I talked about the south spices. Rock Salt is taking off in India in a big way right now it is. Rock salt is doing very well. We have launched iodized rock salt variant for the value seeker. The vitamin D plus calcium range I already talked about. Next Slide. We have now integrated our R&D into three big centers. We've got a Center of Excellence sitting in Bangalore, which is a prime center of operation for us. Apart from that Sri City smart food facility is now our Process Excellence Centers for all food and beverage. And in Mumbai, we've set up a sensory and a kitchen expertise for the Foods Innocentre. Next slide. Our growth businesses, which is Sampann, NourishCo, Soulfull and now Tata Smartfooz is up by 53% year-on-year for the quarter, and as I mentioned the contribution has moved from six to 13 over the last three years. Next slide. On sustainability, we continued to go from strength-to-strength. We won awards for reporting. We linked up with Wastelink, sorry, recycling of waste into animal feed and Damdim Packaging Centre won the energy conservation award for 2022. Next slide. Talking of our different business per se, India Beverages, I already talked about negative 9% and revenue driven by negative 5% volume. We've lost a bit of share. But just to give you some details out there, that revenue has declined because of both pricing corrections as tea prices have come down coupled with some volume declines. And the volume declines have been largely led by the fact that we've seen continued pressure on rural markets as well as a delayed winter up north. Just as a prospective. Winter setting late, I would say probably early to mid-December from then on, we've seen some volume traction. I would still keep my fingers crossed because seeing that we are back on track but December was decent, January was better than December. So we're hoping that we're off to a good quarter. Despite that, just to highlight on a three-year basis, we are still up by 9% on revenue. Market share is, I will say largely a mathematical calculation because we are stronger up north, so if the north doesn't fire. Then in the mix of things our share does come down. So hopefully as the north picks up now, we will start seeing the share coming back apart from the fact that rural should start coming back and they're improving our distribution in semi urban and rural. Coffee continues on a strong growth trajectory of 34% Next slide. Despite the fact that we took a 33% price increase in salt, we continue to show volume growth is 4 revenue growth 29 and with execution and continuous branding efforts, we have a 90-bps market share gain. Next slide. NourishCo, 66% revenue growth, 119 crores for the quarter. NourishCo is on track to deliver 600 crores for the quarter just as a perspective May 2020 when we bought out this business, it was at 180 crores. And we continue to drive this growth both through geographical as well as portfolio expansion. Tata Copper Plus is now running consistently the third quarter in a row at 2x of last year. Next slide. Tata coffee driven primarily by coffee prices per se had a strong revenue growth of 25% both plantations coffee as well as extractions. Revenue growth, overall plantations was negative because as I mentioned, coffee we sold in the previous quarter and pepper, we are planning for this quarter. Next slide. Starbucks just as a perspective, we suggested the last 12 months we've added 65 stores and this number will keep climbing as we go forward. We opened another new store during the quarter, we are now up to 311 and we're present in 2 new cities going up to 38 totally. Incidentally, the business continues to be EBIT positive. On the international front, U.K. was 1% revenue growth, market share broadly maintained, we have now integrated Teapigs' the system. While Teapigs did show a decline that was primarily because consumers are moving from online to offline and we do expect people to start coming back as offline starts growing in line. In the U.S. market, we had 1% revenue growth on coffee. Tea, while revenue declined more or less, we gained a little bit of share on tea and we continued to maintain our shares more or less in coffee. Canada continues to be our star performer growth in both specialty tea as well as black driving a total of 5% revenue growth, and we continue to maintain very strong market shares in Canada. I hand you over to LK now for the financials. Talking through performance highlights for the quarter three. First commenting on the standalone performance we see revenue at 2153 crores higher by 6%. You need to remember that the 6% growth actually consists of a growth of [indiscernible], but more than a 25% growth in the foods business and we expect, like Sunil mentioned around some temporary reasons we expect tea growth to come back in the subsequent quarters. In terms of EBITDA, we grew more than proportionately 17% growth driven by cost initiatives driven also by improving margins in the foods business. In terms of consolidated performance, revenue at 3475 crores up by 8%. And within that you have India business growing by -- India branding business growing by 8%, International up by 2% and non-branded by 22%. So overall, the performance has been very strong in the foods business, slightly underperforming in terms of the international business and tea business that we hope to catch up going forward. In terms of EBITDA, you see a decline and as Sunil mentioned, the decline is primarily due to the international business which saw a lower profit compared to the same period in the previous year. We talked a little more about it when we come to the segmental disclosures. Going through the consolidated P&L, overall, we talked about revenue growth in EBITDA, I'm not going to repeat that here. But the point I wanted to make was, if we look at the PBT before exceptional items, notwithstanding the decline in performance of the international business, we are more or less maintain the same number as in the previous year. In terms of exceptional items we have 79 crores and this is largely consisting of Joekels transaction that Sunil mentioned. Basically, this is an accounting required by the accounting standard because what was earlier a JV is now becoming a subsidiary and we'll go into consolidation. So it is accounted as the sale of minority interest and coming back into the results as a subsidiary. Effective tax rate slightly lower is because of the fact that the Joekels transaction is not liable to tax. It's only in the consolidated book. Group net profit, 364 crores higher 26%. Now, between PAT and group net profit, we have to share our profit loss from JVs and associates, you'll see that in the statutory results. You'll see it slightly worse compared to the same period in the previous year, because the low profitability primarily in the plantation business and one-off costs in the Starbucks business. On a year-to-date basis, we are talking a top-line growth in double digit of 10%. EBIT growth of about 5% and overall PAT growth of 27% after exceptional items and a group net profit growth of over 30%. Moving on, on a standalone basis. As I mentioned earlier, standalone performance has been strong with a 6% revenue growth and 17% EBITDA growth. In terms of exceptional items, no material change. Overall PAT high by 27% compared to the same period in the previous year. One interesting point to note is compared to the year-to-date performance, like you'll see that overall income to EBITDA, overall, we are improving in terms of EBITDA, that's the message that I want to leave compared to the same period in the previous years. Whether you look at, the year-to-date, or you look at the quarter goes through an improving trend. So the underlying India business profitability from situations you had earlier of higher [key] [ph] cost, input cost inflation, I think they're slowly recovering and coming back to a better profitability position. Looking at the segment performance, India business 70% of revenues and 77% of segmental results, international 30% of revenues and 23% of the results. If you look at the individual table, we talked about the India businesses, overall having growth in profits, better than face growth 14% versus 8%. International business you're seeing a decline of 39% and the segmental result of 88 crores compared to 144. But like I mentioned earlier, the segmental number for the international business in quarter three is better than what you saw for quarter two. So there is some improvement. We have taken a price which is hitting the U.K. market. And some of the price increases taken in the U.S. will be reflective in quarter four and beyond. And we are also having further costs restructuring opportunities, which we're working on, which will unfold over the next couple of quarters or so. Yes. So just in summary, for this quarter, we've seen demand impacted by sluggishness in rural and semi urban markets and the delayed winter in some of Australian markets. Like I said, we're putting corrected actions and focus on execution, whether it is expansion of distribution into rural or as I mentioned, December and January look slightly better. The impact of inflation and monetary tightening on the economics and currencies of our key international markets remains a key monitorable. We are taking in both actions both on the pricing front, as well as, as I alluded to last time around structural cost actions. Overall, we have been able to deliver double-digit growth for nine months while balancing margins in an extremely challenging global macro environment. If you look at the India standalone business 8% volume, 13% EBITDA growth so we have expanded margins in India, despite all the challenges. The tea business, as I mentioned, was subdued and in foods business we have taken a key price increase to mitigate input cost, inflation but continue to execute and deliver market share. Our growth businesses have sustained their trajectory continues to keep us in plus and increase its selling. Our out of home businesses, NourishCo and Starbucks are continuing to fire on all cylinders. In the international business, I already talked about pricing as well as structural cost changes. You've already seen some moves of the pricing the 240 bps improvement in EBIT margins that I think this quarter you will see substantially more. And despite the inflationary environment and investments required, our consolidated EBITDA margin has expanded quarter-and-quarter and we will continue to do this balancing act of both market share and margins. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Abneesh Roy from Nuvama. Please go ahead. My first question is on the India tea business. So you mentioned that you'll be working on further expansion in terms of the rural distribution. So I wanted to understand what was the other large Pan India player, in which state would you plan to address this issue? And what kind of gap that you have in mind? And second is, on the competitive intensity from the regional players and other large tea players, how is the situation currently? Thanks, Abneesh. Now if I at very specifically versus our large other Indian competitors very, very simply put, if you look at mathematics, we are about 10% to 12% behind on distribution and we are 10% to 12% behind on market share. So while different markets around the country might play out differently. But overall, broadly, I have to make up for 10% increase in distribution assuming they stay flat, they will not. So we have to be slightly ahead of the curve. So that is the whole focus that we need to close the distribution gap, which in turn will help me close the market share gap. Now if I answer your specific question of where are we trying to close the big gaps? It is in 2 or 3 specific markets. From a value perspective, we have to close our gas in rural Tamil Nadu. In volume gaps, we have to close our gaps in Eastern UP, right, and in some parts of Maharashtra. So these are the big focus areas, but the thrust on increasing distribution in semi-urban and rural is across the country. Just as a perspective, we have a base of about -- I would say about 4,000 DSRs today. In between the split routes, which are to improve depth in large urban areas where we already are decent, not good, we are still decent. And between the extra [indiscernible] street to expand into semi-urban areas, we will be adding anywhere from 35% to 40% of the total DSR base as we go forward. And this will be very early on, we've already started the work. So that's number one. Your second question on locals. See, locals will always be there over a period of time, the brands will take over, and brands will continue to grow. If you look at a 3-year CAGR, we are still about 140, 150 bps above from where we started. You will keep having the small blips up and down, but we do believe as we expand our distribution as we continue to provide value to consumers and as we continue to power our brands with ATL, we will move the unbranded to branded. In the shorter blips when there are price movement especially to the downside, you will have some niggling issues come up, but we remain focused on the longer-term perspective. Sure. My second and last question is on the Sampann business good or strong 37% growth in both Q3 and Q2. So here my question is in terms of pricing -- would you need a price war within the brand? So will you straddle the full price equation, which you have done in your tea or your salt business. When I see your own group company BigBasket, I do see they have Royal and they are popular and there's a big price difference also. Especially given [indiscernible] segment very aggressively at some stage, what is the purpose in terms of full price saddling over the medium, long-term? So Abneesh, whether it's BigBasket or RIL, you have to remember one fundamental thing. I mean there is a huge, huge, huge runway in all the Sampann category, right? [Consolidation] [ph] number into lakh plus crores category and the whole branded play is less than 1%. So today, I would worry more about how I would execute and I would move. I'm not worried too much about the other players out there because I think I've got enough to do on my plate on execution. That's number one. Number two, as regards pricing, I would be very happy to do whatever it takes, providing I make money in the category, right? As long as I'm in positive margins and I'm getting volume growth. I need to balance both these factors. I need to build up sustainable long-term margin-accretive businesses. That's how I would see it. Right now, Sampann is a lower-margin business, and we are driving top-line growth. I think they've got a decent balance. But if we see opportunity to drive it still further by making sure that we've got a consumer winning proposition, right? We need to give consumer a clear reason of why Sampann and why not something else. As long as we have that, there is no reason we will not drive it. Today, we have enough on our plate, but we will continue to look for opportunities for growth. So my question regarding India Food business, despite of portfolio strengthens and the merger of Tata Soulfull and Tata Tea. We have sold only 4% volume growth. So can you talk about what are the challenges we are facing for the volume growth of the newly launched product or and existing products? So Sumant, very simply put, the entire India volume story is overwhelming salt story rather than anything else, while everything else provides decent revenue. You have to remember that tonnage comes completely from salt because just as a perspective, it's probably 1:100,000 sort of or 1:10,000 ratios between the other categories and salt. And I would like to emphasize -- I do not think you would have seen in the last, I'm taking a pun here, probably 15, 20 years where you've seen a 33% increase in salt. So this has been a very, very unnatural year where we've taken these aggressive price increases. Despite that, we've grown volume and we've maintained/grown share. So I would think that -- for that I would commend the team on that. And all that I would say is, if we are seeing stable cost scenarios going forward, and there's no reason why it should not in a given circumstance, but it changes on a daily, if not on a quarterly basis, then we should start seeing volume growth also come back. Salt, we do believe will come to a mid-single-digit sort of volume growth. LK? I thought your question was overall on food. So if you have to look at foods, you have to look at Salt. And Sunil spoke a lot about Salt. But if you move away from salt because you combine Soulfull and other things in your question, right? The rate of growth is much very, very different, right? Sampann grew, I think, over 35% in this quarter. And then, we have Soulfull also growing at 20%, 25%. Triple digit. Sorry, my mistake, triple digit in value terms. And an important part is some of the new launches like Masala Oats has already got double digits or even a high double-digit share in some of the modern trade outlets that they are. So the trending is very good, even though they are smaller, right? And the third part of our growth portfolio is the liquid, right? Thought it's not part of food size still going to talk about it, which is the NourishCo part of business, and that again saw growth in close to triple digits. Overall, the growth portfolio grew at about 50%, and we had the same growth rate, I think in the last quarter as well. But these are small today, and hence, when you just look at weighted average volume number, we are not actually understanding the true trajectory of this. Okay. So why I'm talking about extra salt, can you talk about how is the volume growth when we talk about pulse and resin, how the volume growth happening there because that has a higher contribution in Tata Sampann. Yes. So just as a perspective, we are into [indiscernible] double-digit on Sampann and close to a very, very high double-digit growth on Soulfull as well. So if you take individual categories of tea, we are about 2.7 million outlets numeric. If you take salt, we are in the similar ballpark 2.75 million outlet. But if you take the total Soulfull is about, I think, about 300,000 outlets; NourishCo is about 600,000 outlets. But if you take total Tata Consumer total reach of selling any single product, we are at about 3.6 million outlets. Sunil, just your response to the previous question on the distribution. Just wanted to dive more on that front. So first question is, I just wanted to understand how different is the distribution strategy for the foods business and for the beverages business? Because you talked about having different sales force. So that was question number one. And sub-part to that is, you talked about the depth of distribution for Soulfull and NourishCo. But just want to understand what is the scope with respect to the distribution for these categories, say, in the next 12 to 15 months? Sheela, very simply put, let me dial back, right? When we formed Tata Consumer Products, we actually created a distribution system from scratch. And that point of time, we built a system, which was designed to deliver synergies, and that's why we put up I think over a period of time, we came to close to 3,500 plus DSRs, common sales person carrying both food and beverage operating from a common distributor. Now with that, we have reached individually about 1.9 million to 2 million for tea and a similar number for salt. And in terms of direct coverage, we were about 0.5 million outlets for both, right? So we used to get a multiplier about 4% to 4.5% on each of these categories, the wholesale multiplier. Now what is happening as we are expanding our portfolio, expanding Sampann, expanding Soulfull and even in salt, launching multiple variants, et cetera, is now at the front end, we are seeing that we need to open up bandwidth in case we need to expand the portfolio. The salesman is not able to sell the whole range, and therefore, we are not able to get depth. And that's why we still -- like I said 2.7 million in tea is not the same as 2.7 million in salt. But total, when you put it together, it's about 3.6. So we do believe that in large urban areas, now we've got the scale and the portfolio to play and that's why we're separating it out. We do believe the total 3.6 might not increase dramatically in the urban areas, the 3.6 million to 4 million, I think, will happen more in semi-urban and rural. But in the urban areas, I think now the throughput per outlet, the portfolio and the assortment for outlet is what will get us growth and that is why we are splitting the routes. Just as a perspective, NourishCo is a totally different ball game because the distribution is ready to drink the outlet and or even the way the product is distributed is completely different, so we kept it separate. It is not part of the system. That is a separate system, which is moving, I think, we've moved on about 150,000, 200,000 outlets to about 600,000 outlets now. The universe, let me just say, if you take a Coke and Pepsi, I'm sure you'll get the numbers. We've got a very, very long way to go. Soulfull, I would say would be in a significant portion of our 4 million outlets. For that, we've got to -- I mean, right now, it's about 300, it's about 10, it's about slightly lower than 10%. But you have to remember, it came from 15,000 outlets just about 1.5 years back, right? So we've got it to this level. Now as we expand bandwidth, I think you would see that also accelerating significantly. So Sampann, actually, if you look at the grocery and the kiryana stores sell very similar products to tea. If I benchmark to that so it should be a 80, 90 index to my tea distribution. Just on the perspective in Soulfull, if I take the other large competitor, we are about 40% indexed to their distribution. So in the short-term, it will be to bridge at least that gap and then drive it beyond that. Sorry. Just a follow-up again on this one. So what I understand is on Sampann, we have the most opportunity to expand our distribution because of the core. And probably, how far we have reached according to you versus our expectations, say 2 years ago? So we are pretty decent. But here is the thing Sheela, I mean if you look at the categories per se, they are present in 80%, 90% of the outlet, but difference is the prices and the type of product that is there in the market is significantly different. My pulses are unpolished, I operate at a slight premium to the local. My spices are differentiated. I operate at a slight premium. My dryfruits are still online, have still not gone offline. But it is a journey of category development and making sure that we do have consumer pull as well as push at the same time to expand. But you're right, in terms of a runway, in terms of distribution, I would probably, if I rank it, I would say Sampann is the biggest opportunity followed by NourishCo followed by Soulfull. Understood. And my final question is, do we see any further business rationalization over the coming quarters or something, both domestically or globally? So number one is our overall global simplification, which is already in play, where we aim to reduce from 43 to about 23 to 25 operating entities. The good news is, we just had Tata Coffee NCLT just before this call, and we finished that -- shareholders. So we do expect, by end of Q1, that should be kicked in. We have started already moving the different pieces that we can move while this is in progress. So that will be one big piece that you will see. The second big is, I talked up structural cost interventions in the international space. That is the second piece that you would see. On the India piece itself, I think now we are pretty stable as an organization, there are muscles we need to build, especially in R&D, in digital, expanding distribution in semi-urban and rural, building out analytics, building out RGM, that we will continue to be on a journey. Hi, Sunil. Thanks for the opportunity. Sunil, if I look at 13% of your business, which is a growth business contributes to 53% of growth. So almost the entire growth is coming from this new business. And you're building up a couple of distribution strength, I would say, in NourishCo is a different distribution strength than food and beverage are a different distribution strength. So in the building blocks, if you can help us understand, in beverage, let's take NourishCo, what are the other things you would like to add organically or inorganically? And where are your journey in all the three different verticals? If you can help us also in understanding the management depth you have built on all these three, it will help. Chanchal, I like the mathematics about 13%, 50%, I think that's a good way of looking at it. But just as a perspective, I think the issue is not whether the growth businesses should be growing at 50% or not, they should be. I think the issue is, we need to jump start our India Beverage volume growth and accelerate our India salt growth. So that will change the trajectory. So that equation will change dramatically as we go forward. In terms of India Salt and India Beverage business can at most, I mean, correct me if I am wrong, grow 5% to 6% volume, if I look at next 3, 4-year CAGR. This growth business to fire for you to see sustain a 15% kind of growth. No, no. So you're absolutely right. And that's why we've defined our -- the platforms that we will operate in very clearly, right? We've defined the core. And in the core, the job is to, as you said, mid to high single digits is a very good number in terms of volume growth. And then, there is a ready-to-drink beverages business. There is a Sampann pantry business. There is a pantry business, which is under the Sampann brand. There is mini meals, snacking and breakfast, which is now right now under the Soulfull and a little bit under the Yum side brand. And we just entered the protein platforms, right? So we've defined our platforms. Within those platforms, there will be categories which we will play, some of them organically, some of them inorganically. For example, when I say breakfast, mini meals and snacking. Breakfast is a tick mark, it's Soulfull. Mini meals, we are sort of about somewhere there. Snacking, we are yet to seriously make moves, right? So we are currently in planning stages, both organically and inorganically. And you're absolutely right. The idea is to become a large, strong multi-category food and beverage company. So what to do? Sure. That answers my question. And just building a block when you are trying to build up the India business, specifically, if I look at the NourishCo or Tata Gluco Plus, I mean, those business will require some additional -- the organic, inorganic, the distribution is totally different game. The second part of the question is, I mean given the management attention or management focus on the international business that is, again, you devastated many businesses. What are your thoughts here? How soon you look to build that business or diverge that business because that is a drag for your profitability and also a drag for your management bandwidth? So Chanchal, actually speaking, the international business, if I dial back 12 months earlier or 12, maybe 15 months earlier, the international business was accretive in EBIT margins to the India business. It is just this entire commodity currency and demand softness which has seen the trajectory. It's taken us a bit of work to do but I do think in the next couple of quarters, it should be coming back very strongly to being accretive again to the India business in terms of margins. No. I mean, again, taking, stretching it a bit, but the business doesn't have a pricing power. Correct me, if I'm wrong, the business growth is slower than the India business. And business, we have seen this business history for the last 5, 10 years, you've not been sustaining the growth. So I mean, if you can address this and why retain this business, I mean because good period requires but places where we see the commodity inflation, the business seems to not have pricing power? So I wouldn't completely agree with that Chanchal because if you look at results for tea and coffee players across, we have been stressed because of multiple reasons. I do think we can put it back to a bit positive margin. That's number one. And number two, I also alluded to structural cost actions to make sure that they are rightfully being accretive to our business. So I think it's not a question of or, I think it's a question of and, and I do think we can do this. It doesn't take too much we've got dedicated teams out there. So it's not taking off too much management bandwidth from that perspective. If the India business doesn't deliver then you can rightfully point the finger but I do think the India business is going to come back pretty quickly. So therefore, I would say it's [antigen] [ph]. Sunil, we'll go to the webcast for a few questions now, okay? So Sunil, there is a question from Latika from JPMorgan. She's asking, what in your view are sustainable volume and value growth rates for your core portfolio of tea and salt. Should we expect these segments to register mid-single-digit volume growth and high single-digit value growth over the next 2 to 3 years? Absolutely. Latika, I think this is exactly what we've been saying for a long time and our view doesn't change here. We should see mid-single-digit volume growth both for tea and salt coupled with pack price, price mix as well as premiumization efforts. We should be high single-digit value growth undisputedly. And history proves us right. Just for example, in the India Beverage space, India Tea, I mean if you look -- dial back, it's been about a 5% volume growth. It's just that we've had so many upheavals in the last 2 or 3 years that the whole category growth has been 3.5. But I do think once we find stability in the entire picture, we will start seeing mid-single-digit growth. Thank you, Sunil. The next question from her is, could you provide some flavor on margin profile of Sampann portfolio? Is the top-line growth coming at the cost of profitability? Does it imply, you will use the high margins of salt business to build Sampann. What could be the profit margin range for Sampann portfolio on a sustainable basis? If you can't share absolutely specific numbers, please provide some benchmarking versus the India business market? So I would like to make 2 or 3 statements on the overall growth businesses the way you look at it, right? There are two specific ways to look at it. On a gross margin basis, they have to be positive and they have to start moving in the positive -- a continued upward positive direction. That's point number one. Point number two, as you build scale in these businesses, we might put in infrastructure and/or A&P costs early. And as we get scaled, then we get leverage, and therefore, the total EBIT margins in those businesses will start looking positive. Now Sampann is a lower-margin game than our base businesses. But that said, we've been improving quarter-on-quarter and moving it in the positive trajectory. As we start getting scale as we start building the brands in the hands of the consumers, and we expand our portfolio, move to more value-added stuff. We do expect that this will continue to expand. Just for example, the gross margins in the Sampann Yum-side ready-to-eat portfolio is accretive to my base business. while if you take pulses, it is probably at the lower end, spices would be in the ballpark. Thank you. And last question from her is, please provide some color on Sampann revenue profile in terms of premiums of pulses, spices, RTE et cetera? And how should one think about revenue growth in profitability mix going forward? First of all, I mean, before I get into this, I would also want to emphasize that one of the bugbear for Tata Consumer is our ROCE and Sampann is a significantly high ROCE because there is no capital involved per se. It is completely outsourced manufacturing and distribution. That's number one. Number two, in terms of revenue profile, it is almost exactly in line with the way the market is. Pulses is the most significant followed by spices. RTE is very small. RTE will continue to be small because just to remind everyone here, RTE, the international opportunities 10x that of the India opportunity. India opportunity is about 150 crores only. And just as a perspective, for pulses 1 lakh crores opportunity. So India RTE will continue to be small. India RTE would urge you to look at the margins and not the revenue numbers, the revenue numbers will come from international space. The next question is from [indiscernible]. He's asking India Beverage market share loss, is it to lose an unorganized players? Or we have lost it to the other large branded players? So let me just say the two large branded players, both of them have lost share to the loose and locals. That, in my mind, is a temporary phenomenon, which should get corrected as we go forward. Yes. So there's a question on the arrangement with Tata Chemicals. And I think as LK have already answered in terms of the agreement there. There is no change. There is another question on, how will NourishCo grow? And is the purchase of Bisleri conflict with Tata from [indiscernible]. So before I answer this question, I would just like to reiterate what I said in an interview in the morning. Whenever we look at acquisitions, we look at value building. We look at growing our total addressable market as well as growing total shareholder returns. So we are mindful any category like we walk in or anything that we look at inorganically, we have to deliver the right returns to shareholders. I won't get ahead of myself by trying to comment on Bisleri. All I can say is that we are in active discussions. As and when something materializes, we will definitely come back, explain the rationale for what we are doing, if we are doing it, if it goes through and there are plans for it going forward. Okay. So if I understood the question right, how does currency impact you? That was the question. Currency impacts us both in terms of transaction as well as translation. We buy tea out of Kenya, which is priced in U.S. dollars. The drop in British pounds and our inability to take quick pricing in that market meant that it had a transaction impact. And on top of that, the drop of the British pound versus the Indian rupee meant that there was a translation impact. So currency overall has both a transaction as well as translation impact on us. Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments. I would just put in a summary about, I do think if you take where we have come from, our businesses are on decent footings. We do have work to do to jump shift our volume trajectory in beverages, and I think we've got a very clear action plan in place. We've got to put our international margins back to where they were or where they should be. And we have started taking corrective action, including price hikes. We will continue to remain focused on execution, in terms of innovation, distribution, branding, et cetera. Our portfolio expansion is on track. We moved our growth businesses from 6 to 13. We are focused on cost and efficiency, something that we didn't talk about. In the last 3 years, our headcount as a percentage of revenue has come down by 100 bps. Other overheads have come down by 130 bps. Our working capital in terms of number of days is down by 60%. Our whole strategy of simplifying, synergizing and scaling is on track, and now we will move to the execution pieces of some of the things that we've already put in motion there. Okay. Thanks, Sunil. Thanks, everyone, for joining us. And if you do have any further questions, you can get in touch with us. Thank you, again. Thank you. Ladies and gentlemen, on behalf of ICICI Securities Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.
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EarningCall_751
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My name is Henrik, and I'm the technical operator for today's call. Kindly know that the webinar is being recorded. [Operator Instructions]. One last remark. If you would like to follow the presented slides on your end as well, please feel free to go to roche.com/investors to download the presentation. At this time, it's my pleasure to introduce you to Severin Schwan, CEO, Roche Group. Mr. Schwan, the stage is yours. Thank you very much, and a warm welcome from my side. Thank you for joining us for our management brief -- our briefing on the 2022 group results. Let's get right into the numbers. Overall, we delivered a good performance in both divisions very much driven by the newer medicines on the one hand and a strong base business in Diagnostics. This was partly offset by the starting decline of our COVID-related sales, which amounted to roughly CHF 1 billion last year. Now as far as the pipeline is concerned, on the one hand, as you know, we did have some setbacks last year, but we also made good progress in our portfolio. We launched in particular by Vabysmo, off to a very good start. We also launched Lunsumio. We'll talk about those opportunities later and there's a lot more to come for the current year. Now just to remind us again, we did deliver on the guidance, both in terms of sales and core earnings per share. And on that basis, the Board is proposing to the AGM to increase the dividend to CHF 9.50. Now if you look on the divisional results, you see a 2% growth on the Pharma side. So if we would correct here for the COVID sales, actually, the underlying growth is 4%. And on the Diagnostics side, again, if we would correct for the COVID-19 testing, then the underlying growth of the base business is 7%. So on that slide, actually, you can see the impact of COVID-19 also on a quarterly basis, and it's quite interesting to look at it. And if you focus into the kind of last 4 quarters on the slide on the right-hand side, you see in the first quarter last year, we still had double-digit growth from COVID. That came then sharply down to flat growth in the second quarter. And you saw a declining business, as expected, I should say, in the third quarter of 6%. So what you also see is in the fourth quarter, we have again a positive growth. And then is really driven by one single order we got at the very end of the year from Japan, an order which has been placed already for some time for Ronapreve and that brought us up to 4%. But if you look at the underlying business, we clearly see that impact of the declining COVID-19 business, and that is going to accelerate for 2023, but we'll come back to the guidance in a moment. So here again, on that slide, on the left-hand side, you see a bit more granularity in terms of what is happening with the underlying business. Diag base business up CHF 900 million. So this is the 7% I referred to. And if we then include the CHF 0.5 million COVID-19 testing sales, which we reported last year then you come to the overall 3%, which I showed on the initial slide. Now on the Pharma side, actually, for the purpose of this slide, we excluded 2 parts. On the one hand, COVID-19-related sales, which is Ronapreve, and that was positive because of this Japan order. If we wouldn't have had the Japan order actually would have been negative as well. And you also see this impact, the negative impact of Actemra, which is also driven by less demand for COVID-19. And then on top of it, we have continued erosion on Avastin, Herceptin and Rituxan AHR of CHF 1.9 million. So if you correct for those 2 effects, then the underlying growth has been CHF 3.4 billion. So you see the business, the underlying growing business is -- the underlying business is growing in the high single digits, very much driven by the newer medicines. Now I find the right-hand part of that slide, quite interesting as well. If we look back over the last 5 years, in 2017, we still had the full sales for AHR. You can see this was about half of our sales for the Pharma division. And you can really see 2 things here. One is we were not only to compensate for that decline, but actually, we grew the business overall from about CHF 50 billion back then to over CHF 60 billion today. But what you also see is how much the portfolio has diversified. We have a less prominent position in oncology, even though this remains our most important segment, but we have entered other areas, in particular, neuroscience, of course, with Ocrevus, with Evrysdi, with Enspryng. We are the leader in hemophilia A with Hemlibra. And you see this kind of small part here, this slice in light blue, which is Vabysmo. And for sure, that part of the pie chart will enlarge over time as we see a very strong growth for Vabysmo, and an area where we want to take a leading position. So again, here, a slide which shows the rejuvenation of our Pharma portfolio. Last year, in addition to the launch of Vabysmo, we also launched Lunsumio, the second new molecular entity, as you know, in blood cancer and there's more to come in this field also this year. We expect, hopefully, 3 NME launches this year, glofitamab, in aggressive lymphoma. We have the collaboration with Sarepta in Duchenne. And we actually wait for data for crovalimab, which should come in very soon. Here, again, a look at the underlying business, excluding COVID-related sales. And I guess the message here is we have a good uptick in the fourth quarter, actually both in Pharma and in Diagnostics, with a 5% growth on the Pharma side and 8% growth in Diagnostics. So good momentum as we ended the year. Now stable margins. In terms of core operating results, and I'm sure Alan will be later dive a bit more into the overall financial results, including the nonoperating items. Good. As we announced this morning, the Board is suggesting a dividend increase to CHF 9.50. Let me conclude with the outlook for the current year. We have a number of readouts. Thomas will cover that in more detail. Let me just make a comment on tiragolumab in non-small cell lung cancer. As you know, we didn't reach the positive result for progression-free survival. And as you also know, we are waiting for the overall survival results this year. So just let me again talk about the time lines during this year. First of all, I should say we have no data in-house today. We have no additional information. We have no data in-house. And we expect an interim readout still in February. But from all what we know today, the most likely scenario is that the study will continue until the final readout in the second half of this year. So we think this is about 6 months later. It's an event-driven study, but it will only read out in the second half of the year. And again, this is by far the most likely scenario. There is, of course, as always with an interim study, a possibility that we either get a positive or a negative result. If that should be the case, then we will immediately communicate that result to the outside because that would clearly be material. If, however, the study just continues until the final readout, then we are not going to make a specific announcement. In other words, if you don't hear back in February, then you know that the study will continue until the final readout in the second half of this year. Good. Just a word on the sales outlook. We've guided, as you have seen for low single-digit decline, and it's really entirely driven by the expected decline in our COVID-related sales of roughly CHF 5 billion. That is about 8% of our overall business, and we will largely compensate for that. We've also given you a guidance here of what we expect on the AHR front. We expect a further erosion. But of course, in the meantime, this is on a much lower level at CHF 1.6 billion. But what that means is for the underlying business, as an implied conclusion, that there is a strong growth on the Pharma side, of course, and a strong momentum from our ongoing launches and existing portfolio. And we also expect that our base business in Diagnostics is going to keep a strong momentum. So overall, low single-digit decline on the sales side, core EPS to develop in line with sales. And on that basis, we should again be able to further increase the dividend in Swiss francs. Thank you very much. And with this, I hand over to Thomas. I guess the last time that you present Pharma before you take over from me in March. Over to you. Thank you very much, Severin, and good morning, and good afternoon to everyone. Now before I go into the presentation, let me just comment on the changes that were announced this morning. First, Teresa Graham, who has been announced as the CEO of Pharma. And the second change is that in the future, Levi Garraway, our Chief Medical Officer, and Head of Product Development, will also have a seat at the Corporate Executive Committee. With that, I'm very happy that we have a complete team in the CEC and also happy with those 2 people because they are great leaders. And they both have an extremely good track record, and they're known for the good expertise in this area. So now let me take you through the numbers for Pharma. Now with sales of CHF 45.6 billion, we had a strong growth of 2% in constant exchange rates. And you see that, what Severin has said, is that Actemra and Ronapreve had a certain effect on the sales. So underlying, the Pharma business was actually growing with a good 4%. And then looking at the different regions, let me just give you a bit more insight into that. In the United States, as you know, we never had access to Ronapreve. But here, we had the impact of Actemra, which was used to fight COVID-19. Without this effect, underlying, the U.S. was growing 2%. In the EU, we had both Ronapreve and Actemra effect. Without this, the EU was growing 7%. Without Ronapreve, orders to the Japanese government in Japan, we were growing 3% and international was 5%. So you see an underlying good growth and dynamic in the Pharma division. Now let me take you through the P&L. I mentioned already the sales. The core increased by 5%, so ahead of sales. And with that, we increased margins to 42.1%. And taking you to the next line, the royalties and other operating income, which grew slightly faster than sales. Now here, we had 2 different effects. On the one hand, we had the income from the Ultomiris pattern settlement. And on the other hand, last year, we had CHF 0.6 billion impact from the Ronapreve profit share in the U.S. These 2 things basically equal each other out, but these were the underlying effects in that line. Cost of sales decreased 2%, while volumes increased 7%. And here, we also have some special effects underlying, where we had higher costs last year due to costs related to COVID-19. M&D increased in line with sales and R&D costs increased by plus 1%. Here, again, we had some onetime effects last year related to COVID-19. Without that, we would be growing more in the 4% to 5% range. So overall, a good-looking P&L. From a portfolio diversification perspective, you see the acceleration of the newer products. At the same time, you see impact of biosimilars in the lower half. Now if I would add together the top 6 growth drivers, Ocrevus, Hemlibra, Vabysmo, Evrysdi, Tecentriq and Phesgo, these all add about CHF 3.6 billion in new sales. We have 16 products now with more than CHF 1 billion in sales, 2 that are emerging, Vabysmo and Phesgo in the coming year. On the bottom half, again, Avastin up there, and Herceptin, and AHR declined CHF 1.9 billion, so less than what we had expected. And we do expect that in the coming year, it will be around CHF 1.6 billion. So the erosion is declining further. We did have impact on the Lucentis and Esbriet. Esbriet is here, this being a small molecule, we had generic erosion in the U.S. And as it is with small molecules, this is a pretty fast event. In Lucentis, we had a minor part of this being switches to Vabysmo, and I'll talk about that later. And also, we had some biosimilar effects here. Now let me take you through more details on the different parts of our portfolio. First, starting with the oncology portfolio. Kadcyla, growing 7%. And this growth is really driven, ex U.S., in early breast cancer and this is overcompensating declines in the U.S. Perjeta, growing 5%. This is driven on the one hand by international, specifically China as we got onto the NRDL last year. And also, we do see a decline in the EU. But this decline is due to the fact that we actually have a switch to Phesgo. And you see that Phesgo is growing extremely well with 121%, now making CHF 740 million. And about 33% of all patients on Perjeta were now already switched to Phesgo, and we see this conversion ongoing. So the outlook is for this coming year, that we will continue to see a strong conversion and also growth for the Perjeta and Phesgo combination for the switch from Perjeta to Phesgo. And for Kadcyla, we see the sales to be stable in the coming years. On the hematology side, with Venclexta, we have 2 pivotal Phase III studies that will be read out in 2023. Polivy, I have a special slide on that, but the growth and uptake is really strong with 85%, and this is driven by first-line DLBCL. And the uptick in already more than 50 countries, where this has been improved as the new standard of care. With regards to Lunsumio, not much on the sales side yet because we've only launched in the -- recently in the U.S. got approval just in December. So we do expect this to have an impact in this year. One thing to note is that Lunsumio was now added to the NCCN guidelines in the U.S. as a category 2A treatment, so with a very high level of evidence. And so this is good to see and will certainly help our uptake. Finally, Alecensa, a fantastic medicine coming from our Chugai partner. Here, growth of 15% and the first-line market share is more than 70%. And we do expect more data coming this year in the adjuvant setting, which will fuel further growth. I promised the slide on Polivy in first line diffused large B-cell lymphoma. Now this is a disease with a very high unmet need. More than 40% of the patients are not cured with R-CHOP. And for those patients, the prognosis is poor, with a median overall survival of less than 2 years. We will present -- or we have presented updated data on Phase III results with a median follow-up of almost 40 months with a PFS benefit of -- has a ratio of 0.76. And so we have really exciting data here. And this is really recognized, and PFS is recognized as a good endpoint for most health authorities. In fact, we have more than 50 countries now that have approved this Polivy plus R-CHP combination. And in fact, we have now funding recommendation from NICE, which is fantastic that we received the end of January. And on January 25, we also received or we were included in the NCCN guidelines as Category 1, the highest level that you can get in the U.S. So this is, I think, a very good signal for us. You may have seen that there is an ODAC coming up, so an oncology Advisory Committee on March 9, and the PDUFA date is for April 2. So we'll see how this goes. And obviously, we'll present our case at the ODAC, and then we'll see how the FDA decides. Given that we have the approval in more than 50 countries, we do hope that the FDA then supports this at the end. Now let me talk a bit about the 2 CD20/CD3 bispecifics. We have Lunsumio, which comes from the gRED organization, glofitamab, which is out of the pRED organization. So Lunsumio has been launched in third-line follicular lymphoma, and glofitamab is being filed in the U.S. and EU in third line DLBCL. Now these are 2 first-in-class and potentially best-in-class CD20/CD3 bispecific antibodies, but they also address different patient needs, the off-the-shelf fixed-duration treatments with durable response and manageable safety. Now Lunsumio is good for outpatient and community settings for indolent follicular lymphoma and also for elderly or under patients. Glofitamab has a best-in-class efficacy potential and is -- can be used in more aggressive disease. On the right-hand side, you see that we have a number of ongoing trials that will read out in the next couple of years. The next slide, let me take you through Tecentriq. We have first-in-class indications in first-line hepatocellular carcinoma, first-line small cell lung cancer and also in adjuvant non-small cell lung cancer. These are the main drivers for this growth. We've had a positive readout for subcutaneous version, and this has been filed in the EU and U.S., with a PDUFA date set for September 15. Subcutaneous is much more convenient for patients and physicians. And in fact, it will reduce treatment time to 7 minutes. And here, we have the opportunity to be first in the market for PD-1, PD-L1 subcutaneous formulation, with likely a lead time of over 1 year. As you have seen, we had a first positive readout, Phase III, the IMbrave050 in Tecentriq and Avastin in adjuvant hepatocellular carcinoma, which met the primary endpoint, which was relapse-free survival. And the OS data as communicated, is still immature. And we'll share this data with regulators and at an upcoming conference. The IMpower030 in Tecentriq in neoadjuvant passed the interim analysis and will continue to 2024. Let me say we have not seen any data in-house. It was the recommendation of the IDMC to continue the study. In terms of outlook, we have this year, exciting, hopefully, data that will come in Phase III for adjuvant head and neck cancer and triple-negative breast cancer. We will then have, what Severin also mentioned, the final data of Phase III the SKYSCRAPER-01, Tecentriq and tiragolumab in PD-L1 positive first-line non-small cell lung cancer. As Severin mentioned, we have not seen any additional data. The interim OS analysis has not yet occurred. And as Severin also mentioned, the most likely outcome is that we will continue, anyway, the study until later this year, because also most of the alpha in the statistical analysis is spent on the final analysis. So this is the most likely outcome. Let me talk about Hemlibra, growing extremely well. We have now CHF 3.6 billion in sales. The growth was 24%. Growth was driven both in the U.S. and EU, beating consensus by CHF 32 million, and we do expect this momentum to continue into 2023. This is now the new global standard of care, and we have a patient share of 36% in the EU and the U.S. In the EU, we have the label extension to include moderate patients. And what's also exciting is that we've now moved our gene therapy into Phase III. This is based on 5-year follow-up data with the majority of patients with more than 1 year follow-up, showing no decrease in Factor VIII activity. So very stable expression of Factor VIII. And based on these results, we initiated the Phase III in this year. Next, let me come to immunology. Here, we have a decline of 17%. This decline was driven by 2 factors. One is Actemra and the use of -- less use of Actemra in COVID-19, and also the generic erosion Esbriet of minus 48%. Actemra is the leading RA monotherapy, and we are still shifting IV to subcutaneous formulations now, subcutaneous formulation accounts for about 60% of our sales. Xolair is doing well with 6% for the full year. Now here, we are the market leader in asthma biologics, and we will also have news this coming year for the Xolair auto-injector and also the Phase III in food allergy. Moving to multiple sclerosis, where we're the global market leader. Ocrevus is now more than CHF 6 billion in sales. We have a good momentum in Q4, and we do expect this momentum to continue into 2023. We're the #1 MS treatment in the U.S. and EU. And we're the first and only therapy in RMS and PPMS. And, it's a 6-month IV and with very high retention rates. Now in the meantime, we have 9-year follow-up data. So the data in the back is very solid from that perspective. And we have exciting news to come in the future. We have Phase III ongoing for the 6-month subcutaneous home administration. This will come in the middle of the year. And this will open yet another market for us because the IV and the subcu markets are 2 different markets. And we really have a differentiated product with a 6-month subcutaneous home administration. Further, we have completed our recruitment for the high-dose Ocrevus study, so with even higher efficacy. So again, we are continuing to develop this franchise. Now let me talk about spinal muscular atrophy. Here, this is a small molecule splicing modifier, where we have children that have less expression of SMN1, and now with this alternative splicing, we get an increase by using the SMN2 gene. We have sustained efficacy now for up to 3 years with over 7,000 patients. And this treatment is tolerated well. We have very high retention rates. Evrysdi now achieved CHF 1.1 billion in sales and market leadership in several key markets, such as the U.S. and Japan and many other major markets. The U.S. growth is driven by switching and naive patients, including patients that are less than 2 months old following that label extension. The outlook for 2023 is that we will have growth from treatment-naive patients and switches, as well as a babies of less than 2 months old. At the end of this year, we will have, hopefully, a readout for the pivotal Phase III study in Duchenne muscular dystrophy, this is an ex chromosome-linked genetic disorder. So impacting mostly boys, not only but mostly boys, where the dystrophin gene is not properly expressed. These children usually is sitting in the wheelchair by the age of 10 or 12. And they usually the die in their 20s. So this is 100% fatal disease. There are no treatments available today. So this would be a real relief for these children and these parents. This is a potential first-in-class and best-in-class gene therapy, and we have positive functional and claiming from results at multiple time points for more than 80 patients with a good safety profile. And based on that, we have also the Phase III and we expect this readout in Q4. In the U.S., Sarepta is in priority review with the FDA, with the PDUFA date set for May 29. We have 2 additional studies that will run, one for 0 to 3 year olds and then the other one for the older boys as well from 8 to 18. Now coming to ophthalmology. Vabysmo had an excellent start in the first 11 months. We've achieved CHF 577 million in sales. If we just take the last quarter, in the last quarter we had CHF 300 million of sales. If we multiply that with -- times 4, we would already in the linear run rate, be it CHF 1.2 billion. And we definitely had a strong acceleration in the U.S. after we received the J code on October 1. And about 70% of the new patients are from switches from a competitor product. 15% to 20% of the switches from Lucentis -- more the 5% to 20% of the patients are from Lucentis and the rest is from naive patients. We've received rapid uptake after the nice reimbursement also in the U.K. And in -- on the Phase III sites, we also had very positive results in the ophthalmology franchise. First. getting a third new indication, RVO, retinal vein occlusion for Vabysmo. But also, 2 positive readouts for Susvimo, both in DME and diabetic retinopathy. As you know, we had a voluntary recall for Susvimo. The device that is implanted in the eye in the U.S., we do expect to be on the market in a year or so with this device. Again, we have a very strong momentum with Vabysmo. We do believe that with bispecific, the 2 arms, VEGF and Ang-2, we are highly differentiated. And the clinicians are giving us the feedback as well that they see strong anatomical improvement. And with that, we are well positioned for further growth. Furthermore, we have also another Phase III, which is going to be started, which is anti-IL-6. And this is another pathway that up-regulated and involved in inflammation also in the eye, but many other inflammations, and we really look forward to this reading out in the future. Now this is a slide that I -- or we have shown in the past in the Q3, we just wanted to show it once again. This is a post-talk analysis of our data applied to the study protocol of another company's study. And let me first say, again, that we have dual inhibition, VEGF and Ang-2, so dual mechanisms. We have a clear anatomical benefit of drying of the eye and longer treatment intervals. And our studies actually reflects real-world practice, we're not putting patients at risk. That means we start the patients at more frequent dosing and only if patients fulfill all these 5 criteria, and they have to fulfill all the 5 criteria, then if they miss one, we already move them to a more frequent interval. Whereas in the other study, the less stringent criteria was used. And here, all patients, irrespective of disease state, where actually put on the extended treatment. And there were only 2 criteria, and the patient had to fail both criterias in order for that criteria to be changed. What we have done is we have actually applied our raw data to this study protocol. And with that, you can see on the bottom right side that 96% of the patients would be Q12 or more, and only 4% of the patients are Q8. I've mentioned the different Phase III readouts that you see here. We're very excited to present all of this data at the Angiogenesis Conference in Miami in just a couple of days. But good to see how ophthalmology franchise is developing. Now finally, let me finish with the key late-stage news flow slide. On the regulatory side, we've had approvals already for Hemlibra in moderate hemophilia A, and also Xofluza in young children. On the late-stage pipeline, we will have 19 pivotal readouts that are expected, 3 of them have been achieved in January, Tecentriq in adjuvant HCC. Susvimo in DME and diabetic retinopathy, as mentioned before. We have 3 potential new NMEs this year that are reading out tiragolumab, we mentioned that. We have the gene therapy. So really excited to see that. But we also have a number of very important line extensions that will potentially read out this year for Tecentriq, Venclexta, Alecensa, Phesgo, or the CD20/CD3 bispecifics in Ocrevus. Thanks Thomas. Thank you. Good morning, good afternoon, everyone. It's my pleasure to present the full year 2022 Roche Diagnostics results. So with sales of CHF 17.7 billion, we had good growth of 3% for full year 2022, and this was driven by strong base business growth of plus 7% and offset partly by a decline in COVID-19 testing, which contributed CHF 4.2 billion at constant exchange rate and is no longer a driver of growth for the division going forward. So if we go into the different product categories, what you'll see is our immunodiagnostics business, Core Lab, growing at plus 6%. However, excluding custom biotech, this was growing at 9%. Our point-of-care business growing at plus 17%, and this is mainly driven by our COVID-19 rapid antigen sales. However, strong base business growth of plus 13%, driven by the strong flu season in the Northern Hemisphere. Our molecular lab business, you see minus 15%, and this is driven by a decline in COVID-19 PCR testing. However, there was strong underlying base business growth, again, of 8%. Our Diabetes Care business declined by 2%. However, excluding the settlement in 2021, this business was flat and stable. Our Pathology Lab, you see 11 -- strong 11% growth, and this is driven by our advanced staining immunohistochemistry business as well as our companion diagnostics business. So if you look at the regional drivers of performance, what you see is strong base business growth across all of our regions. Starting with North America, you see plus 13 overall sales driven by COVID-19. However, base business grew at plus 7%. EMEA, you see minus 16%. However, this again, related to COVID-19, the base business growth was 5%. Asia Pacific, plus 23%, mainly again driven by the COVID-19 testing sales. However, underlying base growth was 6%. Latin America, minus 1%. However, base business growth, plus 18%. So across all of the regions, we had really good performance on our base business. So if you look at the development of the Roche Diagnostics sales by quarter over the last 3 years, what I'd like to point out is the strong base business growth of Q4 2022 of plus 8%. And in fact, if you look over the last 8 quarters, what you'll see is strong mid- to high-single-digit growth in every quarter for base business, with the exception of Q2 2022, we were heavily impacted by the lockdowns in China. Now if you look at the blue line, which is our overall sales, you'll see a minus 9% for Q4 2022. And this reflects, again, the decline in COVID-19 testing, where year-over-year, for the fourth quarter, we saw a 58% decline in our COVID-19 testing. Looking forward, we expect to continue to see good performance from our base business, and a continual decline of COVID-19 testing as the disease moves to an endemic state. So when we look at the P&L for diagnostics, core operating profit declined at 5%. And this is mostly driven by our COVID-19 portfolio where we have lower overall sales, with lower PCR and higher rapid antigen. However, overall, we managed to maintain our core operating profit margin above 20%, and our improvement in our base business productivity, where we had a decline in M&S of minus 2%, it enabled us to offset impacts, such as inflation, and fund additional R&D spending, which will drive the future growth of our business in areas such as mass spec and digital solutions. So now I'd like to talk about some of the innovation that this R&D is fueling, and specifically, some FDA approvals we received in 2022. So in Q3 of 2022, we received FDA approval for our mid- to low-throughput system, the cobas pure, which completes our family of Serum Work Area automation for the United States. Additionally, in Q4 of 2022, we received FDA approval for our cobas 5800 molecular diagnostic system. Again, this rounds out the full family of molecular diagnostics automation for the U.S. Why this is important is it allows us to effectively compete in large integrated health care network tenders, where you may have a large core laboratory as well as satellite labs, which makes us more competitive in that space. Additionally, these mid- to low-throughput analyzers are going to enable us to continue to grow our market share in mid- to low-income countries, where this level of automation fits a local market need. So I'd also like to talk about the Roche Diagnostics response to the mpox outbreak in 2022. So in May, shortly after the WHO flagged the spread of mpox outside of the country where it is normally endemic, we very quickly launched a modular virus test on our LightCycler instrumentation. In September of 2022, the FDA opened an emergency use pathway for FDA authorization of mpox tests. Within 2 months, we had received an emergency use authorization for our fully automated x800 mpox test. And why this is important is it shows our commitment to public health globally and the speed with which we're able to get tests to patients in need. So I'd also like to highlight an example of innovation with our existing portfolio. And I'll talk about our STRONG-HF trial in acute heart failure. So the STRONG-HF study was a prospective study, where we had patients who were discharged with acute heart failure from the hospital. And in the experimental arm, these patients were -- had their dose of standard heart failure medication titrated and also were serially tested with our NT-proBNP diagnostic. The result of this study, 34% decrease in hospitalization and death. And in fact, the study was terminated early due to the superior efficacy of the experimental arm. And this shows the power of Diagnostics to change clinical practice. And again, our ability to medically differentiate our existing cardiac portfolio with additional approvals. So now I'd like to turn to the topic of neuroscience, which I know figured as well into the pharmaceutical overview. Roche Diagnostics also has a commitment to deliver innovation along the patient journey for Alzheimer's disease. And what we're very happy about is our approval in Q4 of 2022 for our confirmatory test for cerebral spinal fluid for Alzheimer's disease. I would also point out that in 2022, we received FDA breakthrough designation for our blood-based Alzheimer's triage test, which is currently under development. As you all know, there is a significant global disease burden for Alzheimer's disease, where, by the year 2030, we expect over 80 million people worldwide to be suffering from this illness, and it's our commitment to develop diagnostic solutions that help them live a better life. So with that, looking at 2023, we have some exciting launches this year. One of those is going to be the launch of our point-of-care instrument, the cobas Pulse for hospital blood glucose in the United States. We also expect to launch 3 tests into our hepatitis portfolio, and as well as expand our offering around digital solutions. For example, adding medical value algorithms in the oncology field to our algorithm suite solution. Matt, thank you. Thanks a lot. Yes, I have a little bit of a package today that I have to bring together and I'll come to that. But let me first welcome you from my side as well. I hope everybody is safe and healthy and happy to show you couple of solid financials for 2022. Yes, that's why I'm saying, I think it's not just about the results, cash flow and outlook. We will come up for next year with the new income state representation. And I would like to guide you through what we're going to change and how that looks like. Good. With that, I think the highlights, I will touch on all of them. So I skip that one for the sake of time and we'll go to the group performance right away. And I think my colleagues have done a fantastic job on explaining the sales, so plus 2% in constant rates, as you can see. And then you see really the core operating profit, plus 3%. I think really good cost containment. I will explain that later on. So pretty good here. Then you see really the move from core operating profit was plus 3% to the core net income, with minus 1%. So the question is what's going on here. And there are 2 explanations for it. One is the taxes. You might have seen that the effective tax rate went from 14.5% in '21 to 16.4% in '22, that's one element. And the other element is higher interest expenses and worsened financial result, which I will come to, but I think well explainable and shouldn't be a surprise. Then the core net income from a minus 1% to a core EPS growth of plus 5%, this is the accretion effect from buying back our shares, if you like, from Novartis and terminating them -- we terminated 53.3 million shares. And as you can imagine, I think now the share base is lower, and we have a higher profit distributed to this. So that gives you a higher momentum with plus 5%. Good core EPS. And plus 5% to an IFRS net income of minus 6%. And what we've done here, we've looked at our balance sheet, we have intangible assets on the balance sheet, we looked really at the outlook for these assets and then came up with corrections and impairments. So I think we had higher impairments compared to last year that brought the IFRS net income down with a minus 6%. And then you see the operating free cash flow with a minus 8%. We'll talk about this, but nothing concerning here. We had sales with Chugai with Ronapreve, CHF 1.2 billion. We booked them at the 27th of December. And I think it is absolutely understandable that this was not converted into cash right away. That's something which will convert into cash really at the beginning of this year, so we'll have a jump start. But certainly, we're missing this CHF 1.2 billion, if you like, in the operating free cash flow. And then the free cash flow down by minus 16%. Well, as said, and -- which came through, I think we had pretty good sales and profit impact coming from Japan, where we have a higher tax rate. So we paid higher taxes for Japan and partially for the U.S. as well. So let's get now to the details. I think Severin has made and did a great job on that slide. Let me make a comment about the COVID sales. You see that on the left-hand side. I think in 2021, we had roughly CHF 7.4 billion COVID sales. In 2022, that dropped to CHF 6.4 billion. That's the CHF 1 billion. And now I think, as I said, for 2023, we expect that this will come down by roughly CHF 5 billion. So I think there will be a little bit of a tail end of the COVID sales in 2023. That's what I wanted to add to that slide. So let me get to the P&L and give a little bit on light here. And also here, my comments -- my colleagues have made comments already. Don't want to repeat the 2% on the sales side. You see royalties and other operating income, I have a slide on that one. I have a slide on the cost of sales. So that's going to come. So let me make a comment on M&D. M&D, I think, a modest increase of 2% on the Diagnostics side, really investments in digital and higher distribution costs. When you look at Pharma, certainly, we had the launches, predominantly of Vabysmo, which see a little bit of an increase here. Then you look at R&D, and that's a pretty modest increase, with plus 3%. And we look at Pharma, it's even plus 1%. But here are a couple of base effects. On one hand, we had higher R&D expenses in 2021 due to Ronapreve and Atea. And then in 2022, we had even a release of a couple of provisions. When you add that together, it's CHF 420 million, which worked for us, if you like, coming from the base effect as well as from the release of the accruals in 2022. If you were adjusting for that, I think at least Pharma would have grown by 4% to 5%. But what I want to make is the statement, we're definitely investing into R&D and we're committed to innovation. I think really then when you look at G&A, I think, really good cost containment, good management here, which then brings us to the core operating profit growth of plus 3%. Good. With that, let's go to the royalties and other operating income. And Thomas made a comment here. We had a couple of impacts. So you see really here the increase of 3%, which I had outlined before in constant rates. The royalty income came down by CHF 122 million. That is predominantly due to Lucentis. We had lower Lucentis sales, as you know. And then we have the out-licensing income increase by CHF 713 million, and that's the settlement of Chugai due to Ultomiris. So patent settlement that we have had was a onetime payment, which came in positively. And at the same time, certainly, and that's something which goes back to 2021, we missed really the Ronapreve profit share. These were the sales in the U.S., where we just got a profit share, we didn't show the sales. We just had, if you like, a part of the profits and that declined by CHF 611 million. So you see that matches pretty well. And then we had a little bit of a higher income from product disposals of CHF 116 million. Good. With that, let's get to the group core cost of sales. And also here, I think the explanations are pretty straightforward. As you've seen, I think we had a relatively modest growth, with an underlying volume growth of 6%. So you ask yourself, okay, how is that going? And what you see here is when you start really with the CHF 18.1 billion that we had incremental production cost for Ronapreve and Atea in 2021 of CHF 613 million, so kind of a base effect, and then I think really you get to the normalized number for 2021. And then when you put a 5% increase on top, you get to the 2022 number, and the 5% matches very well the 6% volume increase. So I would argue nothing unusual here. When you look at the margins, yes, let me say here, I think in the morning I received a couple of messages about -- how about profitability. And honestly, I think what you see is we defended the margin quite well. In 2022, Pharma even brought the margin up, as promised and as hoped for, and as expected, to 42%. And Diagnostics, I think, gave the explanations basically on R&D, while they have seen a decline here. When we go to the core net financial result, which worsened by CHF 475 million in constant rates. Then let me go through the explanations. Equity securities at the Roche Venture Fund, I think the market is declining. We all know that. And I think for that, I think we've done pretty okay-ish. Net interest income, I think interest rates have risen, so a CHF 37 million plus here. Currency is predominantly hedging, and that comes predominantly from Russia. And then you have the interest expenses, with a major increase of CHF 269 million. Well, that's pretty clear. That's the additional debt from the share buyback related to Novartis. We bought the shares back for roughly CHF 19 million. I think we have seen that then on the balance sheet at the end of '21, but we just had it -- in the end of '21 in 2021, and then certainly, we had it for the full year of 2022 and that triggered the increase here. Then other is really hyperinflation expenses and some losses from associated companies. Good. With that, let's go to the tax rate. And let me say here, I think we ended up with an effective tax rate -- group core tax rate, I should say, of 16.4%, which I think is not a bad achievement. We guided for 18%, around 18%, as you know, so underlying 17.9%. We had a couple of releases of tax provisions in 2022 as well, but to a lower extent compared to 2021. So I think really pretty okay with what we've achieved here on the tax side. So let me summarize that when we go to the core EPS development. And when you look at it, the plus 4.8%, which you see on the bracket above, that's the rounded 5% core EPS increase. You see operations up by 3.1 percentage points. You see then the Ultomiris patent settlement really then was basically offset and more than offset by the loss of the Ronapreve profit share, which didn't reoccur in 2022, it was a minus 1.5%. You might ask yourself, okay, when you look at the core operating profit, then the Ronapreve profit share is a lower number compared to Ultomiris settlement, so why is it now overcompensating this in the core EPS. And the explanation is relatively simple. Ultomiris comes from Japan, and Japan means a high tax rate, and it means we have a minority in play for Chugai. So that reduces that impact, and I think that movement is explainable. Then we have the net accretion of the Novartis buyback, with the plus 4.8 percentage points, and other is taxes. Good. With that, let's go to the non-core section and the IFRS income. You see the core operating profit plus 3%, as mentioned before, in constant rates. And then you see the IFRS net income with a minus 6%. And then you see what happened here in between. I think -- really, you see the global structuring plans, which are, let's say, a little bit lower than last year. You see the amortization of intangible assets, whether it's Esbriet, which I think is amortized now, so we don't have that anymore impacting this number. We have the impairment of intangible assets, which has increased compared to last year. Nothing extraordinary here. We just went through our assets. And then there was not a lot of activity on the M&A side. And the same basic lies to legal and environmental here. So I think when you then take the financial result and the taxes on top of this, you get to the IFRS net income development of minus 6%. Good. Let's talk about cash a little bit. And cash came down, as I've said, but very explainable. And I would even say, well, I think a good indications for 2023. You see really basically every number is pretty balanced. What sticks out is the net working capital movement. And let me say, net trade working capital here even -- while the accounts receivables went up, Chugai is once again the explanation here with the Ronapreve sales that I've explained before, the CHF 1.2 billion while the accounts receivable up will convert into cash soon, I'm sure. And then we have the inventories, which went up by roughly CHF 1 billion in both divisions, by roughly CHF 500 million. So that's also something we can work against and which will materialize when it comes to cash in 2023. Good, I think, really don't want to go through the margins here. Let's go straight to the group net debt development. When you look at this, I think we ended up 2021 with net debt of minus CHF 18.2 million. End of 2022, a minus CHF 15.6 billion or an improvement or reduction, if you like, of CHF 2.6 billion. Well, let me explain that quickly. I think you see the operating free cash flow, which I've given a couple of explanations about, of CHF 17.7 million. We paid the taxes with a higher number compared to the previous years and the treasury. And then certainly, the dividend payment of CHF 7.8 billion. The dividend we paid in '22 for '21 is another factor here. Certainly, I think this reduction could have been larger with the CHF 1.2 billion from Chugai and Ronapreve, which will come in 2023. Quick comment on the balance sheet just for the sake of completeness, cash and marketable securities went down a little bit. This is because we repaid debt, if you like. So we used our liquidity to do this. The other current assets is the accounts receivables, it's the inventories, as mentioned. The noncurrent assets is really the impairments reduced that by a certain number. Then we have the current liabilities, and they have decreased significantly. And then short-term debt. We have converted short-term debt into long-term debt and the team did really great because basically, when you look at the average interest rates that we are paying, I think this is pretty balanced what we had last year. So I think really great timing here. The noncurrent liabilities, very clearly, that's the long-term debt now kicking in, and that leaves us with an equity ratio of 36%, which I perceive a pretty solid balance sheet. Good. With that, let's go to the outlook and start -- let me start with the currencies here. And I don't want to go back and say, well, what happened in 2022. The major effect was that the U.S. dollar basically got stronger, the euro got weaker against the Swiss franc, and I think that balanced out quite a little bit. So I think we were okay in 2022 despite quite some volatility. And what we think what is striking, you know our model. I think we're always assuming that the year-end rates from '22 remain stable over the course of the year. And if you do that this year or, let's say, at the end of 2022 and projected in 2023, you get to heavy impacts, as outlined on the slide on the right-hand side. So impact of around minus 4 percentage points to minus 6 percentage points on sales, core operating profit and core EPS. Honestly, this is a pretty wild assumption that this is going to happen that everything stays constant. This is surely not the case for the course of 2023. So stay tuned, and we will update you on a quarterly basis, and you will see what's going to happen. Yes, and my basic argumentation certainly would be -- we have a natural hedge in all the countries and all the regions. We have also major sales. So I'm not really concerned here. Let me set the stage as well for your projections on 2023. And you know what's the core EPS. I think this is now the core EPS 2022 as reported. You find it on Page 3 in the finance report. You have to correct that number for the foreign exchange losses, good habit every year. And that number is CHF 0.32. How do you get to that number? Well, you go to Page 59 in the finance report, you'll find a foreign exchange loss of CHF 278 million. You take that CHF 278 million, you put a tax rate on it, so that reduces the impact. And then you divide that by roughly 808 million shares. I'm going to shine, if you like, -- you find that number on Page 116 of the finance report. And that brings you then to the basis for 2023, which is a CHF 20.62 billion. Good. With that, on the outlook, I think, well, I think pretty reasonable outlook that we bring in here for 2023. Don't forget, I think, really, we expect to lose roughly CHF 5 billion in COVID sales, which is a very significant number, represents roughly 8% of our sales. And you see really we work against that. Don't forget on top, we lose on the Pharma side, roughly CHF 1.6 billion due to AHR biosimilar competition. So I think really, we closed the gap quite well. We want to maintain the margin and defend the margin with the core EPS growth broadly in line with the sales decline, and we stay on track with the dividend. Good. That leads me to my last section, and this is really about the income statement presentation. And we would like to change that for a couple of reasons, and there will be a couple of changes. But let me lead you through this really step by step. The first one is really that we would like to apply more to what our peers do, and we would like to go to SG&A, to selling, general and administration. And that's a relatively simple step because we just have to add marketing and distribution and G&A. And that's what we're going to do in the future. We will introduce a line of other revenues, yes, that's another point here. So really, we had before revenue, but now we use other revenues instead of royalties and other operating income. And I think that is very important because there is a little bit, let's say, when you look at IFRS, a discussion about what is revenue and we want to project that well. And you will see there will be now a line other operating income and expense in the P&L, and that will be very much characterized by the disposal of products that will come in there, where you can debate is it revenue or not. And I think we project here evidently that this needs to be in another line. The other piece is really about removing allocations. That is certainly something we do on, if you like -- because we want to do it, we want to simplify and standardize what we're doing internally, and we had quite a hefty allocation system in Roche and we want to get rid of that. And certainly, I think what that means is that we really reduce costs that we allocate to the divisions, and that will have an impact certainly on their margins. What's not going to change is certainly the key metric sales, group operating profit and EPS, all of that remains unchanged. Good. So let me now lead you through this. I think the first step is certainly, and you see a small #1 on that slide here, right in the middle, and this is just adding up M&D and G&A, and that all this is in summary on the right-hand side, into SG&A. So we have now an SG&A line in Roche. And you see on the right-hand side how that would look for 2022. So that's the first step. And then you have the second arrow and the second -- the #2. So we moved CHF 612 million income from disposal of products and CHF 184 million in other income from -- within G&A to the new line, other operating income and expense. So you see that. And as a third step, we renamed the line royalties and other operating income into other revenue. So I think that's more the IFRS move that I've mentioned before. Good. And then the last step is really about the allocations. So we are removing allocations from various reporting lines and that leads to a CHF 660 million lower cost of sales and the CHF 788 million lower R&D costs. The major driver here is informatics cost, by the way. So I think other group functions as well, but the major driver is informatics. The sum of the 2, which accounts for and mentioned on the slide, CHF 1.458 million -- sorry, CHF 1.458 billion, is moved to SG&A, as you can see. So you see it on the far right, how the restated P&L looks like and, of course, still with the same core operating profit of CHF 22.173 billion. Good. I think that's what we wanted to bring to your attention. I think let me close this section by saying, well, very clearly, I think when you look really at core operating profit in absolute terms, I think nothing is going to change. What will change though is how the results look like in the divisions and for corporate. And when you look at the margins, and that's really on the right-hand side, on the lower part of the slide, you see for the Roche Group, the core operating profit margin remains the same with 35%. But it's going to change for Pharma, which then really goes up from 42.1% to 46.4%; and then for Diagnostics, from 20.1% to 24.7%. But this is just due to the fact that we're allocating less from corporate as we did in the past. Good. With that, I think I want to close my section as well, and I assume we are happy to receive your questions. And sorry, that it took quite a while. Perhaps I could kick off with a question around the breast franchise outlook. Kadcyla saw a decline in Q4 for the first time, is that now likely to continue? And we're anticipating some head-to-head neoadjuvant data from the same competitive product that's pressuring you in metastatic, so what's your confidence around sustainability of the franchise in the midterm as well? And then on Perjeta and Phesgo, Phesgo seems to have slightly plateaued in the last couple of quarters. So just give us a sense of what percentage of the franchise you believe you can convert by the time Perjeta faces biosimilars? And perhaps you could also remind us when you expect that actually to be? And then perhaps since among the first, it may be premature question on broader strategy, maybe a little early to comment, but is there an intent to use the forthcoming management change as an opportunity to review current group strategy, for example, as it pertains to the group perimeter, M&A intend to indeed the R&D structure of the company? Or should we really be looking for continuity of approach? Good. As I mentioned in the presentation, we do believe that for the next couple of years, Kadcyla can remain stable. And this is due to the fact that already, I think more than 60% of our sales with Kadcyla are in the adjuvant setting. As you mentioned, there is a certain competitive pressure, especially in the metastatic setting. And these trials will probably read out in a couple of years, and so we'll see how these trials are then going to read out. And depending on that, we will potentially see an impact. At the same time, we know that that's about the same time when we also have our patent life ending on Kadcyla. Now you asked the question on Phesgo. We -- and the conversion, we don't really see a slowing down of the conversion. And for Phesgo, we have a patent life, which is much longer. And this is a triple combination. So -- and very difficult to manufacture. So we do believe that Phesgo has a longer life. Then the question was around reviewing of group strategy. I do believe that as biology will be more and more better understood that diagnosis will become more accurate. It will become earlier. And this combination of diagnosis and medicines is going to be really essential. At the same time, we know that data and artificial intelligence, digitalization in health care is still a huge opportunity. It's something in health care that's lagging behind. But here, we can also have an impact. And I think this combination of these 3 fields is absolutely critical. So with that, I do believe that we have the right strategic direction from my perspective. So I have two. The first being, how big of a benefit really do you see from the IMbrave adjuvant liver cancer indication for Tecentriq, both in China and ex China? And how do you view the reimbursement in China versus the local players? And then my second question is around defending the margins in 2023. So really kind of what sort of level of product disposal income have you assumed in your guidance given we saw about CHF 600 million in 2022, should we assume kind of a continued streamlining of the portfolio? So just trying to get a feel of how much cost savings will be needed to defend the margin and kind of where they will be coming from. Yes. I think we have -- I think the guidance implies that I think we are very prepared to defend the margin. I think that's the signal we want to send here. And honestly, I think all the ingredients that you then have in the P&L have to play out. So I think we will see what that means to product disposal in 2023. Certainly, we have a certain number in mind. I think not worth to mention it now because we have to see how all the other things come together. But very clearly, I think we want to defend the margin in a period where basically we say we have declining sales, which I think is quite a commitment. So let me comment on IMbrave050. So we've only communicated top line results. These results are now going to be shared with regulators, and they're going to be presented at the next conference. Obviously, HCC is a big disease burden in China. But I would say it's still too early to comment on China. But it is an opportunity both outside of China and in China, in my perspective. A number of questions, please. I'm going to start with a big picture one. I don't know whether it's for Thomas as incoming CEO or whether it's a Severin as incoming chair. But you've lost a number of late-stage products over the course of the last few months, zinpentraxin has gone out of Phase III and TIGIT is uncertain. You still have a very strong balance sheet. M&A has not really been a feature of Roche previously, but is now the time for you to act to bolster the late-stage pipeline? But also, I'm aware that the family ownership is now much less of an issue such that a share buyback is much more possible. So is there any way that we can see improved capital allocation or changed capital allocation, perhaps, I should say, at Roche? And then just a couple of quick product questions. Vabysmo, the strong demand, can you confirm that you have no concerns about manufacturing capacity and ability to supply? And then the second issue is around Tecentriq. Adjuvant lung has been a key driver. You have a competitor with now a broader label, is there a risk to growth? Okay. So let me have the first go on the overall big picture question in terms of our strategy and capital allocation. Now first of all, the overall capital structure with the ownership of the founding families, I mean, this has absolutely no influence on how we run our operations, and there's also no impact or change in our strategy following the share by of Novartis. Now as far as M&A is concerned, yes, it's always interesting to bring in opportunities from the outside. We keep looking for opportunities which potentially arise, but there's also a price to be paid. And what we have seen in the past is, in particular for late-stage opportunities, it was difficult to justify it from a business case point of view. So we'll see in the future. But Thomas, I guess, you would agree that we keep looking, right, for opportunities as we did in the past. But I don't see any fundamental change in our overall strategy. Yes, I can confirm that. I mean we always do our due diligence. So whenever anything is on the market, we are usually aware of that. And so we look at it and we make decisions based on the science and based on the financials, and we'll continue to do that as we go forward as we have done in the past. Then you had a question around Vabysmo. If you have any concerns if we can manufacture enough, we don't see that, that will be an issue. And yes, we are excited about the strong uptake and the clinical benefit that patients are seeing with the dual action of the 2 arms of the bispecific antibody. Then you were mentioning a study that was just reading out or got approval lately in adjuvant non-small cell lung cancer, the KEYNOTE-091 study. I would say, I mean, we have looked at data. Some of the data is a bit counterintuitive. So I think it will be a bit of a discussion also among oncologists. Because actually, the hazard ratio was better in PD-L1 negative than in PD-L1 positive population. Now we -- but it's a broader label, as you mentioned. But yes, I think that would be a bit of a discussion. That's the first point. The second point is that we have the label in PD-L1 positive. We have first mover advantage and we have a significant better hazard ratio. In fact, our hazard ratio in the PD-1 positive population is 0.43 versus 0.82 in this KEYNOTE-091 study, which is a significant benefit to patients. Two, please. The first one just on the competitive landscape for Ocrevus. A lot of attention being paid to the recent launch of Briumvi/ublituximab at a lower price point. Could you just give some thoughts on how you continue to -- expect to continue to take share with Ocrevus, given that development? And then also just a clarification on tiragolumab on SKYSCRAPER-01. I appreciate the commentary that you haven't seen any of the data, but I was just going through some of the comments the company made at the ASH conference recently, that talked about the interim OS data being expected in the first quarter of '23. And then the final analysis being in the earlier part of the second half of the year. I just wanted a confirmation that nothing from a timing perspective has changed since ASH. Right. I just would like to clarify on the timing because we gave a more narrow window here. So the interim readout will actually be in February, not only in the first quarter. And the final readout will be 6 months after the interim readout, but it's event-driven. So therefore, you can't be so precise when exactly it will happen. But we have confirmed that. So that timing is confirmed. Perhaps, Thomas, if you can add also on Ocrevus. Sure. And thank you, Emily, for the question. So there are, as you mentioned, to be in class now competitors Ocrevus and Kesimpta and ublituximab. Now we have the longest data with more than 9 years of data. We're the only company that's approved in PPMS and RMS. What we also see is that the market is kind of -- there are 2 different markets. One is the IV market and one is the subcu market. And we have the 6 months, dosing subcu -- IV on the one hand, but we will be also hopefully on the market with subcu version, where the trial will read out in the middle of the year. So then we can play in both markets. Right now, I would say these are more -- 2 separate markets. With regards to ublituximab, I think from a data perspective, from where we approved PPMS with RMS and also in terms of the dosing frequence, et cetera, we see ourselves a significantly differentiated. Plus also from a commercial presence, I mean, we are much more present in the different markets than the company that's selling ublituximab. And I believe Severin answered the question on TIGIT for SKYSCRAPER-01. We don't have more information on any data, so nothing has changed. And so it's still consistent to what we said in the past. And yes, we're hopeful that this will be positive in the final readout for sure. So just excluding COVID, as we think about 2023 and sales, are there any particular moving parts that would lead to a range within your numbers? So I mean, we've touched a little bit on HER2 Kadcyla, anything unusual for Lucentis, Actemra, potential biosimilar at the end of the year? Or you feel that everything on a fairly stable trajectory? And maybe to follow up on those impairments Alan mentioned, but just some explanation about what went wrong. I noticed the hemophilia A, the Spark, there was the impairment, yet you are still planning to start the Phase III this year. So perhaps a bit of an update there and the plans for the Phase III as well. Right. So perhaps just a word on the impairments. So for Spark, it's primarily a matter of delays. Time lines have moved out actually for the whole field, but we are impacted as well. So Spark is part of that. And we also took an impairment on Gavreto. The -- you have seen that sales have been very slow and we have adjusted our projections, and as a result of it we took the respective impairment. Gavreto alone, just to put it into perspective, was about CHF 700 million. Yes, there was some more granularity asked on the guidance on a product level. Sure. As you have said -- seen both in Severin's presentation and Alan's presentation, is that the biggest impact for us in this coming year is the decrease in COVID-19-related sales of CHF 5 billion. And when you calculate that on our total sales, that's about 8%. So that's definitely the most significant effect. We also had, on one slide, the effect of AHR, which is roughly CHF 1.6 billion. With regards to other moving parts, we do believe that the [indiscernible] erosion will continue as well as on Lucentis side. We don't see any impact of Actemra in 2023 because biosimilar will not be on the market yet, more towards the end of the year. A couple of questions. So firstly, on SKY-01, just going back to the alpha spending in relation to the interim analysis. And apologies for the somewhat nerdy question. But my understanding is you're using O'Brien-Fleming, which I'm sure that your team would know is a sort of exponential spending, which means that there will be an exponential increase in the alpha spend. Meaning the probability of hitting at the interim, if it is positive, is materially greater than the initial analysis won't actually improve that much by the time you get to the final. So I'm just somewhat confused why you're downplaying the relative importance of the interim, assuming you are using O'Brien-Fleming. So that's the first question. The second question is more big picture. The organizational changes, which you and Thomas announced this morning, bring Thomas into greater proximity with development decisions through the direct line report, leaving Teresa focusing on the commercial. Could you talk to what you hope to achieve beyond the obvious, whether this is about prioritization of portfolio? Is it decision-making in clinical trial design? How should I think about the key function underpinning -- the key drive underpinning this decision? Thank you for the questions, Andrew. Well, on the first one, I'm not the expert here, but talking to the scientists, what they tell us is that the most -- by far, the most likely scenario is that it only reads out for the final analysis. Perhaps we can make some follow-up on your specific question. I can just reflect what I hear from our scientists. And again, that's what we have been saying throughout that process because we don't have any new data, right? So I just wanted to put that into perspective. There is no change in our assumptions, we just wanted to make clear what our internal expectations are. But perhaps, Thomas, you can give even more color to that and then also talk to the organizational changes. Yes. So we've never disclosed the statistical plan regarding the mode of analysis we've used O'Brien-Fleming, as you've mentioned, but it does increase over time the alpha. And so the highest likelihood is at the end, and so we just ask you to be patient on that one. Again, we have zero view on the data. There's no change in what we are communicating. And I think that's important for you to know. Then regarding the organizational change, yes, whenever you have a management change, this is an opportunity when you also look at how you organize the team. And as you know, in the Corporate Executive Committee, we have already pRED and gRED with VEGF and Hans Clevers representing those 2 organizations. And yes, we felt it was a good moment in time to then also add late stage into the CEC. Now there has been committees like the late-stage portfolio committee or other committees where they have been talking about the R&D portfolio as a whole. But nevertheless, given that there was now this kind of opportunity, we thought it would make a lot of sense to have the holistic end-to-end R&D discussion also in the Corporate Executive Committee. Sarita from Morgan Stanley. Just the first one on Vabysmo. So some physician feedback has suggested that switching Eylea refractory patients has led to mixed outcomes, with some patients doing worse in terms of drying when switching to Vabysmo. So is there a risk that the launch of Eylea high dose will lead to physicians first exhausting the dosing window, with Eylea before switching the remaining refractory patients to Vabysmo? And then secondly, just a follow-up on Tecentriq and Avastin in liver cancer. Any updates on the approval time lines? And will the immature OS data lead to any delays in approval? So let me just answer the second one first, with Tecentriq, Avastin in HCC. So we just recently released the data. We will then show the data in the next conference. We're in discussions with authorities. So at this stage, we can't comment on exactly when we will get the approval. But we are in discussion. . Regarding the Vabysmo, I mean, I have to say I've had a lot of interactions lately with our people who get a lot of positive feedback from clinicians. In fact, especially on this anatomical improvement of drying of the eye, where the dual mechanism plays a very big role. So increasing the dose of VEGF doesn't impact that from that stage. Also, when you compare the 2 trials and you do a fair comparison, you see a significant benefit using Vabysmo versus the product that you just mentioned. Yes, so I would say I've not heard that. And in fact, we see a very high switching rate from this other product to our product. And we are confident that the growth of Vabysmo will continue beyond the mid of this year into the future. Then let me maybe pick a question here from the chat. It comes from Simon Baker and that goes to you, Matt. So that buyer also get to question finally. Can you give us a bit more color on the solid growth ex COVID? And the question is also referring to here, what evidence of trends are you seeing for the non-COVID use of the machines which were installed during the pandemic, and maybe you can provide an update here? Sure. So I can maybe start with the second part first. And so we expanded our installed base of our automated molecular diagnostics instruments significantly during the course of the COVID pandemic. And you see that as well in the 8% growth in our base business in molecular diagnostics. And so what we see is those instruments, which are placed in a lot of hospitals and laboratories across the world, are contributing to future growth of our non-COVID diagnostics base. And so that's the second part of the question. The first part, if you look at the general growth of the diagnostics market, it's mid-single digits, and we expect to outcompete that. And so our expectation is that our performance should be somewhere in the mid- to high single-digit range as we head into 2023. The fastest follow-up ever. It's a finance question. Alan, tax, there were a number of moving parts. You set out a whole series of moving parts '21 versus '22. There's also a lot of debate globally about what will happen to tax rates in terms of OECD, minimum and everything else. Can you give us some help in pointing where your best guess is for the tax rate for 2023? Yes, as I said, I think I'm pretty clear here. I think about 18% is what we're heading to. I think I expect really the minimum tax being applied. I think very early is '24, I think perhaps '25, is a more realistic date if we can really agree and if countries can agree on the right basis, yes, to put the 15% on. So we will see. Let me also say, I think even if I think that scenario comes into play, I think that appears to us rather manageable, certainly wouldn't be a positive, but I think, rather manageable. So I think from today's point of view, I feel pretty okay about that. But to answer your question right away, once again, I think 2023 should be around 18%. Okay. Then we have another follow-on question coming from Emmanuel Papadakis. We'll open the line. And maybe Emmanuel also one comment from my side because I think you mentioned. You asked before about Phesgo and the conversion and how this will proceed. I think we are very bullish on Phesgo, so a significant conversion here to take place in the next 2 to 3 years. We -- the more difficult countries, for example, the U.S. or Germany, we are approaching the 20% conversion rate already. So we clearly -- Thomas mentioned it, I think, as well that we will have blockbuster status reached as of '23. And there is, I think, even more to come afterwards. So it's a decent opportunity. That was very helpful. A few minor follow-ups, if I may, one more on financials. Perhaps I don't know if you could give us a little assistance with the outlook for financial expenses given the step-up in '22, in terms of '23 and beyond that would be very helpful. An R&D question, you've initiated the second-line lung Phase III trial with your KRAS G12C. If you could just help -- as a monotherapy, if you could just help us think about what's the clinical strategy here, how are you hoping to differentiate versus competitors that are already well ahead in that setting. And then perhaps I could take a follow-up on Tecentriq. On your subcutaneous comment, could you just give us your perspective on the IP time lines that implies? And indeed, whether that will have any impact on this potential inclusion in due course in price negotiation. Yes. Well, on the financial result, I think, first of all, I think on the interest expenses, what I can say is, I rather expect in the absence of major M&A. If we do rather smaller stuff, which we have done also in the course of 2022. I think I can even see that it's a certain reduction, nothing of major significance, but I think that is a certain reduction compared to 2022 because I expect, certainly, I think that -- so if we pay back debt, especially in the current environment, I think that's quite an incentive to it. When you look really at the financial result in total, I think we have a couple of moving parts, certainly, I think really the income from equity securities, I've mentioned that with the venture fund. I don't know where you're seeing the biotech market is. But I think if the biotech market were taking off, I think there might be even an opportunity in that field. But I'm a little bit skeptical here, given the environment and what I see currently. So let's see what that means. I think really don't expect a major uplift in the net foreign exchange losses. I think that's really something we have to deal with. And I've said a couple of these things come from very volatile currencies. So I think the spending is really justified here. So I think really okay. I think if interest rates really were further going up, I think there might be a little bit of a higher interest rate or interest income. But I think really the major point is certainly the financing costs and the interest expenses. And I think here, it's not like that I have the feel that we put at the moment, more debt on the balance sheet in the absence of major M&A transactions. Yes. So let me first comment on the KRAS small molecule. So we have initial clinical data in second-line non-small cell lung cancer and colorectal cancer, we've received breakthrough device or therapy designations in this case for non-small cell lung cancer. And in terms of differentiation, it's about the best-in-class potential with respect to potency. And there is also an opportunity to do combinations going forward. Now regarding your question around Tecentriq subcu, so we did have the positive readouts. We do hope that we have regulatory approval soon. With that, we have at least 1 year head start. And as we know from immunotherapies, a head start and being the first is a big thing. And we will be able to reduce infusion time to less than 7 minutes. So we see a big differentiation here for sure. Regarding the patent situation linked to this, so I would say there are 2 elements, that we are probably in a range beyond 2030, but also it's around the manufacturing piece. Manufacturing, it becomes a lot more complicated. And so we do have an opportunity there. And for sure, in some markets, subcu will help even faster uptake of Tecentriq. Just to follow up about, whether it impacts potential inclusion price negotiation was the only additional? I don't know if you can comment on that. I think we would not really portray it that way, that we would believe this is necessarily the case. I think we'll have to wait and see how this develops. But yes, it would not be our case. A couple of pipeline questions. One on the ASO factor B starting Phase III in IgAN. Just wondering if you could give a sense of differentiation versus the other factor? Oral factory B that's already in Phase III there, obviously, you'd be coming later to market. And then on crovalimab, across factor B and factor D in addition to C5, so it just -- it feels like there's a lot of assets going after the PNH space. So just any thoughts on how you feel crovalimab will be differentiated? Yes. So let me start with crovalimab. It's a C5 inhibitor. It's an antibody that using the recycling technology of Chugai, so it's a proprietary technology. And with that, we have a much higher level of activity because the antibodies can be in the body reused multiple times. And that's why we believe, in terms of efficacy, we have differentiation. That's one element. The second element is that it's subcutaneous, once a month. Now yes, there are, as you said, others that have oral administration or longer administration. Now regarding oral administration, the problem is that this is a fatal disease. So if you kind of miss it, so in terms of compliance, it's almost becoming a little bit more difficult. So we do see this as being a subcu. Home as being actually an advantage in this case, as well as the very high efficacy because of this recycling technology. As regards to the antisense oligo factor B, maybe, Bruno, you want to answer that one? Yes. I think we just provided an update here, Emily, last time, and it's globally IgAN and is still the most common primary glomerulonephritis that will progress to renal failure in the end. So I think there is still a high unmet need. We have the Phase II data, and based on what we have seen, we have initiated here the Phase III. And I think we -- yes, on all these areas, which we are referring to, where complement plays a role. These are diseases -- a lot of diseases spanning immunology, but also in neurology, for example. I think it's here, to some extent, also about establishing a molecule and then seeking opportunities. And then also, I think the next step is looking for combination development. So I think this is the progress in general. And yes, I think we see -- clearly, we see there is a high level of competition in the space and different MOAs currently in late-stage development. Yes. I mean that's a good point. I mean also crovalimab, we go in PNH first. But as Bruno mentioned, the complement pathway is involved in many other diseases. So you have an opportunity to expand also into other areas, sickle cell being one of them, yes. Okay. I think with that, actually, we are at the end of the -- of our call. And if there are any remaining questions, then we are please reach out to the IR team. And then I think I hand back to Severin for final word. Yes. Thank you very much. I realize this is my final investor call in the CEO role. Thank you for all your support over the years. Thank you for the good interaction and have a good day. Bye-bye.
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â¦Q4 Sales and Earnings Conference Call. At this time, all participants are on a listen-only mode until the question-and-answer session of todayâs conference. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Peter Dannenbaum, Vice President, Investor Relations. Sir, you may begin. Thank you, and good morning. Welcome to Merckâs fourth quarter 2022 conference call. Speaking on todayâs call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Merck Research Labs. Before we get started, Iâd like to point out a few items. You will see that we have items in our GAAP results, such as acquisition-related charges, restructuring costs and certain other items. You should note that we have excluded these from our non-GAAP results and provide a reconciliation in our press release. I would like to remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of Merckâs management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in the 2021 10-K, identify certain risk factors and cautionary statements that could cause the companyâs actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck undertakes no obligation to publicly update any forward-looking statements. During todayâs call, a slide presentation will accompany our speakersâ prepared remarks. The presentation, todayâs earnings release, as well as our SEC filings are all posted to the Investor Relations section of Merckâs website. Thanks, Peter. Good morning and thank you for joining todayâs call. 2022 was an exceptional year for Merck. Our science-led strategy is working and I couldnât be more proud of what our team has delivered scientifically, commercially and operationally. We are focusing on what matters and keeping the patient at the center of everything we do. We made significant progress in 2022 advancing our broad pipeline, with important internal success complemented by a portfolio of strategic acquisitions, collaborations and partnerships. We have moved with speed and urgency to drive strong progress and we have provided increased transparency into several of our long-term opportunities, including for GARDASIL, for our cardiovascular pipeline, and more recently, from newer assets that leverage our leadership position in Oncology. We enter 2023 with even greater confidence that we are creating a sustainable engine that will bring forth innovation and generate value for both patients and shareholders over the long-term. Turning first to our results. The business is performing extremely well. The growth we have experienced in 2022 reflects a sustained track record of fundamental strength from our de-risked key growth pillars. We begin the year with confidence that we will maintain this strong underlying growth, after taking into account the significant impact LAGEVRIO had during the height of the pandemic last year and are pleased to reflect this in our 2023 initial guidance. Importantly, our pipeline is advancing with significant progress across several late-stage programs. In Oncology, we have expansive research efforts, including our ambition to move treatment into earlier stage settings where there is higher potential for more favorable longer term outcomes for patients. In December, along with our partner Moderna, we were pleased to announce highly encouraging Phase 2 results for a personalized mRNA therapeutic cancer vaccine in combination with KEYTRUDA in the treatment of adjuvant melanoma. We are excited by the potential that this combination may have for patients across a range of tumor types. And last week, we were pleased to receive FDA approval for KEYTRUDA for the treatment of certain patients with early stage non-small cell lung cancer following resection and platinum-based chemotherapy, which Caroline and Dean will speak to. In Cardiovascular, we are exploring candidates across a broad range of diseases and have made substantial progress from just one year ago. At the American College of Cardiology conference, we will present data from the STELLAR trial evaluating sotatercept in pulmonary arterial hypertension and from the Phase 2 trial of MK-0616, our oral PCSK9 inhibitor and we will also host an investor event to discuss these programs. In Vaccines, Instituto Butantan in Brazil, with whom we are collaborating for vaccine development, reported very encouraging topline results for their candidate for the prevention of dengue. These data will inform future development of our dengue vaccine, V181, and our efforts to address this critical public health challenge. Finally, through our business development efforts, we brought in four programs which will have phase three trial starts in 2023 and which have the opportunity to contribute meaningful growth during the latter half of this decade and into the next. We are following our disciplined approach to business development and we will act when scientific opportunity and value align. We have more to do, but I feel very good about the progress we made in 2022 and we believe that all of these efforts will lead to real benefits for patients and in turn for shareholders. We enter 2023 with confidence in the innovation engine we are building and our ability to deliver sustainable value for patients well into the next decade. We will continue to execute on our de-risked assets and act with urgency to advance and grow our pipeline. We are doing all of this with an approach to sustainability that is closely aligned to our overall business strategy. I am very confident in the short- and long-term outlook of our company, and I look forward to providing future updates. Thank you, Rob. Good morning. As Rob noted, 2022 was an exceptional year for our company. We delivered excellent topline growth of 22% driven by strength across our key pillars of Oncology, Vaccines and Hospital, as well as a significant contribution from LAGEVRIO. Our Animal Health business delivered strong operational growth, which was offset by foreign exchange. These results are a testament to the profound impact our medicines and vaccines are having on patients globally, which are enabled by our dedicated teams who are executing with excellence to deliver these important innovations. We are confident in the health of our business and in our outlook for continued strong underlying growth. Now, turning to our fourth quarter results. Total company revenues were $13.8 billion, an increase of 2%. Excluding the impact from foreign exchange, the business delivered strong operational growth of 8%. The remainder of my revenue comments will be on an ex-exchange basis. Our Human Health and Animal Health businesses continued their strong growth increasing 9% and 6%, respectively. Now, turning to the fourth quarter performance of our key brands. In Oncology, KEYTRUDA grew 26% to $5.5 billion, driven by strong global demand for in-line indications, as well as continued global expansion from new approvals. In the U.S., KEYTRUDA grew across all key tumor types and continues to benefit from uptake in earlier-stage cancers, including triple negative breast cancer, as well as in certain types of renal cell carcinoma and melanoma. KEYTRUDA continues to have a profound impact on patients, including in earlier-stage cancers, where there is greater potential for better outcomes. We are excited by the recent approval of KEYNOTE-091, which represents KEYTRUDAâs seventh indication in earlier-stage cancers. Early lung cancer detection and screening remain an important unmet need. It is our ambition, along with others to improve lung cancer screening rates to levels similar to other tumor types, such as breast, where screening programs are more routine. While we are committed to addressing this unmet need, we anticipate a more gradual near-term uptake from this indication. In the metastatic setting, KEYTRUDA maintains its leadership position in non-small cell lung cancer, which gives us confidence that we are well-positioned to positively impact patients in the earlier setting. Outside the U.S., KEYTRUDA growth continues to be driven by uptake in metastatic indications, including non-small cell lung cancer, head and neck cancer and renal cell carcinoma, as well as recent launches in earlier-stage cancers, including certain types of high-risk, early-stage triple negative breast cancer and renal cell carcinoma. Lynparza maintains its leadership of the PARP inhibitor class. Alliance revenue grew 14% primarily due to continued demand in certain patients with high-risk, early-stage breast cancer. Lenvima alliance revenue grew 9%, driven by increased uptake in the treatment of certain patients with advanced renal cell carcinoma and advanced endometrial cancer in the U.S. Lastly, WELIREG is performing in-line with our expectations and we are proud of the impact it is having on adult patients with certain VHL-associated tumors. Our Vaccines portfolio delivered growth, with GARDASIL increasing 6% to $1.5 billion, driven by strong demand in major ex-U.S. markets, particularly China. In the U.S., sales decreased primarily due to CDC purchasing patterns. Vaccines sales also benefited from the pediatric launch of VAXNEUVANCE, which is off to an encouraging start, with revenues also benefitting from inventory stocking. In our Hospital Acute Care portfolio, BRIDION sales grew 7%, driven by an increase in market share among neuromuscular blockade reversal agents and an increase in surgical procedures. Hospital Acute Care sales also benefitted from the resupply of ZERBAXA, which started in the fourth quarter of 2021. Our Animal Health business delivered another solid quarter, with sales increasing 6% reflecting strategic price actions and volume growth. Livestock sales grew 12% driven by increased demand in ruminants and poultry products. Companion animal sales were negatively impacted by supply challenges for certain vaccines and a reduction in vet visits in October, which improved during the quarter. I will now walk you through the remainder of our P&L and my comments will be on a non-GAAP basis. Gross margin was 75.7%, an increase of 0.9 percentage points due to favorable product mix and foreign exchange. Operating expenses increased 8% to $5.7 billion, reflecting increased investments to support our portfolio and growing pipeline. Other income was $86 million, reflecting the return on pension plan assets and capitalized interest, which was largely offset by net interest expense. Our tax rate was 15.6%. Taken together, earnings per share were $1.62. Turning now to our 2023 non-GAAP guidance. The strength across our key pillars is expected to continue into this year. We project revenue to be between $57.2 billion and $58.7 billion, including approximately $1 billion from LAGEVRIO. Excluding the negative impact of LAGEVRIO and an approximate 2% negative impact from foreign exchange using mid-January rates, we expect strong underlying revenue growth of 7% to 10%. Our gross margin is expected to be approximately 77%. Operating expenses are assumed to be between $23.1 billion and $24.1 billion, which includes $1.4 billion of research and development expenses related to our acquisition of Imago and the expansion of our collaboration with Kelun Biotech. As a reminder, our guidance does not assume additional significant potential business development transactions. Other Income is anticipated to be approximately $250 million. We assume a full year tax rate between 17% and 18% and approximately 2.55 billion shares outstanding. Taken together, we expect EPS of $6.80 to $6.95. This range includes a negative impact from foreign exchange of approximately 4% using mid-January rates. Our guidance reflects confidence in the continued strong growth across Oncology, Vaccines and Animal Health. As you consider your models, there are a few items to keep in mind. On revenues, we are confident in our ability to drive strong growth of GARDASIL, particularly in international markets. Global immunization levels remain low, which creates a tremendous opportunity to benefit more patients and we are improving supply, which positions us well to support the significant demand we are experiencing today and expect over the long-term for this vaccine that prevents HPV-related cancers. Other Revenue is projected to decline significantly, primarily reflecting a smaller planned benefit from revenue hedges following the U.S. dollar strength last year, which resulted in an approximate $800 million benefit in 2022. Other revenue is also expected to be lower due to the discontinuation of third-party manufacturing sales to Johnson and Johnson. On the rest of the P&L, we project a shift from other expense to other income, which is primarily attributable to an assumption that there will be no pension settlement cost, as well as an expectation of lower net interest expense and higher joint venture equity income. This benefit is more than offset by an increase in the estimated tax rate due to the unfavorable impact of the R&D capitalization provision, as well as an approximate 1 percentage point impact related to Imago. Now shifting to capital allocation, where our priorities remain unchanged. We will continue to prioritize investments in our business to drive near- and long-term growth. We are excited about the significant progress our team has made to advance and augment our pipeline in 2022. In 2023, we will continue to invest in opportunities that will address important unmet medical needs and drive the next wave of growth for our company, including the initiation of many late-stage clinical trials across a broad set of novel candidates. We remain committed to our dividend, with the goal of increasing it over time. We will continue to pursue the most compelling external science through value-enhancing business development to augment our internal pipeline and will invest appropriately to maximize the potential of our R&D programs. Given the strength of our business and balance sheet, we plan to resume share repurchases, while ensuring we maintain ample capacity to pursue additional business development, which is the higher priority. To conclude, we enter 2023 confident in our ability to execute on the important opportunities we have to deliver innovation to patients and sustain the strong underlying growth of our business well into the future. Thank you, Caroline. Today, I will provide notable updates since our last earnings call. We continue to make significant advancements and achieve important regulatory milestones. The fourth quarter marks the end of a successful year with progress made across Oncology, Vaccines, Infectious Diseases and Cardiology. Let me start with Oncology. We remain committed to transforming the landscape of cancer therapy with an ongoing focus on treating earlier stages of disease. We are pleased by the recent approval of KEYTRUDA for the adjuvant treatment of adult patients with Stage Ib, II or IIIa non-small cell lung cancer following resection and platinum-based chemotherapy based on the results of KEYNOTE-091. This approval provides for the very first time an adjuvant immunotherapy option for this patient population with Stage Ib disease and regardless of PD-L1 status. Beyond KEYNOTE-091, we have additional ongoing studies in earlier stages of non-small cell lung cancer including, KEYNOTE-671 evaluating KEYTRUDA with platinum doublet chemotherapy as neoadjuvant followed by adjuvant therapy in resectable Stage II, IIIa and IIIb disease, KEYNOTE-867 evaluating KEYTRUDA in patients undergoing stereotactic body radiotherapy with unresected Stage I or II disease, and KEYLYNK-012 studying KEYTRUDA in combination with Lynparza in Stage III disease. These trials are all part of our broader effort to treat earlier stages of cancers and further improve patient outcomes across tumor types, such as melanoma. Together with Moderna, we announced positive Phase 2 results for V940/mRNA-4157, in combination with KEYTRUDA for the adjuvant treatment of Stage III and IV melanoma in patients with high risk of recurrence following complete resection. The combination demonstrated a statistically significant and clinically meaningful improvement in recurrence free survival versus KEYTRUDA alone. This investigational personalized neoantigen therapy utilizes mRNA technology and is specifically tailored to target the unique mutational signature of each patientâs tumor. We plan to discuss the results with regulators and initiate Phase 3 trials in multiple tumors this year. Detailed results will be presented at an upcoming medical meeting. We also announced positive results from the Phase 3 KEYNOTE-966 trial evaluating KEYTRUDA in combination with chemotherapy. This trial demonstrated an improvement in overall survival for the first-line treatment of patients with advanced or unresectable biliary tract cancer. In addition, we announced positive topline results from the Phase 3 KEYNOTE-859 trial evaluating KEYTRUDA in combination with chemotherapy for the first-line treatment of patients with HER2-negative locally advanced unresectable or metastatic gastric or gastro-esophageal junction adenocarcinoma. In November, we announced the acquisition of Imago Biosciences, which closed last month. Imagoâs lead candidate, bomedemstat, is a potentially first-in-class orally available lysine-specific demethylase 1 inhibitor. It is currently being evaluated in multiple Phase 2 clinical trials for the treatment of essential thrombocythemia, myelofibrosis and polycythemia vera. The combined team is now focused on continuing to advance the ongoing clinical development programs. At the American Society of Hematology annual meeting, data were presented from multiple pipeline candidates including, favezelimab, our anti-LAG3 antibody, zilovertamab vedotin, an antibody drug conjugate, targeting ROR-1, nemtabrutinib, our oral reversible, non-covalent BTK inhibitor, as well as KEYTRUDA. Updated Phase 2 data for bomedemstat in essential thrombocythemia and advanced myelofibrosis were also presented. We continue to deliver on our regulatory strategy. In the European Union, along with our partner, Astra Zeneca, we announced the approval for Lynparza, in combination with abiraterone and prednisone, for the treatment of certain patients with metastatic castration-resistant prostate cancer based on the results of the PROpel trial. In China, based on the results of KEYNOTE-522 and KEYNOTE-394, we received approvals for KEYTRUDA in neoadjuvant / adjuvant high-risk, early-stage triple negative breast cancer and hepatocellular carcinoma, respectively. With our partners, Astellas and Seagen, we announced the FDA has accepted supplemental biologics license applications for KEYTRUDA with PADCEV, an antibody-drug conjugate targeting Nectin-4, for the first-line treatment of certain patients with locally advanced or metastatic urothelial cancer who are not eligible to receive cisplatin-containing chemotherapy. The agency set a PDUFA date of April 21, 2023 for each application. Building on the clinical benefits observed with KEYTRUDA in combination with chemotherapy and antibody drug conjugates, we have focused on augmenting our tissue targeting candidates through business development. We announced the expansion of our agreement with Kelun Biotech with the addition of up to seven preclinical antibody drug conjugates. The collaboration leverages technology with the potential to yield a new generation of candidates designed to precisely target and deliver potent anticancer agents to the tumor site. This follows previously disclosed agreements for two clinical stage candidates, including MK-2870, an investigational TROP2 targeting ADC we are planning to advance into Phase 3 trials this year. We also expanded our collaboration with PeptiDream to include the discovery and development of peptide drug conjugates. This technology potentially provides for improved permeability and drug selectivity in targeting tumor tissue. Next to our Vaccines portfolio. We were encouraged by the progress scientists and clinicians at the Instituto Butantan in Brazil made in developing a single dose dengue vaccine candidate for registration in Brazil. We are collaborating with the team there to conduct a detailed analysis of these positive, topline Phase 3 results to determine next steps for our own dengue vaccine candidate, V181, currently in Phase 2 development. Merckâs goal is to make V181 available outside of Brazil for populations at-risk for dengue. As Caroline noted, we are receiving positive feedback from the field regarding the recent launch of VAXNEUVANCE in the pediatric setting and remain confident in our population specific strategy for the prevention of pneumococcal disease. VAXNEUVANCE offers strong protection, including in the first year of life, with robust immunity across all shared and unique serotypes. This is important because the incidence of invasive pneumococcal disease is greatest in the first year of life for children. Also, we are on track and look forward to the Phase 3 results from our V116 program for the protection of adults this year. We, along with others in the industry, are making a real impact in our goal to help reduce cancer incidence. It was noteworthy that the American Cancer Societyâs recently published annual report on cancer facts and trends included the remarkable observation that there has been a 65% reduction in cervical cancer incidence in women 20 years old to 24 years old from 2012 through 2019. It is this type of finding that further reinforces Merckâs commitment to bringing forward treatment and prevention options to help patients with this devastating disease. As part of this commitment, we are encouraged by the role GARDASIL continues to play in helping to prevent certain HPV related cervical cancers. Turning to the broader portfolio. With the continued impact of COVID-19 in China, treatment options are urgently needed to help reduce the incidence of disease and burden on healthcare systems. We were pleased LAGEVRIO was granted conditional marketing authorization by Chinaâs National Medical Products Administration in December, for use in adult patients who have mild to moderate COVID-19 infection and a high risk of progressing to severe cases. I wish to reinforce something Rob mentioned. Please mark your calendars for March 6th where we will present detailed findings of the Phase 3 STELLAR trial evaluating sotatercept in patients with pulmonary arterial hypertension and the Phase 2 results for MK-0616, our oral PCSK9 inhibitor, at the American College of Cardiology in conjunction with the World Congress of Cardiology meeting in New Orleans. We will also host a live investor event to answer your questions. We look forward to bringing sotatercept as an important treatment option to patients and are currently working towards submission of the data from the STELLAR trial. We are in discussions with the FDA about submission of the data on a rolling basis, which is likely to result in a potential approval in early 2024. As we close out 2022, it is important to highlight that over the course of the year we made strong progress across therapeutic areas, modalities, stages of development and multiple business development transactions. In Oncology, we obtained several important regulatory approvals globally for KEYTRUDA and Lynparza, as well as advanced a number of programs evaluating earlier stage cancer regimens. In Vaccines, we received an important approval in pediatrics for VAXNEUVANCE. In addition, we were granted expanded authorizations in China and active recommendations were reinstated in Japan for GARDASIL. Taken together, we continue to deliver on our strategy of advancing promising candidates across multiple therapeutic areas. We have strong momentum across our pipeline and look forward to providing further updates on our progress in 2023. Thanks, Dean. Kelly, we are ready to take questions now. We intend to end the call at 9 sharp this morning, so request that analysts limit themselves to one question, please. Hi. Thank you for taking the question. Maybe just you made some comments around sort of uptake in the adjuvant setting after the most recent label update. Can you maybe just sort of set expectations there and does that comment reflect any sort of assumptions around when we might see mature data from the PEARLS study potentially this year? Thank you. Yeah. So I believe you are speaking about KEYNOTE-091. So I just want to take a broad view and then today view and the tomorrow view. So I would just count that the American Cancer Society in 2023, itâs really remarkable. They suggest that for between 1991 and 2023, thereâs a massive reduction in lung cancer of 58%, 36% and KEYTRUDA has been critical in that story and now we are moving to early lung. The label is broad. It is regardless of PD-L1 and it reflects the clinical trial, where we demonstrated a 27% reduction. We are pushing into these earlier lines with other trials. But I think for what we need to set for is two things. We need to make it much more easier with scientific innovation other means to get subcu, I mean, to get KEYTRUDA and thatâs why we are very eager to push our subcu pembrolizumab with [inaudible] to face through this year. But we also need to do a lot to improve adherence to established guidelines, which currently only have 6% or so of individuals actually who should be screened in the United States. So, I think, with that, we have work to do in relationship to really taking this important advance and making it broadly available through to individuals who should be getting screened. So, Carter, maybe I can just add on a little bit about the commercial opportunity. As Dean said, this will be a slower ramp, because we have to drive more people to get diagnosed early so that we can get them the care they need. But just to give you some sizing of this. If you look at 2023, there are about 230,000 people who were diagnosed with lung cancer in U.S. and the majority of that group was not diagnosed until they were in the metastatic setting. So if you think about it from a minority perspective, we would estimate about 120,000 people in the early-stage setting, of which only a quarter will have a section or have surgery and be in the Stage Ib to IIIa, which is what our label indicates. So you are looking at about 30,000 patients who would be the addressable population and then obviously, of that group, historically, only about half of those patients have gone on to receive treatment in the form of chemotherapy or IO. So thatâs obviously something we hope to change as we go forward, because we think the outcome will show that if you are resected, you should pursue KEYTRUDA in that setting and itâs our goal over time not only to drive more patients in that segment. But, obviously, the more people we can get diagnosed early pre-metastatic, then actually we will expand the population over time. So we see this as a meaningful opportunity long-term that is going to take us time to ramp as we work to change the paradigm thatâs existed in the past. Thank you, Carter. Next question, please, Kelly? Hi. Thank you. A couple of questions, could you please address the demand on Merckâs business to the hole associated with the KEYTRUDA LOE post-2028 or alternatively instead just build the exit growth rate and focus less on finding revenues to plug the hole as you think about your strategy? And perhaps quickly for, Dean, could you just give us some guidance on the timing for the PFS analysis and the PD-L1 high, greater than 50 cohort from KEYVIBE-003. Should we expect it in the next 12 months? I know the total PFS reset for the whole trial is somewhere in 2024, but it strikes me you may have a mere separate analysis for that greater than 50 subgroup? Thank you. Great. Well, maybe, Andrew, I will start off and if Caroline or Dean want to jump in. But to give you a sense, obviously, we havenât given specific guidance to the LOE period. But just to ground everyone into facts, KEYTRUDA and our expectation will lose exclusivity in the United States in 2028 and in China in 2028. It leaves it in Europe in 2030 and in Japan in 2032. So, obviously, by shorthand, we refer to 2028, but the reality of it is over most of the markets and KEYTRUDA increasingly is becoming, as you know, a global product, itâs spread out. But as we look at where we sit today, I would say, we feel good about the progress we have made. We are confident that we are on a path to sustainable growth into the next decade. Obviously, we have more work to do, but I would just point to you to a few proof points that I think support that. First of all, as we talked about in the last 18 months, we have made meaningful progress in our cardiovascular pipeline. We have eight potential approvals between 2025 and 2030. Obviously, the centerpiece of that is sotatercept and what we are seeing from the STELLAR data, which really was just quite phenomenal. If you look at that, we expect those products, that portfolio of opportunity on an unrisk adjusted basis to be in excess of $10 billion as you approach the mid-2030s. We recently discussed the fact we see the business development deals we have done. We have brought in new assets apart from KEYTRUDA, apart from Lynparza, Lenvima and WELIREG, that themselves, these new mechanisms, I would point you to things like Orion and Imago, those products, along with what we see in the ADC space as a portfolio, we think themselves have the potential for $10 billion or more of revenue as you get into the early to mid-2030s. So today we sit there with the expectation that we are starting to make meaningful progress and that excludes all the work we are doing to bring an incremental value to patients on KEYTRUDA. Obviously, as great as KEYTRUDA is, it still only has an overall response rate averaging around 30%. We need to deepen and drive better response. We are looking to do that through combinations and through other means to find ways to improve on KEYTRUDA. We are looking to continue to expand into new tumor types as well and clearly move into earlier lines of therapy where we believe we can start to move to a point that we can actually give people an extension of life, and hopefully, someday get to a point that we talk about cancer a chronic disease, not a fatal disease. Obviously, we have more to do there, but that is the aspiration and we have a lot of efforts underway to do that through what we are doing in IO combinations, IO/ADC combinations with our subcutaneous offering. And then, obviously, we are very excited recently about the deal we did with Moderna for the personalized cancer vaccine, which is really a therapeutic that we think, in combination with KEYTRUDA, while we are studying in first in melanoma, obviously, we believe, has the potential to move into broader tumor. So that in and of itself gives us a lot of confidence and we are doing similar activities with Lynparza, with Lenvima, and obviously, WELIREG itâs in early days. So if you look at the total of that and I have even gotten into our Vaccines portfolio and what we see as excitement there, we feel like we have made a lot of progress. We have more to do, but thatâs why you hear me talk more about how do we build the sustainable engine to drive growth well into the next decade and that really should be a focus point, because I am confident, if we do that well, the LOE of KEYTRUDA will take curve itself. So Dean? Yeah. So there was a question on our TIGIT program, KEYTRUDA plus TIGIT. Just to remind everyone, we have nine ongoing trials. We have five Phase 3s. In fact, just recently, we opened up KEYVIBE-10, which is Phase 3 in early melanoma. In relationship to KEYVIBE-003, which I think is the question, we added the TPS greater than 50% as an endpoint. These are event driven, and as the events drive to statistically and clinically meaningful data, we will announce it appropriately. Hi, guys. Thank you so much for taking the question. I would love for you to talk to what might make MK-2870 better TROP2 targeting ADC versus those that we have seen from Gilead and Astra and Daiichi. Also, do you still believe that itâs too difficult to combine an ADC plus IO in a fixed dose combination? Thank you. Yeah. So let me just state, I -- we will be starting a whole series of Phase 3 trials this year. I really appreciate your question. For me, the critical thing is, whether it be an ADC or whether it be a RAS inhibitor in solid tumors, especially as you want to advance them in solid tumors where IO has been important, the combination benefit of the two becomes really important. So we are very excited to be pushing forward our TROP2 ADC. I can get into the details of the molecules and the linkers and the payloads and the darts. But really, the better sort of thing is, I believe that this year, we will be presenting our Phase 2 studies, and at the end of the day, that will be the most convincing data to provide to you as to why we think we have been important play with our TROP2 ADC, but itâs also the play of that TROP2 ADC in relationship to adding it to an IO agent. We think that is an important considerations when thinking about any cancer killing mechanism in solid tumors. Hi. Thanks for taking my questions here. So wanted to know how you are thinking about your Phase 3 trial design for your oral PCSK9 and how will that design really highlight the competitive advantages of your product? Thank you. Thank you very much. So, first, I donât want to get ahead too much of our March 6 Investor meeting where we are least showing the data that we have in relationship to the oral PCSK9 and sotatercept. I will just sort of emphasize what we are trying to accomplish and what we are trying to accomplish is we are trying to accomplish the most potent LDL lowering oral pill for lowering cholesterol. There should be no co-chain, there should be very little need to interact with the healthcare system, which makes it reach very easy and very accessible, not just in the U.S. but globally. And we need to do it at a price point of what I would call a branded oral medicine would be not in order to maximize the access. In relationship with Phase 3, thereâs a general set sort of view of how that is. One is you would drive it, because LDL lowering is such a clean biomarker. So thatâs something. But one would also have that, at the same time, drive towards outcomes, which is also going to be important. So our Phase 3 trial design is informed by the history of the field has been and what the FDAâs regulatory sort of outline have been for others. Thank you. If I could ask you a question on V940 cancer vaccine, what tumor types outside of melanoma, do you already have any positive human data and even if those are earlier stage? And if you donât have any human data in nonmelanoma tumor types, can you talk about animal data? I am trying to obviously think about what Phase 3 trials you may be starting in 2023 with that product? Thank you. Thank you very much. So you are speaking about the wonderful partnership that we have with Moderna in the personalized cancer vaccine. I just want to preface everything. What we have released is topline data in melanoma. That data will be presented sometime in the near-term where we present the data that we have for melanoma and we have work to do to move that into Phase 3. So I -- we have a lot of work to do just in melanoma. I am not going to speak ahead of a human data we have outside of that. But I would say two things that are really important. One is one can watch which of the tumors have sensitivity to an immune approach and one can watch about the clinical development with KEYTRUDA to sort of map out where you would think about doing that. The second issue that I would emphasize is that, when we are talking about an IO-IO strategy, which often people speak about, I view this personalized neoantigen therapy as an IO-IO strategy with KEYTRUDA. And the reason I want to emphasize that is, there is a view that we are beginning to develop that IO-IO strategies may be especially useful in early cancer stages and you see that in our interest in our combination projects related to checkpoint inhibitors, but also in relationship to personalized neoantigen therapy. And so we think that, thatâs around that we are going to advance and the critical component for us to be able to advance that is to advance KEYTRUDA as a monotherapy in indications, because it creates us to actually do these clinical trials. Great. Good morning, guys. Thanks for the question. Dean, on subcu feature, can you talk about the cadence of data this year and what you are ultimately looking for from a risk/benefit perspective, as you evaluate different technologies? And Rob, I wasnât sure where this program ranks on kind of your strategic priorities across IO? Thank you. So thank you very much for that question. I think itâs on -- we will be -- when we talk about starting 10 to 15 Phase 3 clinical trials, just in Oncology, this subcu program is a critical component to that and we will be starting those Phase 3 this year. What are we seeking to achieve? I have talked about the early cancer space. Early cancer space, I think, is really important just from a medical standpoint of where we can intact really the outcomes of patients. We can markedly improve that. If you are going to go in the early space, whether itâs neoadjuvant or adjuvant, from my clinical training, working with lung cancer doctors and oncologists, our ability to limit the need for individuals to constantly come to infusion centers is very important and we need to have the scientific innovation to do that. In doing that, we have to think carefully about how do we give as much optionality to three weeks to six weeks in that subcu regimen and thatâs what we are trying to drive through in our Phase 3 trials. Rob, did you want to answer anything else? No. I appreciate the question, Geoff. I think Dean covered it well. This is a very important part of our overall strategy as we think about moving into earlier lines of therapy and then to drive convenience and access for patients, which is very important. So itâs meaningful and itâs something we are going to pursue as fast as we can. Thanks, Geoff. Next question please, Kelly. Great. Thank you very much for taking my question. I think I have a big picture question regarding IO-IO combinations and the development strategies there, because the common criticism is that, many of these big Phase 3 studies were started with after less than robust Phase 2 data and thatâs why they failed to show benefit in Phase 3. I mean looking at your data in Phase 2, they are single-arm data as well. So can you just help us understand what gives you confidence that this is the right strategy to move forward and wouldnât it be better to do some kind of Phase 2 trial where you are -- you have pembro as a control? Thank you. Yeah. Thank you very much. I will just emphasize that as a general rule the way that I have begun to develop my view of IO-IO strategies, is that IO-IO strategies are very important to pursue. I think that IO-IO strategies plus other therapies that kill cancers may be especially important in the metastatic, but IO-IO strategies in the early stage could be quite impactful. And so, as I have just said, we have advanced our IO-IO strategy. We have advanced it with TIGIT CTLA-4 and LAG-3, so another component part. But I would just say this, I donât know that thereâs one single addition to KEYTRUDA that will have the breadth of KEYTRUDA. So we have been a little bit selective there and I think the movement of IO-IO, not just in the metastatic space, but especially in the early space will become important. And the ability to do that requires your first IO of that IO-IO to be approved in the early space and that is why we are so excited about moving into earlier spaces with KEYTRUDA, because that allows us to execute in an IO-IO strategy in early-stage cancers. Great. Thanks very much. I think you mentioned that you are looking to review share repo and it does seem like maybe, Rob, some of your recent business development commentary has been skewed towards smaller deals or collaboration. So can you just put into context what you view as an appropriate level of leverage for Merck and should we be thinking about kind of the cash generation beyond that level as maybe going towards repo going forward? And I just have really quick second one, just help me on FX. I think you are talking about a 2% headwind, most of your peers arenât seeing much given the recent weakening of the dollar. Are there any currencies that stand out we should be keeping in mind there? Thanks so much. Yeah. Chris, this is Caroline. First to talk to share repurchase, as we have stated previously, itâs our goal as a company to deploy our cash, first and foremost, behind the business opportunities we have within the company, as well as augment that with business development. We have turned on the share repurchase program, given the strength of our business and our balance sheet, but we will be ensuring we have ample capacity to pursue business development, which is the highest priority and is a better generator of growth and value creation. We have a portfolio of BD that we are reviewing and we will continue to do some test have news that we will be sharing in future. So priority remains really investing in the business, but to the extent, there is excess cash, we will return that to shareholders through the share buyback. We will maintain an appropriate leverage for our company. We are very comfortable operating at the credit rating we are at and we would expect to sustain that kind of level as we go forward. From a foreign exchange perspective, in 2022, we were extremely successful as a company in blunting the impact of foreign exchange with our revenue hedging program. The underlying impact of foreign exchange to our business in 2022 was approximately 6% on the topline, 10% on the bottomline, but with our expected hedging program, which brought revenue on the other revenue line of approximately $800 million that blunted the impact to 4% on the top and 4% on the bottom. As you rightly note, as we look at 2023, we expect the underlying impact of foreign exchange to be around 1 percentage point on the top and the bottomline. What is impacting the guidance that we have given is we obviously donât expect as significant hedge gains in 2023, which means that the overall impact from foreign exchange year-over-year is expected to be 2% on the top and 4% on the bottom. Great. Thanks so much for taking the question. I know you guys typically donât give product level guidance, Caroline. But I was wondering if you can speak at a high level about your Vaccine franchise this year. Obviously, you have new capacity coming on for GARDASIL, but you also talked about the pediatric opportunity for VAXNEUVANCE. So just wondering how we should think about those this year. And then one follow-up for Dean on sotatercept, I know you are talking to the FDA now. Are you still confident that, that single trial will be sufficient for approval or is there a possibility you could need data from the other ongoing studies? Thank you. Thank you for the question. So the guidance that we provided for 2023 is underpinned by very strong revenue growth of 7% to 10% when you exclude the impact of LAGEVRIO as foreign exchange. The drivers of that growth are our key pillars of Oncology, where we expect continued impact to patients and growth driven the portfolio of indications we have in KEYTRUDA, Lynparza and Lenvima. Vaccines, as you rightly note, driven by an acceleration expected in the growth of GARDASIL as we have new supply coming on line, as well as an acceleration in our VAXNEUVANCE performance, especially given the strong data we have for the pediatric setting. And we expect continued growth strong growth in our Animal Health business. There are some headwinds against that that we have talked about with LAGEVRIO with foreign exchange and with an increased level of pricing expected, especially in Europe with the changes we have seen in U.K. and also in Germany. But, overall, very confident in the underlying growth of our business anchored to Oncology, Vaccines and Animal Health. Dean? Yeah. So, again, March 6th, clinical trial data for sotatercept will be more fully discussed. I think it will be very impactful data and I have no indication at this point that we will need a readout from any other trial from a clinical standpoint to support our filing to the FDA for 10%. Hey. Good morning and thanks for taking the questions. I guess I will piggyback on a couple of the others. On TIGIT, we have obviously seen some competitive data recently and then we have some Phase 3 competitor readout this year. Just what is your level of enthusiasm for this class currently and just what underpins that in terms of the data we have seen? And then just second on GARDASIL, are you able to give any more granularity on the timing and levels of additional supply that will be coming online with respect to the new manufacturing facility? Thank you. Yeah. Well, thank you for that question. In relationship to TIGIT, I mean, we are very confident on our molecule. As I have said, we have nine ongoing five Phase 3 trials. Pushing the boundaries of what pembro can do or PD-1 can do with another IO agent has been something thatâs very important for the field. And the way that I can simply answer your question about the confidence the molecule is, we just opened an additional KEYVIBE study, a Phase 3 study in the earlier stages of cancer for this IO-IO combination. And for GARDASIL, we -- as you know, we have driven productivity in the existing manufacturing facilities we have and we have two new facilities coming online over the course of 2023, 2024. So it will be a progressive ramp, but I will reiterate we are expecting an acceleration in our growth during 2023. Hi, guys. Thanks for taking my question. There was a story in New York Times last week, which mentioned Merck has a patent state of 180 patents on KEYTRUDA, and I am curious, since your 10-K only points to the earliest patent expiry date of 2028. Can you speak to the types of patents encompassed in this 180 patent estate and is it reasonable to assume that your true patent estate on KEYTRUDA goes well past 2035? Thank you. Yeah. So I would just want to elevate the question a little bit. The focus of what we are trying to do is we are trying to drive the concept of inhibition of checkpoint inhibitors can really have a profound effect throughout cancers in all stages in all tumor types. We talk about expand into different tissue types and stages, deepen in combination and extend with routes of delivery, roots of indentation and frequent safety and these innovations are critically important to make sure that this life saving sort of treatment is available. And we are confident in those innovations providing benefit to patients and we have filed where appropriate intellectual property for it -- for that. Thank you. Novartis said yesterday that it believes the treatment of cardiovascular disease is moving towards infrequently administered injectables as opposed to orals citing very poor compliance with orals. They probably have a good point because the Merck PCSK9 could be associated with GI issues and other issues, which may make oral delivery a challenge. So I assume you disagree is that because indeed, your oral PCSK9 is very well tolerated and clean or do you disagree for other reasons? Thank you. We will be talking about the detailed data from the PCSK9. We believe that itâs very clean. But I will just step back as a cardiologist who trained in the late 1980s and 1990s, the ability to have an oral drug that lowered LDL cholesterol was impactful for the world. Yes, every oral drug, regardless of what therapy it is, has a compliance, so itâs very important to maintain clients. What we are trying to do is to create the most potent LDL cholesterol lowering pill ever made that does not require constant interactions with a healthcare system, we think that, that axis is actually one thatâs very important, not just in the U.S., but also globally. And this is personally speaking, as someone who practices early, as of late, as recently as five years ago. If I had an oral PCSK9 LDL lowering pill back then, I would be prescribing it with the other three to four oral pills that I am prescribing an individual. Thank you, Steve, and thank you everybody for your thoughtful questions. Please follow-up with me and the IR team if you have anything additional and we look forward to staying in touch. Take care.
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Hello, everyone and welcome to the Financial Institutions Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Bruno, and I will be operating your call today. [Operator Instructions] Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham; and CFO, Jack Plants. Chief Community Banking Officer Justin Bigham; and Director of Financial Planning and Analysis, Mike Grover will join us for Q&A. Today's prepared comments and Q&A will include forward-looking statements. Actual results may differ materially from forward-looking statements due to a variety of risks uncertainties and other factors. We refer you to yesterday's earnings release and investor presentation as well as historical SEC filings all available on our Investor Relations website for our Safe Harbor description and a detailed discussion of the risk factors relating to forward-looking statements. We'll also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Reconciliations of these measures to GAAP financial measures were provided in the earnings release filed with an exhibit to Form 8-K. Please note that this call includes information that may only be accurate as of today's date January 31, 2023. Thank you Pam. Good morning, everyone and thank you for joining us today. Fourth quarter net income available to common shareholders was $11.7 million or $0.76 per diluted share down as compared to linked and prior year quarters. The decline was primarily the result of higher provision for credit losses and lower PPP-related revenue described in detail in our earnings release. Adjusting for revenue related to PPP loans restructuring charges and impact of the third quarter 2022 surrender and redeployment of company-owned life insurance pre-tax pre-provision income for the quarter was $20.8 million $261,000 higher than the linked quarter and $865,000 higher than the prior year period. I believe these are strong results in a challenging operating environment. Organic loan growth was once again a highlight this quarter with 4.7% increase in total loans from September 30. All major loan categories contributed to this growth with increases of 4.8% in commercial business, 7.4% in commercial mortgage, 2.1% in residential real estate and 2.6% in Consumer Indirect. As our loan portfolio has grown over the past several years, I reinforce our commitment to credit discipline and the management of risk. We have continued to invest in credit and risk personnel and develop what we believe is an effective and efficient risk and control environment. A current example is the transition of Randy Phillips to a newly created position of Deputy Chief Credit Officer from his current role of Chief Risk Officer. With 32 years of local commercial credit experience Randy has the skills and experience to help lead and support a continued evolution of our credit delivery function. The Chief Risk Officer role will be assumed on February 6 by a risk professional who has 34 years of progressive experience in compliance consumer credit, audit and operations, while working for international, national and regional banking institutions. He most recently served as Chief Compliance Officer in a $50 billion bank. In 2023, we expect that our loan portfolio performance will be consistent with historic credit outcomes despite market concerns regarding the economic environment a potential recession and the quality of credit. Positive year end total loan portfolio metrics, included non-performing loans to total loans of 25 basis points allowance for credit losses on loans to total loans of 112 basis points. An allowance for credit losses on loans to nonperforming loans of 445%. In addition there were zero delinquencies in our large commercial loan portfolio as of December 31. The ratio of annualized net charge-offs to average loans was 34 basis points in the current quarter, 22 basis points in the third quarter of 2022 and 51 basis points in the fourth quarter of 2021. During the fourth quarter, we did have a $1.2 million charge-off of a credit with a previously established specific reserve, which was related to a small commercial loan associated with office space. Our overall loan portfolio is performing quite well, inclusive of this asset class. As I stated in the earnings press release, commercial loan growth was back-end weighted in 2022, largely driven by the success of our Mid-Atlantic team. After joining us in February, they worked quickly to develop a pipeline of high-quality opportunities in the Baltimore and Washington D.C. market. Commercial loans outstanding in the Mid-Atlantic market increased by approximately $75 million in the fourth quarter and totaled $148 million at year-end. Our commercial loan pipeline in the Mid-Atlantic market is holding steady at about $200 million, while the total commercial loan pipeline is about $750 million. I'm very pleased with the progress made to date in this market, with new credit and deposit customer relationships established and cross-sell conversations related to insurance and wealth underway. Despite the ongoing pressures of inflation, higher interest rates and tight housing inventory, our residential loan portfolio grew 2.1% from September 30. This increase can be primarily attributed to our loan program that provides easier access to homeownership for borrowers with less than 80% of the area median income. We are also seeing positive outcomes from recently added talent and operational efficiencies implemented to enhance our underwriting and application processes. The consumer indirect loan portfolio was $1 billion at year-end, up 2.6% or $26 million from the linked quarter due to continued strong demand. We are proactively moderating consumer indirect production through pricing and remain laser focused on credit quality and stringent underwriting standards. Net charge-offs were 57 basis points in the current quarter, down from the linked quarter and in line with historical trends. I'd like to remind everyone that our indirect business is a prime lending operation with an average portfolio of FICO score above 700. This business has delivered consistent results through several economic cycles with annual charge-offs ranging from a low of 14 basis points to a high of 87 basis points between 2008 and 2022. Annual indirect charge-offs were 45 basis points in 2022. The long history of demonstrated outperformance of this portfolio, coupled with the exceptional quality of our commercial loan book and unwavering credit standards across all of our lending platforms, provide me with the utmost comfort as we enter the 2023 operating environment. This concludes my introductory comments. It's now my pleasure to turn the call over to Jack for additional details on results and our guidance for 2023. Jack? Thank you, Marty. Good morning, everyone. Loan growth contributed to an $81,000 increase in net interest income from the linked quarter. The impact of PPP loans is winding down, as only $1 million of these loans remained as of December 31. During the fourth and third quarters of 2022, $1.6 million and $6 million of PPP loans were forgiven, respectively, with a related fee accretion of $78,000 in the fourth quarter as compared to $312,000 in the third quarter. NIM, on a fully taxable equivalent basis, was 323 basis points in the fourth quarter of 2022, down 5 basis points from the linked quarter due to repricing and the seasonality of our public deposit portfolio, coupled with a shift in mix from lower cost transaction deposit accounts to higher-cost time deposits. Relative to the magnitude of FOMC rate increases that occurred in 2022, our total deposit portfolio has experienced a cycle-to-date beta of 22%, including the cost of time deposits. Excluding the cost of time deposits, the non-maturity deposit portfolio had a beta of 7%. The investment securities portfolio was down slightly from the linked quarter as a result of the use of portfolio cash flow to fund loan originations in the quarter. As I stated in the earnings press release, for 2023 we have modeled cash flows of approximately $1 billion from the investment and loan portfolios for reinvestment and new loan originations at market rates, benefiting NIM. Our cost of funds was 109 basis points in the current quarter, up from 58 basis points in the linked quarter due to the impact of higher rates on public and reciprocal deposits and wholesale borrowings, combined with a shift in overall mix from lower cost transaction deposit accounts to higher-cost time deposits. Non-interest income, which includes revenue from our insurance and wealth management businesses was $10.9 million in the fourth quarter, down $1.7 million from the linked quarter. The primary driver of this decline was the third quarter 2022 non-recurring $2 million enhancement associated with the surrender and redeployment of company-owned life insurance. Non-interest expense of $33.5 million was $686,000 higher than the linked-quarter, primarily as a result of $440,000 of non-recurring severance expense related to a restructuring that eliminated approximately 20 positions across the organization and $350,000 of non-recurring restructuring charges related to the 2020 closure of five branches. Income tax expense was $2.4 million in the quarter representing an effective tax rate of 16.4% compared to $4.7 million and an effective tax rate of 25.4% in the third quarter of 2022. Approximately $1.5 billion of third quarter expense was associated with the previously mentioned company-owned life insurance surrender and redeployment strategy. The full year negative impact to accumulated other comprehensive loss was $124 million, driven by the unrealized loss position of our available for sale securities portfolio. As illustrated in our investor presentation, this unrealized loss position negatively impacted year-end TCE by 216 basis points and tangible common book value per share by $8.10. Excluding the AOCI impact, our TCE ratio and tangible common book value per share would have been 7.65% and $28.63 respectively. We continue to expect these metrics to return to more normalized levels over time given the high quality of our investment portfolio. I would now like to spend the next few minutes providing our outlook for 2023 in key areas. We expect mid to high-single-digit growth in our total loan portfolio. Growth will be driven by the commercial loan categories and include our expansion into the Mid-Atlantic region and the recent opening of a Syracuse LPO. We plan for mid-single-digit growth in non-public deposits. We are focused on attracting new consumer and commercial deposit accounts and expect the positive impact of these new accounts to be partially offset by a lower average balance per comp as an outcome of the economic environment. Banking-as-a-Service or BaaS initiatives are expected to generate approximately $150 million of deposits in 2023, a significant contributor to our non-public deposit growth goals. We are projecting reciprocal and public deposits to be relatively flat with typical seasonal fluctuations on a quarterly basis. We expect full year NIM of 330 to 335 basis points, using a forward rate curve that reflects economists predictions for 25 basis point rate increases in February and March with Fed activity remaining muted thereafter. Net interest margin is expected to be relatively flat in the first quarter, with expansion in the remaining quarters as we reposition our balance sheet by utilizing cash flow from the loan and investment portfolios, coupled with core deposit growth to fund anticipated loan originations. As a reminder, our NIM fluctuates from quarter-to-quarter due to the seasonality of public deposits and its impact on both our earning asset and funding mix. In quarters where our average public deposit balances are higher due to seasonal inflows the second and fourth quarters, our earning asset yields are lower given the short-term duration of the deposits and limited opportunity to invest the funds. We are projecting relatively flat non-interest income. Excluding non-recurring items, such as the impact of the 2022 company-owned life insurance surrender and redeployment transaction and other non-interest income categories that are difficult to predict, such as limited partnership income, gains on investment securities and gain on sale of indirect loans. We are targeting an increase in the mid-single-digit range for non-interest expense. Our spend in 2023 reflects inflationary impacts experienced in 2022, partially offset by savings from the staffing restructuring completed in the fourth quarter. 2023 non-interest expense also includes ongoing investments in strategic initiatives, including our customer relationship management solution, digital banking, and BaaS. We expect these investments to begin producing incremental revenue in 2023 contributing to positive operating leverage and ROA above 1%, and an efficiency ratio below 60%. We expect the 2023 effective tax rate to fall within a range of 19% to 20%, including the impact of the amortization of tax credit investments placed in service in recent years. We will continue to evaluate tax credit opportunities and our effective tax rate would be positively impacted by taking advantage of further investment opportunities. We expect net charge-offs to be within our annual historical range of approximately 35 to 40 basis points. Our overall focus includes executing on key strategic initiatives that will improve profitability and operating leverage over time. We believe that achieving results in line with the guidance provided will drive these outcomes. That concludes my prepared remarks. Thank you, Jack. We are proud of our many accomplishments in 2022. In addition to delivering strong financial and operating results in a challenging environment, we achieved the following: in February, Five Star Bank launched a commercial lending platform in Baltimore and Washington D.C. by taking advantage of experience and available talent to hire a team of four commercial banking officers. As previously mentioned, this team is experiencing great success in establishing relationships with strong sponsors and closing loans. During the second quarter, we took advantage of the opportunity to sell a $31 million portfolio of indirect loans and recognize a gain of $586,000 demonstrating our ability to capture gains within this portfolio by leveraging capital market relationships to remix loan exposures. In September, we celebrated the grand opening of Five Star Bank Center, the new home of our Western New York regional administrative office and SDN Insurance Agency. This was an investment in both the Buffalo region, and our future in this important market. The investment underscores our commitment to Western New York and our valued local associates, setting the stage for continued growth in the Buffalo market. Our BaaS pipeline expanded throughout the year and as noted in our investor presentation we have several partnerships in various stages of on-boarding. We also remain steadfast in our mission to support our customers and our communities. For the fifth consecutive year, our Five Star Bank Community Report highlights the ways in which we are fulfilling our purpose in promoting sustainable business practices that deliver long-term value to the communities we serve as well as our shareholders. I encourage you to read the Five Star Bank 2022 community report available on the Five Star Bank website, and our Investor Relations website to better understand the many ways we keep people at the heart of everything we do. Our positive momentum continues in 2023. Just last week, we announced our expansion into the Syracuse market, with a new commercial loan production office in the city's historic Franklin Square. This new office provides entrance into Onondaga County expanding Five Star Bank's Upstate New York footprint to 15 counties throughout Western New York, the Southern tier, and the Finger Lakes region. The Syracuse office will be home to a three person commercial and industrial team, and a commercial real estate banker. In accordance with our strategic plan, we've expanded beyond our historic rural Upstate New York footprint, to serve metros like Buffalo Rochester, and now Syracuse. This most recent expansion supports our focus on driving credit disciplined loan growth, and growing deposits by bringing our style of community banking, with local leadership and local decision-making to businesses of all sizes throughout Central New York. In closing, I would like to thank my fellow teammates for their ongoing dedication and commitment. Their efforts are instrumental to our achievements and ongoing success. Operator, please open the call for questions. [Operator Instructions] Our first question is from Alex Twerdahl from Piper Sandler. Alex, your line is now open. Please go ahead. First off Jack, I was hoping you could give us a little bit more on the $1 billion of cash flow from the securities and loans. I guess first off, how much of that would you need just to keep the loan portfolio flat? I'm just trying to figure out how much might be excess after the loan growth guidance that you gave us. So if we're bifurcating that guidance between the two portfolios, we're currently modeling $180 million in cash flow from the securities portfolio and then about $900 million in cash flow off the loan portfolio. Okay. And is that going to be â should we expect those cash flows to be pretty consistent throughout the year, or are there any big chunks in there that we should be aware of? It modeled to be a little fairly consistent. There is lumpiness in the commercial portfolio. But from a timing standpoint we would expect that to be relatively flat over the year. Okay. And then when we think about the reinvestments of that into new loans. Can you give us a little bit of sense for what kind of rates you're getting? What kind of yields you're getting on new production? And if that is different across the different portfolios as well as the different geographies that you're in? Yes I can comment on the total portfolio. Just as recently as December, we were seeing new origination rates in the commercial portfolio come on around 7% and a little bit better in the indirect portfolio. Okay. And the last question that I had is on the $150 million of deposits from the Banking as a Service relationships. Would those typically be time deposits or transactional deposits, or what kind of â I guess what kind of rate would you need to pay on the types of deposits that those relationships would generate? Those are generally non-maturity deposits and the rate that we would have there is favorable to what we're seeing in the time deposit space. So I'm not going to comment purely on what we're paying but it does benefit margin. Thank you, Alex. Our next question is from Damon DelMonte from KBW. Damon, your line is now open. Please go ahead. Good morning, guys. Thanks for taking my questions today. With respect to the deposit betas, I think Marty you made a comment that cycle to date you see about 22% deposit beta. What is like the full cycle expectation from you guys on your end? Hey, Damon. Yes, so cycle to date through the end of the year we were at 22% for total deposits. As we look at our expectations for rate increases in 2023 and then go back and consider that full cycle which would essentially be two years, right? We're looking at 25% to 30% cycle to date betas. Got it. Okay. And then with respect to the growth you guys have been getting in the Mid-Atlantic, could you just give a little bit more color on the size and the type of industries that these loans are for? I know they're predominantly office space but what kind of businesses are these supporting? So it's really kind of been across the board. We've seen some very nice health care-related opportunities related to tenants related to the federal government and others in between. All right. Great. And then lastly the guidance calls for 35 to 40 basis points of net charge-offs. So when we think about loan growth, when we think about that level of charge-offs, the reserve was around I think 112 in this last quarter. Is your goal to hold that? Is your goal to grow that a little bit kind of just given growing uncertainty trying to kind of triangulate to figure out how we should think about actual provision each quarter. Yes. Damon, I think, you're spot on there. The coverage ratio of 112 basis points is consistent with where we were from our day one CECL modeling, and there are moving parts of the CECL model related to unemployment forecast, which is our quantitative driver, but that coverage ratio makes me comfortable when I look at the credit quality of our portfolio. So holding that against loan growth and modeling 35 to 40 basis points of charge-offs should get you to the number you need from a provisioning standpoint. First just wanted to start, make sure I've got something right, Jack. In terms of the outlook for non-interest income to be relatively flat in 2023 versus kind of that adjusted 2022 number -- sorry, if I missed this. Can you just refresh me on what that kind of adjusted 2022 base number should be? Yes. We stripped out $2 million of gains that we had from or additional income we had from a bank-owned life insurance enhancement realized in the third quarter when we surrendered and redeployed part of that portfolio. So we consider that to be non-recurring. Great. Thank you. And then in terms of -- you talked a little bit about the cash flow coming off of the securities portfolio. That book has shrunk over the last year or so in terms of percentage of total assets down to about 20% now. What would be the optimal size relative to total assets for the securities portfolio in your mind? Got it. And then in terms of the $350,000 of restructuring charges related to the branch closures, I think, you mentioned there are write-down in the real estate assets to fair market values based on current market conditions. Curious if those fair value marks are kind of something specific related to those branches, or if there's anything larger you're seeing in terms of real estate values in your markets, or any kind of broader view or read through we could take from those marks? Those were five branches that were located in our rural banking footprint. Two of those are under sale agreements at this stage of the game. And the other three were written down to recent broker opinion of value as of year-end. So it's just reflective of market conditions for older abandoned bank space in that area. I think it's specific to these buildings, these facilities versus a larger issue in the marketplace. These are kind of single-use type of facilities, some are older. And they're in markets where demand is pretty modest. That's helpful. That's what I expected, but I just wanted to make sure. And then last one just thinking about the Banking-as-a-Service initiative. Just curious if you can kind of update us on from a bigger picture perspective where you are in the entire process? And what goals or milestones you hope to reach in 2023 you mentioned the deposits that you expect about $150 million of deposits, but just curious what else you're kind of targeting and looking for this year? Well, the way, we're thinking about that first and foremost is to make sure that we have a curate -- a series of opportunities that end up being a reasonable risk and really in alignment working with companies that are in alignment with our own approach to our risk appetite statement. As we indicated in our investor deck, we've got five opportunities that we're in various stages of. One is live, and two are in integration onboarding, and two are in testing right now. So we are emphasizing commercial business versus consumer, because we think that that's a more sustainable opportunity over the longer-term. And we can -- from a budgeting standpoint, it's inject's guidance that in the next 12 months what we're investing is and what will the benefits and the costs will end up offsetting each other and be neutral to our budget. But over time we see large opportunity, substantive opportunity in terms of driving non-interest revenues contributing to our deposit portfolio and a modest amount of utilization of the balance sheet relative to lending. I just want to follow up quickly on the announcement you guys made earlier this week on Syracuse. And I was hoping Marty maybe you could talk a little bit more about the overall strategy in that market. I know there's been a major investment announced by Micron. And I'm just curious, if this is kind of the start of an overall longer-term strategy to kind of be a little bit more active in that market or how you're thinking about it? So thanks for circling back, Alex. We've been active really in that market servicing it at the end of our geographic footprint, which is halfway between Rochester and Syracuse out of our Auburn market, but we've had significant participation through seasoned relationship management. Our regional president is a long-term commercial banking professional that's really helped us drive some very nice opportunities full commercial relationships. And so based on that experience, we've been working together to build out a loan production office including importantly our human capital that would help us lead that initiative. The Micron announcement really is indicative of what we've been talking to investors about for a number of years and that on a regional basis New York State has been encouraging regions to work together to develop strategic economic development plans that are grounded in the assets, the technology, the human capital that is in the regions, the industries that are there and to pursue it and to leverage the collaborative opportunity for investment that comes through the public sector private sector and other sources. So the Micron deal obviously was turbocharged through the Senate majority leader and others and we see that as very significant upside relative to that region. But I would just point out that as you go down the true way there are very bright opportunities in every kind of so-called major city Buffalo, Rochester, Syracuse, Utica and Albany as a result of that collaborative regional economic development process. We currently have no further questions. I will now hand back to our speaker Mr. Birmingham. Mr. Birmingham, please go ahead. Thanks so much for your assistance operator this morning. Thanks to all who participated. We look forward to continuing to build on our communication with you at the conclusion of our first quarter results. Thank you. 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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Moving to slide 3, I would like to remind you that information presented in this call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. I refer you to our Form 20-F document on file with the SEC and also our Document dâEnregistrement Universel for a description of these risk factors. With that, please advance to slide 4. Our speakers on the call today are: Paul Hudson, Chief Executive Officer; the Global Business Unit Heads, Bill Sibold, Thomas Triomphe, Olivier Charmeil and Julie Van Ongevalle; and Jean-Baptiste de Chatillon, Chief Financial Officer. For the Q&A, you have two options to participate: option one, click the Raise Hand icon at the bottom of your screen; or option two, submit your question by clicking the Q&A icon at the bottom of the screen. Well, thank you, Eva. Nicely done. And thanks to everyone for joining our call today. I'm delighted to be here and together with members of the executive team to take you through our 2022 business and financial performance. Weâre proud of the progress we made in transforming our R&D organization by delivering on operational and financial performance. With 10 consecutive quarters of growth, weâre successfully closing the first chapter of our âPlay to Winâ strategy. Moving on to the next chapter. Well, we are looking forward to the upcoming launches, key readouts as well as Dupixent that is set to reach â¬10 billion in 20 23. On slide 6, starting with the full year view, 2022 marks the first year, where Specialty Care delivered a highest sales amongst our businesses. The main driver of this performance is Dupixent. This unique medicine, which we identified in 2019, is a core driver of our transformation. The biologic profile of Dupixent, to this day, we believe remains the best in its class with exceptional ability to balance high efficacy with compelling safety. Blazing the trail in markets that are underpenetrated in terms of eligible patient populations, Dupixent keeps adding significant patient pools through multiple approvals in diseases that are still underserved. Without question, this medicine is now a key cornerstone in treating chronic Type 2 inflammatory diseases. 2022 also marks another successful year for vaccines. We maintained our leadership in flu and are getting momentum quickly as the pediatric vaccines company of choice. In fact, Thomas will share with you in a few minutes how well our latest pediatric launch is performing. In the second half of the year, weâll be ready to launch Beyfortus. This winter almost everybody learned how contagious the virus such as RSV can be, with the potential to cause a serious respiratory illness requiring hospitalization in those that need protection most. Switching to Consumer Healthcare. We continue to be pleased with performance and consistent growth since Julie took over. And Julie has reshaped the business and the CHC GBU is now executing successfully in its prioritized franchises. We have carved in a standalone structure over the past few years and we are embarking on the next phase, enabling CHC to fully manage all its corporate functions independently. Finally, the progress we're making in streamlining GenMed also delivered encouraging results. Notably, the core assets we are prioritizing are increasingly contributing to GenMed's performance, now totaling â¬6.4 billion of sales, up 5.2% from last year. While our CFO, J-B, will detail our financial performance in his section, I would like to highlight our strong earnings of â¬8.26 per share, growing 17.1% at a CER and continuing the strong trend we set in 2019. Moving to slide 7, let me remind you of the achievements of the first chapter of our six-year strategic plan. As a few proof points of our transformation thus far, I highlight the 10 consecutive quarters of growth, the 540 bps BOI margin improvement, and the â¬2.7 billion of cost efficiencies, which we reinvested behind growth drivers in our pipeline. To accelerate our R&D pipeline, we also deployed cash to value-creating transactions securing access to external innovation. We are committed to continue investing in BD and M&A activities to bolster our priority TAs. We see digital transformation as a key area for enabling further productivity and efficiency gains, employing insights from AI and predictive analytics across the organization. On the next slide, let us pivot to some leading indicators of our transformation to an innovation led company. In 2022, our R&D efforts were recognized by as many as nine publications in major peer reviewed medical journals, including New England Journal of Medicine and the Lancet. We have received five priority reviews or breakthrough designations and launched two new molecular entities in 2022 Xenpozyme for the treatment of SMD and Enjaymo for cold agglutinin disease. Bill will explain to you in just a moment how meaningful those launches are for our longstanding leadership and commitment in rare diseases. Turning to the next slide, 2022 has been a landmark year in Sanofi positioning -- sorry, in Sanofi positioning itself as a player to drive global ESG initiatives, which we presented to you by the way back in July â22. Our commitment to society is exemplified in our R&D efforts to address underserved populations, and I'm particularly proud to give you the latest update on our dedication to eliminating sleeping sickness, a terrifying disease killing patients in less than two years of untreated and still endemic in very remote areas of sub-Saharan Africa. Sanofi has been partnering with the World Health Organization for more than two decades, donating drugs and providing financial support, and as a result, the number of diagnosed patients fell by 97% since 2001 to reach as few as 800 cases last year. Incredible work really. At the same time, we've continued R&D efforts in order to push those numbers even lower. Acoziborole is a potentially transformative treatment and it raises hope for the elimination of sleeping sickness in Africa. Phase 2/3 trial results show compelling efficacy and safety, and the key advantage of acoziborole is simplification and accessibility, providing an oral one and done dosing option. Patients can be treated with no need for hospitalization, and our regimen could also include the treatment of children. Looking ahead, 2023 will mark two major first-in-class or best-in-class launches, for the first time in the Company's recent history. We plan to launch Altuviiio in Hemophilia A, a medicine with a compelling profile that is poised to capture market share, both from factor and non-factor therapies. Equally exciting, we are ready to launch Beyfortus for RSV prevention in time for the next season, providing all infant protection. We have -- we expect to have two pivotal readouts this year as well. Dupixent in COPD and tolebrutinib in relapsing remitting MS. For both, we hope to see breakthrough data sets, particularly in COPD. When you think about the huge unmet need and the challenges that patients and healthcare systems face, this could be a real game changer. With 27 earlier stage readouts from assets with first or best-in-class profiles, especially in immunology, we are set to deliver on our ambition to transform the practice of medicine. Although all research and development in our industry involves risks, we are committed to break new ground and to chase the miracles of science. Across the organization, our teams have been relentlessly executing our plan over the last three years, and I want to take this opportunity to express my gratitude for all their hard work. During the 2023 to 2025 period, our action will be focused on our existing objective to achieve more than 32% BOI by 2025. We are steadfast in our ambition to reach this target with new launches, continuous Dupixent profitability improvement, and by further streamlining our portfolio. Now, what will lead us into the next chapter of our growth story? While 2026 and beyond is not fully laid out yet, we have previously guided you on growth targets for the second half of the decade, the immunology and vaccines. Unlike any of our peers in the industry, we are in a unique position with the portfolio uncompromised by a meaningful LOE exposure over this period. To fuel this next chapter of growth, we are confident in our improved R&D productivity, driving a pipeline made up of at least 70% biologics with 90% to 95% of products being best in class or first in class. This lays a promising foundation for us to bring three to five products to market with â¬2 billion to â¬5 billion peak sales potential each in the second half of the decade. Significant unmet need remains in immunology, neurology, oncology, and vaccines, where our science is gaining momentum as we continue to focus on winning product profiles, including medicines such as to tolebrutinib, itepekimab and amlitelimab. On the next slide, let me transition to the business performance of Q4, which will be led by our GBU heads. Bill will start by highlighting Dupixentâs growth weâve shown again in Q4, driving Specialty Care performance to new heights. Q4 has been another extremely successful quarter for the Specialty Care with solid double digit growth. Dupixent remains the top driver of this growth fueled by strong demand across indications, geographies, and age groups. In 2022 alone, we managed to add 225,000 new biologics eligible patients with the addition of asthma in the EU to treat 6 to 11 year olds, EoE in the U.S. for 12 years and up, AD in the U.S. for ages from six months to five years, and finally prurigo nodularis in the U.S. targeting adults with high unmet need. Switching to rare diseases, I am pleased with our performance in this core TA where we not only continue to add new patients in our LSD franchises, we are also starting to benefit from the contribution of recent new launches. I would specifically point out the quick ramp up of Nexviazyme and Xenpozyme where we have rapidly established the standard of care. Turning to oncology and neurology, as you know, we anticipated lower sales in the quarter due to a number of factors related to late life cycles. In particular Jevtana in the U.S. and the Aubagio LoE in Canada, which gives us an indication of the very significant impact we can expect from U.S. generic entrants to Aubagio beginning as early as March of this year. In Europe, the first generic entrant is expected in the fourth quarter of 2023, based on confidential agreements Sanofi concluded. On slide 15, let me draw your attention back to Dupixentâs growth trajectory, set to reach â¬10 billion in sales in 2023. Q4 delivered another quarter of more than 40% sales growth globally, ex U.S. sales are now annualizing over â¬2 billion and incremental â¬3 billion were added in 2022 globally, also benefiting from the strong U.S. dollar. Going forward, this currency benefit on a reported basis may not continue at the same rate. We keep making tremendous progress with our regulatory milestones. Not only did we launch Dupixent for PN in the U.S. in the fourth quarter, but we also received approval for this indication in Europe in December, making Dupixent the first and only biologic available for the treatment of this dermatological disease. For chronic spontaneous urticaria, in short CSU, we had already shared in January the submission to the FDA. This indication has the potential to add another 308,000 biologics eligible patients to receive treatment for a highly debilitating skin disease. If approved, we have the potential to add a population close to the size of the market targeted with Dupixent in COPD. As a quick reminder, the usual dynamics around co-pay assistance programs that typically take place at the beginning of the year are expected to weigh on reported sales figures in Q1. Now on the next slide. Dupixent's leadership amongst specialty respiratory biologics is depicted by the pie chart on the left side, reaching 37% NBRx share. More importantly, as you can see in the table on the right, the asthma biologics market in the U.S. remains largely underpenetrated. Today, only 22% of biologics eligible asthma patients above the age of 12 receive an advanced therapy, and as such, represents an enormous potential for future growth with Dupixent in this indication alone. In children, the opportunity to treat biologics eligible patients with unmet need is even higher. Furthermore, as Paul already mentioned, our teams are highly excited about Dupixent's potential to become the first biologic to treat COPD, a devastating disease that has seen no innovation in the field for the last decade and is the third leading cause of death worldwide. On slide 17, switching now to some recent innovative launches in our rare disease portfolio. Here are some great examples of how Sanofi's R&D transformation has translated to the expansion of our portfolio to address significant unmet medical need. While the targeted patient populations for these products may be small individually, the importance of improving people's lives with these first-in-class therapies continues to reinforce our leadership in rare diseases. Specifically, in Q4, we have seen strong adoption of Xenpozyme and Cablivi. Enjaymo has seen meaningful growth in new patient starts. Moving to my final slide, I want to zoom in on our expected upcoming launch of Altuviiio. We see this medicine as an important future growth driver for Sanofi overall and building on our expertise in the greater than â¬10 billion hemophilia A market. With Altuviiio, we have a best in class factor treatment with the potential to set a new efficacy standard by providing a near to normal range of factor VIII levels for most of the week, coupled with its reduced treatment burden of once weekly dosing. With the PDUFA date later this month, we believe Altuviiio will be the first breakthrough medicine to enable new daily lifestyle possibilities for hem A patients. To-date, we are particularly excited about the positive physician and patient feedback we have received over the time of its development. In addition, the recent New England Journal of Medicine publication highlighted Altuviiio's potential to transform the treatment landscape for people with hemophilia A. Q4 Vaccines sales were â¬1.7 billion, 16% down versus prior year as expected, owing to strong operational execution leading to the shipment of large volumes of flu vaccines already in Q3. We delivered another record sales year for flu, driven by our differentiated vaccines. I will touch on this more on my next slide. PPH sales were lower compared to the same quarter last year due to the COVID-19 situation in China, disrupting the routine infant vaccination at the centers of care. In addition, Vaxelis sales keep growing in the U.S. Given it's a JV between Merck and Sanofi, those sales are not consolidated in our sales line. We continue also to observe progressive recovery of booster and travel vaccines, but the latter have not yet fully reached their pre-pandemic level. And finally, sales in the others category benefited from our COVID-19 booster VidPrevtyn Beta in Europe. Depending on individual countries supply arrangements, those revenues were either booked in the sales or in the other revenues line. Moving on to slide 20 for flu. With almost â¬3 billion sales, we achieved another record year of flu sales in 2022 in a challenging vaccination environment marked by both, patient and provider fatigue. Our strategy to focus on vaccines offering protection beyond flu is paying off and is driving the flu franchise growth, Fluzone high dose and Flublok represent the majority of our flu sales since 2021 and do continue to grow. In the U.S., although overall vaccination rates decreased this season, the senior market has been stable and Fluzone high dose remains the market leader, gaining 4 points share in this segment. In Europe, we observed a similar trend in those countries where we have launched Efluelda. [Ph] After Germany in 2021, some regions in Italy and in Spain have awarded their influenza tenders to Efluelda to vaccinate their seniors in 2022, thus providing the most vulnerable vaccine with demonstrated efficacy against both flu infections and its dramatic consequences. Next slide, please. As we start the year, we are set to build up our strong position in pediatric vaccines. First, Vaxelis, the first and only hexavalent pediatric vaccine available in the U.S. reached 26% share of the 3 dose primary service at the end of 2022, 18-month only after launch, gaining share from the pentavalent pediatric vaccines. We expect Vaxelis to be the leading pediatric vaccine in the very near future. Second, we're getting ready to launch Beyfortus for the next RSV season. As soon as we get the license and ACIP recommendation. RSV is creating havoc this season. It has put heavy burden on healthcare systems and emotional strain on families, which reinforces the value of Beyfortus as a solution for an important unmet medical need. We're working closely with the FDA to expedite review timelines given the urgent unmet public health need caused by RSV, and to ensure equitable access to Beyfortus to protect all infants against RSV as soon as possible. Finally, on the R&D side, as announced at our vaccines event in December 2021, we now have interim results of our PCV21, RSV toddler, and Meningitis B programs. These interim results give us confidence on the path forward for these programs. We will host a vaccine R&D event in the first half of this year to share detailed results and to give a broader update on our pipeline. Very much looking forward to this event, I hand over the call to Olivier. The execution of our strategy continues to deliver as planned. In Q4, general medicine sales decreased 3.7% to â¬3.4 billion. The impact of the consolidation of EUROAPI third party sales was minus 3.6 percentage points while the impact of divestments of noncore assets was minus 0.7 percentage points. Our core assets grew 8% in Q4 despite the decrease in Lovenox sales, which continues to be affected by a low molecular weight heparin markets, decline following high demand during the COVID period. Our strong brands, Praluent, Toujeo, Thymoglobulin and Plavix all delivered double-digit growth in Q4. Furthermore, the adoption of Rezurock was robust with more than 1,400 patients treated since launch. The noncore asset sales decreased 10.8% in Q4, reflecting portfolio streamlining and Lantus decline in the U.S. as well as in China due to VBP implementation in May. Moving now to slide 23. For the full year 2022, General Medicine sales reached â¬14.2 billion. Importantly, our core assets were up 5.2%, in line with our ambition to grow our core asset mid-single-digit CAGR over the period of 2020 to 2025. Our core assets now represent 47% of GenMed sales versus 43% in 2021. Across our core brands, Praluent, Thymoglobulin, and Rezurock performed well, and we are specifically proud of reaching blockbuster status for Toujeo for the first time. This year, our total glargine sales, Toujeo and Lantus were down 10.7% in China. VBP implementation in May 2022 impacted Lantus sales as expected, but we saw a strong ramp-up of Toujeo, which benefited from a demand increase. Looking forward, we remain confident in the performance of our core assets. Our transplant franchise is expected to continue its growth path driven by Rezurock despite the loss of exclusivity of Mozobil in July in the U.S. Praluentâs strong performance should continue driven by Europe and China. Soliqua was approved in China in January 2023 and we plan to launch in Q2 of this year. We will work with Chinese authorities to get access to patients to NRDL. In parallel, we will continue to leveraging the compelling SoliMix data to source market share from the premixed insulin in the Rest of the World region. The strong performance of Plavix in China is also expected to continue in 2023. In 2023, we expect Toujeo to continue to be a significant contributor to the growth of General Medicines across many geographies, including China. The streamlining of the GenMed established product portfolio continues. In Q4, we closed two further local deals in Germany and Spain, ending the year with 122 product families from originally more than 300 in 2018. In summary, our recent performance and streamlining efforts gives us confidence in our ability to further drive the share of core asset sales to 60% of total GenMed sales by 2025. The Consumer Healthcare market continues to post double-digit growth in several of the categories, with price contributing way more than volumes. Q4 was notably affected by the tripledemic with high levels of influenza, COVID-19 and RSV across all geographies. This high level of incidence drove consumers to purchase significantly more Cough & Cold than general pain remedies to protect themselves and their families. Sanofi CHC participated in the strong Cough & Cold momentum with our European portfolio. However, our absence from this segment in major markets like the U.S., where market dynamic has been very strong, with over 30% growth, drove our latest rolling 12-month growth to lag slightly behind the market. Nonetheless, I'm proud to share that Sanofi CHC has delivered a fourth consecutive quarter of double-digit growth on a rolling 12-month basis, with strong performance across Digestive Wellness, Allergy and Cough & Cold categories. Our Digestive Wellness portfolio, in particular, continues to deliver outstanding results with 19 months of consecutive share gain. On the organization side, we're also taking the next big step towards becoming a fully standalone business within Sanofi. Effective January 1, 2023, all core functions such as finance, legal, HR and digital have been integrated under the unique CHC umbrella. These remaining functions are essential to the development of our integrated FMCH operating model to further accelerate our agility and consumer relevance. In particular, dedicated digital systems and the IT teams joining our CHC forces enable us to initiate our disentanglement and further optimize and upgrade our road map with a clear end-to-end perspective. As a result, Q1 2023 onwards, we will be reporting results as a fully formed CHC organization, carrying our full portion of the support function expenses that were shared across the organization so far and reflected in the section, Other. J-B will explain the details in a minute. For CHC, taking full ownership of our P&L will enable us to tackle our opportunities and increase our competitiveness in order to further drive growth. Moving on to Q4 net sales. We delivered 6.6% sales growth and 7.5% excluding the impact of divestments as a result of our portfolio simplification. Many of our major categories, Digestive Wellness, Pain Care, Allergy, and Cough & Cold generated meaningful gains during the quarter. The Digestive Wellness brands, I highlighted last quarter in Enterogermina, Buscopan and Dulcolax continue to deliver outstanding growth, maintaining their leadership position and expanding new market share. Additionally, our leading local and regional brands delivered high growth. For instance, Eve, the number one general pain relief brand in Japan has delivered phenomenal market performance and sales growth in Q4. Strong marketing, commercial and pricing execution have resulted in driving market share above pre-COVID levels. Our Cough & Cold brands enjoyed double-digit growth in Q4 and have been the largest contributors to our strong full year performance. This is a result of robust consumer demand. Coupled with a very relevant and impactful global campaign, Don't Hide your Cough, rolled out across more than 30 markets with brands like Mucosolvan and Bisolvon Europe or East Asia and Mexico. This campaign drove significant improvement in brand equity, reached the highest brand [ph] scores in the key countries and won Euro Effie Award. In summary, 2022 was another year of strong performance, growing 8.6% in net sales and almost 10% organically, while transforming our business into a standalone organization. Yes. As Paul mentioned, I would like to pick a few drivers of our strong financial performance in 2022, obtained in spite of a challenging macroeconomic environment. Full year company sales reached almost â¬43 billion, growing 7% at constant exchange rate. Adjusting for divestments on EUROAPI sales in the prior period, sales growth would have been 8.6%. Other revenues benefited from higher VaxServe sales as well as COVID-19 vaccine-related revenues. The gross margin improved by 180 basis points driven by product mix and efficiencies that more than offset increased cost of energy and transportation as well as higher labor cost. Operating expenses grew roughly in line with sales, the majority coming from R&D to fund and expand our pipeline for future growth. Other operating income, mainly driven by the Regeneron profit share was up more than 25% versus prior year due to the outstanding success of Dupixent. We also recorded capital gains from divestments totaling â¬615 million in this line. We continue to identify assets across GenMed and CHC that are noncore and expect to generate capital gains from divestments of a similar magnitude in 2023. As a reminder, the upfront payment on the regulatory milestone payment linked to the Libtayo license agreement are only recorded in our IFRS P&L. Our BOI margin reached 30% at constant exchange rate and 30.3% at published. An improved effective tax rate of 19.3% on higher financial income also contributed to the business EPS growth 17.1% at CER. On slide 29, our pipeline being now mainly biologics, on our new manufacturing facilities becoming fully versatile, we have decided to combine vaccines and pharma manufacturing operations. This will trigger new efficiencies, eliminate duplications and will increase flexibility. This will be effective January 1, 2023. CHC, on the other hand is successfully implementing its standalone model, driving significant improvement in performance over the last two years. This year, we have moved to the next level of autonomy by transferring remaining global functions. As such, beginning with Q1 2023, we will report a fully loaded segment P&L for CHC. 2022 comparable figures will be provided ahead of Q1 earnings. To sum up, starting from Q1, we will present our divisional business, P&Ls categorized by Biopharma, Consumer Healthcare and Other. As a result, you can expect a much enhanced CHC disclosure, allowing you easy peer comparisons and for our team, benchmark will be easier and more compelling. With support functions now largely allocated to the businesses, so section other will be significantly reduced. Turning to slide 30. Reducing greenhouse gas emissions to net zero is an unprecedented challenge. With the consequences of climate change becoming very visible, it has become critical to set higher ambitions to effectively address these challenges. At Sanofi, we are bringing forward the time line of our ambition to net zero emissions to 2045. This marks a five-year acceleration versus our previous target, building on great work already done. For example, increasing our renewable electricity use and transitioning to a carbon-neutral car fleet, that has allowed us to already reduce emissions from our activities by 29% since 2019. Weâll also continue to work closely with our suppliers to reduce our Scope 3 emissions. These have come down 7% since 2019. On slide 31, our gradually growing dividend remains an important element of our capital allocation policy and ranks only behind organic investment on business development in our priorities. This is reflected in the fact that the Company has consistently increased its dividend payments for the last -- for the past 28 years. For the year 2022, we announced that the Board has proposed a plus 6.9% increase in the dividend to â¬3.56. Advancing to my final slide, we expect full year 2023 business EPS to grow in the low single digits at constant exchange rate. On ForEx, based on January 2023 average exchange rates, we see a currency impact of minus 3.5% to minus 4.5%. So, we will now open the call for your questions. As a reminder, we would like to ask you to limit your questions to two each. And I will now repeat, for the Q&A, you have two options to participate: option one, click the Raise Hand icon at the bottom of your screen, and you will be notified when your line is open to ask your question, at that time, please make sure you unmute your microphone; or option two is to submit your questions by clicking the Q&A icon at the bottom of the screen, and then your question will be read by our panelists. Can we have the first question, please? Great. Thanks for taking my question. So, first one is on tolebrutinib. So, the FDA has had the Hepatic Assessment Committeeâs results since, I think, the end of September and your own data monitoring committee was happy to restart recruitment in Rest of World study. So just what's holding the FDA back if you have any direct dialogue with them? And if not, when would that happen? And do you think those discussions will define the label there? And then secondly, on Beyfortus. Just interested to understand why the FDA didn't give priority review given breakthrough therapy designation, huge epidemic. I saw in your press release that said you work -- they would be working to expedite the review. But what does that mean? So could you still hit the June ACIP panel meeting for Beyfortus, do you think? Yes. Graham, thanks for the question. The -- we're still conducting the work that FDA had requested to try to gain a mechanistic understanding and to why a handful of patients out of over 2,000 on the studies have experienced liver injury. That work is ongoing. In the interim, as you know, 3 of the 4 studies are fully recruited, the 2 GEMINI study is for relapsing remitting and the HERCULES study for non-relapsing secondary progressive. The PERSEUS study for primary progressive continues to recruit ex U.S. And -- so we'll keep working towards that ambition of understanding more mechanistically why a rare occasional patient might have a liver issue. I would note that in the world of MS drugs, it's not uncommon for practitioners to have liver monitoring as part of the onboarding of a patient as they started a new initiation of therapy when you ask about what the label might bring. I can't really speculate, but I suspect it would have monitoring in the early going -- and that's not uncommon among MS medicines. Maybe -- thanks, John. And maybe -- you touched on already, there is no drug, I think, specifically designed for secondary progressive MS and progressive nature of the disease. So that study has recruited as you mentioned, primary progressive still recruiting. And it's not uncommon for additional steps and initiation. So really, still a very compelling story for us, and we'd rather spend the time now with the regulator getting it right and making sure we all understand where we are. And of course, the regulator decides because those studies are fully recruited. So, it's worth spending the time to make sure we're good. We are definitely going to launch Beyfortus in the U.S. in 2023, Graham. So, getting back to your question, we're not going to speculate about the rationale by the FDA. Clearly, what's very important is that as you've pointed out, after the approval in the UK, there has been a clear understanding by the agency and as well by the ACIP of the importance of Beyfortus to tackle RSV, which is the number one cause of hospitalization in the U.S. or in Europe or worldwide, actually in the first year of life. So, that's been clearly very important and fruitful dialogue. We're all moving forward to be ready for the launch. And I clearly don't see -- and we've been working a lot also with the ACIP member, as you know very well. Good progress, up and ready for the 2023 launch with both a licensure and ACIP recommendation. So firstly, just on the Consumer Health. I mean, I think it's sort of the obvious question, if you'd like, and obviously, you've now got a fully loaded P&L and certainly, the use, I guess, by Julie of the words sort of road map forward. I guess, have you got sort of any update or thinking on your thoughts with regards to how much longer you think this business should remain within Sanofi? And perhaps more importantly, what are the gating factors for that decision? I'm thinking, in particular, the Rx-OTC global switches, perhaps you update on those? And is potentially getting clarity and a clear path to time line for those a gating factor before we can potentially have a decision potentially on the future of consumer within Sanofi? And then secondly, again, just strategically on the decision to combine Pharma and Vaccines into Biopharma. I guess, curious, I understand sort of what you said, but I wondered if you could provide a bit more color on why now, I guess, for that. I mean vaccines, obviously, in Sanofi is a key sort of franchise and arguably it gets perhaps better appreciated the value of it and the longevity of it, if it's a standalone. So I guess combining it within the unit, does this coincide with nirsevimab Beyfortus launch, is that sort of cross over, or how should we think about the decision to do that at this point in time? Thank you. Okay. Peter, thank you. I'll make a -- well, I'll make some comments, and then Thomas or John, if you want to jump in. On Pharma and Vaccine combination, I mean some of the platforms are coming together, mRNA, biologics, as you pointed out. It's a decision already taken. It started, and the work has been going on for some time in terms of converging platforms, shared services, could be engineering, could be many things. We're just already underway. And of course, the modular nature of the three cutting-edge facilities we're building mean that we can move between antibodies and vaccines depending. So, it's a sort of future stake. We're getting organized now. We think it's more appropriate to do that. And it will probably free up some synergies and opportunities for productivity gains. So, sort of common sense for us. Want to add anything you guys? I would just say for me, it's basically smart resource allocation, which actually increases the ability to develop, launch and distribute first-in-class, best-in-class asset moving forward. Okay. Good. Thank you. As for other question, it's interesting that the turnaround in Consumer has been a real joy to watch. And frankly, we wanted to stand it up completely on its own, so you could make the comparison. I think you know better than perhaps even I do, inside a company, we don't always benefit from the multiples and things associated with it. So, we would like people to understand what a great Consumer business that we have and we're very proud of it, and it's really moving at high speed. It, of course, adds a little bit of tension for the consumer team. Now they're properly benchmark. Now they have to raise their game, too, to make sure they compete with all other absolutely like-for-like consumer businesses. And I think that's healthy. As for choices, well, we declared in 2019, we just wanted to grow faster than the market. And while we're growing faster than the market, we're in great shape. We've never communicated anything other than that. Next question? First question, just on the flu vaccines, and apologies if I missed it. I didn't really hear whether you anticipated a record flu season in '23. So, perhaps you could talk about the expected drivers in the U.S. around maybe a return to more vaccinations because of a bad flu season and price rises. And in Europe, do you see potential for increased penetration of high dose flu beyond Germany, Spain, Italy, et cetera? And then, second question, just on BOI margin. Maybe you could give us an idea of margin progression in '23, '24 towards your target of over 32% by '25? That would be very helpful. Thank you very much. Thank you, Richard. J-B will come to you in a moment on margin. Thomas, you predicted a record flu season every single year since at least I've been here. So, what do you have to say for yourself for '23? It's always nice to be recognized. Thank you very much for that point. Moving forward, a great question, Richard. It's indeed a very dynamic flu market. As you know very well, I very often have that question at that moment of the year. We always say that we are only in early February, you know very well, but strains for the completion of the vaccines will be selected in March. And you also know very well that we are in the middle. We just started the prebooking process for the flu and H '23 season. So, it's probably a bit early to give a guidance. Usually, I will tell you that at the Q1 earnings call. So a bit more suspense for the month of April. But definitely, we believe that we have the right assets with our differentiated vaccines. To keep being the leader in the flu market, there is some work to do on the vaccination rate. As we highlighted, it's been, I would say, a soft vaccination rate this year in H 2022. There has been disease, as we all have seen, but there is more disease coming back now, but there is less COVID-19 virus circulation. I think we can work with the system to make sure that this vaccination coverage rates do recover in '23 and '24, and that's the work we're on. Yes. Thank you. It's clear that with our target in '25, 32%, we are aiming to go on improving our underlying performance for the Company. So, with an EPS growing in '23 as we are guiding at constant exchange rate, of course, it means that in spite of the LOE of Aubagio, we are looking at deep and important improvement of the underlying performance of the Company. So yes, all said, you can make the calculation with an EPS growing as we are guiding. We are clearly aiming to reach our target of '25. Thank you to both. I think just a quick additional comment. I think even the chart shown today by Thomas, the progression and the value of the flu franchise since 2018 is, frankly, staggering. And while it's impressive, the total performance, the move to high dose has been really incredible. And as Thomas mentioned, the countries now that are making that standard of care in the elderly, just shows you that the protection beyond flu itself is significant and meaningful for payers and health systems. So, I'm very proud of how the teams have delivered on that. And on the margin expansion, I think JB has touched on it. We will swallow Aubagio this year and continue on our journey of making a connection between 2022 and 2025 on BOI. I'm not sure that's always easily picked up, certainly this morning. But we are -- it's our last LOE. And I would strongly encourage some reflection on that because we are -- as we exit '23 on track for a BOI in '25, that's a major moment for us to be launching and with the last LOE behind us. That's why we're excited about what we've communicated even if it takes a little bit of reflection. Okay. Next question? I have just two. Firstly, in terms of Dupixent, could you help us understand how to gauge the potential probative success here in COPD? I guess if we look back at other IL-5s, but not with Dupixent and eosinophilic enriched populations against the triple combination therapy. We're seeing roughly 17% to 18% exacerbation benefit. And that, I guess, is maybe on the cusp of if clinical meaningfulness. So, it would be great to get your viewpoints on your thoughts and expectations ahead of the data readout on the top line later in the first half of this year? And then secondly, Paul, you provided us with some of the key drugs to keep a progress support on back in December '19. As you sort of think about these sort of 3 to 5 new products with â¬2 billion to â¬5 billion of peak sales potentially each launching over the second half of this decade, could you sort of help us by identifying which you feel we should focus on? A drug like the OX40-ligand, for example, Phase 2b data and in Q3, would that be one of them? Just to try and get some additional color there would be great. Thank you. Well, listen, we're very excited about our COPD programs. We're the only company in the industry that has two assets in Phase 3 development for COPD, which is a huge healthcare burden, as you know, some estimates are the third leading cause of death, a huge burden on healthcare systems and no new mechanisms have been approved for over 50 years. So to have two opportunities with Dupixent and itepekimab in advanced Phase 3 studies is really exciting for us. The dynamic around exacerbation rates has been affected by the pandemic and the overall rates are lower. We have monitored that in the unblinded total population and believe that our studies are adequately powered to show the statistically significant differences based on the effect sizes that we've assumed. And so, we remain confident in the studies going forward. I think also the lung function part of the equation too is something that's often overlooked in addition to exacerbations. But the lung function improvements that we've seen with both of these molecules have just been really rock solid, unequivocal. So, that's an important variable to also mention when you think about what our prospects are for doing something meaningful for patients with COPD. Thanks, John. So, we know there's no advanced therapies, I think inhaled therapy is what we referred to in triple, and we know we passed a high hurdle on the interim. And so, we know we have high expectations, but we're also turning the cards over here. So -- and this is exactly what we should be doing in the Company. Maybe just to flow on from that in terms of your other question, let's stay in COPD for a moment. Itepekimab, IL-33, that's around the corner. In an ideal world, we'll have two advanced therapies in COPD that would be -- well, incredible, frankly. Amlitelimab, I think you've mentioned yourself that's starting to get very exciting. We're doing some very clever work around there, getting some really interesting data now that we're getting first patients in, in our nanobodies, IL-13/TSLP, for example, TNF IL-6, I think we have 3 already in the clinic. So that's pretty fantastic. We mentioned, I think, in what we circulated right at the end of the year that with the 27 early- to mid-stage readouts, there's a lot there. To go all the back to 2019, we picked that list in 2019, and I think we fared pretty well, I have to be honest, both -- in hemophilia, I think we've really exceeded our expectations for [indiscernible] to come. I think we've done very well with nirsevimab. I think we have really made progress on the Dupixent LCM, of course. And so, I feel like the last three years as well, we've been upping our game in improving our probability of success just by much more methodical, much more rigorous work, not it wasn't being done before, really upping our game. So, as we pass through the sort of inherited readouts, let's say, kindly, we start to believe our probability of success just improves because we're getting better at it. And in particular, in immunology, I think we really will surprise everybody in immunology. My belief with Dupixent beyond -- we either win or we win depending on the mechanisms that we bring alongside. So, it's starting to get really exciting. Okay. Next question? A question on Altuviiio with the launch coming up. Just how quickly you anticipate that patients could be switching here, certainly looks like good reception in the journal, et cetera, great data. So the pace of that launch and who the kind of early target patients might be? And the second question, just on business development. So just to check up on the Horizon situation with the press release naming Sanofi as being involved in preliminary discussions on an acquisition, how active were you and why? And should we expect more attempts at deals in this kind of price range? Thank you. Okay. Thank you. Bill, Altuviiio, Luisa shares her excitement. And what about the ramp-up? And then J-B, do you want to comment on BD and in particular, Horizon? Yes. Thanks for the question. Look, we are really, really excited about Altuviiio. It's not too often that you get to set a whole new standard of care of efficacy in a very well-established category. Usually, you're talking about incremental gains here and there, maybe some convenience gains. But with Altuviiio, you're allowing patients to be at near normal factor levels for the majority of the week. That's the first time that's been offered to patients. And we're going to be spending a lot of time and are spending a lot of time in the community, educating what is possible now. Possible to return somebody from experienced bleeds or at a high risk for bleeds to bringing them to an almost near-normal state. So, I think what we're excited about, in particular, is to see what does that mean to the mobility, to the lifestyle to just total quality of life for hemophilia A patients just around the corner from now. So, PDUFA, end of the month, we're excited. We are going to be out there with product in a few weeks after the launch. When you talk to the KOLs, as I'm sure you have, there are some that have their patients lined up ready to go. There's others that are saying, my patients -- they do for their regular appointments over the next months, and that's when we'll have the discussion about switching. So look, we're really optimistic that this is going to be a great launch. It's going to be a matter of getting our message out to everyone about now what's possible versus what you've settled for, for all these years. Thanks, Bill, and that's what's possible thing gets interesting because perhaps as we get a little bit further into the launch and physicians get the real experience of what it's like to give patients that near normal life, then the weekly nonfactors start to become a major consideration. And we might see some real opportunity for us there. Thank you, Luisa. BD and globally, capital allocation has no change. You've seen 25 deals going through BD and M&A and they are mostly centered on early science. Horizon, or I could name also Rezurock that we brought, even though it's much smaller than Horizon, it's opportunistic. If we see an opportunity where we can create value for shareholders, we would seize it. On -- it's not always about the size because Horizon has the right price, was a great opportunity to accelerate our journey to invest more in innovative science. So no change of strategy, but always on the lookout to seize an opportunity and try to create value for shareholders. Thanks, J-B. And as you rightly point out that the -- at the right price, there was an opportunity to use our pipeline in terms of investment and other assets. But we're very comfortable where we are, the choices we're making. So, next question? Yes. Thank you very much. On Dupixent and COPD, what level of effect size are the trials powered to show? That's first simple question. And the second question on the flu franchise longer term. So, Sanofi's guidance is to double vaccine sales by 2030. I'm guessing influenzaâs likely the largest single segment within that. And I'm wondering if you can talk about COVID flu combination products, specifically because Pfizer is talking about launching such a combo in 2025. I'm wondering what your thoughts are on such a combo opportunity and what the timing is for a combo product from you guys? Thank you. No, we haven't shared that. So that is -- and I don't think our partners, Regeneron have either. So, we're -- we've designed what we think is of meaningful -- clinically significant, clinically meaningful effect size, but we have not disclosed quantitatively what that is. So, definitely doubling vaccines, what does it mean for flu, I think is at the heart of question of Tim. Definitely, flu will grow, Tim. You're absolutely right, when we move forward from now in 2030. There are a couple of important reasons. First of all, the fundamentals of the flu markets are positive in terms of more and more people in the aging part of our population. And therefore, the 60-plus segment is increasing and more and more recognition of the importance of preventing the severe epidemics moving forward. So definitely, it's going to grow. Now, our positioning, as we said before, we believe we have the right assets to start from, thatâs how we're growing the business today with different -- flu vaccines that have both the ability to protection beyond flu, so an extra protection and doing it at a very good tolerability profile. Now, moving forward, obviously, we are a data-driven company. I'm sure you've seen some exciting slides from a -- company recently showing results. These are projections without any data. We are looking at science where it's going to go. That's why we've initiated 3 mRNA QIV clinical Phase 1/2 trials in 2022. We'll be happy to report those results when we have our vaccines IR event altogether at the end of the first half of 2023. The goal is to go with 3 different LNPs in order to get as much knowledge as possible to be as competitive as possible and moving to Phase 3 in Q4 2023 if we have the right product profile from this Phase 1/2. So it's really about, first, let's look at the data? Can this product profile generate protection beyond flu? Can they be competitive versus standard flu or Fluzone high dose, or is it just a me too standard dose of flu? And then there's a big issue to get an ACIP recommendation in the critical 65-plus segment for flu. So, there's a lot we don't know yet. What we are sure is that we're developing the first generation of mRNA and the second generation working on thermal stability, tolerability and self administration. In a nutshell, Tim, if mRNA flu doesn't work, we win; if mRNA works very well, we will be also there. I'm not sure everybody fully appreciates the expectation of payers on protection beyond flu. I think, the quality that's needed the organizational history and expertise, I think it won't just be about flu in the end, it will be -- because there are many of these people sadly passed from non-flu-related complications. You have to match that data. We will see -- we love to compete. So, we will see how those things go in time. Thank you. All right. Next question? Thanks for the questions. Two questions, please, for John and Paul. John, just on the NK cell therapy platform, we've seen some disappointing updates from your competitors as it relates to NK cell expansion and durability of effects. I just wanted to know or understand whether you feel Kiadis platform is differentiated and the outlook there for the NK cell therapy platform? And then secondly for Paul, forget what we've think, but the market, I think when we hear you talk about Play to Win, I think the market gets it on immunology. They get it on vaccines and rare diseases. But when we hear you talk about playing to win in oncology, it's very difficult to really buy into that. I just wanted to understand from you whether oncology is a sacred cow that you'll continue to invest in, or is there a point where you'll take a difficult decision to say, look, we're not going to win here let's double down on where we could and focus there. So just the outlook for oncology at Sanofi. Thank you. Yes, we're very excited about the NK cell platform that we've been building at Sanofi. That platform really has three legs to the stool, all of which are progressing nicely. One leg is NK cell engagers. So these are bispecific for multispecific molecules that grab hold of the malignant cell with one or more binders and then to the NK cell with typically two binders to activate the NK cell and induce the killing. So, the first of those is in the clinic for AML, acute myeloid leukemia, that targets CD-123, and we haven't disclosed data on it, but the trial is progressing well. We're in dose escalation. The other leg of the stool is the allogeneic, one size fits all universal NK cells. And that is also in the clinic also for AML, where prior to obtaining that platform, there was a proof of concept data already generated. That's just sort of NK cells 1.0 without genetic engineering, but we've established the capabilities to do the engineering on the cells for next-generation products, and you might have seen an announcement about our collaboration with Scribe, a company that has next-generation genome editing enzymes that we've been able to avail ourselves of those through that collaboration. And then, the third leg of the stool is our engineered lymphokines, which include various versions of IL-2 and IL-15. The most advanced of those is the so-called SAR'245 non-alpha IL-2 that has shown very excellent pharmacology pharmacodynamic effects with typically elevations of endogenous NK-cells of tenfold with extremely well-tolerated doses. We're continuing to really optimize schedule and dose around that and look forward to eventually combining these 3 legs of the stool in various ways for a variety of malignancies, starting with hematologic but then advancing into solid tumors in time. So, it's early days. They're all -- all 3 of those components are in signal-seeking studies, and we hope to have a lot more to say about it as we approach the end of this year. Thanks, John, and the in-house confidence builds a little bit, right? The things that we've seen, not showed you, of course, that's the way it goes. So let's go to the second part of the question. Peter, around playing to win. First of all, I'm delighted that people fully appreciate, we're playing to win rare, we're playing to win in vaccines, we're playing to win in immunology. That's quite a lot of playing to win. On oncology, I think we just have to be pragmatic. And I think -- I hope you realize that we are with the setback with Amcenestrant -- just also to remind ourselves that was a medicine that had an effect that could have been launched in some form but would not have competed the level so we would consider playing to win. So we have to set a really high bar for ourselves. And of course, with our IL-2 retreating to Phase 1/2 on the dose interval, we may yet still come back and say something very meaningful that with the internal reduction, what that means in efficacy. The ability to increase the dose was why -- or reduce the interval was one of the reasons why we took the decision to invest it in the first place. But I think we have to concede that maybe our efforts are naturally moving towards an earlier oncology positioning. We're doing some very interesting things, setting a very high bar, Johnâs just touched on some of it, but it is earlier. So, it consumes a little less investment. It allows us to allocate more towards the areas where we're having a really important effect. We're not in areas because of history. You saw that when we exited diabetes and type 2 diabetes and cardiovascular, where we think we can make a massive difference, and then we're all in. So you know that, but we have to deliver the profiles of these medicines as they emerge. Otherwise, we're not going to throw good money after bad, coming as a me too late. That's the company weâre leaving behind. So we may go back to the magic a bit earlier in oncology, fair, and hope to surprise, but we are really playing to win across the areas that you mentioned. Actually, I was going to ask about cardiology and diabetes. Given the renewed interest in these categories, does Sanofi have any interest in reengaging in either of them? Presumably, Sanofi still has much internal expertise and could make that shift easier than just about any other company. So, I'm curious if you've thought about that. Second question is for John. Your BTK inhibitor competitors in MS continue to claim they haven't seen liver tox in their studies. Curious what you conclude from that. Is it just a matter of time until they do? Is it the population they're studying, perhaps it's a different geography, or could there be differences in the molecules? Thank you. Steve, excellent questions. That'll be clear. I think -- I'm going to try and choose my words carefully by remembering them. But back in December '19, we said we're out of the me-too late business. We did not want to be the fifth-to-market GLP-1 or the seventh to market SGLT2. It was consuming too much spend and would cost too much to commercialize and wouldn't -- delivered. You may not have followed the story, Multaq, for example. It's a great little success story in cardiovascular and afib I think and has been -- it shows you where we think there are niche populations where we trade somewhere between rare disease sort of levels, we think we can have some money, we still participate. You know -- I think you know by now that we have a co-promotion deal with -- on type 1 diabetes, which is much closer to immunology and rare in terms of patient profile. So, I think what we declared was there's huge big commercial deployments to be fifth to market. We're not going to be our game anymore. But I think we have, as you point out, a brilliant set of experiences in both cardiovascular and diabetes. And I think if we thought that it stayed true to our ambitions, we'd be interested. I don't know whether Olivier, you want to add anything? No, I think you said it all. And I think in some way, what we have done with Rezurock, I think proves our ability in area of expertise that we are to win. Yes. Thank you. And I think it's -- we've got expertise, but we're not going to play that arms race in those other indications. But we're well aware of our expertise. This is why companies are talking to us in those areas. But we will see. But immunology and rare, theyâre amazing capabilities this company has. And so, sweet spot in and around that worked very well for us. John, BTKIs? Yes. I think one thing to remember is that Sanofi has by far the largest BTK program with well over 2,000 patients enrolled across four Phase 3 studies. So, we certainly have exposed far more patients than any of the other companies. And so, I'll leave you to speculate whether it's a matter of time and simply testing enough patients to adjudicate this issue. You're all aware, of course, Biogen announced that they had some issues with their BTK inhibitor and were put on clinical -- on a partial hold as well. So, let's see what happens as more patients over more time, get treated with this class of agents. Thanks, John. So, I think we -- I donât know, maybe add too much more, come back to where we were. We're learning about this mechanism. And remember, the goal is to try and break new ground on efficacy, in particular, by crossing blood-brain barrier. It may become a risk benefit balanced conversation, often is in MS and other diseases. We think we can be very well placed on that. And John's already answered, when we look left and right at the BTK landscape. Some excluded a lot of patients from their trial designs upfront and some are too early really to know. So let's just be really clear that we are in -- we're navigating, and -- we're navigating in a narrow corridor but still weighted in our favor. Okay. Next question? Thank you. Two questions, if I can, please. The first for J-B. A year ago or six months ago you called out Dupixent manufacturing savings as a particular driver of margin improvement. Can you tell us, are we still on track? And can you remind us of the time line and the magnitude of the saving that you anticipate? And then one for Olivier. You've got a very large GenMed business at Sanofi. Ex U.S. pricing very rarely gets talked about, but we're seeing meaningful clawbacks in your home market of France, also in the UK and there's some worrying legislation in front of the European Commission about ex U.S. or EU drug pricing moving forward? I'd love your thoughts on the pricing environment and whether those challenges are one of the contributors holding back earnings this year at Sanofi. Yes, we are fully on track on these deployments. Of course, it has to be deployed in all centers, and we are switching progressively. This will take time till '23 -- for all of '23. And then as you know, we have a high level of inventory. So before it shows into the margin, it takes a bit more time. But effectively, at the alliance level, it's a significant improvement on the COGS, â¬600 million will be in the bottom line, but it will improve the gross margin in Sanofi. So yes, it's a good success story. And it is being deployed as we speak exactly as planned. Trying to get to that real improvement and what it means for us, given how quickly we're growing, it's really incredible and how it fuels the rest of what we'll do next. Olivier, pricing ex U.S.? So, pricing ex U.S. So Matthew, you mentioned it in the right way, the situation is very different in emerging markets and in European. In the emerging market in some markets, although we face some price pressure, there are some markets we are able even to increase our price, especially in the countries that are weak currency, like Turkey, Argentina and couple of others. In Europe, we face, of course, in the current environment price pressure. But I would mention that we have a very broad portfolio. So, we have products that are probably less visible and of course, than others. We face some price pressure on our products that have been in the market for many years, relatively small product but not more than on the average of the portfolio. And on the core assets, of course there is some pressure on some of the brand. But the fact that GenMed is not relying on 1 or 2 assets, but on a broad portfolio, of course, puts us in a better situation. The last point is, of course, given the price pressure that we face, especially in EU, we continue of course to work on our go-to-market model in order to make it as efficient as possible in an environment where we know that, of course, the price pressure will continue. I will say and couple of us -- team that the use of AI as well in helping us be very acutely aware of all of these moments has been some of the best I've ever seen, frankly. So, we continue to develop those capabilities and are starting with our team. Next question? Hi. Thank you for taking my questions. Hopefully, you can hear me okay. Paul, just a big picture one for you on capital allocation structure strategy. I know youâve been asked this before on the call, but just kind of between, Horizon, I think reports -- press reports earlier in kind of last week talking about potentially exploring a merger with Haley [ph] and for the consumer health business. Just a little bit of a speed on how you are thinking about the shape of the overall group, where you think it makes sense for you to kind of flex your balance sheet, and how you are thinking about areas of priorities over the next kind of 6 to 12 months? And then separately on kind of the BOI kind of guidance or kind of how we should think about BOI into 2023 or into '25? Given the Aubagio kind of hit in 2023, are you still expecting BOI to grow in '23 over '22? Okay. Keyur, thank you. J-B, I'll give you the BOI question. On the capital allocation, we've been clean from 2019 saying that we're looking to add science where we can. We've done 25 BD and M&A deals. I think as JB said, we're not scared to leverage the balance sheet. You saw it's public. We were in play for Horizon, last year, it was opportunistic for us. If you remember that Q2 was disappointing on execution, and we're brilliant in rare. We figured it was a good fit. We could make it work and it would unleash some things for us. So, you should know that we're not conservative if we think we can create more value for patients, for shareholders and for ourselves as a company, no hesitation. The gossip around Consumer, it makes me smile because we're running a really great Consumer business, but I wouldn't be misled by that. We're very proud of what we're doing in Consumer. J-B? Yes. Well, as we mentioned during this call, there are several drivers which are helping us in our trajectory to '25. Of course, the Dupixent spectacular growth is accretive and has been accelerated with the acceleration of the reimbursement of the development balance with Regeneron. But I mentioned also the COGS improvement that we are working on. I could mention also some royalties. We said you could calculate looking at fitusiran projections, the products on which we have significant royalties. So we have on top of the performance of the efficiencies, we go on working on the underlying business. Yes, we will go across the Aubagio LoE in '23 with an EPS guidance at constant exchange rate, which is low single digit, which I think makes it quite easy to see what it can look like in terms of BOI. So, you see we are on our trajectory to '25, and we have multiple drivers to get there. Firstly, on flu vaccine, I just wanted to ask it a bit different way. Could you talk about how much performance this year was depressed by lower vaccine uptake, just so we can get a better understanding of how a rebound next year, maybe you could talk about the kind of levels of returns, et cetera. And then secondly, just sorry to push on the consumer again. Can you just update us where you are in terms of the Tamiflu Cialis OTC switch studies. I think there were some ongoing discussions over the clinical protocol for the Cialis trial. So I wondered if that was resolved. There's a perception out there that progress of those trials is a gating factor to whether a consumer will stay within the Sanofi Group longer term? So maybe -- I don't know if you can comment on that. A few more words on flu. So, I'm not going to help you, Richard, to give 2023 flu guidance quite yet. But what I can tell you is that the situation is a bit contrasted in between the [indiscernible]. So I think in flu, what we're seeing in the U.S. is low this year, I would say, but which we expect to increase in the coming years. I would say the fundamentals and the trend is looking good. But again, flu is a progressive uptake year-on-year. It's way too early to know. You know very well that the current this year is also due to vaccinatorâs fatigue, I would say, following the COVID-19 situation. So I remain cautious there. Again, why I think it's very important is that we have the right assets. You saw the growth of our differentiated flu portfolio, meaning that the impact was much more on the standard flu product. And as you've seen, for example, on recently published results from one of our flu competitors, they had a minus 4% annual flu between 2023 full year and 2022 full year -- 2022, sorry, and 2021 full year. You see that on the contrary, thanks to our portfolio, we have a growth in 2022, showing the strength -- and the strength of our strategy. So, more than 10 years of data Fluzone high dose and experienced commercial organization, we believe we have the right assets. Let's wait for the pre-booking. Let's make sure we know a bit more about the season and the completion of the vaccines, in Q1 we will share more. Unfortunately, we don't really have an update. We continue to work with the FDA on the OTC approval for Cialis in the U.S. and we're advancing on the execution of our strategy to lift the clinical hold including generating the necessary data that was requested. There's also no update for -- on timing for Tamiflu as we continue to incorporate FDA's most recent feedback into our development program for '23. And as you all know, the current flu season, which continues to evolve is very dynamic, and we believe really underscores the importance of getting vaccinated, of course, but also the importance of quick widespread consumer access to medication like Tamiflu. So it is important, not just for Sanofi, but for public health, so we continue. So, thank you, Julie. It's good to get that question actually and the last couple of questions around consumer. Let's just be really clear. We're running a great consumer business. It's growing fast, faster than the market. We have launches to come. Exciting things to do, switches, I think, represent over â¬1 billion in additional sales between them at peak, and it's a fast peak, as you know, in Consumer. Again, I wouldnât listen to gossip. Really spending time just making sure we have the best consumer business and so, that you can compare it to others. And you can see why we're doing a great job. Thank you to the Executive Committee. Thanks to everybody that dialed in and gave us time. We appreciate it. Look forward to connecting with you soon. We're well underway. We're looking forward to 2023. And yes, we'll look forward to seeing you at certain points on the counter.
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EarningCall_755
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Good morning and welcome to Dover's Fourth Quarter and Full Year 2022 Earnings Conference Call. Speaking today are Richard J. Tobin, President and Chief Executive Officer; Brad Cerepak, Senior Vice President and Chief Financial Officer; and Jack Dickens, Senior Director of Investor Relations. After the speakersâ remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you, Gretchen. Good morning, everyone, and thank you for joining our call. An audio version of this call will be available on our website through February 21, and a replay link of the webcast will be archived for 90 days. Dover provides non-GAAP information, and reconciliations between GAAP and adjusted measures are included in our investor supplement and presentation materials, which are available on our website. Our comments today will include forward-looking statements based on current expectations. Actual results and events could differ from those statements due to a number of risks and uncertainties, which are discussed in our SEC filings. We assume no obligation to update our forward-looking statements. Thanks Jack. Letâs get started with the performance highlights on Slide 3. Dover delivered strong organic revenue growth of 9% and margin improvement of 150 basis points in the fourth quarter. Volume mix, price cost and prior period cost reduction actions all contributed to the positive performance. As we've been forecasting throughout 2021, the relationship between supply chain constraints and bookings has continued to play out into Q4. The majority of the labor and component availability and logistics constraints have dissipated resulting in production lead times returning to pre pandemic levels. Importantly, our 4% annualized through cycle organic bookings growth rate reflects the continued secular demand strength across our businesses. Our order backlog remains elevated compared to normal levels, and provides us with a good topline visibility going into [Indiscernible]. Our continuous efforts to improve productivity and efficiency principally enabled by advances we achieved in e-commerce adoption, back office consolidation and SKU or SKU complexity reduction, resulted in robust margin accretion in the quarter. We expect benefits from our research efforts to further accrue in 2023. We continue to deploy capital toward portfolio improvement, organic growth and production efficiency in 2022. Our capital expenditures in 2022 were the highest in recent Dover history and we continue to invest in manufacturing productivity projects and proactive capacity expansions to fuel our top line growth and margin improvement capabilities. We also completed five attractive bolt-on acquisitions in 2022 that provide exposure to high growth technologies and end markets and finally, we took the opportunity to return capital to our shareholders, including the completion of our 500 million accelerated share repurchase, which was completed in quarter four. We entered 2023 with a constructive stance. Demand trends remain healthy across a portfolio and we have a significant volume of business in backlog entering to the New Year. Expected revenue growth price actions and productivity measures from 2022 lay the foundation for margin accretion in 2023 have high confidence in Dover's end markets, flexible business model and proven execution playbook continuing to deliver earnings growth. Our strategy for robust through cycle shareholder value creation remains unchanged, to combine solid and consistent growth above GDP, strong operational execution generating meaningful margin accretion over time, and value added discipline capital deployment. As a result of this, we are forecasting for -- guided revenue guidance of 3% to 5% Organic revenue growth and adjusted EPS of $8.85 to $9.05. I'll skip slide 4, and let's move on to Slide 5. Engineered Products revenue was up 16% in the quarter continuing the trend of double-digit top line growth through the year. Revenue growth was broad based across the portfolio of particular strength in North America. Margins continued the sequential build throughout the year finishing -- 20% at 620 basis points year-over-year primarily driven by improving supply chains and price cost dynamics products mix as well as events investments and productivity initiatives. Clean Energy & Fueling finished the quarter and the year roughly flat on organic basis. Revenue performance for the quarter was up and clean energy components. Vehicle wash, fuel transport and below-ground retail fuel, offsetting the comparable declined a dispenser and EMV card readers in the period. Margins in the quarter were up 170 basis points on positive price cost and the mix impact from both organic, inorganic investments that we made in clean energy components and vehicle wash. This was augmented by further cost reduction actions initiatives in the third quarter, and the full, the full year carry over these actions will continue to accrue in 2023. In Imaging & Identification, volumes for our marking and coding printers, spare parts and consumables were strong in all geographies, with the exception of near term softness in China due to the COVID impact. Our software businesses continue to perform well with penetration of key customer brand accounts with strong growth in SaaS portion of our serialization software. FX remained negative headwind to absolute revenue and profits in the segment given its large base of non-US dollar revenue. Q4 margins in Imaging & ID were very strong at 25% improving 250 basis points on stronger volumes, pricing actions and products product mix richness. This business has delivered exemplary margin improvement in the last few year years as it utilizes our productivity tools for e-commerce back office consolidation and offshore engineering. Pumps & Process Solutions was up 4% organically for the year but posted a 4% decline in the fourth quarter driven principally by post-COVID transition in the biopharma space. The non-COVID biopharma business has continued to grow and our overall biopharma business as well above its pre-pandemic level. New orders for biopharma connectors reflected positively in the fourth quarter after several quarters of sequential declines. All other business this segment posted solid organic growth in the fourth quarter with particular strength in polymer processing equipment and precision components in the back of improved conditions in energy markets. Operating margin for the quarter was 29% is comparable revenue mix of products delivered. Top line in Climate & Sustainability technologies continued its double digit growth in the fourth quarter posted 27% organic growth across all business geographies. Demand trends remain particularly robust in heat exchangers and CO2 refrigeration systems driven by the global investments in sustainability. Our capacity expansion programs in both these businesses remain on schedule and will continue to allow us to continue to meet growing customer demand. Margins are up 450 basis points in the quarter and over 300 basis points for the full year on improved productivity in food, retail and strong volume growth and good mix of product delivered. Thanks, Rich. Good morning, everyone. I'm on Slide 6. The top bridge shows our quarterly organic revenue growth of 9% driven by increases in four of our five segments. As expected FX was a substantial headwind at 5% or $94 million and impacted both revenue growth and profitability. FX headwinds resulted in Q4 and full year 2022 negative EPS impacts of $0.10 and $0.35 respectively. Recent euro gains against dollar have reduced our forecasted FX headwinds in 2023, which we currently estimate at $0.05 to $0.10 for the full year EPS. M&A contributed $58 million to the top line in the quarter, a product of $80 million from acquisitions partially offset by $22 million from divestitures late in 2021. We saw a strong organic growth across most of our geographies in the quarter. The U.S. our largest market was up 7% organically, Europe was up 19% organically driven by particular strength in polymer processing, beverage can making, natural refrigerate systems and heat exchangers. All of Asia was down 1%. China, which represents approximately half of our business in Asia declined by about 10% in Q4, driven by short term impacts from the COVID resurgence. On the bottom chart, bookings were down year-over-year due to foreign exchange, translation and normalizing lead times across several businesses. Now on our cash flow statement on page, slide 7. Free cash flow for the year came in at $585 million, down year-over-year on increased capital expenditures, onetime tax payments and investments and working capital supporting growth. At our current earnings margin, we would expect to generate free cash flow of approximately 13% of revenue in an average year. 2022 free cash flow lagged behind that level, due primarily to elevate a working capital investment striving two thirds of the gap. As previously discussed, our view -- we view incremental investment in inventory over the past two years as productive despite its carrying cost enabling us to deliver 17% cumulative organic top line growth and over 30% growth in absolute EBITDA between 2019 and 2022. We are now focused on extracting back cash invested in inventory. As supply chain is improved in the fourth quarter, we began reducing inventory particularly finished goods. The majority of excess we carry into 2023 is in raw materials and we expect to consume a significant portion of that excess in the first half of the year. In addition to inventory reductions, we expect to collect elevated receivables from the fourth quarter and normalize our payable balances driving significant improvement in working capital in 2023. We also forecast lower CapEx followed following a stepped up cap next year in 2022. As a result, our forecast for 2023 free cash flow is between 15% and 17% of revenue. Okay, I'm on slide 8. I'll be brief on this slide since we've been discussing the linkages between bookings, backlog and revenue and expected trajectory of these metrics for nearly two years. First to remind everyone that in 2021 bookings of $9.4 billion driven by post-COVID demand surge, as well as constrained supply chains the required customers drew order in advance were roughly 20% higher than our revenue that year resulting in an unprecedented backlog that requires time to ship and unwind while bookings normalize. Importantly, concerns about double ordering and cancellations did not materialize. And we have been depleting the backlog in an orderly fashion as product lead times improved. If we smooth out the post pandemic surge in bookings our bookings CAGR has been 4% from 2019 to 2022. Let's go to Slide 9 here, we show the growth and margin outlook by segment for 2023. that underpin our guidance. We expect Engineered Products to remain solid. Pent-up demand and automation initiatives and waste hauling support our robust outlook. Despite high demand, our refuse collection vehicles shipments in 2022 is still has not recovered to pre-pandemic levels due to chassis availability. After an excellent performance in vehicle services group in Q4 we expect a slower start in 2023 and Engineered Products is forecast to improve margins in 2023 on solid volumes benefits from our recent productivity capital investments taking hold and positive call price cost tailwinds. Clean Energy & Fueling is expected to grow single digits organically which we expect to be second half weighted due to demand for dispensers during the year. Dispenser bookings beginning to normalize, we expect Q1 to be the trough for the business with gradual recovery through the remainder of the year. All other businesses in the segment are positioned well for growth in 2023, with particular strength in our clean energy components. For the year we expect margin improvements in Clean Energy & Fueling and volume recovery, improved mix and recently enacted restructuring actions and above ground fueling. Imaging & ID is expected to continue its trajectory steady GDP growth and attractive margins. We see robust demand for new printers and components and consumables and professional services the outlook for the bulk serialization and brand protection software is also strong. Margin as business are robust and we expect them to remain as such to 2023. We project flat organic growth in pumps and process solutions. Our industrial pumps and plastics and polymers, precision components and thermo connector businesses are all positioned for solid growth. The biopharma components business is expect to hit its bottom in volume and margin in the first quarter as customers worked through and repurpose excess inventory. We are beginning to see encouraging signs and bookings for our biopharma connectors, and our full year forecasts may prove to be conservative. The long-term tailwinds of single use components for biological drug manufacture remain compelling. And importantly, our products are specified for regulated manufacturing of therapies with attractive growth outlook. And we continue to win new specifications and an active pipeline of new biologic and cell and gene therapies. Margin performance is expected to be roughly flat for the year with a sequentially lower level in the first and second quarters on unfavorable product mix from slower biopharma and geographic mix from higher sales in China, for plastics and polymers. Growth outlook for climate and sustainability technologies remain solid as our businesses continue to ship against strong backlog levels. We are forecasting continued double-digit growth in both natural refrigerant systems and heat exchangers for heat pumps. Our beverage can making businesses booked well into 2023 and expect continued margin improvement in 2023 on volume conversion, productivity gains and mix. Move on to Slide 10. Here we show our recent performance against our capital allocation priorities, our priorities to reinvest in our business, which represents the highest return on investment. 2022 represented a recent record for CapEx with numerous capacity expansions and productivity investments completed. We will continue our efforts to add attractive bolt-on acquisitions to improve our portfolio by entering new markets with secular growth. We invested $325 million into five highly attractive acquisitions in 2022. We're carrying significant firepower in a compelling M&A pipeline into 2023. Finally, as we did in 2022, we will return excess liquidity to our shareholders through increased dividends and opportunistic. Letâs move onto Slide 11. For the wrap up, before we get into our full year guidance Iâll make a few comments on our view of the macro environment and how we believe the year may develop. First and foremost, we hope that the Fed is cautious going forward from here. We support the efforts to tackle inflation, which had had a large hand in causing but we are in the camp that believes the Fed has gone far enough and the lagged effect of the further actions can be problematic to economic growth. Market participants are likely to be cautious with the timing of their demand generating decisions as there is a recognition that manufacturing lead times and logistics constraints have been largely repaired. And as such, we expect first quarter demand to reflect this cautious stance. We expect seasonality to the year to be weighted towards quarters two and three in revenue and earnings and weighted to H1 for cash flow as our balance sheet reflects liquidation of inventory and receivables from 2022. Despite the uncertain macro, our goals remain ambitious, we will push hard to win our share of demand. We have done a lot of work to improve the performance of our products and we believe we would have the right to win. We have proactively expanded capacity to meet projected demand and areas of the portfolio with significant secular growth opportunities. So now let me put our guide in EPS performance of the longer term perspective. Our objectives delivered double-digit through cycle EPS growth for our investors through a balanced mix of healthy revenue growth, margin accretion, value creative capital deployment. We have been delivering on that equipment that had led to that commitment, and we drive will continue to drive to continue to do so. I want to thank our customers for trusting Dover businesses to deliver on their important needs. And I'm grateful to Dover teams across the world for continuing to serve our customers and execute well despite various challenges along the road. Good morning, this is David Ridley-Lane on for Andrew. And so there are different reasons, reasons for each segment. But the guidance assumes better second half growth in three of the five segments. What's kind of the underlying demand assumption? Are you assuming things are fairly stable? Or do you embed kind of a deterioration in underlying demand given you're seeing better second half growth in several segments? I think that the feedback that we're getting from our customers is to start off the year cautiously. I think that there's in a lot of portions of the marketplace, there's inventory that needs to be depleted. And I think that there's a concern about the macro. There also is this view that inflation is coming down, and that being prudent about when to start projects is probably going to put them in the money. Furthermore, I think they have a difficult comp in Q1 just because of FX alone. So I don't think there's anything other than as we mentioned, biopharma meeting, getting to the bottom where we expect orders to inflect positively from there. I think it's just an overly cautious stance going into the New Year. Everybody knows that lead times have been prepared -- have been repaired. So it's not as if they have to put the orders in and take and take the deliveries in Q1. So it will actually go back to what had been historically the seasonality of the Dover portfolio, where a little bit of a slow start second quarter and third quarter quite high and then we run for cash in Q4. Got it. And then a quick one on China, I heard you that you'd seen some demand disruptions, given the COVID resurgence. Any concern about labor related disruptions of your operations, were -- are suppliers showing up later this year? No. I mean, from a supply standpoint, we are not overly levered towards China with the exception of electronic components, which don't make a disproportionate high amount of our purchases. So no, I don't I think that China, we the stance is it's going to get better from here, not worse. Thank you. Good morning, everyone. Hey Rich, just on the order normalization agreement and talking about this for a long time, do you kind of expect things to revert back to that kind of historical balance for your backlog as, call it 20% or so forward sales by the end of the year? Or do you think this takes a bit longer than normalize? Well, a lot of that depends on the macro, Jeff at the end of the day. But yes, I mean, yes, we would expect to go back there. I would call your attention to the slide that we had at the end of Q3 that showed normal backlogs by segment. We would expect to go back there. If 19 is normal. Let's say, I think that's what the comparison, comparative number there is. We would expect it to go back there. But it may flex over time. And well, again, I'll leave it at that. It will go back to I would call your attention to that slide. And that's where we're going to end up. Okay, great. Thanks for that. And then, you're the comments to this prior question kind of touched on this a little bit. The nature of my follow up here is what is the price discussion, like on orders now, now that as you say, as to why chains are normalizing, and there's the expectation that inflation does begin to fade. Do you see downward pressure on price and maybe put that in the context of what your own cost equation looks like in 2023? Yes, we've been pretty disciplined in terms of not repricing our backlog. For sure. So I don't expect any issues there that are not manageable. I think that what we can expect at the beginning of this year is everybody having a view -- we're not and this includes us when we deal with our own suppliers that inflation is coming down. And if I, if I spend some time in Q1 renegotiating maybe I can force the issue to a certain extent. So in our estimates, we don't have any unannounced pricing that's not out in the marketplace, meaning thatâs not baked into our numbers, another price increase in the June time period. But it's going to be it's, it's going to be interesting to see how it develops over time. I think it's going to be reflected more in a delay in terms of the order rates, until we get into a position of back and forth of do you -- when do you need the product and when do you have to stop negotiating the price? Yes. Yes. Our estimates are price cost positive for the year based on roll forward, what basically what you see in Q4. So it just if you have these backlogs, right, and expect them to expect to work them down over the course of the year. Why wouldn't that mean that, assuming that those lead times I mean, they are extended, but I wouldn't think too extended given the nature of your business. Why wouldn't that, liquidation of backlog help kind of the normal seasonality, assuming that you -- your the trend line is what it is, but you're delivering at a backlog which should help sales in the near term. Why are customers not taking this stuff earlier? Well, a lot of them are based on their own CapEx plan. So as we as we talked about in the end of Q4 about the decline in dispensers it was kind of interesting to us because we were shipping heavily in the below ground and hardly shipping anything and above ground. And that was a reflection of the delay in getting these projects done because of supply chain constraints and labor and everything else. I think that we're going to see a little, that's an example. We're going to see a little bit of that more in Q1. Right? So despite having the backlog, the customers are not saying, what, deliver it on January 1, and I'll go put it in the warehouse, and I'll pull it out when I want. They just don't feel the need. That's what was kind of going on in the marketplace to a certain extent, for a period of time. As that accordion effect is beginning to unwind. Yes, the backlog is there, but they're saying, what, here's the timing of my project, and I may want it in March. I may want it in April. So the depletion will be orderly over the balance of the year. Okay, and then one last one for you just on orders. I think to get to that level of backlog at the end of the year looks like it's roughly I don't know, like a $2 billion backlog assuming a mid-single digit growth rate, which would imply roughly 6 billion of orders. Is that does that feel about right? It gets very much it's going to be very much contingent of what happens in the long cycle portion of the business, right? The Maags and the Belvac and to a certain extent, SWEP, which is becoming a long-cycle business, because we're beginning to rather than sell the products and selling capacity. So if those three hang in there, then yes, that's what that's all be. So, Rich I just want to make sure I understand your seasonality comments as it relates to the first quarter. Because if I go back to like prior seasonality, you could see, the first quarter being kind of like a high teens percentage of the full year to kind of mid 20s. I mean, if I use the midpoint, it kind of puts me around the $2 range. If I'm doing the math, right. For the first quarter, I just want to make sure that I'm level setting correctly. Joe, I don't have Excel open here in front of me. I'd like to just -- look at the end of the day this is just a general statement about the feedback that we're getting from the marketplace, right. Everybody's concerned about recession. And so there's a bias towards being very careful with inventory also included. So we just think that the take off is back to the question that Steve asked before is that the backlog is there, but the take rate on that backlog should start out slowly, right, until everybody gets in place where we can, a lot of what we deliver goes right to the project site. And a lot of cases least the businesses that are tethered to distribution. So I'm, I'm not calling for a collapse in Q1 by any stretch of the margin. But, but we don't want to do it, the only reason that we're calling it out is we're coming out of periods where we had very strong Q1s in the seasonality versus the past got a little bit out of whack. So we're just telling you to just be careful with Q1, the full year is the full year. And we're confident in that. But I think they just we have to be, we have to recognize that is an amount of caution in the marketplace. And everybody's going to be very careful about how much inventory they lay in until they can see what's going on with kind of the macro, per se. Got it. No, that makes sense. I guess maybe my quick follow up, I think last quarter, you guys had called out I think like a roughly $0.23 benefit in DC from the cost actions. And you're continuing to highlight, kind of margin improvement this year. Can you maybe so, firstly, we still on track for that $0.23. And then secondly, across the rest of the portfolio, where are you seeing opportunities for margin expansion in 2023? I think all of the $0.23 was not in clean energy. I think $0.19 of the $0.23 if I remember correctly, more or less is in there. Yes. And some of that was in the fourth quarter also because we actually took the cost actions in Q3 But everything is on track. What you do as you get -- you get a bad comp in that business because it was still delivering pretty heavily in Q1, but we expect that to be offset by clean energy components and below ground and car wash, which are margin accretive. So you get basically over the year, a positive inflection of mix on the portfolio, but I think you just have to be a little bit careful in Q1 just because the above ground is a bad comp. Rich, could you give us a little more color regarding your expectations for DPPS in 2023. What's your conviction level in terms of biopharma connectors destock ending in Q1? I know you mentioned book is inflected sequentially. And then you're -- just in terms of margin, I know you're forecasting flattish for the year in this segment. Given where Q4 2022 left off, it's not that easy to get there. So maybe you could elaborate on your cost controls and productivity actions in that segment that gets you back to those 2022 levels? Yes. Well, we did take cost out as volume came out of the sector for sure, and we did that progressively through the year. And I think we took a further action in the end of Q3, Q4, more or less. Look, orders are beginning to inflect. We are paying a lot of attention to the commentary of our customers out there who are basically saying it's an H1 event and then expect to have all the inventory cleared. I will tell you that we have not been overly ambitious in our estimates for the full year. So I think if we're going to -- I think that we may have a little bit more difficult H1, but I think that we've got a better and even chance to have a better-than-expected performance in the second half of the year. But what we'd like to see is the order rates come up and us start expanding capacity to deal with it, which I think we can turn around to do it. So yes, the flat margins year-over-year. We're going to have to be really careful with our cost controls, and we're going to have to deliver polymers and plastics and precision components are going to have to deliver on the volume that we expect to get out of those businesses. But it's not like we're being overly ambitious in volume in biopharma for the year. Great. And then, Rich, I know you don't want to tell us all about your Investor Day in March. But maybe in terms of -- you've talked about portfolio management a little more frequently lately, so maybe update us on that. And then obviously, you talked at the beginning of your prepared comments around SKU management. We know you've been really focused on costs. So in terms of longer-term margin targets, anything to sort of talk about their preview there? I assume margins can rise pretty significantly from where they ended in 2022? Well, I mean that's going to be part of it Andy, at the end of the day. So let's not the card before the horse, but we're going to basically do what we did back in 2019 and try to give you a 3-year forward role by segment and what we think the contributing factors to it. I mean a lot of it is going to be on-going productivity, but I think what's underestimated is that the organic revenue potential is underestimated. And I think we've done a lot of work in terms of mix here. So the mix of the products that we have today versus what we started with in 2020 is, I think, a lot different than that was back then. So it's not some ambitious we're going to grow completely out of the order. I think we'll grow higher than basically the market expects us because we generally get bottom quartile expected growth rates and revenue, but I think mix is going to be the most important aspect of it. The -- I probably asked this a couple of quarters ago, but the M&A markets, Richard, they come down to kind of more realistic levels for you guys and expect to be a little bit more active in 2023? Well, I guess taking on any leverage to do a deal has not been well received by anybody. So I guess we'd have to be careful with a larger deal presently for whatever reason, the capital markets are not looking kindly on leverage for, I guess, the reasons we can understand about unsurety of the macro going forward. But yes, I think that what we've seen so far is that a realistic multiples are now becoming -- are reflective of what's going on in the capital markets. So you always have -- most of our deals are private, as you know, private companies. There's always a lag between the public capital markets at a private valuation. I think that, that has narrowed towards to the public capital markets. Okay. And I don't like the traffic of minutia [ph], but is there such a thing as a can-making cycle? I mean what -- it seems like we've had pretty high demand year for several years in a row. What -- what's in the other side of it? Is there a big investment cycle now and that it's just kind of air pockets after that? Or is there some new dynamic involved in that world? Yes, I'm not allowed to say that the AP, right because the CTAs love to pick up on that step. But yes, look, I mean, it is a cyclical business and there are investment cycles and part and parcel is to not over capacitize yourself as the cycle goes up and the recapture on the spare parts, which are margin accretive on the way down. So that's the way that we look at the business. Now having said that, it will be interesting to see what happens with PET in drinks going forward. I know that there's been a little bit of a pushback on ESG lately. But the fact of the matter is that PET from an environmental point of view is not a preferred option. So to the extent that the cost plus ESG aspect of PET over time make aluminum more attractive, then we could -- that is by far the largest portion of the market. So even if a recapture rate of 15% of PET market would drive another cycle. So that's kind of where we are right now. Rich, so you've been sort of holographing what's happened with orders and backlog and kind of watching the Fed movements for a while now and been more concerned about them we're doing it. Does your view of kind of downturn management look different because of some of the scarcity that we've had the last 2 years in terms of hiring folks, looking for new suppliers, maybe honoring existing agreements? Does any of that look different with the recovery on the other side we kind of have more of the same scarcity that we've had in the past. Yes. I wouldn't expect to run into the logistics constraints that we've seen. I think that was a one-off. I mean, you had just such a collapse of the macro and then a restart and then add a lot of the energy markets went haywire which drove the logistics market say, well, I don't expect that to happen. I mean I think that capacity was brought on. And if you look at logistics costs and the forward curves there, I don't expect that to repeat under any reasonable macro scenario from here. I think there is a lot of liquidity that's being taken from the general market. I think that lending is very low right now. It's very difficult to get loans and secure loans -- secure liquidity to run businesses out there. I'm not making it a Dover comment. I'm talking in total. So I'm concerned about that. And if that's the case, and there's the only way that if you're a private company, the only way you can generate liquidity in order to continue to fund yourself is to draw down inventory balances to extremely low levels, and that's negative to orders and revenue going forward. So that's our overall concern of -- I don't see the point of bringing out another 50 basis points only to turn around and give the 50 basis points back into Q4. Why bother? Why can't we just sit where we're standing right here because liquidity in the market is incredibly tight right now. So that's the fear. At the end of the day is that you have a delayed CapEx cycle, which we ascribe to the fact that there is a CapEx need out there because of productivity to offset higher labor costs, and then you've got all the stimulus money out there. But fact of the matter is there's no liquidity to accompany that I think that you have a delay effect that could be problematic. Got it. That's helpful. And then just thinking about the 4Q orders, any sense from you guys as lead times have improved that this is sort of the quarter where customers kind of squeeze the accordion on, hey, we don't need things 16 weeks earlier than normal anymore. So let's get back to maybe more normal ordering pace. Like -- is there an artificial low that you go through on orders as lead times normalize? Or is that something that's kind of barely perceptible over the medium term? No, that's exactly what we think, and we think it's going to continue through Q1. And then from there, we expect based on our view of the demand cycle that it will inflect positively from there. But I think you're going to get another quarter of exactly how you described it, right? I know I can get the product. I have enough inventory to carry me through the quarter. I'm going to take the chance of depleting it because I know you can deliver into Q2. Rich, I think on the last call, you talked about a fundamental change in the business model in DCF. Are you ready to talk a bit more about that today? Well, I would leave that to the Investor Day, right? I mean, I think that my comment was is that -- we went through this period of EMV and then we went through this period of the overhype EV taking over the world, and we were basically saying that we believe that we can position this business to harvest profits for 20 years. And I think that we're -- we've made the moves in Q3 of this year to begin to position ourselves appropriately there, right? So there was no sense of doing it in advance of a rising revenue curve. But now that it flattens out, we've got to run the business differently on one hand. And on the other hand, we've been a pretty active acquirer in that particular segment as we transition to clean energy exposure, particularly in the hydrogen space. So we're doing it -- but I would -- if you're looking for, what does that mean going forward from here in a holistic way, why don't we wait until March and we'll surely talk about it. And just a follow-up. Could you clarify that backlog math? Where do you think you could be at the end of the year? Why don't we take this off-line because everybody's got a different calculation of if it's -- I think that there was 20% of the annual revenue should be in backlog in a normal time. So we got what our forecast is for revenue for this year. So it's a relatively easy calculation. Hi, good morning everyone. So Rich, a couple of ground here. But just going back to the caution. You seem to talk about inventory and your inventory management more so than projects. I'm just wondering if you have to generalize, would you say the cautions more on CapEx? Or is it more the channel partners managing inventory levels very tightly. And would you say it's U.S. versus Europe? Would you say both are in the same camp? Or would you say the U.S. is right now where you've seen the more caution? I think it's a U.S.-centric comment. I mean if you look at our growth rate in Europe, I don't think anybody would have modeled that considering kind of the overall caution about Europe in total, but frankly, a lot of what we do out of our production base in Europe gets -- we recognize the revenue in Europe, but it may end up around the world at the end of the day. But I think -- it's more -- we don't -- our exposure in terms of -- our exposure is larger in North America, so it's largely a North American comment. I don't -- I think that Europe, any kind of let's call it destocking would have happened during this past year because they were on the front end of the curve. Right. Okay. That's helpful. And then just you mentioned free cash flow more loaded to the first half of the year, which is obviously very unusual. You mentioned that the bulk of your excess inventories were material. So that doesn't seem to have an impact on your fixed cost absorption. But I'm wondering as you go through the inventory management, are you expecting there to be some margin penalty as you build inventories? No. Actually, I think that in our models, it's a margin credit as we liquidate it because if you look at forwards based on when we bought that inventory sequentially grew 2022. It's actually -- and you can see it in our margins in some of the sectors, that's part and parcel to this price cost. Look, at the end of the day, yes. If I go back and look over the last couple of years, we made a significant investment in inventory and that allowed us to deliver revenue growth that was above expectation. So now lead times and availability and capacity is repaired itself. So we get almost a triple effect of -- we liquidate kind of the excess raw materials that we've been carrying to meet demand because we slowed down production in Q4, our payables balance dropped significantly. So from a net working capital point of view, we got the negative of shipping heavily in Q4. So there's a big receivable balance that gets liquidated build probably in the latter half of Q1, but more in Q2, our payables expand and then we collect on that receivables balance. So all three come in, in the first half. Hi, good morning and thanks for squeezing me in. Maybe, Rich, you'd mentioned mix once or twice as a factor, and we can obviously see that impact in DPPS as well documented. I just wanted to circle back to the DII segment. There was a mixed tailwind, I think, in fourth quarter possible headwind in the year ahead guided and that's weighing on the margins there. Maybe expand a little bit on that. And DEP had an exceptional margin expansion, albeit off an easy base. Is there anything much moving around on mix in DEP? In DEP, no, I think rightly, I would look at DEP sequentially as opposed to comp, right? We all know what happened in Q4 of 2022. So that's why we had been saying all year that not to worry because as price cost rolls forward, you're going to get what you get. But I would look at DEP on a sequential basis as a precursor of what you can expect into 2023. And the other question you had was on marking and coding, right? That is just a function of the amount of consumables we shipped in any given period, meaning the more that you ship in printers, that is negative to margins. The more that you ship in consumables, it's positive. It's going to bounce around. I think that our comment that we made on that particular business is that the margins are quite robust, and it's all about what kind of revenue growth we can get from here. We're not calling it down for 2023. That's helpful. Thank you. And then just a follow-up on kind of firm-wide Dover operating margin. So I think the operating margin overall was flattish in 2022. It's guided maybe to grow a little bit in 2023. I just wondered with that backdrop, is there the appetite maybe to accelerate restructuring spend. I saw in your guide, you've got kind of $0.10, I think, for 2023 after $0.20 last year. But I wondered just sort of thinking ahead, is there maybe the appetite to drive -- make sure that 2024, let's say, has stronger margin expansion and that might require more restructuring this year. Well, Julian, I mean, I think to the extent that we have flat margins despite the fact that our biopharma business, which is clearly our most profitable portion of the portfolio being down, one could argue that once we get to the strong -- we get through this destocking period, which we expect to be an H1 2023 event is that inflect back to the positive that the incremental margins that we're going to see there. And all things being equal, we hold and continuing to improve the balance of the portfolio that, that by itself is margin accretion. But I think I would call your attention to what we've done in Climate & Sustainability. We think that that's got room to run. We think that we've gotten DPPS we've just talked about. I think we've got some growth there. and we've got the return of biopharma in the second half of the year, which by I'll repeat myself, I don't think we've been overly ambitious with that. We think we're going to keep that in our back pocket and see how the market develops. And the roll forward on the Engineered Products, if we look at what our exit rate is and we roll that forward, I think that's quite healthy from a margin point of view. So back to the restructuring. Look, we're always scouring our fixed costs around here. Our management is incentivized to deliver fixed cost reduction and incremental margins. So I would expect we'll continue to do so, but I don't see any need to accelerate it to protect our performance going forward. Thank you. That concludes our question-and-answer period and Dover's fourth quarter and full year 2022 earnings conference call. You may now disconnect your line at this time, and have a wonderful day.
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EarningCall_756
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Good morning and welcome to the Tyson Foods First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note todayâs event is being recorded. I would now like to turn the conference over to Sean Cornett, Vice President, Investor Relations. Please go ahead, sir. Good morning and welcome to Tyson Foodsâ fiscal first quarter 2023 earnings conference call. Prepared remarks today will be provided by Donnie King, President and Chief Executive Officer and John R. Tyson, Executive Vice President and Chief Financial Officer. Additionally, Brady Stewart, Group President, Fresh Meats; Stewart Glendinning, Group President, Prepared Foods; Wes Morris, Group President, Poultry; and Amy Tu, President, International and Chief Administrative Officer, will join the live Q&A session. We have prepared presentation slides to supplement our comments, which are available on the Investor Relations section of the Tyson website and through the link on our webcast. During todayâs call, we will make forward-looking statements regarding our expectations for the future. These forward-looking statements made during this call are provided pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include comments reflecting our expectations, assumptions or beliefs about future events or performance that do not relate solely to historical periods. These forward-looking statements are subject to risks, uncertainties and assumptions, which may cause actual results to differ materially from our current projections. Please refer to our forward-looking statements disclaimers on Slide 2 as well as our SEC filings for additional information concerning risk factors that could cause our actual results to differ materially from our projections. We assume no obligation to update any forward-looking statements. Please note that references to earnings per share, operating income and operating margin in our remarks are on an adjusted basis unless otherwise noted. For reconciliations of these non-GAAP measures to their corresponding GAAP measures, please refer to our earnings press release. Thank you, Sean and thank you to everyone on the call for joining. Earlier today, we announced our first quarter 2023 results. We delivered solid top line results with year-over-year revenue and volume growth and continued strength in our share position, providing momentum for the remainder of the fiscal year. Compared to record performance in the prior year, first quarter earnings declined driven by weaker results in chicken, pork and beef, which more than offset strong performance in Prepared Foods. Itâs important for you to know that we are uniquely positioned to win in an attractive global protein market. We have market leading brands across diverse portfolio that resonate with consumers as proven by our year-over-year sales and volume growth. We serve an estimated one-fifth of U. S. protein consumption and we are well positioned to meet consumer demand, which remains steady despite a challenging macroeconomic environment with ongoing elevated levels of inflation. As we navigate a complex and dynamic operating environment, I am grateful for our team members whose hard work and dedication make our business operations possible. Five key pillars of our strategy are: transforming our team member experience, growing with our customers to service demand, investing in digital and automation to drive operational excellence, restoring competitiveness in our Chicken segment and leveraging our financial strength to invest in the business and return cash to shareholders. In service of these long-term strategic imperatives, Iâd like to emphasize that we continue to deliver on our commitments of growing volume by filling up our footprint, solving labor problems, investing in automation, and building inventory to meet customer demand with improved fill rates all while maintaining a focus on liquidity and financial health. We are confident these investments will pay dividends over the long run and we remain committed to methodically executing our growth strategy driving long-term value creation for our shareholders. Now, let me take a moment to discuss our results and shed some light on some of the challenges and outlook. We went into Q1 with a good plan, but our overall results were impacted by a confluence of factors, including consumer and customer demand dynamics and the curve of the beef cycle, among other things. Allow me to touch on each segment. As we have previously mentioned to you, we have been expecting beef to come under pressure for some time. With higher cattle prices, we expected overall harvest to slow down, but that hasnât happened yet. As such, we continue to draw on the herd, which continues to decline. This is putting pressure on spread margin in the business. We tightened our outlook range for the year. For pork, when you account for mark-to-market derivatives in the number, we flip back to breakeven as expected, but given continued supply and demand dynamics, we lowered our outlook for the year by 200 basis points. For chicken, when compared to expectations from last quarter, a few different things didnât go as planned. Most notably, demand didnât appear in the parts of the market where we had expected. As a result, we had to move things around and we experienced higher cost, a lower price environment and knock-on effects from a network standpoint. And last, itâs worth emphasizing our Prepared Foods segment, which delivered a great result for the quarter. We said we were going to grow dollar share and volume share with the strongest portfolio of brands in the categories where we compete and we have done just that. We are feeling good about the outlook for the balance of the year. And our international business continues to build momentum in terms of volume and sales growth. With the end of COVID lockdowns, particularly in China, we expect good year-over-year comps. We will dive deeper into this during the discussion of segment results and the Q&A portion of the call. Now, letâs turn to our growth numbers. Sales improved 2.5% year-over-year. And as we delivered record first quarter revenue for a total company and individually in chicken, Prepared Foods and International Other, we are focused on driving growth in these segments, which will enhance our margin profile over time. We continue to see benefits of our efforts to optimize our existing footprint, add new capacity, adjust our product mix by plant, and match our portfolio more closely with customer and consumer needs. Prepared Foods revenues increased 8.8% for the quarter driven by both volume growth and pricing actions implemented in the prior year. Positive momentum continues to build in Prepared Foods, as it delivered sequential quarterly improvement in revenue since the fiscal fourth quarter of 2021, driven primarily by the strength of our retail brands. Beef revenue was down 5.6% compared to prior year. Lower average sales price driven by the decreased value of beef cut out more than offset the increased volume from higher headcount throughput. Compared to prior year, pork revenue was down 6% for the quarter. This was driven by decreased volume due to balancing supply with customer demand, partly offset by increase in average sales price. Chicken revenue increased 9.6% compared to prior year driven by volume growth from increased domestic production and pricing initiatives and an elevated inflationary cost environment. In international, revenue growth remained strong, up 11.3% compared to prior year quarter. This was driven by our investment in capacity, innovation and brand to support market share growth. In the next few slides, we will detail our success winning in retail marketplace with our advantaged brands in advantaged categories. The retail categories in which we participate are highly consumer relevant with the vast majority remaining elevated relative to pre-pandemic and demonstrating growth over the prior year. With our iconic retail brands, Tyson, Jimmy Dean, Hillshire Farm, and BallPark, Tyson core business lines outpaced total food and beverage and our peers in volume growth, up 9% relative to a year ago per Nielsen. Tyson core business lines also grew pound share by 2 points this quarter relative to year ago for Nielsen, continued to be market share leader in most of the retail core categories in which we compete. We delivered both dollar and pound share growth in both the aggregate and across day parts compared to a year ago, most notably in the morning meal occasion. Our brands continue to perform well as we see elasticities below historical levels. Additionally, Tyson, Jimmy Dean, Hillshire Farm, and BallPark, all hold favorite brand status with consumers in the categories in which we compete, highlighting our brand strength relative to our peers. Consumers spend on relevant categories and brands they know and trust. The trajectory of our Tyson Core business lines volume share growth shows, the recovery we have seen since April and the momentum we now have. We have improved fill rates and on-shelf availability. Price gaps relative to competitors have narrowed while we continue to invest in merchandising and advertising to support our brands. These factors, along with other strong business fundamentals, resulted in sequential quarterly share growth in Tyson core business lines commanding a 5-year record high market share of nearly 28%. It is evident we are delivering the brands and products that consumers desire. While the foodservice industry is yet to recover to pre-pandemic traffic levels, the Tyson Focus 6 group is outperforming pre-pandemic volume sales, up 2.7 and 1.7 share points in the latest 52 weeks according to NPD SupplyTrack data. The Tyson Focus 6 group is also outpacing both total broadline and its respective categories, up 11.7% in volume sales and 0.6 share points in the latest 52 weeks compared to last year per NPD. We believe strongly in our foodservice portfolio and are confident in the path to continue to grow this business as we align with key growing customers to build momentum for the future. Our team members are essential to providing the products our customers and consumersâ demand. We are seeing business results from making significant investments to become the most sought after place to work by investing in our team membersâ experience. Recent highlights include expanding access to benefits with Day 1 eligibility, enhanced parental leave policies, expanding mental health benefits and citizenship support at no cost to our U.S. team members. In November, as recognition for our Tyson immigration programâs commitment to improving the lives of immigrant team members, we received the prestigious Keepers of the American Dream award from the National Immigration Forum. We also just completed what we have been calling Project Next Frontier. We are setting the foundation for an HR shared service model focused on process and system efficacy and better overall HR service delivery for our team members, setting us up for savings in the future. I am pleased to report we are also progressing as expected with our North American headquarters consolidation focused on building our OneTyson culture. In addition to realizing savings, we are collaborating, innovating and working with greater speed and agility to serve our customers. I would also like to thank our team members for their dedication that led to Tyson Foods number one ranking on Fortune Magazineâs list of the worldâs most admired companies in food production category for the seventh consecutive year. Following the strong outperformance of expectation in fiscal 2022, the productivity program is on track to meet expectations this fiscal year and to deliver the $1 billion of recurring savings commitment a year earlier than originally promised. We expect this program to translate from a onetime initiative to sustained year-on-year productivity improvements, supporting our bottom line on a continued basis. Examples of initiatives in our productivity program include leveraging data analytics to improve inventory visibility, mitigating distressed pounds, a direct plant shipment program, which continues to bring on new customers and categories, removing miles from the roads and driving efficiency in our distribution network. This is an example of how our scale drives competitive advantage. Investing heavily in automation, we recently rolled out automated sandwich hand wrap and burrito assembly capabilities as well as an automated line to serve snacking production. We have also continued to scale our chicken debone automation across multiple facilities and we are piloting a robotic tray pack machine that is showing promising results, expanding our smart factory program to digitize our plants to new sites as well as exploring opportunities to digitize our processes. Our progress displays how Tyson remains focused on optimizing our business processes, digitalizing the supply chain increasing automation and aggressively managing SG&A across our operations. Before I turn the call over to John to walk us through more detail on our financial results for the quarter some final comments. Our segments individually and in aggregate have clear and compelling roles within Tysonâs portfolio strategy to deliver sustainable, high-quality growth at good value. We have a powerful and diverse portfolio across proteins and channels around the world. We have products for consumers across proteins and price points, delivering performance that supports the companyâs long-term earnings objectives and desirable return for shareholders. We are modernizing our operations with our productivity program and are building a team positioned to take advantage of the opportunities in front of us. Again, we entered Q1 with a good plan to execute our strategy. That led to solid top line growth and strong performance in Prepared Foods. Market dynamics and some operational inefficiencies impacted our profitability. We see opportunities to become more agile and efficient, which will further improve our operational execution. We remain committed to executing our growth strategy and are confident we will grow volume, revenue and operating income in the back half of fiscal year 2023 and have a long runway of growth ahead of us. Thanks, Donnie. First, letâs review a summary of our total company financial performance then we can dive deeper into the detail for the individual segments. As Donnie stated, sales were up year-over-year for the first quarter, benefiting from both volume growth and disciplined revenue management to offset elevated inflationary increases in our cost of goods. Looking at our sales results by channel, retail drove $324 million of top line improvement led by Chicken and Prepared Foods. Our industrial and other channel sales increased by $108 million, led by beef and chicken and this was offset by slight decreases in sales to the foodservice and international channels. As expected, given the record strength of beef a year ago, we delivered lower adjusted operating income in the prior year of $453 million. This translated to an adjusted earnings per share of $0.85. Now, turning to the adjusted operating income bridge, we significantly grew Prepared Foods earnings in the quarter, but underperformance in chicken, pork and beef led to $979 million lower operating income compared to the prior year. While pricing actions led to an improvement of $222 million, higher input costs per pound increased cost of goods sold by $1.3 billion. About two-thirds of this increase was driven by inflationary impacts on raw material and supply chain costs. The remainder was primarily due to a shift to producing more value-added mix, higher labor costs and unfavorable derivative impact. Excluding the impact of restructuring, SG&A expenses as a percentage of sales was down to 3.7% from 4.3% in the prior fiscal year as we continue to eliminate non-value-added spend across our business while investing to support the future growth of our brands. Our productivity program continues to play a critical role in the long-term improvement of our margin profile. Now to the individual segment results. Starting with the Beef segment, sales in the quarter remained strong at more than $4.7 billion, but were down 5.6% compared to record high sales in the prior year. Volume gains of 2.9% were supported by improved staffing for higher throughput, while the average sales price was down 8.5% due to softer domestic demand for Beef. Live cattle costs increased approximately $530 million in the quarter as cattle supplies continue to tighten. Net-net, segment operating income for beef was $129 million for an operating margin of 2.7% off the previous yearâs historical record first quarter margin of 19%. We saw higher cattle prices as beef herd numbers continue to decline. We will continue to monitor the beef cutout value and balance our supply with customer demand during a period of margin compression while pushing volume growth in case-ready and premium branded products. Although the near-term operating environment remains challenging, we have reasons to believe in our long-term outlook for beef. This outlook is supported by our investment in strategic supplier relationships that provide higher quality beef, a growing global demand, specifically in Asia, and the strengthening drop credit as well as opportunities to shift our beef products up the value pyramid. Now, letâs look at the Pork segment. Sales were approximately $1.5 billion for the quarter, down 6% for the record high in the prior year. Average sales price gains of 1.4%, mostly driven by higher value specialty products were offset by volume decreases of 7.4%. International demand for U.S. pork products continues to be impacted by the strong U.S. dollar, while domestic demand is being affected by high retail prices despite the cutout realigning to historical norms. However, we are optimistic that when these factors normalize, demand will improve. We expect to see continued industry supply challenges in the fiscal year as the producer navigates herd health issues and higher input costs. On expenses, we incurred greater cost as lean hog costs increased approximately $55 million over the prior year. We also experienced an unfavorable year-over-year derivative impact of $35 million. Segment operating income was lower than expected at a loss of $19 million for the quarter, down from a profit of $160 million in the prior year. As we move forward, pork margins should be supported over time with the normalization and the strength of the U.S. dollar aiding future export demand, a strengthening drop credit and additional opportunity to shift pork products up the value pyramid, especially into our case-ready business. Now, letâs move on to the Chicken segmentâs results. Sales were a record first quarter high at $4.3 billion, up 9.6% from the prior year. The sales increase was attributable to a 2.5% uptick in volume and 7.1% gain in pricing compared to the prior year quarter. Volume gains are due to a combination of strategic choices to maximize our capacity utilization and pursue an optimal mix strategy with products and customers. Our pricing results while improved were lower than expected. We pegged this to a combination of factors that influence chicken prices, mostly related to total protein availability, notably chicken and beef. We anticipate these factors easing in the back half of 2023 as beef availability lessened and total poultry harvest normalizes, providing support for improvement in our chicken prices. The fall in commodity chicken prices driven by heightened protein supply in the market and seasonal demand weakness does not change our strategy. Based on current USDA industry placement data, we are optimistic on our forward-looking supply conditions in the intermediate term. We intend to grow our domestic production to 42 million head per week during this fiscal year, which should enable us to improve our fixed cost leverage, grow volume and gain market share. We will continue optimizing our plant network and portfolio mix to maximize the profitability of our Chicken segment, particularly by growing our portfolio of value-added products, which remain in high demand. Operating income in the quarter was negatively impacted by $225 million of higher feed ingredient costs and an unfavorable year-over-year derivative impact of approximately $40 million. Net-net, our Chicken segment delivered operating income of $77 million in the first quarter. We see significant room for improvement in the long-term operating margin of our Chicken segment as there is still work to do to attain industry leading performance and we are optimistic it can be achieved due to the following: our diversified value-added portfolio with lower margin volatility, our brand strength with the highest consumer awareness and brand loyalty according to Nielsen data, our growth strategy, taking advantage of existing capacity, optimization of our portfolio by shifting from commodity to value-added products, and last, a further implementation of our productivity program as we ramp up more automation. Last, I want to turn to our Prepared Foods business. In this segment, we had a solid quarter with growth in both revenue and volume. This was driven by strong brands, increased support for our customers and pricing aimed at recovering the continued inflation. Revenue was approximately $2.5 billion for a record first quarter, up 8.8% compared to the prior year. Volume gains of 1.2% were driven by strength in retail, notably Jimmy Dean and improved customer fulfillment despite decreased volumes in foodservice. This quarter was our third sequential quarter of volume growth and we saw significant pricing power of our portfolio with a year-over-year increase of 7.6%. Driven by top line growth and productivity savings, we delivered segment operating income of $266 million for the quarter. The operating margin of 10.5% was up from 8% in the prior year. We are very pleased with the performance of this quarter in Prepared Foods, as this segment is critical to drive profitable growth for Tyson by valuing of Beef, Pork and Chicken commodity meat products. We continue to be optimistic for the outlook of this segment due to the following. Our diversified portfolio meets consumers across meal eating occasions and snacking occasions in all sales channels. We are outperforming our competition in retail with room to grow further market household penetration. Our comprehensive foodservice portfolio has opportunity to grow by regaining lost customers and broadening our customer base. We have got additional operational efficiencies to unlock by increasing plant utilization in addition to the implementation of our various productivity initiatives. And finally, we have an opportunity to innovate, expand and acquire into new spaces through new offerings, the growth of our existing products, and attractive disciplined approach to M&A. Now, turning to talk about our financial position. Building financial strength, investing in our business and returning cash to shareholders remain the priorities of our capital allocation strategy. We produced operating cash flows of $762 million for the quarter and our leverage ratio finished the quarter at 1.6x net debt to adjusted EBITDA, demonstrating our commitment to a sound balance sheet. Focused primarily on new capacity and automation objectives, we invested nearly $600 million into our business in the first quarter to capitalize on projected demand growth over the next decade. Investment in the business, both organically and inorganically, is expected to generate returns at or above our 12% return on invested capital target over time. Our capital allocation priorities are first to invest in growth and productivity in our existing footprint. Then we will employ a disciplined M&A approach by investing in opportunities that fit well with our existing portfolio. Next, we remain focused on returning cash to shareholders through dividends and share repurchases. Notably, we will continue to support and grow the dividend for our shareholders as evidenced by its continuous payment since 1977 and annual increases each fiscal year since 2013. Our approach to share buybacks will continue to be managing for dilution and entering the market opportunistically when assessing for multiple factors. We returned nearly $500 million in cash to shareholders in the quarter through $169 million in dividends and $313 million of share repurchases. At Tyson, we utilize a disciplined capital allocation approach to invest in our business for both organic and inorganic growth and we returned cash to shareholders while maintaining a robust balance sheet. Now, letâs turn to the fiscal 2023 financial outlook. We are maintaining our total company sales guidance of $55 million to $57 billion, which implies a 3% to 7% sales growth for the year. Supported by the factors detailed earlier, we expect future Beef segment margins to be in a normalized range of 5% to 7% in the long-term. However, based on current market dynamics, we now expect to perform between 2% and 4% this fiscal year. Given the result in pork in the first quarter, we are lowering margin guidance for the year to be between 0% and 2%. Counter to normal seasonality for our pork segment, we expect the back half of the year to outperform the first half of the year. For our poultry business, we now expect full year margins to be between 2% and 4%, but gaining momentum through the year and exiting the fourth quarter at a margin above this range. Prepared Foods had a strong first quarter in performance as this is historically normal seasonality for the segment we are maintaining our expected full year margin performance to be between 8% and 10%. In international, we continue to see volume and sales growth year-over-year, and we anticipate improved profitability in fiscal 2023, driven by volume and revenue growth from new facilities ramping up. We remain committed to growing our business internationally, representing the fastest-growing protein consumption markets in the world. Our expectation for CapEx for the remainder of the year is unchanged at approximately $2.5 billion. Our expectations for productivity savings remain unchanged at $300 million to $400 million. Our net interest expense and tax rate are now expected to be around $330 million and 24%, respectively. We remain committed to our investment-grade rating and managing our net leverage ratio to be at or below 2x net debt to adjusted EBITDA over the long-term, providing optionality for inorganic investment and additional return of cash to shareholders. In summary, we had a slower start than expected, but are optimistic on the outlook for the remainder of the fiscal year and long-term. We have a great team, growing demand for our products, strong portfolio diversity and a differentiated asset footprint needed to win in the marketplace. Overall, we see some persistent market factors, some operational challenges, and some expected seasonality influencing our second quarter results. And therefore, weâre expecting total company volume, revenue and operating income to be meaningfully stronger in the second half of the year compared to the first half of the year. We remain in the strong financial position to support continued investment in our existing footprint, productivity and the support of our brands as we continue to grow our business and provide desirable returns for our shareholders. Thanks, John. We will now move on to your questions. Please recall our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Okay. I guess we need to focus in on the Chicken segment here. And I know in your prepared remarks, you made some comments about why things came up short this quarter. Can you talk about what was the big negative surprises, chicken prices? It sounds like there were some operational and executional issues. And also, as we look forward, can you talk about how quickly you expect some of those issues to resolve? And what gives you the confidence that they might improve over the remainder of the year? And then I have a follow-up. Okay. Alexia, thank you and thank you for your question. Iâll start out with some broad comments, and we will get a little more tactical as it relates to chicken and then wait to your next question. But I would just simply tell you that Q1 was a very challenging quarter for us is the confluence of several external factors across all businesses. We saw market swings across all businesses and they were unpredictable and sizable. While we have opportunities to perform better and you would never hear me say anything other than that. This is the first time Iâve seen all markets work against us all at the same time. Itâs the first time I remember market impacts being greater than those controllables that we have and the opportunity for improvement of them. As we think about moving forward, efficiency in our operations and our company will be a focal point for us. There are some places where we need to make decisions faster and, in some cases, better decisions. In some cases, we will need to adjust our business model. And in other cases, the accuracy of our projections has to be better than what weâve demonstrated here in Q1. Iâd remind you and everyone else that weâre not bigger than the market. And in Q1 and over time, markets will do their job, and we simply have to do ours. Q2 will be seasonally softer than Q1, and the back half will be better than the first half. While the back half will be better than the first half, we feel good about our business outlook. For example, we knew the beef herd is nearing the bottom of the cycle. We knew pork had heard health issues and that there would be incremental packing capacity coming online and it did. We did not expect the incremental beef, pork and chicken in the marketplace domestically in Q1, especially in light of the fact that the cost of animals and the cut out of the pricing was declining. Our Prepared Foods performed as expected, delivering on operating income. We grew share in both dollars and pounds in the quarter. And I would just â I have to remind everyone else before I get into chicken in the details is that we have a strong diversified portfolio, and we have confidence in our multi-protein strategy that it will deliver growth and shareholder value. Now let me go a little deeper as it relates to chicken, and we perhaps can go even deeper or later. In chicken, we have a differentiated model. We have the number one brand in chicken. Weâve talked often about the fact that our model doesnât get the highest or lows of the commodity markets. This does not mean weâre not impacted. For example, we talked a lot about variable pricing models, we have those. And â but I would remind you that those pricing models have lags as well. As we started this year in chicken in particular, we had a good plan. We still like our chicken business, but there were a lot of moving parts in Q1. So what happened in Q1? Our volume was up 3% and our harvest pounds were up 15%. This is due to a mix shift from small bird bone-in to more of a boneless product, and it was part of our strategy. Our supply plan is dictated by our demand plan. This is a core tenet of our business. We plan for a strong November and December. If youâll remember, for fresh chicken, if you remember, we shorted fresh chicken in the last 3 years in a significant way, and we had a plan in place this holiday season to not have that happen again. November and December were softer than we expected or planned for in retail fresh chicken. This created excess in our retail fresh chicken. Because of sales didnât materialize in retail fresh. This triggered a resale or movement of products. The resale price was much lower than modeled for the original sale. So to help you a little bit, I would say, just to dimensionalize this, that about two-thirds of our miss was market-driven and about third of the miss was related to labor, yield and spend, some of which was associated with the movement of product because of the miss on fresh chicken, the movement of product from one location to another impacted labor, yield and created incremental freight costs. We also had some knock-on effects of building inventory as a result of this, inventory above our plan. And as a reminder, avian influenza impacted our pricing and volume on both cost and chicken leg quarters in the quarter. There was more chicken, beef and pork in the market than anticipated. So it sounds like a lot of excuses there. I get that. So what now what, so what are we doing? Iâd tell you that we still have a great chicken business. We still have a good plan. We are cleaning up and have been cleaning up some issues from Q1 that Iâve talked about earlier. So as we think about from this day â or since Q1, we have to control the controllables. I would remind you that we are fully staffed, and we continue to invest in a better workplace experience through automation, etcetera. We are growing our business, servicing our customers and becoming the most sought-after place to work and we will compete with the very best in the chicken space. So, let me pause and get a follow-up question and we will go from there. Thank you for that. Just moving quickly to the Beef segment, youâve given us a range of 2% to 4% on the operating margin side now. Prior to that, it was more open ended just below your long-term guidance. What has become clearer? What is more certain now about the outlook for this year? And what gives you the confidence that it will come in within that range and not below it? Thank you and I will pass it on. Alright. Thank you. I will â Iâll start out on this, and then I will flip it to Brady for a few comments. Weâre moving closer to the bottom or to the trough of the beef cycle. We obviously were surprised at the amount of beef harvested in our Q1. There was a lot more beef on the market than what we had expected particularly in light of increased pricing â or excuse me, increased cost of cattle and at the same time, a decline in cut out. So that was a bit of a surprise to us. Thatâs a miss for us. But we are moving closer. We know that there are more hoppers being harvested. We know there are more cows being harvested. We know what those signs are that we are looking for in terms of when the herd would rebuild. And itâs going to require a rain or precipitation. Itâs going to require the rancher to see more forage in hay. Availability, those are some of the things you need to look for. But as weâve gotten a quarter closer to answer your question, Alexia, we â we see a little more clearly than now. We know that the trough is coming, but we wanted to â the number you see is a conservative number for us and making every effort to make sure that we guide you to where we see Q2 and the balance of the year going. And so Brady, let me see if you want to add anything to that. Welcome, Brady Stewart. Thank you, Donnie. And certainly, your points relative to cattle availability and the look into the future is spot on the drought, lack of affordable hay and forage and higher overall supply chain costs are still driving cal liquidation in parts of the U.S. as we move out of this cycle of the cal liquidation and start to see some [indiscernible] replacements into the future, we will certainly have better visibility to the trough that you mentioned as well, Donnie. Why I am optimistic about the future? Is the team has worked diligently and effectively to strategically align ourselves with suppliers to ensure we have the supply required relative to higher grading cattle. We feel good about global demand, specifically on higher-grading beef products from a macro standpoint. Weâre seeing some appreciation in drop credit values, specifically on specialty products, including fats and oils. And while it is hard to pinpoint the exact bottom based on the current drought and feedstock conditions, we are seeing some moderation and some signs of optimism relative to the drought conditions that we will keep an eye on moving into the future. Hi, thank you. I wanted to ask a couple of questions. First, Donnie, you made a change at the top in the Chicken segment. Can you outline a little bit which changes are most important as we think about the next few years that youâd like to see and maybe why the change was made now? Sure, Ken. Iâd be happy to â David Bray was leading our poultry business. And I talked about in Q1 that we had some issues as it related to markets and the amount of protein on the market. The change that we made is a result of some of the controllables that I think we made some good decisions. Iâd like to have seen those decisions faster and perhaps some better quality of decisions and there were things in Q1 as it relates to chicken that we could have done better. And I made the change. I went out immediately and recruited Wes Morris, who Wes has had has run many parts of our Chicken business. Heâs led our Prepared Foods business, and heâs also led our Case-Ready beef and pork business. And they had an opportunity to pick up a great talent with many, many years of experience and know-how in this business, and we made the change. In terms of the overall organization, Shane Miller leaving our pork â or excuse me, our beef and pork business, our fresh meats business, the relocation got change. Shane is still actively engaged in the company. He and Brady are working through a transition. And so we â when Shane decided he could not move for reasons. By the way, Shane is still trying to figure out how he can get here and be a part of it. There are some personal things that heâs got to deal with. But we were fortunate to pick up Brady Stewart, who is the COO of another company, and heâs well versed in the pork business and the packaged meats business and could do a number of roles for us going forward. Weâre very fortunate to be able to pick up both Wes and Brady in our organization, and we look for great things from them. But weâve got a lot of upside and runway in the organization because of them. Recently, we announced Amy Tu leading our international business, along with a few other functions. But weâre excited about Amy and what sheâs doing and her passion for the international market and her passion for growing Tyson in international markets. And I feel really good about where we are from an international perspective. I feel really good about where we are from a chicken perspective and the leadership there. I feel really good about where we are from a beef and pork perspective. If you click down one level as it relates to beef. That team is largely intact moving here, and some have, in fact, already moved here. So Stewart, you saw the numbers in Prepared Foods. Stewart has done a really nice job of challenging the business and upgrading pork raw material into this branded portfolio that we have. And then finally, today â actually today, Melanie Boulden is joining us. And so why Melanie and why a Chief Growth Officer, it was all in an effort to try to get a center of excellence here in Springdale, Arkansas around branding, marketing, communication and innovation. And Melanie has got great experience in consumer packaged goods and most recently, Chief Marketing Officer in a food and beverage company. So Iâll pause and take a breath right there, Ken, and wait for a follow-up. No, no, thatâs helpful. Thank you for that. I guess as my quick follow-up, itâs obviously not the largest segment you have, but since you mentioned international, itâs never made money. And Iâm just curious. Iâm not trying to be critical of it because, obviously, itâs â but in the long run, itâs going to be a business that should be very profitable for you and others. But whatâs the strategy? Don, youâve taken a much stronger tack toward, I think, profitability and margins and just efficiency than perhaps your predecessors have. Between you and Amy, what is the frac that we should expect that margin to be going on ahead? Thanks, Ken. We do appreciate the interest in our International business. I would tell you that weâve invested a great deal in plants. And with COVID over the last year, particularly in the foodservice channel, weâve had some headwinds with that. Those have lessened. And weâre in a sweet spot there in terms of our alignment with global customers, many of which are in the food service channel. But we also have launched a branded portfolio across Thailand, Malaysia and China. And we feel good about that. Itâs â they are doing â the brands are doing really, really well and provide not only innovation or outside the U.S., and we also take that innovation and we add that and we bring some of those things back to the U.S. But we feel good about it. Itâs been an investment. Itâs been a long time coming, but I think you will see here in â23, our international business delivered some really nice results for in the way of operating income. Amy, anything you would like to add to that? Ken thank you for the question and pointing out profitability, our non-profitability over the last few years. I think Donnie is absolutely right. This is our growth strategy. Weâve talked about in the past where global population growth will happen and will happen outside the United States. And so weâre taking our existing footprint right now. Weâre putting in place the kind of execution fundamentals that we need to have. And then weâre also discussing with our other segments, the opportunities that lie before us, given the raw materials that we have here in the United States. But Donnie just put forward exactly what we have outside the United States with our strong brands. We are launching smart factories. We are able to do things more quickly outside the United States which will give us ultimately a benefit for the entire company. So more to come, but we are very excited about what we see right now. Hey, Ken, Also, this is John. And I think itâs just worth pointing out. The business has been profitable over the last few years. And on an EBITDA basis, we look at something in the high single digits for that. So I think there is financial performance to support the continued investment there, but at the right... Hey, good morning. I want to ask a follow-up on chicken. Donnie, I think you characterized the underperformance in the first quarter as two-thirds of the market, one-third Tyson-specific as you look forward, understanding that your view is, and I think we would agree that recovery is underway in kind of commodity chicken fundamentals, what is the critical path from an internal standpoint to improve that business from here? I think last year, the focus was hatchability, that was a big opportunity around growing capacity utilization what are the focus points as we move through fiscal â23? Thanks, Ben. I will make a few remarks, and then Iâll pass it to Wes for a little more detail. As I said in my opening comments to â also in the first question, we still feel really good about our chicken business. We think we have a good plan. Yes, we got hitting the mouth in Q1 because of all the protein on the market in Q1. And our tray pack, our fresh chicken business did materialize as we had expected. And so we kind a created â we created our own issue with that because of what happened in the market. But I would tell you, we still have tremendous opportunity and upside as we execute this business. And itâs nothing exciting, but itâs the fundamentals of labor and yield and spend and just maintaining growing this business to fill up our capacity and service the needs that we have. And I would remind you that you and everyone else that we place chickens based on what our demand plan looks like is in service of our demand plan. So as we go back and look at what happened in Q1 and think about the future, in Q1 strategically, the only thing that went awry was the fact that the demand didnât materialize in the place at retail in which we thought it would. And so that triggered a number of other inefficient moves and activities. But again, we think Q1, youâve seen the numbers, Q2 is seasonally softer. But as we start getting towards the to that Q3 time period, we feel good about it, and we donât have something thatâs broken here that like a hatch issue and a genetics issue, the time horizon for fixing this is much shorter than many of those things. Wes, anything you want to add to that? Yes. Good morning, Ben, and thanks for the opportunity. First, let me say how excited I am to be a part of Tyson Foods. This is a great chicken company. Itâs got great people, great brands, great customers. And I want to echo what Donnie said around, we did a lot of foundational work and executed it very well. We said that we would improve our capacity utilization. We would staff our plants and they are at a record staffing level. Weâve added automation and got some opportunities as we start up that that negatively impacted our yield in Q1. And then we said weâd rebuild inventory post COVID to better service our customers and our order fill rate indicates that we did that well. And so from a live perspective, we performed very well. The volatility of our hatch numbers are behind us, and we did exactly what we said we were going to do on the live production side. And so that allows us to focus more of our energy on standing up that automation to its expected results. And to make sure weâre still meeting the needs of the consumer. But the one thing thatâs obvious we can do better is understanding the consumer shifts in our business and making sure we got the right amount of birds in the right place at the right time. Okay, very good. Thank you. My second question is on the Prepared Foods business, a very strong start to the year. The guidance is unchanged. I know itâs early in the year, but implied in the guidance being unchanged is a moderation in the operating margin. So what is it that we would need to see for that to happen? How much of that is itâs early in the year and you want to get a little bit more of the fiscal year under your belt to adjust that guidance versus explicit view that things soften from here? So let me make a comment, and then Iâll flip it over to Stewart. In terms of prepared, we did deliver what we said we would in Q1. We feel good about that on a go-forward basis with these iconic billion-dollar-plus brands that we have, we feel good about that. Stewart said in the last quarter that retail was really, really good, and we had some work to do as it relates to the food service side. And of course, weâre still not back to pre-COVID levels in the food service channel. And so there is some upside for that opportunities when that happens, but we need more demand there. I would tell you, even in all of that we continue to grow our share in the foodservice prepared and poultry business. But Stewart, why donât you add some color to this? Yes. Thanks for that, Donnie. Well, look, foodservice, as I said last quarter is operating from a very, very strong platform. And investors should expect to see that over the medium-term that, that business continues to grow and the profitability improves. And in the short run, we have got a job to do on foodservice, and I believe we are making progress there as I look at the pipeline thatâs developing. Very strong performance on retail, but acknowledge that in the first quarter, some of that is seasonal as you look at some of the Sausage Breakfast, Sausage Products that we have. And we are taking some of that benefit. I feel good about the guidance we have given for the year. There may be a little bit of variability in some of the quarters. But I am really standing on the fact that this is a solid platform that we can continue to see go from strength-to-strength. Hi guys. Thank you. Hi. Good morning. So, I guess coming back to chicken a little bit more deeply. I guess I am trying to just kind of square kind of the point on market kind of demand dynamics were a bit responsible for pretty unfavorable mix. And Donnie, you talked about your sales volumes in chicken up, I think 2.7%, but harvest up 15%. So, clearly and you talked about too much meat in the market. If I think about your own harvest levels up 15%, that would represent a pretty disproportionate amount of the increase in poultry production in the industry in the fourth quarter. And so I guess I am just trying to get a sense of when you say market was the source of weakness, is it just pricing, is it mix, or is it just â look, we saw the big bird cut up be down with commodity market pricing was bad, or is it just demand in your highest value channel or higher value channel in retail tray pack and you had to sell that meat into the big bird market at a discount at a lower value? Let me make a few comments, and then I will let Wes add some color to this. The miss for us was clearly in our fresh chicken, our tray pack chicken at retail. That was where we stumbled. The demand for our branded retail products was very good, demand for our foodservice chicken products were all very good. The thing that has exacerbated this was the amount of overall protein in the marketplace in Q1, beef, pork and chicken. While our harvest pounds were up 15%, remember that we are converting all those pounds into a boneless form, right. Thatâs different. Thatâs a mix shift and a strategy change as we get out of some of the more small bird, whole body, 8 Piece type products. We talked about that last quarter. We have moved into a boneless mix in that area. And we have got more to come as it relates to that. But Wes, why donât you cover some of the details? Yes. Adam, thanks for the question. Like I said before, we executed our live plan very well and did exactly what we said we were going to do. We did have a strategic mix change and had less bones. And then one of the other drivers was the impact of our sales of 2% to 2.5% of a lot of chicken depending on what size. Rebuilding our safety stock inventory. And then the seasonal increase in inventory to supply wings to the marketplace. But Adam, the way I would ask you to think about it is at a macro level, we did a very good job, and we absolutely had the right number of chickens. We simply had them in the wrong place based on the post-COVID changes. And so we had more than we needed in our fresh chicken business and came up short in some other areas. Okay. And then I guess, this goes to both the performance in the quarter and the change in outlook for the balance of the year, just you guys reported in mid-November, nearly halfway through the quarter at that point. I just â help me understand kind of where the information disconnect was between live production operations and financial planning that there was this big of a disconnect in the period? And in terms of the magnitude of the guided margin change for the rest of the year, is that just continued unfavorable mix? Is that cost? Is that contracting and pricing? I am just trying to make sure I understand the moving pieces on the magnitude of that margin change relative to three months ago. Sure, Adam. So, I have said earlier that as a way of a reminder that we start with a demand plan and that over the past 3 years, we have not been able to service the demand in fresh chicken at retail. We were trying to correct that at this point. And every demand signal we had said that the demand was going to materialize and we place chickens accordingly. Remember, we placed those chickens for that November timeframe back in August. And so we were going â I understand your point about we are in November and we are having the last earnings call. A lot of things from that day forward, the demand didnât show up in fresh chicken. A lot of the other things worked exactly the way we planned for them. And â but that trigger, if you think about fresh chicken, you typically put that products in a tray and then before you have the order. And when the order doesnât show up, then you have to take it out of the tray or sell it in the tray at a discounted or in a distressed fashion. We had a lot of that in our Q1. And we have cleaned up that. We are still trying to get ourselves going back again. Q2 is going to be seasonally softer, variable pricing models and the lag associated with that. I mean we will get caught up with that. The back half of the year, we feel good about where we are going to be relative to that. And so Wes, thatâs I think the first question, what about the second one? Yes. Optimistic about the path forward, the USDA is projecting Q2 numbers around 2%, which is a lot less chicken availability than the 77 increase we saw in Q1. Then when you couple that with 4% to 5% less cattle, you should have an overall protein per capita that is much smaller than what we saw in Q1. We are already seeing some changes in the marketplace. Since the end of the quarter, we have seen boneless go up the quarter. Wings are up around $0.14, $0.15. And so optimistic going forward that the chicken values will correct. We have talked about variable pricing on a lot of these different calls. And the good news is itâs much, much faster than the historical 1-year fixed price agreements. But unfortunately, it still has a short-term lag as these markets correct, it will take a minute to hit the self sheet. Hey Adam, this is John, too. I think there is just a couple of other things that we have said that are worth reemphasizing. One is, and I think you asked a good question about, hey, what was going on, you have talked to this last time in November. I think in addition to all the poultry dynamics that Donnie was described here, I think there is still different of outlook as it relates to beef availability, which I think was maybe a little bit of a surprise. And then I think as it relates to the outlook for the year, if you just look at kind of what the public data says, I think itâs something like 25% to 30% more chicken meat in the freezer. And so our plan is to account for working through that, but it does take some time to work through that. And there are timing differentials between how the market recovers and where our pricing recovers. So, all of that influences just the shape of the year for us. And I think we have also said this, but just to make sure the listeners on the call get it today, Q2 will be softer for us in Q1. And we expect to see a recovery in what is our Q3 and Q4, the second part of our fiscal year. Hi. Thanks for the question. I guess the follow-up is it sounds like there is no change to your production plan for chicken. I think you had a plan of 42 million head per week. Is that still the same? And I donât know, like do you still have to harvest 15% more chicken now in order to satisfy the demand that you have three months from now? Is it â are you still at a 15% increase in production? So, let me make sure I separate it for you. Great question, by the way. One is head and one is weight. The 15% is weight. The head is different. We have talked in terms of in fiscal â23, by the end of fiscal â23, we would be at about 42 million head a week. And thatâs still the plan. I would also tell you that the plan is â I mean, the demand is there to support 42 million chickens a week. And if that changes, we will change. But thatâs what we see right now as we look at the demand picture. The other thing that I think that â and I will just say it as we talked about the beef cycle and the pork cycle and herd health and so forth, I think itâs â if you look at what happened in Q1, I think every chicken company in America, read the headlines around there is going to be less beef, less pork, and the natural belief is that chicken will fill that gap. But the problem with all of that is there wasnât a gap in beef and pork in Q1. And so I think you are seeing even now based on the numbers that Wes quoted earlier, you are seeing adjustments in the marketplace relative to that. And â but we will always balance our supply with what our demand needs are. And I just â itâs just the fundamental tenet of how we operate this business and have operated for many years. Okay. I guess the follow-up is, I have gotten questions from investors asking whether this is an indication of much weaker demand from consumers. Would you describe it that way, or is it really oversupply thatâs been the issue. And then in the back half of your fiscal year, you think that, thatâs whatâs going to correct? Itâs not really demand needs to get better. Itâs that the supply needs to normalize? I think you are spot on relative to that. And you are â I think you are already seeing adjustments in terms of the supply plan. I would tell you and I donât want to mislead you or anyone else on this. There is some, there is unusual erratic to describe a behavior as it relates between channel swapping and even parts of the store and how â whatâs going on there. Swapping between proteins, all the normal things that you would know from all your years of covering this protein sector, they are all in play. But I think this is â I think in Q1, this was a supply issue first and foremost. Secondly, there was some shifting in what part of the store and what products were purchased. Yes. Good morning and thanks for taking my question. Just wanted to dig a little bit into if you could explain in more detail what happened on the derivatives in both cases chicken and pork? And if there is something else outstanding that might go wrong going forward and how you are planning on trying to not run into this? Because I think you said on pork, without the derivatives, it would have been positive, but then obviously, because of there has been were negative, so just to understand a little bit of that dynamic. That would be my first question. Hey Ben, this is John. I think maybe just a couple of comments headlining on kind of how we are using hedging and derivatives as it relates to a risk management kind of overarching strategy. Generally speaking, what you would expect from us is to kind of have coverage in the near-term, coordinated with what our sales picture looks like with customers. And we really use it as a margin management tool more than any type of speculative tool. And so I think that just emphasizing that last point, we would not project any â there is no outside best sitting out there in terms of what the markets are going to be doing. We kind of keep things in close and use it more from a margin management standpoint. Okay. And then just from a like general within prepared foods, I mean obviously, you had a very good quarter, both pricing still nicely up, but at the same time, volume was actually up. Can you help us understand how much of that volume was just recovery in some of the foodservice thing as you were saying, you still need to catch up here on the volume to get to pre-pandemic levels? And are you seeing any sort of elasticities or any headwinds on some consumers becoming a little more sensible to the price increases, just to understand the volume impact within it as it was still positive? Yes. Sure. Well, Stewart here. I will just pick that up. So, first of all, look, like I said earlier, we have a very, very powerful platform here, both on the retail side and on the foodservice side. The increase in volume was not driven by food service. Foodservice for me is still a place where there is a lot of work to be done. A good platform, but opportunity to fill some plants to sell harder against volume that we lost during COVID. This was driven by the strength of retail. And what was really impressive in the quarter was the ability of our brands to gain price to offset some inflation and also to gain ground with consumers. But we are working closely with our customers. We are providing the right level of support for our brands. And I think this â the performance in this quarter just demonstrates the real strength of our retail platform. At the same time, there is ground that we can cover in innovation. I am pleased that Melanie is on Board. She is going to be a big help. There is ground we can cover from a productivity standpoint. Just in running our operations better. And certainly, we will start to fill up that foodservice volume. Thank you. Good morning. I just wanted to follow-up on the consumer demand piece and just understand you have said you have seen channel shifts and protein shifts and things that sound pretty typical. But in just a few weeks, the elevated SNAP party is going to be over. And just curious how you think about for that cohort, which it is a certain demographic. But â how do you think about that impact in your planning for the rest of the year? Sure. I will start and then offer it up to anyone else that may have something to add. But I think itâs â if you look at the information that we see, it says the consumer is working through savings. In the middle of the pandemic, they were able to bank a lot of savings. And over the last little bit they have been working through that savings. And I think many consumers are now out of that â those savings and/or at least nearing the last of it. And so I would expect the consumer to be under more pressure as we move forward in this year. And â but I would also remind you that as a company, if you look at our brands and we cover the spectrum across proteins. We have a product for every consumer across various proteins and price points. So, we feel very good about the fact that we can intersect with that consumer wherever they are. And thatâs I think a good position to be in and are the best position you can be in. And so we will see how it turns out. But we donât know any more about that than you do today. Yes. I would add two things to what Donnie is saying. Number one, if you think about the kind of prepared and retail branded side of our business, we have been paying attention to what the consumer is doing and feeling over the last few quarters and we continue today. I think the good news is even in these times where the outlook for the economy is evolving, we have had pretty steady growth and pretty strong performance in that part of our business, which tells us that while, yes, there may be a lot of behavioral changes going on in the economy, we see consumers come into the brands and the categories that we are in repeatedly. So, I think we feel good about that. On the second point I want to make is from a â how to say it, the supply and demand balancing on the kind of fresh and frozen more commodity protein side of our business, has more influence on how we are performing than does the macro situation because people are going to continue to eat protein. They may cut back on other things, but food is not one of them. Thatâs helpful. And just a follow-up on the beef spreads you have called out the drivers of the pressure near-term. But any sense of how long before it can rebound? And I know you donât want to get into fiscal â24 really, but maybe any just directional guardrails of how to think about it? Is this going to be more of the same for a while? Is there something you can point to thatâs a catalyst one way or the other, just a little bit maybe longer look if there is anything you can add there? Yes. I mean itâs I wish I could be here before you today and tell you I knew when that was going to happen. But there is kind of some prerequisites before we are going to see [indiscernible] retention, which is going to be driven by better precipitation, getting past the drought and for ranchers to see to have hay thatâs more affordable and forage land to be able to feed those animals. I donât think you are going to see [indiscernible] retention in a meaningful way until those things occur. And I have listened to every expert thatâs been through all of these cycles through all of these years. And I have been through a couple of them myself. Itâs I get a number somewhere between the spring of â23 and the spring of â24. And thatâs how variable it could be. What I can tell you is the harvest of [indiscernible] and the harvest of cows continue. And in a lot of cases, people are paying up for those animals to sell them at a â for a lesser cut out. So, thatâs what I can tell you about it, Brady, anything you would add to that? No, Donnie. Donnie, I think you covered it very well. We have a different situation today than we have in the past as well relative to some of the interest rate pressures. That certainly will have an impact as these ranchers decide to retain [indiscernible] as well. So, that coupled with some of the weather and impacts that we see certainly create the uncertainty that you outlined. Hi. Yes. Thanks for taking my question. Itâs on the beef cycle again. And it is â I guess itâs not surprising that we continue to see call it [indiscernible] slaughter. But I guess the question that I have, and itâs related to this, we are at 50-year kind of low on these various cattle sectors. And it seems like the recovery for this will certainly take quite a bit longer than maybe I would have expected. Is that â and now when you have got new capacity coming on stream from some more competitors, what does the increase in capacity with lower and maybe more sustainable lower supplies mean for the mid to longer term margin for your business? Yes, I will make a few comments, and Brady can step in on this. I mean I think you have described it very well in terms of what the levers are here. Everything you have said I think I agree with what you have said and how you characterize it. And you have also described this future state where there will be more packing capacity with fewer animals. And so if you build the capacity, these are â for these large plants, you can spend $1 billion to build the beef plant. So, if you spend $1 billion to get a beef plant, you are going to process animals. And so that could all likelihood drive up the price of the cattle that are available at that point. But you are going to get some pushback with the consumer if you try to cover that or try to get cut out to cover that. So, I see all the same pressures and dynamics that you just outlined. And itâs going to take a bit to rebuild the herd. And once we get to whatever the bottom is, I mean we are looking at 2-plus years to be able to see some better times. Brady? Thanks for that, Donnie. I think there is a couple of other factors that we need to consider as we come out of the cycle. And one of them is certainly relative to export demand. And we have seen an increase in terms of demand from our export partners relative to higher grading cattle. I think that is an anomaly relative to cycles that we have certainly seen in the past, and itâs something that we will be watching as well. Now, we have seen the strength that I mentioned earlier relative to some of the drop values in byproducts as well. So, certainly combining not only the supply factors that you touched on from a live cattle perspective, but also the demand factors that are going to come into play from both our export customers and our domestic customers is certainly a focal point for us. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn it back to management for any final remarks. Sure. This is John again. And just a couple of things to wrap up on. We want to make sure we got to cover with you before I hand it to Donnie to close it off. I think the first thing, if we think about the top line guidance that we have given, our outlook there is probably in the bottom half of that range just to kind of crystallize where we are today. And I think the second thing is we didnât really have to touch on capital allocation today, although I know itâs a point of interest for many folks. And our capital expenditure outlook for the year is firm at or around that $2.5 billion number. But I think what we would guide to as we look forward, thatâs probably the high watermark. And for us, our priorities are kind of preserving financial strength and flexibility, investing for returns in our business and then after that, being disciplined on M&A, dividends and share repo. So, I just want to make sure people understood kind of what the outlook was like there. And yes, I think with that, Donnie, I will hand it back to you just to close it out. Alright. Thank, John. We are building a world-class business organization positioned to take advantage of the opportunities in front of us. We remain confident that our strategy will deliver long-term growth and shareholder value. Thank you for your interest in Tyson Foods, and we look forward to speaking with you soon. Goodbye. Thank you. Ladies and gentlemen, this concludes todayâs conference call. We thank you all for attending todayâs presentation. You may now disconnect your lines and have a wonderful day.
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EarningCall_757
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Good afternoon, ladies and gentlemen, and welcome to Valmet's 2022 Results Publication of Webcast. The highlights of the year included the finalization of the merger with Neles, which now means that Valmet's stable business consisting of Services and Automation was â¬2.8 billion in terms of net sales. My name is Pekka Rouhiainen, I am the Head of Investor Relations here at Valmet; and the speakers today are President and CEO, Pasi Laine; as well as CFO, Katri Hokkanen. After the presentations, you will have the chance to ask questions over the phone lines. Thank you Pekka. Hello, so our headline is today that, orders received increased to â¬5.2 billion and comparable EBITA to â¬533 million. So the traditional agenda first 2022 in brief then some words about the segments and business lines then one page about Flow Control integration. Katri will go through the financial development, and I will then talk about dividend, guidance and short-term market outlook. First year in brief, so orders received was â¬5.2 billion, net sales â¬5.1 billion, backlog ended to be â¬4.4 billion, unlike said, our EBITDA increased comparatively EBITDA increased to â¬533 million, and EBITDA margin was 10.5%. Gearing in the end of the year was 20%. And here are the same numbers in pictures as well and last year, we employed about 17,500 people. And if you think about the net sales and divide that to the segment. So a little bit less than 50% came from Process Technology, and there is of course no change because of the merger with Neles. Services contributed to 32% and Automation segment to 20% of our net sales. Geographically, North America was strong 21%; South America 14%, Europe Middle East and Africa 37%; China 16%; and Asia Pacific 12%. So good and quite traditional contribution of the net sales between the areas. Then, here's the historic graph which we have been showing for some years now in quarter four call. So we started with orders received somewhere â¬2.5, â¬3 billion level and first time, we are over â¬5 billion, and quite constant growth in orders received. Net sales has been growing even more steadily with â¬2.5 billion and now we have doubled that in nine years. So now we are a little bit over â¬5 billion. Comparable EBITDA has been improving Euros year after. So we started from â¬50 million, and now we ended up at 533 so constant improvement. And comparable EBITA margin has been developing every year, and now there is exception and our EBITDA margin went down even if comparable EBITA was going up. So, of course, this is disappointment to us of course our target was to improve our comparable EBITDA margin as well. But last year, we didn't succeed on that. Our order's received has been increasing steadily. Here you see the graph. So it is going from this â¬2.5 billion, and now the trend of last four quarters is at a little bit over â¬5 billion level. Geographically, of course in this graph, we are not comparing apples to apples the year 2021 is without Flow Controls and 2022 has three quarters of Flow Controls included. North America is a big market for us but almost â¬1.3 billion. South America last year a little bit less than in a good year so 350. Europe continues to be strong little bit over almost 2.1 billion. China was performing well 711 million. Of course, there is some growth from â coming from flow controls, but all-in-all Chinese market was active last year again. And Asia Pacific has been improving from 544 to 771. So all the areas with one exception actually two exceptions were growth. So three we're growing two not. Stable business. Orders received total to a little bit over â¬2.8 billion. When we started, we had the services with â¬1 billion order intake and then we acquired systems business. We have been growing organically Services and Automation business and now we've made the merge. And now last year's order intake was a little bit over â¬2.8 billion. So, this is a good summary slide telling what kind of changes, what has been one of the changes that has happened in Valmet. And we are of course very proud and happy of the organic development, merger development and acquisition development. Backlog ended up to be â¬4.4 billion. We are saying that about 65% comes from Process Technologies; Services 20%; and Automation 15%. We are also saying that about 75% of the backlog is currently expected to be realized as net sales during 2023. Last year the same number was 70%. Then some words about the segments and business lines. So first, the services which is a segment and business line. Order intake ended up at a little bit over â¬1.7 billion. So nice growth in order intake. Net sales grew also and was a little bit of â¬1.6 billion. EBITDA in Euros improved from â¬204 million to â¬237 million. And EBITDA margin last year was year before 2021 was 15% and 22%, 14.8%. So our organization did very good work like you all remember, first quarter was not that good, second was better, third were not that good and now we are only 0.2% below in margin compared to the previous year of good development and good work by services business line and all the area organizations. We can happily tell that all the geographical areas were growing and all the business lines were growing. And if we take a look at the business units, all the business units were growing earlier. So if we take a look at the business units, so performance parts was about 35% of the orders received, Rolls 17, Fabrics 13, Board Paper and Tissue Solutions 17 and Pulp and Energy Solution 18. Roughly the same percentages less than a year ago, maybe some small changes, but all business units have been growing. Geographically, North America was performing well and a strong so 34% of the order scheme from North America. South America, China and Asia Pacific are roughly the same size. So if you take 10% out of â¬1.7 billion then you end up roughly at â¬170 million level. So we have good about â¬170 million order intake in all these three growing areas. And Europe was 37% in Euros that was growing as well. So good performance in all the business units and good performance in all the areas as well. In Automation segment, of course the big change is that order intake was almost â¬1.1 billion and big change was of course the merger of Neles -- merger with Neles, net sales was a little bit over â¬1 billion as well. Comparable EBITDA for the whole year, last year was â¬79 million, of course consisting only on systems business then. And now we ended up in a comparable EBITDA of â¬190 million. Last year, EBITDA margin was 19.2% and this year 18.3%. So we are happy with the performance of Automation segment both in Flow Control and in Systems business. In Flow Controls, order intake in Valmet books was â¬576 million. And totally, you can add a little bit less than â¬200 million and then you end up at a total order intake so 770. This is of course very good performance by Flow Controls. Net sales grew as well. So in Valmet books â¬551 million and before that in Neles books â¬166 million. So good growth both in order intake and in net sales. And I'll come back to the integration later on. But we are very happy with the performance of Flow Controls. In Flow Controls about 68% of the business came from a business unit called MRO and Services. Valve controls and actuators brought 19% and projects 30. So this is the first time when you see the split between the business units in Neles. But that's how it's -- the business is now managed and that's the share of businesses based on the business unit structure. Customer segment-wise about 26 came from Pulp and Paper; Renewable Energy and Gases, seven; Refining and Chemical, 48; Metals and Mining, 10; and the rest of 10. And then by areas North America was strong last year. And traditionally it's also a strong for Flow Controls. So almost 40% a little bit over 30% from Europe, and then China Asia Pacific and South America close to 10% all of them. In Systems business, we are proud to announce that the order intake went over â¬500 million first time ever. So here you see the growth trend starting from 2016 and order intake has been growing with one exception. Every year now it ended up around â¬505 million. Net sales grew also nicely â¬412 million to â¬489 million. So nice development in systems business as well. So we are happy with the performance of automation systems. And here the traditional graphs. So Pulp and Paper was 72% and Energy and Process was 28%. Usually this is about 30/70 last year Pulp and Paper activity was a little bit more than in Energy and Process. In geographies, so North America was strong here as well. Europe is always big and then the rest of the areas, South America 6% and Asia Pacific and China 9%. In Process Technologies, our order intake dropped from the peak year to a little bit over â¬2.3 billion. So now it's second best year in the history. So it's a good year in order intake. Net sales has been growing steadily. And last year it was a little bit over â¬2.4 billion. EBITDA last year was â¬175 million now to â¬30 million less â¬145 million. And EBITDA margin has gone from 8.1% to 6.0%. So the profitability is impacted like we have been saying with some selective -- some Pulp and Energy projects where we have cost overruns and the same projects, which we have earlier had. And now we have the full-year picture and last year's profitability. EBITDA margin was 6% in Process Technologies. Then if we take a look on business lines, Pulp and Energy business line, order intake a little bit less than â¬1.1 billion but almost â¬90 million less than a year ago. But at the -- let's say one could say normal level if you look at the graph there, which is telling the history. Net sales has been growing steadily. So net sales ended up at â¬1.081 billion. Orders received wise, Energy was active so 54% came from Energy. We had one year when we went over almost at the same level or same level in order intake in energy. And then we had a marine scrubber business booming. And then if I remember correctly, we told that marine business, scrubber business order intake was roughly â¬190 million. And last year it was very marginal, so no material orders at all, which now means that our boiler market has been active and we have been very successful in boiler market. Then where we haven't been successful is with Pulp. So our competitor has been winning more cases, but order intake has been at a decent level in some of the business units. But of course, we have to accept the fact that our competition has been stronger in Pulp side, but we have been a lot stronger in energy. Geographically, Europe has been big, Asia Pacific as well and North America, South America and Chinese market haven't been active or we haven't been successful in Pulp cases on those areas. Then in Paper business line, last year was very good order intake over 1.6% and now it's a little bit less than â¬1.3 billion. But I would say, that this is a good level order intake level for Paper business line. So, good performance. Net sales has been growing nicely, as well. So we started from â¬500 million and now the record is a little bit over â¬1.3 billion. So, good and constant development in Paper business line. And like you here see, our net sales was a little bit higher than order intake, which means now that we start to be on top of the not on the backlog, so that it's not growing and lengthening our delivery times even further. So this is positive news that we have in Paper business line, higher net sales than orders received. Business unit wise, Board was 74%, so majority of the business is coming from packaging applications. Paper was contributing 9% and tissue 17%. And the board market has been very active. And like we have been, saying tissue market has been satisfactory to us and that has then resulted that order intake was only 17%, of the total. Geographically, here are always big changes depending where the projects are landing. North America, good market for us 21%; South America not too much activity in 2022. Europe was strong, China was still strong and Asia Pacific was strong as well. So, here the pie chart is changing quite a lot, depending on in which land the country the big projects are landing. Then, some words about integration of flow controls into Valmet. So, first of all, I want to say that the integration is according to plan or maybe even, a little bit better. So we have now started to integrate the sales effort, so that when we are offering Process Technology and services in selected cases, we are then including our wells into the package not in all, but it depends always on a customer case and application. We have done most of the synergy actions in functions, common locations and supply chain. We have been saying earlier, that we expect about â¬25 million annual run rate synergies and we have been saying that about 60% of them will be achieved by end of 2023 and 90% after -- by the end of 2024. Now we can tell that our orders received included about â¬10 million of synergy impact in 2022. So, we are well developing that. You have to remember that, Flow Control was only nine months with us. And then of course, in the beginning it took a little bit time to get the machines, synchronized and then we can tell that we have implemented cost synergy actions so that the annual rate is about â¬12 million. Out of which, we are saying, that roughly half was achieved already in -- as a realized cost saving in 2022. So integration is going according to plan, or even a little bit better and we have started and we have seen already synergy benefits both in sales, orders, orders sales and in costs. Good. Thank you, Pasi and hello everybody, on my behalf as well. Before actually going into the financial development, I would like to thank all the Valmeteers for the year 2022. Thank you, for your hard work. And I also want to send a special thanks to my team globally, for getting us to this point today, that we can report the results. A few words about the Q4 first. So our order intake increased to â¬1.4 billion. Our net sales also increased to â¬1.5 billion and our order backlog was at â¬4.4 billion. Our comparable EBITDA increased to â¬196 million or 12.7%. And gearing was 20% at the end of last year. Then a few words about the full year numbers. So order intake was at the level of â¬5.2 billion and that was 10% higher than in Europe in 2021. Backlog as I said earlier was at the level of â¬4.4 billion. There was a 7% increase and net sales was â¬5.1 billion and there was 29% increase. Comparable EBITDA was at the level of â¬533 million or 10.5%. So in millions of Euros we were â¬104 million ahead of 2021. But as Pasi said earlier, the margin was down by 0.4 percentage points. Few words also about segment key numbers. So starting from order intake. So Q4, as said earlier was at the level of â¬1.4 billion. All of our segments increased during the fourth quarter. And then when looking at the full year numbers, so services was at the level of â¬1.8 billion. There was a 19% increase compared to 2021. Automation was at the level of â¬1.1 billion. So there we had now three quarters of low control. And then Process Technologies was at the level of 2.4% and there we had a decrease of 16%. Moving onto the net sales of fourth quarter. Also all segments increased compared to the comparison quarter. And when looking at the full year numbers so Services was â¬1.6 billion, Automation â¬1 billion; and Process Technologies â¬2.4 billion, and all of these increased compared to 2021. Then a few words about the profitability. So first Q4, Services was at the level of 18.7% and that was a good achievement from the Services segment. Considering that the first quarter was below 10% then during Q2 and Q3, we were around 14% level and now at 18.7%. Automation was the highest this year â sorry last year 21.4% and then Process Technologies was at the level of 5.6%. And when looking at the full year, profitability Service is 14.8%, Automation segment was 18.3% and Process Technologies at the level of 6%. And as said earlier, â¬533 million was the comparable EBITDA, out of which 80% was coming from the stable business. Gross profit was â¬1.2 billion at the end of last year, so there was an increase in millions of Euros but the profitability went down from 25% to 24% level. SG&A was at the level of â¬852 million. So there was a big increase compared to 2021. And out of that increase roughly 65% was coming from Flow Control. And the rest is then related to personnel cost increase so we have more people, there was also FX impact and more traveling. Few words also about the development over the year. So net sales has been developing quite nicely over the years. And as Pasi said, last year was the first year that we were above â¬5 billion and stable business net sales was at the level of â¬2.6 billion. Pasi also mentioned, the comparable EBITDA percentage that it went down to 10.5%. This was the first year that we were not able to improve the margin even if in millions of Euros we improved. And when looking at our financial targets, so it is unchanged. So we are targeting to be between 12% to 14% and continue the hard work towards that target. When looking at the cash flow, so that was â¬36 million at the end of last year. So there was a big drop compared to 2021. And of course, 2020 and 2021 have been kind of exceptionally high numbers when it comes to cash flow. But this change is coming from the change in net working capital. And when looking at the net working capital profile, so it has changed after Flow became part of Valmet. And I already said this last time that, if we would have had Flow Control as part of us the whole time, we roughly estimate that it net working capital would have been on the level of minus 7%. And now when looking at last year's number, we were at minus 2%, so clearly below that being at minus 82%. And there are three items, which contributed to this decline. First is related to inventory. So this one we have been discussing already in the earlier quarters that our inventory levels have gone up. This is partly explained by Flow Control, but we have also increased the inventories in legacy Valmet to be able to deliver to our customers. Then the second topic impacting this was trade receivable. So we had very high invoicing month in December. So that then increased the trade receivables. And, of course, that is something that then we expect to collect early this year. And then the third item was related to customer advances. So in 2022 we had less customer advances than in 2021. So there's where the gradients impacting the cash flow and also the net working capital. Net debt was at â¬502 million at the end of last year and our gearing was 20%. So no big changes there. And we have now added a new ratio to the presentation material. So it's this net debt-to-EBITDA ratio and that was 0.78 at the end of last year. Capital employed was at the level of â¬3.3 billion. So no changes to previous quarter and there is an increase of â¬1.5 billion and that is related to the merger of Neles. Our comparable return on capital employed was at the level of 17% and our financial target is to be at least 15%. Then last, but not least adjusted earnings per share so this is without the business combinations. Last year we were at 2.37% and it has increased compared to 2021. Thank you, Katri. It seems that Katri talks faster and more precisely than I so I have to speed up as well in my presentation skills. So I'll go through the dividend proposals guidance and short-term market outlook. First the dividend proposal. So like you know our policy is that dividend payout should be at least 50% of the net profit. And now our Board of Directors have decided to make a dividend propose after the AGM in a way that we would be paying â¬1.30 dividend per share, which represents about 68% payout ratio. And here you have then the graph showing how the dividend has been developing from â¬0.15 and now the proposal is â¬1.30. And we haven't added here in the slide, but we are proposing also that the dividend is paid in two installments. So one in spring and one in autumn to make the cash flow management easier in Valmet, but 1.30 is the dividend proposal to AGM. Then our guidance in short-term market outlook. So this time we are saying that Valmet estimates that the net sales in 2023 will increase in comparison with 2022 and comparable EBITA in 2023 will increase in comparison with 2022. So both guidances are increased. Then short-term market outlook. Services we keep the good status like you have seen order intake has been developing well which means that we have good capacity utilization and current market activity is still good. In Flow Control same reasons good order intake and market activity continues to be good. Automation Systems business the same, good market activity and good order intake last year. In Pulp and Energy same story. So we have units where we have good utilization a good backlog and then we have one unit where the situation is not that good. And that's why it's good/satisfactory. Energy order intake has been good and market activity continues to be good. And board and paper order intake has been good. There's still plenty of projects active and tissue we order intake wasn't that good last year and we keep then the satisfactory outlook for short-term market outlook for tissue. So that's the guidance and short-term market outlook. Thanks Pasi, and we are now ready to move on to the Q&A session then. So, we will be taking questions over the phone lines. Hi guys. Thanks for taking my question. First one is on the services and kind of the order growth that you saw on Q4 and kind of the demand outlook. I mean, the growth was 5% in comparable FX. So I'd assume that is fully driven by pricing, but the outlook remains good. So, could you maybe elaborate what did you see geographically or different type of services in Q4 and kind of what is the outlook there going into first half this year? That was a good question. So, we saw good market activity and Katri, correct if my answer is not correct. So, we saw good market activity in all the areas and then the same goes actually with all the business units. So, I wouldn't say that we have seen any difference compared to the whole year results and outlook. Okay. And then, the kind of the process tech margins and the issues that you have had with the projects, is it any way possible to quantify kind of the revenue impact this year from those projects relating to -- or in comparison to '22? I mean, just trying to get how much of those projects are still ongoing this year compared to how much they impacted last year's numbers? Yes. That's a difficult one to answer. It's -- of course, we know the backlog numbers and how much, but we have been saying all the time that it's selected projects in Pulp and Energy segment. So first you can take Paper away from that calculation and then you can think that it's selected. So, it can't be maturity and then you can -- so -- but I can't give to accurate answer on that. So, maybe the best is that I continue with the message we have had earlier and we have been saying that it's selected projects in Pulp and Energy. Okay. But there's kind of like no communication on when those projects are due to be finalized or anything like that? Okay. And then perhaps a follow-up on the process tech. I mean the backlog is a bit down, but obviously from a very elevated level. So is it kind of getting back to normal or is there some point of concern about kind of capacity utilization or do you have enough workflow going forward? How would you look at that? I know it's a mixture of different businesses and probably quite uneven situation. But how should we think about kind of the volume impact? No, we have one business unit where we have -- not that good work situation, but it's a small one and then the rest they have good workload. Like you said and like I said also, it's good that the backlog is getting a little bit down in -- especially in pulp side. So, it means that our delivery times start to be more competitive again. Okay. And then the last one actually to Katri regarding your financial expenses this year, I mean you have roughly â¬700 million in debt or how should we think about how much will that cost you in '23, if the interest rates going up? How is the structure on that set? Yes. So, when looking at the interest, of course, it's probably better to look at the net debt, so that was â¬502 million. And now, at the end of last year, our average interest rate was 2.3%. So there was 1% increase compared to the third quarter. So, clearly the interest has a little bit increased. So of course if this continues it will have an impact. But of course, we are playing with the fixed and floating interest rates. That's one way of handling it, but with this level, I think that we are not worried about the situation. Yes. Hi. Good afternoon everybody. First a question on order intake heading into this year. Now what are your expectations there overall if you think about new equipment and aftermarket businesses separately? And are you seeing any hesitations out there given the macro headwinds? So we are giving the market outlook with the business or the segments what we told. And like we said or like I said, we are still seeing good activity in stable business in services and flow control and automation and pulp. It's good/satisfactory and energy and board and paper are good and Tissue is satisfactory. So we are not guiding the order intake for the whole year and not more specifically. But for coming six months this is our view of the market is saying. Then hesitation, we haven't seen increasing hesitation. So in our pipeline, we always have a certain amount of projects. And some of them customers are delaying, some they are speeding up and some are going according to plans. But we haven't seen any actually change compared to the normal situation now in our capital or process technology sales pipeline. Okay. And then in terms of productivity, I guess, you talked about your margins going down in 2022. You're citing supply chain issues and weaker productivity. So I was just wondering, are you able to quantify what kind of an impact the weaker productivity actually had on your earnings and margins last year and if you would expect that to reverse this year? So of course internally we have analyzed many things. So productivity is maybe it's in a gross profit of course the inflation had maybe a bigger role than productivity and then cost inflation both in materials and labor and logistics and so on. And for coming year of course, people are reading newspapers and you can see that there's some discussion that logistics prices might drop at some point of the year and maybe even raw material prices. But then next inflationary topic is more the salary inflation and the impact of it. So we are working on, of course, all these fronts to make sure that our gross profit would go up. But last year we did. Katri, do you want to add something? Okay. No, that's clear. And just finally just wondering given the opening up in China and you're having a decent exposure, I was wondering, if you can say anything about what you're seeing on the ground in China right now in terms of activity, and also in terms of the project pipeline, I guess, there are a few bigger integrated packaging mills planned and are these moving ahead now? Last year our order intake in services was developing well like you can calculate from percentages even if there was COVID and COVID limitations. Capital market was active last year as well, and we are still a little bit above the normal, if you can have a normal Chinese market. But it has -- Chinese market has been last three years good for us. Now the sentiment is more positive. So, of course, people are the somehow relieved that the normal life comes back and people can travel and meet with each other and go to restaurants. So when talking with our Chinese team they are happy now. Yes. Good afternoon. Thanks for taking my question. As always, the first one partly is around the revenue and the EBIT guidance for this year. Obviously, there's still a bit of a sizable impact from the one additional quarter from Neles. I mean, would you also be happy to say that you expect the company to grow organically on both items? I think it's â rules are saying that, company can give only one guidance and company is giving only one guidance. So as a total Valmet is giving guidance that net sales will increase and EBITDA will increase. Sorry, Sven but I can't open that more. Okay. It's fine. I was kind of expecting that answer. That's okay. Worth the try always. And maybe on the second one you can be a little bit more detail, because I was wondering on the Stora project in Oulu, I hope I pronounced that correctly. I was a bit surprised with the order size you had announced related to the project given that the total project size is â¬1 billion. I mean, are you expecting more business potential from that middle, or is that basically it. What you have announced? No, no. It's maybe not our normal. We have announced the orders what we are getting from Oulu. So we got â Of course, some small ones but not that ones that we â that size â sizable that we would make announcement. Okay. Thank you. And the other one is a follow-up question to the Process Technology margin. Is it still fair to assume that there is still an impact this year, but the impact is smaller than it was in 2022 from those problems we talked about in the Q&A? No I'm not giving a direct answer to that, but I'll come back to our earlier statement that once Valmet targets to reach higher profitability all the business lines have to improve. So, automation has to improve Services has to improve and Process Technologies have to improve. Are we able to do it this year? I can't promise that, but of course our goal setting has to be that all the business lines are improving. Otherwise, we couldn't be saying that our EBITDA guidance is that EBITDA will increase. Okay. And the final one is just on the pulp greenfield pipeline, how you look at that you already mentioned that last year the period was a bit more successful. But how do you see the pipeline in general? Is it still a reasonably good one or now with pulp prices going down a bit has been any change? No. The pulp business people are paying a lot of attention to mega mills, and we traditionally haven't been listing the mega mills. Our dear friends might be listing them we haven't. So I would assume that some bigger mega mill cases, if we decide, it will be in latter part of the year. And then one has to remember that in pulp side pulp business there are also Island decision. So, somebody wants to build a new recovery or increased the fiber line on build on new cooking line and so on. And that's the market where from last year, we got that order intake what we got. So that market continues to be active. So for us to have a good business, we can't base that on the thinking that, there has to be a mega mill every year. Firstly, on the competition, I mean you commented in the pulp side competitor was maybe more successful and it seems that Stora Voit got the bigger order. So, can you kind of comment. Is it more like pricing why competition has won these orders or what was the kind of plan out? Now, all-in-all in both side our hit ratio last time against dear friends from Germany was about 70%. And sometimes you lose project. And then we can't of course open why we lost. But of course we have had good discussions with Stora why they selected somebody else but that happens in the business. And generally the hit ratio has been about 70% for us against Voit. All right. And secondly on the services margin, it was up clearly from previous year. The question is basically was Q4 2021 already impacted by the inflation since we haven't seen like earlier quarters. So, I mean is it like above normal levels in Q4 2022, or was it like the recovery after inflation. Our look at it so that it has been a development over the year. So, Q4 margin was lower than this year. Of course then there was the low margin in Q1 and then we have been improving again. So, we have been increasing the prices. So, we have said also earlier that we were maybe a little bit late with increasing the prices and that was visible earlier this year in our results. All right. Thanks. Then on the receivables like they increased. Was there anything special related to like timing of sales or where did the increase come from? It came from many fronts, but we had a very high invoicing month in December. So, that was clearly visible and it is in our current receivables. So, it was very active December let's put it that way. All right. And then finally on Networks or Flow Control, I think the split of orders that you showed was quite interesting. So, Pulp and Paper was only like 25% if I remember correctly. And then clearly the biggest part came from Refining and Chemicals. So, can you talk about like what are you seeing in there and where is the growth coming from and kind of how do you see the different end markets? So, I think it's -- actually it's quite normal. If I remember correctly at the highest Pulp and Paper has been now 29% in the order intake. So 26% is good taking into account that the total amount of growing. So, I'm not calculating my head, but I actually would assume now that 26% is bigger number than a year before 29% in absolute terms. So, Flow Control has been doing good work on that front as well. But otherwise this is selling quite well in where we are and where the growth -- so growth can come still in paper. And we have been saying that Flow Controls can increase the market presence in board and tissue. Then an interesting case is the -- the case is -- Metals and Mining as well. But I'm sure that in our Capital Markets Day Simo will open the growth avenues even more. So, if it's okay that this time, I'm just telling that we try to grow in all these segments. Hi, this is Tomi from DNB. Also trying to ask about the profitability and the underperforming projects. Just simply it must be fair to assume that the share of revenues is smaller this year compared to last year. You all try to know put us to answer something what we haven't have been reluctant to answer to me. The same question and answer continues that we have selected projects where there are cost overruns in Pulp and Energy. Okay. Another way to ask, would you be able to comment the overall order backlog quality from the profitability point of view? Is it better or similar than -- starting last year? Yes. It's on a good level â¬4.4 billion it's over â¬300 million higher than a year ago. And of course, it's good to also mention that we have 35% of stable business in the backlog and that is more than what we had in 2021. So I agree with Pasi. Okay. And then, Energy really good up-tick almost at â¬600 million orders, as Pasi said, above the previous peaks which included the scrubber. Do you have any capacity limitations on that side, or is it really in a way shared with the pulp and so on, so can you continue to grow orders in Energy? So Energy business unit is sharing the capacity with recovery boilers which is part of the pulp side. And I think our capacity starts to be very well utilized there. So in Energy side, it's easier to outsource manufacturing. But then, at some point of time becomes the limitation of project management and engineering capability. And I think we start to be at very high-level from an organization load point of view. Katri, you have been as a business controller. And finally, group costs jumped in the fourth quarter at least. Any color you could give for this year for the quick quarter? Yeah. So the other was â¬39 million. So there was an increase as you said. And we have more people there now. There has been some increase in the personnel cost and we will do our best to keep it roughly on the same level I think. That's fair to say. Hello. Its Johan here at Kepler Cheuvreux. Just coming back to the pulp side again you mentioned you have been losing some share. You've gone for the Ireland midsized orders rather than the big greenfield. But I think some time ago Pasi, you sort of mentioned now with Neles you're a bigger company you might take on risk and go for the greenfields as well. Have anything changed there regarding your strategy? No we have been doing greenfields earlier as well. And like currently we are doing one very big greenfield closer with Metsa in Finland and in South America we have been doing several of them. Of course we go after them. And in the future -- we have been going after them. We haven't been during the last two years as successful as Enbridge but of course then we want to be successful in the future. And of course now when Valmet's EBITA is over â¬500 million then of course our capability to take calculated risks is higher. But of course, we want to say, to the investors as well that we are not making any stupid decisions now because we are a bigger company. So of course we will be very careful with our decision-making in the future as well. I think this one sentence what I said last time has been a little bit over quoted by many people. It was one sentence in one sentence. So of course we are careful. But of course, we want to increase our market share in pulp. Okay. Excellent. Then on profitability. I mean we learned about this excellent profit improvement in the automation systems business, if you took it over from Metso, a couple of years ago. Now obviously, we see it down year-over-year which is clearly the Nele impact in Q4 and on the full year I suppose. But would you say the automation systems margins, have they improved further, or have they also slowed sort of on a standalone basis? Difficult question to answer. So we opened the system business profitability last year. And then I'm not allowed to tell the business line profitability for systems of flow controls. But I would say that last year's profitability in Automation segment was actually quite good but of course, they should continue to improve the profitability as well. Okay. And then coming back to the interest comment. You said 2.3% now at the end of the quarter. I think previously, Katri sort of alluded to the fact that you had a big cash position that wasn't yielding any interest income at all and that's why your interest rate looked or interest net looked a little bit high. How we sit today? I mean are you â your cash position is that yielding anything or should we just calculate the costs on the debt? When you look at the overall, you should look at the net debt. So of course, we have had a strong cash at the end of last year, almost â¬300 million. We also gained the interest, so you should look at the net debt. Yes. Thanks for taking the follow-up. It's on the pulp and energy side, where we now see this kind of a mix shift from pulp towards energy. So could you on a general level talk a little bit about profitability differences on those two businesses. If you do an energy project, is it materially different than the pulp side or clearly the same type of margin. Is there any impact on profitability from this shift? In average the same and some years energy is better than pulp, less and some years the other way around but as a rule of thumb it's the same. Yes. Thanks. Just a brief follow-up. Coming back to your comment there around margins. I'm just wondering if you can talk a bit more about the headwinds and tailwinds going into this year. I mean you mentioned the order backlog having a bigger share of stable business. So that should suggest that there'd be a bit of a mix improvement perhaps supporting margins. But I was also wondering to what extent there is still a catch-up effect coming from pricing versus costs, or are you in fact already seeing pricing ahead of cost in the year. So maybe if you could talk a bit about the headwinds and tailwinds for margin. Thanks. Well, if I start of course, maybe the one question more for this year is related to the salary cost inflation and that impact on the cost level. So maybe that's one thing at least to mention. Do you want to add something here? Okay. But do you feel comfortable with your current pricing in the order backlog to handle these changes to cost inflation one? You never feel comfortable but of course, we are comfortable enough but there will be a lot of work is needed like last year as well and the same kind of work continues that we will have somewhere some cost increases and we have to compensate them from somewhere else. So normal management is needed. Nothing special. Yes. Good afternoon. This is Tom from Carnegie. So I have a couple of questions, starting with the market sentiment. I mean, I'm sitting next to our pulp and paper analyst in our office and things are getting much worse for your customers at the moment and you have a very long experience both of you from this industry. So when -- how long can the downturn be without that really starting to impact customer negotiations and confidence to go ahead with the project. Is it -- if the downturn in pulp and board prices are longer than one year would that start to have an impact or so? Okay to say now some of the European or we have been focusing a little bit on our own numbers. So I haven't had time to analyze globally what our customers have been announcing. So some of the -- our European customers have now announced that demand was weak in quarter four. Then when discussing with some customers they have been saying that they see that the market will pick up somewhere in latter part of the first half. Then when you think of -- and then of course I haven't been yet following what happens in Latin America and China and North America with the results. So too early to say that. But when thinking about the investments our customers are looking for the long-term growth of the market and that's deciding whether they invest or not, short-term everybody knows that there is fluctuation of market. But my view is still on the positive side. Okay. Then in service, I mean, we saw during the pandemic that you were not allowed to visit some customers and then we had a very high board price last year and also on the pulp side the price is very high. So I guess a lot of modernization projects have not went ahead that have been planned for several years. So do you see pent-up demand in service that could be realized now when the heat is off for your customers? In pent-up demand, we have been saying that maybe limitation. So this pent-up demand will not materialize as a peak in order intake because customers have limited resources and we have limited resources. So we have been trying to say that first there was a level then business went down and then it came back. But this pent-up peak after the -- with a little bit lower period is not possible because there's -- customers don't have unlimited resources and we don't have unlimited resources either. All right. And then I wonder about capital allocation when you start to turn your net working capital into cash, you will soon have a very strong balance sheet and a strong cash flow again. And then the question is I mean, given you have so high market shares in the kind of project business, is it so that acquisitions will focus now on flow control and automation companies. I mean, I realize you want to buy service companies to if something is available, but we have tried that for the last 10 years. So -- but this is a new opportunity when you have Neles now as part of the company. So will capital allocation focus more and more on the Automation and Flow Control business. Katri, can you comment on other parts, but if I'll comment on acquisitions. So we continue to work on all these three lines so Process Technology Services and Automation and we somehow internally keep all of them at the same level. So the one who has good idea and can bring a good opportunity will be supported. And let's see where we can find good and suitable acquisition targets earliest. Like you know, it takes several years to develop the cases. So it's not something that you have money and then you buy something. So it can be that an acquisition process takes three to four years. So it's long-term activity and all the corners of the triangle will be supported. So there is no kind of strategy to further strengthen the automation low control, but you have a much lower market share than in the Of course, we want to strengthen it, but I don't want to send a message that we strengthen that and neglect the opportunities and services of Process Technology. So of course, if there are opportunities, good opportunities, then of course we'll strengthen our Automation business. No question about that. There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. I will tell in the closing comment, but first time when it has taken over one hour, so maybe my presentation was long. So thanks for a very good activity and thanks for very good questions. Yeah. All right. And thanks also from my behalf. And the next event for Valmet will be the Capital Markets Day that will take place on the 8th of March here in Espoo so welcome everybody. We distributed formal invites today, so please register and come to see the Capital Markets Day. And then after that the quarter one results will be published on April 26. So thanks for the active Q&A and have a nice rest of the week for everybody.
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Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the SunCoke Energy Fourth Quarter 2022 Earnings and 2023 Guidance Conference Call. All lines have been placed on mute to prevent any background noise. After the speakerâs remarks, there will be a question-and-answer session. [Operator Instructions] Thanks, Rob. Good morning. And thank you for joining us this morning to discuss SunCoke Energyâs fourth quarter and full year 2022 results, as well as 2023 guidance. With me today are Mike Rippey, Chief Executive Officer; Katherine Gates, President; and Mark Marinko, Senior Vice President and Chief Financial Officer. Following managementâs prepared remarks, we will open the call for Q&A. This conference call is being webcast live on the Investor Relations section of our website and a replay will be available later today. If we donât get your questions on the call today, please feel free to reach out to our Investor Relations team. Before I turn things over to Mike, let me remind you that the various remarks we make on todayâs call regarding future expectations constitute forward-looking statements. The cautionary language regarding forward-looking statements in our SEC filings apply to the remarks we make today. These documents are available on our website as are reconciliations to non-GAAP financial measures discussed on todayâs call. Thanks, Shantanu. Good morning and thank you all for joining us today. Let me start by recognizing the appointment of Katherine Gates as President of SunCoke effective January 1st of this year. Katherine joined SunCoke in early 2013 and has demonstrated excellent judgment and leadership in each of our various roles. Katherineâs promotion to President recognizes her significant contributions at SunCoke and I look forward to continuing to work together in her new role. Katherine will review our 2023 earnings guidance and key initiatives later in this presentation. As we look back on 2022, I want to thank all of our SunCoke employees for their contributions in achieving our 2022 objectives. The dedication of our team is evident through our excellent safety record, operational performance and financial results. Slide three details the key objectives that we set out for 2022 and how we performed against these objectives. We exceeded the high end of our revised guidance range of $285 million, delivering $297.7 million of adjusted EBITDA in 2022, a record for our company. Additionally, we generated approximately $133 million of free cash flow, which was within our revised guidance range of $120 million to $135 million. Our Domestic Coke business operated at full capacity, which allowed us to take advantage of strong export coke market conditions, as well as increase our foundry market participation. As announced in our previous earnings call, we are undertaking a capital project that will enable our Jewell plant to produce 100% foundry coke. This project, which is expected to be completed in the third quarter of this year, will allow SunCoke to further grow our participation in the foundry market. Importantly, the Jewell facility will not lose the flexibility to alternate between blast and foundry coke production after this project is completed. We also made great progress on our capital allocation priorities in 2022. We deployed free cash flow to reduce our gross debt by approximately $83 million. Additionally, we returned almost $24 million to our shareholders, having increased our quarterly dividend from $0.06 per share to $0.08 per share during 2022, which we anticipate will continue in 2023. Lastly, we entered into a non-binding letter of intent with U.S. Steel to manufacture granulated pig iron. We will continue developing this project in the coming year. With that, I will turn it over to Mark to review our fourth quarter and full year earnings in detail. Mark? Thanks, Mike. Turning to slide four. The fourth quarter net income attributable to SunCoke was $0.14 per share, down $0.01 versus the fourth quarter of 2021 due to lower export coke contribution margins being partially offset by lower interest expense. Our full year 2022 net income attributable to SunCoke was $1.19 per share, up $0.67 versus the full year 2021, driven by our strong operating results, the absence of debt refinancing related expenses and lower interest expense. Consolidated adjusted EBITDA for the fourth quarter 2022 was $58.9 million, down $4 million versus the fourth quarter of 2021. The decrease was mainly driven by lower contribution margin on export coke sales, partially offset by higher volumes in the Logistics segment and lower legacy liability expense at Corporate. On a full year basis, we delivered adjusted EBITDA of $297.7 million, up $22.3 million versus the full year 2021. Turning to slide five to discuss the year-over-year adjusted EBITDA variance in detail. Our coke business delivered strong financial results, mainly driven by higher contribution margin on export coke sales. The Domestic Coke segment delivered full year adjusted EBITDA of $263.4 million, well above our full year revised Domestic Coke guidance range. Including Brazil, our coke operations delivered adjusted EBITDA of $277.9 million. The Logistics segment adjusted EBITDA increased approximately $6.2 million year-over-year driven by higher throughput volumes and higher pricing. With the backdrop of a strong commodity market, the Logistics segment delivered full year adjusted EBITDA of $49.7 million. Finally, our Corporate and Other expenses were higher by $1.2 million year-over-year, mainly due to higher employee related expenses, partially offset by lower non-cash legacy liability expenses. Overall, we are very pleased with the performance across all segments, resulting in a historic year for the company. Turning to slide six to discuss capital deployment in 2022. We generated very strong operating cash flow of approximately $209 million, which allowed us to make good progress on our capital deployment initiatives. Capital expenditures of $75.5 million during the year were slightly below our guidance of approximately $80 million. We also reduced our gross debt outstanding by approximately $83 million in 2022. Year-over-year, we brought down our gross leverage ratio from 2.28 times to 1.83 times. We expect to continue to delever in 2023 and reduce our outstanding revolver balance. We returned capital to our shareholders in the form of our common dividend in 2022, which was a use of approximately $24 million of cash. As mentioned by Mike, we increased our dividend by 33%. That is from $0.06 per share to $0.08 per share during the third quarter of 2022. In total, we ended 2022 with a cash balance of approximately $90 million and strong liquidity of approximately $405 million, setting the stage for continued progress against our capital allocation priorities in 2023. Thanks, Mark, and good morning, everyone. We expect adjusted EBITDA to be between $250 million and $265 million this year. Domestic Coke adjusted EBITDA is expected to be lower by $22 million to $30 million, driven primarily by our expectation of lower price realization on export sales due to market conditions. We expect to continue to run our coke facilities at full capacity and to continue increasing our participation in the foundry coke market. Brazil coke adjusted EBITDA will be lower by $5 million to $6 million due to the expiration of a technology fee from a prior transaction. In 2016, ArcelorMittal Brazil redeemed SunCokeâs equity interest in the Brazil coke facility for $41 million cash consideration. SunCoke also received approximately $5 million in technology fees annually for year 2017 to 2022 as part of that redemption transaction. As a reminder, the Brazil coke facility is owned by ArcelorMittal Brazil and SunCoke provides the operating and technological services pursuant to an operating agreement. Turning to the Logistics segment. We expect adjusted EBITDA to be flat to lower by $3 million in 2023. We anticipate similar volumes at CMT year-over-year, but with normalized high water costs that could impact profitability year-over-year. Lastly, we expect our Corporate and Other segment expense to be higher by approximately $6 million to $9 million, driven by normalized noncash legacy liability expenses. Moving on to slide nine to discuss the coke segment in detail. In 2023, we estimate our Domestic Coke adjusted EBITDA to be between $234 million and $242 million, with sales of approximately 4 million tons of contract, foundry and export coke. We expect to run the domestic fleet at full capacity. Approximately 3.6 million tons are contracted under our long-term take-or-pay agreements in 2023. We anticipate selling the remaining 650,000 furnace equivalent tons in the foundry and export coke markets. As a reminder, foundry tons do not replace blast furnace tons on a ton per ton basis. For example, due to differences in the production process, a single ton of foundry coke replaces approximately 2 tons of blast furnace coke. The order book for foundry coke is solid and export sales for the first quarter of 2023 have been finalized. While we expect to continue running at full capacity, the lower year-over-year adjusted EBITDA is primarily due to lower price realizations on export coke sales based on current and future expected market conditions. The export coke market is experiencing significant price volatility and that is factored into our guidance. Moving to slide 10 to discuss Logistics in more detail. 2023 Logistics adjusted EBITDA is estimated to be between $47 million and $50 million. This estimate is based on normalized high water costs at CMT, which we did not experience in 2022. Our outlook also considers the current expectations for thermal coal export volumes from the Gulf Coast, the price realizations based on the API2 forward curve. We anticipate volumes to be similar year-over-year at CMT, projecting approximately 5.7 million tons of coal to be exported and approximately 4.3 million tons of non-coal throughput such as iron ore, pet coke and other products. We anticipate Logistics adjusted EBITDA to be slightly lower to flat year-over-year, mainly driven by the expectation of more normalized high water costs in 2023. Like 2021, 2022 was another unusual year at CMT from a high water perspective. We incurred no high water costs during 2021 or 2022, but anticipate a more normalized weather pattern, resulting in high water costs at CMT in 2023. Overall, we anticipate another strong year for our Logistics segment. Moving to the 2023 guidance summary on slide 11, this slide provides a historical view of actual performance across several metrics, as well as a summary of our 2023 guidance. Once again, we expect adjusted EBITDA to be between $250 million and $265 million. Our coke business is expected to run at full capacity, but with lower price realizations on export coke sales. We expect 2023 Logistics performance to be similar to 2022. We anticipate our CapEx requirements in 2023 to be approximately $95 million, which includes the foundry coke expansion project. Our free cash flow is expected to be between $105 million and $120 million after taking into account cash interest, cash taxes, capital expenditures and working capital changes. Now turning over to slide 12 to discuss our 2023 key initiatives. As always, safety is our first priority and we will continue to focus on strong safety and environmental performance in 2023. Operational excellence will drive our operating and capital plan achievements. We will continue to pursue opportunities to optimize our assets, specifically as it relates to foundry and export coke. As mentioned earlier in the call, we are pleased with our increased participation in the foundry coke market and our focus in 2023 will be on completing the foundry coke expansion project at our Jewell facility. This will enable us to continue to grow our market participation and provide further diversification. As we have demonstrated in the past, we will continue to pursue a balanced yet opportunistic approach to capital allocation. We expect our deleveraging initiatives to continue in 2023 as we look to bring down our revolver balance further. From a growth perspective, we will work on developing the Granite City GPI project. We continue to evaluate the capital needs of the business, our capital structure and the need to reward our shareholders, and we will make capital allocation decisions accordingly. Looking beyond 2023, we believe that SunCoke is well positioned for long-term success. We believe that coke supply will continue to exit the market, as many assets are underinvested and significantly aging. SunCoke has the youngest domestic cokemaking facilities in North America with the leading technology. We will continue to invest in our facilities to ensure that they operate safely, efficiently and with outstanding environmental performance. We will continue to take advantage of our facilities and their performance by taking additional steps towards diversifying both our customer and product base. In 2023, we see good potential to further build on the strength of our core cokemaking and Logistics businesses to meet our financial targets and create value for shareholders. Thank you very much, Operator. Good morning, everyone, and nice results. And this leads me to my first question, you are providing solid guidance for next year kind of from EBITDA down to cash flow. What stands in the way here of significantly higher capital returns to shareholders? Thank you very much for your color on that. Lucas, I appreciate your comments and we donât think anything stands in the way of our continued progress. Our balance sheet is in great shape. As we have indicated in the past, we expect it to delever significantly. We have done that. We positioned ourselves very well to grow. Our focus with regard to growth now is the GPI facility at Granite City. We continue to work in developing that project and our cokemaking assets continue to run full. We have been able to move some away from the contractual market into the export market, as well as our success in foundry. We have repositioned CMT towards slowing off very, very high levels of return operating -- not yet capacity, but pretty darn close to it. So there are incremental opportunities to grow our participation down at CMT, but the challenge for us is to keep doing the good things we are doing and generating cash and deploying it to grow to the benefit of our shareholders. Thatâs helpful. Thank you. Then maybe to turn to the balance sheet on this note. What is your long-term debt gross or net target? We said we wanted to be under 3 times. We have successfully brought it down under 3 times. We have had great progress, $83 million down this year and we are going to continue to work. We still got a little bit left in revolver. We will pull it down, and again, that leaves us very well positioned. For growth, it leaves our balance sheet in a really good shape to weather any storms we might see out ahead. We have to remind ourselves that this is, in fact, a cyclical business. So we are not going to lever up and we have the ability to continue to reward shareholders as we did last year when we raised the dividend by 33%. I appreciate that. And then in terms of the capital for 2020 -- CapEx spending, capital spending for 2023, can you provide the breakdown between sustaining capital and growth capital? Thanks, Lucas. In terms of the capital for 2023, we donât give out specific capital on projects itself. But as you can see in the capital number. That reflects the growth expansion project for foundry at Jewell and that is built into our $95 million number. That would be and that gives you a good sense of going forward when we think about our sort of ongoing maintenance CapEx to continue to invest in our facilities, you can think about that around $80 million to $85 million. Thatâs very helpful. I appreciate the color. I have more questions, but I will turn it over for now. Thank you and best of luck. You are welcome. You guys talked about how again expected lower realizations on export sales or likely to drive down EBITDA per ton in the Domestic Coke segment this year. Can we maybe get your thoughts on possible cadence of that pricing over the next four quarters? I know you pointed out 1Q export coke sales have already been finalized. So as an example is the market weaker now and you expect it to get better in the second half or any color there would be great? Thank you. Sure. Thanks, Nathan. I think as we look over the full course of 2023, we expect to see some improvement in the market as we move further into 2023. So the back half is looking better for us than as we sit here in the first quarter and second quarter. Great. Very helpful, Katherine. Maybe a quick question on CMT. It looks like you guys guiding to kind of flat volumes overall, about 5.7 million tons of coke exports for this year. Curious how does that compare to full year 2022, even just directionally would be helpful and then with the pullback of API2 prices we have seen around $145 a metric ton a day. So are you still receiving that price kicker on those tons? Thanks. So in terms of the volumes, we are really flat year-over-year, satisfied with those volumes, but really itâs flat year-over-year. And when we look at API2, we are very comfortable that the guidance that we have build in the price adjustment for the full year and with where we are today, we are very comfortable with that guidance on the API2 pricing. So are you receiving that kicker today or no or is that incorporated in your guidance that you are comfortable with, I guess? Perfect. Very helpful. Thank you. Maybe just one final question on a segment you doesnât give much attention. I think you have described this a little bit in your prepared remarks, but the Brazil Coke segment again kind of down $5 million to $6 million on the EBITDA side, the expiration of those technology fees. Is there any opportunity to get some of that EBITDA back over the next few years or is it kind of going from $15 million of EBITDA plus or minus to $22 million to around, letâs call it, $10 million this year, is that $10 million kind of a good run rate to think about going forward for that? It is, Nathan. That really is the run rate going forward. This was an expected drop and based on the structure of Brazil, we donât take any risk on the capital or operating side and we anticipate collecting that $10 million going forward. Got it. And maybe just one final one, just I am going to try. Any updates you can share on the Granite City opportunity? I appreciate. Yeah. I am going to try. But I may disappoint you a bit Nathan. But we are in discussions with U.S. Steel and we are continuing to assess the capital and the other project requirements. Thank you very much, Operator. And I want to ask a few more questions on Granite City. So I appreciate Nathan softening the ground on that score. Is there a time by which you would like to conclude the analysis? Well, Lucas, I appreciate the question. I think we are -- this is a complex project. It takes time. We are going to take the time that it takes to get the project right. And in terms of the aspects that are still under analysis today, is it -- could you comment on that, what -- where are you spending most of the time in the due diligence today? And thatâs on an ongoing -- thatâs essentially like the amount of capital you would have to put into the facility to convert it to pig iron facility? Okay. Thatâs very helpful. I appreciate that. And in terms of cap -- back to capital returns, would it be fair to assume that part of the current capital return policy is contingent upon a decision on Granite City or is that maybe a step too far? Thank you. No. Sure. Absolutely. No. I think thatâs really -- thatâs right in the sense of right now. We are really focused on preserving our cash for the GPI project. Yeah. I can take that, Lucas. I mean, basically, what we have left on the revolver kind of -- thatâs kind of our target to get that off about, like, get that paid down. Thatâs what Mike said and then kind of we will go from there. And as we said in the past, Lucas, 3 times is the high watermark for us, so we are not going above that, and as we indicated with regard to the GPI project, we fully expect to fund that with cash flow from operations and perhaps, some very modest borrowings under our revolver. But we have very, very significant liquidity and we donât expect to have to go into that, and if we do at all, it will be in a very modest revolver. So we are in good shape all the way around. And there are no further questions at this time. Ms. Katherine Gates, I turn the call back over to you for some final closing comments. All right. Well, thank you all again for joining us this morning. For those of you who are attending the BMO Conference coming up here, I look forward to meeting with you in-person and thank you for your continued interest in SunCoke.
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Thank you for standing by, and welcome to the Honeywell Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. Thank you, Crystal. Good morning and welcome to Honeywell's fourth quarter 2022 earnings and 2023 outlook conference call. On the call with me today are Chairman and CEO, Darius Adamczyk; Senior Vice President and Chief Financial Officer, Greg Lewis; President and Chief Operating Officer, Vimal Kapur; and Senior Vice President, General Counsel, Anne Madden. This call and webcast, including any non-GAAP reconciliations, are available on our website at www.honeywell.com/investor. Honeywell also uses our website as a means of disclosing information, which may be of interest or material to our investors and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our Investor Relations website in addition to following our press releases, SEC filings, public conference calls, webcasts and social media. Note that elements of this presentation contain forward-looking statements that are based on our best view of the world and of the businesses as we see them today. Those elements can change based on many factors, including changing economic and business conditions, and we ask that you interpret them in that light. We identify the principal risks and uncertainties that may affect our performance in our Annual Report on Form 10-K and other SEC filings. This morning, we will review our financial results for the fourth quarter and full year 2022 and discuss our 2023 outlook, including sharing our guidance for the first quarter of 2023 and full year 2023. As always, we'll leave time for your questions at the end. Thank you, Sean, and good morning, everyone. Let's begin on slide two. The fourth quarter was another challenging one, with supply chain constraints and inflation headwinds still at play. But Honeywell's disciplined execution and differentiated solutions enable us to deliver on organic sales, segment margin, earnings and free cash flow commitments. Organic sales were up 10% year-over-year or up 11%, excluding the impact of the wind-down of operations in Russia, led by double-digit growth in commercial aviation, building products, advanced materials and UOP businesses, a testament to the underlying strength we are seeing across our end markets, particularly in long-cycle businesses. The fourth quarter was another strong one for our backlog, which grew to a new record of $29.6 billion, up 7% year-over-year and 2% sequentially due to strength in Aerospace and Performance Materials and Technologies. Orders were also a positive story in Aero and PMT, leading to a 2% organic orders growth and 6% sequential growth in the fourth quarter. The tailwinds weâll continue to see in these two businesses gives us confidence in our 2023 outlook, which Greg and Vimal will share more detail about in a few minutes. Our segment margin expanded 150 basis points year-over-year, led by over 900 basis points of expansion in safety and productivity solutions as volumes improve. And we continue to stay ahead with the inflation curve through our strategic pricing actions. Excluding the year-over-year impact of our investment in Quantinuum, the margin expansion was 180 basis points. Free cash flow was $2.1 billion in the fourth quarter, with 125% adjusted conversion, down 18% year-over-year but delivering in line with our original guidance for the year. Capital deployment in the fourth quarter was $2.3 billion, including $1.4 billion of share repurchases, bringing our full year total to $4.2 billion in shares repurchased and exceeding our goal of $4 billion from our March Investor Day. For the full year 2022, we delivered outstanding results above the high-end of our initial guidance for segment margin and adjusted earnings per share, despite approximately $2 billion in year-over-year top line headwinds and constantly shifting macroeconomic conditions. We finished the year with 6% organic sales growth, 70 basis points of margin expansion and $8.76 of adjusted earnings per share, up 9% year-over-year and above the top end of our original $8.70 guide. Orders ended the year up 8% on an organic basis. And our backlog reached an all-time high of $29.6 billion. We generated $4.9 billion of cash in the year, 14% of our revenue. The appendix of this presentation contains a slide highlighting our guidance progression through 2022 as well as our performance against these guides. Capital deployment for 2022 was $7.9 billion in total, in addition to the $4.2 billion in share repurchases, which lowered our weighted average share count by 2.5%. We deployed $800 million to high-return capital expenditures and $200 million on closing the acquisition of US Digital Designs. Finally, we maintained our dividend growth policy, paying out $2.7 billion and raising our dividend for the 13th time in 12 years. As always, we continue to execute on our proven value-creation framework, which is underpinned by our Accelerator operating system. I am confident in the strength of our backlog and the tailwinds, we're seeing across our end markets, and I'm proud of our ability to execute and drive shareowner value to the current challenging environment. Now let's turn to slide 3 and to discuss an important development from the fourth quarter, which further improved our company's strength for the future. In the fourth quarter, we announced the final court approval of our buyout agreement with the NARCO Trust, providing the elimination of our funding obligations in exchange for our $1.325 billion cash payment to the trust. This liability has been weighing on our balance sheet since 2002, one of the numbers of legacy liabilities the company has been carefully managing. We recognized the charge from the buyout in the fourth quarter, and the cash outflow took place in January. Partially offsetting the impact of the buyout is the sale of Harbison-Walker International, the reorganized and renamed entity that emerged from the NARCO bankruptcy, which announced that and will be acquired from the Trust by private equity firm, Platinum Equity. We expect this transaction to be completed later in 2023, reducing the net free cash flow impact by approximately $300 million. This development represents a significant improvement in our financial strength. Specifically, it simplifies our balance sheet by eliminating our evergreen funding obligations, eliminates quarterly asbestos charges related to NARCO and extinguishes any further uncertainty on our company's financial health. Thank you, Darius, and good morning, everyone. Let's turn to slide 4. As Darius mentioned, we continue to deliver on our financial commitments, despite a very challenging operating environment. In the fourth quarter, sales grew 10% organically with double-digit growth in three of our four SBGs: HPT, PMT and Aero. We generated volume improvement from third quarter in Aero and HPT despite continued supply chain constraints. As expected, we are seeing some signs of demand weakness in pockets of our shorter-cycle businesses in SPS and HBT, but demand across our long-cycle portfolio remains robust with the exception of warehouse automation as evidenced by 2% organic growth in orders and 7% growth in backlog. Supply chain remains a constraint on our overall growth, but we are encouraged by another quarter of sequential volume improvement in Aero as output expanded by double digits in 4Q. Alongside solid organic growth came robust segment margin expansion of 150 basis point year-over-year to nearly 23% as our investment in Honeywell Digital enable us to make a nimble and surgical approach to staying ahead of price/cost. While SPS was a lone segment to experience a decline in revenue year-over-year, the business also generated the most profitable quarter in its history, which we will discuss in more detail shortly. Let's spend a few minutes on the fourth quarter performance by business. Aerospace. Sales for the fourth quarter were up 11% organically year-over-year led by 23% growth in commercial aviation. This marks the second consecutive quarter of double-digit Aerospace organic sales growth and the seventh straight for commercial aviation, which gives us confidence despite the state of the aero supply chain over the past two years. Supply chain remains a gating factor to volume growth, though we made a further progress this quarter with a factory output up 15% year-over-year and 14% sequentially. Our past-due backlog grew an accelerated pace in the fourth quarter, but this was more driven by the strength of inbound orders. Growth was highest in commercial OE, where increased ship set deliveries led to 25% sales growth year-over-year. Commercial aero aftermarket sales were up 20% in the fourth quarter as increased flight hours resulted in higher spare shipments and repair and overhaul activity. While defense volumes continue to be in the lower on a year-on-year basis in the fourth quarter, our order rates remained strong, up high single digits for the quarter and mid-single digit for the year, giving us positive momentum for 2023. Aero segment margins contracted 120 basis point to 27.8% due to higher sales of lower-margin OE products, partially offset by our commercial excellence efforts. Building Technologies delivered another outstanding quarter with 15% organic sales growth year-over-year. Modest improvement in supply chain enabled us to reduce our cost to use backlog sequentially and deliver more fire products and building management systems, resulting in 21% organic growth in building products. However, supply chains still have not fully unlocked. We exited 2022 with higher past due backlogs than we entered the year and considerably higher levels than our pre-COVID norms. Building solutions sales also increased organically with double-digit organic growth in project sales for the third consecutive quarter. We finished the year with higher project backlog levels than the start of the year, providing a solid runway for 2023. Our continued commercial excellence in this inflationary environment enabled us to expand HBT segment margins 370 basis point to 24.8%, substantial progress nearly reaching our long-term margin target of 25%. Performance Materials and Technologies sales grew 15% organically in fourth quarter despite a 4% headwind from Russia. Advanced materials grew 20% organically in the quarter as we continue to see robust value capture across the portfolio and demand in fluorine products. The quarter was the fourth consecutive quarter where advanced materials led PMT growth. UOP grew 13% organically, overcoming 9% headwind year-over-year from loss ratio sales. Growth in UOP was led by refining catalyst shipments, and we also saw a double-digit sales increase in Sustainable Technology Solutions. Process Technology returned to growth in the quarter as a result of strong gas processing demand. Process Solutions also grew double digit in the quarter, with a strength across the portfolio, led by thermal solutions, life cycle solution and services and projects. In late 2022, weather freeze caused some operational challenges at one of our plants, reducing output in the quarter. PMT orders once again grew organically in the fourth quarter, underpinned by strength in Fluorine products. Segment margins contracted 100 basis points in the quarter to 22% driven by cost inflation and higher sales of lower margin products, partially offset by our commercial excellence efforts. Safety and Productivity Solutions sales decreased 5% organically in the quarter, in line with our expectation, as continued growth in sensing portion of sensing and safety technology business was offset by lower volume in warehouse automation and productivity solution and services. While Intelligrated volumes declined overall, our aftermarket services business saw another quarter of double-digit growth. PSS continues to see some demand moderation from macroeconomic conditions, but we remain confident in our differentiated solutions. Segment margin was a standout for SPS with expansion of 940 basis point to 20.2%, our highest ever in this business due to commercial excellence, improved sales mix, and productivity actions more than offsetting lower volume leverage and cost inflation headwinds. Growth across portfolio continues to be supported by accretive results in Honeywell Connected Enterprise. We had another quarter of double-digit revenue growth, including over 20% growth in our recurring and SaaS business year-over-year. Cyber, Sparta Systems and Connected Building all grew by more than 35% year-over-year in the quarter. For the full year, SC sales and profit both grew by double digit, which is an indicator of the power of a strong software franchise. Overall, this is a great operational result for Honeywell. Adjusted earnings per share in the fourth quarter grew 21% to $2.52, a $0.01 above the midpoint of our prior guidance range. Segment margin drove 29% of year-over-year improvement in earnings per share, the main driver of our year-over-year growth. A lower adjusted effective tax rate contributed 10% of improvement, and reduced share count added an additional $0.07. A bridge for adjusted EPS from 4Q 2021 to 4Q 2022 can be found in the appendix of this presentation. Moving to cash. We generated $2.1 billion of free cash flow in the quarter, down 18% year-over-year but delivering the midpoint of our full year free cash flow guidance at $4.9 billion. Cash continued to be challenged by higher receivables and inventory as we continue to work through the supply-constrained environment as well as $200 million headwind from Garrett receipt in the fourth quarter of 2021. So overall, Honeywell's rigorous operating principles allowed us to manage successfully through another challenging quarter as we close our 2022. Now let's turn to Slide 5 to talk about where we expect to see across our end markets and the broader macro environment in 2023. Looking ahead to 2023, we see a continuation of many of the challenges we faced in 2022. But we also see ongoing progress in our key initiative to unlock more volume from our supply chain in order to meet very robust demand in several of our key end markets. Commercial Aerospace will continue to be a standout in terms of demand, both build rates amongst our OEM customers as well as aftermarket flight hours, particularly as wide-body makes a more meaningful contribution on its way back to normalization. Alongside that strong demand profile, we expect steady progress of the Aero supply chain in 2022 to continue in 2023. As a result, we expect acceleration in Aero's top line growth compared to 2022, potentially achieving low double digits. We continue -- we see continued tailwinds for investment in sustainable building solutions, particularly through institutional channels as well in the production of both current and future energy supply as evidenced by strength in orders across both sustainable building technologies and sustainable technology solutions, including green fuels. We expect a moderation in raw material inflation but for it to remain at elevated levels. Coupled with a gradual improvement in supply chain, we should see more of a balance between volume and price to drive our top line growth in 2023. Our order growth of 2% decelerated in the fourth quarter compared to 8% for the full year, but remained in positive territory, including sequential growth from the third quarter for Aero, PMT and SPS. Our backlog of almost $30 billion remains at record levels, growing 7% year-over-year in fourth quarter. We reduced our positive backlog in all SPGs except Aero for the second consecutive quarter, reflecting supply chain loosening and the effects of effort to mitigate part shortages. The current macroeconomic uncertainty is giving some customers pause amongst our short-cycle businesses in SPS and HBT, and there's a lot of near-term uncertainty regarding how the reversal of China's Zero COVID policy will impact 1Q, particularly the potential impact of Chinese New Year, though this may be a tailwind in the second half. As discussed on the third quarter call, lower non-cash pension income is a headwind to EPS growth in 2023, but our underlying segment profit growth continues to look robust. Underpinning our expectation is the confidence we have in our continued operational execution, underpinned by our operating system called Honeywell Accelerator. We'll manage through another challenging operational environment with the rigor you have come to expect from us. Now let me turn it over to Greg as we move to Slide 6 to discuss in more detail how these dynamics come together for our 2023 financial guidance. Thanks, Vimal, and good morning, everyone. Given the backdrop Vimal just shared, in total for 2023, we expect sales of $36 billion to $37 billion, which represents an overall organic growth sales range of 2% to 5% for the year. While we'll continue to drive pricing actions where needed to offset the impact of cost inflation, we expect more balance between the contributions of volume and price in 2022. Similar to last year, we believe the first half of the year will be slower as supply chains improve sequentially throughout the year and potential headwinds from the reversal of zero COVID policies in China are strongest in the first quarter. In Aerospace, the demand backdrop remains very encouraging in both commercial aviation and defense and space. In the commercial aftermarket, we expect continued flight hour growth, particularly in wide-body as international borders open and travel further normalizes to drive growth in air transport aftermarket sales. The policy change in China should provide added fuel to this dynamic. On the commercial OE side, build rate schedules among the OEMs are trending upwards year-over-year, leading to more ship set deliveries for Honeywell, driving revenue growth, but also translating into a corresponding increase in selection credits, a headwind to margins. In Defense and Space, we plan to convert our strong order book into sales and expect defense to return to growth in 2023 as the supply chain improves. Supply chain constraints, not demand, remain the gating factor to both commercial and defense volume growth in 2023, but we're encouraged by the improvements our team has executed in recent months, resulting in 7% output growth in 2022. The sourcing environment for electronic components in Aero improved over the past quarter, but the supply chain for mechanical components remains constrained due to skilled labor shortages among Tier 3 and 4 suppliers. We entered 2023 with Aerospace backlog levels that are more than 20% higher year-over-year, giving us confidence in our growth projections. For overall Aero, we expect organic growth for the year to be in the high single-digit to low double-digit range. While Aerospace will likely be our strongest top line grower in 2023, we expect only modest margin expansion year-over-year as increased volume leverage is largely offset by unfavorable mix due to increased selection credits in the commercial OE business. In Building Technologies, we're cognizant of the broader economic environment and expect private investment in non-res construction to continue to be impacted by increased financing costs. However, throughout 2022, we built a strong slate of orders, partially as a result of the supply chain environment that provides solid sales visibility and buffer for 2023. In addition, we believe that institutional investment will remain robust buoyed by government stimulus funds that have not yet been deployed, supporting key verticals such as education, airports and healthcare. We see the most significant sales growth this year coming from building projects and building management systems as we capitalize on a robust 2022 book-to-bill in these businesses. We also expect increased spot orders for our building services throughout the year as the supply chain normalizes, layering incremental demand in. For overall HPT, we remain cautious in the current environment, expecting our strong backlog to support us early in the year and anticipate low single-digit organic sales growth for 2023 overall. However, we remain very confident in our long-term framework for Building Technologies as much of our portfolio is aligned with secular trends of sustainability and energy efficiency. On the segment margins, we expect to carry the momentum from 2022 strong exit rate, resulting in year-over-year expansion for the full year. In PMT, we are set up to build upon an impressive 2022 and convert favorable macro conditions into another solid year with sales growth sequentially throughout the year. Backlog built through 2022 will enable another year of growth in Process Solutions led by Lifecycle Solutions and Services and thermal solutions. In UOP, improved comps as we lap the lost Russian sales headwinds will provide support to a business that already has potential for upside. Our Process Technologies business returned to growth in the fourth quarter and is poised to continue to grow at 2023, while catalyst shipments should remain robust throughout the year. Demand for new energy capacity to offset lost Russian supply will also be a tailwind, particularly for our LNG business. In Advanced Materials, growth will continue despite difficult comps, thanks to strong demand for our Solstice products and supply chain improvements. In addition to Solstice, our other sustainable offerings will benefit from legislation, such as the inflation reduction app and increased customer focus on environmental responsibility. Orders in our Sustainable Technology Solutions business have accelerated dramatically over the past two years, and we're expecting more of the same in 2023 as we continue towards our $700 million sales target by the end of 2024. In total, we expect PMT sales to be up mid-single digits for 2023. PMT margins should expand modestly as a result of improved volume leverage and continued pricing and productivity actions. Turning to Safety and Productivity Solutions. That will be the business most impacted by the macroeconomic environment in 2023. And Intelligrated, decreased investment in new warehouse capacity will continue to limit near-term opportunities in our long-cycle projects business with the trough and demand likely coming this year before returning to growth in 2024. However, our aftermarket services business has been growing at double-digit rates, and we expect that to continue in 2023. And productivity solutions and services, short-cycle demand softness and the distributor destocking will impact sales in the first half of '23, but we expect this dynamic to taper off and should see sequential improvement later in the year. In sensing and safety technologies, sales growth will continue in '23 after a strong finish to 2022. In total, we expect SPS sales to be down mid to high single digits for the year. From a margin standpoint, '23 should be another solid year for SPS, as we continue to benefit from improved business mix and drive our operational improvements. While 4Q '22 was a high watermark for the business and will not necessarily be the new standard moving forward, we believe high-teen margin rates are achievable in 2023. So we expect our overall segment margin to expand 50 to 90 basis points next year, supported by higher sales volumes, our continued commercial excellence efforts and productivity actions. Similar to last year, we expect SPS margins to expand the most, as we build on our operational improvements in '22 and continue to benefit from improved mix and cost structure in that business. For the year, we expect earnings per share of $8.80 to $9.20, flat to up 5% adjusted, despite an approximately $0.55 headwind from lower pension income. Excluding this impact, our adjusted EPS range would have been $9.35 to $9.75, up 7% to 11% adjusted. On the free cash flow front, we expect a range of $3.9 billion to $4.3 billion in 2023 or $5.1 billion to $5.5 billion, excluding the onetime $1.2 billion net impact of NARCO, HWI and UOP matters. I'll walk through the puts and takes for our '23 cash flow in greater detail in a couple of minutes. But first, let's turn to slide seven and walk through our EPS bridge for 2023. As you can see, segment profit will be the key driver of our earnings growth in '23, contributing $0.59 at the midpoint of our guidance range. Net below-the-line impact, which is the difference between segment profit and income before tax, is expected to be in the range of negative $475 million to $625 million, which includes capacity for $200 million to $325 million of repositioning, which is lower than the approximately $400 million we used in '22. For tax, we expect an effective tax rate of approximately 21% for the year. With these inputs below the line and other items, excluding pension, are expected to be up $0.05 per share year-over-year at the midpoint of guidance, primarily driven by lower repositioning and asbestos charges, partially offset by higher net interest expense. For share count, our base case for 2023 is that our minimum 1% share count reduction program will result in a benefit of approximately $0.15 per share, reducing our weighted average share count to approximately 672 million from the 683 million in 2022. As we previously communicated, we expect a large decline in pension and OPEB income this year, as a result of the increased interest rate environment. For the full year, we expect approximately $550 million of pension and OPEB income, down about $500 million from 2022, driving about $0.55 headwind to EPS. However, this is a noncash accounting item as our overfunded pension status will ensure that no incremental contributions are needed. We ended '22 with a pension-funded status of over 125%, as a result of diligent management and strong returns, a great position to be in for our employees and shareholders. In total, we expect '23 earnings per share to be in the range of $8.80 to $9.20, flat to up 5% year-on-year on an adjusted basis. However, excluding the impact of non-cash pension headwinds, our guidance would be a range of $9.35 to $9.75, up 9% at the midpoint. Now let's turn to slide 8 and talk about the drivers of our free cash guidance for 2023. As we've outlined in the bridge, our 2023 free cash flow story can be characterized as strong operational performance offset by a few discrete non-operational items. Income growth is the largest driver of free cash flow, and we expect to make further progress this year on working capital as the supply chain normalizes. We expect 2023 free cash flow, excluding the settlement of the legacy legal matters we discussed earlier, to range between $5.1 billion to $5.5 billion, up 8% year-over-year at the midpoint as we had previously spoken about. Accounting for the settlements, we are expecting free cash flow for 2023 in the range of $3.9 billion to $4.3 billion. Now let's turn to slide 9, and we can discuss our guidance for Q1. As we highlighted earlier, we entered 2023 with record backlog, providing a solid foundation for the first quarter. Supply chains remain constrained, however, we anticipate modest sequential improvement in volumes. We're closely monitoring the impacts of Zero COVID policy changes in China as the country reopens and eased its COVID restrictions and are wary of potential Q1 impacts. However, we anticipate that these policy changes will be a net positive for demand as we progress throughout the year and will result in a robust second half in China. Looking at the segments. We expect sales growth in Aerospace in the first quarter as the demand environment remains robust, and we execute on our strong backlog. However, the rate of growth will be more subdued than our full year expectations as we anticipate 1Q will be the most supply constrained for the quarter. In Building Technologies, we anticipate modest organic sales growth in the first quarter as we work through our backlog and the supply chain continues to heal. We see the strongest sales growth in building projects, followed by increased sales of fire. In PMT, we expect another quarter of year-over-year growth in 1Q. We expect that growth to be once again led by advanced materials with Process Solutions, the laggard, though still with strong year-over-year growth. We're expecting, sorry, we experienced a disruption in one of our PMT plants that will cause some unplanned downtime, though that is embedded in our guidance. In Safety and Productivity Solutions, short-cycle and warehouse automation demand softness will offset growth in Intelligrated aftermarket services and the sensing part of our sensing and safety technologies business, leading to a decline in year-over-year sales. However, we expect another strong margin performance in the high teens. So for overall Honeywell, we anticipate sales in the range of $8.3 billion to $8.6 billion in the first quarter, up 1% to 5% organically. We expect margins in the range of 21.4% to 21.8%, up 30 to 70 basis points year-over-year as we remain diligent in our price/cost management and benefit from favorable business mix. The net below the line impact is expected to be between $165 million to $210 million of an expense with a range of repositioning between $80 million and $120 million as we continue to provide capacity to fund our transformational efforts. We expect the effective tax rate to be in the range of 21% to 22% for the quarter and average share count to be approximately 675 million shares. As a result, we expect first quarter EPS between $1.86 and $1.96, down 3% to up 3% year-over-year or up 5% to 10%, excluding the year-over-year impact of lower non-cash pension income. And lastly, while the first quarter is already historically our lowest from a free cash flow perspective, the settlement payments related to the aforementioned legal liabilities were paid out in January, and we expect cash from operations to be a net use in 1Q. Overall, while we maintain a prudent level of caution, we're confident in our operational abilities and our portfolio of differentiated technologies. Our portfolio is well positioned for this stage of the cycle, and we'll continue to innovate and invest in the businesses to support long-term growth. 2022 was another year of both challenges and progress for Honeywell. Despite another host of macroeconomic and geopolitical difficulties, we attacked the challenges we faced head on, we over-delivered on our financial commitments. While 2023 brings new -- including potential recession scenarios, leading to uncertain demand in short cycle with a record $30 billion backlog, a robust balance sheet and one that has been further derisked due to the NARCO settlement and the ability to deploy capital organically and inorganically, I remain optimistic about the future of Honeywell and believe the company is well positioned to drive innovation to solve some of the world's most challenging problems. One last item before we move to Q&A. I'm pleased to announce that our 2023 Investor Day will be held on May 11 in New York City. At this Investor Day, I, along with our other members of the senior management team, will provide an update on Honeywell's business strategy, exciting new growth opportunities and our long-term growth algorithm. We look forward to sharing more about Honeywell's future data. Thank you, Darius. Darius, Greg, Vimal and Anne are now available to answer your questions. We ask you please remindful of others in the queue by only asking one question. Crystal, please open the line for Q&A. Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] And our first question will come from Julian Mitchell from Barclays. Your line is open. Good morning. Just wanted to start -- my question would be around the first quarter outlook. So maybe two parts on that. Firstly, just on the segment margin assumption. Are we assuming within that, that you have a sort of 200 or 300 points increase that SPS year-on-year and then maybe down in Aerospace and PMT on margins? Just wanted to check that? And then also in Q1, should we expect orders to be down after they were up kind of low-single-digit in the second half of last year? Thank you. Thanks, Julian. First off, we don't guide orders, so we're not really going to comment on that specifically. As it relates to the margin outlook you highlighted, I think you're in the right neighborhood. Again, we don't guide our individual margin rates for each of the segments. But to expect that Aero might be down in 1Q is probably a reasonable expectation. And as I highlighted, SPS is going to be on the top end of our margin expansion all year long, frankly, given all the work that, that team has done, adjusting their cost structure for the realities of the sales environment that they've been in as well as, as we talked about before, the reductions in Intelligrated sales are actually not painful from a margin standpoint. They actually help given the margin profile of that business. So, I think your instincts are right, but we're not going to be specific on that guide. Yes. And maybe just to add to that, I mean, I think SPS results, particularly in Q4, really exemplify our -- the strength of our operating systems and how quickly we adjust to market conditions. As you saw, they posted record margins. And that's not by accident. That's by very pronounced actions that -- they were facing some challenges on the revenue side. They adjusted their cost structure. They maximized our aftermarket services business, which resulted in a really nice margin profile. That's an example of how Honeywell operates, which is when we see challenges, we act upon them early and make sure that we still print very good results despite some market headwinds. Can you just give a little more color on how much the OEM incentives are, what kind of headwind that is? And then are you guys on track for the longer term target? What's -- any color on the trajectory and timing towards that? I think you said historically or last year was, I don't know, 29%. Are you guys still on track for that? Yes, I mean we absolutely are. I think that we're very committed to that number. As we look at the outlook for this year, we're very much within our operating algorithm that we provided last Investor Day, sort of -- if you just take the midpoint, we're sort of at the lower end on revenue, but we're above our margin profile. But in terms of our commitments to our long-term gains, it's very much on track. The OEM credits are significant as a headwind. And Greg? Yes. So -- and think about that -- that is tied to Boeing's delivery, specifically of airplanes and incentives that we have for -- with the airlines who are taking those airplanes and that is going to be a multiyear realignment. Today, they've promised in excess of their production rate in terms of deliveries. And so that's going to -- that's what's going to move the needle. It's going to impact our sales. When we print our OE sales growth rates, you're going to see that as an offset, and it's obviously a margin headwind. So, it's measured in the hundreds of millions of dollars. We're not going to be precise about what that is. And again, there's going to be variability around that, depending on the actual delivery performance of the OEs to the airlines themselves. Yes. And maybe just some closing two points, we do expect modest margin expansion in Aero. And we're very committed to the goal we gave you at the last Investor Day. I was wondering if you guys could walk through a little bit of what your cost inflation assumptions are and maybe a little color around kind of that -- the price/cost environment. Just in context, are we kind of done with the inflation part of the cycle? Are your suppliers still raising prices on you guys? And are you still raising prices on your side? And just a little bit of color per segment, I think, would be helpful. Thanks. And I'll pass it on after that. Scott, as a headline, I would say that inflation is moderating. It's not going away. So we are not losing our eye on our model on driving positive price/cost. And -- but on a trend basis, there is some deflation in some commodities. But labor costs still high, energy costs are kind of more on a standstill basis. So that's our entry assumption that it's on a -- more on a reducing trend but not getting -- moving away. So our pricing targets have been adjusted. We still want positive price/cost model into our P&L. So we're not going to go away from that execution we did in 2022. But we are also sensitive that with the market being tighter compared to 2022, we want to also protect our volumes. And to that extent, we are watching how we want to adjust our price/cost algorithm. So that's kind of the overarching principles. They vary within the businesses a little bit, but directionally, that's our guiding principles. Maybe, Greg, if you want to add anything. Yeah. I mean all I would say is that means rather than double-digit price increases, we're planning on mid single-digits, maybe low single-digits this year with inflation in that same neighborhood. Yeah. And I think that's important is that we do -- we just don't do pricing blindly. I mean we do watch demand versus pricing versus balancing our inflation. And we try to do that thoughtfully such that it's not just blind increases. We also have to be mindful of market share, demand, et cetera. And we've got a set of analytics to do that. I mean this is the power of Honeywell Digital, which we've been implementing in the last three to four years. Our level of visibility accuracy is actually really good, and it's a new set of muscles we've developed actually in the last 1.5 years as we face this inflationary environment. Thank you. One moment for our next question. And our next question comes from Sheila Kahyaoglu from Jefferies. Your line is open. Maybe if I could ask about supply chain improvement. You have a little bit of improvement in working capital year-over-year on supply chain. Can you frame the total impact in 2022 of supply chain? And how do you expect it panning out in 2023? You called it out in Aerospace with the Tier 3, Tier 4 suppliers having labor issues. Where else are you seeing it? And how do you kind of expect it to improve across the segments? Yeah. Let me kind of -- there's sort of not one way to describe it, but I'll give you a few metrics which indicate sort of the direction. I mean, I think the punchline, the summary punchline, it is improving, and we saw that. I mean we saw a reduction in our past two and three out of the four SBGs. The only one the past dues went up in Q4 was Aero. But we also saw very robust demand in Aero. So I think you have to offset that. Is that an issue? Is that an opportunity? And I would tell you that our Aero output on a year-over-year basis was up around 15%. So that's actually a pretty good outcome, which also tells you that we're migrating in the right direction and given that the past due is reduced and the other one. So let me kind of split the discussion on two segments. One, for semiconductors, it is definitely getting better. It is improving, and we see that sort of really moderating towards a normal state before the end of this year. That's sort of what we saw. We saw some clearing of the past dues. We still have some left, and that's how we see it. In Aero, it's also improving. The pace is likely going to be slower than what it was in semiconductors. Our level of decommits in Q4 was below 20%, which was a low for the year. Every year -- every quarter prior to Q4, the level of decommits from our supply base was over 20%, actually, under 20%, which is also a good sign. So we see a slow and steady improvement as we move throughout the year. That's sort of our expectation for the supply chain. Thank you. One moment for our next question. And our next question comes from Nigel Coe from Wolfe Research. Your line is open. Hi. Good morning. Just wanted to dive into SPS a bit more. So if we think about -- maybe, first of all, can we just dive in a bit deeper into what happened with the PPS. I know there's been some channel headwinds there, but that's a big change from what we saw last quarter. And then, when we think about the 2023 outlook, it looks like Intelligrated down 15%, 20%. Is that representative of the market, or are you being more selective in terms of the projects that you've been accepting and therefore converting? And then on top of that, I know that's only one question, but it looks like margins this year is high teens, maybe 20% range. When we normalize the mix beyond this year, are we going to be above 20%? Any color there would be helpful. Yes. The last part of the one question is, when we normalize the mix to Intelligrated PPS in 2024, 2025, are we at 20 and above margins? Yes. I think that one was going to be -- it's probably too early to tell, but what I will tell you is that, for -- we already basically demonstrated we can get to 20% margins in SPS in Q4. So the target hasn't changed. In terms of what's happening overall with the business, again, Intelligrated is -- the markets are down. I mean, we see it, the warehouse and distribution segment is down. There's an overbuild that occurred in the year 2020 and 2021. The markets are absorbing that capacity. We do expect an uptick in orders and return to growth in 2024. We actually are encouraged by the pipeline that's starting to form. And at the same time, we're also are being a little bit more selective in terms of margin profile and so on. And we have an algorithm in terms of the kinds of orders that want. So it's a little bit of both. PSS has been a bit softer than in the prior. We got to remember that we're coming off of record orders, particularly in the first half. But, overall, we expect to see a fairly strong robust level of business in the second half of this year, and we still have a backlog to draw from. So -- and I don't think there's -- there was nothing in SPS in Q4 that was out of expectations. It was actually incredibly consistent. And frankly, I was very encouraged by the margin rate, and that team has done a nice job in really managing to the cards they're dealt from a revenue base, using our Accelerator operating system to really deliver a strong financial result, even with some revenue headwinds. I don't know, Vimal, if you -- So, IGS, I think, I just want to add a comment on IGS. I think top line challenge will be there in 2023. But we are focused on margin in this business. Our aftermarket service business is growing double digits for last several years. That trend will continue in 2023. In fact, we want to do everything possible to continue to drive that at a higher rate and other margin improvement opportunity. But better operating efficiency, executing projects better and faster is going to be another focus area. So while the volumes are down, we are constantly looking at margin expansion strategy in Intelligrated business. Thank you. One moment for our next question please. Our next question comes from Andrew Obin from Bank of America. Your line is open. Just a couple of questions on PMT. So first, on decarbonization, I mean, clearly a big revenue driver. But are you seeing any delays in process and fund disbursement at the federal level because we, sort of, heard about just shortage of staffing there? So that's question one. And second, if you could just talk about visibility on advanced material strength because that seems to be just get better and better every quarter? Thank you. So on the -- Andrew, on the decarbonization, I would say, at least I see much stronger trend in orders in our Sustainable Technology Solutions business as we had forecasted, IRS at least helping. We had a pretty strong performance in our sustainable aviation fuel part of the portfolio. We see that further strengthening in 2023. But in addition, now we see activity happening in carbon capture and hydrogen space. So we see more active projects where customers are making decisions. So we remain very optimistic on good performance by STS business in 2023. On advanced materials, I would say the momentum on Solstice continue. We see more application adoption in newer areas. As an example, heat pump is becoming another exciting area where we are developing new applications. And that business is all about expanding new applications and expanding new geographies. So we see that trend. There are pockets in advanced material where there is an economic headwind on residential side. So that's a smaller part of the business, but there are headwinds. There are pockets in electronic materials, where there's a server-related demand in PC. So we supply some products in that. But on an overall picture advanced materials has a strong momentum. And you said it rightly, the momentum will continue in 2023 also. Yes. Maybe just to add a couple of things and a couple of specific numbers. I mean our orders in Q4, particularly in our flooring business, were very, very strong, I think, double-digit strong. Our LST business is strong. UOP is well-positioned for the year. Sparta business was extraordinarily strong on the acquisition we made in 2021. So all-in-all, I think it was a very strong orders quarter. As we pointed out on our track, if you remember, some of the very, very unusual cold weather that we faced around the Christmas time caused us some challenges in some of our process operations because, frankly, they're just not built to operate in 5-degree weather. That's not what you typically see in Louisiana in December. So all-in-all, I think that this is -- our AM and PMT business is well positioned. Good orders growth and strong performance should be expected. Thank you. One moment for our next question please. And our next question comes from Jeffrey Sprague from Vertical Research. Your line is open. Hi. Thanks. Good morning, everyone. Just a follow-up on Aero margins from me, if I could. Appreciate the color on the OEM incentives. Just trying to think about the next couple of years also, if you can give us some directional help, right? It's not hard to imagine those incentives -- continue to escalate the next couple of years as Boeing delivers more, but I think you might be getting some help going the other way in business jet or other parts of Aero. So can you just give us a sense of, is 2023, kind of, peak headwind for incentives? Yeah. Great question, Jeff, and your â again, your instincts are on â this is the bubble, right, because they â Boeing, in particular, was not able to deliver jets when they were grounded. And so that acceleration is going to go up and then come back down again. As we see it right now, it looks like 2023 is going to be the top and then it starts coming back down. But again, that's going to depend entirely on the pace of those deliveries. But it ought to be, let's say, reoriented back with deliveries in our view by 2025, for sure, and maybe into 2024. So this is going to be a temporary headwind, and then things will realign back where deliveries and shipments come back into line. And so therefore, our P&L will become more aligned. Yeah. I think that's exactly right. I think that, this is probably an unusual 2023 headwind. But even the headwind, we expect to modestly expand margins. But I think the most important thing that's missing here is, we're very excited about the future of Aerospace. I mean, the orders are up, backlog is way up. I mean, we think the next three years will be very exciting for Aero. Supply chain is getting better. Our ISC teams have really demonstrated unlock of a lot of capacity. And I think there's nothing other than to be excited for the next three years in Aerospace. It's â I'm very confident in the backlog position, and it's going to be a really nice period for that business. Thank you. One moment for our next question. And our next question will come from Andrew Kaplowitz from Citigroup. Your line is open. So you mentioned capital deployment in line with three year $25 billion plan for 2023, I think, which would mean another year somewhat similar to 2022. You deployed almost $8 billion of cash. Obviously, out there, you've got National Instruments conducting a strategic review, as I'm sure you know. If Honeywell were to consider to be quite a bit larger than you've done in the past there â so we know you have the financial capacity to do it, but you've been disciplined when you've done M&A and really stuck to more bolt-ons. Can you remind us of your return hurdles to do a larger acquisition? And what, if any, strategic requirements you have to make a larger acquisition? Yeah. I think good question. Yeah. So I mean, obviously, we have a balance sheet that's strong. And over the last two years, we have, let's call it, roughly around $15 billion-plus to deploy it based on our 2025, over the next two years, so we have the capacity. But I'd just point out a couple of things. Number one is, we are disciplined in our approach. That's point one. So point two is, where our controls and automation and sustainability and digital company. And point three is, we typically don't do hospital acquisitions. So we are interested in doing more M&A â smart M&A in 2023. I think you should expect that at some point. But it's going to be thoughtful. It's going to be acquired at a price where we have a lot of confidence in generating shareholder value. And it's going to be something that we can â is truly strategic and fit what we do as a company. Thank you. One moment for our next question, please. And our next question will come from Josh Pokrzywinski from Morgan Stanley. Your line is open. Good morning. Thanks Darius for taking the question. I understand you guys have above-average backlog right now, obviously, some longer-cycle businesses as well as supply chain. Any way we should think about backlog conversion this year, or where do you guys think maybe backlog should end or hopefully end if you're able to start getting more product out the door? I think teasing out the demand environment versus the supply chain environment has been a bit of a trick here for a while? Yeah. Maybe I'll start and I'll turn it over to Vimal. So first of all, we feel very good about the backlog, because if you look at the backlog where we are in totality, it's about $3 billion to $4 billion more than what I call a normal state. If you go back two, three years, if -- we can debate whether it's in that $3 billion to $5 billion more than normal. So the backlog position is very strong. From a long-cycle perspective, Aero, especially PMT, very strong position. Even in the short-cycle businesses, which are predominantly HBT and SPS, we've got strong backlog through at least the first half of this year. We do expect an uptick as we go into the second half of this year in terms of some of those businesses because we have some unusual pull-forward order activity in the first half. So especially as we get into the second half of this year, we don't know this yet, but we're cautiously optimistic it can actually be one of those unique periods where the short cycle and long cycle are turning at a really good pace. We have much more confidence in the first half based on the strength of the long cycle, and we expect an uptick in the second half in the short cycles too. Vimal? So maybe do in-person on that in addition, as we talked earlier, we do expect supply chain performance to get better both on the Aero supply chain and semiconductor constraint, which will mean that we can burn our past dues/backlog better than our -- what we did in 2022. And we also expect that our project businesses will also execute on our backlog on a more determined basis, because they also faced a lot of headwinds on supply chain constraints in 2022. Where the back will land, it's just indirectly answering the question of orders forecast, and we don't guide that. But we remain optimistic. We are going to get our fair share of demand in the market that we can commit. And as long as market performs, we will perform in line with the market. Thank you. One moment for our next question please. And our next question comes from Joe Ritchie from Goldman Sachs. Your line is open. Thanks. Good morning, everyone. I want to ask that last question, maybe slightly differently, because guidance is a little bit wider than normal. And so perhaps maybe under what scenario would you guys see yourselves coming in below the midpoint of the guidance, the EPS guidance for the year? Yeah. I mean, I think -- first of all, let me -- there's a couple of questions. And the first one is why is the guidance wider than normal, because I think we would probably admit that in terms of the economic scenarios this year are probably a bit wider than most people guess. And you have anything ranging from a soft landing out there to a deep recession, and I've heard opinions anywhere in that range. So I just think from a highway perspective, and this is, I think, consistent of how we guide every year is -- and probably this year more than ever. We try to have a little bit of a wider range, which is indicative of the uncertainty around the economic conditions. And I would say if I were compared to this year versus 2022 or 2021, it's probably more uncertainty rather than us. So that's the reason for the wide range. In terms of the range, it's out, sure. At the lower end â at the lower end, it's probably -- it probably means that tougher economic conditions. The second half is the economic conditions turn worse, the short cycle is worse than we expect at the top end. It's a bit more of what we hope is the expectation, which is some of the order activity turns. Short cycle becomes more robust in the second half and China returns to growth. I mean we -- Q1 -- we actually think Q1 in China could be challenging because of the lifting of the COVID restrictions, Chinese New Year and so on. And we embedded that in our guide. But we actually think that second half in China could actually be quite strong. And if that comes to fruition, that sort of points to the upper end of our guide. So that's where we kind of have a bit of a wider range. And by the way, we did guide a wider range like this historically it could. Since it's not that much wider and 2022 was a little bit narrower. But I think it's just -- it's as simple as it's indicative of the economic uncertainty that I think many of us are facing. And there's a wide range of educated guess as to... Yes. I think we'll know a lot more come June, right? I mean as we talked about, I think we feel pretty good about where we are from a backlog position. And no one really knows what the level of activity in the economy will be. I mean we've had some good things. The European winter has been more mild than people thought, and Europe has held up relatively well and -- versus what some have figured it could be. But I think, as you said, we feel really good about where we are right now. And we'll continue to take that temperature as we go through the first four to five months a year. Thank you. One moment for our next question, please. And our next question comes from Deane Dray from RBC Capital Markets. Your line is open. Thank you. Good morning, everyone. And start with congrats on getting to the finish line on the NARCO Trust. That was a really long road. And I know you had to get all the approvals. So nice to see. Yes. I know it's been a long road. But Honeywell was one of the first to pursue that trust, and you've got all the approvals with the plaintiffs and so forth. But great to see it derisked. And just a follow-up on the last question on the geography. Did anything really surprise you in the quarter in terms of the geographies? It seems like Europe -- was it just the weather that's not as dire on the energy side? But what were the surprises on the geographies? And what's baked in for 2023 major geographies? I know you have a little bit on China, but if you could round that out, that would be helpful. Thanks. Maybe I'll start and Vimal will add any further commentary. I would say, no major surprises, I mean, in terms of how we ended up. I mean, Europe was softer, particularly the UK was really soft in Q4. That probably stood out for us in Europe. But then as we looked at December, the exit rates weren't actually bad. So November and October were a bit weaker, December exit rates were better. In terms of the overall business performance, I mean, it was actually incredibly consistent with what we guided. I mean, we guided -- we came in roughly at the middle of our range, a little bit better on operating margin. I mean we guide for a reason, and that's sort of where we ended. And by the way, thank you for acknowledging the NARCO. I mean, I think as you kind of read the articles and some of the other companies out there, I can't understate how important or overstate how important it is to eliminate liabilities from your balance sheet. And when you can do that permanently with confidence, it substantially derisks the future of the company. I think maybe just didn't get as much offense as I think it should have because it was a huge deal. It hit up a lot of bandwidth. But I am thrilled to have this liability reduced off the balance sheet. Vimal, if you⦠So I think the only thing I'll add is that I think everybody is aware of commentary on US and Europe, so I won't repeat it. But high growth regions represent a very large part of Honeywell revenue. We do expect China to have a strong growth in 2023. We are cautious in Q1, but very optimistic for the year. But other high growth region markets, we are confident on good growth. Middle East, we have good backlog and a very strong pipeline for orders. India, we remain very optimistic. Turkey, Central Asia, we remain very optimistic, ASEAN. So overall, that part of the word should offset some of the headwinds we see in Europe, and that's what we are kind of dialing in into our planning process. Thank you. That does conclude our question-and-answer session. I would now like to turn the conference back over to Darius Adamczyk for any closing remarks. I want to thank our shareholders for your ongoing support. We delivered strong fourth quarter results and continue to navigate effectively multiple uncertainties with the typical level of operational rigor you've come to expect from Honeywell. Our future is bright, and we look forward to discussing this further at our upcoming Investor Day in May. Thank you all for listening, and please stay safe and healthy. Thank you.
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Welcome to the Dorian LPGâs Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Additionally, a live audio webcast of todayâs conference call is available on Dorian LPGâs website, which is www.dorianlpg.com. I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young. Please go ahead. Thank you, Darryl. Good morning, everyone, and thank you all for joining us for our third quarter 2023 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; and Tim Hansen, Chief Commercial Officer. As a reminder, this conference call webcast and replay of this call will be available through February 8, 2023. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe, or similar indications of future expectations. Although, we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors, as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer you to our unaudited results for the period ended December 31, 2022 that were filed this morning on Form 10-Q. In addition, please refer to our filings on Form 10-K, where youâll find risk factors that could cause actual result results to differ materially from those forward-looking statements. Finally, you may find it useful to refer to the investor highlight slides posted this morning on our website. Thank you, Ted. Good morning and thank you for joining Ted, Tim, and me to discuss our third quarter financial year 2023 results. John Lycouris isnât with us this morning, because heâs having knee surgery. John Lycouris has contributed a slide you will find in the deck. That was much interesting information which I think, you will â may want to note and take, and we will follow with. We will have some remarks read by â from him at the end of our presentation and feel free any questions you may have. After me, Tim will present and then â ultimately, Ted will present and then Tim, including the $1 irregular dividend announced today, we will have returned over $500 million to shareholders since our IPO. Our board has focused on returns to shareholders, while remaining commercial â retaining commercial flexibility and ensuring a strong balance sheet. Weâre still investing in our business as evidenced by the full vessel joining our fleet in this calendar year and our commitment to the installation of 3 additional scrubbers. For the quarter our EBITDA was $76.2 million, and net income was $51.3 million. The net income is the second highest in our corporate history. Our net debt-to-capitalization was about 34%. Ted will give you details and, of course, answer any questions you may have on our quarterâs financial results. Global LPG market fundamentals strengthened in 2022 with increased volumes from both major export basin and more frequent cargo routes to Europe. Global exports increased 4% this past quarter, and up 6% for the year with support primarily from North America. Total exports for 2022 increased to 117.5 million from 110.9 million tons in 2021. U.S. exports increased 6% or 700,000 metric tons from the third calendar quarter supported by favorable arbitrage economics, which persist today. 2022 U.S. volumes were up 3%, an increase of 1.3 million tons from 2021. Middle East export volumes showed continued growth, despite maintenance in some terminals in the beginning of December. Annual volumes out of the region are up 18%, increasing by 6.4 million tons from 35.9 million tons in 2021 to 42.3 in 2022 driven by reversals to OPEC+ production cuts. Freight rates were this past quarter underpinned by a strong arbitrage and increased waiting time in Panama. Rates fell in early December as canal waiting ease and some terminals in the Middle East underwent maintenance and demand in Asia was subdued. Weâre now seeing a rapid reversal and an increase in freight rates in both basins. On the shore side, Dorianâs operation, we continue to work hard to ensure the well being of our crew, especially our Ukrainian and Russian seafarers and their families. On the performance side, we have been very focused on our strategy to comply with the 2023 IMO emission regulations, the EEXI and CII. We have built out dashboards and forecasting tools that assist our commercial team and optimizing our utilization, and achieve a solid CII score for each vessel in the pool. Our team has spent the past 2 years preparing for these regulations. And see this year as a turning point and a journey to decarbonize shipping. We will continue our research efforts and installations of various energy saving devices and premium paints to reduce consumption costs and carbon footprint. Looking ahead at the market estimates for U.S. exports point to further growth in 2023 and 2024. And its January short-term outlook report, the EIA said it now estimates are U.S. LPG exports will grow 15.9% in 2023 year-over-year. This is up from their October estimate of 11.3% in 2023. The U.S. is now producing well over 100 million tons of LPG a year, with 2022 numbers coming in at about 106 million tons. Thanks, John. My comments today will focus on the recent capital allocation events, our financial position liquidity and our unaudited third quarter results. At December 31, 2022, we reported $129.8 million of cash, which was net of the $40 million dividend payment made at the beginning of the month. Of January 30, 2023, we have roughly $165 million in cash, with the increase from December 31, reflecting the January distribution from the Helios pool. Also, as John mentioned, we will pay another $1 per share, which is an irregular dividend or roughly $40.3 million in total of dividends on or about February 28, 2023 to shareholders of record as of February 15, 2023. The irregular dividend announced this morning reflects the strong rate environment and our resulting cash flow. Once paid at the end of February, Dorian will have paid over $300 million in dividends and repurchased nearly $229 million in stock, representing 18.8 million shares, which together totals nearly $530 million in capital returned to our investors since our IPO in 2014. Our Board continues to take a pragmatic quarter-by-quarter review of the companyâs performance, the LPG chartering market environment and other macroeconomic and industry factor to determine whether to pay, and if so, how much in dividends. With a debt balance at quarter end of $635.6 million, our debt to total capitalization stood at 43.2%, and our net debt to total cap is of course even lower given our large cash balance. Moving into this calendar year, we will take delivery of our dual-fuel new building from Kawasaki at the end of March, as well as 3 long-term time chartered-in dual-fuel ships, representing nearly 20% growth in our commercially managed fleet. With these additional vessels, our cash cost per day will increase to $24,000 to $25,000 a day, but I would also note that these vessels offer higher earnings potential given their size, fuel efficiency and dual-fuel optionality. For the discussion of our third quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website. Turning to our third quarter chartering results, we achieved a total utilization of 97.8% for the quarter with a daily TCE per operating day as those terms are defined in our filings of $52,768 yielding a utilization adjusted TCE of about $51,630, that again is TCE per available day. Spot TCE per available day, which reflects our portion of the net profits of the Helios pool for the quarter was about $52,583. Also, the overall Helios pool reported the spot TCE including COAs of approximately $57,000 per available day for the quarter. You will note that these results are somewhat correlated with the average Baltic rate recorded on a 2-month lag. As many investors and analysts look to model the business, we would note that a 2-month lag Baltic is more in line with the actual cycle of the business. Our team books voyage is about 30 days out and the average load to discharge voyage â i.e., 1-way voyage is about 30 days. It is also worth reminding the investment community that the published Baltic rate assumes 100% utilization and is based only on the Ras Tanura-Chiba route. Turning to the cost side. Our daily OpEx for the quarter was $9,739, which is up marginally from the quarter ended September 30, 2022. The crew costs, which include crew travel, appear to have found a new normal as crew cost per day has been relatively stable over the last 3 quarters, and spares and stores were actually down sequentially. Repairs and maintenance and lubricant costs drove the increase this quarter. Our time charter-in expense for the 2 TCE in vessels remained stable at $5.2 million. Total G&A for the quarter was $6.9 million and cash G&A, thatâs G&A excluding non-cash compensation expense was $5.9 million. Included in the $5.9 million is approximately $200,000 that we spent to provide accommodation and food to the families of our seafarers affected by the war in Ukraine. We also recognized about $250,000 of performance-based bonuses for some employees in the quarter. Thus, our core G&A for the quarter was about $5.5 million, which is consistent with our expectations. Our reported adjusted EBITDA for the quarter was $76.2 million, up sharply from the prior quarterâs $46.2 million. We look at cash interest expense on our debt as the sum of the line items interest expense, excluding deferred financing fees and other loan expenses, and realized gain loss on interest rate swap derivatives. On that basis, total cash interest expense for the quarter was $6.6 million. Our hedges saved us $1.4 million in cash interest this period, and we recently extended our existing hedge profile to ensure that the 2022 debt facility is 80% hedged and towards maturity in 2029. Although, we currently hold an 87.5% economic interest in Helios, we do not consolidate its P&L or balance sheet accounts, which has the effect of understating our cash and working capital. Thus, we believe itâs useful to provide some additional data in order to give a more complete picture. As of Monday, January 30, 2023, the Helios Pool held $20.5 million of cash on hand. Page 5 of the investor highlights materials outlines the economics of our scrubber investments and clearly this investment has been valuable for our shareholders. Of note, the total scrubberâs cost savings have now paid back the entire initial investment. In addition, as John noted, weâve committed to 3 additional scrubbers. And I would note that the installed cost of these 3 scrubbers will be roughly two-thirds of the cost that we incurred on the first 10 retrofits. You also note that our investments in performance monitoring have also proven their value as both our AER and EEOI have on the basis of unaudited figures for calendar year 2022 fallen by mid-single-digit percentages versus the prior year. Thus, Dorianâs contribution to a cleaner environment continues unabated. The significant irregular dividends in the last 12 months underscore our Boardâs commitment to a sensible capital allocation policy. The balance is market outlook, operating and capital needs of the business and appropriate level of risk tolerance given the volatility in shipping. We also continue to evaluate potentially interesting investment opportunities that may represent attractive risk adjusted returns. With a continuing solid freight market backdrop, we remain cautiously optimistic about our cash flow generation over the coming months. Thank you, Ted, and good day, everyone. Thanks for dialing in. The October to December 2022 call for increased LPG export as well as import demand, which translated into a current freight market. North American export was buoyed by relatively mild winter, dampening domestic LPG consumption, and continued record setting production levels. The quarter is often characterized by seasonality as Asian importers tend to stockpiled for the winter, and 2022 was no exception. North American exports set a record for exports for the quarter, while South Korea and Japan posted a strong import level also held by demand for LPGâs piling to navigate the cold winter. Middle East export volumes were slightly down compared to previous quarter. But nonetheless, it was a record high fourth quarter export. The East of Suez market saw the BLPG1, which is a benchmark for [AG Chiba route] [ph] continually offers strength from the quarter prior, despite a free flow during the golden week holidays in the Far East. Several delays at key discharge ports in India and in the Far East saw considerable tonnage during October and November. Meantime, market players also had to plan with long lead times, because the west market was seen fixing in those 5 to 6 weeks in advance of the low delay hands [ph]. The result of the favorite product markets have sold in tonnage discharge port and navigating long lead times was a bullish [ph] market in October and November. On the 21st of November, we saw record high BLPG1 posted at $148 per metric tons. December was relatively quiet, as the seasonal back rotation in the markets impacted the product market, and a significant downward correction was seen in the second half of December. The rest of Suez market likewise saw a rising market during October and November, with a downward correction in December. The rest of Suez market was also impacted by delays at discharge, but also had to contend with increasing delays for transiting the Panama Canal. These delays factors to vessels resulted in market players having to secure tonnage well in advance of the [lake hands] [ph]. The Western Suez market did not climb at the same pace as Suez market, partly due to the fact that ship ownersâ being enticed to lock in firm earnings and longer voyages, which increased the competition for cargoes known to be destined for the Far East discharge ranges. By September, a weakening in arbitrage, as you can see on investor deck online, due to the forward delivery prices of product in the Far East, the activity levels in the last few trading days of calendar 2022, this resulted in a significant freight market reductions. The East and West market freight indicated a well balance shipping markets are supported by strong fundamentals. Whereas in the summer, the balance shipping market demonstrated that the VLGC market could weather seasonal summer doldrums, the early into demonstrated how strong the market will rise when shipping demand increased. The positive fundamentals of the market has been deemed over the quarters. This remain, however, market players attempting to understand the impact of the new COVID-19 normal in China, and whether world recession is looming in the horizon. Despite the present external risk, propane inventories continue to build in North America, and demand for LPG remains robust. Also, thereâs reasonable optimism of increasing demand for LPG in China, once a hard landing of sudden opening is handled with more PDH to recover on stream and the industry operating on more stable basis. Yeah, thank you. As I said in the beginning, I think, weâll have the remarks briefly that John Lycouris had prepared briefly read now, and then weâll go back for questions. Thank you. Peter? Thank you. [Technical Difficulty] operation results and our near-term ESG strategy. Starting with our scrubbers, fuel spreads for calendar fourth quarter2022, our third quarter 2023 widened between LSFO and HFO benefiting our scrubber vessels with improved wage economics averaging about $5,831 per day net of our scrubber OpEx costs. The realized average savings were about $246 per metric ton of HFO consumed by our scrubber vessels versus the cost of LSFO. The hybrid features of our scrubbers provided additional upside for all ECA and SECA areas of trading. In addition, scrubbers reduced not only stocks, but also significantly reduced Particulate Matter and Black Carbon, and we feel are necessary precursor for putting future Carbon Capture systems on our vessels. Pivoting to our ESG strategy, our immediate focus is on our fleetâs IMO mandated EEXI and CII rating, which will come into effect in stages in 2023. Weâre reducing emissions and improving commercial performance by installing various Energy Saving Devices or ESDs. Weâve also implemented real-time data monitoring, as we mentioned before with sensors that track performance and optimize onboard operations and voyage completion. We combine this with robust crew training efforts, which we feel to paramount to getting this done. In addition, we have contracted 3 additional scrubbers, which will be installed in the next 2 quarters for 3 of our vessels which have upcoming drydocks. Looking ahead, weâre investigating the potential for Carbon Capture and Storage onboard our vessels. Weâre continuing to improve our energy efficiency onboard our vessels with a focus in vessel performance and emissions improvement, and weâre continuing to study technological innovations and advances as they mature and implementing them as soon as we can. Thank you. With the prepared remarks completed, we will now open the line for questions. [Operator Instructions] Our first question comes from the line of Omar Nokta with Jefferies. Please proceed with your questions. Hi, there. Itâs a nice solid quarter, obviously, and it looks like more is on the way here, especially given what weâve seen in the spot market here in the past week or so. I would say the dollar dividend you declared, I think, clearly youâre conditioning us to â or I think, Iâm being conditioned to expect these payments. And, I know, youâre still viewing them as irregular. And you mentioned in your opening remarks, the Board takes a more pragmatic approach to the payout each quarter. But how should we think of Dorianâs use of cash here as we think about the near- to medium-term? Are dividends the number one priority? No. They are â our capital allocation is our number one priority. And our â the way we think about the dividends are as part of a whole, which includes â it has included in the past buybacks, and now they could include them again; dividends, obviously, and reserves for a rainy day and for investment, including renewal. So up until now, as you know, weâve invested only in one new ship, we feel that weâre covered with the 3 double fuel ships that weâve chartered in, plus the new building that weâre taking in for ourselves. Weâre investing a little more in the scrubber because we feel that, that has given us good returns and we think the prospects are good. So while dividends are right up there, I think, you asked specifically, are the first priority? And, I think, we should say that they are equal weight in â thatâs how we view them, equal weight within every quarterâs capital decision allocation, which is kind of long-term and medium-term. Okay. Thatâs fair enough. I appreciate that color. Maybe you did mention the investment and youâve got the 1 new build, the 3 charter-in. At this point, it looks like youâre deploying capital on those 3 scrubbers. Just out of curiosity, you mentioned that those will carry a cost thatâs about two-thirds of the initial program a few years ago. I think, generally, people have just assumed that it would be more costly today. And so, I just want to get a sense of what makes it cheaper this time around? I think the production really, because youâre right, it should be more expensive. But if you compare it to the first time we put scrubbers on board, which was in our initial 2 new buildings, itâs not only a third â itâs probably a third of the cost, not just a third offer. So theyâre just â they keep coming down, Iâm sure thereâs â they will level off somewhere. But theyâre more efficient. Theyâre more compact, easier to install. And thatâs it really, I think, Ted, do you want to add? I mean, I think the other thing if there was some costs when we initially did the first retrofit, so basically Iâm not a technical guy, but like high tech MRIs of the structure to see exactly where to put stuff. Well, now we know the plan of the ship. So some of that weâve avoided and weâve gotten better at installing them, our piece of it, and the yards have gotten better, too. So itâs all the learning curve, I think like John said. Okay. Yeah. What do you think in terms of timing, it sounds like, I think, Theodore had mentioned in the second and third quarters, you expect to complete them. Whatâs the expected sort of off hire time for those ships? Weâve modeled for the time being 30 days, thatâs what itâs worked out to historically. Weâve done a little bit better than that sort of 27, 28 days, but weâve assumed 30 for our internal modeling purposes. It would, except itâs worth remembering, Omar, that when we normally do our special surveys, we actually are only in dock for 15 days. So it takes sort of an additional 2 weeks to install the scrubber. So we normally do not have 30-day regular drydockings. Okay. Got it. And then maybe just one more. And I guess maybe a bit more bigger picture just on what weâre seeing in the market. You referenced this early in the commentary. And maybe, Tim, just whatâs been going on, I guess, with the spot market here recently kind of came into the year a bit softer kind of a little lower looks like the first couple of weeks and then here a bit of the past week or so weâve seen a big jump. Just wondering whatâs driving that that uptrend here recently? Yeah, I think, itâs a combination of things that probably at the end of December we came from a very high point, and as we closed in on Christmas and the arbitrage closed in a little bit. I think people got quite keen to take the cargo that was there before the holidays and that made the rates fall. Then you had kind of two weeks of quietness before people got back in the seat and in that time, itâs really that you can say the broker setting the politics that kind of dictates the market without any much action. So the market probably felt more than it should have done from that perspective. But also at the same time, as we came back, we normally see the quiet of the Chinese New Year, but this year, due to the cold spells suddenly hitting Asia, we actually saw the Chinese coming back during the Chinese holidays, which normally they take a week or so to before they get back in their seats. So the demand really picked up due to the cold spells in Asia, and we saw them [scraping for tons] [ph] even during the holidays, which we normally donât see. So, of course, that demand open the up and kickback the action in the market. And, actually, when we then saw that there was actually not a length in the shipping market, which became apparent quite quickly. But as there was no demand, the previous week or activity at least and then that kind of make the market dropped quite quickly, and then it rebounded actually to probably where it should have been⦠Got it. Thank you. Thanks for that color. I appreciate the time guys. Congrats again on a follow-up quarter. And Iâll turn it over. Thank you. [Operator Instructions] Our next question is come from the line of Sean Morgan with Evercore. Please proceed with your questions. Yeah. And just kind of, I guess, sort of a macro question about the market? How do you sort of think about the current order book, one in five, I guess, versus the existing fleet, and thatâs the delivery schedule in 2023 versus kind of some of the petchem build out in Asia and sort of the ability of the market to sort of absorb that new tonnage. How do you get comfortable with sort of the rate outlook in that context? We think about it a lot. And we never get comfortable. We just weigh the balance of probability and to the best of our ability. So I let Tim give you some benefit of â some of the conclusions that weâve reached on the projected equilibrium. Weâre generally, I think, a little bit more optimistic than some other people. And, heâll tell you why? Tim? Yeah. So, of course, one thing that you canât hide is, obviously, is evident to everybody is at 46 ships or so delivering in this year. But, what we think, we believe, weâll balance this out to see the additional production, especially from the U.S, which have surprised quite a lot on the upside. So we see that most of the U.S. 80% of whatever is produced in the U.S. will go to the Far East. So the demand side is really in the Far East. So when we model that we see kind of around 20 ships absorbed due to that increase of volume at least, and thatâs without any inefficiency. On top of that, when we have more congestions in the borders received more and more as a lot of places the infrastructure isnât built out for the increased volume, especially like India and other places. Weâre also seeing a lot more go into Europe due to the war in Ukraine. So here we also seen more delays and then usually as its bigger volumes coming in. And then as we mentioned a few times if the Panama Canal delays, we do see them increasing. You can say some of the delays have happened due to the quite firm container market. But, again, even though that is that is kind of easing off, you are going to have a significant amount of LNG carriers built for the next year or delivering in the next year. And we also are going to see more Panamax container ships are delivering, and the new regulations in the Panama also allowing larger container ships actually to go through as they do not have to check the trucks into the box anymore. So we do see increased Panama Canal delays. And then, we have â as Theodore mentioned earlier, the regulations on the EEXI and CII, which will have an impact on the shipping fleet as the SEC normally goes very close to full speed, where you see the tanker markets and the dry markets previously has not been running on full steam. So for them the EEXI reduction is not so significant. But for VLGC, this will have an impact on the fleet, which is quite significant, actually. So we see these factors as being able to absorb this shipping fleet coming in. Thatâs really interesting. So, basically, I think you have a little bit of a natural hedge, the downside, I guess, more VLGCs coming in the market and obviously a larger impact from the big container ship, right? But what youâre saying is that thereâs still only one Panama Canal and youâre just going to have more congestion. So are you sort of now thinking that the new steady state is just constant congestion in the Panama Canal thatâs effectively slowing down fleets for not just obviously VLGCs, but just global fleets and increasing kind of utilization based on wait times? Yeah. That is our view. I mean, you have about 260 new Panamax container ships on order and about 250 LNG new Panamax ships on order. So this will â not all of them will naturally use the canal, but there is more ships going in that way. And, I think, the LNG from the U.S. eventually even though youâve seen it lately due to the war going into Europe. There will be more going to the east as well. So, I think, the utilization of the Panama Canal will be or it will be more busy. And we have also seen LPG carriers probably being the hard ahead of those, because we are excluded from booking ahead, where other liners and LNG carriers that can speculatively booked slots a year ahead. LPG ships can only book 14 days ahead for the canal and future the ranking that most companies have then that is an issue as the larger container lines have the higher rankings. So, I see this increase continue, and also the Panama Canal authorities have increased the cost of the LPG carriers passing. I guess the LPG carriers is the smallest ship that can pass the canal â that canât pass the old canal, and ask giving the least revenue. So we see significant increases of the actual transit cost plus people is most of the time having to bid for the auctions, which goes everything from $100,000 to $2 million on the auction fee. So weâre seeing more people also taking the longer route around the Cape or to the Suez Canal to ensure that they can actually meet their [late hands] [ph] and have a firmer schedule. So also that longer route will give some more tons in the balance of things. And that configuration has gone due to the delays and due to the uncertainties and the auction fees, of course, which also you donât know what will be. So these things, I think, is the actual statement. And then, if I could just squeeze in one more on this, I think, Ted in the prepared remarks said that the Baltic rate reflects Ras Tanura-Chiba route. And if Iâm hearing correctly, itâs almost something like he doesnât view that as maybe as central important route relative to the actual rates that you guys are seeing at your charter desks. So what routes do you think like now are kind of more indicative of how the trade is really happening for VLGCs kind of a weekly basis? Sean, let me take this as two questions, actually. And weâll give you two answers. Tim will answer you specifically on the part of your question, which says, what kind of mix the trade â how we should think of the mix, right? Because itâs not just AG East, obviously, itâs a western route. And even the West is both AG, and then U.S. Gulf East, but also U.S. Gulf to the continent and other short-term. So I let him give you that. But first, I want to Ted to address the reason why he said the lag and the 100%, because when you â I noticed that most analysts now use a 1-month lag on the VLGC rate on the AG rate. And, of course, itâs still 100% utilization, which is fine. But, I think, Iâd like Ted to have to explain to you why we think the 1-month lag will not reflect the actual earnings, because the lag in the receipt of freight is at least 2 months. Ted, do you want to? Yeah, sure. Yeah. So, Sean, exactly what John said, so aside from there being a mix, itâs really the business, itâs really the cycle, right? Our guys are booking now here at the beginning of February, for voyages that wonât complete until at the earliest sort of April, and maybe even further out. And so, as a result, when youâre trying to do undertake a modeling exercise, and given how the loaded â sorry, the revenue recognition accounting works, you really tend to find that, there are 2-month lagged average is going to be a lot better. Tim will give you more on the specific trade lines and thereâs some â the rates behave differently there, particularly weâve seen U.S. Gulf to Northwest Europe be a sweet spot, but Tim will comment on that. But itâs really just simply a better â look, if thereâs no perfect way to do this, we acknowledge that we wanted to give a little guidance to the investment community about how to maybe narrow or make it somewhat more accurate. And, again, I mean averages are tricky. We booked somewhere around 9 to 10 voyages a month, so 20 some odd working days in any given month. So it becomes quite tricky to strike broad averages, but we at least feel that looking at it 2-month lag is going to give you a better indication of what we expect to see in for quarter or what you can expect to see when we deliver quarterly results. Okay. But as Ted mentioned, thereâs basically three routes, so the Ras Tanura-Chiba, or East of Middle East to Far East; and then thereâs a route U.S. Gulf to the Far East and U.S. Gulf to Europe. And I actually indexes for these three routes. They are not used very much, because there have been too illiquid and you can say, trading purposes and other which was really the intended for these rules to be published. So theyâre not really used on a paper trading basis. And the market is not so big to have too many indexes, which then makes them adequate. But you can say, our trading is probably 80% out of the U.S. and 20% out of the AG. And the U.S. East is the most active spot market route â of the routes and itâs also the longer route. So you can say it will have a bigger impact fixing on U.S. to the East, and then the AG to the East, or U.S. to the West. So it will imply the ship for 70 days instead of 30 to 40 days. So that route is really the most significant route I would say to match it up and, of course, people will change from one patient to the other. One of the routes is paying far less than the other ones, but itâs a matter of like, how do you deploy your ships, and which cargo do you for and where do you come open. But I would say the most traded route is U.S. to the Far East. So what I would kind of watch out for that as well to kind of judge your readings and they are like said on the AG East, the index route doesnât take into account kind of our waiting and it doesnât take into account, I think time as well auction fees for the Panama Canal. So again, when you calculate the TCE returns on those, you will have to take that with a pinch of sold as well. And then you have like a premium market has been U.S. to the West, where thatâs a difficult market to operate in, because you are open quite close to the low posts. And as I mentioned before, sometimes the fixtures are 5 to 6 weeks ahead, when we fix the ship, so youâre hardly opening the AG, when you are opening the Far East story when you fix the ships, let alone open 14 days on the low port. So a lot of people avoid giving ending up in the western due to these reasons. But they do pay a premium. So if you kind of figure out how to manage it, and then the attractive market for some, so â but that also again when you then your earnings is really depending on where I come open on the previous whereas if Iâm open in the West and go to the Far East, of course that will give you a significantly higher return on discharge versus balancing from the East, and then ending up on a short version in the West. So these are kind of the variances as you see and as we fix sometimes 5 to 6 weeks ahead, if the market is tight; if the market is not so tight, and you will fix 2 to 3 weeks ahead in the West. But in the East, they will be more like 10 to 30 days ahead. So 30 days in the tight market, 10 days Iâm not sure tight markets. And thatâs, of course, again, kind of the lack that you would have to use would depend on how tight is the market and how hard to fix that. Thanks, guys. Thank you very much. Thank you. Darryl, I think weâre done. Thank you very much everyone for joining us, and we look forward to next quarterâs call. Thanks again. Bye-bye. Thank you. This does conclude todayâs teleconference. We appreciate the participation. You may disconnect your lines at this time. Thank you and enjoy the rest of your day.
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EarningCall_761
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Good afternoon. My name is Dave and I will be your conference operator today. At this time, I would like to welcome everyone to the Meta Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] This call will be recorded. Thank you very much. Ms. Deborah Crawford, Metaâs Vice President of Investor Relations, you may begin. Thank you. Good afternoon and welcome to Meta Platformâs fourth quarter 2022 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; and Susan Li, CFO. Javier Olivan, COO, is also on the call and will join Mark and Susan for the Q&A portion. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in todayâs press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in todayâs earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. Alright. Hey, everyone and thanks for joining us today. 2022 is a challenging year, but I think we ended it having made good progress on our main priorities and setting ourselves up to deliver better results this year as long as we keep pushing on efficiency. And I said last quarter that I thought our product trends look better than most of the commentary out there suggests. And I think thatâs even more the case now. We reached more than 3.7 billion people monthly across our Family of Apps. On Facebook, we now reached 2 billion daily actives and almost 3 billion monthly. The number of people daily using Facebook, Instagram and WhatsApp is the highest itâs ever been. Now before getting into our product priorities, I want to discuss my management theme for 2023, which is the Year of Efficiency. We closed last year with some difficult layoffs and restructuring some teams. And when we did this, I said clearly that this was the beginning of our focus on efficiency and not the end. And since then, we have taken some additional steps, like working with our infrastructure team on how to deliver our roadmap while spending less on CapEx. Next, we are working on flattening our org structure and removing some layers of middle management to make decisions faster as well as deploying AI tools to help our engineers be more productive. As part of this, we are going to be more proactive about cutting projects that arenât performing or may no longer be as crucial. But my main focus is on increasing the efficiency of how we execute our top priorities. So I think that there is going to be some more that we can do to improve our productivity, speed and cost structure. And by working on this over a sustained period, I think we will both build a stronger technology company and become more profitable. I am very focused on doing this in a way that helps us build better products. And because of that, even if our business outperforms our goals, this will stay our management theme for the year since I think itâs going to make us a better company. Now at the same time, I am also focused on delivering better financial results than what we have reported recently and on meeting the expectation that I outlined last year of delivering compounding earnings growth even while investing aggressively in future technology. And next, I want to give some updates on our priority areas. Our priorities havenât changed since last year. The two major technological waves driving our roadmap are AI today and over the longer term, the metaverse. So first, letâs talk about our AI discovery engine. Facebook and Instagram are shifting from being organized solely around people and accounts you follow to increasingly showing more relevant content recommended by our AI systems. And this covers every content format, which is something that makes our services unique. But we are especially focused on short-form video since Reels is growing so quickly. And I am really proud of our progress here. Reels plays across Facebook and Instagram have more than doubled over the last year, while the social component of people resharing Reels has grown even faster and has more than doubled on both apps in just the last 6 months. The next bottleneck that we are focused on to continue growing Reels is improving monetization efficiency or the revenue thatâs generated per minute of Reels watched. Currently, the monetization efficiency of Reels is much less than Feed. So the more that Reels grows, even though it adds engagement to the system overall, it takes some time away from Feed and we actually lose money. But people want to see more Reels though. So the key to unlocking that is improving our monetization efficiencies that way we can show more Reels without losing increasing amounts of money. We are making progress here and our monetization efficiency on Facebook has doubled in the past 6 months. In terms of the revenue headwind, we are still on track to be roughly neutral by the end of this year or maybe early next year. And then after that, we should be able to profitably grow Reels while keeping up with the demand that we see. In our broader ads business, we are continuing to invest in AI and we are seeing our efforts pay off here. In the last quarter, advertisers saw over 20% more conversions than in the year before. And combined with the decline in cost per acquisition, this has resulted in higher returns on ad spend. We continue to be excited about the monetization opportunity with Business Messaging, too. Facebook and Instagram are the first two pillars of our business. And in the next few years, we hope to bring Messaging Online as the next pillar. One way of doing this is click-to-message ads, which is now the $10 billion run-rate. And paid messaging is the other piece of this. We are earlier here, but we continue to onboard more businesses to the WhatsApp Business Platform where they can answer customer questions and updates and sell directly in chat. So for example, Air France has started using WhatsApp to share boarding passes and other information, other flight information, in 22 countries and 4 languages. And businesses often tell us that more people open their messages and they get better results on WhatsApp than other channels. AI, itâs the foundation of our discovery engine and our ads business. And we also think that itâs going to enable many new products and additional transformations in our apps. Generative AI is an extremely exciting new area with so many different applications. And one of my goals for Meta is to build on our research to become a leader in generative AI in addition to our leading work in recommendation AI. The last area that I want to talk about is the Metaverse. We shipped Quest Pro at the end of last year. I am really proud of it. Itâs the first mainstream mixed reality device. I mean, we are setting the standard for the industry with our Meta Reality system. As always, the reason why we are focused on building these platforms is to deliver better social experiences, than whatâs possible today on phones. And the value of MR is that you can experience the immersion and presence of VR while still being grounded in the physical world around you. We are already seeing developers build out some impressive new experiences like Nanome for 3D modeling, molecules and drug development; Arkio for architects and designers to create interiors; and of course, a lot of great games. The MR ecosystem is relatively new, but I think itâs going to grow a lot over the next few years. Later this year, we are going to launch our next-generation consumer headset, which will feature Meta Reality as well. And I expect that this is going to establish this technology as the baseline for all headsets going forward and eventually, of course, for AR glasses as well. Beyond MR, the broader VR ecosystem continues growing. There are now over 200 apps on our VR devices that have made more than $1 million in revenue. We are also continuing to make progress with avatars. We just launched avatars on WhatsApp last quarter and more than 100 million people have already created avatars in the app. And of those, about 1 in 5 are using their avatar as their WhatsApp profile photo. I thought that, that was an interesting example of how the Family of Apps and Metaverse visions come together, because even though most of our Reality Labs investment is going towards future computing platforms, glasses, headsets and the software to run them, as the technology develops, most people are going to experience the Metaverse for the first time on phones and then start building up their digital identities across our apps. Alright. So those are the areas we are focused on, AI, including our discovery engine, ads, business messaging and increasingly generative AI and the future platforms for the Metaverse. And from an operating perspective, we are focused on efficiency and continuing to streamline the company so we can execute these priorities as well as possible and build a better company while improving our business performance. And as always, I am grateful to our teams for your work on all of these important areas and to all of you for being on this journey with us. Thanks, Mark and good afternoon everyone. Letâs begin with our consolidated results. All comparisons are on a year-over-year basis, unless otherwise noted. Q4 total revenue was $32.2 billion, down 4% or up 2% year-over-year on a constant currency basis. Had foreign exchange rates remained constant with Q4 of last year, total revenue would have been approximately $2 billion higher. Q4 total expenses were $25.8 billion, up 22% compared to last year. In terms of the specific line items, cost of revenue increased 31%, driven mostly by a write-down of certain data center assets as well as growth in infrastructure-related costs. R&D increased 39%, marketing and sales increased 4%, and G&A decreased 7%. Operating lease impairments and employee-related costs were the largest contributors to growth for all three expense lines. However, growth in marketing and sales was partially offset by lower marketing spend and growth in G&A was more than fully offset by a decrease in legal-related expenses. We ended the fourth quarter with over 86,400 employees, which includes a substantial majority of the approximately 11,000 employees impacted by our previously announced layoffs who remained on payroll as of December 31 due to applicable legal requirements. We expect the vast majority of the impacted employees will no longer be captured in our reported headcount figures by the end of the first quarter of 2023. Fourth quarter operating income was $6.4 billion, representing a 20% operating margin. Our tax rate for the quarter was 24%. Net income was $4.7 billion or $1.76 per share. Capital expenditures, including principal payments on finance leases, were $9.2 billion, driven by investments in servers, data centers and network infrastructure. Free cash flow was $5.3 billion and we ended the year with $40.7 billion in cash and marketable securities. In the fourth quarter, we repurchased $6.9 billion of our Class A common stock, bringing our total share repurchases for the full year to $27.9 billion. We had $10.9 billion remaining on our prior authorization as of December 31. And today, we announced a $40 billion increase in our stock repurchase authorization. Moving now to our segment results. I will begin with our Family of Apps segment. Our community across the Family of Apps continues to grow. We estimate that approximately 2.96 billion people used at least one of our Family of Apps on a daily basis in December and that approximately 3.74 billion people used at least one on a monthly basis. Facebook continues to grow globally and engagement remains strong. We reached 2 billion Facebook daily active users for the first time in December, up 4% or 71 million compared to last year. DAUs represented approximately 67% of the 2.96 billion monthly active users in December. MAUs grew by 51 million or 2% compared to last year. Q4 total Family of Apps revenue was $31.4 billion, down 4% year-over-year. Q4 Family of Apps ad revenue was $31.3 billion, down 4%, but up 2% on a constant currency basis. Consistent with our expectations, Q4 revenue remained under pressure from weak advertising demand which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape. The financial services and technology verticals were the largest negative contributors to the year-over-year decline in Q4, but both have relatively smaller shares of our revenue. Growth remained negative in our largest verticals, online commerce and CPG, though the pace of year-over-year decline in online commerce has slowed compared to last quarter. The largest positive contributors to year-over-year growth in Q4 were the travel and healthcare verticals, though both are relatively smaller verticals in absolute share. Foreign currency remained a significant headwind to advertising revenue growth in all international regions. On a user geography basis, ad revenue growth was strongest in Rest of World at 5%. North America was flat, while Asia-Pacific and Europe declined 3% and 16% respectively. In Q4, the total number of ad impressions served across our services increased 23% and the average price per ad decreased 22%. Impression growth was primarily driven by the Asia-Pacific and Rest of World regions. The year-over-year decline in pricing was primarily driven by strong impression growth, especially from lower monetizing surfaces and regions, lower advertiser demand and foreign currency depreciation. While overall pricing remains under pressure from these factors, we have continued to make improvements to our ads targeting and measurement that we believe are driving more conversions and better returns for advertisers. Family of Appsâ other revenue was $184 million in Q4, up 19%, with strong business messaging revenue growth from our WhatsApp business platform partially offset by a decline in other line items. We continue to direct the majority of our investments towards the development and operation of our Family of Apps. In Q4, Family of Apps expenses were $20.8 billion, representing 81% of our overall expenses. Family of Appsâ expenses were up 23% due primarily to restructuring-related expenses and growth in infrastructure-related costs. Family of Appsâ operating income was $10.7 billion, representing a 34% operating margin. Within our Reality Labs segment, Q4 revenue was $727 million, down 17% due to lower Quest 2 sales. Reality Labs expenses were $5 billion, up 20% due primarily to employee-related costs and restructuring-related expenses. Reality Labs operating loss was $4.3 billion. Before turning to the outlook, Iâd like to discuss our work to grow profitability by scaling monetization and improving our operational efficiency. There are two primary levers to increasing monetization: growing supply and growing demand. Growing ad supply gives businesses more opportunities to get in front of people and we are focused on enabling that in a couple of ways. First and foremost, we remain focused on building engaging experiences for the people who use our apps. We are coming into 2023 with a strong foundation as Reels continues to scale and we are seeing in-feed recommendations contribute to engagement as we help people discover new content in their feeds. We will continue to invest in making these experiences best-in-class. The other side of growing supply comes from more effectively monetizing the surfaces within our apps, including those that have a lower level of ads today. In the nearer term, ramping Reels monetization remains a primary focus. Over the longer term, we see opportunities to continue improving Facebook and Instagram monetization while also scaling revenue contributions from our messaging platforms. Growing advertiser demand is the other focus and a big effort here is around continuing to drive advertiser performance. While we are still contending with the broader macro uncertainty and signals landscape weighing on advertiser demand in the near-term, we are making good progress on our roadmap and are already seeing improvements to add performance and measurement from the investments we have made. We see opportunities for continued gains in the near and medium-term, with our AI investments powering a lot of this work as we continue to improve ads ranking and enable increased automation for advertisers to make it easier for them to run campaigns and use our systems to optimize their performance. Another opportunity we have is to further scale onsite conversions through products like click-to-message, lead ads and shop ads. Click-to-message ads continue to grow quickly and we believe they are bringing incremental demand onto our platform, with over half of click-to-message advertisers exclusively using click-to-messaging ads on our platform. We see further opportunity as we continue to scale click-to-WhatsApp ads and are investing in growing newer formats like shop ads. Over the long-term, we are investing heavily in AI to develop and deploy privacy-enhancing technologies and continue building new tools that will make it easier for advertisers to create and deliver more relevant and engaging ads. Moving now to our efficiency work, we took significant actions in 2022 to operate more efficiently. In Q4, we made the difficult decision to layoff employees while deprioritizing certain projects and curtailing non-headcount-related expenses. We have applied the same scrutiny to our physical assets. We identified opportunities to consolidate our office facilities and we have streamlined our future data centers to a new architecture, which we believe will be more cost efficient and more flexible that provides us optionality to support both AI and non-AI workloads. In Q4, we recorded $4.2 billion of total restructuring costs in connection with all of these efforts and expect there to be some additional costs in 2023 in areas like office facilities impairments as we continue this work. As Mark has said, these actions are just the beginning of our efficiency efforts, and we remain keenly focused on this in 2023. We are working across the company to deprioritize lower ROI work, move faster, increase productivity and reduce costs across the business. As part of this, we are carefully scrutinizing our hiring needs, actively reevaluating projects and reducing management layers. Iâm confident that our company-wide focus on efficiency will position us to be an even more productive organization going forward. Turning now to the revenue outlook, we expect first quarter 2023 total revenue to be in the range of $26 billion to $28.5 billion. Our guidance assumes foreign currency will be an approximately 2% headwind to year-over-year total revenue growth in the first quarter based on current exchange rates. Turning now to the expense outlook, we anticipate our full year 2023 total expenses will be in the range of $89 billion to $95 billion, lower from our prior outlook of $94 billion to $100 billion due to slower anticipated growth in payroll expenses and cost of revenue. We now expect to record an estimated $1 billion in restructuring charges in 2023 related to consolidating our office facilities footprint. This is down from our prior estimate of $2 billion as we recorded a portion of the charges in the fourth quarter of 2022. We may incur additional restructuring charges as we progress further in our efficiency efforts. Turning now to the CapEx outlook for 2023, we expect capital expenditures to be in the range of $30 billion to $33 billion, lowered from our prior estimate of $34 billion to $37 billion. The reduced outlook reflects our updated plans for lower data center construction spend in 2023 as we shift to a new data center architecture that is more cost efficient and can support both AI and non-AI workloads. Substantially, all of our capital expenditures continue to support the Family of Apps. On to tax. Absent any changes to U.S. tax law, we expect our full year 2023 tax rate percentage to be in the low 20s. In addition, as noted on previous calls, we continue to monitor developments regarding the viability of transatlantic data transfers and their potential impact on our European operations. In closing, 2022 was a challenging but pivotal year for our business. We made important progress on our priorities and have taken significant steps to improve our efficiency and productivity. We are set up well to build on this work in 2023 as we continue investing for future growth while remaining focused on delivering strong financial performance. Thank you. [Operator Instructions] Your first question comes from the line of Brian Nowak with Morgan Stanley. Your line is open. Great. Thanks for taking my questions. I have two, one for Mark, one for Susan. Mark, the first one is on generative AI. I sort of wanted to dig a little more into how you think about your blue-sky potential user and advertiser use cases of generative AI? And how do you think about the timeline foresee some glimpses of those on the platform? And then the second one for Susan, just anymore color on the new data center architecture and how we should think about the long-term capital intensity of the business, whether itâs CapEx per minute, CapEx per DAU? How big of a long-term benefit could this change be to the overall cash flow? Thanks. Yes, I can start with generative AI. Yes, I think this is a really exciting area. And I mean, Iâd say the two biggest themes that focused on for this year and one is efficiency and then the kind of the new product area is going to be the generative AI work. We have a bunch of different work streams across almost every single one of our products to use the new technologies, especially the large language models and diffusion models for generating images and videos and avatars and 3D assets and all kinds of different stuff across all of the different work streams that weâre working on, as well as over the long-term, working on things that could really empower creators to be way more productive and creative across the apps and run a lot of different accounts. So I know there is some really exciting stuff here. I want to be careful not to kind of get too far ahead of the development of it. So I think youâll see us launch a number of different things this year, and we will talk about them, and we will share updates on how they are doing. I do expect that the space will move quickly. I think we will learn a lot about what works and what doesnât. A lot of the stuff is expensive, right, to kind of generate an image or a video or a chat interaction. These things weâre talking about, like cents or fraction of a cent. So one of the big interesting challenges here also is going to be how do we scale this and make this work more efficient so way we can bring it to a much larger user base. But I think once we do that, there are going to be a number of very exciting use cases. I realize this is a pretty high-level answer for now, but I think that we will be able to share more details over the coming months. Thanks, Brian. On your questions about CapEx, so your first question was about the new data center architecture that we talked about, which is underpinning the lower CapEx outlook. So weâre shifting our data centers to a new architecture that can more efficiently support both AI and non-AI workloads. And thatâs going to give us more optionality as we better understand our demand for AI over time. Additionally, weâre expecting that the new design will be cheaper and faster to build than previous data center architecture. Along with the new data center architecture, weâre going to optimize our approach to building data centers. So we have a new phased approach that allows us to build base plans with less initial capacity and less initial capital outlay, but then flex up future capacity quickly if needed. Weâre still planning to grow AI capacity significantly, and that connects, I think, to a lot of the things that Mark was describing earlier in his question. In terms of longer-run capital intensity, we certainly expect that the lower CapEx outlook will have some incremental benefit to CapEx as a percent of revenue, and thatâs still really something that we are focused on over the longer term. The current surge in CapEx is really due to the building out of AI infrastructure, which we really began last year and are continuing into this year. We will be measuring the ROI of these AI investments, and their returns will continue to inform our future spend. Our intention is still to bring CapEx as a percent of revenue down, but capital intensity in the nearest term is really going to depend, in part, on the revenue outlook and our needs to further build AI capacity for future demand. Thank you so much. Maybe I can ask a multiparter on going back to some of your comments on Reels. Mark, you always had this philosophy of letting the user sort of continue to grow engagement, and monetization has always lagged sort of consumer adoption of new products. How do you think about going a little bit deeper on the mixture of letting the engagement of short-form video continue to build versus eventually sort of continuing to drive higher levels of monetization against that product? Second, can you give us a little bit of color of how advertiser conversations continue to evolve around short-form video and the adoption of the Canvas and the utilization of that as a means to deliver a mixture of brand and DR messages? And then lastly would just be, can you quantify at all the gap that still exists between the engagement around short-form video and the monetization and how that might close as we look out over the next couple of years? Thanks so much. Yes. I mean the way Iâve always looked at â I can take the first part of this, is that for these consumer products, often building up and scaling the product use case is a somewhat different discipline than working on the monetization. So itâs such a kind of hard problem to build these new types of products that you want to give the teams as much clarity and as simple of goals as possible. So in the beginning, just saying, okay, just letâs make something that works for people. And then once we get to many hundreds of millions of people or billions of people using it, then we will focus on ramping up the monetization, which has been a formula thatâs worked for us. Thatâs the general approach. Now with Reels, we do have a lot of people using it now. So I think at this point, the question is, is there any strategic advantage to letting it scale further than will be â than would be profitable to do? And I think at the scale that itâs at right now, itâs not clear that there is much strategic advantage. I mean there are certain flywheels, and you get certain more feedback or data points from a little bit more distribution. But at this point, weâre at pretty good scale. So I think for now, the right thing to do is to work on monetization efficiency. And we know that there is demand to see some more Reels. And as we naturally improve the monetization efficiency, which I have confidence in because the teams are doing good work, and thatâs been working, I shared the stat about it, the efficiency doubling over the last 6 months on Facebook, I think as we can continue some of those trends, then we will naturally just unlock the ability to show more and more Reels, and we will continue to grow from there. But thatâs the overall approach. I do think that our philosophy of building these consumer products, focusing on getting them to hundreds of millions or billions of people and then focusing on monetization beyond that and bringing that in as the balance is the right approach. It served us well. You can expect us to continue doing that on future things that we do, including some â hopefully, some of the new generative AI products or some of the new Metaverse stuff that weâre doing. Weâre going to take the same approach there as well. So on the advertisers reaction to Reels. We continue working on enabling more advertisers to participate in Reels app, more formats, more objectives, more tools to create them. And weâve been making good progress with now over 40% of our advertisers use Reels across our apps. And between Direct Response versus brand, we are actually seeing progress with both, but Direct Response continues to be where advertisers are focused. And just as an example, Outletcity, which is a German fashion retailer, developed â created specifically for Reels to test the impact of conversions. And they found that Reels resulted in a 19x higher ROIs, 89% lower cost per purchase, and 9x higher lift in sales. So overall, very good results. On your third question, Eric, we are not quantifying the gap in monetization efficiency between Reels and other services. We know it took us several years to bring the gap close between Stories and Feed Ads. And we expect that this will take longer for Reels. Having said that, we are still roughly on track to bring the overall Reels revenue headwind to a neutral place by the end of this year or early next year and we are planning to do that through both improving Reels monetization efficiency and growing incremental engagement from Reels. Yes. Thanks for taking the questions. Iâve got a couple as well. First one, I know for Susan or Javier. As we think about â I appreciate the color on improving conversion rate. Would it be fair to say that youâre kind of through the other side of some of those IDFA headwinds weâve been talking about for the last year or so? And any more color just kind of that journey of the AI-driven adage would be appreciated. And secondly, Mark, kind of diving in that annual theme of efficiency and following on Buzzâs post. Whatâs the right way to think about long-term investment intensity in Reality Labs and kind of balancing that with the ambition to build the next computing platform. Is this the right intensity of kind of where youâre at right now to think about? Or are there any milestones we should be looking for? Thanks. Thanks Mark. So on your first question, we are continuing to make progress in mitigating the impact from the ATT change. But this is more generally just the reality of the online advertising environment that we operate in now. So weâre continuing to work on building tools that mitigate the impact of those changes, and we see strong adoption of those tools, including tools weâve talked about before like CAPI Gateway, etcetera. Weâre also investing in ways to bring conversions on site, and we have a lot of ad formats that have been instrumental in doing so across both click-to-messaging ads, leads ads â lead ads and shop adds being formats that bring conversions on site. And then over the longer run, weâre continuing to invest in our privacy-enhancing technologies to more fundamentally enable us to deliver more performance and privacy-safe ads to advertisers. Javi, is there anything you want to add on that? Yes. And I think, Susan, you touched on most of it, I think if you look at the strategy on ads, we really have two parts, which is continue investing in AI and thatâs where we are seeing a lot of the improvement in ads relevance. And as Mark was saying, we saw over 20% more conversions than in the prior year, which, combined with the decline in cost per acquisition, results on high ROIs. We also use it for automated experiences for the advertisers, improvements on measurement, which allow advertisers to do better decisions. But the second part is bringing more conversions onsite, which are also obviously helping offsetting this Signal loss. Indeed, we are reframing the column of the Signal growth opportunity. And one example we believe that where just to give another example, IRIS [ph], which is an online marketing and sales automation agency in Italy for hotels and resorts. They use this app to collect a higher volume of qualified links at a lower cost, so basically compared to offsite leads [indiscernible]. They managed to achieve a 2x more final bookings with onsite leads, 4x more qualified leads than onsite based on a 2.7x lower cost per lead with onsite versus the alternative option in the lead acquisition offsite. Alright. And I can give some color on â and I think there was a question about how weâre thinking about this efficiency theme as it applies to Reality Labs over time. I guess there are two ways that I think this applies. The first thing is, I think itâs important to not just think about Reality Labs as one thing, right? There are like three major areas, right? There is the augmented reality work long-term, which is actually the biggest area, but hasnât â but itâs still a large research problem. There is a lot of work there that we havenât actually shipped the product yet. VR, which is starting to ramp, right, Quest 2, I think, did quite well. We have multiple product lines there with the Quest Pro. And then the smallest by kind of budget size today is the Metaverse software program. And thatâs â it doesnât reflect the importance of it. I think the software and social platform might be the most critical part of what weâre doing, but software is just a lot less capital intensive to build than the hardware. So itâs the smallest part of the program. And within each of those areas, there are a lot of different things that weâre doing. So just like any project that we would run weâre constantly learning from how the products that weâve shipped are doing, how the market is evolving overall, how competitors are doing, and what reaction they are seeing to different things, and what experiments are being played out. And weâre kind of constantly tuning the road map. And obviously, some of these are longer-term things, right? So you start planning out the hardware that youâre going to ship 2, 3 years in advance. But weâre kind of constantly looking at the signals and learning and making decisions about what it makes sense to do forward. So thatâs definitely going to continue. And we will â even though Iâm â none of the signals that Iâve seen so far suggests that we should shift the Reality Lab strategy long-term. We are constantly adjusting the specifics of how we adjust â of how we execute this. So I think that we will certainly look at that as part of the ongoing efficiency work. The other piece is just different tactics, things like trying to flatten the org, things like that. Those are going to apply across the whole company. So we expect that within the road map that weâre trying to execute, both on Reality Labs and Family of Apps, we just want to focus on making all of our work more efficient. A lot of the time, when people talk about efficiency, there is a lot of focus on prioritization and which big things can you cut. But I actually think what makes you a better company over time is being able to execute and do more things because youâre operating more efficiently, and you can get things done with fewer resources. So Iâd like to kind of get us to that mode more, which I guess gets me to a higher level point in this, which is I just think weâre in â weâve entered somewhat of a phase change for the company, where we just grew so quickly for like the first 18 years of the companyâs growth. And itâs very hard to really crank on efficiency while youâre growing that quickly. And I just think weâre in a different environment now where we have a bunch of areas that, I mean, youâre still extremely exciting and growing quickly for the future, where I think the right strategy will be to focus on kind of top line growth. But I think a lot of what we do, it really just makes sense to really focus on the efficiency a lot more than we had previously and making sure that we can do that work more effectively. For what itâs worth, I think if we do that well, it will be â I think we will be able to do better product work. And I think it will be a more fun place for people to work because I think they are going to get more stuff done. So Iâm pretty committed to this, and itâs going to go across all of the different things that weâre doing. Great. Thanks for taking the questions. Susan, I know the expense outlook came down by $5 billion. I was just hoping you could talk about some of the areas where you may be able to get increased efficiency still? And then what does the new expense outlook suggest for hiring levels in â23? And then separately, I was hoping you could comment on the issues in Europe around Metaâs use of first-party data to target ads. How could this get resolved? And how should we think about the risk to Meta? Thanks. I will start with the 2023, the expense outlook. So, the primary components of the reduction in the 2023 expense outlook are across three areas. The first is slower payroll growth. So, we are continuing to scrutinize how we allocate resources across the company on this. We have a broad hiring freeze in place right now. And we continue to expect a slower pace of hiring in the year as we evaluate what roles we are going to open. I will role in the answer to your second question here, which is this is an ongoing process for us. We donât presently have a hiring target to share for the end of the year. The second component of the lower expense outlook is on cost of revenue. We are expecting slower growth. Depreciation here is impacted by us extending the useful lives of non-AI servers in Q4. And then the third component is our outlook now reflects an estimated $1 billion in facilitiesâ consolidation charges. Thatâs down from the prior $2 billion estimate that we gave in the last guidance range since a portion of the previously estimated charges were already recognized in Q4 2022. So, those are really the big â those are really the primary issues as it pertains to the lower expense outlook. Your second question was on the issues in Europe around Meta using data to target ads. So, I think if you are referring to the EU DPC ruling that we have to change our approach regarding our reliance on contractual necessity as a legal basis for ads in Europe, thatâs a decision. We donât agree with it. We believe that our current approach is GDPR compliant, and we are appealing the substance of the rulings and the fines. We donât expect that those decisions are going to affect our ability to provide personalized advertising in the EU, and that advertisers should be able to continue to use our platforms to reach customers and grow their businesses. Great. Thank you. Maybe a follow-up on the privacy and data use. Are you still facing headwinds in the first quarter, or are you kind of past that from IDFA or ATT? And then as you look out over the next year, anything on Android or in the EU with Digital Markets Act, or anything we should be thinking about or aware of? Thank you. Thanks Justin. On ATT, I think what I would say is there is still certainly an absolute headwind to our revenue number. That is the impact of the ATT changes being in place. Having said that, we are lapping its rollout and adoption and we are making progress in mitigating the impact due to a lot of the work that both Javi and I just talked about, including the different advertiser tools, including ad formats that bring conversions on-site and including the longer term AI investments in privacy-enhancing technologies. The second part of your question was on, oh, anything from Android and other headwinds. On Android, itâs too early to know where this will land. I think Google is taking an approach that is collaborating with the industry, which we think is critical, and we will have updates as more time elapses there. And then your third â the third part of your question, I think was on regulatory issues in the EU, I think this was on DSA. We are expecting â we have been preparing for some time to comply with DSA and meet the compliance deadlines that we expect to come into effect this year. Those are meaningful but manageable segment of costs. We have been preparing for a long time, and those costs have been factored already into our total expense guidance. Great. Thank you. Two questions for me, please. First, maybe one for Susan. Just staying on the theme of the efficiency and with all the adjustments to your cost basis lately, can you maybe just speak to the relationship you are trying to build between revenue growth and OpEx, CapEx growth over time? I think the last time we saw them move in tandem or close to each other was back in 2017. So, are you at a point where you would want them to grow much closer to each other, or are we still in an investment mode and therefore, potentially margin compression mode beyond just 2023? And then maybe, Mark, can you just provide an update on kind of the health of the broad digital ad space, especially for the SMB side and DR. Just curious if coming out of Q4, you are incrementally bullish or you are still as cautious as that you are three months or six months ago? Thank you. Thanks. I am happy to take the first question. So certainly, the lower expense outlook and CapEx outlook puts us in a better position in terms of financial performance for this year. We are I think still â we are focused on the goal that Mark outlined, I think last quarter of delivering compounding earnings growth, while enabling aggressively in the future technology. And that continues to be the principle by which we are â by which we are guiding our financial plans. The second question is on update â oh, on the health of the broader digital ad space. I can take â I can start with this and Javi, you should feel free to jump in if you want to add more color. Q4, for us, we saw that the holiday season, for us, fell mostly within our range of expectations. Trends in online commerce modestly improved for us, which is encouraging, but again, the growth was still negative year-over-year. So, overall, I think this is still a pretty volatile macro environment. Itâs early in the year to know how this will shape up for 2023. And if there is anything, Javi, you would like to add, you can jump in. Great. Thanks for taking the question. Mark, I wanted to talk a little bit more around the progress on the AI discovery engine in Reels. And we are seeing it in our own usage in terms of content and categories and just getting more insights and content that we would like to see. But can you just talk about the added signal that Meta is seeing and gaining you to produce this more relevant content across Reels to Stories to Feed and maybe even to Messenger? Thank you. I am not exactly sure what would be useful to share here. But in general, a lot of the gains that we are seeing on the discovery engine overall, which we basically used to refer to our AI recommendation system across Facebook and Instagram across all different content types of which Reels is sort of a special case, and thatâs growing the fastest with short-form video. But a lot of this is â I mean there is not like one specific data type thatâs useful. A lot of the trends that we are seeing here is, we are using larger models, which require more computation. We have shifted the models from being more CPU-based to being GPU-based. We have seen big improvements in the amount of time and engagement that we have gotten. And we â itâs a little bit hard for us to predict exactly how much we will be able to continue tuning those and improving. But from the experience that we have had so far, I would bet that there is still pretty significant upside there. I know that you kind of asked about specific data points, but I think that thatâs really the theme that we are seeing. And that applies across Reels and the rest of the discovery engine. The â one thing that I would add, itâs a little bit separate from your question, but we do spend most of the time talking about Reels, so maybe itâs worth giving some color on the rest of the discovery engine work, which is, it has also been doing quite well and is much more incremental to the rest of the business because if people end up being able to discover additional photos or links or groups or things like that in Facebook or just interesting content across Instagram, then they are just more engaged in the product. And we already know how to monetize that content. So, that ends up being really helpful both for the overall engagement, not very cannibalistic at all and already profitable. So, thatâs â we have spent less time talking about that because I get that Reels is sort of the faster-growing area. But we do still expect that as a percent of the overall feeds in Facebook and Instagram, recommended content will continue growing. I donât know if it will be a majority by the end of this year, but maybe it will be 30%-ish, 40%, something in that zone, and continuing to grow because we can just find content that people are going to be interested in that may not be from accounts that they have followed directly. So, hopefully, thatâs some useful color on what we are seeing across those efforts. Great. Thanks. Two questions. Just a follow-up on Reality Labs, should we continue to expect accelerating losses at Reality Labs in â23? And if so, should we expect Reality Labs to be a peak up losses this year? And then second, Susan mentioned shop ads in the bucket of early monetization. Just any color there on how we might see that scale this year. Thank you. Yes. Sorry, I will go ahead and take the first question about Realty Labs, and Javi, you can take the second question on shop ads. On Reality Labs, we still expect our full year Reality Labs losses to increase in 2023, and we are going to continue to invest meaningfully in this area given the significant long-term opportunities that we see. It is a long-duration investment, and our investments here are underpinned by the accompanying need to drive overall operating profit growth while we are making these investments. I will turn it to Javi on the shop ads. Yes. So, in Q4, we continued to test shop ads in the U.S., and we are seeing increased performance by helping direct the consumer to the place where they are most likely to purchase. So, itâs early to know, but we really finally saw product market fit in the test. Itâs off a small base. But to just give you a sense, we saw triple-digit growth in both revenue and adoption across Q4. And we expect this growth to normalize to a lower level in 2023. And the shop ads beta has a revenue run rate in the hundreds of millions of dollars. So, that gives you a small base. Itâs a small revenue run rate yet, but itâs growing rapidly. And we expect it to continue, but normalize to more lower levels in 2023. Thanks. Two questions, please. The click-to-messaging is now about $10 billion revenue run rate. How do you think about the growth path for that going forward? And do you find that thatâs bringing in brand-new advertisers to Meta that you hadnât seen before? Like who is coming in on that? And does that give you a new growth path? And then, Mark, if I could just ask you. This year of efficiency, itâs almost like there has been a journey going on since early last year when you talked about â talking about driving the business for growing operating profit. And I guess I just want to ask the why question. I mean itâs â the markets obviously like what they are hearing from you today and the changes. But why the much greater focus on efficiency, not just tonight, but kind of over the last 9 months or 12 months with maybe a few hiccups. Like what â is it just the maturity of the business? Is it just trying to take on advantage of a crisis, but there is a crisis out there in terms of the economy, and maybe that forced minds to think this way. Just a little bit more color on the why. Thanks a lot. Thanks. This is Susan. On the click-to-messaging ads, so we are â this is one of our fastest-growing ads products. And we believe that they are bringing incremental demand onto our platform. I mentioned in my script that over half of click-to-message advertisers exclusively use click-to-message ads on our platform. In terms â you asked how we are going to scale and I think there are a couple of dimensions. In terms of demand, I think the biggest piece here is getting more businesses to adopt click-to-messaging ads via creating more entry points, simplifying creation flows. We are trying to integrate with partners who can help smaller businesses scale. So, there is a lot of work going on there. On the performance side, we are continuing to focus on just driving up the ROI that advertisers get from click-to-messaging ads. We are trying to give advertisers the ability to do more down-funnel optimization, create better in-thread experiences and simplify flows that help them drive conversion. And then ultimately, we are always focused on growing supply and in this case, growing the business messaging ecosystem by creating more ways for people and businesses to connect across our messaging app. So, I think an example of that would be something like business direct research on WhatsApp. So, itâs an opportunity we are very excited about and we have invested a lot in and we have seen very healthy growth. I will turn it to Mark on the efficiency question. Yes. So, I mean on the efficiency point, I think we come to it from a few places. I mean one is just like the journey of the company. And for the first 18 years, I think we grew at 20%, 30% compound or a lot more every year, right. And then obviously, that changed very dramatically in 2022, where our revenue was negative for the growth for the first time in the companyâs history. So, that was a pretty big step down. And we donât anticipate that, thatâs going to continue, but I also donât think itâs going to necessarily go back to the way it was before. So, I do think this is a pretty rapid phase change there that I think just forced us to basically take a step back and say, okay, we canât just treat everything like itâs hyper growth. There are going to be some areas that are going to be very rapidly growing or that are very kind of future investments that we want to make. But we also have a lot of things now that are â just kind of have a lot of people using them and support large amounts of business and that we think we should operate somewhat differently. So, there is that piece of it. But the other part of it that I would say is that as we started doing the work, I actually think it makes us better, right. And that was somewhat unexpected, right. I kind of historically would have thought that this would just occupy some amount of our mind space and that, that would be more of a trade-off against how we are able to build products and get things done. But at this point, I am actually fairly optimistic that there are a pretty good roadmap of things that we can do that will just make us more efficient and actually better able to build the things that we want. Not all of them will help save money, right. So, for example, focusing on AI tools to help improve engineer productivity, itâs not necessarily going to reduce costs. Although over the long-term, maybe it will make it so we can have fewer â we just hire less, right, and stay a smaller company for longer. But I do think things like reducing layers of management just make it so information flows better through the company and so you can make faster decisions. And I think ultimately, that will help us not only make better products, but I think it will help us attract and retain the best people who want to work in a faster-moving environment. And so that honestly was a little bit surprising, right, that as we started digging into this that the company would actually start to feel better to me. And I donât know how long that will â like how long the roadmap is, if things that what we can continue to do where that will be the case. But I do think we have a good amount of things like that. So, thatâs why I am really focused on this now. And I do want to continue to emphasize the dual goals here of making the company a better technology company and increasing our profitability. They are both important, but I think itâs also really important to focus on the first one of just making it a better company because that way, even if we outperform our business goals this year, I just want to communicate, especially the people inside the company that we are going to stick with this, because I think itâs just going to make us a better company over the long-term. So, I think thatâs it for now. Thanks. Susan, for your Q1 guidance, can you just remind us all what your embedded expectations are for market conditions, how you think about seasonality? Whatâs embedded in that guidance? Thanks Brent. For â I mean for Q1, we are â our guidance range of $26 billion to $28.5 billion corresponds to negative 7% to plus 2% year-over-year growth. And it reflects a wide range of uncertainty given the continuation of the general macro environment that we have been operating in. Again, we are pleased with the core engagement trends that we have talked about and the performance improvements that we are delivering for advertisers with our monetization work and our investments in AI. And we expect FX to be less of a headwind to year-over-year growth in Q1 than it was in Q4. But again, we are keeping a close eye on advertising demand and on the ongoing macroeconomic volatility.
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EarningCall_762
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Greetings, and welcome to the W.W. Grainger Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Kyle Bland, Vice President of Investor Relations. Thank you. You may begin. Good morning. Welcome to Grainger's fourth quarter and full year 2022 earnings call. With me are D.G. Macpherson, Chairman and CEO; and Dee Merriwether, Senior Vice President and CFO. As a reminder, some of our comments today may include forward-looking statements. Actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of any non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our Q4 earnings release, both of which are available on our Investor Relations website. This morning's call will focus on fourth quarter and full year 2022 adjusted results, which exclude the gain related to the divestiture of Cromwell's enterprise software business, which was sold in the fourth quarter. We will also share results related to MonotaRO. Please remember that MonotaRO was a public company and follows Japanese GAAP, which differs from U.S. GAAP and is reported in our results 1 month in arrears. As a result, the numbers disclosed will differ somewhat from MonotaRO's public statements. Thanks, Kyle. Good morning and thank you for joining us today. I'm going to discuss some of our key accomplishments from 2022, and then I'll pass it to Dee to walk through the specifics of our fourth quarter performance and our outlook for 2023. Turning to Slide 4. The Grainger Edge framework has been instrumental in guiding our work in 2022. We know that when we live our principles, focus on the things that matter and serve our customers well, we can achieve great things. Our customer base is very broad. I've been with customers that are seeing positive economic signs like aerospace, and I've also been with other customers like some retailers that are seeing some concerning economic signs. But in general, our customers continue to be busy, and Grainger has and will remain the trusted partner of providing value to their operations every day. As we look to 2023 and beyond, we are excited to continue living out the Grainger Edge starting with the customer and serving as their valued partner through any cycle. In 2022, the Grainger team stayed relentlessly focused on what matters most, providing our customers exceptional service, supporting each other and making a positive impact on our communities and the environment. In both models, we made strategic investments to support customers and build the business for the future. This included adding supply chain capacity, including a new bulk warehouse in the U.S. and the start-up of the Anegawa distribution center in Japan, expanding our digital and data capabilities, including progress with our customer and product information systems, in our high-touch business and improved account management tools and our endless assortment model, and executing against our merchandising and marketing initiatives, including temp search and recommendation functionality. During the year, we also continued to strengthen our purpose-driven culture by ensuring Grainger is a place where our team members can be their true cells and have a fulfilling career. We continue to receive external recognition for our workplace culture. But what means the most to me and the rest of the leadership team is the positive feedback from team members about why they choose to build their career at Grainger. And finally, we continue to make progress with our environmental, social and governance objectives, both internally and in supporting our customers to help them achieve their own ESG goals. The result of this focus was an outstanding year of profitable growth, and we are extremely proud of our results, which surpassed our own expectations throughout the year. Turning to Slide 6. We finished the year with over $15.2 billion in sales, up 16.5% on a daily basis or 19.3% in daily constant currency as demand across the business remains strong. In our high-touch business in North America, we focused on our growth engines and achieved approximately 775 basis points of U.S. market outgrowth in 2022, far exceeding our updated target of 400 to 500 basis points. In the endless assortment model, both Zoro and MonotaRO made progress to achieve high-teens growth in local currency and local days. During the year, we drove 215 basis points of gross margin improvement, which, when coupled with 40 basis points of SG&A leverage resulted in 255 basis points of operating margin expansion and a nearly 50% increase in adjusted EPS. We also generated over $1.3 billion in operating cash flow, an increase of 42% over 2021 and returned $949 million to Grainger shareholders through dividends and share repurchases. We accomplished this while also improving our ROIC by 870 basis points to 40.6%. The strong 2022 financials were the result of staying focused throughout the year on what truly matters to our customers, our suppliers and our team members, and we are well positioned to continue this momentum into 2023. Thanks, D.G. Turning to our fourth quarter 2022 results for the total company, it was a solid quarter to finish out this year. And while you'll notice some noise as we walk through the financials, at the end of the day, we delivered great results. Sales growth in the quarter was 13.2% or 17.2% on a daily constant currency basis, which normalizes for the impact of the depreciating yen. Our results this quarter included strong growth in both segments as we continue to execute well against our strategic priorities. This includes approximately 800 basis points of share gain in the U.S. high-touch business and high-teens growth in local currency across endless assortment. Total company gross profit margin in the quarter was 39.6%, expanding 230 basis points over the prior year fourth quarter driven by increases in both segments and including a favorable year-over-year impact from year-end inventory adjustments, which I'll detail in a moment. The strong gross margin performance was partially offset by a decrease in SG&A leverage in the quarter. We continue to invest in our strategic initiatives and also incurred an aggregate $35 million in non-recurring items in the quarter. This includes a one-time bonus to most hourly employees within high touch to recognize their significant contributions towards our 2022 performance. Excluding these one-time non-recurring items, total company SG&A as a percentage of sales would have been roughly flat year-over-year. Despite these non-recurring costs, we still finished the quarter with operating margin up 135 basis points over the prior year period. This profitable growth resulted in diluted EPS of $7.14 for the fourth quarter, representing a 31% increase versus the fourth quarter 2021, another strong quarter of performance. In our High-Touch Solutions segment, we continue to see strong growth with daily sales up 16.8% compared to the fourth quarter of 2021. We saw continued positive growth in all major customer end markets across the segment, including over 20% growth in natural resources, transportation and heavy manufacturing. The daily sales increase in the U.S. of over 17% was fueled by mid-single-digit volume growth and continued strong price realization of over 11% in the quarter. Canadian daily sales were also strong, up 7% or 17.2% in local days in local currency. For the segment, GP margin finished the quarter at 41.9%, achieving 225 basis points of margin expansion. During the quarter, the segment benefited from lower freight costs and continued improvement in product mix. Margin was also favorably impacted by year-end inventory adjustments as we lap the unfavorable LIFO adjustment from the prior year period and also recorded a positive net inventory adjustment in the current year period. The net impact of these inventory adjustments was around 130 basis points for the segment. Price/cost spread in the quarter was also roughly neutral. Moving to SG&A. The segment delevered by about 35 basis points, which was driven by continued investments in marketing and headcount to support growth. In addition, the segment incurred $29 million in non-recurring items in the period, including the one-time bonus payment previously discussed and some accounting true-ups to close the year. While we did modestly delever SG&A, we still expanded operating margins by 190 basis points year-over-year, finishing with a 15.5% operating margin for the segment. This is a strong finish for our High-Touch team. Looking at market outgrowth on Slide 10, we estimate that the U.S. MRO market, including volume and price inflation, grew between 9% and 10%, implying we outpaced the market by roughly 800 basis points in the quarter. This strong finish helped us deliver 775 basis points of market outgrowth for the full year 2022. We continue to have great success in gaining share as we execute against our strategic growth engines in our High-Touch model. We remain confident in our ability to deliver the 400 to 500 basis points of annual outgrowth going forward and are excited to continue partnering with our customers and our suppliers to drive value for all parties each and every day. Moving to our Endless Assortment segment, reported and daily sales increased 0.9% or 18.2% on a daily constant currency basis after normalizing for the significant impact of the depreciating yen. In local currency and local days, MonotaRO achieved 19.4% growth and Zoro U.S. was up 19.5%. Revenue growth continues to be driven by strong new customer acquisition and repeat business for the segment as well as enterprise customer growth at MonotaRO. Gross margin for this segment expanded 170 basis points versus the fourth quarter of 2022 as we saw strong price realization, coupled with continued freight efficiencies as average order values have increased year-over-year. We also benefited from favorable business unit mix as Zoro grew faster than MonotaRO in the quarter. Segment operating margin declined 180 basis points as favorable gross margin was more than offset by heightened SG&A costs. While Zoro's operating margins were roughly flat in the quarter, MonotaRO was impacted by start-up costs at the new Anegawa DC as well as non-recurring asset retirement costs related to the upcoming closure of the Amagasaki facility. As we lap the DC transition costs and ramp a new facility to peak efficiency, we expect profitability will begin trending towards more normal levels as we move through 2023. On Slide 12, we continue to see positive results with our key Endless Assortment operating metrics. Total registered users are tracking nicely with Zoro and MonotaRO combined, up 17% over the prior year. On the right, we show the continued growth of Zoro SKU portfolio, now at over 11 million SKUs. And in 2022, the team successfully delivered on our stated goal to add 2 million SKUs per year over the next several years. In summary, a great job of spending the Endless Assortment flywheel by both Zoro and MonotaRO in 2022. I also want to acknowledge the exciting news that our Zoro U.S. business surpassed $1 billion in annual sales in 2022, the first time they exceeded that threshold in their history. It's been an amazing success story since we launched this business back in 2011, and we remain excited about what Masaya, Kevin and the rest of the Zoro team will accomplish going forward. Moving to our outlook. Despite the economic uncertainty heading into 2023, our high-level earnings algorithm remains intact. Within our High-Touch segment, over the longer-term economic cycle, we target growing 400 to 500 basis points faster than the U.S. MRO market and remain confident in our ability to do so. In our Endless Assortment segment, we expect to continue our track record of strong growth, both in the U.S. and in Japan. At the total company level, we target generally stable gross margin performance over time while sticking to our core pricing tenant, and as we strive to grow SG&A slower than sales to help expand operating margin. Couple this with our balanced and consistent approach to capital allocation, and we can drive attractive returns over the long term as we've done especially well over the last few years. So what does this mean for 2023? At the total company, we expect revenue between $16.2 billion and $16.8 billion, with daily sales growth between 7% and 11%, driven by strong top line performance in both segments. Note that this range is 40 basis points lower on a reported basis when factoring in one less selling day in 2023. Within our High-Touch Solutions segment, we expect daily sales growth between 5% and 9.5%. In the U.S., we're planning for MRO market growth between 1% and 5%, comprised of a volume range of flat to down 3% coupled with price inflation between 4% and 5%, largely representing the wrap of 2022 price increases. On top of a 1% to 5% market, we expect to continue executing against our strategic growth engines to achieve 400 to 500 basis points of U.S. market outgrowth in 2023. In the Endless Assortment segment, we anticipate daily sales to grow between 16% and 18% or roughly 17% to 19% in daily constant currency when factoring in 100 basis points of foreign exchange headwind at the segment level from the Japanese yen. Zoro is anticipated to grow within the segment range, reflecting further SKU expansion and a continued focus on acquiring and retaining high-value business customers. MonotaRO is also expected to grow within the segment range and local currency as they continue to grow with both small businesses and large enterprise customers. Moving to our margin expectations. We expect strong performance in both segments with stable to expanding performance in High-Touch Solutions and improving profitability in Endless Assortment. In the High-Touch Solutions segment, we expect gross profit in the year to be flat to slightly down as we anticipate some of the price/cost favorability experienced in 2022 to unwind as we trend back to neutrality over the long term. We expect this headwind will be partially offset by freight favorability given the improvement in container cost and the current outlook for diesel prices. On the SG&A side, we will continue to make incremental investments toward our strategic initiatives as we fuel our growth algorithm. We will also have some tailwinds as we lap the non-recurring items that hit in the fourth quarter and a certain expenses like variable compensation reset in the new year. Overall, in total, we expect SG&A leverage to be favorable, and therefore, when combined with our top line growth expectations, we anticipate operating margin of 16.3% to 16.8% in High-Touch for 2023. In the Endless Assortment segment, we expect MonotaRO's operating margins to improve year-over-year as they continue to benefit from favorable freight efficiencies and strong price realization. At Zoro, we expect operating margins to continue to ramp as they gain leverage on their cost base. Overall, this represents operating margin for the segment between 8.6% and 9%, an improvement of 60 to 100 basis points compared to 2022. Growing this up for total company, we expect to gain SG&A leverage of 30 to 60 basis points to offset a modest decline in gross margin, resulting in operating margin between 14.4% and 14.9% for the full year. Turning now to capital allocation, we expect the business will continue to generate strong cash flow in the year with an expected range of $1.45 billion to $1.65 billion, an increase of over $215 million at the midpoint compared to 2022. We expect to use this cash to invest in the business and return capital to shareholders. As discussed at our Investor Day in September, we plan to invest in our DC network over the next few years to support strong growth and to maintain industry-leading service levels. With this, we anticipate capital spending in the range of $450 million to $525 million in 2023. This includes DC capacity investments to expand our service advantage in the U.S. as well as the start of a new DC project in Tokyo. We are also continuing to invest in technology to further our customer and product information advantage and we'll continue spending on accretive ESG investment across the portfolio. We expect to continue to return a significant amount of cash to shareholders in line with our historical approach. This will include share repurchases to the tune of $550 million to $700 million and a strong cash dividend, which we've increased consistently for the past 51 years and expect to do so again here in 2023. Summarizing the high-level points on Slide 17, you can see these revenue, profitability and capital allocation expectations translate to adjusted EPS of $32 to $34.50 per share, a 7.9 to 16.3 percentage increase over 2022, and nearly double our pre-pandemic 2019 adjusted EPS of $17.29. We are off to a really strong start in January with preliminary total company daily sales of 16% or around 19% in daily constant currency. We do expect growth rates will be stronger in the first half as results will benefit from a more pronounced price wrap. In the second half, we will face tougher comps and have modeled a slower economic cycle. On profitability, while every year is different, we do expect gross margins will generally follow our traditional seasonal pattern with a high water mark in the first quarter and sequential declines in the second and third quarters. We anticipate SG&A will be reasonably consistent over the course of the year. Thank you, Dee. Before I open it up for questions, I want to first and foremost, thank the Grainger team as well as our customers and supplier partners who have helped to drive such a successful year. We truly kept the world working in 2022 and in turn achieved outstanding results for the year, both financially and operationally. I am excited for what is to come in 2023 and remain confident in Grainger's ability to create tangible value, the liver follows experience to drive profitable growth over the long haul. With our team's continued commitment to focusing on the things that matter, we are well poised to deliver in any macro environment. Thank you. And at this time, we will conduct a question-and-answer session. Please limit yourself to one question and one follow-up question. [Operator Instructions] Our first question comes from Tommy Moll with Stephens. Please state your question. I'll ask two, both on High-Touch. Let's start on pricing there. It looks like for 2023, four to five points of growth on price. Dee, I think you heard -- I think I heard you say that most, but maybe not all of that is a wrap, but if you could comment there on the wrap versus any new initiatives? And then also just a related point, are there any areas of pricing pressure? That's something that's been picked up in the marketplace this quarter elsewhere. And I just wonder if you've seen any of that in your business. So I'll start with the first part and then maybe D.G. can add in a little bit on what he's hearing from -- what he's hearing from some customers on the visit. So, yes, when we look at the market outlook, it includes both price and volume. And so the sum of that, we believe, will be somewhere in the range of 1% to 5% of the total market. We believe that volume will be down 3% to flat. And as you know, at price, up 4% to up 5%, we have more visibility into our pricing than anyone. And so when we look at price, we are also taking into account our wrap, which is basically the price increases that we took in 2022 and their full impact to 2023. So, we still see a little bit more price coming our way. So, it takes that three-ish percent up to about 4% to 5% from for the price outlook. Yes. Tommy, I would say most of the -- if there's deflationary pressure, it's mostly due to commodities. So there are -- we have -- we've taken prices up and down across the assortment and the ones that are down are almost always very commodity intensive. So they're very steel-intensive or very -- some specific commodity intensive. So, we do see -- we do see that broad market pressure. We don't see that much. It's more specific commodities that we're seeing right now. That's helpful. And then I wanted to follow up on the volume -- the volume outlook for High-Touch flat to down three. And D.G., you mentioned at least one area of strength in aero and one area of relative weakness in retail. But I'm just curious, as you roll it all up into that full year outlook, are there other areas of weakness you're already seeing? Or is it more just potentially some conservatism around the back half? Anything you could provide there would be helpful. Yes. We're really sticking to what the market projections are at this point. In terms of -- you heard the January results. We aren't seeing a lot of weakness to be fair at this point. We do expect in the back half, there to be more challenges from a volume perspective. What I would say is every customer we have has a COVID-fueled story about what's happened to their volume over the past few years and where they've been determines whether they're facing pressures now or whether they're seeing optimism. So obviously, with aerospace, they -- we shut down the airlines for a long time and they now have orders. So they're starting to build up. And that's going to take a couple more years to actually get the full speed, we think, with aerospace. With some, they may have forward loaded some of their volume because they were selling things that were very important during the pandemic, and now they're faced with situations where things are slowing down. So, I would say every customer has their own story, net-net, that we're not seeing any real softness as of yet, and that's showing in the numbers. Nice quarter. I wanted to start with a couple of questions on price cost. Just wanted to dig in a little bit more. So last quarter, I think price cost held by 60 basis points. And then in the fourth quarter, it was flat. I'm just curious, why does it move around so much. And then I think you're managing the price cost being neutral. But typically in the past, when there's a lot of inflation, right, your gross margins would expand. I'm curious how you're sort of managing to that price cost neutral. Well, if you're specifically focused on GP in the U.S., our gross margins have expanded, if you look over a longer period of time here. And as it relates to price cost, just want to reiterate, when we talk about neutrality, we do talk about that over time. And we have continued to speak about the fact that price cost just like GP is lumpy. We have a cost cycle, which we have traditionally had for years that really didn't hold last year because of how fast cost inflation was coming in to suppliers. So that makes the cost piece of that a little bit lumpier. And then if you recall, we have the opportunity based upon our percentage of revenue, highly contracted. We have the right to introduce price at different periods during the time. We also have web price, which is also a good portion of our business, and we can pass price on web at any particular time. So that is the lumpiness. It's the timing of when we can actually price plus the timing of when cost actually comes through. And that's why our focus is doing that over a period of time and when it makes sense, both for our supply base as well as for our customer base. Okay. That makes sense. And then my follow-up, I think you had 9% price mix in '22. And my question is, is that 9% also included in your definition of the MRO market? And really what I'm getting at is, did Grainger have more price in '22 than the market? And if so, why? Yes. Maybe I'll cover that. First of all, I think that the way you measure price inflation is probably not common across everybody. So you dive into the details that we don't really know how others are talking about price inflation, so we wouldn't comment on that. I think the thing I would point to is, to Dee's point, we generally think of price as pricing to the market, and we are very confident that what we have now is market competitive, and we look at that very, very, very closely, given our history, you might understand why we would do that. And so we are more wired on how we price competitive. As you said, there's really a lot of lumpiness. We may have taken price later than others or some may have taken earlier who knows. But the reality is that we are very competitive now and feel like we're in a good position on pricing. Could we touch on freight for a second? It looked like that rate efficiencies helped you on price cost, if I read that correctly, but it still sounds like there's freight inflation. So where does that stand today? Yes. So our price cost does not include freight the way we define it for you. So freight is a separate issue. Obviously, we consider freight in everything we do. Like everybody, we saw huge freight increases during 2021 and 2022. That has certainly moderated. It's still above 2019 levels fairly substantially, but we have seen that come down quite a bit. So -- and we talked about for this year, we expect it to be a benefit in terms of some of the moderating prices. And some of that is sort of obvious places the containers from overseas or a lot cheaper than they were six months ago, quite a bit. They're still relatively higher than 2019, but getting closer. Other parts of the market are still tight. So net-net, we still feel like it will be a small benefit this year for sure. That's helpful. And then a follow-up on the supply chain. Just where does it stand today in efficiencies? What kind of lead times are you seeing and expectations about returning to normal? Yes. I mean, it's a great question. So what I would say is that -- from our perspective, once we have the product to -- when customers get it, that part of the supply chain is all good. We were basically clean every night, barring a storm in Dallas or something that we've seen in the last couple of days where people won't pick up. But in general, the supply chain on the outbound side, both in our buildings and then our freight partners is very, very good. On the inbound side, we still have some elongated supply chains. It's gotten much better in the past four or five months, and we expect to continue to get better. At normal, I think I'd probably say in quotes now. I do expect it to get closer to 2019 lead times, but maybe not quite all the way there as the year progresses, but we do expect it to continue to get better. And congrats on a really great year. Market outgrowth for the U.S. High-Touch business has continued to improve despite presumably better product availability across your smaller competitors. So it seems like the strategic initiatives are certainly taking hold. So I guess my question with that, does this change the way you think about the 400 to 500 basis points of outgrowth? And should we think about price as part of that outgrowth? It sounds like a lot of the questioning seems to suggest that you guys are overpricing the market. But it just feels like with the digital divide we're seeing and the increased importance that brings to customers, I would suspect you guys should be able to outprice the smaller regional competitors who do not offer that. Yes. I mean I guess I would say just from a core sort of principle for us, we think of outgrowth in terms of volume, we expect price to be relatively neutral. You're right, we make it modest benefits over time that can happen. But certainly, what we're talking about is volume outgrowth. The position from last year, certainly, we got some benefit from supply chain fairly modest. And what we do is we sort of decouple that analytically and look at what our initiatives are doing, and that's how we came up with the 400 to 500 basis point target at the Analyst Day, we're still sticking with that. I mean, obviously, we've done a little better than that. But for now, we're not changing that. That's our expectation going forward. And then for my follow-up, I wanted to talk about the High-Touch favorable mix during the quarter, typically mixed screens as transitory. But on the last call, the Company talked about the mix benefit coming from an increased focus on technical products. And just given the strategic nature of that, it sounds more structural, so just hoping for more color on how to think about mix going forward. Yes. So we have a favorable mix. Mix for us generally means product mix here. And so you can imagine during 2020 and 2021, in particular, we had a very negative mix because we had -- we were selling any mask in the world we could find, we're selling it, and that is a lower margin product. I would say we are more back to normal now in terms of the industrial products that we have typically sold, and that's been a favorable mix for us. And certainly, we are working hard to make sure that we can compete with technical products or industrial products, and that will be a focus for us going forward. But most of the mix benefit has been getting -- really getting back to normal is the way I describe it. D.G., are you guys still experiencing any kind of labor issues either at the factory level or otherwise? Just thinking about kind of the mix signals we're seeing in the labor market. You still got wage inflation at the lower end and seemingly a lot of competition and warehouses and factories and whatnot, but just curious what -- how that translates for you guys. Yes. Well, I mean -- so a couple of things. One is we certainly, we had wage labor challenges 18 months ago, a year ago. We have made adjustments in wages for our team members. I would say we are in a much, much better position. Our churn rates are back to normal basically in most parts of the business. And we are in a much more stable staffing pattern than we've been. And I mentioned some of the outbound, our DCs are performing well. Our call centers are performing well. We don't have as much churn -- near as much churn as we did at the peak, and we're really close to back to normal at this point. That's helpful. And just switching gears, I guess, as a consumer when you get a lot of inflation, you see people switching from the premium product to the private label brand. Are you seeing that kind of trend in your business where customers that might want to prefer your Grainger brand over some of the marquee brands, if you will. You know, not. We aren't seeing a big shift there. I would say that most customers, when they're buying industrial products, they need the product for the application they're using it for. And so if our private brand works that we use it and they always have. But generally, we aren't seeing certainly a down shift to lower cost products. That's not what we're seeing right now. So I think last quarter, another topic that came into the improved mix discussion for HTS was the result of the merchandising initiatives. So drilling into that, is that trend kind of in the input there full throttle now or still ramping up? And is that kind of expected to be a good guide driver for an indefinite number of years? Yes, it's the latter, Chris. So we've -- we started this initiative three or four years ago. We've worked through sort of some initial category reviews. We keep getting better at them. What we've discovered is that we've learned a ton as we've gone, and we're just getting better and better at it and there's still a lot of improvement to be made. It will be a consistent benefit for us, we believe, going forward for the foreseeable future, sort of that midterm three- to five-year time frame. We still see a lot of benefit from improving the way we merge. And it's core to what we do. I mean helping customers have confidence that they found the right product, it's kind of what we do. So getting better at that seems to have a good result, and we're going to continue to really push hard on that. No. We are -- I would say we are agnostic to what the -- not agnostic to the economics, but agnostic to sort of identifying higher-value products. We're trying to make it super easy for customers to find what they need. And so it's really all about, do we have the right assortment, can we present it in a way that makes it really easy for customers to find so they can have a lot of confidence that they're getting the product that they need to use for the right application. First off, I'm interested in understanding how you capture a LIFO benefit when both inventories and the LIFO reserve are up quarter-to-quarter and year-to-year. I just if you could go through the mechanics of that, I'd appreciate it. Sure, sure, Dave. So I'll go back to last year, you just start with that because there was two things. We're lapping last year's -- it was unfavorable last year, favorably this year adjustment. And if you recall last year, we had a sharp increase in cost, and then we had an outsized amount of inventory kind of get delivered in the fourth quarter. And that combination of those two factors happening at the same time, resulted in us recording a meaningful LIFO adjustment to our fourth quarter adjustments in 2021. Now looking at that and understanding that we were still in an inflationary period as it relates to cost and we saw costs still coming in. From our suppliers, we worked on improving our processes, tightening our processes, making sure that we were booking entries and looking at the process, not just from the financials, but with the chain leaders to ensure our inventory valuation was staying up to par as we move through the year. So I feel like we did a much better job there. However, when you look at the inventory that was sold through in the last quarter of the year, it required us to take a favorable LIFO adjustment to correct for that. Because if something has an increase for those that don't know, something has an increase in the quarter, it haven't sold it or the price change in that quarter from when it changed early in the year, the LIFO adjustment causes you to refactor all of those sales to the latest cost. So that adjustment was favorable for us. The combination of those two year-over-year in Q4 resulted in about 130 basis points, a net 130 basis point year-over-year impact to GP for the High-Touch business. Okay. And the second, the share gains that you've been seeing has clearly been terrific. Could you discuss the balance that you're seeing between new customer adds and selling more to existing customers? I would imagine there's a difference between High-Touch and Endless Assortment. But could you just give us some color on that. Yes. I mean in High-Touch, so I would just say that in High-Touch that the vast majority of our share gain is the existing customers. The reality is that the Grainger brand sells something to most large and midsized customers' business customers in a year. And so a vast majority of those are -- the share gains we're seeing are actually share of wallet as opposed to new customer acquisitions. In the Endless Assortment, it's more balanced. We're seeing in Japan, we're seeing a mix of new customers, but also significant growth with existing customers. And at Zoro, we're seeing nice retention rates. So we are seeing more balance between new customer acquisition and volume and existing customer volume in the Endless assortment model. I think the midpoint of guide implies SG&A leverage of, call it, high teens for 2023 at the midpoint. Just remind me how much of the SG&A spend is fixed versus variable at this point? And should we think about high teens as kind of the right way for SG&A leverage to progress if sales stay at this at or above mid-single-digit growth going forward? So the -- if you're looking at our guide, the guide is implying 30 to 60 basis points of SG&A leverage for next year. And as I think about that, let's remember a couple of things. We're continuing to invest in demand generation, and we had some one-time costs this year that we don't expect to impact us next year. And I will say the -- one of the last things to consider is going into a new year, we get to reset our variable cost like variable costs such as variable compensation back to a 100% of our plan. And then we have some modest productivity that we built into the plan because we focus our organization on looking at driving standard work automation and productivity every day. So, we don't have to have huge events. We do that in times when things are going really well, and we can scale and also when things are tightening up. So, those are the numbers that I had related to the type of SG&A leverage we're looking to gain. And remember, that's in the midst of us continuing to invest. That's helpful. For my follow-up here, it does look like inventories took a decent step up from the third quarter to fourth quarter, which makes sense given the sales guide increase. Can you just provide some color on what's embedded in the operating cash guide for how inventories and working capital trend throughout the year? So with that investment, it also includes some investments in DC capacity. So we expect to continue to build inventory as we stand up some of those new buildings. We do expect to see some slight improvement in working capital as far as it is not diminishing as much as it has in the last couple of years because we were investing much more significantly in inventory, say, last year, and we're starting to see some improvement and our accounts receivable execution as well. I guess looking at the margin guide for analyst assortment, pretty impressive expansion in '23 expected here. How do we think about kind of the long-term path towards that 11% margin guide? I mean does the DC investment in Tokyo, what else should we be thinking about in terms of cost and investments in '24 and beyond maybe as we think about Endless Assortment profitability over time here? Yes. So I mean the two biggest portions of the Endless Assortment are on our Zoro U.S. and MonotaRO. MonotaRO, their profitability in the last year was deflated by operating two buildings at once in the in the Osaka area. That goes away. So they'll see some improvement next year. They will be investing in a building in the Tokyo region in the next several years. But generally, I think the pattern for them will be getting closer back to where they were prior to the dual DC Osaka situation. So, we would expect them to improve over time. And then we talked a lot about Zoro U.S. We expect that to get a kind of high single-digit operating margins over the next several years. And so that combination gets you to sort of that long-term guidance. Okay. And just to put a finer point on that last piece about Tokyo. I mean, will that have a similar impact as the stand of Osaka did in terms of operating two facilities that once whenever that investment comes through? So, we expect -- so, the Anegawa DC that went up and getting out of Amagasaki in 2023, the first half, they will still be incurring some costs as well as wrapping up to their full efficiency. In the midst of that, they're also launching Phase 2 of the Anegawa DC, which has additional cost -- so our expectation is that they will end the year in 2023 or exit that year with op margin rate similar to what you saw prior to both product. I think Chris was asking a different question, which you were asking about Tokyo, whether it's going to be a similar issue with Tokyo when that comes on board. The answer is who knows. It depends on the pattern of the timing and when things open. It may or may not be as impactful, but we'll comment on that as we get closer to that's three or four years out so. A quick one, I think you're expecting on gross margin for the fourth quarter, like 38% to 34%. Can you just walk from what you were expecting to that 39.6% that you reported kind of like what surprised you? You called out LIFO benefit, but that's like a year-over-year impact. So I'm not sure if that's like the entire bridge to that 39.6%. I know, it's 1/3 year-over-year, but I'm not sure that that's like the difference in kind of where you came in at versus what you expected. So maybe color on that. Sure. So admittedly, we did end stronger than what we expected as we continue to execute well. And a number of things as you kind of note went our way. So we talked about one of them earlier. We got some tailwind from freight efficiencies with both fuel and container costs coming down over the last couple of months. In addition to that, we did get some price/cost timing benefits as we look to implement some web prices, we implemented some web prices in the quarter ahead of our January price increases, so that helped us a bit. And then if you break away the inventory valuation adjustment this year from what we saw last year that was more something that wasn't anticipated. So that inventory valuation adjustment that we booked in the quarter that was favorable, that was the third piece. Great. And then my follow-up is just on -- it's also on gross margin, just to guide for '23. Just wondering what the assumptions are kind of behind that modest contraction for some of these moving parts? Like is it price/cost negative which is offset by freight kind of those wash out and then kind of the decline is like just kind of segment mix related? Or is there anything in there for kind of the inventory adjustment dynamics to think about? Just wondering that year-over-year guide, how to think about the moving parts for that. No, I think you said it exactly right. I can repeat what you said, but we have some price/cost benefit timing. Some of that may fall away. We may have some freight efficiencies. Those may or may not cover that completely up. And then you've got the business unit mix between Endless Assortment and High-Touch and the fact that Endless Assortment is going to grow faster. So it has a negative impact. And we have reached the end of our question-and-answer session today. I will now turn the call over to D.G. Macpherson for closing remarks. Yes. Thanks for joining us today. I really appreciate you jumping on the call. Hopefully, you get a sense that we feel pretty good about the path we're on. We've had at a really good year, but we're more excited about the future and driving things to help our customers operate better and help them succeed. So with that, I'll just say thanks for joining again, and hope you stay safe. If you're going to get cold, I think, in the Northeast. So, hopefully, you don't ice up too much. That does affect us too. But have a great rest of the week. Thank you. And this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.
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EarningCall_763
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Good day, and welcome to the Accuray Second Quarter Fiscal 2023 Financial Results. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jesse Chew, Senior Vice President, General Counsel and Corporate Secretary. Please go ahead. Thank you, operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the second quarter of fiscal year 2023 which ended December 31, 2022. During our call this afternoon, management will review recent corporate developments. Joining us on today's call are Suzanne Winter, Accuray's President and Chief Executive Officer; and Ali Pervaiz, Accuray's Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward-looking statements. Actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause these results to differ materially are set forth in the press release we issued just after the market closed this afternoon as well as in our filings with the Securities and Exchange Commission. The forward-looking statements on this call are based on information available to us at today's date and we assume no obligation to update any forward-looking statements as a result of new information or future events, except to the extent required by applicable securities laws. Accordingly, you should not put undue reliance on any forward-looking statements. As a few house Keeping items for today's call. First, during the Q&A session, we request that participants limit themselves to 2 questions and then requeue with any follow-ups. Second, all references we make to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our second quarter refer to our fiscal second quarter ended December 31, 2022. Additionally, there will be a supplemental slide deck that accompany this call which can be accessed by going directly to Accuray's investor page at investors.accuray.com. Thank you, Jesse. Good afternoon, and thank you for joining the call. I am very pleased with our excellent performance in the second quarter and our position going into the second half of the fiscal year. During the quarter, we delivered strong revenue and EBITDA performance, delivered a robust book of orders across all regions and made significant progress on our FY '23 strategic agenda of driving above-market revenue, margin expansion and profitability initiatives and the formation of strategic partnerships that can create value for all stakeholders. We are doing this while navigating persistent macroeconomic and foreign exchange headwinds which Ali will elaborate on later in the call. I'd like to start by expressing my thanks to the Accuray team that continues to deliver new levels of performance. While we have seen some improvements in the supply chain environment over the course of the past year, our teams continue to battle and ride the challenge every day, driven by accountability to Accuray's higher purpose of ensuring that our customers have access to the highest precision radiotherapy tools available, so they can provide advanced cancer care to improve lives. Over this past year, we have taken actions to improve the flexibility of our supply chain and customer-facing teams, so that we will fulfill new demand as well as maintain smooth operations and satisfaction in our installed base of customers. These initiatives have put Accuray in a better position to manage the ongoing headwinds with teams performing at the highest level. This is why I'm especially proud of a couple of key accomplishments within the quarter. The first, we delivered a record system shipments in the second quarter with 29 new systems delivered, which represents a historical milestone for the company. Second, we are proud to be recognized by the 2022 IMV service track report for achieving best in-service in radiation oncology based on IMV's annual survey of new radiation oncology professionals. These are shining examples of the talent, agility and dedication of our global Accuray team. We continue to make significant progress in advancing our innovation-driven growth strategy. Our product pipeline is the strongest in the company's history and we continue to focus on solving clinical challenges and enhancing the value of our portfolio. I am very pleased with the Q2 orders performance, which included 34 new systems and represents 13% sequential orders dollar growth. These results reflect both growing customer demand for Accuray Solutions and to the positive impact from our commercial initiatives. We believe these factors will continue to grow Accuray's revenue faster than our addressable market for FY '23 and beyond. Sharing key highlights in the regions, the Americas region delivered another quarter of outstanding order performance with 92% year-over-year growth driven by the adoption of our latest innovations. ClearRT, the industry's only helical CT imaging technology and Synchrony, Accuray's exclusive real-time adaptive radiotherapy delivery are capabilities that are differentiated and driving win rates. In the U.S., in Q2, we saw that 100% of Radixact orders included the options for ClearRT and Synchrony, up from 80% in Q1. In Japan, Accuray has gained the number 2 market share position. And in Q2, we continued our strong competitive win rates. Nearly 50% of Q2 orders in Japan were replacements of the competitors' aged installed base. Additionally, the Japan team won a 7 Radixact systems public tender in a highly competitive battle against the number 1 market share leader. Our Japan team continues to drive share gain in this largely replacement market. We also had strategic wins in the EIMEA region. With a competitive replacement Radixact win in Belgium and [indiscernible] University Hospital. Additionally, we celebrated a second CyberKnife system win and strategic endorsement at the prestigious Euro Radio Surgery Center in Munich. Dr. Alexander Muacevic, Director of the facility is quoted saying, he believes that CyberKnife is the number 1 technology for delivering radiosurgery and purchased the additional CyberKnife, so they could accommodate the growing patient demand for ultraprecise radiosurgical care. Turning to China. Our joint venture continues to be a long-term value driver for Accuray and we continue to dominate market share in the premier of Type A radiotherapy market segment with greater than 75% market share. In Type B, we advanced our progress completing our NMPA regulatory submission of Tomo C. Tomo C will be our domestic China made JV product that will compete in the Type B segment, which is the largest segment of the China market, with an estimated annual market potential of $600 million. We expect Accuray's premier brand reputation and awareness in the Type A segment will also help drive success in share gain of Tomo C in the Type B value segment upon introduction. Further, we believe our success with the Tomo C product in China will have translation potential globally as we enter new geographies with a value segment product allowing Accuray to compete in the large $1.3 billion annual global value market segment. Additionally, in November, the Ministry of Health Central bidding process for Type A licenses resumed after a delay due to COVID lockdown. 18 Accuray systems were awarded to customers during the central bidding process and are expected to convert to revenue over the next few quarters. Despite the impact of challenges of the COVID lockdown in China, demand for radiotherapy, system installation and training remains very high. We saw this firsthand at Accuray's 10th annual CyberKnife users meeting in November, where training participation rates were tremendous with over 100 participants attending in person and 850 participants joining the training online. As we continue to accelerate our top line through growth initiatives, we are equally laser-focused on profitability. We made solid progress on our margin and profitability expansion plans and saw early indicators of a positive impact to our service margins in Q2, an area where we think we have tremendous opportunity. As we have mentioned on recent calls, the leadership team and I are focused on 3 main pillars: pricing discipline in our commercial efforts, including new value-added service offerings; reducing product and service costs through efficiencies; and optimizing operating expenses, which will have a meaningful impact in the midterm. Finally, establishing strategic partnerships are essential to our growth agenda, allowing us to provide best-in-class solutions and expand the scope of our commercial access. In Q2, we advanced key strategic partnerships, most recently with C-RAD, introducing the VitalHold breast package that will allow Accuray to offer the most comprehensive breast package in the marketplace. RaySearch also continues to be a very strong partner for us in treatment planning solutions, oncology information systems and with the development of Artemis adaptive radiotherapy that combines ClearRT imaging and RaySearch's industry-leading digital technology and auto contrary algorithms. This solution will further differentiate Accuray as the only company that offers a comprehensive adaptive radiotherapy solution that can correct for patient changes both during treatment with Synchrony and between treatments with Artemis, both with precision, speed and patient experience. Finally, we're very excited to have announced a commercial partnership with GE Healthcare. This partnership pairs 2 industry technology leaders together with the aligned goal of providing personalized ultraprecision solutions throughout the care continuum, from diagnosis to treatment to survivorship. Our commercial teams are engaged leveraging our respective strengths and developing customer pipeline. We believe the GE partnership will be a powerful value driver for patients, providers and shareholders. Thank you, Suzanne and good afternoon, everyone. I'd like to begin by thanking our global class functional team to execute with the intensity to deliver a strong second quarter of fiscal 2023 despite ongoing macroeconomic challenges, including supply chain shortages, global inflationary pressure and FX headwinds in our non-U.S. markets. Net revenue for the second quarter was $114.8 million which was down 1% compared to the prior fiscal year, primarily due to supply chain constraints and $6.1 million of foreign exchange headwinds. Net revenue on a constant currency basis was a $120.9 million which represents a 4% increase versus the same period in the prior fiscal year. Product revenue for the second quarter was $63.3 million which was up 4% from the prior year and up 8% after adjusting for the impact of FX. As Suzanne mentioned, this product revenue represented 29 systems upgrades which is a record number of system shipments in the company's history. It's important to note that this was achieved while continuing to navigate unprecedented supply chain issues which really speaks to the hard work of our cross-functional teams. Service revenue for the quarter was $51.5 million which was down 7% from prior year but flat once adjusted for the negative impact of FX which was $4.1 million. Gross orders for the second quarter were $79 million which is an increase of 13% sequentially and a decrease of 7% from the same period in the prior fiscal year and represented a healthy book-to-bill ratio of over 1.2. As mentioned in prior calls, we believe the book-to-bill ratio is the right metric to monitor to ensure healthy growth for our backlog and to focus our teams to book orders that will convert to revenue within 30 months. Gross orders on a constant currency basis were $82.6 million. Moving to backlog. We ended the second quarter with a backlog of approximately $515 million which is 11.4% lower than prior year due to $41.4 million of orders that aged beyond 30 months within the quarter, mainly driven by customer installation timelines. We had no order cancellations within the quarter. As discussed in prior quarters, our global commercial teams continue to be focused on converting all orders regardless of age to revenue. In Q2, this resulted in $6.5 million of orders converting to revenue within the quarter that had previously aged out. Our overall gross margin for the quarter was 37.4% compared to 36.7% in the prior year which is an increase of 70 basis points despite the FX headwinds. This showcases our focus on margin expansion through pricing and cost discipline is starting to take shape. Operating expenses in the second quarter were $40.3 million which included nonrecurring charges of $1.9 million for restructuring charges and $0.5 million of ERP and ERP-related expenditures compared to $38.6 million in the second quarter of prior fiscal year. Excluding nonrecurring charges, total operating expenses were down 2% compared to the same period in the prior year, illustrating good cost control as we continue to push our teams to focus on return on investment. Operating income for the quarter was $2.7 million compared to $4.1 million from the prior year. Adjusted EBITDA for the quarter was $8.5 million compared to $6.8 million in the prior year which represents a 24% growth year-over-year despite the FX headwinds which impacted our top line by $6.1 million. The reconciliation between GAAP net income and adjusted EBITDA is described in our earnings release issued today. Turning to the balance sheet. Total cash, cash equivalents and short-term restricted cash amounted to $68 million compared to $81 million at the end of last quarter. Net accounts receivable were $89 million, up $12 million from last quarter as we had quite a few shipments in the last month of the quarter. Our net inventory balance was $156 million, up $3 million from prior quarter, primarily due to 3 units in finished goods which we expect to ship out to customer sites in early Q3. Although we continue to battle supply chain constraints, we are taking firm actions to bring our inventory back to healthier levels in the coming quarters to optimize our cash and working capital. While we delivered strong results in Q2 and continue to navigate through supply chain constraints, the headwinds associated with foreign exchange have had a $12 million impact on our top line in the first half of fiscal 2023. Currently, we are reiterating our full year guidance with revenue in the range of $447 million to $455 million and EBITDA target range of $26 million to $30 million. We will continue to closely monitor the impact of FX and supply chain as we enter the second half of our fiscal year. Thank you, Ali. In summary, I'd like to again thank our teams for their unwavering support of our customers so they can provide the highest level of care to patients. While we expect to continue to navigate the uncertainty of the macroeconomic conditions we've seen over the last year, we remain encouraged by continued customer demand for Accuray technologies and our robust product pipeline as well as market trends that favor Accuray technology and where we are positioned to win and take share. As an organization, we are strengthening our fundamentals, advancing multiple growth catalysts and creating new strategic partnerships. Congrats on a very nice quarter. I wanted to start here and try to understand a little bit more about what drove that record product revenue, the record shipments that you mentioned in the quarter. Was this a bit of a backlog that had been building up in some geographies? What really drove kind of the strength in that metric this quarter? Hi, Marie. Thank you for the question. Yes, I would say our revenue was really driven by 2 regions, the EIMEA region as well as the Japan region. But we did start to see some recovery in China as well. And so again, really working through our supply chain to be able to manufacture as much product as possible and be able to fulfill that demand. Our customer demand continues to be very, very strong. And again, working through our supply chain to make sure that we can fulfill demand. It was at the top of our priority list. And while we're talking about supply chain challenges, I know you're navigating quite well right now. But what are the specific components or issues you're dealing with there? And I guess, as a partial follow-up on China, are you expecting any impact in the fiscal third quarter from sort of the reopening, the Lunar New Year, any of the COVID dynamics around that quarter? Yes, in general, just from a supply chain standpoint, I would think that we are seeing over the course of this past year, some easing of supply chain. And certainly, from our standpoint, instead of dealing with 2 dozen supply chain vendor issues, I think we've narrowed it down to less than half a dozen. Now those half a dozen -- those challenges are still real. We're working very closely with those suppliers. We are micromanaging those operations. We're helping to source materials. We're building in the flexibility, I think, overall in our supply chain. We're redesigning where we need to. At the same time, it continues to be a headwind and we battle it every single day. In terms of China, I would say that we are seeing some recovery with opening up - since the COVID lockdown, our orders have been very strong in the first half. So that is a good indication, I think, of things starting to turn in China. And so we are expecting that the second half of the year, we're going to see some recovery. I wanted to just start off and ask about the Americas order growth, the big performance for that region. And I wanted to just get a reminder or better understand the strategic initiatives that are in place to kind of drive growth of orders in the Americas region. I know you have the technology portfolio that's in play, but any other strategic initiatives that were successful and that could continue through the remainder of fiscal '23 and beyond? Yes, Josh. Thanks for the question. The Americas region is obviously the largest health care market globally. We have doubled down in terms of our investment in commercial organization and initiatives. One of the big growth catalyst is the very large replacement market. This is largely a replacement market in the U.S. It's a mature market. We have an older aged installed base. I would say our sales teams are firmly focused on ensuring customer satisfaction within that installed base, but also encouraging upgrading those systems through trade-in, trade-up to our latest performance capabilities, so that they can start to provide advanced care like ultra-hypofractionation and in CyberKnife radiosurgical capabilities. So we do expect to continue to see the return on those investments and that focus. And I wanted to ask about the Type A wins in China and the revenue conversion cycle here. It seems like that's a great revenue opportunity in the back half and in the early fiscal '24. But one, just any more details you can share just on that the November bidding process? And just within the Type A award channel, just what should we expect next? Is there -- are there more rounds to go? And is there more opportunity for Accuray? Yes. Again, thanks for that question. Yes. No, the Type A, we were very encouraged to see the bidding, the central bidding process resumed after a period of time during COVID, where it was delayed. And so this is very encouraging and I think it's a good sign of recovery in China. This is -- the bidding process is the next step to being -- achieving the funding for the systems and beginning of the installation. And so for us, it's very strategic. It is the opportunity to place 18 more systems into the China market which, again, just is that critical mass of premier systems at premier institutions within the market that we think will drive the branding for Accuray within that subregion. No, we do expect there'll be additional bidding -- central bidding processes that will happen throughout the year. We don't have any visibility at this time into timing. And certainly, there's a new 5-year plan that will be announced that will get a better indication, I think, of Type A and Type B market sizes. If I could just sneak one more in, just while we're on China, just seems like everything you downloaded today on the progress with the regulatory submission and some of the completion of production and testing at the manufacturing facility, things are on track. But should we still be thinking about a fiscal '24 kind of approval and launch? Maybe just to refresh any timelines you'd have us thinking about for the Tomo C through the JV in China? Yes. I think no additional information from what we've discussed in the past. A typical regulatory cycle is about 12 months. And again, we can never predict the regulatory cycle. But if we assume that it will be typical, yes, we have -- we're still holding to potential impact in the back half of FY '24 from an approval for the Tomo C product. Congrats on a strong quarter. Maybe just first off, you talked about the Munich Center, adding the second CyberKnife. Just curious if you could just remind us how often you see that dynamic of centers adding multiple iterate systems. Yes, that's a great question. I think we're seeing it more and more. We're also seeing centers that are starting to get the combination of the CyberKnife and the Radixact. And I think that, that is a commercial strategy that our teams are showing how our sites can really build up their patient referrals, how they can build their business by having this combination of a radiosurgery system in the CyberKnife but also a workhorse system like the Radixact. So I think we're going to continue to see it more and more. But we're absolutely thrilled with the center in Munich, primarily because they're very well known for radiosurgery. The first system was really bought for intracranial type of applications and he is buying the second system now for more extra cranial more full body SBRT type of applications. And so again, we think it's a strong endorsement and a site that we can use for strategic reference. Maybe just one follow-up here. So regarding kind of the customer installation delays or the aged outs. Just curious if there's any updated insight on the construction environment, whether that's related to worker shortages or supply issues? Just any update there? Yes. No, I think that's a great question. I would say the aged out is really driven largely by systems that we had in the backlog that are in Russia that have aged out, still orders that we hope will go to installation. But because of the timing and what's going on there, it have aged out. Also, I think that in general, COVID had an impact on the length of time for some of our backlog. We are firmly focused on our new orders, trying to put it through the lengths of orders that we believe will go to installation within 30 months so that we don't have this sort of dynamic. But I would say, in general, we're not seeing increased length of time for installations. And I think it's very region independent. But there's some good research that is out there on the capital equipment spend. And I think that there's a couple of key catalysts. One, radiation oncology is a revenue generator for the hospital. So it's well positioned for priority and capital equipment spent. It's also a strategic service line oncology, the key care area. And then the third is there is a large replacement market opportunity and in that research that was done, how old the equipment seems to be a key -- one of the key points of prioritization of capital equipment funds. So again, we think that that will drive priority amongst the installation dollars that are needed. And congratulations on what I think is a terrific quarter under the circumstances. I have -- I am pleased to hear you talk about competitive wins, Suzanne and I wonder if you could just amplify a little bit on sort of what you think the dynamics are that are leading to competitive wins and not necessarily expecting you to call out the victims but if you could just highlight what you think is leading to your wins versus established competitors, that would be great. Thank you for the question, Brooks. Yes. No, we're excited. I think about our competitive wins. I think, obviously, a lot of it is driven by our new product innovations. We talked a little bit on the -- in the basic this part of the call on how many systems are ordering ClearRT, for example, in Synchrony and VOLO Ultra as well, that is driving a lot of the differentiation of our products compared to competition. And I think that, that's gaining traction. We're seeing the increase in growing demand for our products. Same thing in -- for the CyberKnife. It continues to be a very unique product that just based on the technology is able to do things that other platforms are not able to do. That being said, I think there's disruption in the competitive landscape that is allowing us to get the second look that maybe we wouldn't have gotten 5 years ago. And we are in a very strong position. And I think that with the growing use of SBRT and ultra-hypofractionation, the need for precision has never been more important. And we bring unique product innovation to the table that others cannot. So all of those things, I think, are just helping us along with commercial focus and a little bit more of a commercial swagger, I think, in knowing that we can win against previous market leaders. So my second question, I know you talked a little bit about it in the prepared remarks but increasing your service revenue and driving margin improvement are key strategic objectives. Can you just give us any additional color on where you feel you are, how fast we might be able to see progress in some of the key priorities? Yes, it's absolutely a key priority. We also think we have tremendous opportunity in the service business as well as margin expansion. I'll let Ali talk a little bit more about what we're doing in those areas. Yes, absolutely. Hey, Brooks. On the service side, we are -- we think there's a massive opportunity to continue to increase the top line on that annuity business. It's through enhanced offerings that could be around training that are more tailored to our customers' needs. And we think the bigger opportunity in service beyond just the top line growth is around margin expansion. And really, it's focused on just really optimizing that business and making sure that we focus on 2 of the big cost drivers over there which is really around parts consumption. Take a look at our parts consumption, understand that a little bit better and really focus on parts that we're utilizing quite a bit and actually try and optimize those. And then when it comes to utilization, really drive that down. First off, 2 things in terms of what's driving this quarter and it looks like it should drive through the rest of the year. One, I think you guys have mentioned replacement cycle or replacement at least. I mean where are we in terms of a replacement cycle? And I don't know if you can even give us any kind of color in terms of how many of the systems sold regionally were replacements? And then secondly, you do have quite a bit of new innovations you're offering at this point. Can you give us any kind of indication in terms of what the take rate is for those and what that might be doing to ASPs? Yes. And I'll start and then I'll hand over the ASP question to, Ali. But yes, I'd say in our mature markets, in our developed markets like the U.S., like Western Europe, like Japan, it is largely a replacement market. And so the goal really for our teams is heavily on bringing our aged IB up to the latest performance. I would say, through COVID, the average use of systems have gone from 10-year life to 12 to 12.5-year life. And so there is -- this is a growing demand, a growing -- growth catalyst for us to be able to bring those customers to the latest revision. And certainly, our NPIs, they're supporting that as well as the clinical trends with that, it drives higher value and higher pricing. And I'll let Ali speak a little bit more to that. Yes. So just to reiterate, Suzanne's point, the majority of the trade-in, trade-up and activity is really happening within our mature markets. But going to your pricing question, that's part of our margin expansion initiative, right? Pricing is the cornerstone of our margin expansion initiative. And we've actually done quite a bit over there in terms of changing things around commercially. Number one, we've actually aligned our commercial team's incentive to ensuring that we can reach the profitability targets for new incoming orders. And we've actually armed them with tools so that -- as they are positioning configurations to our customers, we can optimize it so that we meet our customers' needs but then we're also optimizing our margins. So I think those 2 things coupled together are really driving the focus not only on bringing in orders volume but bringing in profitable orders volume. And actually, we are starting to see some pretty positive signs of that reflect in our overall ASP quarter-over-quarter. So that is very encouraging. And so all of that fills our backlog with good healthy orders and those are -- we're just focused on converting those orders into revenue. And maybe just a quick follow-up. Maybe at the exception of China, I wouldn't say we're in a post-COVID world but we did -- we have been talking to hospitals and a lot of them are saying, look, we've kind of held back in the last 3 years and we're now kind of going back and reinvesting where we have and notably in some capital equipment products. I mean, is that your sense as well in terms of what's going on, especially in the mature markets? Yes. I would say it's highly dependent on the institution. I think a big factor is also how old is their equipment because I do think that that's what's driving certain institutions to be able to upgrade their equipment. But I would say and again, I go back to the research that was done in this area that really surveyed the C level in capital equipment. I would say about 1/3 of them have already seen some capital equipment easing but the rest are feeling like, at least by the second half of calendar year '23 and into '24, we should get back to pre-COVID level. Thank you very much. And this concludes our earnings call. We are looking forward to speaking with you all again in April for our fiscal year 2023 third quarter earnings release. Thanks for joining us.
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EarningCall_764
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Good day, and welcome to the Suburban Propane Partners First Quarter 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 also note this event is being recorded. Thanks, Chad. Good morning, everyone. Thank you for joining us this morning for our fiscal 2023 first quarter earnings conference call. Joining me this morning are Mike Stivala, our President and Chief Executive Officer; Mike Kuglin, Chief Financial Officer and Chief Accounting Officer; and Steve Boyd, our Chief Operating Officer. This morning, we will review our first quarter financial results, along with our current outlook for the business. Once we concluded our prepared remarks, we will open the session to questions. Our conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, relating to the partnership's future business expectations and predictions and financial conditions and results of operations. These forward-looking statements involve certain risk and uncertainties. We have listed some of the important factors that could cause actual results to differ materially from those discussed in such forward-looking statements, which are referred to as cautionary statements in our earnings press release, which can be viewed on our website at suburbanpropane.com. All subsequent written and oral forward-looking statements attributable to the partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements. Our annual report on Form 10-K for the fiscal year ended September 24, 2022, and Form 10-Q for the period ended December 24, 2022, which will be filed by the end of business today, contains additional disclosure regarding forward-looking statements and risk factors, copies may be obtained by contacting the partnership or the SEC. For non-GAAP measures will be discussed on this call. We have provided a description of those measures as well as a discussion of why we believe this information to be useful in our Form 8-K, which was furnished to the SEC this morning. Form 8-K will be available through a link in the Investor Relations section of our website. Great. Thanks, Davin. Good morning and thank you all for joining us today. Let me start with some color on our first quarter performance, and then I will give you some details on the acquisition that we closed on December 28, just after the end of our fiscal first quarter. Looking at the first quarter, the positive momentum from our strong performance in fiscal 2022 carried into the first quarter of fiscal 2023. Results benefited from a combination of continued positive trends in our customer base growth and retention initiatives, cooler average temperatures and excellent management of selling prices and expenses in a challenging economic backdrop. Propane volumes increased more than 3% and adjusted EBITDA improved by more than 4% to $90 million for the fiscal 2023 first quarter. Our operating personnel continue to do an outstanding job delivering exceptional service to our customers and the communities we serve while continuing to drive efficiencies and effectively managing the things they can control. Weather is certainly a positive factor in the first quarter, particularly in the latter half of December 2022, which presented hidden degree days that were 26% cooler than normal. But we believe that it's our best-in-class operating model and the hard work and dedication of our people that sets us apart from the competition in our core propane business and allows us to continually adapt to the business circumstances that we face, whether that's volatile commodity prices, inflationary factors or erratic weather patterns. Now let me comment on the progress toward our long-term strategic growth plans and specifically the continued build-out of our renewable energy platform. As announced on December 28, 2022, we took a significant step to immediately and meaningfully increase the scale of our renewable energy portfolio and created a platform for visible growth in this rapidly developing market for renewable natural gas distribution. So to highlight some of the details of the acquisition and the newly formed joint venture, through our wholly owned subsidiary, Suburban Renewable Energy, we acquired two RNG production and distribution facilities from Equilibrium Capital Group for $190 million plus transaction fees and expenses. This was funded with borrowings of approximately $112 million under our existing revolver and the assumption of approximately $80 million of green bonds that were associated with the assets. One facility located in Stanfield, Arizona is one of the largest dairy manure to RNG facilities in the United States, processing dairy manure from seven local dairies with a total of 55,000 dairy cows. With the completion of expansion and plant optimization plans over the next 12 months, it is expected to have a run rate capacity of approximately 525,000 MMBtus of RNG annually for injection into an interstate pipeline interconnect nearby. Revenues are generated from a combination of RNG sales, LCFS credits, D3 and D5 RINs, tipping fees and fertilizer sales. The second facility located in Columbus, Ohio is currently the main source of receiving and processing municipal waste as well as food waste from several large food and beverage providers in the Columbus area. The facility earns tipping fees for accepting and processing approximately 100,000 tons of waste into biogas and fertilizer. And we'll earn additional revenue from sales of RNG, D5 RINs and fertilizer upon completion of an active development project to upgrade the biogas into pipeline quality R&D, which is expected to be completed over the next 18 to 24 months. Once completed, the facility is expected to have a run rate capacity of approximately 225,000 MMBtus of RNG per year. Therefore, the platform once current expansion and upgrade plans are completed, is expected to produce a run rate capacity of about 750,000 MMBtus per year. And while there will be an immediate contribution to EBITDA in fiscal 2023, the acquired facilities are projected to be accretive to our overall distributable cash flow per unit in fiscal 2024 as earnings benefit from the upgrades, expansion and efficiency gains. Under the purchase agreement, Equilibrium could earn additional consideration based on a multiple of EBITDA that is earned for the two-year period from January 1, 2024, through December 31, 2025, but only after EBITDA exceeds a certain minimum threshold. The maximum earn-out potential is $45 million and will be paid in fiscal 2026 if earned. The EBITDA threshold was established at a level that would reduce the overall transaction multiple and significantly enhance the accretion of the deal, even after making any additional payments under the earn-out provision. Additionally, Equilibrium has agreed to provide ongoing operational management and transitional support to Suburban under a management services agreement that extends through December 2025. This will allow Suburban to continue to benefit from the deep knowledge and experience of the Equilibrium management team and operating these assets during the transition and ensure that the parties' interests are well aligned for the future optimization of the earnings potential of these assets through the earn-out mechanism. In addition to the acquired facilities, Suburban Renewable Energy and Equilibrium have formed a partnership to serve as a long-term growth platform for the identification, development and operation of additional RNG projects, which includes an existing pipeline of identified RNG projects that are in various stages of development. Under the joint venture agreement, the parties have agreed to invest up to $155 million to develop additional RNG projects over the next three years or so, of which Suburban will fund $120 million and Equilibrium will fund $35 million. Suburban Renewables will own approximately 70% of the joint venture once capital has been fully committed and deployed. Established in 2008, Equilibrium is a leading sustainability driven asset management firm that has developed deep expertise in the development and operation of waste-to-energy projects and that is supported by a well-established network of operators, engineering and construction providers and off-takers. We are extremely excited to be partnering with the team at Equilibrium because we believe that our cultures have aligned so well. And we can bring together Equilibrium's knowledge and more than a decade of experience in this rapidly growing RNG space with our deep knowledge of end-use energy markets, logistics and distribution expertise. So as you can see, this acquisition and the formation of the partnership with Equilibrium was a highly strategic and meaningful step forward in the support and execution of our long-term strategic goals. This combined with our previous investments in renewable DME through our 38% equity stake in overall fuels as well as in hydrogen production and distribution through our 25% equity stake in independents and our first investment in the RNG production market through our previously announced agreement with Adirondack Farms in Upstate New York. These have all greatly supported our efforts to diversify our business and develop what we call an interconnected portfolio of renewable energy assets. In a moment, I'll come back with some closing remarks and provide added color on our strategic initiatives. However, at this point, I'll turn the call over to Mike Kuglin to discuss the first quarter results in some more detail. Thanks, Mike, and good morning, everyone. To be consistent with previous reporting, as I discuss our first quarter results, I'm excluding the impact of unrealized mark-to-market adjustments on our commodity hedges, which resulted in an unrealized loss of $13.7 million for the first quarter compared to an unrealized loss of $33.5 million in the prior year first quarter. Excluding these items as well as the noncash equity and earnings of unconsolidated subsidiaries before under the equity method and costs associated with the acquisition of the renewable natural gas assets. Net income for the first quarter was $60.3 million or $0.95 per common unit compared to net income of $55.4 million or $0.88 per common unit in the prior year first quarter. Adjusted EBITDA for the first quarter of $90 million improved by $3.5 million or 4.1% compared to the prior year. As Mike mentioned, the improvement in earnings was driven by several factors, including organic growth in our customer base and cooler weather that contributed to higher volumes along with solid margin management that was partially offset by continued inflationary pressures on our expenses. Retail propane gallons sold in the first quarter were 108.8 million gallons, which was 3.3% higher than the prior year, primarily due to cooler weather and favorable customer base trends. Expected weather, average temperatures during the first quarter were 3% warmer than normal and 13% cooler than the prior year first quarter. The increase in degree days was experienced in early October, which is the least critical month during the quarter for heating demand in the last two weeks of December. With that said, although we experienced an overall increase in heating degree days compared to the prior year first quarter, seven of the nine weeks in the November and December period were negatively impacted by warmer temperatures, particularly in our East and Midwest operating territories. From a commodity perspective, propane inventory levels in the U.S. continue to build during the quarter as solid domestic production outpaced demand and a softening in exports. At the end of the first quarter, U.S. propane inventories were at 84 million barrels, which was 27% higher than December 2021 levels and 14% higher than historical averages for that time of the year. As a result of the increase in inventories and other factors, wholesale propane prices trended lower during the quarter. Overall, average wholesale prices bases Mont Belvieu for the first quarter were $0.80 per gallon, which was 36% lower than the prior year first quarter and 26% lower than the fourth quarter of fiscal 2022. Excluding the impact of the mark-to-market adjustments on our commodity hedges that I mentioned earlier, total gross margin of $228.5 million for the first quarter increased $15.9 million or 7.5% compared to the prior year, primarily due to higher volumes sold and higher unit margins. Excluding the impact of the unrealized mark-to-market adjustments, propane unit margins for the first quarter increased $0.06 or 3.2% per gallon compared to the prior year, primarily due to effective selling price management during a period of declining commodity prices, that helped offset the impact of inflationary pressures on our delivery costs and other expenses. With respect to expenses, excluding acquisition-related costs of approximately $1 million during the first quarter combined operating and G&A expenses of $137.8 million increased $12.3 million or 9.8% compared to the prior year, primarily due to continued inflationary pressures across most areas of the business, including higher payroll and benefit-related expenses, higher vehicle lease and fuel costs and higher provisions for doubtful accounts. Although inflationary pressures persist, we remain focused on leveraging our investments in technology and our operating model to drive efficiencies while continuing to provide superior customer service. Net interest expense of $16 million for the first quarter increased $700,000 or 4.5% due to the impact of higher benchmark interest rates for borrowings under our revolver, which was substantially offset by a lower average level of outstanding debt. Total capital spending for the quarter of $10.8 million was flat to the prior year and the mix between maintenance and growth was roughly evenly split. During the first quarter, we started construction on the assets associated with the RNG production facility at Adirondack Farms. Total capital spending during the quarter on the project was not significant, we expect our growth capital spending for the remainder of the fiscal year to be higher than historical levels as we build out the RNG production facility at Adirondack Farms, which is expected to take 18 to 24 months to complete. As we begin to integrate the assets acquired from Equilibrium, there will be additional growth capital to complete the expansion and upgrade efforts underway at those facilities that Mike mentioned earlier in his remarks. Turning to our balance sheet. Given the seasonal nature of our business, we typically borrow under our revolving credit facility during the first quarter to help fund a portion of our seasonal working capital needs. With that said, we borrowed $34 million under the revolver during the first quarter, which was lower than our borrowings during the prior year first quarter due to the impact of lower commodity prices on our seasonal working capital build. Despite the borrowings to help fund our working capital, our total debt outstanding as of December 2022 was $52.9 million lower than December 2021, given our efforts to significantly reduce debt during the prior fiscal year. At the end of the first quarter, our consolidated leverage ratio for the trailing 12-month period was 3.68 times, which was roughly flat to what we reported at the end of fiscal 2022 and reflects an improvement from where we ended the prior year first quarter. As a result of the recent acquisition of the RNG assets from Equilibrium, we expect our leverage for the second quarter and the remainder of this fiscal year to be elevated relative to the current level, somewhere in the mid-four times range depending on the level of EBITDA for the remainder of the year. However, we expect to be well within our debt covenant requirement of 5.75 times. Our working capital needs typically peak towards the end of the heating season, late February or early March time frame, after which we expect to generate excess cash flows. We will continue to remain focused on utilizing excess cash flows to strengthen the balance sheet as opportunities arise, to fund strategic growth including growth capital for RNG expansion efforts. We have more than ample borrowing capacity under our revolver to fund our remaining working capital needs for the heating season as well as to support our capital expansion plans, and ongoing strategic growth initiatives. While the recent debt-funded acquisition will temporarily add to our leverage profile, we expect our leverage metrics to improve as the earnings from the acquired assets reach their run rate potential. At Suburban Propane, we have a long and proven track record of being great stewards of our balance sheet. We have long believed that conservative balance sheet management provides added protection for a potential short-term earnings impact a weather-driven demand softness, but also provides you dry powder for opportunistic investments and the execution of our long-term strategic initiatives. Over the course of the last three years, we have reduced our total debt by nearly $150 million, all while continuing to invest in the growth of the business. As we continue to focus on the execution of our long-term strategic goals, we will also stay focused on maintaining a strong balance sheet. Thanks Mike. As announced on January 19, our Board of Supervisors declared our quarterly distribution of $0.325 for a common unit in respect of our first quarter of fiscal 2023. This equates to an annualized rate of $1.30 per common unit. Our quarterly distribution will be paid on February 7 to our unitholders of record as of January 31. Our distribution coverage continues to remain strong at 2.61 times based on our trailing 12-month distributable cash flow for the quarter. Looking ahead to the rest of fiscal 2023, there is still a significant amount of the heating season ahead. And while the second quarter has started out unseasonably warm, we are very well positioned, both operationally and financially, to adapt as demand dictates. The foundation of our ongoing success continues to be rooted in our more than 3,200 dedicated employees at Suburban Propane and their hard work and unwavering focus on the safety and comfort of our customers and the communities will serve. I will close with this. We have a proud 95-year legacy of being a trusted provider of energy to local communities. Leveraging the strength and stability of our core propane business, we are investing in the clean energy economy of the future as society transitions to lower carbon alternatives and positioning Suburban Propane for long-term growth for our employees, our valued unitholders and our key stakeholders. We are taking a measured and long-term approach toward positioning the business for the next 95 years. As always, we appreciate your support and attention. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will be from James Spicer with TD Securities. Please go ahead. 2024, okay. Can you share the transaction multiple paid for the acquisition? And then more generally speak about how we should think about EBITDA generation from the Equilibrium assets and your renewables platform in general for 2024? Yes. So, we don't give guidance on earnings potential, as you know, James. So it's safe to say that, obviously, this is our first large acquisition in the RNG space the transaction multiple, I think, benefited actually from some changes in the environment for RNG, particularly in relation to the environmental credit attribute market that is particularly in California with LCFS credits. So the earnings for 2024, as we said, is going to be accretive to distributable cash flow. There is upside for lots of different opportunities, which is why I highlighted the earnout potential that we have in the deal for the seller to earn additional purchase price or consideration depending on the level of EBITDA. That level would dramatically reduce the multiple. I would say that the multiple is in the high single digit going in and with the potential upside potential for us to gain additional earnings potential as more expansion is in the works. And as the expansion that we're currently underway generates the kind of run rate that we expect in 2024. And if we can achieve the ultimate minimum level of EBITDA that is set in the earn-out provision, it would reduce the multiple into the lower to mid-single-digit item. Okay. So it sounds like you -- it sounds like you think there's a high likelihood that you'll get at least some portion of that earn-out? I think there's -- I think we set the threshold in a way that gives us a runway for upside of EBITDA for Suburban and then as the minimum threshold kicks in, it will provide additional consideration for the seller. And if that happens, I think both the seller and Suburban will be really happy with the transaction overall. And if the EBITDA doesn't reach the minimum threshold level, we have a terrific deal in its own right for suburban and our shareholders. Okay. Great. Understood. And then I was also wondering about the CapEx for next year. You spoke about or this year. You spoke about the upgrades and expansions of the new facilities purchased from Equilibrium and then some of your other investment commitments, how should we think about CapEx? And then as a follow-on to that, when we think about the balance sheet here and I know prior to this build-out, you were targeting leverage of around 3.5 times. Just sort of wondering what the appropriate target is to think about at this point? And if there were additional opportunities for acquisitions and build out, where can we see leverage trend? Yes. So I'll take the CapEx question first. So I think, first, I think you have to reflect on sort of the excess cash flow generating capacity of our core propane business. And and what we've proven over the past couple of years in relatively normal weather patterns. The business can generate sort of after propane-related somewhere in the $70 million to $100 million range depending on weather. Currently, we have visibility to the expansion efforts and projects that we've committed to so far and the cadence of that cash -- the cash needs for that CapEx, we have visibility to anywhere from $10 million to $50 million growth capital for the rest of this year, depending on how some of the projects continue to develop and the cash needs for 2023 versus some of the capital shifting into 2024 as well as depending on how fast and what kind of opportunities that come our way in the joint venture to deploy additional capital. So, I think if you think about it as we have $70 million to $100 million or so of excess cash flow with current visibility of $10 million to $50 million. We still have some dry powder within our existing cash flow generating capacity to do additional CapEx as opportunities arise. As it relates to the balance sheet, I mentioned or Mike mentioned in his opening remarks, that obviously, this was all funded with debt, this particular acquisition. I think when -- if you think about our history on acquisition funding, we do typically like to be closer to 50-50 on debt and equity financing, given what we've -- the focus that we've had over the past several years in really delevering the balance sheet and getting it down in the 3.6% range at the end of fiscal 2022, really did allow us to take on additional leverage for something that was highly strategic like this Equilibrium acquisition. And so if you think about it, we referenced in our opening remarks that in the past three years, we paid off $150 million. And so that really did reload the balance sheet to be able to take on the additional $200 million or so of debt associated with this deal and still not really damage the balance sheet on a pro forma basis, without any earnings expectation right today in terms of the balance sheet. If you just look at the leverage and the trailing 12 EBITDA and is on pro forma the earnings potential, it's still below 4.5 times levered. And if you pro forma the potential earnings for 2024 and beyond, it will get closer to four. So I think relative to this acquisition, I think the steps we took over the past several years to continue to strengthen the balance sheet put us in a very advantageous position to be able to add some leverage to allow the business to get to its run rate capacity to then naturally bring leverage down. And so, I think as you think about profiling us going forward, we still have a similar strategy for our leverage. We're always going to be focused on strengthening the balance sheet because as Mike said in his remarks, we plan for the potential for record warm-type winters in the propane industry. We plan for being able to be very opportunistic when the right deals come our way. I think we've demonstrated a pretty good discipline in our acquisition approach. And so, I think you'll see us continue to work towards bringing leverage back down below four so that we can -- we always have sufficient capital to be opportunistic. And as equity markets perhaps improve in the future, there may be an opportunity for us to bring in some capital on the equity side to offset some of the leveraging aspect of this particular acquisition or maybe future acquisitions. So we haven't accessed the equity markets in a long time. I'm not saying I'm not telegraphing that we are. I'm just suggesting that if you look back at history, we typically fund acquisitions of this kind of size with half debt and half equity just to continue to manage the balance sheet. So it's a long way of saying CapEx can be funded with the excess cash flow that we see in the business right now, the balance sheet is still well positioned from a leverage perspective and will continue to get better naturally as the earnings potential of this acquisition start to come to fruition. Just to go back on the Equilibrium transaction. Could you maybe provide additional details on the contract structure of some of the assets, more specifically what percentage of RNG production volumes from the currently operating facilities is contracted under fixed price arrangements? So, Ned, we do not have any fixed price off-take at this point. We do have the one major off-take player for the Stanfield operations, but that's market-based pricing, and they're taking all of the off-take from that facility. The Columbus facility in Ohio is currently going through an upgrade, as I said, from biogas to... Pardon me, this is the operator. Apparently, our hosting site has inadvertently disconnected. We please ask that you be hold on the line until we get them reconnected. Thank you very much. Chad, I think we're good now. So I apologize for -- to everybody for technical difficulties there. Apparently, somebody didn't like my answer. So I just was answering your question there, Ned, on off-take. Hopefully, you got the first part of it relative to the Arizona facility being fully contracted as to a single off-taker. The Columbus facility is going through an upgrade that's going to take the next 18 months or so to finish and we'll be producing pipeline quality R&D, and we are currently working with a number of potential off-take opportunities. And I would expect those opportunities to also be market based, and there may be multiple off-takers that will manage or perhaps one off-taker that takes all the gas and handles it on our behalf. So we have plenty of optionality I think the market for RNG is developing in lots of different ways. Obviously, a lot of RNG players are seeking to get RNG out to the California transportation market to take advantage of LCFS credits, but there are other markets developing throughout the country for different applications. And so, I think we're going to continue to be somewhat patient in how we set up the off-take for not only the Columbus facility, but also we have the Adirondack Facility in New York, which we own outright, and we're currently building out and are also working on potential customers to take that RNG. Appreciate the response. Can you maybe just review some of the IRA benefits related to RNG from which you expect to benefit? Well, as you know, Ned, a lot of the regulations now that will ultimately carry out the legislation are still to be developed. So I think the only thing that I would say at this point is that we've evaluated the potential credit opportunities under the IRA. It would seem safe to say that RNG and particularly the production that we're doing at all of our facilities should be eligible for 45 credits, and those will kick in 2025 and currently for 45z credits. They will last through 2027 unless extended. And given the feedstock for these facilities primarily being certainly the Arizona Facility and the New York Facility are both dairy biogas. So it's got a pretty significant reduction in carbon intensity score, which should be eligible for a higher portion of those available credits than, say, other feedstock for RNG production. So -- and that -- the other side of the opportunity here is that those -- that legislation all sort of came out like mid- to late 2022 and gave us the opportunity to sort of look at that as more sort of upside than factoring it into the deal to achieve the earnings potential. Got it. And then moving on to propane. Do you think that current unit gross margins in this business are sustainable going forward? And does the pickup in doubtful accounts keep you up at night? I do think, obviously, pricing is always going to be very tied to the direction of commodity prices commodity prices have ticked up now in the January time frame from the average prices in the fiscal first quarter. So there's still a fair amount of volatility I think what we're seeing in the marketplace is that all marketers are experiencing the same thing, which is a bit of a challenge with respect to hiring and retaining drivers and service techs and inflationary factors in payroll as a result of the competitive landscape to attract qualified individuals for those positions and the inflationary factors around fuel costs and insurance costs and the price of steel for the tanks that we buy and place at our customers' locations. So I think everybody is experiencing a higher operating threshold, and that gives it gives the market sort of the need to ensure that we're covering those costs through our margin profile, but also ensuring that the customers are getting some of the benefits as commodity prices do come off, but ensuring that we can cover our expenses and the inflationary factors that we face. And I think what we see in the market is that all the marketers are experiencing that same dynamic and are pretty disciplined in their own pricing structure, and that's created a lot of stability in the marketplace. As far as doubtful accounts, the only thing I would say is we do a heck of a job at the field level in terms of setting credit limits and the upfront credit profile for our customers, not to say that receivable management isn't a bigger challenge in an environment like this. We're certainly seeing our customers challenged with respect to their own household budgets and commodity prices have been elevated. So we have more invested in receivables because of the pure level of commodity prices over the last year. And so we are certainly working with and managing those receivables very closely and working with our customers to ensure that they have the kind of flexibility to manage their budgets and continue to work with us through whatever payment mechanism works best for them and for us. So I would say it doesn't keep me up at night because I know just how focused our team is on that every single day, but it certainly is a challenge. A lot of my questions have been answered, but I did want to follow up on the Equilibrium deal. What -- this is a different acquisition for you. This is a production in commodity price risk type business versus your distribution, logistics, customer service model. How are you going to hedge or look to stabilize those cash flows given that a lot of them are dependent, I think, on California type credits, what is your ability to do that? And how are you going to look to hedge those? And maybe to help us out, what is the current price that you're getting for your RNG kind of vis-Ã -vis the price that you would get for a standard unit of natural gas? Yes. So as I said earlier, Jay, pricing right now -- first of all, we're still building out capacity for RNG. So I can't answer the question about the potential for how much of that RNG is going to be tied to something that is volatile, okay? There's -- as I said earlier in one of my responses, there's lots of different markets that are developing the need to replace traditional natural gas in different aspects of the economy, whether that's transportation, whether it's in energy consumption for industrial uses. People are looking to lower their carbon footprint. And one way to do that is to move to a renewable a renewable product such as renewable natural gas, which can be a direct drop in replacement. So we did not look at this deal as an opportunity to take advantage of LCFS credit values, honestly. There is volatility in that market. We understand that. We generate LCFS credits in our propane business. So we already have an active process internally to manage those credits, and we understand how those markets operate. But I think what we're seeing is -- and I'm sure you're aware, there's been a significant pullback in LCFS prices from, say, $150 a ton to somewhere in the mid-$60 per ton in California. The good thing is, is all that occurred sort of before we were able to execute this deal. And I would say we were never going to be paying a value for a business off of $150 LCFS price anyway. But the market did correct itself in a time frame that allowed us to sort of stress the business for those things. But I think as more markets and more demand for a renewable product such as this develop there's either going to be more LCFS markets in different states that we'll develop. I know there's an active -- there's active legislation in several states that may adopt such programs, which could be beneficial. But I think the way we're going to be looking at the business is actually more with a propane market eye towards how to make money in this business. And that is being a trusted provider of that energy to the customers that are seeking a lower carbon alternative. And so it may not just be selling it to one off-taker like we have in Arizona, that's going to put it into a transportation market. There could be direct fueling into fleets with customers that we have in our propane business as an example. So I think the opportunities that we see in the RNG space are bigger than just taking advantage of environmental attributes, okay? Environmental attributes are there to sort of kick-start a renewable market I think we're getting in at a really good time to get some visibility to more uses that are developing to effectively make the natural gas price, the pure price for the gas that we're selling to make these projects make sense in their own right. And then with credits available, it certainly enhances returns. But I think if we continue to think about the off-take in a more propane-like way, I think that's going to benefit us in really growing and developing this market. Understood, and I appreciate that. But maybe specifically with respect to the Arizona facility, which you said has a current off-take agreement based upon market pricing. What I'm trying to get an appreciation for us, what is that market pricing today that you're getting for MMBtu of RNG versus looking at natural gas at $250. And what is your ability under that current contract to hedge that to hedge that premium that you get for that RNG? Like are you able to go out and hedge that for any length or period of time as you transitioned, as you were stating to all these different various uses or growth opportunities, you have to do something different than just straight commoditize and sell the RNG? Yes. So I'm not going to get into specific pricing of the contracts for sure. All I would say is that particular contract is market-based, market-based pricing allows us to be able to take advantage of whatever hedging profile that we decide to use, just like we do in our propane business. So I think that's how that particular contract works. It is market based, and that's sort of what you'd want to be. It's not a fixed price. So it's not as though we're locked into something that is outside of what the market pricing structure would accept. So the risk is not really tied to something that we can't control. The market is something we can't control. But as long as we're moving with the market, we have the opportunity to make those hedging decisions just like we do in our propane business. Okay. And then I guess just one last question. Just at a higher level. Like how do you think about your capital allocation strategy going forward? You've talked a lot about continuing to invest in renewable natural gas. You do have your core propane business, which there seems to be -- it's still very fragmented tuck-in acquisitions there makes sense. But as you look at this, you still have a large ability to also increase your dividend. What is your overall thoughts and mix between acquisitions, debt reduction, increasing the dividend? You do have a really stable business that gives you a lot of opportunities to manage all three. And I just kind of wanted to get your high-level thoughts on how you would look to manage that mix going forward. Yes. And you sort of answered your own question at the end there by saying we have this great, stable business that we can manage all three. You're right. I mean that's what we've been doing for years as far as where do we go from here? Look, I said it in the end of my remarks, we have a great business that I've been here for more than 20 years involved in the leadership of this business. We are the best-in-class in running the propane business. The first thing I would say is we are not deviating from our core propane business. Our GoGreen initiative that we launched in 2019 had two tenants; one, advocacy for propane as a long-term solution in a lower carbon economy; and two, innovation for the clean energy of the future. And that's what you're seeing us execute on right now. We're enhancing, preserving we're advocating for our propane business. The propane business has always been a great cash generator. And I referenced some of the excess cash flow earlier. The past couple of years, we've used a lot of the excess cash flow to delever because we are taking a very long-term strategic approach to set this business up for the future and for growth. And so I think we don't set arbitrary targets on specific allocation of that excess cash flow because we look at every deal on its own right, whether it's a propane deal, whether it's a renewable energy deal, it's got to stand on its own merits, which is also why we don't go out there and talk about big broad targets for what the business makeup is going to look like five or 10 years from now. Because, if you say x percent of our business is going to be propane and x percent is going to be renewable. Well, then you sort of have an incentive to hit that at the -- maybe at the behest of doing a good deal. And I'd rather just continue to be very patient be very measured and be very strategic about how we allocate our capital for the right set of circumstances. If you look at our history, this $200 million deal is the third largest deal we've done since 2002. We did a $206 million deal in 2003. We did a $1.8 billion deal in 2012, and now we're doing a $200 million deal in 2022. So we're pretty patient and disciplined when it comes to allocating capital. Now we do have growth projects to fund. And we are looking at the allocation of capital to fund those growth projects because that's how these businesses are going to reach their run rate potential and then some. And so that is a little different for us to manage because we are making commitments. But as I said earlier, that those commitments as we see the visibility today gives us plenty of cushion for -- within our own cash flow generation to fund that growth capital. So we're managing the business for the long term for growth, and as growth comes, it will provide growth opportunities for everybody, for our employees, for our unitholders and all of our key stakeholders. And that's really what we're here to do is to take a long-term view. In the meantime, we have a business that's generating great cash flow. We have a stock price that is generating an 8.25% yield that is pretty darn stable. And with this growth, opportunities that we have, I think it provides our unitholders that comfort that not only is there good stability in the distribution, but the Company is making strategic moves for long-term growth. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Michael Stivala for any closing remarks. Great. Thanks for your help, Chad. Thank you all for your interest and your support. We look forward to talking to you again in February at the end of our second quarter, and I hope you all stay safe and warm.
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EarningCall_765
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Good morning, everyone, and welcome to Konecranes' Q4 Earnings Conference. My name is Kiira Froberg, and I'm the Head of Investor Relations at Konecranes. Here with me today, I have our President and CEO, Anders Svensson; and our CFO, Teo Ottola. This time around, we have slightly renewed our presentation. I hope you like it. Before we start, I would kindly remind, that our presentation contains forward-looking statements. Next, Anders and Teo will walk you through our Q4 results. Anders will start by presenting the group numbers, after which Teo will focus on our business segments. The presentation is followed by Q&A as always. Anders, please go ahead. Thank you very much, Kiira, and a warm welcome from my side as well to the Konecranes Q4 2022 webcast. I will start with some highlights of the quarter. We had a solid closing to the 2022 year and the demand sentiment remained solid throughout the quarter, despite market uncertainty that continued and macroeconomic indicators that were signaling weakening market conditions. Our order intake continued good. We delivered â¬879 million, which was 1% less than the comparison period in the previous year. Our delivery capability improved in the quarter. We had more component availability. And in several material categories, it improved. It's not over, however, the component availability challenges, especially within electronic components continues. And our supply chains remained fragile in the quarter, but held up well. So we managed to deliver above â¬1 billion, at â¬1.21 billion for net sales. That was 8% up versus the comparison period in the previous year. And that made us close the year with an order book of â¬2.9 billion and that's 42% up on the previous year. We delivered â¬118 million of adjusted EBITA versus the previous year of â¬113 million. That was down from 11.9 percentage points of adjusted EBITA to 11.6. And I think this is a good achievement given the circumstances in the world with the Ukraine war, with the inflation, with material availability issues and with the COVID situation that continued. And the Board proposal for dividend for 2022 is â¬1.25 per share. I'll move into the market environment. So we follow a couple of macro indicators and we will start with the capacity utilization rate in Europe. And it declined during the quarter and declined both sequentially, but also year-on-year with 1 percentage point. And if we move into the U.S. capacity utilization rate, it ended the previous quarter at 80% and now we ended at 77.5%. And that's the manufacturing utilization rate then. So it declined both sequentially, but also year-on-year with 1.2 percentage points. If we move into the manufacturing PMIs, it's not on the slide, but [measuring] the European one as well. It reached a low point in October and then increased during the quarter, but ended the year still below 50%. And that's the six months in a row then with below 50%, meaning market contraction. The same for U.S., but ended the third quarter at 52% signaling market expansion, but had a steep decline during the quarter and ended the quarter at 46.2%, so also signaling market contraction. If we go into Brazil, India and China, China remained solid below 50% throughout the quarter, while Brazil started being far above the 50% mark, but had a steep decline and ended below 45% at the end of the quarter. India remained strong and were above 55% at the end of the quarter. And moving to the demand driver then for Port Solutions. And here, we measure and follow the seasonally adjusted container throughput index. The index declined in the beginning of the quarter and that was driven by lower activity then in Europe, but had a strong ending at the quarter and that was driven by China, but also recovery within Europe. I will now go a bit into the Group financials, and I will then leave to our CFO, Teo Ottola, to continue more with the segments and the balance sheet. So as I previously said, we managed to deliver â¬879 million. We couldn't follow-up the three quarters above â¬1 billion, but we think that â¬879 million for the quarter was a solid performance. And that's a 1.5% negative versus the previous year and 4.5% negative then in comparable rates versus the previous year. We had a decrease in Service order intake and an increase in Industrial Equipment and Port Solutions. The decrease in Service was related to a strong comparable in the previous year. And there we had an order intake of a nuclear modernization order of US$59 million. So if you strip that out of the comparison, actually, we had a growth also in order intake for Service on both reported and comparable rates, but also for the Group on both reported and comparable rates. Moving into net sales. So we managed to deliver â¬1,021 million for the quarter, good to be above â¬1 billion mark. And here, we were at 7.6% above previous year and 4.4% then above in comparable rates. The increase was in Service and Industrial Equipment, while we had a decrease in Port Solutions, and that was expected due to the delivery schedule within Port Solutions. If we look into the markets, so when it comes to the order intake side, we had a decrease in the Americas, and that was then related to the nuclear modernization order. Otherwise, that was an increase. It was flat in EMEA, and it was a decrease in APAC. And on the net sales side, we had an increase in EMEA, that was actually a strong increase in EMEA, but the decrease in Americas and APAC. And to say here, maybe it should be stated as well that we had had some challenges in APAC in the quarter, mostly related then to COVID effects, affecting both people working on site, being off on sick leave, but also the suppliers and we also had a close down for suppliers, et cetera and also for ourselves. So it's been difficult in APAC in the quarter. I'll move forward then to the Group order book. We ended the year on a â¬2.9 billion order book. And here, you can see represented by different colors, the relative size of the different businesses. So Service is the red one and Industrial Equipment is the gray one and the blue, green one represents Port Solutions. The â¬2.9 billion was up 42.2% on reported rates versus previous year, while it was up 41.1% in comparable rates. And we had an increase in all three segments, and it was driven then by the largest increase in Port Solutions, as you can see also on the slide. It was somewhat lower, about â¬150 million versus the Q3 period. So it's positive that we start to deliver on our order backlog. I'll move in to our adjusted EBITA. So we delivered â¬118 million for the quarter. That was â¬5 million up versus the previous quarter of â¬113 million. The margin, however, declined from 11.9% in the previous year to 11.6% in this year. So that was a decline of 35 basis points. The profitability increased in Service, we had a slight decrease in Industrial Equipment and a more solid decrease in Port Solutions. That was primarily related then to lower underlying sales volume. And when I mean â when I talk about lower underlying sales volume, I mean that we had a growth for the Group of 4.4% in comparable rates, but our pricing components is larger than that. So the actual volume growth was negative compared to the comparison period. We also had a slight decrease in our gross margin and that was driven by Industrial Equipment, not fully compensated for the inflation with increased prices. We have taken the measures. They are in the order book, but they haven't filtered through to invoicing yet fully. We have updated our first quarter 2023 demand outlook. The world demand picture remains subject to volatility and uncertainty. Within the Industrial Customer segment, we say, despite the weakened global macro indicators, our overall demand environment within Industrial Customer segment has remained good and continues on a healthy level. That said, we have started to see some signs of weakening within all three regions. Within ports customers, we say, global container throughput continues high and long-term prospects related to global container handling remains good overall. So the financial guidance for full-year 2023. Net sales is expected to increase in full-year 2023 compared to 2022 and the adjusted EBITA margin is expected to improve in full-year 2023 from 2022. And with that, I will then leave over to our CFO, Teo Ottola, to continue with the presentation. Go ahead, Teo. Thank you. Thank you, Anders. Welcome also on my behalf. And as usual, let's take a look at the performance by business segments. Before that, however, we have added one new slide in the presentation, and we could start this section with that slide actually. So it's an adjusted EBITA bridge between the fourth quarter of 2022 and then the fourth quarter of 2021, where we actually dividing or splitting the different change factors, different deltas into various categories. So like Anders already explained, the adjusted EBITA in the fourth quarter of 2021 was â¬113 million, and in the fourth quarter of 2022, â¬118 million. There are four different categories that where we are splitting the delta. The first one of them is volume pricing and mix combined, so we have combined all of these in one bucket. The other one is variable cost, which is of course excluding volume impact because that's already in the first category. This is basically inflation and so-called performance in comparison to the previous years corresponding period. The third one is fixed cost, which is basically the cost level below the gross margin. And then we have translation impact as a result of the FX changes. And if we then take a little bit deeper look on these different buckets, so the volume pricing mix altogether, â¬103 million positive. So our, let's say, understanding and our view on the pricing in an year-on-year comparison is that that our prices were around 10% higher than they were a year-ago. And that is of course, with the sales that we have roughly a â¬100 million difference by itself. The volume impact in the fourth quarter of 2022 in comparison to a situation a year-ago is a negative one. Exactly like Anders already explained. Our pricing is 10%, having a 10% impact and sales grew by 4.4% with comparable currencies. So the volume impact to the EBITA from that point of view is negative. However, our product mix was actually positive also, both within the business segments as well as between the business segments and this product mix, positive impact almost compensated for the volume difference that we had in comparison to the situation a year-ago. When we take a look at the variable costs, so like I said, this is inflation, and then of course, so-called performance in a year-on-year comparison, inflation obviously is creating a negative variation. We are compensating that by price increases like this picture also explains the so-called performance component was a little bit negative in an year-on-year comparison due to project execution, due to inefficiencies caused by component shortages and other supply chain issues. The fourth quarter of 2021 actually was a very clean quarter from those that point of view like was the third quarter of 2022 also, but a small negative deviation in a way in an year-on-year comparison from the performance part. Fixed cost minus â¬8 million tells that our fixed costs are that much higher than what they were in the fourth quarter of 2021. And this in this context basically mostly comes from inflation. So actually the underlying growth within the fixed expenses of fixed cost is very, very modest, but the inflation is impacting this one as well. And then the translation impact relatively big number, this time â¬6 million as a result of the currency changes, of course, euro dollar impacting quite a bit here as well. So this is in a way a summary of the bridge that we have now put into the presentation. Then if we take a look at the segment performance and start with the service, as usually order intake â¬283 million that is a decline both in reported as well as comparable currencies for the reason that Anders also already explained a very big modernization order one year-ago. Excluding that one, we would have seen growth in the service order intake. There was actually growth both in field service and parts in an year-on-year comparison. We had a decrease in the Americas from the regional point of view then we were approximately flat in EMEA and APAC in an year-on-year comparison. If you take a look at it sequentially, the order intake declined there as well. So Americas and APAC were declining, whereas EMEA was more or less on the same level as in the third quarter. Agreement base, the number â of the value of the agreement base â¬307 million, roughly at the end of the year, 3.4% growth with comparable currencies could remember that the Russian business agreement base is not included in this number and adjusting for that, we would've seen maybe a percentage point higher growth for the agreement base in a year-on-year comparison. Sales were â¬376 million, that is up 7.7% with comparable currencies. There was increase both in field service as well as in parts and also in all of the regions. Adjusted EBITA is on a very good level. The euro number is â¬79 million and 21.1%. There is actually an increase in an year-on-year comparison of very small increase, but an increase anyways, which is driven by higher sales. Higher sales obviously driven by pricing as already discussed during this call. And the gross margin also slightly increased within the service business, so a very solid performance from the service business. Industrial Equipment and order intake â¬306 million, this is 7.8% higher than the corresponding period a year-ago. And then the â maybe the most meaningful number from the order intake point of view, external orders year-on-year with comparable currencies plus 2.9%, we had in a year-on-year in comparison increase in standard cranes and components. The process crane order intake declined in an year-on-year comparison from the regional point of view, increase in Americas and EMEA whereas APAC decreased. Then, if we take a look at sequentially, so sequentially order intake declined from the third quarter. The explanations are very similar to what they are in an year-on-year comparison. So actually standard crane orders even increased in a sequential comparison, process crane orders declined and component orders, this short cycle product category was more or less flat in Q3, Q4 comparison. Sales â¬377 million, that is an increase of 9.2%, year-on-year, also external sales with comparable currencies, 9.2% and increase in all major business units as well as in all regions. Order book, of course, on a good level, on a high level as was already visible in Anders presentation as well. Adjusted EBITA â¬22 million, that is 6%. There is a slight decline in the margin. The volume development has been quite good, but then as Anders explained, so the cost inflation is still impacting the price increases that we have done during the first half of last year are impacting, but maybe not to the full extent yet during the fourth quarter, and we still have a little bit of the, let's say, negative delta as a result of price inflation relationship in the fourth quarter of 2022. Port Solutions order intake was â¬356 million that is almost exactly on the same level as it was a year-ago from regional perspective in an year-on-year comparison, there was an increase in Asia-Pacific, there was a decrease in Americas and EMEA. If we take a look at it by business units within the Port's business so actually Lift Trucks and automation parts did very well in an year-on-year comparison. Sequentially, the order intake declined from the very good level that we have been having in the third quarter and again, if we take a look at the short cycle product categories within Ports business, so lift truck orders declined in a sequential comparison, whereas Port Service was more or less on the same level both in Q3 and Q4. Net sales declined 2.6% with comparable currencies. This was primarily as a result of timing of the deliveries. So project timings impacted that way. It of course then also means that the order book continues to be on a very good level, â¬1.6 billion, 60% â more than 60% up year-on-year. Adjusted EBITA, â¬21 million, 6.5%, so there is a decline both in euros as well as in margin. The main reason clearly for the decline is volume, so the underlying volume is quite a bit lower than what it was a year-ago. But then also a little bit performance topics from the project execution point of view. Like I said, the comparison period was very clean from that point of view, as was the third quarter. Now we had a little bit more of that, nothing dramatic an indication of which is that, that we are here stating that the gross margin actually increased within the Port Solution. So the issues within the execution by no means are massive, but a little bit let's say to the negative in comparison to the situation a year-ago. Then finally before going into the Q&A, a couple of comments on the net working capital and cash flow. Net working capital was at the end of the year, â¬581 million, that is 17.3% of rolling 12 months sales. The net working capital has been increasing during the year as we can see from the slide. There was a very small increase from the third quarter to the fourth quarter as well. But as we can see, so the rotation in a way improves the relation between â through the rolling 12-month sales improved. Inventories declined during the fourth quarter. And of course, then the â in a way, the same deliveries then moved into the AR at the end of the year. Cash flow in the fourth quarter was positive â¬91 million, of course, as a result of the relatively good result, and that was barely enough to make the cash flow, free cash flow positive for the full-year as well, so â¬25 million on a cumulative basis at the end of 2022. Of course, the main reason for the low cash flow still continues to be the networking capital accumulation. Gearing and net debt, so net debt decreased from the third quarter level slightly to â¬688 million, that corresponds to gearing of 48%, which also of course came down from the previous quarters level. And then finally, the return on capital employed on an adjusted basis. It's a very stable on the level of 13.4%. And I guess that with these comments, we can then move into the Q&A. Thank you, Teo. Thank you, Anders. Before we turn the line on, we have a couple of questions through the chat. So maybe we could start by them. First one is regarding Industrial Equipment. So this is not now my words, but Industrial Equipment is the black sheep of the company. What we can expect on that area? I think in Industrial Equipment, we have had a difficult time since the inflation started to really compensate for the â with the prices for the increased inflation. We have now taken all the right measures, and looking forward, we are compensating for that. So we are recovering. And we are also with easing of our supply chain issues, getting up the productivity within Industrial Equipment. And we shouldn't forget, without Industrial Equipment, our service wouldn't have the kind of growth that we have had. We are sort of populating the market with our equipment and then we are servicing our equipment. We're also servicing third-party equipment, of course, but our own equipment is critical as well in this. So if you look at it integrated, it's actually a very nice business. Maybe worth adding to this one is that when we have been talking about the efficiency improvement activities within the industrial segment or industrial business area, consisting of two segments, Service and Industrial Equipment. So we have been talking about an efficiency improvement targets of â¬30 million to â¬35 million within the next three years. And of course, this is combined for the Service Industrial Equipment business area, but a clear majority, a very big deal of this expected efficiency improvements would be taking place within the Industrial Equipment sector. And the actions that we have been discussing regarding those ones are in relation to product platform changes and go-to-market changes, among other things, but those are maybe some of the most relevant ones here. Thank you. Then we have another question, which is related to the Russian write-offs. And this question actually came in while you were, Teo, discussing the EBITA bridge. So what impact did the Russian write-off accumulated to? And there, I think we need to now remember that all Russian-related write-offs, so they have been adjusted for, so they are not included in the bridge. But perhaps, you can share with... That is correct, like Kiira said. So these corrections that we have done, so they have been adjusted from these numbers. However, if we take a look at the brief summary of that one, so at the end of the year, the adjustments in relation to the Russia-Ukraine crisis and Russian business are altogether in the ballpark of â¬38 million. There is also a sales impact because we have in a way canceled POC sales that were already in the books. And the sales impact is slightly smaller amount. It's about â¬30 million, â¬32 million or so, but the P&L impact is â¬38 million within the adjustments. So that is basically impairment of the assets in Ukraine or impairment of the majority of the assets in Ukraine and then the impact of the canceled projects that we are not delivering to and in Russia. In addition to that one, of course, the overall decision of withdrawing from the Russian business or not taking new orders and sales is, of course, having its own impact to these numbers as well in the way that the business does not exist anymore. We have not been giving the actual profitability numbers. We have been referring to the Russian business having been around 2% of our total Group turnover. And then maybe as we have been discussing also earlier, so the â we cannot utilize the Ukrainian manufacturing facility, obviously, in the way that we earlier planned. And this has created a need to manufacture crane structures elsewhere. And this has created a cost of approximately â¬1 million per quarter, which is also visible in these numbers that we can see in this slide. So that has not been adjusted for. Hi, guys. Itâs Antti from SEB. A couple of questions regarding Industrial Equipment. I mean, on the outlook comments, you are flagging some signs of weakness on the demand, but then if we look at what's happening, kind of the short cycle business components and standard cranes are doing better than the process cranes. So what does this tell you kind of where we are in the cycle and how do you kind of â where are you actually seeing the signs of weakness? Yes. Thanks, Antti. I think, if you start with a macro indicators that are showing sort of decline in utilization in both Europe and in U.S. and we have our true connect where we can follow utilization equipment. So we also see in our connected equipments that are utilized to a somewhat lower level than previously. Then we have our sales funnel within Industrial Equipment, in the Industrial segment where we can see that we have slightly fewer cases in the funnel. And also the value of the funnel is slightly less than previously. We have also seen that decision making is somewhat longer than previously, so it hasn't hit us in any way so far, but we see signs of weakening in the different regions. Then back to your question about the, what can you conclude about the process cranes being in a way or weaker than the standard cranes or the componentry. Of course, you are absolutely right, so that it's not according to the model. But I would say that it is rather a coincidence than other than anything else. So I wouldn't really conclude anything on the position where we are regarding the cycle based on that one. And the key thing is still just to take a look at the development within the components within lift trucks, standard cranes to some extent and try to conclude it there. As we discussed through the components were more or less flat in a sequential comparison. Lift trucks came down, service number is visible as we can, as we can see it. So there are signs of weaker demand, which have not really massively, at least been in a way materializing in the order intake. All right. That's very clear. And then the second question is on the sales guidance for this year. Could you little bit talk about how do you say that divisionally and also price versus volume, and I'm quite interested on the Port side, how much of that big backlog you are kind of scheduling to deliver during 2023? I think we are not really giving any more details on how we see that. But what we can say is that we go into the year with an order book as you can see which is very strong at â¬2.9 billion and a large part of that to be delivered in 2023. If you compare, we have 500 million more going into 2023 being delivered in the year than we had going into 2022. So I think we are fairly confident that we go in with a strong backlog and we have done the pricing changes, et cetera, needed to keep a profitability going forward. We already did that earlier in 2022, and that are reflecting into the later half of 2022, but also now more into 2023, but we are not giving any guidance on specific sales development per segment, et cetera going forward. Okay. And then perhaps on the EBITA guidance, it's a very nice bridge chart that you provide for Q4. So could you conceptually talk about 2023 profitability improvement in the same terms? I think, if you look here at the different businesses, I mean it was mentioned by Teo as well. In the service, we have improved our profitability from 21.0 to 21.1. And we have seen sort of an underlying performance improvement, also driven by pricing as Teo mentioned, and not by volume, but service is a volume business. So the more we can get our componentry business in line, of course, there's an opportunity to drive additional productivity. Also, the productivity and service is driven when we don't have supply chain constraints hindering us from doing the right sort of planning of our service technicians, et cetera. So there is potential going forward. There's nothing that doesn't say that we could keep the development that we have had within that area. When it comes to the port side, we have been challenged by lower volumes in the year, as mentioned and that impacts our profitability and we now see we go in with a very strong order book and improved delivery capabilities. So even though we also had some project related performance challenges with imports that is not something which will follow us into 2023, what we believe. And in the Industrial Equipment, we have already talked about the compensation of pricing versus inflation. And also here we have had, like Teo mentioned, impact from the war with a million per quarter related to not being able to operate our [indiscernible] plant. We have also seen here COVID effects of lack of availability impacting our business and our ability to plan in our different production facilities also closing due to COVID in Asia. So there's an underlying â we are going confident with that in our pockets. Yes. Maybe regarding the product mix comment that we have been discussing earlier as well a little bit regarding the future, so there maybe, one can conclude that if we take a look at the current situation, for example, in the fourth quarter, and it applies for the full-year, so the mix impact has been positive, so it most likely will not be that positive in 2023. The mix between the segments will probably change to the worst and it is maybe even so that also, at least within ports, the mix most likely will change to the worst. So I guess this is something that one can in a way conclude from the order book that we have at this point of time. Then I think that the overall margin development very much boils down to what Anders was saying about the order book being much higher than a year ago, and then that what is the delivery schedule of that one and how are we constrained by component availabilities or other topics within this year. Yes. Hi, good morning. Thanks for taking my questions. My first one would be on Port Solutions and execution challenges that you mentioned. I was wondering, first of all, if these projects are already ongoing or have they been finished and so if I should think about, how should I think about these execution challenges potentially affecting also 2023 and maybe which measures have been taken to avoid these execution challenges in the future? When we take a look at the challenges as we have been talking about them, so like already said, so there is no reason to exaggerate the impact of those because the gross margin is basically up year-on-year even with these challenges. These are primarily projects that are at the very, let's say towards the end of the period of those projects. So they are not â I cannot say that they would be completed, but they are to be completed. We feel that adequate measures have been taken and we are not expecting any kind of, let's say trend wise weakening of the performance as a result of project execution. I would rather maybe say even so that this is kind of normal fluctuation and volatility. Like already said, Q4 2021 was very clean from project execution point of view. Q3 2022 was also very clean. We even had within the Ports a small positive one-off there in the third quarter. And this now in comparison to those two, this is maybe weaker performance in a way, but it doesn't mean that that we would be having any massive issues in this respect. So just to clarify, it's not really related to maybe cost inflation hitting the margins on your backlog, this is more of a one-off, and you do not generally see any larger than usual issue on cost inflation on your backlog in projects? This particular challenge that we are talking about here now is not pricing related. So this is more like project timing execution-related topic. When we talk about the order book margins, so as already discussed, so I think that it applies to all of the businesses. And of course, the order book is picking, Industrial Equipment and Port, in particular in those. So we are quite comfortable with the margin levels that we have within the order book. Okay. Thank you. And my second question is going back to the topic of process cranes and the turnaround. I was wondering if you can give us an update on whether process cranes were profitable in 2022? And if they're not profitable, how would you think about 2023 and process cranes turnaround continuing to be somewhat of a tailwind for Industrial Equipment going forward? So I think Teo mentioned it a bit in his part of the presentation, but process cranes are unfortunately still in the red for us. We have a lot of initiatives ongoing. And we have communicated around these as well, what we do in terms of our different platforms and go-to-market models, et cetera. And we also communicated that, that will in 2025 then contribute with an EBITA improvement of â¬30 million to â¬35 million and it will come at a cost of â¬30 million to â¬35 million. And we are executing on that plan and proceeding according to our own plan. And most of that related cost will then be taken within the first 12 months of announcement, which was basically one quarter ago. Taking a look at the 2023 and from the process crane point of view, in particular. So I think that it would be fair to say that the war impact that we were now discussing in connection to the 2022, so this â¬1 million per quarter, so unfortunately, it will not completely go away. We were not intending to update on the number every quarter, because of course, the impact has been there on 2022 as well. But I mean, it will not be vanishing just like that. So I think that it will continue to burden the process crane profitability. And hence, it's not at all guaranteed that it would be with black numbers in 2023. Obviously, we are working the best we can to make it happen. But of course, these extra costs may impact that plan to some extent. Of course, we can probably comment the process crane profitability then on a quarterly basis going forward as well, maybe not with the number, but whether we are on the black or on the red. And we have â you could probably add as well that the lead time to filter through from the price increases has also been longer in ETO cranes and process cranes than in the short-cycle products. And that would then help us a bit during 2023 as well. Yes. Clear. Thank you. My very last question would be, again, on the order book of Port Solutions, if you could maybe comment. I would expect it right now to be more tilted maybe towards mobile equipment than it has been historically because of supply chain issues. I was wondering whether it is the case? If you can help us provide more or less the split between short-cycle equipment and then large cranes. And more or less, in terms of the mix of 2023, how much do you expect to be able to sell in terms of revenue generation capacity? And I don't know if you can provide any color at all about how much could be large cranes versus mobile equipment? We would maybe rather not talk about the numbers exactly, but I think that your underlying question is that is the order book tilted more towards the shorter-cycle product offering within the port. So I would not necessarily draw that conclusion. And the reason is that we have definitely longer delivery times when it comes to the mobile equipment than what we have been having previously. But the same applies to many other product categories. And of course, the order book in a way, is basically quite long when it â longer than usual regarding most of the product groups that we have. The key question then from the mix point of view, which I think that you are after, is then that what is the delivery capability regarding all of those business units, in particular product groups. And that is what we'll be decisive then from the P&L point of view in 2023. We are a bit cautious on commenting that in any more detail because the future is an uncertain thing after all. Hi, Anders, Teo and Kiira. It's Tomi from DNB. A couple of questions. Firstly, I respect you have the outlook, but can you say anything how the year has started, especially for the short-cycle business? Are these fourth quarter levels a good proxy where we start the year with the comment that demand is overall healthy in terms of components and services as well? Yes. Basically, we don't go in and comment within existing quarters. But if you read and listen to what we say in our outlook, it continues on a healthy level. And we haven't seen anything that would deviate from continuing, as we said, that flat or increasing quarter-on-quarter or year-on-year, as Teo mentioned previously, on the short-cycle products. And if something would have changed in the last weeks, we would have mentioned that. There are always order cancellations to some extent, but we haven't seen more order cancellations than we do in â have done historically in previous quarters. So no sort of escalation in any cancellations and not within any projects such as specific projects that we couldn't sell to others more as we normally have within price list products that we then can sell to another customer. But nothing that's indicating any sort of increased cancellations. And then maybe on the currency or ForEx impact. Do you think or do you believe, expect any negative currency impact on EBIT this year due to the strengthened euro compared to U.S. dollar? I don't think it's our job to speculate on currency development going forward. So I think what we normally say is that changes between U.S. and euro of 10% has an effect of roughly â¬10 million on our adjusted EBITA, and that's about what we can say regarding that. Okay. And finally, just checking what Anders you said on booking of the efficiency improvement costs. Can you please repeat that? No, it's what we announced in â already in the third quarter report that we are making initiatives to improve the profitability of the Industrial Equipment segment. And we have a project that will reward us with â¬30 million to â¬35 million EBITA improvement in 2025, but it will come at the cost, a one-time cost of â¬30 million to â¬35 million. And most of those costs will be booked within the first 12 months from when we announced. We have actually refinanced the debt maturing 2023. There will be refinancing needs for the year 2024, which at this point of time has not been refinanced, but will be planned during 2023. Thank you. And can I just ask a follow-up on what we should consider the right level of inventory for the business in the medium term? The level of inventory, as a normalized case, is that it's a very, very challenging question because it is so much depending on the product mix that we have and we cannot really give a very good guideline and what is the correct number because the work in progress in long projects, of course, starts to accumulate in a very early phase. And then on the other hand, you can have an inventory of spare parts. And it is a lot, let's say, depending on the mix. I would maybe concentrate and focus on the indicator that we are also showing ourselves, which is the net working capital as a whole in relation to rolling 12-month sales. So this has proven to be, let's say, the one of the best indicators for net working capital efficiency, including inventories. And to add to that, maybe that we target to be clearly below the 15% mark and we are currently at 17.3%. So we will work on that during 2023. Yes. Hi. Thanks for the follow-up. It was on something that, Anders, you said about Industrial Equipment and Services and it's obviously an enabler of Services. So could you elaborate a bit how do you look at those two businesses? Is there more kind of a collaboration to be done? How do you look at kind of an equipment profitability versus lifetime profitability, including the Services? And maybe talk a little bit about around that theme. No, we are working on our strategy update now for the CMD on 10th of May where we will more in detail talk about our strategy going forward. But clearly, there is an opportunity to â as we have combined these two segments into one business area to look more on end-to-end profitability, to really understand our profitability in the different legs that we have of the business. Yes. It won't mean that we will start reporting only together or so. We will keep reporting separate as we do today. Yes. But I was thinking kind of if you look at the process cranes and there's been a couple of questions regarding the margin weakness over there. If you look at the service opportunity in process cranes and kind of the lifetime profitability, including the Services, how does that stack up against the component and standard crane business today? Yes. Versus the component business, of course, it's not the same because you're not comparing apples with apples. Components is basically a part of the service on the cranes, the process cranes. So I think it's difficult to compare. But I think for us, it's important to understand the lifecycle margin, and we haven't been working in that way previously. So that is something we more will look into to really understand where we should not water the plant and where we should water the plant. We have some questions in the chat function. A couple of questions related to the inflation. So I think that we could take them here in between. So what should we think of raw material inflation developments in 2023? Could that become a tailwind to Group margin in the course of the year? If this inflation occurs, should we see a downside risk to the pricing? That would be one question. So I think that when we take a look at the inflation picture as a whole, so of course, it's extremely difficult to say that where the inflation would be going. That depends on the overall economic environment and the Central Bank's rate increases and all of that. But of course, it would be realistic to think that the material inflation would be declining because we have been seeing raw material prices going down as a result of the â how the economies have been doing. So it is quite possible that the material inflation would be lower in 2023 than what it has been in 2022. It's not certain, but it's possible. If that happens, it has typically been a piece of good news for us. So a, let's say, declining raw material prices are maybe an easier environment for us even though raw materials technically are a pass-through item. So there is maybe a potential to, in a way, benefit a little bit from the margin point of view. I would not, however, exaggerate the impact of this one, because by definition, we are passing it on to the customers. But the environment where raw material prices are going down is definitely easier for us to manage than the other way around. So from that point of view, maybe it would be, to some extent, a positive thing. Then again, it may be that the labor inflation is somewhat higher even in 2023 than what it has been in 2022. That's at least a possibility given the current sort of status where we are. Hi, Anders, Teo and Kiira. Just regarding what Tier 2 capital labor inflation. What was the labor inflation last year? And what kind of inflation do you expect in 2023? The labor inflation has been somewhere between 4 and 5, maybe 4.5 to 5 or so. Whether it will accelerate or not is an excellent question. It might, but that's not in a way, of course, certain. But let's say, between 4 and 5 for the full of 2022, and of course, higher towards the end of the year than in the beginning of the year. And then I'm not sure if you're going to answer this, but regarding your ongoing or planned price increases you're tendering currently or in 2023 in total. Are you still raising prices altogether in 2023 as we speak? We are raising prices basically on a quarterly level when it comes to the Service side and have been doing so. We will probably not do it on a quarterly level going forward if the inflation sort of starts reducing. But we are taking all the measures needed and we learned our lesson being late a bit in the industrial side during the early days of this cycle. So we have learned and we are quick and we are taking all the measures that's needed. But as Teo mentioned, now we have raw material prices at the end of 2022 was lower than at the beginning of 2022. So what we are mainly battling now going forward is then labor inflation. Okay. Thanks. And then a final one to Teo, just a housekeeping question regarding corporate tax rate, a ballpark figure for 2023? It was a little bit more than 27%, 27.4% or 27.5% now in 2022. I would use roughly the same. So no major change to be expected. Okay. I think that we start to run out of time here. So it's time to conclude our today's conference. I thank you all for participation. And just as a reminder, Q1 interim report will be then reported on April 28. So we'll meet then again. Thank you.
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EarningCall_766
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Thank you, operator. Earlier this afternoon Avnet released financial results for the second quarter fiscal year 2023. The release is available on the Investor Relations section of the company's website. A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release, as well as on the IR section of Avnet's website. Some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not the guarantee of performance and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward-looking statement or supply new information regarding the circumstances after the date of this presentation. Thank you, Joe, and thank you everyone for joining us on our second quarter fiscal year 2023 earnings conference call. I am pleased to share that we delivered another quarter of solid financial results, which exceeded the higher end of our sales and earnings guidance. More importantly, we achieved these results despite the macro headwinds affecting certain areas of our business, which I'll touch on in a minute. In the quarter, we grew sales 21% year-over-year in constant currency, making it our eighth consecutive quarter of double-digit year-over-year sales growth. We believe this growth resulted in another quarter of gaining market share, thanks in large part to our customer partnerships and the dedication and execution of our employees. Efficient management of our operations also enabled us to drive solid operating margin of 4.5%, which is the fourth consecutive quarter of greater than 4% operating margin. Further, the combination of strong sales growth and effective management of operations allowed us to increase operating income nearly three times faster than that of revenue on a year-over-year basis. During the quarter, we saw continued strength in the Americas and EMEA regions and began to see signs of slowing in Asia beyond the COVID-19 customer shutdowns, which had some impact on both electronic components and Farnell. Our team has executed very well in helping our customers manage market complexities, as they face dynamic supply chain conditions and uncertainties. From a demand perspective, in the quarter, we saw continued strength in key vertical segments, most notably transportation and industrial. In the last earnings call, we indicated that lead times were improving. And in the second quarter lead times continued that trend for many products. Although, for certain products, lead times still remain extended. Across all regions, we've been coordinating closely with customers and suppliers to effectively manage our backlog. As a result of those actions our overall book-to-bill ratio softened during the quarter and we exited the second quarter below parity on a global basis. Across the supply chain, inventory levels remain elevated, including that of many of our customers. In order to support our customers, as they continue to be challenged with higher inventory and obtaining all the key parts required to complete their products, our inventory levels also increased this quarter, which Ken will speak to further in his commentary. Overall, we remain comfortable with the quality of inventory and are working to improve our inventory turnover heading into the third quarter. Our role as a distributor is particularly critical in these types of uneven environments. As we have proven over the years, the value of Avnet and the complex operating environment is our ability to serve as a control tower for our customers and suppliers, helping them to proactively manage their supply chains. With the changes we have made to organization over the past two-and-a-half years, I'm confident that we are a much stronger and more resilient company today and are well positioned to deliver value and quickly adapt as marketing conditions change in the future. So with that, let me turn to the highlights for our business. Electronic Components business drove year-over-year sales growth across all three regions. In constant currency, Electronic Component sales were up 23% year-over-year the seventh consecutive quarter of 20% or greater organic sales growth in constant currency. I am particularly proud of our EMEA team, delivering record sales and operating income for the quarter. The Americas team also continued to make steady progress and delivered another strong quarter with sales, and achieving the highest operating income in several years. The Americas and EMEA regions both benefited from strength in key verticals, notably, industrial and transportation. In Asia, we experienced a softening of demand as we worked with customers to adjust their backlogs due to lead time improvements. Additionally, many of our customers across the region experienced challenges with their operations due to the rise in COVID-19 cases. I'm proud of our Asia team's continued success not only in ensuring business continuity, but it consistently gaining market share in the region at the same time. Although our Asia business saw signs of slowing, they continue to get market share during the quarter and a favorable sales mix led to operating margin expansion during the second quarter both sequentially and year-over-year. Overall across all regions we continue to benefit from our unique engineering and demand creation capabilities with our field application engineers and digital design tools once again achieving record revenue and gross profit dollars for demand creation. We believe this ongoing strength is indicative of the increasing value of the capabilities we provide to both our customers and suppliers. Now let's turn to our Farnell business. Farnell sales declined sequentially and year-over-year and continue to be impacted by product availability and pricing. As shortages for certain parts begin to moderate, customers will shift some of their orders to volume distributors thereby affecting demand and pricing at Farnell. As we announced last quarter, we are the exclusive distributor for the Raspberry Pi single-board computer, which continues to see more potential in industrial applications. The backlog for single-board computers remains robust. And when certain key semi-electronic components become more available towards the end of our fiscal year, we expect to realize such sales. Operating margins for Farnell were over 9% during the quarter. Our operating margins are lower this quarter. It's really important to note that Farnell's margins are still two times that of Avnet's overall operating margin. Our investments in Farnell's eCommerce platform and improved user experience continued to yield results with 55% of Farnell's total sales and 73% of total orders placed through the eCommerce platform this quarter. We are pleased with these results and expect to see increased traffic and new customer acquisitions in the quarters to come as certain components for new product introductions and single-board computer products become more available. Additionally, Farnell has a diverse product mix that not only solves customers on-the-board needs, but also supports test and measurement as well as industrial maintenance and repair operations as needed. For the long-term, we remain very excited about Farnell and continue to see opportunity to leverage Farnell's and Electronic Components' unique and synergistic collaboration. This allows us to better serve our customers and suppliers for new product introduction to mass production and is a key differentiator for Avnet. To recap, while we are pleased with the strong finish of the calendar year 2022 and the better-than-expected results for the quarter, we are closely monitoring market visions and the impact of component lead times on our backlog and inventory levels as products become more available. We expect to experience a high end of seasonal sales declines in the Asia region due to the Lunar New Year with some uncertainty on how COVID-19 may impact the return of the workforce once the holiday is over. We're also keeping an eye on the impact of rising interest rates inflation and the signs of slowing growth in the global economy. We continue to be confident in our team's ability to execute in a dynamic and uncertain environment by delivering value to our supplier and customer partners. We have been in the business for over 100 years. We have weathered many market cycles and our team is up to the challenge. There has never been a greater need for the capabilities that Avnet has to offer and we look forward to continue to play a critical role at the center of the technology supply chain. Thank you, Phil. Good afternoon, everyone and thank you for your interest in Avnet. The Avnet team delivered another strong quarter of sales and operating income growth compared to the year ago quarter. We are very pleased with our second quarter and the calendar year 2022 financial performance. We believe we continue to be well-positioned to deal with the market challenges and uncertainties that Phil previously mentioned. In the second quarter, our sales were $6.7 billion, up nearly 15% year-over-year, exceeding the top end of our guidance range. This represents our 10th consecutive quarter of year-over-year sales growth. In constant currency, sales growth was 21% year-over-year with each region contributing to the growth. Sales were flat on a sequential basis in constant currency, which was above our typical seasonal trend and included a higher mix of sales from our Western regions. We had year-over-year sales growth across all of our regions led by EMEA, which delivered a record $2.3 billion of sales. On a year-over-year basis in constant currency, sales grew 38% in EMEA, 21% in the Americas and 9% in Asia. From an operating group perspective, Electronic Component sales grew 16% year-over-year or 23% in constant currency. Electronic component sales were flat quarter-over-quarter in constant currency. Farnell sales declined nearly 8% year-over-year and was flat with the prior year in constant currency. Excluding sales of single-board computers, Farnell sales grew 4% year-over-year in constant currency. For the second quarter, gross margin of 11.7% improved 29 basis points quarter-over-quarter and was down 49 basis points year-over-year. The sequential improvement was primarily due to higher gross margins across all three regions as well as a shift in sales mix from Asia to the Western regions. We continue to maintain discipline around SG&A expenses as adjusted operating expenses were $484 million for the quarter, down 3% year-over-year and up 2% sequentially. Adjusted operating expenses increased 4% year-over-year in constant currency to support the 21% sales growth. As a percentage of gross profit dollars, adjusted operating expenses were 62% in the second quarter, a full eight percentage points lower than the 70% a year ago. Adjusted operating income of $301 million increased 39% year-over-year and grew 2.7 times greater than sales. This is the eighth consecutive quarter of operating income growth exceeding our sales growth. Our adjusted operating margin was 4.5% in the second quarter, which improved 80 basis points year-over-year and improved 12 basis points quarter-over-quarter. By operating group, Electronic Components operating income was $297 million, up 57% year-over-year. EC operating margin was 4.7%, up 122 basis points year-over-year and up 47 basis points quarter-over-quarter. All three EC regions saw year-over-year and quarter-over-quarter operating margin expansion led by our EC EMEA business, which expanded operating margin by more than 200 basis points year-over-year. Farnell operating income was $37 million, down 39% year-over-year. Farnell operating margin was 9% in the quarter, down 461 basis points year-over-year and down 308 basis points quarter-over-quarter. The decline in Farnell operating margin was primarily driven by a combination of lower sales in part due to the lack of availability of certain components for single-board computers and from a lower gross profit margin. The expected decline in gross profit margin was primarily related to the unwinding of pricing premiums as certain components became more available. Farnell continues to be the highest margin within Avnet and their operating income margin continues to be two times greater than Avnet's overall operating income margin. We expect Farnell operating margins to remain at similar levels for the second half of fiscal 2023 as seasonal sales growth will be offset by the continued unwinding of pricing premiums on certain components. Turning to expenses and gains below operating income. Second quarter interest expense of $59 million increased by $37 million year-over-year and $14 million quarter-over-quarter primarily due to a combination of increases in interest rates and higher borrowing amounts to support working capital increases. This increase in interest expense negatively impacted adjusted diluted earnings per share by $0.31 year-over-year. During the second quarter, we entered into legal settlements, which resulted in a one-time gain of $62 million. This gain benefited second quarter GAAP earnings per share by $0.51. Our adjusted effective income tax rate was 23.6% in the quarter. Adjusted diluted earnings per share were $2 for the quarter, which increased 32% year-over-year and were flat quarter-over-quarter. Turning to the balance sheet and liquidity. During the quarter, working capital increased by $876 million including a $318 million increase in inventories. As a result of this working capital increase, working capital days was 84 days for the quarter which increased 11 days quarter-over-quarter. Our inventory days increased by approximately six days and our receivable days increased by approximately four days quarter-over-quarter. Our return on working capital continues to be higher than our cost of capital and improved over 100 basis points year-over-year. Our inventories grew during the quarter due to a combination of factors, including customers requesting delays of product shipments changes in foreign currency exchange rates compared to last quarter and an increase in Farnell inventories, as components became more readily available. We have seen an increasing trend of customers rescheduling product shipments as they manage their inventory, production timing and cash flow challenges. This contributed to the increase in days of inventory, as turns slowed during the quarter. The quality and freshness of our inventory continues to improve year-over-year. During the second quarter we also saw a slowdown in the collection of receivables. Our team continues to work diligently with customers to collect past due receivables and effectively manage bad debt risks. Our team has done a tremendous job since the onset of the pandemic in minimizing bad debts by proactively managing the credit and collection activities with our customers. While we continue to focus on improving inventory turns our top priority is to ensure we are managing overall customer risks appropriately. The increase in working capital led to an increase in debt of approximately $850 million and a corresponding $321 million use of cash from operations. The increase in debt led to a gross leverage of 2.4 times at the end of the quarter. At quarter end, we had approximately $300 million of available borrowing capacity and our teams continue to work on selling inventory on hand and collecting receivables to provide additional liquidity. In the second quarter, we repurchased approximately $64 million worth of shares, which represented nearly 2% of shares outstanding. We have $319 million left on our current share repurchase authorization entering the third quarter. We continue to prioritize our existing business needs including working capital and capital expenditures when we evaluate share repurchases. During the second quarter, cash used for investing activities including capital expenditures was $107 million or an increase of approximately $90 million quarter-over-quarter, primarily to support a new warehouse being built in EMEA. During the quarter, we also paid our quarterly dividend of $0.29 per share or $26 million. Book value per share improved to approximately $48 per share or an increase of approximately $6 per share due to a combination of strong earnings, lower share count and changes in foreign currency exchange rates compared to last quarter. Turning to guidance, for the third quarter of fiscal 2023, we are guiding sales in the range of $6.15 billion to $6.45 billion and adjusted diluted earnings per share in the range of $1.75 to $1.85. Our third quarter guidance is based on current market conditions and implies a sequential sales decline of 4% to 8%. This guidance assumes a seasonal decline in sales from Asia, primarily due to the Lunar New Year and below seasonal sales growth for the Western regions. This guidance assumes similar interest expense compared to the second quarter an effective tax rate of between 22% and 26% and 92.5 million outstanding shares on a diluted basis. In closing, I want to thank our team for delivering another strong quarter of sales and earnings growth. During calendar year 2022 we delivered sales of over $26 billion and adjusted diluted earnings per share of over $8. Avnet's diversification of suppliers, products and the end markets we serve are key differentiators that will enable us to be resilient, despite uncertain and challenging market conditions. Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Melissa Fairbanks with Raymond James. Please proceed with your question. Hi guys. Thanks very much. Great work navigating kind of uncertain times today. It's really great to see these results and the outlook. You did mention that lead times are improving for a lot of the products. Last quarter you gave us some detail on to which products still had the longest lead times. I was wondering if you could maybe give us a little bit more detail on that. Sure Melissa. This is Phil and thanks for your compliment there. Appreciate that. So yeah, I know this is a hot one, right? So yeah, we did say that we're seeing some modest improvement right, maybe a little bit better than modest. But at the end of the day lead-times they've stabilized in the vast majority of the products but are still at levels 20% to 60% higher than pre-pandemic, okay? So, while some products are coming in products like MCU particularly in automotive analog power, IGBTs, MOSFETs, 45-nanometer, FPGA programmable logic are still in many cases significantly constrained. So, that's what makes this market so much more complex than what we've maybe experienced in the past. And IP&E and passives ceramics 12 to 18 weeks, some cases 26 to 32. [indiscernible] are still 26 to 56 weeks. Resistors like thick films still 52 to 72 week lead-times. So, it's kind of a mixed bag. The connector guys overall, again as a general statement are probably the lowest of all the categories in interconnect. They're probably averaging 13 to 16 weeks depending again on the type of connector products. So, I was just summing up, high-end controllers, anything around power, op amps, voltage regs, things along those lines are still pretty tight as well as I said automotive. But -- yes -- no -- so, probably cleared as much for you, right? But it's kind of -- it's still a little bit all over the map. No, that's actually really helpful. Absolutely. Yes, I really appreciate the detail. Maybe one for Ken on the growth in inventory. This is something that obviously everyone is paying really close attention to. You highlighted a few different factors behind the growth this quarter. And I think it's fairly well understood what's driving it. But can you maybe quantify was the majority of it due to Farnell? Was the -- what was the kind of breakdown the contribution there? Yes, I would say about 50% was actually driven by FX that we did have some challenges there. Farnell is about another let's say 25% of that and then the rest was call it just slower turns and those types of things. But I will comment that the FX impact kind of offsets what was last quarter so it would be kind of a wash over the past two quarters the FX has kind of normalized. So, clearly just some broader growth in the regional inventories this quarter mostly in the West versus last quarter it was mostly Asia. Hi, thanks for taking my questions. I was wondering if you can delve a little bit deeper into the margin performance for each of the segments. So, in components on flat sequential revenue, you had 50 basis points of margin improvement. Is there any way that you can parse out how much of that was because of pricing versus say volume versus mix versus FX? And how should we think about the sustainable level of margins in the component segment? And same question for Farnell, I mean 300 basis points sequential decline any way to parse that out between all of these factors? Yes, I'll go first and let Ken jump in. You kind of answered the first part of that question Ruplu. A lot of that is mix, okay? Regional mix. Very little on ASP inflation this quarter although we had a lot of supplier price increases that would not really affect the margin necessarily maybe some of the dollars, but not the percent in the margin. But most of it is the mix. We noted that we said that we saw some softening coming out of Asia at the end of the quarter and we had strengthening in the West. And when that happens we pick up some margin. So it's really just good execution by the team. On Farnell, yes, so, again we've signaled this as well. They get some appreciation in a upmarket or a more constrained market so they get some let's call it a natural upside. And some of that as products are coming into -- back to the question we just got from Melissa where some lead times are starting to come in the more the -- some of those customers they get I'll call it nontraditionally come back into the volume space. So, they've seen some margin pressure and of course some of the volume decline. Thus the negative drop-through. Ken do you want to comment? Yes. On the components business, I would say it's regional mix but then we did have a more favorable let's say product customer mix. If you recall what we said last quarter was because gross margin was down a little bit there. All of our regional businesses had a more favorable mix and then the regional mix between the West versus Asia was the bigger driver there with controlled expenses obviously, right? And then when you get to Farnell, I would say, approximately 50-50 between the sales piece and then the deterioration of the gross profit margin due to the unwinding of the premiums. That's probably the right way to think about it. I do want to highlight though Farnell -- we're still extremely pleased with Farnell. Their operating margins are two times the core. So we're going to continue to be doubling down on the Farnell performance and growth. Okay. Thanks for the details there. Phil, you made a comment that Asia is softening. And for the next quarter you're guiding below seasonal growth in the West. So, can you maybe touch a little bit deeper into that like which end markets or which verticals are softer now and in Asia versus in the West? And how do you see that progressing as you go through the year? Yes. So, tough to call throughout the year. So I want to be careful on that one, because the market fluctuates so much. But right now, look, as we've already talked about there's a bit of inventory oversupply right in Asia-Pac in general, okay? And Ken just talked about we had some inventory increase last quarter there. Except in the automotive, automotive is still strong. Matter of fact automotive and industrial, we've got great momentum in Asia-Pac. It's really the end consumer, the applications, your PC, mobile, they continue to look pretty weak. And then you got to remember the -- just a reminder, we're no more traditional, if you will, whatever that word means anymore with the Lunar New Year, right? So that's kind of been on and off the last couple of years with COVID. So we've got to see how that affects the market and the volumes of people that come back to work if they come back to work, right, when they go into the Lunar New Year. So we've got to watch that. And then, of course we got the unpredictability of the COVID, right? And what's going to happen that had a negative impact on us as well. But overall, I want to be clear, we're really pleased with our Asia performance and we believe we're gaining share. We have a really diverse market in Asia, a lot of times you think Asia everything is China. I mean we're doing really well in Southeast Asia, the Greater Taiwan. We have a nice business in Japan. So a little bit more diversified outside of just China. But of course we have a good presence in China as well. So, a bit of a mixed bag. On the West, I can comment on this a little bit. I mean the West -- and you're right, typically we'll see a sequential increase quarter-on-quarter from December to March. But again, a lot of these are the old traditional curves, if you will from the quarter-to-quarter seasonality, I should say. They've all been kind of thrown out the last couple of years. But typically, you do see the West come back. And we're having a good performance in the West. We just -- frankly as we said had pretty much record quarters in Europe. And so they're just going against a tough compare but the number in Europe is solid for the March quarter we believe as the Americas. Okay Phil, thanks for the details there. If I can sneak one more in. OpEx as a percent of gross profit, is that at a stable level now? It looks like it's been in the 62% of gross profit over the last couple of quarters. Or do you have more levers to take out costs? So how should we think about OpEx going forward? Thanks. This is Ken. I would say, I wouldn't think about additional cost takeout. Clearly depending on market conditions, we may have to tighten our first strings a little bit, but no significant actions planned at this time at these levels of sales. And so I would say, it's a pretty stable percentage at this level of sales. Yes. Thank you. Phil, I'm hoping that you can be a little bit more specific on the book-to-bill ratios that you're seeing by region? And then on the push-outs that you're seeing from customers, are you seeing cancellations as well? And as you've gotten through the quarter so far has that gotten worse or stabilized? Yes. Thanks Matt. So on the book-to-bill, yes, we don't provide it at a regional level but we'll just share that we're -- as we said in the script, we're negative book-to-bill or below parity now in all regions. I would say, the one that's closest to parity is still the Americas then Europe then Asia, okay? So -- and I said this before they're moderating, but I don't see that as a negative thing. We've had such a run-off of positive book-to-bills that were excessive as we all know on the call that this is I think a natural and healthy moderation of the book-to-bill. So, it's not -- really doesn't have any overly concern. And because a lot of this, to your second part Matt is, I want to say, suffered, but we're managing the backlog. We're working with our customers on this. And there's certainly as the market shifts still reluctant to cancel. I mean, so we're having to do some of that form if you will in the backlog. They might be rescheduling, which push out. But our cancellation rates and I'm looking at the chart now as I've said in previous calls our buffer â our shock absorber in backlog is roughly 25% to 30% adjustments in any given day, where we're either pulling in pushing out canceling. Right now, we're running between roughly around 27%. So, it's up a couple of points, but nothing that's overly alarming. And again, we watch that on a daily basis. So, that's how we're seeing it. I mean, I think, I don't think, it's a negative thing. I think, it's an adjustment in the market that, the market is required. And you commented previously on a question regarding seasonality next quarter. It sounds like you're saying that even though Europe and North America will be below seasonal they're both going to be up sequentially? Matt, I would say, flat to down slightly, and then Asia obviously down. And that's where the drop in revenue comes from. But I think just to remind everyone, when we move into our third and fourth quarters we've got a higher mix of Western sales. So, we offset some of that sales decline by higher gross margin, because of the more favorable mix. Okay. So Europe too. Okay. Okay. Great. And then just lastly on the inventory, it looks like your inventory was up roughly 40% year-on-year. Your guiding revenue you're down modestly year-on-year. You talked about customers pushing out orders. Can you do the same thing? Are you turning around and canceling or pushing out orders to your own suppliers to try to start working this down? Yeah. Everyone is a one-off Matt. every supplier depending on the commodity has different â we've got different NCNRs non-cancel non-returnables and all those things in place. But where we can, we certainly are. And we're also working out with our customers. So, we do believe, as we say, we'll start turning that inventory. The inventory is good inventory. It's fresh inventory. We have a customer that needs some help for a challenge. And we're in it for the long haul. So we may be carrying a little bit more than we would for some customers, because we want to work with them for the long term, and not force them to take something we know they're not going to be able to pay for or don't want or need. And that's not â that doesn't bode well for the relationship. And again, we've been in this situation before it's not our first rodeo, but â yes, it's a constant negotiation of all one-offs. I will say the positive is, we're not seeing suppliers ship early. We're not â so I think that's a really important point. So â I'm sure I'm going to get that question. But â so it's just, they're catching up, based on lead times coming in okay, and then we've got to work with the customers to see what other parts they need to finish out their builds. Thank you, Phil and Ken. Phil, when you were away from Avnet for a little bit of time, there were some supplier relationships that kind of went up for bid had some changes. Some of them adversely affected Avnet. Some of them did not. Now that, we're exiting COVID are the suppliers coming back and talking about changes or new terms or anything different? Because it seems like the past two to three years it's been anything but stable. Thank you. Yeah. Thanks, Jim. Yeah, those were some interesting years. They're behind us, with the supplier, I'll say destabilization. No, I think the supplier â supplier ratios have been extremely positive. And we even note that, when it comes to things like demand creation they're actually leaning on us more as we saw our demand creation numbers go up again this quarter to some record numbers. So I think that, the supplier relationships are strong partnerships as they are relationships and they're actually asking us to do more for them. So now, I'm very open about this. We don't sit in the boardrooms. We don't know, who's looking to potentially buy who, and that we can only control how well we execute for them. And when we look at the top suppliers on the semi side and the top suppliers on the IP&E side, we're pretty much number one or two with every one of them. So, conversations right now are very strategic and very positive as we sit here today. Yeah. And â no I didn't mean that in a negative way like share losses or disengagement in a minute. Just as far as discussions could they potentially be evolving into more demand creation or more services are holding or consignments that didn't happen pre-COVID? Yes. So, thanks, Jim. So what â some of the suppliers are acknowledging that customers are looking for as much around solutions as they are chips â they want total solutions, right? Board solutions not just chip solutions. And that's where we can offer that value of the chip plus the balance of the solution for the customer. So â and as engineering resources to become more and more scarce and difficult to get and more on the software side, the suppliers can scale with us and we've got the reach to help them get to that other customer base that they may not be able to get to. So in that regard I mean there's not a meeting we have with the supplier that we're not talking about demand creation. A matter of fact, it's the first thing you want to talk about. And then on the supply chain as we call Supply-Chain-as-a-Service or our Avnet Velocity business we've had more suppliers coming into us and large OEM customers say, "Hey we need some help in building out the supply chain capabilities. The suppliers want to drive R&D manufacturing, sales and marketing and you know us for some of our supply chain capabilities. So I think that's been a real positive through these last 2.5 years and I think it's very sticky. And then maybe a follow-up for Ken. Ken, you mentioned premier Farnell's margins came â come down a little bit some of it due to sales, some of it due to the removal of the premiums that happened during the shortages. I'm wondering have those premiums now been largely or completely resolved, or are those premiums still coming out of the model, where we should model a little bit more margin compression in the quarters ahead? Thank you, gentlemen. Yes. So Jim, thanks for the question. I think how I'd look at it would be â and I think I said this in the commentary where it was really â they'll have a seasonal uplift in sales because they're more of a Western kind of business but that will be offset by the continued unwinding. So I'd say â I don't know, if I'd say most but over half, but there's still some to go. And so that's kind of what we're expecting as a flattish or a stable margin â operating margin because you have higher sales offset by some further pricing deterioration to get to a steady state. And we do see positive signals, especially when it comes to what we just talked about with product availability, the single-board computers and the components needed we see that being a positive momentum going into our fiscal year 2024. Great. Thanks for taking my questions. First, the receivables increase I think was a little bit unusual. I know you guys historically have not had any sort of unusual collection issues. So I don't think, we expect that this during the cycle. But I wonder if you can comment as to any concentration in the AR increase either by geo or end market or any other way you'd categorize it? Yes. Thanks, Bill. I guess I would say no specific concentration. But again, we don't have any major customer concentrations or supplier concentration that matters. We like the fact that we're not beholding to any one customer or supplier. But what I would tell you is it was kind of across the board regionally, and part of it was challenges the customers with their own cash flow situations that we worked through like Phil talked about. And on the other part was just quite frankly, it was December 31 and people want to pay us in January and that was a piece of it which kind of then recovered early in the next quarter. So I would say we actually just had a call with the team today because we are definitely focused on credit collections, any high-risk areas that we can get the business involved in. And I think they're saying actually the aging has improved a little bit. Still have about a normal amount of past dues but it's improved a little bit but clearly something we continue to focus on. Well I'll just jump on that. You actually â because actually a couple of years ago when all this started to happen with COVID, 2.5 years ago, we actually were very concerned about receivables and from a standpoint of bad debt and we're concerned that customers aren't going to make it the ones with the weaker balance sheets. And actually we've been pleased, frankly that we've not had that, okay? A little extension yes for sure we're all over it. But our bad debt exposure of write-offs if you will have been minimal, okay? And that's a complement to our collections and receivable teams and the business overall. I just want to add that on. Yes. I appreciate that. Two other real â well, one quick one and then a more in depth one if that's okay. It sounded like the way you were talking about the changes in order patterns, the backlog, the order reduction. It sounds like that was more of a China-focused event, but I would think lead time is more of a global metric. So, I'm hoping you can just level set me on that. It is. No, I don't know. The lead times are definitely on a global basis. And it's not -- no it's not just Asia. As I said, we saw the West -- I just said that the West was still a little bit stronger in book-to-bill than Asia Pac that's all. And again, it would surprise anybody with the -- what's going on in Asia Pac right now. And what we're doing is, as I said, we're being a little bit more assertive and even the customers are with us in making sure we're working to clean that backlog up. So to Matt's point, we're in fair negotiations with the suppliers in that side. Well, we don't want product coming in that the customers don't want, right? And suppliers don't want us to have the product on the shelf that's no good. As they build out their capacity. They want to know what's real and what's not. So, that's going back to Matt's question, the suppliers some are working with us really, really well and letting customers out of the NCNRs because they don't want to build stuff that they're ultimately not going to want, other suppliers are a little bit more rigid. So everyone is a little bit of a one-off, but not unique to Asia. Appreciate that. Last one, if I can squeeze it in. Can you remind us of the capital allocation strategy or tactics however, you want to describe it the dividend in particular, what the plan might be for future increases there? Thanks so much guys. Yes. I think our -- in the dividend in particular, our historical pattern has been once a year in the September quarter, we would look at increase, buybacks I think we've been pretty good there. We've bought back 8% of our shares since the last 12 months. This quarter, I would say, if you'd look at our buybacks plus dividend plus CapEx that was actually higher than any of the past few quarters, so we did have a larger CapEx. So from a priority standpoint, we're going to continue to prioritize the business, in terms of needs for working capital and CapEx, before we get into returning to shareholders. But we think especially, as we start to get back to cash flow generation versus use of cash on working capital, we'll be able to have enough to repurchase shares and we do look at it still is below -- trading below book value and it still looks like an attractive price even though our stock has performed relatively well to others over the past couple quarters. Yes. Thanks for taking the question. I was curious, how do you guys thinking about the pricing pressure that you're seeing in Farnell, as being maybe correlated to the components business. Is this kind of like a leading indicator or a precursor that you are a little bit worried about? I guess, I would answer that. I don't know that we're worried about it. I think it was expected. We knew that we got some uplift there in the market and normally would correct itself. And I guess, how I would characterize it is, I think we talked about it as in the 200 basis points range maybe a little bit north of there, but we still have a very healthy margin gross margin in Farnell and they do have a pretty diverse product set, right? There's on-the-board type components. And that's really what we're talking about pricing premiums when we talk about on-the-board semiconductors certain IP&E. But they also have a lot of their business in other kind of areas test and measurement, maintenance and repair. So there's a nice balanced portfolio that can keep that steady margin we believe. Yes. So, Joe this, is Phil. I'll just ramp that. No, it's not a concern. We just spent a week with them in the UK last week. As matter fact, Ken and I, we've got a solid team. We've got a solid plan. Since we call this -- we signaled this quarters ago. They're a little afraid that's going to come down. But on top of that the single-board computer backlog is really, really growing. So that's impacting some of the top line. And that will definitely come back as Ken pointed near the end of our fiscal year into Q1 fiscal '24. Got it. And maybe just ask it a little bit differently. Do you see I guess the pricing pressure that's happening in Farnell potentially spreading into the core components business, I guess is what I'm trying to ask. Yes. Okay. Got you. Yes. So -- good question. Again, Farnell buys different than the core, right? There's not as much from the shipping debit and things along those lines. So, you'll see -- it's different. On our side -- on the core side, we'll start seeing some pricing pressure. Right now, not so much, okay? There's still -- a matter of factor there's still as I called out 20-plus suppliers that raised prices in January. So back to the first question on lead time. Lead times are all coming in -- not all of them because they're still raising prices. So, there's always pressure in the system, right? But right now we're not seeing anything that overt that's going to have that big a negative impact. And I would just add to that, there are competitive pressures will always put pressure on our gross margin, but we do have -- we talk about Supply-Chain-as-a-Service, IP&E initiatives as well as our demand creation to help us kind of keep the margin stable, right? So we're always probably going to have some competitive pressure going down, but we can keep on filling the funnel with the higher-margin revenues including Farnell and getting Farnell growing again helps offset that overall and that's kind of how we're thinking about the model. Yes. Sorry to jump back in Joe, but just because this is a good question. And that's why we got to drive digital, right? And that's why we've got to drive eCommerce and online sales. And in Farnell, we had I think a record-breaking number and 55% of the revenues were actually done online and 73% of the transaction. So, that really helps you drive and offset some pressures, because you have a much lower touch, lower cost to serve on that piece of business. So, I just want to add that in. Yes. That's helpful. And just maybe as a follow-up with March quarter revenue guidance declining nearly on the midpoint, how do we think about cash flow generation? Should we start to think about that as maybe inflecting positive? And then just also on that note how do we think about CapEx? I know there's maybe more of a onetime kind of CapEx this quarter? How do we think about the CapEx in the next couple of quarters? Yes. To answer the CapEx question first, I'd say, it's maybe more consistent flow. So, $25 million-ish a quarter give or take something would kind of be the expectation there on CapEx. And I'd say the answer is yes on cash flow, but we've got some work to do to get the inventory levels down and collect the receivables. So, that's clearly the goal when sales go down. Our model then needs less working capital, including less receivables and less inventory and it works through. So, it may take a little bit more time than we'd like. But that's what we're clearly focused on this next quarter and then going into the fourth quarter. Thank you. There are no further questions at this time. I would like to hand the call back over to Phil Gallagher, CEO for any closing comments. Thanks a lot. I want to thank everyone for attending today's earnings call. Yes I look forward to speaking to you again in our fiscal third quarter earnings report in early May. Have a great 2023.
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Hello, and welcome to McDonald's Fourth Quarter 2022 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. Following todayâs presentation, there will be a question-and-answer session for investors. [Operator Instructions]. I would now like to turn the conference over to Mr. Mike Cieplak, Investor Relations Officer for McDonald's Corporation. Mr. Cieplak, you may begin. Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Ian Borden. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website as our reconciliations of any non-GAAP financial measures mentioned on today's call, along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and reenter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. Thank you and good morning, everyone. When we gathered at this time last year, we expected 2022 to be a year of recovery from the pandemic, particularly in Europe. Little did we know there would be another challenging year and nobody could have predicted the extent to which the war in Europe would disrupt businesses around the world and the macroeconomic impact that would follow. Despite continued volatility in nearly every corner of the globe, McDonaldâs delivered exceptional growth throughout 2022. We achieved full year comp sales growth of 10.9%, delivered strong guest count performance with 5% growth globally, and saw our momentum strengthen as the year progressed with double-digit comp sales growth across all segments in Q4. These results are a testament to the resilience of the McDonaldâs system and demonstrate that our Accelerating the Arches strategy, which we unveiled in the early days of the pandemic, is working. This strategy is anchored by three growth pillars also known as our M, C, and Dâs, maximize our marketing, commit to the core menu, and double down on the 3Ds. Our 2022 performance demonstrated that continued potential of each growth pillar. You've heard me say McDonald's is one of the world's greatest brands. In the last year, we've unlocked even more ways to elevate our marketing through creative excellence. Our scalable insights are helping us tap into our fans love for McDonald's and create culturally relevant campaigns that resonate across markets and drive growth. That momentum continued into Q4. In October, our collaboration with Cactus Plant Flea Market in the U.S. brought together our adult fans love and nostalgia for the Happy Meal with one of the most on trend brands and culture. Customer excitement was palpable and it's fair to say the program exceeded expectations. This program drove the highest weekly digital transactions ever seen in the U.S. To celebrate the FIFA World Cup, we launched our largest global marketing campaign ever with more than 75 markets participating worldwide. Want to go to McDonald's? Brought to life yet another fan truth, whatever the culture or language and whatever the outcome of the game, we can all unite under the Golden Arches. Our aim was to support fans that were watching the FIFA World Cup at home through relevant and meaningful McDelivery promotions, regardless of the time zone that their team was playing in. During this campaign, we saw double-digit increases in delivery sales across our top 10 markets. And just a couple of weeks ago, the UK launched their Raise Your Arches campaign, which has generated significant excitement with our customers. Even though the campaign never shows our food, never shows our restaurant, and never mentioned our brand name, it's nonetheless instantly recognizable as only McDonald's. Imagine that, a brand so powerful, it requires no introduction. The campaign has been quickly picked up by over 30 other markets, demonstrating our systemsâ ability to quickly scale compelling ideas across the globe. Throughout 2022, some of our most successful campaign platforms brought our customers closer to the core menu items they love. The strength of our brand goes beyond the Golden Arches themselves and includes our iconic products such as our world famous French Fries, the Big Mac or Chicken McNuggets and the McFlurry. Each of these products are billion-dollar brands and in total, McDonald's possesses 10 of these billion-dollar brand equities. In an environment where our customers are looking for the simple and familiar, our core menu items have never been more relevant or beloved. Throughout the year, we continue to step up our game on the favorites that build our heritage. We're delivering hotter, juicier, more delicious burgers and building on the success of emerging equities like the McCrispy Chicken Sandwich. As a result, we are gaining market share in both chicken and beef. When customers want to enjoy our classic favorites, they are increasingly looking for even more personalized and convenient ways to get their meals. Through our focus on digital, we are transforming from a brand that serve billions and billions all the same way to one that serves each of our billions of customers uniquely as individuals with customized products, offers, and experiences. By doing this, we strengthen our customers love and loyalty for McDonald's. These investments are paying off. In the fourth quarter, digital represented over 35% of system-wide sales in our top six markets. In 2022, the McDonald's App was downloaded over 40 million times in the U.S., greater than the total downloads of the 2nd, 3rd and 4th brands combined. Through our loyalty program, which we've expanded over 50 markets and counting, customers are feeling more connected to McDonald's, which in turn increases visits and frequency. As we closed the year, we had almost 50 million active loyalty users in our top six markets. The success of Accelerating the Arches has put McDonald's in an advantage position. Since the start of the pandemic, we've grown system-wide sales nearly $20 billion despite closing over 800 restaurants in Russia. Our brand is clearly in the strongest position it's been in years, attributable in part to our best-in-class marketing engine. And service times and customer satisfaction are both improving, a testament to the dedication of our restaurant teams. Our success is fueling even greater ambitions. While we feel good about our strategy and the growth potential in each of our M-C-D pillars, we've been asking ourselves two questions, is there anything we should add to Accelerating the Arches? And is there anything that could get in the way of the success of Accelerating the Arches? The answers to these two questions led us to evolve our Accelerating the Arches strategy, which we announced a few weeks ago. We'll continue to double down our M-C-D's while adding a fourth D, restaurant development to our 3D's growth pillar. Our strong comp and brand performance has given us the right to build new units at a faster rate than we have historically. We also announced accelerating the organization, an effort to modernize the way we work, so that we're faster, more innovative, and more efficient. Work is now underway to further build out these initiatives and quantify their contribution to our long-term financial algorithm. We'll share more details with all of you at an investor update in Chicago sometime in late 2023. Thanks, Chris. By putting our customers at the center of Accelerating the Arches, we're driving top line momentum and broad-based global strength for our brand. Global comparable sales were up double digits for the fourth quarter, and we continue to gain share across most of our major markets. Our performance is a direct result of executing against our strategy, making it clear that we're operating from a position of strength and proving once again that our business remains resilient despite the dynamic macro environment. In our international operated markets, we leveraged our digital channels and highlighted our core menu delivering comp sales growth of nearly 13% for the quarter. As our big five international operated markets continued to recover from COVID throughout the year, we consistently created delicious feel good moments for our customers, achieving strong performance across each of these markets. The UK continued their focus on chicken with an early fourth quarter launch of the McCrispy Chicken Sandwich. This emerging global equity builds on iconic core favorites like Chicken McNuggets and drove a meaningful lift to the chicken category. The UK market also leaned into the power of our brand with the popular Reindeer Ready holiday campaign returning for the sixth consecutive year. The fourth quarter also brought the return of McDonald's monopoly to the Canadian market, but this time utilizing our app to elevate the experience. We leveraged learnings from recent UK and Australia activations, where we combine the nostalgic peel off game pieces with the option to digitally scan and track progress on our app, which helped accelerate top line momentum and sales through our digital channels. Fueling digital growth was also central to Germany's strong performance with the market's first My McDonald's branded affordability campaign. This promotion featured daily offers alongside mobile order messaging to drive full digital platform engagement. It was followed by the launch of Digital Monopoly in the market, which helped grow digital to over 60% of total sales. It's examples like this that once again highlight the power of the McDonald's system, allowing us to tap into proven successes in one market and then scale those ideas. In Australia, we continued to leverage the strength of our McCafé brand with an iced coffee promotion in the summer months. This campaign built upon our coffee leadership in the market as we continue to drive share gains. And we maintained our market leadership in France with always on family messaging and a fully integrated chicken campaign highlighting our iconic chicken McNuggets paired with unique and trendy sauces. Moving to the U.S., comp sales were up over 10% for the quarter, a testament to our work together with franchisees over the last several years, which has created a strong foundation. The collective decisions to put brand at the center of our marketing, along with simplifying our menus, strengthening our digital business, and recommitting to our core have resonated with consumers and are continuing to drive growth. Strategic calendar planning from marketing to restaurant execution has enabled our teams to stay laser focused on what truly matters most for our customers. Higher average check supported by strategic price increases as well as positive guest counts, contributed to our performance this quarter. Memorable marketing campaigns, including our collaboration with Cactus Plant Flea Market, Blue Buckets, and McRib brought nostalgia to our customers fueling top line momentum with limited added complexity in our restaurants. Turning to our international developmental license markets, comp sales were up over 16% for the quarter, with strong sales growth across all geographies in the segment. Japan achieved an impressive 29th consecutive quarter of positive comp sales with continued strength at the dinner day part. A focus on driving digital affordability helped increase the frequency of our most loyal digital customers. Recovery in China, however, remain challenging as COVID related government restrictions were still in place for a majority of the fourth quarter, resulting in some temporary closures and limited operations. While comp sales in China were negative, we focused on showcasing our strength in beef with the Big Mac Best Burger launch and continued to gain traffic share in a shrinking QSR market. And despite the ongoing operating challenges, we opened over 700 new restaurants last year, which is an all-time high. Turning to our P&L, company operated margins were just over 15% for the quarter, reflecting the continued pressure from elevated commodities, wages, as well as higher energy costs. Foreign currency translation negatively impacted fourth quarter results by $0.16 per share, with earnings per share of $2.59 for the quarter. For the full year, adjusted operating margin was nearly 45%, reflecting higher restaurant margin dollars across all segments. Despite the significant P&L pressures that we've discussed, top line results generated restaurant margin dollars of over 13 billion for the year, an increase of nearly 1.5 billion in constant currency. Franchise restaurants, which now represent 95% of our global portfolio, contributed nearly 90% of our total restaurant margins, reflecting the stability of our business model. Lastly, before I hand it back over to Chris, I want to touch briefly on our capital expenditures and free cash flow profile. Our CAPEX spend for the year was approximately 1.9 billion, which included remaining reinvestment to substantially complete our experience of the future efforts in the U.S. market. Over the last few years, we've invested billions of dollars in modernizing our estate, and it's clear in our results that these investments are paying off. After reinvesting in the business, our free cash flow conversion was nearly 90% for the year. And with that, let me pass it back over to Chris. Thanks, Ian. As we look ahead to 2023, macroeconomic uncertainties will persist and we expect to continue to face headwinds. Our base case for a mild to moderate recession in the U.S. and one that will be a little deeper and longer in Europe is unchanged from what we shared on our Q3 earnings call. We also expect inflationary costs to continue to pressure our margins, which Ian will discuss in greater detail. In this environment, we must maintain our disciplined approach to pricing. We need to balance passing through our pricing on our menus while maintaining our strong position on value with our customers. Our positive guest count performance in 2022 demonstrates our success so far in balancing these competing demands, and we need to remain judicious with pricing actions. Ongoing communication with our franchisees regarding the magnitude and pace of pricing will remain essential. Our franchisees are focused on the long term and time and again that approach has been rewarded. As long as we continue to do the right things for the customer, we can always work through short term challenges. McDonald's understands that customerâs perception on value is made up of more than just the price of our food. It's also about the experience we provide. Our modernization efforts have had a significant impact on improving our customers experience, and this is also improving how our customers think of our brand. Now that we are nearly fully modernized, our attention is turned to being laser focused on our operations and running great restaurants. In 2022, we reengaged most of our system on maintaining operational excellence in our restaurants through our Performance and Customer Excellence program, also known as PACE. This restaurant assessment and consulting tool, which is currently deployed in 30 markets, was suspended during COVID. Along with providing new tools, this represents a new way of working for our field teams that help us market target organizational and restaurant support for key growth drivers. This renewed focus will help protect McDonald's brand standards for an outstanding customer experience every single day. Restarting PACE in 2022 led to strong operational improvements in several key markets as a result of a more dedicated consulting and coaching time to support lower performing restaurants. For example, the UK saw improved customer satisfaction, speed of service, and overall experience for these restaurants. In Spain, restaurants that had the lowest customer satisfaction scores in the drive-thru improved to be at the same level as top-performing restaurants by the end of 2022. Additionally, as a result of this program, France saw increases of 30% in customer satisfaction scores at locations with the lowest scores. PACE clearly drives operational improvements, which provides a better customer experience that in turn drives business performance. This month, the U.S. also restarted PACE, and we expect to see similar operational benefits in our largest market in 2023. I'll now turn it back to Ian to talk in more detail about our 2023 outlook. As Chris just discussed and as I talked about last quarter, we continue to operate in an extremely dynamic environment. Looking ahead to this year, we anticipate macro-related pressures will continue to weigh on both our consumers and our business. With significant inflationary headwinds across commodities, labor and utilities, our company-operated margin percent will be hampered in the near term, and we expect full year 2023 company-operated margin percent will be slightly lower than our quarter four results. This elevated cost environment is also impacting restaurant cash flow for our franchisees, particularly in our European markets. As we've previously mentioned, our financial strength and scale gives us the ability to provide temporary and targeted support, ultimately keeping our entire system aligned on proactively investing to drive long-term growth. We estimate that these efforts will have an impact of between $100 million to $150 million in 2023. Turning to G&A, the digital and technology investments that we've made over the past few years have been strong contributors to our top line growth. Moving forward, focusing on our evolution of Accelerating the Arches, and in particular accelerating the organization, will enable us to work more efficiently and effectively, harnessing our scale and reallocating resources to drive growth in the future. In 2023, we expect G&A to be between 2.2% and 2.3% of system wide sales. Despite the cost pressures throughout the P&L in 2023, we anticipate an operating margin of about 45% driven primarily by strong top line growth and franchise margin performance. We're projecting interest expense this year to increase between 10% and 12% compared to 2022 primarily due to higher average rates on our debt balances. And we expect our effective tax rate for the year to be between 20% and 22%. We anticipate currency translation will negatively impact earnings per share of between $0.07 and $0.09 in the first quarter. As of now, we expect currency translation to be a slight tailwind for the full year but as you have seen, currency rates have been fluctuating quite a bit recently. So we'll continue to keep you posted on the anticipated impact to our results. Transitioning to capital expenditures, we plan to spend between $2.2 billion and $2.4 billion this year, about half of which will be dedicated to new unit openings. Globally, we plan to open about 1,900 restaurants with more than 400 of these openings in our U.S. and IOM segments, where we continue to see strong returns. The remaining 1,500-or-so new restaurants, including about 900 in China, will be across our IDL markets. As a reminder, our strategic partners provide the capital for these restaurant openings. Overall, we anticipate almost 4% unit growth from about 1,500 net restaurant additions in 2023. We expect this will contribute along with restaurants opened in 2022, nearly 1.5% to system-wide sales growth. As Chris mentioned, work is underway on our fourth D, restaurant development, within Accelerating the Arches. We'll have more details to share later this year, but we're excited about the opportunity to accelerate the pace of our new unit openings moving forward. And finally, we expect to generate strong cash flow in 2023, enabling us once again to convert more than 90% of our net income to free cash flow. Going forward, our capital allocation priorities remain unchanged: first, to invest in new units and opportunities to grow the business along with reinvesting in existing restaurants; second, to continue growing our dividend; and third, to repurchase shares. It's times like these that highlight the strength and scale of our McDonald's system. Although 2023 will bring short-term pressures, I'm confident that the resilience of our business and our strategy will continue to deliver long-term growth for our system and our shareholders. Now let me turn it back over to Chris to close. The McDonald's global system is executing at a high level, and I'm optimistic that our Accelerating the Arches strategy offers us a long runway of growth despite the headwinds that we've discussed on this call. The McDonald's brand is in great shape, and yet there's so much more we can do. In my travels throughout our global system, I sometimes like to ask our people, what exactly does McDonald's Corporation sell? As you might imagine, this usually prompts a lot of puzzled looks, and a brave soul or two will raise their hand and say, "Well, we sell great-tasting food or we sell burgers and fries." Of course, that's technically true. But as a largely franchised business, ultimately, McDonald's Corporation is in the business of selling a brand so that others can sell burgers and fries. And while some may see it as a trivial distinction, I see it as fundamental. As goes the McDonald's brand, so goes the health and economic value of our company and system. Our Accelerating the Arches strategy is designed to build our brand to make McDonald's more relevant to more people more often. Our M-C-D growth pillars are driving system-wide sales, and the recently announced Accelerating the Organization initiative will help us unlock further growth by enabling our system to be even faster, more innovative, and more efficient. Through Accelerating the Organization, we'll sharpen our priorities and increase our investments against our biggest opportunities. I want to congratulate the McDonald's system on a terrific 2022 and thank all three legs of the stool, our franchisees, our suppliers, and our company employees for their dedication and passion for our business. A global pandemic, record-breaking inflation, a war in Europe, the McDonald's system continues to execute and deliver no matter the challenge, and I'm excited to continue our success into 2023. Thank you. A big-picture question tied into some of the stuff you were talking about in the U.S. It's been fascinating to see how McDonald's traffic in the U.S. has largely declined, most years at least, even as you've added about $1 million in sales per unit. And your customer satisfaction scores and the external stuff that we see, it's been stubbornly and surprisingly low. It's almost like the consumers being more honest with his or her spending rather than these surveys. So I'm wondering, in your work, where do you see the customer satisfaction opportunity in the U.S., whether that's in convenience and speed or food or other? And do you think the U.S. will have a different same-store traffic outcome over the next year or decade based on some of the stuff that you're doing? Thank you. David, it's Chris. Thanks for the question. Well, I think starting with -- we've talked about on a number of calls over the last several years that guest count is a very imprecise measure, and it's imprecise because of what we've seen with delivery, but also what we've seen with digital, where we're now getting multiple orders. And so while it's important for us to always be attentive to guest count, I think also recognize that the complexion of how customers are experiencing the restaurant has changed. So from that vantage point, we look at things from a relative perspective and we feel very good about our relative performance on that as evidenced by our strong traffic growth that we had in the U.S. this year. I think your larger question about the health of the brand, there are lots of different surveys. Ultimately for us, we have our own internal surveys and customer satisfaction with McDonald's is strong. I think our brand clearly is resonating as you've seen in our marketing communication, the fact that we have a modernized restaurant estate, I think, has been huge for us in terms of improving customer perception of the brand. And so I feel very good about that. But for us, going forward, the opportunity for us to continue to make our brands more and more beloved is going to be on this digital opportunity. And as I mentioned in the opening comments there, digital gives us such an unlock to get more tailored in the experience, the offer, the products that we're delivering to our customers. So I think for us, if we can get there on digital, that's going to be a big opportunity. And we've made a lot of progress. As you heard in the opening comments, about 35%, I think it's 36% in Q4, were digital transactions. And by the way, half of those digital transactions are known digital transactions, where we know the customer. Imagine if that number -- I'll just use as one outlier, close to 90% of our transactions in China are digital transactions. And imagine if most of those are known transactions, you can start to imagine what that can mean for the brand in the long-term. So I'm optimistic about where we're at. Hi, good morning. I had a question about the investments you're making in the franchisee system. I think, Ian, you mentioned it was $100 million to $150 million for this year. I'm just wondering if you could elaborate on why that was necessary given the strength you're seeing in the top line or the franchisees presumably are seeing in the top line and also some signs that maybe the cost environment has not been as bad as feared? And then maybe as part of that question, if you could just comment on where franchisee-level cash flows are today versus maybe where they were a year ago, that would be helpful? Thanks. Great. Good morning David. Thanks for the question. Well, I think as you've heard us and particularly me speak to, I think, particularly in Europe, we're seeing some quite strong headwinds due to the levels of inflation on things like commodity costs, energy prices and, of course, labor. And I think the pace and scale of inflation mean that those headwinds are creating relatively significant levels of short-term impact to our margins and then, of course, to our franchisee cash flows. And I think one of the competitive advantages that we have as a global franchisor with our size, our scale, and our brand strength is that we're able to provide that temporary and targeted support for our franchisees, which we always, of course, direct to where it's most needed. I mean I would use the UK as a bit of an example and Europe. I mean, I think -- obviously, we've seen significant levels of food inflation, significant levels of energy inflation, even though energy maybe hasn't gotten to the peak of where some were predicting because Europe's had a warm or milder winter so far. I mean still significantly above where it was 12 to 18 months ago. And I think, again, just the pace and scale of that impact is creating quite a bit of pressure on margins and cash flow, as I said. And our size and scale, as I said, just allows us -- puts us in a position to provide that support, direct it to where it's most needed. I think, honestly, that's nothing new for McDonald's. I mean it occurs from time to time around the world when conditions warrant. It's just a little bit more significant now just due to the broader nature and scale of some of those short-term impacts that we're seeing. And if you remember, during COVID, we did provide support to our system. It was critically important because it allowed all of our systems to stay focused on our plans and was really fundamental to the accelerated momentum that we saw through and then coming out of the pandemic. This is a very similar situation. I mean our system is highly aligned, it's confident, and it's focused on our strategic plans and is continuing to proactively invest against the opportunity areas that we have. So I think it's this that's really going to help us stay focused on the category-leading momentum we have and make sure that we -- as we get out of these headwinds, we're in the strongest possible position. Hey, thanks for the question. Maybe if I can ask one about unit growth, if I can. I'm not sure you already finished 2022 on a gross basis. But I'm guessing based on the year-end CAPEX number that it was maybe slightly below your expectations. And then this year, you're expecting development to be a bigger focus and an uptick in unit openings to about 1,900. So maybe if you can comment on where you're starting to see maybe some improvement in the construction and permit timing and also what you're seeing in terms of build-out costs, perhaps directionally new unit economics given those higher costs and presumably the lower margins that you're signaling with your guidance? Thanks. Good morning, Eric. Yes, thanks for that. I think for sure, in 2022, we had some impact just from that -- coming out of COVID, some of the impacts on just getting permits approved. I mean, as you've heard us talk about in our outlook for 2023, we think we're going to open on a gross basis about 1,900 locations, about 1,500 on a net basis. If you look specifically at the U.S. and IOM segments, we're planning about 400 openings there. That's up about 25% from where we landed on in 2022. So I think that's a sign of the confidence we have and the opportunity that we've got in those segments to begin to start accelerating openings as we've talked about adding that 4D development. For sure, I think there's certainly some inflation on the construction and development costs like we're seeing across almost every sector today. But we also know we've got opportunity, I think, to be more efficient and effective in our investments that we're making in some of the restaurant formats and how we can get more efficient and effective as we bring those formats up. And so feel really good about the returns that we're continuing to generate, particularly in the U.S. and our IOM segments, and feel confident in the opportunity we've got to add more units as we go forward. Yes. I would just add a couple of things. I mean think about the U.S. for a moment. We haven't added new units in the U.S. in eight years. I mean 2014 was the last year that we actually grew restaurants in the U.S. So we've had eight years where we have been focused largely on a remodel program. And in that same period of time, I think everybody would agree, our U.S. business is in a significantly better shape today than it was back then. And so you look at our three-year stack, our three-year stack in the U.S. is 25%. Our global three-year stack is also around 25%. We've grown the business to a great degree and what we haven't done is we haven't kept up with the new unit pace, particularly in our owned markets, U.S. and IOM. And so we're spending the time right now to get a very granular look at where we would build, at what pace, and what types of restaurants, and that's the -- what we plan on sharing with you at the end of 2023. Great. Thank you very much. Just a question on the U.S. and Europe. Clearly strong double-digit comp performance. I'm just wondering as you kind of look beneath the top line, any sign of slowing macro impact in the consumer or perhaps any concern of consumer pushback on the outsized menu pricing or maybe just looking more broadly, any color on McDonald's versus the industry in terms of market share in key markets since we know everyone is being more aggressive on price, any kind of color you could provide would be great? Thank you. I think overall, we're still seeing the consumer is resilient, and it plays to our strengths as a system in terms of being well positioned on value. We lead in every market around the world on affordability and value for money. And so that puts McDonald's in a strong position. We've talked about on prior calls, there is a little bit of a decrease in units per transaction that we're seeing. We're seeing a little bit of trade-down. But I got to say, these are probably on the margin that we're seeing this. Overall, the consumer, whether it's in Europe or the U.S., is actually holding up better than what we would have probably expected or maybe what I would have expected a year ago or six months ago. So I think the question is as we go into 2023, there is going to continue to be inflation. The environment is going to continue to be challenging, I think, from a macro standpoint. And so do you reach a point where maybe it does start to materialize around the consumer. Certainly, consumer sentiment out there remains depressed in many markets. But we're not seeing it right now. I think it goes back to what I said in the opening though, we have to be very judicious. And our franchisees have been great about the pace of pricing, where we're just making sure that we're keeping the customer engaged and coming into our restaurants as we're working through the menu pricing. And we're today still seeing flow through on pricing in line with our historical numbers. So not seeing any big resistance right now. Maybe I'll just hook on to that a little bit because I think as Chris touched on, I mean, we're laser-focused on those two consumer-facing metrics and value for money and making sure we've got those affordable choices across our menu. And I think, as Chris said, we're in a leadership position across the majority of our top markets in both of those metrics. And we know that even though those metrics have probably come down a little bit over the last 12 months or so on the back of higher pricing, the gap to the competitive set that we have has remained consistent. And so as Chris talked about, I think we've had a good discipline around pricing and making sure we keep that strong value for money in place. I think the other thing that's important to highlight is we know that we're continuing to gain share across all of those key markets. And so another kind of proof point of, I think, how we're navigating and continue to resonate with consumers. I mean, I think at the end of the day, value for money is about the experience we deliver over the price we charge. And I think it goes back to what Chris touched on earlier that we've made a lot of investments over the last couple of years in the experience. We've got a fully modernized estate. I think we've upped our game in terms of our marketing, creativity, and execution. We've invested a lot in our digital capabilities and interaction with consumers. And I think all of those strengths are coming together now. And I think our focus as we head into 2023 is really on making sure that each and every time consumers choose to come into one of our restaurants, we deliver them a great experience and continue to ensure that we earn those visits each and every time. Yes, thank you, good morning. Maybe I'll just ask about the kind of 45% operating margin outlook for the year and the components of that. Do you think that as a result of kind of the Accelerating the Organization strategy that there will be some savings in G&A over time or is this just perhaps a reallocation, would you expect to continue to see some leverage on the franchise margin side, for example, I guess I'm just trying to think through some of the drivers of that? Good morning Brian, yes, thanks for the question. Well, let me talk about, I guess, a couple of the pieces. I mean, when you think about operating margin, for sure, there are a couple of specific pressures that we're working through that we believe are short term in nature. Obviously, we've got that pressure on our company-operated margins from the inflationary pressures that we're working through. And so that's an impact. Obviously, we've got the incremental support we're providing to franchisees, which is an impact focused on 2023. So we'll have both of those pressures to work through this year. I think in regards to G&A and ATO, I mean, as you heard in my opening comments, we expect G&A for the year to be between 2.2% and 2.3%. Any kind of outcomes and just a reminder on ATO is it's really focused on our ways of working, which the output is how do we get more efficient, how do we reallocate resource against innovation and growth, and how do we make sure we're moving faster as an organization. So any of the outputs of ATO are kind of included in our 2023 guidance for G&A. I think certainly, the best way to work through any kind of short-term pressures is to continue to make sure we're driving strong top line momentum, which I think our quarter four results reflect, and it's certainly our focus for 2023. And as we get through these short-term pressures, certainly believe that, that strong top line momentum will mean that we're beginning to drive greater leverage and operating margin and anything that's kind of dependent on sales as we go forward like G&A. And so I think we certainly expect to see that beyond 2023. Thank you very much. So obviously, very strong U.S. comps. Can you talk about specifically what you saw with traffic and average check in the quarter and performance across dayparts, if there's anything notable there? And then just as it relates to share gains, what are you seeing with the lower-income consumer versus the high-income consumer? Thank you. Yes. So focusing just on the U.S., I think what we saw from a performance standpoint was very balanced growth across the dayparts. So nothing particularly noteworthy there. Late night for us continues to be the opportunity just because of some changes that we've made around operating hours due to the staffing environment. But around kind of our core dayparts, that's been very strong. We're also seeing strong growth on our core menu, particularly on chicken, where we've been gaining share quite a bit of share on chicken. We've gained about a point of share on chicken in the last year. And then if you think about beef, we're also continuing to grow our share in beef despite having a very strong presence in that already. So nice balanced growth with the U.S. Digital and delivery, of course, are driving outsized growth. So digital, if you look at digital transactions, up close to 40% in the U.S., which is above obviously the 25% -- or the 10%, rather, growth that we saw in Q4. And then on the low-income consumer I'd say the only thing that is probably noteworthy there is while the units per transaction is maybe down slightly, we're seeing a little bit of an uptick in frequency of visits. And so I think that's maybe something where the customer is coming in, being a little bit more cautious about how much they're ordering. They're probably spending to an absolute dollar amount, but we're seeing a little bit of an improvement around frequency with that low-income consumer. Maybe just I'll hook on a couple of additional kind of pieces of texture. I mean, I think if you look at the full year in the U.S., we were up about 10% from an average pricing standpoint. And as Chris talked about a little bit earlier, a couple of partial offsets to that. One is we continue to kind of see this reversion of order channels more to the kind of pre-COVID behavior. So of course, while delivery is still elevated, it's come back a little bit as customerâs kind of revert to more typical ordering channels. And then as Chris also touched on, you've got that -- maybe that more value-conscious discerning kind of choice making that consumers are making. I think two things that are really important. I mean value for money and affordability, which we've already talked to, we know we're in a really strong leadership position in the U.S. business. And I think the second thing is that on a comp basis, we continue to gain share. And I think those are both strong proof points of the fact that we're well positioned and the fact that we are in a position to ensure that we are affordable and accessible for our consumers despite their individual circumstances as we go forward. Thank you. Chris, following all the momentum in 2022 and really in recent years, could you talk a bit more about the biggest opportunities that you see as it relates to continuing to drive that guest count momentum in 2023 and perhaps beyond? I don't know if it's the same in the U.S. as key global markets, but just curious how you'd kind of think about or rank order some of the opportunities that you've spoken to on the call? Thank you. Yes. It really just goes back to the pillars that we have in our strategy. It's marketing for menu and now the 4Ds. I think each of those still has quite a bit of runway of growth. I'm encouraged by what we're doing from a brand standpoint. But there's a lot more we can and will be doing on that to continue to strengthen our brand and marketing excellence. And we're still not as good as we could be around lifting and shifting great ideas around the world and so we're going to get better at that through this Accelerating the Organization effort. On core menu, chicken for us is a big opportunity as is coffee. I think on burgers, we're very well developed. But chicken and coffee, in particular, offer us, I think, a good growth opportunity. And we're going to be focused on that with some very specific products as opposed to having that maybe be something in the past that was a little bit more left to individual markets to kind of chart their course. And then on the 4Ds, I think all of those for us have growth. So it's not a different playbook than what we're talking about with Accelerating the Arches. It's very much the same playbook. And what we're adding into the U.S. this year, as I mentioned in my comments in the opening, is on the operational side. With PACE restarting, I've been very encouraged to see how PACE has been driving customer satisfaction when we put that in, and we're seeing improvement around service time. So you take all of the top line-driving initiatives related to the MCDs and you overlay on top of that improved operations or improved execution at the restaurant, and that gives me confidence in the outlook. Thank you. I wanted to sort of just ask about this -- some of these initiatives in the context maybe of McDonald's history, which is to say, when -- you mentioned, Chris, that it's been since -- 2014 since you had unit growth in the U.S. As I recall, unit growth had picked up a few years before then, but same-store sales slowed. And so there has -- historically, it seems like there's maybe a trade-off there. So that was one sort of piece that I wanted to ask about and how you think about that balance? And then related, Chris, when you joined, there was an initiative, I think, around reducing some of the management layers and really streamlining and making the lines of communication clear between the markets and the headquarters. I guess, what's happened since then or it feels like it's maybe a renewed initiative to do that, so if you could just compare perhaps where you were to what you're doing now and where the reinvestments might be this time versus the last time? Thank you. Sure. I think on your first point around unit growth versus comp growth, we have to walk and chew gum. It's not one or the other. It's the two of them in combination. And I think the big difference is when you want to be growing units is when you've got strong comp sales because that reflects the underlying health of the business. I'm always very leery when I see someone out there putting a strong unit growth number without strong underlying comp sales because that's historically not been a good recipe in our industry. And so for us, I think we've got, as you've seen in our results, strong comp sales. I feel very good about the outlook. And so that now gives to me permission to put on top of that some unit growth. But we need to be very smart about where and how we do that. And I think sometimes in the past, we were looking at just putting units and looking at an absolute number and not maybe looking at the quality of the site. And so that's why we want to take some time this year to make sure we feel confident about the exact number, the pacing, the quality of the site so that when we do roll that out that we've got the ability to continue to drive both comp sales as well as unit growth. And then your question about the organization, there's maybe some similarities with differences. I think if you go back to what was done in -- I think it was 2016 or thereabouts, I mean that was savings that largely came about through refranchising a big chunk of our restaurants. And so that was -- as we took McOpCo percentage down and we moved more of that to the franchise side, that gave us some benefits from a G&A standpoint. There were some changes that happened in terms of delayering at the senior level. But what -- that effort was not about is ways of working. That was much more kind of, what I would say, are just business model approaches as opposed to ways of working. And what I've seen in my time in this job and also what I've seen in the U.S. when I was in that role is that we have a lot of opportunities to get faster, more innovative, more efficient. And it's because we have historically been very decentralized in some areas where we reinvent the wheel way too often. And I think the other thing that we've seen is we haven't been as sharp around our global priorities and so there's been proliferation of priorities that sometimes happen at the market level. I would just give you an example. As we're going through this ATO exercise and learning about where we have the opportunities, we're uncovering all sorts of interesting things, like, for example, one market that has 300 priorities. Well, of course, you can't have 300 priorities, and you can't resource 300 priorities. And so as we discover and learn these things, this is all going to be about making us better. So the difference of today versus what we did maybe back in 2016, I think that was much more of a structural change related to our franchising model with some delayering at the senior level. This is much more fundamental about changing ways of working that I think ultimately are going to make us better both on the top line, but I think are also going to give us efficiencies that flow through, as Ian was talking about with G&A leverage. Great, thanks for taking the question. Just curious, I know we've spoken quite a bit about some of the cost inflation and stuff like that running through the business across the globe in 2023. Curious if you can give us an indication on your thoughts regarding pricing versus the inflation expectations for the full year and how you're working with your franchisees across the globe to address that? And then second, if you could talk about the quarter-to-date industry data, particularly in the U.S., it's been quite strong to start the year. Curious to know if some of the strength that McDonald's saw in the fourth quarter has carried over into the first quarter? Thank you. Good morning Jon, let me start on that one. And maybe just to give a bit of texture to my answer, I'll talk about it in a couple of pieces. I'll start with the U.S. and then talk a little bit about IOM but maybe with a focus on Europe. I mean, I think in the U.S., we would say we're past the inflation peak and kind of heading on that downward slope. But certainly, we had high inflation, mid-teens in 2022 from a food and paper perspective. I think in 2023, we think our food and paper inflation is going to be kind of mid to high single digits. So still obviously very elevated from where it's been for a long time. And so in combination with that, you've also got energy prices that are up and interest rates and things like that, that are impacting us. I think if you move to IOM with a focus on Europe, I think we're still working through the peak period of inflation. I don't think we think inflation will -- in Europe we will start to ease probably until mid-2023. In fact, we'll see some markets in Europe with higher levels of inflation in 2023 than we saw in 2022. And so I would say, on an IOM basis for 2023, we probably expect food and paper inflation to be kind of in that mid-teens, not substantially lower than what we saw in 2022. So I think that gives you an indication of the level of the inflationary pressure. Of course, energy prices in Europe, maybe while they haven't hit the peak, as I was talking about earlier because we've had a warmer winter in Europe so far, I mean the underlying tensions aren't fully resolved yet, and inflation levels and energy prices are certainly up significantly where they were 12 months or so ago. And so I think from a pricing perspective, what we're trying to do is be very disciplined and be very consumer-led in our thinking. You may have heard me talk in the third quarter call just a little bit about the investments we've made over the last couple of years to really improve the tools, the data, and the analytics that our advisers use to provide recommendations to the business. Of course, as always, our franchisees make their own pricing decisions. But I think as Chris talked about, we feel good that we're being very disciplined around the pricing we're taking. We're using a long-term mindset, knowing that what we want to continue to do is drive strong top line momentum so that we have that momentum through these pressures and then, of course, out of the pressures and begin to kind of recover margins and gain leverage as we go forward. And we think our system has done a really good job on that because when we look at our value for money and affordability scores, we continue to maintain those leadership positions. And so I think 2023 is kind of a moment in time where we're seeing kind of the peaks of those pressures but feel really good as we get out of 2023 that the momentum that we're going to continue to drive will keep us in a really strong position to start gaining leverage again. Yes. I just would add, I mean, I've seen some of the industry reports on the momentum heading into 2023, and we feel good about how our business is performing. But I think Ian touched on one thing, just keep in mind, we've got Omicron, that's a tailwind. We've got good weather, not just in Europe, but there's favorable weather in the U.S. So there are some things there that are helping, I think, industry-wide, but we feel very good about the momentum we're starting the year off with. Great, thanks. Chris, you expressed the same macro concerns in Europe as last quarter. But within IOM, strong 4Q comps, the UK, France, and Germany, you called out really standout performers. And so you spoke about a few country-specific operating highlights. But can you talk about the degree that Europe is benefiting from trade-down from higher-priced dining and how you're positioning the business to sharpen the focus on value in 2023 while recognizing franchisee profitability in Europe is seeing the greatest challenge? And if I could just squeeze in one quick housekeeping question, how will the $100 million to $150 million of 2023 franchise release show up in the income statement and if you anticipate that to be front half or back half-weighted or spread evenly throughout the year would be helpful? Thanks. Why don't I have Ian cover the housekeeping item, and then I'll get to your broader question about Europe and the consumer. Yes, hi Andrew. So just on the $100 million to $150 million, that obviously is directed to support franchisees. And so it would show up through our franchisee revenue in the income statement as we work through that. I'll give it back to Chris for the rest. Yes. And to the question about trade-down and the benefits of that, we're seeing good balanced growth in Europe and in our IOM markets. So I wouldn't say that we are disproportionately benefiting from some sort of trade-down to the degree that we have visibility kind of at the different strata of the consumer, we're continuing to see that hold up well across sort of all consumer segments. Hi. Thank you so much for that question. The question is on CAPEX and just overall capital needs of the business. Certainly, appreciate the guide for fiscal 2023 at $2.2 billion to $2.4 billion, but that includes new units on 400 IOM in U.S. units. So I guess there's a couple of different parts to this. Do you think -- is that 400 number kind of the right number to think about in these developed markets going forward or could that number necessarily increase, I guess, the first part? Secondly, you did mention the completion of EOTF in the U.S., largely in 2022 and I'm wondering if there's another large project, specifically, I guess, in the IOM markets, that may kind of take up for existing unit CAPEX? And finally, in the release, and I think this has been a really important thing for McDonald's' 90% cash conversion. I mean I suppose you mean of earnings of your net earnings, I mean, is that the right ratio that you expect to hit on an annual basis going forward, maybe getting a little bit of a preview of what you will talk about later this year at your analyst meeting? Thanks. Yeah, good morning John, thanks for all that. So I think on the 400 openings, as Chris said, we'll have more to say on that later in the year. But I think what we've done well over the last couple of years is really build demand for the brand by investing in the brand, I think in doing a good job to resonate with consumers. And so certainly feel there's opportunity ahead. I think from a quantification standpoint, we'll talk about that, as I said, more later in the year. On 2023, the $2.2 billion to $2.4 billion of CAPEX, about half of that is going to go towards new unit growth. I would say one of the things as we work through COVID and dealt with kind of consumer shifts in behavior was we certainly understood there was an opportunity for us to deal -- obviously, we've got a lot more ordering channels coming into restaurants. I think that's certainly -- and with the demand and volume that we've created, has created some challenges just in managing the capacity and the volume of customers we're dealing with in some of our restaurants across our owned markets. And so some of that reinvestment CAPEX is just going to us kind of working through these new ordering channels like delivery and digital and just enabling our restaurants to be better set up to deal with the volume of business that they're handling and to make sure that they can continue to grow volume by having more capacity available as we go forward. And so some of that capital is going there. I think on the 90%, I think you should feel good that that's something that we feel will be in place going forward, as we've talked about in 93 [ph] in terms of converting our net income to free cash flow.
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Hello and welcome to Intevacâs Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, February 1, 2023. Thank you, and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the fourth quarter and full year 2022, which ended on December 31. In addition to discussing the companyâs results, we will provide financial guidance for the first quarter of 2023 and our outlook looking forward. Joining me on today's call are Nigel Hunton, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer. Nigel will start with the review of our business and our outlook. Then Jim will review fourth quarter results and discuss our financial outlook before turning the call over to Q&A. I'd like to remind everyone that today's conference call contains certain forward-looking statements, including, but not limited to, statements regarding financial results for the company's most recently completed fiscal quarter and year, which remains subject to adjustment in connection with the preparation of our Form 10-K as well as comments regarding future events and projections about the future financial performance of Intevac. These forward-looking statements are based upon our current expectations and actual results could differ materially as a result of various risks and uncertainties relating to these comments and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The contents of this February 1 call include time-sensitive forward-looking statements that represent our projections as of today. We undertake no obligation to update the forward-looking statements made during this conference call. I will now turn the call over to Nigel. Thanks Claire, and good afternoon. I'm excited to share with all of you today, our latest earnings results and to highlight the momentum we built and the achievements we had in 2022. 2022 was quite a year for Intevac. We set out with a bold ambition of transforming the business and laid out a clear vision of the future of the company. I'm pleased to say we have taken huge strides towards our vision over the past 12 months, there's been a year of significant change for the company. Intevac now feels and operates very differently to that over a year ago, we have transformed Intevac into a new company. The new Intevac as we refer to internally and with customers. Intevac will continue this journey in 2023. The goal of this journey is to return strong shareholder value with sustained profitable growth. And we are already creating this momentum. I'm immensely proud of the entire team not only for the progress they have made in delivering on our ambitious aims, but how they have embraced the vast and rapid change I've tasked the company with through this past year. As I reflect upon, our commitments to our shareholders, started with my first earnings call one year ago. I'm pleased to share that our team has executed on every single one of the mandates that we laid out for 2022. We have refocused the business around a leaner product portfolio, streamlined our business and strengthened and diversified the leadership team and the wider business as a whole. We've laid out a clear plan to return to profitability, built on our existing strong position in the hard disk drive market and most excitedly of all have developed a critical strategic partnership that is supporting Intevacâs expansion into a new growth market. We also delivered on each quarter's commitments and our financial targets for 2022. Looking briefly back on 2022, I'm pleased to share the following highlights with all of you. Each of these achievements has been a significant contributor to the change of direction, pace, energy and momentum the company has gained recently and with a specific intent set out at the start of my tenure with Intevac. A primary goal for Intevac reestablishing momentum and focus last year was to first assess the growth potential in each of our end markets. Intevac needed to refocus its business around a leaner product portfolio. As vaccines for COVID continued the global rollout. And with the gradual reopening of travel, I took the opportunity to meet personally with each and every key customer in order to determine the correct direction and priorities for Intevac going forward. I'm pleased to share that I've traveled extensively each quarter of the year and met personally with all critical stakeholders that touch our business today, and have potential to impact it greatly in the future. These efforts not only resulted in strengthen relationships, but also led to the decision to cease development of multiple equipment initiatives, in order to focus our innovation efforts on our flagship 200 Lean and to enable the development and emergence of our game changing TRIO platform. This proved to be a decision that has not only shifted energy and momentum for the company, but has changed its future growth trajectory, and also the company's financial potential. It has also led to an early pattern toward TRIO platform, and a further nine patent applications have been submitted, key achievements as Intevac begins the process of strengthening and broadening its IP portfolio. Looking internally, we committed at the start of 2022, to streamlining the structure of the business, and doing so took action to align internal resource to genuine revenue growth prospects. 2022 source raise the bar for employee performance, and also source dramatically enhance the capability of the organization. We introduced an internal development program within the business and recruited high caliber talent. We have taken steps to significantly strengthen and diversify the senior leadership team and unify the organization under one cohesive leadership group comprised of the best talent from both the US and Asian teams. Further still today, we repeatedly measure and assess the strength of our organizational culture, having heightened emphasis on our company values of innovation and accountability. Our internal metrics and measurements are already showing strong evidence that our global team of employees feel invested in, energized and excited for the future and our customers and partners have also validates the strength the organizational culture, plays in our ability to deliver outstanding engineering. This past year, has not only seen Intevac in personal and professional development. We've invested in our physical space too. We know the importance of having an environment that encourages collaboration, something that in turn enables innovation. And the changes made to our building to the creation of a dedicated collaboration space has been a key enabler of greater cohesion throughout the business, and also led to the rapid development of our game changing TRIO platform. 2022 was momentous from an organizational perspective. Our products, people, culture and customers have been part of this positive change. And I've seen this all year. Today, our R&D, engineering and operational teams are developing into world class high performing teams. And we have begun the process of enhancing and developing our commercial team. I believe we are beginning 2023 with a strong team and are poised for continued execution in the year ahead. In relation to returning the company to profitability, we are firmly on track to return Intevac to profitability for the full year in 2024. And remain fully invested in preserving the strength of our balance sheet. I have personally met and engaged with dozens of investors, each of which have expressed their preference for a measured protection of our balance of cash and investments. Whilst also showing the reassurance and how we have executed on these preferences to date. In 2022, we maintain the strength of balance sheets, and are committed to do the same in 2023. Turning to our existing hard disk drive market and our flagship 200 Lean product, we believe firmly that we're increasing our share of worldwide media capacity. And that customer partnerships have resulted in is rapidly advancing business opportunities through HAMR upgrade initiatives, and the securing of $70 million in 200 Lean orders which will be delivered over the next four years. We continue to believe in the future of the hard drive business. And our efforts in 2022 have kept us in a prime position to continue to be at the forefront of the market and its development. Finally, in what is now highly regarded internally with Intevac as well as externally as a game changing development, 2022 source deliver on our commitment to develop a meaningful partnership relating to a new product craft category. Intevacâs development of the TRIO platform, A new product that supports consumer electronics and other applications has the potential to provide a runway of compelling and sustainable long term growth opportunities and revenue for Intevac far into the future. It is by far and away the most important development achieved by the company, since the launch of the 200 Lean product 20 years ago. The recently announced partnership on December 30 is a key milestone in our growth strategy. It broadens our product line and dramatically increases the total addressable markets we can now reach. As we sit today, we have a stronger, leaner, more diverse team, delivering world class products to the forefront of the markets we're operating in and pursuing. Our objective on this call today is to ensure that our investors, analysts, employees, suppliers, customers and all stakeholders recognize the achievements of the past year and our competence and commitment in our strategy to deliver strong growth and financial performance of the years to come. Now turning towards the TRIO. In late December, we completed our joint development agreement with a leading provider of glass and glass ceramic materials. The completion of this definitive agreement was a transformational event for Intevac. The agreement includes a minimum revenue requirement of approximately $100 million over five years, in order for our customer to maintain exclusive access to the TRIO platform for consumer electronics applications. The agreement also includes a minimal annual commitment to maintain exclusivity. We are currently completing the first TRIO system which will begin qualification later this quarter. We anticipate that once the first TRIO completes qualification, we will receive a purchase order for the qualified unit. At this time, we are planning to deliver at least two additional TRIO systems within 12 months of qualification. We will be building several additional tools this year in advance of 2024 shipments, so it'd be ready for some upside to support our key partner. I would like to point out at this time that going forward we will be limited to what we can communicate about our work with this customer. However, I can share with you a bit of what makes the TRIO such a compelling manufacturing platform for the coating of glass on consumer electronic devices, which is what excited this customer to engage with us and seek a level of exclusivity, which we granted. And it can also share why we see the potential for this partnership to be well in excess of $100 million over the next five years. The TRIO offers three primary advantages over current coating options. First, it offers tremendous flexibility compared to existing coating equipment, as the platform can accommodate almost limitless configurations of device form factors, including both 2D and 3D shapes. Second, building from our 20-year history of leadership in the hard disk drive market, our systems have a proven track record of depositing highly uniform and defect free films of the highest quality standards for durability and precision executed with very high yield over a long operating life. And lastly, also critical to our TRIO customer is its productivity, throughput and competitive cost of ownership in a compact footprint. So the compelling advantages of the TRIO platform are flexibility, cost competitiveness, and providing one platform for many different applications. Our plans for 2023 will be focused on qualifying the initial TRIO system for our customers thin film technologies by mid-year, delivering the initial systems and working with our customers to ramp in the field. As our customer gains confidence in the value of TRIO, we expect that many additional systems will be deployed potentially beyond the minimum contract or volume required to maintain exclusivity. The investments in inventory that we're making today, and which began in earnest during Q4. support the build of multiple TRIO systems. These include not only the systems we expect to deliver this year, but substantially more systems to ship in the following 12 months. In the short term, these investments will be enabled by our strong cash balance. It is worth noting that the strength of our balance sheet is critically important to each of our customers, not just for the TRIO partnership but also for our HDD business. And the investments we're making in 2023 will set us up for a profitable year in 2024 and consistent positive cash flows and returns on invested capital beginning next year. As I mentioned earlier, the $100 million revenue level is merely the minimum required to maintain exclusivity with our first customer, we will continue to pursue additional customers in TRIO and outside of consumer devices. Once successful with the first few tool deployments, we continue to expect our TRIO opportunity will be very significant. In summary, the development of this innovative and game changing platform will make a significant contribution to our growth plans. Which brings me to an update on our HDD business. Recent news indicates encouraging signs on the horizon, setting up a return to growth in datacenter investments and mass-capacity drive. In the meantime, as we discussed last quarter, we're seeing a greater level of customer investments in new technology during this period of reduced factory utilization. We're very proud to be a critical technology partner in the industry's transition to HAMR which is proceeding ahead of schedule, testament to our strong upgrade revenues in Q4 and another strong quarter expected ahead upgrades in Q1. A fundamental part of our strategy is to maintain a focus on innovation in collaboration with key partners. As such our roadmaps are aligned with them. Our HDD guidance for 2023 as well as the five-year revenue forecast remains consistent with what we communicated last quarter. We continue to see an extended investment cycle in both capacity and technology upgrades. That is providing visibility for at least $300 million of HDD revenues from 2022 to 2026. We expect this strong revenue growth the next few years will be driven by upgrades in support of the install base of over 150 systems that will require additional process modules to be HAMR capable, as well as a system backlog today of about $70 million. In summary, 2022 was a transformational year for Intevac. We are very excited about the year ahead and our new partnership TRIO platform. I will take this moment to emphasize just how committed we are as a company to increasing stockholder value, and protecting the strength of the balance sheet as we grow the business and transform into back into a consistently growing and profitable cash generating company with a leading position in each of its key markets. That completes my prepared remarks. Thank you, Nigel. First, I will briefly summarize our fourth quarter results. Revenues came in a bit stronger than forecast at $11.3 million, compared to our guidance of $10 million. As expected Q4 revenues were comprised of HDD upgrades, spares and service. The primary reason for the upside in Q4 was our customers prioritization and pooling of certain upgrade investments which resulted in a more favorable mix of revenue in the quarter. This resulted in Q4 gross margins of 44.3%, well above our guidance of 32% to 34%. The mix of lower margin business that was expected in Q4 is now spread across our full year 2023 forecast. So we expect to continue to maintain our quarterly gross margins of 40% or more for the forthcoming quarters. Q4 operating expenses were $8.3 million, slightly above our guidance of $8 million due to the prioritization of certain R&D spending for TRIO as well as an increase in variable compensation due to the exceptional work of the team and executing key milestones before yearend. The Q4 net loss was $3.2 million, or $0.13 per diluted share, and better than our guidance of $0.17 to $0.21 per diluted share, primarily as a result of the favorable revenue profile in the quarter. With total new orders of $133 million in 2022. We ended the year with 12-year record high backlog of $122 million. As we have communicated throughout 2022, the strong level of order activity for both systems and upgrades resulted in quarterly increases in backlog during every quarter of 2022 of the 11, 200 Lean HDD systems in backlog we expect to deliver one in Q4 and multiple Leans in each of the following three years. We ended the year with cash and investments including restricted cash of $113 million, equivalent to approximately $4.42 per share, based on 25.5 million shares at yearend. Our yearend cash balance was stronger than our forecast of $105 million to $110 million, primarily due to Q4âs TRIO inventory purchases, still residing in AP at the close of fiscal 2022. And we have since paid down that AP year-to-date. Cash flow used by operations was $11.3 million during the quarter and $7.4 million for the year. During Q4, we added $11.9 million in inventory to support the growing backlog and anticipated shipments of TRIO systems in 2023. Q4 capital expenditures were $493,000 and depreciation and amortization were $383,000 for the quarter. Now moving to Q1 2023 guidance, we are projecting revenues to be between $10.5 million and $11.5 million, consistent with our commentary last quarter, we do not expect system revenues until the second half of 2023. But the level of upgrades and field service for the first half of 2023 is a bit stronger than we indicated last quarter. We expect first quarter gross margin to be between 40% and 42%. Q1 operating expenses are expected to be between $9 million and $9.5 million, slightly higher than our expected run rate for the full year due to timing of investments in research and development, along with some typical seasonal increases. After Q1, we expect quarterly OpEx to be around the $9 million level for the remainder of 2023. We expect interest income of about $400,000 and GAAP tax expense of about $400,000 in the quarter. We are projecting a net loss in the range of $0.16 to $0.20 cents per share, based on 26 million shares outstanding. As we look ahead to the full year's financial results, I'll recap some highlights from Nigel's remarks. We continue to expect approximately $40 million in HDD revenue in 2023, which will be relatively evenly weighted between the first half and second half, with upgrades driving most of the first half revenue and one system expected to revenue in the second half. The TRIO activity in the first half will be to build the -- production system and work with our customer to pass qualification in Q2 on that system. After we pass qualification, we expect to receive the purchase order for the initial unit. We are currently planning to deliver at least two additional TRIO systems within 12 months of successful qualification. On our May call once we are well into the qualification process, we expect to be able to provide a range of how many systems could revenue in 2023. With this revenue profile, which is largely HDD driven, but should also include some level of TRIO systems revenue, we expect full year gross margins to be around 40%. And as I mentioned earlier, OpEx of approximately $36 million to $37 million. We expect both interest income and taxes to be in the range of $1 million to $2 million in 2023. Finally, we will continue to closely manage cash to support the business strategy. This completes the formal part of our presentation. Kevin, we're ready for questions. Good afternoon, Nigel and James. Yes, so, Nigel, congratulation on the TRIO partnership. May I inquire like more colors on what kind of letâs say like profiles that we can expect, let's say for the TRIO system once the customer ramp up, should we expect a linear sales profile? Or it will resembles more like a step up profile from letâs say like one period to another? Yes, Hendi, thanks for the question. I mean, very clearly and hope it was coming across on the call, our focus absolutely has to be this month on completing the build of the first tool, we then move into the qualification of the tool. And we are optimistic and enthusiastic and excited about the process, we're going through on this qualification. And that's a qualification of the production tool, mean, the tool was qualified on the testbed and now moved to production tool. And really, that process is going to take the next couple of quarters and that's a critical thing for me is to maintain this organization's focus on delivering and executing on that plan. If I look out way beyond that, and the profile, I think it's too early to say, I mean, I think for me, the opportunity, as we've said, is pretty compelling. It's a very significant opportunity. It's a very different market we're entering, it's one that is the partner and us are going to maintain a level of confidentiality, which is why I said, we're going to have to be cautious what we actually share with people on these calls moving forward. Because the key for me is to maintain our strength, maintain that technology advantage, and then move forward. So really, for this call, it's very much about we're absolutely on track with that first unit, we're on track with our partners to get that qualify. I think once we get through that, we'll have a much better view on what the market potential opportunity is. And the great thing for me is the commitment from that partner for the $100 million over five years as a minimum for that period. But I think it's too early to say that that's a linear or anything else, I think the excitement for me is to get the first tool completed into the market, and actually start building success and securing some orders. So that's going to be my absolute focus. So it's really too early, we're so excited about and that the potential is huge. So I don't think it'll be linear, let's say that's probably anything to say. And then Nigel, with regard to the TRIO system, what is the latest estimate of the production rate? And that I would like, also to know, let's say, when there's estimate for production rate will be it's somewhat like semi fixed, meaning that that's the run rate. And then there is no, like, big window, let's say it's like from, like early into like a full ramp up, whether there's like a big range, like how many units they can produce? Yes, would you share some color on that? Yes, I mean, I think probably one of the really exciting things about the product is this new platform, which is very different to anything we've done before. So people are going to start thinking about segregating in their minds, the traditional business to this new platform, this platform has huge flexibility, not only can it do two-dimensional coating, but it can-do three-dimensional coating, which is a phenomenal step forward. But it also has the ability to actually do multiple size structures through the machine. So it's not like we're just putting through, if I go back to the HDD business, a machine that has billions of one size disk, day in, day out, and so on its platform concept. And the flexibility of the design is one of the key things that attracted us this technology to our partner. And so the machine can have multiple sizes running on it. It can be running on different programs. So you can't really say it's going to be a fixed number. So I think that level of flexibility is probably one of the unique capabilities of the technology. And is it going into a consumer electronics market, I mean, again, that market is huge, has different components within it. And therefore this flexibility of the tool is probably fundamentally one of the game changer and why we've been selected by the partner. I hope that answers your questions, but hopefully it gives you some flavor that this machine can do it. So this isn't about one machine it is about multiple machines supporting a very large industry that we're actually going to start entering. And, Nigel, with regard to the annual minimum commitment of that partnership. Like when is the timing of like the exclusivity like will it start when the annual minimum commitment like got -- was -- is met, or whether now you can explore potential sales with other customers while waiting for the annual minimum commitment to be met sometime later in 2023. The agreements, I think we're pretty clear when we announced it does not restrict us from looking at other market opportunities. So the exclusivity is that is within the consumer electronic devices, for glass and glass substrates. So that is very clearly documented and was in the announcement. So outside of that we can look for other opportunities from the starting point of the agreement. So the agreement that we announced was signed in December. That's the start date for the agreement. But for me, it's the real focus today is making sure we get the first production unit, executed on finished that first unit qualified, and then move forward with that strategic partner. Got it. And then questions for James. James, would you be able to share how much like cash consumption we can expect in 2023, especially considering that Intevac needs to build TRIO systems. And then I also notice that there is a long-term customer expenses of $22 million on the balance sheet. I'm wondering whether the cash on the balance sheet got boosted by that $22 million. And that's why the cash balance is higher than the prior estimates? Sure, I can answer a couple of questions. First, let me answer your second question first. The cash, ending cash of $113 million, was not influenced necessarily by the $22 million that was known quarters ago. that is one of our customers who placed large orders that are in our backlog, customary for that customer to give us cash down payments or customer deposits, we use those customer deposits to secure inventory. So if you look at the inventory growth through the year, inventory went up by about $24 million from the beginning of the year to the end of the year. The majority of that was not TRIO, TRIO inventory started to build in earnest in the fourth quarter. So we were using the customers down payments, to support the backlog and to buy the inventory as the customer requested. But that number of the cash down payment, the $22 million had been reflected in our estimations of $105 million to $110 million and when we ended at $113 million, the slightly higher $113 million above our last call guidance was we did security inventory for TRIO that we expected but it came later in the quarter. So it's still the payment was not made did not draw down the cash. It was in accounts payable we since drawn that down. As far as the cash being used for the business, I think if you look over the last number of years, and especially in 2022, we've been excellent stewards of the cash, we'll continue to use the cash strategically. And as Nigel said in his prepared remarks, we're building inventory beyond whatever the minimum order quantity is for 2023. So you'll likely see inventory continue to go up as we go through the year, but we will still manage cash, you won't see cash go down, let's say to an $80 million or $90 million level right away. If you see cash go down, there'll be normally a corresponding increase with less building inventory to support customer requirements. Congratulations on your progress last year and looking forward to the future. After listening to [inaudible] Western Digital over the last week, they are indicating that the customer inventory for hard drives is starting to deplete. And as a result, they're more optimistic about the outlook, at least for hard drives for the remainder of the year. Have you sensed anything in terms of improvements and capacity utilization or a thing in terms of maybe more demand, kind of expected now that the customer inventories of hard drives come down? Yes, I think the first indicator, what we've seen is and really excitement is, as you say, listening to some of other calls, one in particular, and the emphasis and the level of Q&A around the HAMR. I think well, we've done in the last year we have enabled the HAMR technologies has come through that's been a key part of our last quarter's performance. And we're seeing that HAMR focus and the HAMR readiness and to ensure that actually the equipment is capable of supplying the equipment for their launch, to be maintained. And I think Jim said that would be maintained into Q1. So we're seeing continued focus around those technology upgrades. And again, like you, we are optimistic that demand is starting to come back. Some of those key markets in Asia will start to get additional business for them. And we're confident that the positive outlooks are going to sort of start to make through. But really, under fundamentally, is this technology shift to HAMR I think, is actually also going to be a significant change in that sector in our industry. And we're well positioned to maximize on that. Anything you want to add to that, Jim? No, I think as Nigel mentioned, it's been, you can see some of that in the results in Q4. And some of our customers calls as you mentioned, Mark, they really are taking advantage of the lower capacity and trying to build that inventory to improve their technology. And we're a key component of them being able to do that. And they're helping, as you see in Q4, that's one of the main drivers why revenue was above guidance. And will continue, as I said in my prepared remarks that the first half of the year will actually be stronger than what we implied on the last earnings call as it relates to the linearity of shipments first half second half, and most of that will be upgrades. Okay, from what I gleaned from your -- youâre just comments about cash in 2023. There's going to be some drawdown as you build new tools. But you're talking about shipping, I believe one Lean tool later in the year, do you think by the fourth quarter you will be cash flow positive? I think it all depends on what happens with the TRIO build. That's really going to be the driver of cashflow positive when you look at combination of what the linearity of the revenue is in Q4. But I think the biggest use of cash for us, which is just going to be a timing issue is going to be building to support a large backlog should that happen once we pass qualification on TRIO. Terms of the Lean tools you'll be shipping later late this year and beyond. These tools have more features such as more deposition chambers than prior tools, or any new technology in these tools. I think that the one that'll ship has an additional process module. But I don't think there's much additional technology other than some of it has some HAMR enabled capability. I mean, the major focus is really we've talked on is enabling the install base, putting in the HAMR upgrades for those tools, and ensuring that our customers are ready and enabled to actually execute on their HAMR roadmaps. And that's a key thing we've done is making sure our roadmaps are absolutely aligned with our key customers. And that's been a key success over the last 12 months is having those regular technology, review meetings, and ensuring we're meeting their needs and actually helping enabling them to actually move to that next generation of technology. So it's been an exciting year. If all goes well, with the first qualification of the TRIO tool, you're talking about delivering two more TRIO after that. When could you think these tools be revenue in early 2024? I think as is customary with our reg responsibility and rules, we'll need a couple of tools on the field to be installed to go through full qualification on site. And once they do that, and the customer signs off on the qualification, we'll take revenue, and then probably the third or fourth tool after that. We can take revenue as at the time of shipment, but we have to first pass the call. And we do expect revenue in 2023 as we've said, that first qualified tool that Nigel emphasizes, and I think everybody should remember is that's our focus right now. Our focus right now is building a production tool getting to qualification trying to get that qualification through Q2. Once we get qualification and sign off, that tool can take revenue, and then any tools we ship after that if they go into the field, they'll have to get installed, qualified signed off and then we can take revenue there and then it's after that point in time that we can probably take revenue at shipment but revenue at shipment is likely to happen in 2024. But we will see sign offs and we will see revenue in 2023 from TRIO. So if I understand your question, although it was hard to understand that question, the accounts payable was higher at the end of the year because of the timing, mostly of the delivery of the TRIO inventories. So it came in it was received, but their payment terms of when we have to pay our vendors, those payment terms required us to pay the vendors in January, not December, so it was sitting in accounts payable, you'll see accounts payable went up from the September quarter to the December quarter. And that helped the cash because essentially, it was in accounts payable, which has since been paid, and it was roughly around $5 million. But it coincided with the growth of the TRIO inventory in this quarter. Thanks. As a follow up the new 200 systems that you will be shipping in the next two or three years, they will all be going out with HAMR updates, right? Those were ordered around this time last year. And some of that technology innovation will be included in them and there'll be some that's not, so that we further upgrade for those tools, sort of post install. So there'll be some level of HAMR readiness, but not the latest HAMR upgrades that we've actually developed and executed and delivered on in 2022. Also on the subject of exclusivity, could you explain what it exactly means meaning that you cannot sell it to somebody else or you can sell it to somebody else. So, the exclusivity is very clearly for consumer electronic devices for glass and glass ceramic substrate. So it is a very clear definition of the market and the substrates. So in that, again, what I mean is that exclusivity means we cannot sell to anyone for those applications. So that's what the -- that's why the exclusivity, it is absolutely exclusive to them for that application. And this is actually a show of my ignorance. But I want to know what is the market share of your TRIO partner in the cellphone market? You mean from our partnerâs market share is not really for us to comment on, the market share of our partner is probably on their website but they are clearly the market leader in absolute number one, so they are market leader in that sector. And I would say anybody that has paid attention over the last four or five months as to what we're doing. Yes. Okay. There is a trend towards putting tempered glass on top of the display. Would that temper glass stick to your film? I mean, I think if you look at what we announced in the press release, the TRIO is for coating glass and glass ceramic substrates, and any glass and glass ceramic substrate is covered in that agreement. So it doesn't matter if it's tempered or not tempered, I think it will cover -- it covers any substrate. And that's why I mean is a game changing technology that really has the flexibility and everything about it is why our partner is so excited about it and why we're given the exclusivity. Yes, hi, again, Nigel and James. I think 2024 is still far away. But with regard to the first full year of profitable results. Do you have insight into what revenue level? And what kind of revenue mix is the underlying assumptions among letâs say like hard disk drive market Lean 200, HAMR and TRIO? Yes, I would say at this time, we're not prepared to talk about what the revenue mix could be how much between the two, but what we look at internally is if you look at the investments, we'll make an R&D this year. And as we said in our prepared remarks our OpEx being somewhere between $36 million and $37 million. If you just did simple math and assumed a 40% gross margin, you need to be somewhere around $90 million in revenue to breakeven. So that is very encouraging, James. And the second question is I saw on your website ballistic coating, is that the commercial name for TRIO letâs say end products. And then outside of consumer electronic devices, do you see any like low hanging fruit applications? Yes, just to cover that first. I mean, as you said, as you know, when I joined a year ago, we had the Intevac ballistic coating and the IBC as a potential route forward and a potential technology. And some of that has been developed into this TRIO tool. So the website, as it says is under development. And we will actually address that in 2023. My focus in 2022 has not been about trying to put nice things onto a website, it's been absolutely about creating a new technology platform, getting this business fundamentals correct. But you're right this year is the time to get the website upgraded, put some additional material on there and actually bring TRIO to life on the website. So that will be one of my actions for this year. But last year was very much about getting the technology launched, focused and making this company success. But you're right, the website still does say under development for IBC. And we will change that to TRIO on current platform and the future growth. Yes, I mean at the moment, as we've said very much the focus is getting this tool built, qualified and out there and making that success. Beyond that I see other opportunities. I think we talked in one of the announcements about this potential around the automotive and other sectors. There are market opportunities, I mean but for me at the moment is let's get this thing built, qualified into the market and keep updating use of it every single quarter by saying this is what we've done. This is what we're going to do next quarter and keep building that story and building that success. So I think I've got enough to do to focus on that one exciting market opportunity of electronic devices first. Yes, hi, good afternoon, guys. Thanks for taking the questions, and congratulations on all the progress. Most of the questions have been answered just a few more, if you don't mind. In terms of the TRIO, could you share with us what you think your internal capacity is for build and ship per year for that product? I mean, that's highly confidential. As you can imagine, what we're really doing now is building the plan around it, we're executing on the first builds, we're going to get the full qualification done. And then we're going to ensure we have capacity to meet whatever demand is out there. So it's, I mean, the market size and what we're going to do, and how we're going to deliver against that is clearly within internal plans. And we are planning and scaling and building for success. You don't enter something like this without saying we're going to be successful. We know what we need to do, we have capacity to do it, we have to be able to actually manage our way through the industry with some still supply chain challenges. We've got the strength of the balance sheet to actually help us leverage with some inventory. So we can be ready to ramp and build whatever the market needs. But I don't want to put numbers in there for people at the moment. But we've got, we know we have to do. And as we've said, we actually plan things out, we think it through and then we execute. So we are, looking forward to it. No, itâs first one. It's great. But it's, we are going to move forward, we're going to be successful. And it's about getting this first one qualified, and then moving forward successfully with our partner. Totally understood. Thank you for that, Nigel. And let me ask it this way, just given the minimum commitments on this particular customer for TRIO, assumes I'm guessing using a roundabout figure of about four units per year to build and ship and revenue. Let's say the customer exceeded these minimum commitments. And he required eight or 10 units to be built and shipped to him in a particular year. Are you saying that you could successfully build and ship 10 units per year? Yes, I'm not committed to any number, but I'm saying we are planning for success. And whatever our customer needs, we will deliver. So if you can read into that what we're doing, yes. Fair enough, okay, fine. Let me ask you a question in terms of the evaluations that Corning was doing initially on the TRIO platform? Did, did they have any of their end customers involved in that evaluation as well? I mean, clearly, I can't answer that question. But I can say to you is the, and we've covered on the last couple of calls. When you launch a new product, you align it with a key partner, you have them to be successful launching products. So my 30 years of experience in many different companies, is when you have a customer who is working with you. It's feeding and working with your development teams. And you're producing products. And we talked on a call a couple of quarters ago, we gave them some samples they came in, they ran their own samples. We've done coupons for multiple different potential applications, and so on. We've had other people come in and run and qualification success. And the real performance of the TRIO and its flexibility and adaptability has been superb. And on the back of that they've -- that's why they wanted exclusivity. So if you are able to read into that, what we've been doing. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. Thank you. As I look at where we are today, compared to my first earnings call one year ago, I feel we've executed on a complete transformation of the company. We've created a new Intevac, an outstanding achievement. We are now squarely on a path towards consistent annual revenue growth and the 2024 outlook supporting significant revenue growth, positive cash flow from operations and a profitable year for the company. Overall, I'm extremely enthusiastic about the future of Intevac. And I will continue to leverage our collective expertise and strong balance sheets to ensure the company is positioned for growth well into the future. And finally, I want to thank all of our employees as well as their counterparts with our industry partners, for their hard work and dedication, as we progress with our partnership with the new TRIO platform, as well as the HDD industry transition to HAMR. And that's been for me, it's been a fantastic achievement all round. We've also been steadily ramping up our investor outreach over the last year. And we're eager to continue meeting with as many institutional investors as possible. So if anyone wants to reach out to Claire, please do that directly. And we'll organize follow ups with us. And with that, I will conclude today's call. So thank you. Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.
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EarningCall_769
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Ladies and gentlemen, welcome to the MidWestOne Financial Group, Inc. Fourth Quarter 2022 Earnings Call. My name is Glenn, and I will be the moderator for today's call. [Operator Instructions] Thank you, everyone, for joining us today. We appreciate your participation in our fourth quarter 2022 earnings conference call. With me here on the call this morning is Chip Reeves, our Chief Executive Officer; and Len Devaisher, our President and Chief Operating Officer. Following the conclusion of today's conference, a replay of this call will be available on our website. Before we begin, let me remind everyone on the call that this presentation contains forward-looking statements relating to the financial condition, results of operations and business of MidWestOne Financial Group, Inc. Forward-looking statements generally include words such as believes, expects, anticipates and other similar expressions. Actual results could differ materially from those indicated. Among the important factors that could cause actual results to differ materially are interest rates, change in the mix of the company's business, competitive pressures, general economic conditions and the risk factors detailed in the company's periodic reports and registration statements filed with the Securities and Exchange Commission. MidWestOne Financial Group, Inc. undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation. Thank you, Barry, and good morning, everyone. I'm excited to be here today and thankful for the opportunity to succeed Charlie as MidWestOne's next CEO. Through Charlie's 22 years of leadership and vision, MidWestOne has grown to $6.6 billion in assets, while expanding our geographic footprint to five states. Charlie has also developed an enduring culture focused on our employees, communities and customers that's firmly positioned this company for future success. I'm honored to succeed Charlie and grateful for his wisdom and counsel through my first 90 days. I'd also like to acknowledge Len Devaisher, our President and COO, who did quite simply an outstanding job as interim CEO. For those who don't know me, I spent my banking career at both super regional and community banks in both rural and metro markets, building organic growth engines, while developing new lines of business through a combination of a disciplined strategic process and talent acquisition. I've been fortunate to work with outstanding bankers and teams that executed on strategic priorities, ultimately delivering improved financial results and shareholder value. Here at MidWestOne, I see a bank with a strong foundation, compelling markets and diverse business lines. Our commercial banking franchise has benefited from initiatives implemented 18 to 24 months ago, which can be seen in our fourth quarter and full year results. We also have a significant wealth business that during 2022 has strategically added talent and AUM in our growth markets. While year-over-year revenue in the business is muted due to equity valuations, this business line is prepared for substantial growth. In addition, MidWestOne enjoys dominant community bank market share in many of our core Iowa banking markets. We now need to translate these foundational strengths into our operating performance. Looking at our fourth quarter results in more detail. They reflected many of these initiatives with loan growth exceeding 10% annualized for the third consecutive quarter. This growth driven by talent acquisition and our relationship banking model, occurred primarily in our select metro target markets of the Twin Cities, Denver and Metro Iowa. Turning to credit quality. Through expertise in fourth quarter strategic actions, our asset quality metrics improved measurably with the nonperforming assets ratio decreasing 16 basis points to 0.24%, our allowance coverage ratio is at 1.28% and our 30 to 89 day delinquencies remained at historically low levels. We've now remedied our organization's legacy credit issues and are positioned well for 2023's uncertain economic conditions. Our fourth quarter results, however, were impacted by higher funding costs and a primarily fixed rate earning asset composition, leading to net interest margin compression. In addition, noninterest income was impacted due primarily to lower mortgage origination volumes, both pressured our profitability and earnings. Looking forward, I believe there's an opportunity to improve our operations, while enhancing and further developing our growth engines with the ultimate goal of becoming a top-performing bank. To accomplish this, we've commenced the development of a strategic plan that will position MidWestOne to achieve this goal. While we outlined more details of the plan in our late April first quarter 2023 earnings call, let me share some high-level thoughts on our review. First, a clear area of focus is to more actively manage the bank's balance sheet, given that we are liability-sensitive. We're reviewing a broad range of initiatives to address this challenge. Second, we will review our business lines and the geographies in which we operate. We must ensure that we are in businesses and markets that provide opportunities for scale and profitable responsible growth. Third, as we review our business lines, a commensurate review of our operating expense base will occur. This will likely lead to a reallocation of resources to drive growth, as well as efficiency. You'll hear me say this often, we want to be a high-performing bank with an organic growth engine to power our results. Once again, I'm honored to be a part of MidWestOne Bank. This is a special place with a strong foundation, compelling markets and talented bankers, and we look forward to creating a high-performing organization. Thank you, Chip, and good morning, everyone. With Chip's arrival, the leadership team is aligned, and we are committed to the acceleration of our journey to build MidWestOne into a high-performing bank. While that journey has begun, we're just getting started. Looking back over the past year, I am proud of our accomplishments as we executed on our strategic priorities, including: number one, driving loan growth, while improving the risk profile of our portfolio; number two, scaling up our wealth business; and number three, integrating the Iowa First acquisition. I'll offer some high-level perspective on each of these focus areas. Looking at our commercial loan growth, Denver and Twin Cities led the way, each growing more than $120 million in 2022. We are very pleased that Twin City's commercial portfolio now exceeds $1 billion. Iowa Metro has also been a strong contributor to growth, Des Moines growing more than $25 million. These are different markets, but with one common thread, recruiting new talent. These talent investments have driven increased volume, but just as importantly, an improving risk profile. Nonperforming assets are down by more than half, a nearly $60 million reduction, while 30-day past dues have followed the same trend. Finally, I should point out that while commercial is the needle mover in our loan growth engine, our retail team continues to deliver high-quality consumer growth across our footprint with balances up $33 million in consumer and $38 million in mortgage. Looking forward, our commercial pipeline remains solid. In the current environment, we feel mid-single digits is an appropriate growth range to target. At the same time, given the new talent we've onboarded and our low loan-to-deposit ratio, we will continue to add new customer relationships opportunistically when the risk and return profile is a shareholder win. Our belief is that some of the uncertainty of 2023 could present opportunities for our credit disciplined relationship approach to take advantage and gain share, especially in our growth market. The wealth business is the same talent story. Well, the revenue growth has been slower to materialize than we planned, the momentum over the back half of 2022 bodes well for the future. We are pleased that we saw AUM grow materially faster than the S&P 500, with our wealth teams bringing on $180 million of new AUM. As we look forward, we are encouraged with the pipeline of similar magnitude, and we will be opening our new Cedar Rapids wealth and commercial office in the next 90 days. Finally, Iowa First has performed according to plan with expense takeouts realized and earnings contribution evident. With Iowa First now fully integrated, we are positioned to focus our technology and operations capacity on strategic initiatives in the year ahead to drive growth and efficiency. Thank you, Len. I'll walk through our financial statements beginning with the balance sheet. Starting with assets. Loans increased $94.2 million or 10.4% annualized from the linked quarter to $3.8 billion. Strength in the fourth quarter was led by commercial loans, which increased $82.5 million or 11.2% annualized from the linked quarter. In the quarter, new loans were brought on at an average coupon of 6.06% and at a premium from 4.94% in the third quarter of 2022. The overall portfolio yield was 4.66%, resulting in a 20 basis point improvement in interest-earning asset yields as compared to the linked quarter. As Chip discussed, we took strategic actions through the fourth quarter to improve the credit profile of our loan portfolio, which positions the bank for an uncertain economic outlook. During the quarter, the allowance for credit losses declined $2.9 million to $49.2 million or 1.28% of loans held for investment at December 31. The decline was due to net loan charge-offs of $3.5 million, partially offset by credit loss expense of $0.6 million. Deposits were down slightly from the linked quarter, but up 6.9% to $5.5 billion as compared to year-end 2021. During the quarter, we experienced increased competition for deposits, which required us to raise our rates to maintain deposit relationships. Looking at this more closely, the cost of interest-bearing liabilities increased 44 basis points to 1.08%, comprised of increases to our interest-bearing deposits, short-term borrowing costs and long-term debt costs. Finishing the balance sheet. Total shareholders' equity rose $20.6 million to $492.8 million, driven primarily by net income of $16 million and a favorable change in AOCI of $7.6 million, partially offset by cash dividends of $3.7 million. Turning to the income statement. Net interest income declined $2.1 million in the fourth quarter to $43.6 million as compared to the linked quarter, due primarily to the higher cost of funds combined with the increased level of high-cost borrowings and partially offset by the increase in interest-earning asset levels and yields. Our net interest margin declined 15 basis points to 2.93% in the fourth quarter as compared to 3.08% in the linked quarter. Our NIM was impacted in the fourth quarter by an increase in our funding costs, which rose more rapidly than the increase in our total interest earning asset yield. Noninterest income in the fourth quarter declined $1.6 million to $10.9 million as compared to the linked quarter. The decline was primarily due to an $800,000 decline in loan revenue due to a smaller increase in the fair value of our mortgage servicing rights and a decline in our mortgage origination fee income combined with a $700,000 decrease in other income due primarily to a onetime settlement recorded in the third quarter of 2022, which was partially offset by an increase of $2.5 million in the bargain purchase gain recorded in connection with the IOFB acquisition. Finishing with expenses, total noninterest expense in the fourth quarter was $34.4 million, a slight decline of $200,000 from the linked quarter. The decline was largely due to a $400,000 decline in merger-related expenses from the IOFB acquisition related to data processing, marketing and legal and professional fees, partially offset by a $400,000 increase in compensation and employee benefits at MOFG, reflecting an increase in incentive compensation expense. Thank you. [Operator Instructions] We have our first question that comes from Brendan Nosal from Piper Sandler. Brendan, your line is now open. Brendan? Hey. Sorry about that folks. My apologies. Maybe just to start off on the equation between kind of loan growth and funding. So it sounds like mid-single-digit pace on loan growth is a reasonable expectation. Just kind of curious on how you think about funding that growth looking ahead? I mean, it looks like the securities reinvestment can fund a piece, but just kind of thinking about the balance of that. Brendan, this is Barry. I'll start. Yes, the securities cash flows would fund upwards of about -- to the mid-single digits of loan growth to the extent that we are able to exceed that particular target then we're looking at wholesale funding sources. What we're looking at right now are brokered deposits as an alternative given their favorable cost over the short run and then obviously, FHLB advances. Got it. Got it. Okay. And then maybe a second one, just on kind of general deposit pricing pressures, assuming we get a couple of more hedges out in the sense, where do you think we are in the cycle of pricing pressures at this point? I think we're in the thick of deposit pricing pressures is how it feels, Brendan. I think we indicated in our release that our cycle-to-date deposit beta has been 15%, which I think we believe is respectable when we see what's happening out there in the industry. It did ramp up in the fourth quarter quarter-over-quarter to 25%, which we also indicated in the release. I expect those pressures to continue and perhaps, those quarter-over-quarter betas to ramp up as well. At least until the FOMC reaches their terminal rate whenever that may be. And Brendan, this is Chip. Actually, to -- through the cycle or at least to date through the cycle, we've been actually pretty impressed with our granular core deposit franchise in terms of a beta of only 15%. And what I'll tell you is, we're going to visually protect that core deposit franchise and the granularity of it. So I would expect, to Barry's point, that beta to rise here and the deposit pressures continue, but we also believe it's a huge part of our franchise value. So we're going to protect it. Maybe start off with how far along are you through the portfolio review of the loan portfolio? And I guess, said another way, should we expect additional kind of credit actions to resolve some of those legacy loan issues? Yes. Let me go -- I'll go ahead and hit this first, and then we also have Gary Sims, our Chief Credit Officer, with us, Terry. So when I first joined, obviously, November 1, one of the first pieces that I -- we began to look at was, let's finish the credit job of the legacy credit issues. So we put in place, obviously, the review and then went with the actions that we did. Ultimately, anything that we did not believe we would be able to resolve in 2023, we remedied through either a sale or some other resolution. So with that impact, we were able to reduce that nonperforming asset ratio down to 24 basis points. Yes. Thanks, Chip. And what I see from the portfolio and specifically, the nonperforming portfolio that we have left on the books at December 31. There is still potential resolutions, as Chip identified, in 2023. So I think that existing book will continue to resolve and decline throughout 2023. We -- as we've talked about before, we do a very thorough review of the portfolio at the end of the year and touch virtually every credit of material size by the end of the year. And we don't see a migration continued into the nonperforming book in 2023. So generally, I think you're going to continue to see that book go down as we continue to resolve credits. Does that help? It does, yes. Thank you both for the response. And then as a follow-up, when I look at your shareholder value strategy slide or the third or fourth bullets says strengthening the commercial banking franchise. And should I interpret that as adding commercial bankers? If so, is that in your expense outlook? And what about incremental products? Do you have the product set to compete within the commercial banking space to the degree that you can be successful? This is Chip, Terry. Iâm going to give couple of comments and then turn it to Len Devaisher, who really led this effort over the last 24 months. I believe what you'll see as we begin to unveil more of our strategic plans for internally within the bank as well as for the external market. We'll have more of a lean into our commercial banking space than even we do today, and we've made significant progress in the last two years. In terms of talent and where it goes, absolutely in terms of adding commercial bankers, and I think we'll be adding those in our select metro markets of Minneapolis, Denver and Metro Iowa. In terms of our product set, I think some of the things that we'll begin to continue to accelerate is our treasury management initiatives as well. I think, Chip, that hits it well. I think the only thing I might add is, we do feel like the -- to the extent there's any clouds of uncertainty on a macro level over this environment that there will be opportunities for companies like ours that can take advantage and take care when the risk profile is there, the pricing makes sense, where other folks might be on the sidelines a little bit. And we enjoy that loan-to-deposit ratio that positions us to do that. So I think that helps our recruiting story. And then, Terry, I think the second part of your question is, is that in the expense base today? So in terms of the guidance, that Barry mentioned. We have a significant number of new hires built into that new base, but it will also take a reallocation of some of our current expense base to ensure that we hit that guidance. Hey, good morning, everyone. I hope you guys are all doing well today. Just wanted to dig in a little bit on the margin -- Good morning. Just wanted to dig in a little bit on the margin. I understand you're seeing some near-term pressure here. But Barry, if you guys -- there's two more rate hikes of 25 basis points at the Fed. Just kind of given the market dynamics and on the funding side of the equation, can you give us a little bit more perspective on where the margin could kind of bottom out? Yes. It's -- obviously, Damon, there's a lot of puts and takes with respect to where the margin ultimately lands. I'll do my best to answer your question. I think that in the near term, there will be downward pressure on the margin as expected, the FOMC continues to increase short-term rates, and our deposit betas pick up. As we discussed earlier on the -- so that's going to be on the liability side. On the asset side, we will have some benefit on the asset side to those same rates. It's about 17% of our portfolio reprices within a quarter or so. So those will be some of the positives. And the reason why it's difficult to articulate where it's going to bottom is, there's uncertainty around what's going to happen. What's going to happen to deposits, for example. The shape of the yield curve is a challenge. So it's difficult to answer. My best answer Damon is, I think there's going to be some downward pressure in the near term. Okay. So -- all right. So it ended higher than for the quarter. Okay. All right. Great. Thank you. And then just with respect to exposure to asset classes, which may come under additional pressure in the coming quarters, do you guys did do a lot in the office space? Can you remind us what your exposure is there? Thanks, Damon. Like most banks, our size office is not really a preferred asset class right now. As a result, we're not overexposed. We have 4.5% of our portfolio in office, and that's down year-to-year. That's down from 4.7% down to 4.5%. And to kind of give you an idea, our stance on it, when you look at our construction category, we don't have any office exposure in our construction category. So for the most part, we're not doing new office space. That probably gives you the best idea of how we feel about office. The existing office portfolio primarily -- well, about 60% of it is in the Minnesota and Twin Cities market. We feel that, that portfolio is relatively stable right now, backed up by good leases, et cetera, but we're just not in the market to be adding to that exposure right now. Does that help? Just maybe one last one, Barry. Not to beat a dead horse on the margin, but it sounds as though without quantifying where they go, it sounds like maybe the margin trough in the second quarter. Is that how you would think about it today based on the pressure and the competitive factors that you're currently experiencing? Second quarter and maybe, potentially, flat into the third quarter and then maybe some positive benefit in the latter half of the year, Brian, is how I think about it. Yes. Okay. And just remind me the level of -- you talked about, I think, a portion that reprices. How much of the loan book would reprice over maybe the next 12 months? Is that -- do you have a handle on what that is? Or could you give us a little perspective on that? Okay. 35%. And the new loan yield you're putting on today, the origination rate, where was it? I think you said that or maybe I missed it. Got you. Okay. Cool. Thank you. And then how about just maybe -- I don't -- maybe it's for you, Barry, or someone else. Chip, just on the fee income outlook, I mean Chip talked about the opportunities on the wealth side, maybe being a little muted with the performance in the market this year, but it sounds like a significant opportunity. Maybe just kind of frame up the outlook on mortgage and wealth or just kind of fee income in general, how we should think about that or at least maybe near term and maybe more gets divulged at your -- as you kind of unveil your plan, but any help on the fee income side would be appreciated. Brian, minus equity valuations, we're bullish on the wealth management space here at MOFG right now. Len mentioned that $180 million of AUM was brought on in 2022. We believe that number will increase and potentially increase substantially here in 2023. Obviously, equity valuations may determine a little bit of actually what comes to the revenue line item there. Mortgage banking is challenged. I think we know that from other -- for the housing inventory is still low. Rates are high. Our pipelines in the mortgage business, it's obviously seasonally adjusted as well now, but are challenged. And so that is a business that, frankly, we do not expect great momentum in, in 2023. Okay. And then maybe just in general, how to think about the -- maybe growth? I don't know whether you look at growth year-over-year in fee income in aggregate or just -- there's a lot of puts and takes last year as far as noise going through there and even -- so just trying to think about what the run rate is, a realistic run rate to start the year and maybe as you progress and get some momentum, but its fourth quarter's level kind of that level? Or is it -- should we be thinking about it being lower to start? I think -- this is Chip again, Brian. That $8.5 million to $9 million range is, I think, a good range to begin the year. Okay. Perfect. And just last one for me, more housekeeping. Just on the outlook for accretion income, Barry, any insight as far as how that may evolved through the year? I guess, is it just kind of stair step down from where we are today? Is that how to best think about it in any significant payoffs or paydowns? Is this a good level? Yes. That's the way I think about it, Brian, take the fourth quarter and stair step it down throughout the year and in future years as well. Thank you, Brian. [Operator Instructions] We have no further questions on the line. I will now hand back to the team for closing remarks. Great. Thanks, everyone, for joining today. I look forward to sharing more of our strategic plan and priorities in late April as we continue our journey to becoming a top-performing bank. Thanks, everyone.
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EarningCall_770
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Welcome to Shell's Fourth Quarter 2022 Financial Results Announcement. Shell's CEO, Wael Sawan; and CFO, Sinead Gorman, will present the results, then host a Q&A session. [Operator Instructions]. We will now begin the presentation. Hi. I'm Wael Sawan, and I'm pleased to present to you for the first time as Shell's CEO. Today, alongside Sinead, we'll be presenting Shell's fourth quarter and full year results. I'd like to start by thanking Ben for his leadership over the last 9 years and for building the strong foundations that I now inherit. We have a world-class organization with exceptional people, a leading portfolio and the right strategy, all of which, I believe, position us very well for the future. 2022 was a year in which energy security was front and center. The world mobilized. We saw policy progress with Fit for 55 in Europe and the introduction of the Inflation Reduction Act in the U.S. This is evidence of moving from ambition into action. Despite this progress, the energy system still faces huge challenges, and it continues to need bold, decisive actions by companies, governments and society at large. The world requires a secure supply of affordable energy and, at the same time, needs this energy to be increasingly low carbon to make the transition to a net-zero emissions energy system. In short, the world needs a balanced energy transition. Moving too fast by dismantling the current energy system before the new system is ready could worsen the situation. But moving too slowly could waste precious time and lose the momentum to build necessary solutions for low-carbon energy at scale. However, this transition will not be linear and will play out with different solutions needed at different times in different places across the world. We at Shell will do our part. We will invest with discipline where we have differentiated capabilities. We aim to deliver the oil and gas that the world sorely needs today while also leveraging our unparalleled customer reach to develop the scalable and profitable low-carbon products that are urgently needed. Shell, under my leadership, will work to be the trusted partner of choice as the world's energy systems transition for our customers, governments and investors. By doing so, we aim to deliver competitive returns and create significant shareholder value over the coming years. Now let's look at our Q4 and full year results and financial framework. And for that, let me hand over to Sinead. Thank you, Wael. By continuing to provide the energy our customers need, we have again produced strong results. Our safety performance was impressive. We made good progress in both personal and process safety year-on-year. We also made good progress on carbon. By the end of 2022, we were more than halfway towards achieving our target reduction of 50% by 2030 for Scope 1 and 2 emissions. Moving to our financial performance. Our adjusted earnings for the fourth quarter were $9.8 billion, with strong contributions from our Integrated Gas business, and we generated $22.4 billion of cash flow from operations, including a positive inflow of $10.4 billion of working capital. These strong quarterly results helped us to achieve our highest ever full year results, with adjusted earnings of some $40 billion, more than double those of last year and around $17 billion higher than in 2014 when Brent prices were similar. We delivered a full year cash flow from operations of over $68 billion. And our organic free cash flow was around $48 billion. In 2022, our financials were impacted by additional taxes of around $2.3 billion. Of this, around $1.5 billion related to the EU solidarity contributions in the Netherlands, Germany and Italy, with cash outflows expected in 2023 and 2024. For the U.K. Energy Profits Levy, they impact us some $900 million. And now on to our financial framework. Our strong performance over the year has allowed us to enhance our distributions to shareholders. Our total shareholder distributions for the year were around $26 billion in excess of 35% of our 2022 cash flow from operations. And today, we have announced a new $4 billion share buyback program, which we expect to complete on time of our Q1 results announcement. As planned, we have also increased our dividend per share by 15% in the fourth quarter. Demonstrating discipline, our total cash capital expenditure for 2022 was $25 billion. And our outlook for 2023 is to maintain the $23 billion to $27 billion range, absorbing inflation. Our AA credit metrics ambition remains. We intend to continue to reduce our net debt as part of our robust financial framework. Finally, we will continue to target shareholder distributions of at least 20% to 30% of our cash flow from operations. As you've heard, our results for 2022 were strong in what was a volatile external environment. So what do we expect to see for 2023? The balance between global energy supply and demand remains extremely tight. Small changes on either side can have a significant impact. So volatility and uncertainty will continue to be the watch words in 2023. And how will Shell respond to that? With confidence in the direction of our strategy and the strength of our businesses and with discipline and a focus on value. We've worked hard over the years to strengthen our portfolio. We have a clear strategy empowering progress. Our focus now is to further operationalize and profitably deliver this strategy. We will build from our strengths, where we will prioritize value over volume while reducing carbon emissions. In Upstream, we will continue to proudly deliver energy that the world needs while driving strong results with our high-graded portfolio. In Integrated Gas, we will leverage and extend our world-leading LNG position. And in Marketing, we will build on the robust performance that we have seen in recent years. Performance will be top of mind. In every area of show, we aim to demonstrate progress at pace, not through words but through results, and we will continue to simplify our organization. One example of this is the more aligned and focused senior leadership structure that we announced earlier this week, with fewer rules and greater accountabilities, simplifying decision-making. By building on our strengths, focusing on performance and simplification, we intend to deliver compelling shareholder returns. Shell is already a great company, and we are determined to be a great investment. And to give you more insights on how we plan to do this, join us in New York for our Capital Markets Day in June. Thank you. Thank you for joining us today. We hope that after watching the presentation, you've seen how we delivered strong results and how we intend to further operationalize our Powering Progress strategy. Today, Sinead and I will be answering your questions. And now please, could we have just 1 or 2 questions each, so everyone has the opportunity. And with that, could we have the first one, please, Dan? Thank you very much, and good afternoon to both of you, and welcome, Wael, to the Q&A interrogation. First one on capital investment, please. Spend levels looking into the year in line with your guidance. That's good. I think Sinead mentioned the guide is also absorbing inflation. So I was curious just how much and where you're experiencing those hot spots at the moment. It doesn't imply any activity has to be phased or pushed back. And I see within CapEx, Marketing steps up a bit this year. I assume that's Nature Energy. But I'm just looking at Marketing, wondering that the earnings there are still a little bit below trend. And does Asia reopening here really start to help the earnings trend within that Marketing business? That was the first question. Secondly, I'd love to ask about Integrated Gas. Wael, you mentioned volatility, uncertainty, your watch words for this year. We obviously had one hiccup last year around this business around hedging. So curious to know what the lessons learned were from 2022 and what's the hedging strategy for this year, if there's any changes needed in that approach. Super. Oswald, thank you for that, and I appreciate being here for the interrogation. I guess I'll get used to it. Let me start by maybe giving you, Sinead, the floor on the Marketing question and maybe also the Integrated Gas learnings. I can reflect a bit on inflation in a moment. Certainly. So indeed, thank you for that, Oswald. So in terms of Marketing, so taking a step back for the moment. So 46 sites and regional sites, #1 in lubes, if anyone can make substantial returns out of this, it is us. We are well positioned for it. In saying that, I agree. $400 million of earnings for this quarter was a little bit disappointing. But if you take a step back and look at why. So what we're very comfortable with is seeing the fact that COVID has really not completely played out. So we're still seeing the impact of that. And you're right, you point out China as well. So we have great expectations with China opening up to be able to see that advance, and we've got green shoots already. And particularly in our lubes business, of course, we have a bit of a parachute effect. The normal where the high cost of the inputs, it takes a while for that to be passed through as well. So those combinations, including with our differentiated offerings, we're pretty confident in terms of how you will start to see some of our marketing results begin to improve. The second one was in relation to IG and the volatility around it. I'm just going to take a bit of an opportunity also to take that stuff back. We talked before about the fact that for IG, you really need -- or Integrated Gas, you need to look at it over a series of quarters, not one specific quarter. We use price risk management. Our hedging is price risk management, and we use it to look at the exposures we have across the period, not specifically quarter by quarter by quarter. Of course, that does mean that you see different things play out. You do see correlations becoming more or less effective. This quarter, you saw them being very effective because we didn't see those dislocations between the EU and, in fact, JKM, et cetera. But those breakdowns are typically temporary, and that's what you saw as it came through. So this quarter, hedging acting very much as intended, and that's what we like. Thanks for that, Sinead. And Oswald to your first question, just to play back. So the $23 billion to $27 billion includes a few things. One, we have said is it will include Nature Energy, which you know is to the tune of around $2 billion. Secondly, we've also said it includes general inorganics. So that's also within that number. And then thirdly, indeed, there is inflationary pressure that we're absorbing. The inflationary pressure we're seeing at the moment is in the range of, say, 10% to 12%, typically. Of that, we're being able to mitigate a decent portion of that but not all of it. Most of the mitigations come from long-term contracts with suppliers where we have these enterprise framework agreements that we can lean on because of the scale of our purchases with those suppliers. So that allows us to mitigate some of the exposure. You talked about delaying projects and the like. There are examples of that, of course. We took the decision on Gato do Mato, which is our Brazilian offshore opportunity, to recycle that project because of the cost estimates that came in were higher than we were comfortable taking a final investment decision on. And so with a disciplined focus on our capital allocation, we said this is not the right time to do it. And therefore, we punt it until there is a better environment to be able to invest in. So hopefully, that just gives you a bit of a flavor of how our thinking has gone with that. I've got 2, please. The first one is a few days ago, there were some headlines around you looking to review your U.K. electricity business. I was just wondering, I know this is not a huge part of the portfolio, but is this part of a broader review of your low-carbon efforts? Or is it specific to this business? Because I guess if I look from the outside in, this is a fairly low-margin business that actually has needed quite a lot of capital given all the volatility in power prices. So just wanted to get a sense of what has triggered that review there. And the second question is in the Upstream. So in 2020, 2021, you put out your emissions targets and all the targets related to the energy transition. And one of those was declining oil production, 1% to 2% per annum. If I look at the last 2 years, it's down something like 10% to 12%. So clearly, you've moved a lot faster on some divestments and so on, and that's been a part of that. So given you're well ahead of where you intended to be on that front, what does this mean for Upstream volumes going forward? Should we expect more stable production now or even growth? Because I guess the realities of the energy market are very different to when you put those targets out there as well. So just some thoughts on that. Super. Thank you for that, Biraj. I'll take both of those and start off with the SERL one, so Shell Energy Retail. The broad -- the review of SERL is specific to SERL. It's not a broader review of low-carbon investments. Ultimately, we are looking at every single one of our investments in its own right and trying to understand whether we can totally unlock the value out of that investment opportunity. For Shell Energy Retail, what we have found is despite a few years of trying to make that work as part of an integrated value chain, the market conditions are just structurally not there for us to be able to create the returns we expect. We have seen significant interventions from the government, including price caps, including windfall taxes. We have seen nationalization in that sector. And so it is not a structurally advantaged sector for us to play in here in the U.K. It also meant we had to review our German and Dutch positions because they run off a lot of common infrastructure. It wouldn't make sense to look at just one of them in isolation. That's what triggers the review and our ability to be able to understand how we can -- or what position we need to take going forward, and that will take a few months. Our broader low-carbon opportunities will, again, like everything else, also in our Upstream, be assessed on their own merits. Opportunities that we can see running room in, we're going to continue to scale up and invest in and grow. And we've seen some of these opportunities, and we can talk about that as well in the coming hour. On the -- on where we are with Upstream. Having had the privilege of being with Sinead in the Upstream business at the time when we set these targets, we have indeed moved very fast on being able to monetize the parts of the portfolio that we felt did not fit into the broader core of what we wanted in the Upstream. And just as a reminder, we've done a lot of work in the Upstream over the past several years to fundamentally high grade the quality of that asset base. I referenced earlier in the morning, the fact that in 2014, at the similar Brent price, we were delivering -- we had in 2022, 7% less production than we had in 2014, yet we're able to deliver some 80-plus percent free cash flow and 70-plus percent earnings. And therefore, the quality of the Upstream has significantly improved as a result of this focus on value over volume. As we look into the future, longevity of Upstream and our Upstream resource is a key focus area for me and for Sinead. That's going to be something we focus on. More on exactly how that looks, I think, is better discussed in our Capital Markets Day in June 2023. But longevity is a core part of our focus. Wael, let me take your last comment and ask you a very mean question. What else did you feel like you can't tell us today that you're going to focus on in June? So apologies already for that question. But maybe I might want to make a suggestion to review that payout ratio. How do you feel about the formal 20% to 30%? As you've highlighted, you've gone well beyond that. It seems a little outdated. So hopefully, we can look forward to an update on that front as well as the longevity point that you just made. So any other thoughts in terms of what keeps you busy as you prepare for June would be great. And I'm not asking for a full preview of that event. And then a quick one, hopefully, for Sinead. Just wondering whether you can give us a little bit of detail in terms of what you expect into Q1, Q2 when it comes to both the net working capital potentially a bit reversing as well as those derivative margining costs that went the other way in Q4. Thanks, Chris. I'm going to ask Sinead, if you want to cover Q1, Q2 and maybe also the point around distributions. The -- and then I'll come back and cover any other items on June. Super. Indeed. No. Thanks, Christopher. And specifically on working capital. So in terms of the working capital, we've had comments in the past about the fact that our working capital has been an outflow. And as you saw this quarter, it was a substantial inflow of over $10 billion as well. Volatility comes with working capital. Our working capital comes from volatility is probably a better way of putting it. And we are in a great position where we have the financial framework that allows us to take this and have the capability to make money from us, of course. So as we play through that, what are we expecting to see? In terms of the working capital that occurred this quarter, there were a number of things. It was price that came down obviously impacted. We saw a change less outflows with respect to margin, which you referred to as well, and that was to active management. We really looked at what are the right returns we need for that side of things and for the margining. And the third one is some one-offs. So in those one-offs, we saw quite a few people actually prepaying us towards year-end, so their own form of active cash management. And we also saw, of course, some cash deposits from some of our joint ventures who have to pay tax in January rather than in December. So just a change in terms of how taxes are playing out for them. As such, specifically to your question, how much do I expect to see? I'm probably seeing $4 billion to $5 billion of that number that came in, I would expect to see flow out. Now of course, that's just simply about things that will reverse in Q1. How working capital will play out will depend on, as you well know, the pricing and the different deals that we do during that quarter. So I won't speculate more than that. I would say that our margin, we're very active in looking at, and we're ensuring we have an appropriate return for it. You also asked about the payout ratio, which I think you said was outdated. With respect to the payout ratio, as you know, we've been quite clear on this and the fact that we have 20% to 30% range of CFFO. And taking a step back from that as well, 20% to 30%, well, as you can see, when market conditions and economic conditions allow for it, we go beyond that. So you can see in the course of the year, we actually got to 35%. That's not about being outdated. That's about an effect of us having 20% to 30% through the cycle, and that's why we are very, very clear on the fact that it is a soft ceiling and a hard floor if that helps. Thanks for that, Sinead. Let me touch on the broader question of what to expect in June. I think Chris, it's worthwhile to sort of restate here that I continue to believe that our Powering Progress strategy is the right strategy for us and that the focus that at least I'm really keen to bring is how we're going to operationalize that strategy. When we start from an incredibly privileged position; when you have something as strong as your current core Upstream business that is delivering significant value, higher margins, strong, strong performance overall; when you have this world-leading Integrated Gas business, of which we've been able to significant strength as well in 2022 with the many announcements we've made; and when you have the customer interface that we have with a very strong Marketing business, we start from a very strong position. And we recognize that as we move forward, we can continue to grow and strengthen that position while continuing to decarbonize our own assets and help our customers decarbonize their energy. So that core is very, very strong. But there's 2 pieces that I have said, and I'll continue to reiterate. Our focus is going to be on performance and discipline. Performance is going to be very much about how do we continue to drive operational excellence in our business? How do we focus on making sure that we are getting the consistency and the predictability in our overall results? And so that has all sorts of elements around how we think about working capital and the like. But also how do we continue to be lean and fit in what is an inflationary environment? So those are all elements of the performance. And why do we focus on performance? Because I think there's a lot more running room in the company. I know we've left money on the table in my previous business in Integrated Gas this year, so we can do better. And that's the aim. We want to really drive that performance. And ultimately, to your question around distributions, if we can drive the performance to its full potential, we will have sufficient cash to be able to distribute even more to our shareholders. And that's very much a core part of our focus. And when it comes to discipline, it's about making sure we continue to be ruthless in our allocation of capital towards the value-enhancing opportunities we see there. And so you'll hear a lot more of that. I've given you a bit of a preview, and you'll get a bit more of the details as we work them out over the coming few months. Chris, thank you for that question. Two questions, if I could. Firstly, Wael, on the exec committee changes, you've talked about making the business simpler and that pure interfaces mean greater cooperation, discipline and faith. What in practice are you changing about that capital allocation process? And what leaves it to be better effectively? And then just picking up on what you're thinking about the operational performance and particularly in Integrated Gas, it does look like that's been disappointing certainly relative to history. What can actually be done to improve that performance? And I'm not asking you to give too much, but just in terms of any kind of gap that you think is really there that we need to look at. Yes, sure. I think on the first one, on the executive committee changes, I just mentioned to Chris' question there, Lydia, the fact that performance and discipline were key going forward. And those were the 2 that also played in the decisions around the executive committee changes. And let me elaborate on that. And through that, maybe pick up on the operational performance question as well. The structure we are creating is one where we're trying to minimize interfaces to be able to really allow the front line to deliver the value that's needed with clear line of sight that the business directors have. In this case, our Upstream, Integrated Gas director as well as our Downstream and RES directors to have clear line of sight towards those business outcomes while the integration of our strategy as well as finance as well as M&A into one shop that will report into Sinead is meant to be able to allow us to ensure that strategy, capital allocation, the monitoring of performance to make sure that our capital is being allocated to where we see sustained strong performance, that loop has been sort of cut across 3 different parts of the organization comes together now. And so when we talk about discipline, it's our ability to be able to look life cycle at the choices we make in the way we allocate capital and continue to improve the way we do that in an objective way, unemotional way, rather than leaving it to each business to sort of try to pitch for their own capital. So that's really a core part of it. In that strand, when you talk -- when we talk about operational performance and coming to the Integrated Gas assets, I want to maybe correct a bit of an impression because there's 2 things that we're working on hard in Integrated Gas. There's one element around feedstock in certain areas like Nigeria and Trinidad that has nothing to do with performance. The assets are doing very, very, very well. The problem is it's really challenging in Nigeria, given sabotage of the pipelines and the like to be able to get sufficient gas into the system. If we can overcome some of those challenges, the machine runs well. In Trinidad, it's simply a lack of gas supply. And you've heard recently that the U.S. government has -- OFAC has allowed now Trinidadian government and Shell to consider bringing gas from the Dragon field in Venezuela. So those are the sorts of solutions for that part of the problem. The other challenge we've had is, in particular, Prelude has been a challenge, and that's one that we are very focused on right now with the team, and the leadership in Australia is really looking forensically at what are the things that would potentially mitigate further challenges. And that's what I would say at the stage, Lydia, around where our focus has been. Thank you for the question. Really, congratulations for the excellent delivery in the quarter. I wanted to ask 2 questions. The first one is about the EU green taxonomy. It's going to be one of the biggest new regulations from an ESG perspective in Europe. It's far from perfect, but it still offers an interesting insight in change towards a greener company with especially the percentage of green CapEx. And I was wondering if you had an initial assessment of what percentage of your CapEx would be green taxonomy-aligned. My second question relates to the gas market. You are one of the largest players worldwide. It seems to me like the market is getting a little bit too relaxed about the risks in the second half of the year. The price incentive is moving away from substitution. Gas-intensive industries are restarting in the EU. And I wonder if we run into a risk of potentially having another crisis this winter and how you think you can position yourself to be best positioned to benefit from that. Indeed. So indeed, Michele, it's a really interesting one, the EU green taxonomy because, as you know, it will play out and be delivered across just a different period of time. Whether you're in the EU, whether you're part of the U.K., the timing of that will change. What you can do is actually, if you look back at our annual report from last year, you can see where we actually showed a breakdown of how the taxonomy works. And actually, the spend that we would say fits very well, and we sort of described our points of why we didn't feel the taxonomy was actually properly worded, et cetera. So that taxonomy is playing out. As you know, definitions are being challenged at the moment, and a variety of that will happen. So I would say, look back at our one from last year. So from 2021, and you'll get a very good indication of that. What I would say as well, of course, is that we want consistency. That's the main thing. We have so many different regulations and rules that are coming, whether it's from the U.S., whether it's from the EU, whether it's coming from the U.K., or a benefit to all of us is to have standardization, transparency where we all use the same definitions. And we're very keen to do that as an industry. Of course, what we've said before, and I described it this morning several times as well, was the fact that if you were to look at our CapEx and our OpEx together, we would say that 1/3 of that approximately at the moment is spent on low-carbon or zero-carbon investments or expenditure as well. Thanks for that, Sinead. Michele, to your question around gas markets. When asked this morning in both CNBC and Bloomberg, my answer was the same that we are not out of the energy crisis in Europe. Far from, I think. And I would agree with your point that there seems to be some who feel that it's all back to normal. This is, I think, a multiyear energy crisis, and we want to have to collectively figure out how we address that. Why do I say that? I think just looking at some of the facts. So last year, what happened with Russia was roughly 2.5% of global gas demand was taken out because of the reduction in gas supplies from Russia into Europe. That caused havoc in the markets, as you know well. What supported or what bridged the gap, of course, LNG played an important role. Mild weather played an important draw, and critically, demand destruction also played an important role. Let's take the first one. There isn't a huge amount of LNG coming into the market over the next 2 years. It's around 20 million tonnes is what we see, but that's about it. And that one shouldn't also forget that many of these machines have been running hard now for a good year. And you're beginning to see some of the challenges in just the reliability of the machines around the world. So that's an issue. The second issue, of course, is that China was the one that diverted roughly 50% of its LNG to come here to Europe or 50% of Europe's needs was met with diverted LNG cargoes from China. That might change or is likely to change given where things are going with the recovery -- the economic recovery in China. So you look at that, you don't want to be in a position to be depending on the weather as your savior or the fact that you're going to destroy more demand. And so I do think this is a multiyear issue. We've been very vocal with governments here in Europe that we're going to have to move faster. What the Shell do as a result of this, of course, our portfolio has typically been positioned for Northern Hemisphere winters. That's where we typically have our . We, of course, work on significant support in storage this year -- or last year, sorry, we invested in storage in Germany and in Austria, which was part of where we used our working capital, for example. We're investing in projects right now. We have Pierce depressurization that's coming on stream in Penguins in the U.K. So we have a lot of opportunities to be able to supply the market and, of course, create value through the tremendous portfolio that we have in LNG. Thank you for the question, Michele. Congratulations on the results. So 2 questions from me. Just first, sort of slightly different topic but some related on the industrial and financial logic of renewables at this stage with energy transition. One of your peers sort of appears to be dialing back in renewables and into the returns proposition or the evolving returns. Can you share more views on the case to scale clean energy at this point, be it M&A or organic and so the time lines around how you think about the transition in the context of clean energy? My second question is regarding the oil outlook specifically. What does it take for you to grab the bull by the horns in oil investment and break out of the range you provided? As it still seems somewhat in contrast, the U.S. majors who are leaning into low-growth . Yes, you framed the mood as more volatile and uncertain, and you're talking about energy crisis again on the other hand. So I'm just trying to understand what are the key milestones we're looking to see for you to step in on particularly the crude side. Super. Thank you, Christyan, for those 2 questions. Sinead, do you want to start with the industrial and financial logic of how we're thinking about renewables? Yes, indeed. I'll keep it simple, Christyan. It sounds like you're in an airport without a doubt. But what I am seeing on that is the logic is very simple for us. We look first at whether any of the investments that come to us are fitting our strategic way forward. And then we're looking at very much how does it fit in terms of the returns profile. And we probably had this conversation before on that. Each investment has to fit both aspects of it. And on the return side, what we're seeing, of course, is that we have many different projects that are open to us. So we're not short of investment opportunities. It's finding the right one where we can actually differentiate and we can get those specific returns. I'm very comfortable that we have the right strategy for that. So that's where we're going to. But in terms of the -- are we dialing back or any of that side of things, you can see from our capital investment, we have a very healthy budget within the side of things with respect to renewables, in respect to green. But it will depend, of course, on the returns that we see as those come through, and that will continue to be the case. At the moment, we're seeing good opportunities, Nature Energy being a great one where, of course, it's just a logic where it fits through. We're good at molecules. We're able to move those to different locations. And of course, having the sort of business that we have with a number of customers to be able to decarbonize them, it's a very clear logic as well. Thanks for that, Sinead. Let me take the oil bit, Christyan. I think first to step back, I think the strategy that we have is a very balanced strategy. I mean we're playing the game for the short, medium and long term. So we're looking at how do we create value for our shareholders today but also how do we create the value opportunities for 2040 when the energy system will be fundamentally different. By the way, by 2040, I'm still convinced you're going to need oil and you're going to need gas and you're going to need a lot more renewables. And so our strategy is one that's saying, how do we play across these multiple energy forms but really focus on the opportunities that create the most value for us, a bit like what we've done in Upstream, where we have gone to the core of 8 countries and really doubled down. And you're seeing the benefits of that through margin expansion and our ability to really focus on value drive. Does that mean we will continue to look at that? Absolutely, you've heard me say earlier as well, we will continue to look at how do we have longevity in our oil business. But I would also say I love the fact that we have a world-leading Integrated Gas business that actually has a significant portion, north of 70% of our term contracts indexed to Brent. I want to continue to grow that part of the business because I can get exposure to a business that we are uniquely differentiated in that gives Brent exposure and, at the same time, where we are able to have much more resilience as we go through the energy transition because of the lower-carbon footprint of that business. That is at the core of the strategy. And so we will continue to follow that. And we've built on that in 2022, the North Field expansion, North Field South, our ability to be able to pick up significant volumes from the U.S. through Venture Global, Mexico Pacific Limited. And so we're really putting that strategy into action to be able to grow without necessarily saying it just has to be oil, but oil exposure is a good thing for us as a company, and that's what we're really looking. That exposure to Brent is going to be important. My first question, if I can go back to the cash payout ratio, please. You point to 20% to 30% through the cycle and 35% at current prices. To be fair that 35% was clearly helped by the proceeds from the Permian disposal. My question is, can you give us a sense and indication of what for you is the Brent oil price which you would consider as average through the cycle and which would, therefore, correspond to the 20% to 30%? And then the second question, just a numerical one on RES. Capital employed more than doubled basically between Q2 and the end of the year. I presume this was due to the spike in power prices possibly more working capital for trading. Is that correct? Or is there anything else behind the increase? Yes. I'll take both. So on the RES one, Irene, very simply put, there's a mixture in there. You're completely right. The working capital part of it is to do with power. But a large part of it is to do with the build into storage. So we talked about earlier, Germany and Austria, also some storage in the U.K., of course, as well. So you saw -- between Q2 and Q3, you saw that go up. You saw a little bit of that come down in terms of the storage side of things as well as it played out. So that's part of what occurs there. That will play out as we release out of storage as well. If I were to look at the first one as well that you asked around the payout ratio, fundamentally, it's -- if you said Permian, it's still above 30% as well. So I do acknowledge, yes, the Permian is in there. But of course, that's part of the capital allocation that we have. We make choices about which assets we are best kept -- best suited to keep and which should go out of the portfolio as well. Of course, that has implications on the CFFO as well that plays through. But we were over 30% in either way that you look at it. We tend to look at in terms of price because you were quite specific on the price. I'm not going to be drawn on what specific price it is. As you can imagine, we look at scenarios. We don't look at one specific price or strip probably quite sensible as you can imagine, given how volatile we've seen in the last year as well. So we look at the different aspects of that. And that's how we play out as we plan beyond just next quarter but through the cycle as we look to invest. A couple of questions from me. The first one, a follow-up on renewables and the changes to the executive committee. Can you expand on the rationale for grouping renewables with the Downstream and whether this has any implications for the strategy for renewables? And then secondly, on Chemicals with the start-up of Shell Polymers Monaca, not just making full contribution. How long do you expect for that asset to ramp up to get to full contribution to earnings? And should we expect to [indiscernible] improvement in the first quarter? Or does that take a bit longer? Sure. Absolutely. No, indeed. And thank you, Henri. Yes, Shell Polymers Monaca, really great to see it actually starting up and beginning to run through. It's quite exciting when you're actually there and just see it. In terms of the ramp-up, you can imagine with anything of this size, I'd love to say we'd get up and running within a couple of months. It doesn't. It always takes approximately 12 months by the time you run up, you get certified on the quality of the products, et cetera. So that's what we're seeing. So you'll start to see it play out in the results more and more. Of course, we're getting all of the costs coming through now that we're operating, but the true value of it will take approximately 12 months to play out, and then you'll really see it hitting. Thank you, Sinead. Then on the first question, Henri, on the RES-Downstream grouping. Dial back to 2017 when we started the renewables business, it was really nascent. We were looking at how do we think about power, how do we think about hydrogen, how do we think about CCS. And so that's been evolving. And what you have seen, in particular in 2022, we made some big moves, right? So we made a fine investment decision on a green hydrogen project in Rotterdam, leveraging our requirements in Pernis while, at the same time, being able to leverage our leading commercial road transport business as a potential sync for that green hydrogen and leveraging, of course, also the very strong incentives from the European government. We've made moves in India and in the U.S. around Sprng and Savion, respectively. And we continue to look at those opportunities. So we have a good base. The reality, of course, is we've always talked about a customer-backed strategy, and the majority of our customers have traditionally sat in our more conventional business in Downstream. And so there has been quite a bit of an interface between renewables and Downstream, what products should we be selling to our customer and the like. And so what this is doing is actually it's strengthening our ability to access customers with green products that we are developing in our renewables business. It also harmonizes things because, currently, biofuels, for example, sits in Downstream, doesn't sit in renewables. EV charging sits in Downstream, even though the power generation and power trading sits in renewables. So this is bringing cohesion, removing interfaces and duplication and allowing us to make sure that we can deliver for our customers the decarbonized products that they want. And then being agnostic as to what green electron or green molecule they want just trying to maximize value for the group from doing that. Thank you for the question, Henri. A couple, if I might. Sinead, this is probably directed at you because it's LNG and it's first quarter. And look, we've had a year of considerable volatility. You're a month into the quarter. Price has obviously been volatile. But can you give us any help in terms of how we should be thinking about the way that the current quarter is likely to shape up in LNG? Sorry, it's so short term. And perhaps staying with gas, if I go back to last quarter, gas storage, a lot have gone into gas storage. You indicated the benefits of that would be seen through the fourth quarter, maybe the first quarter. Where are we in that process? Has it all been released? Have the benefits been seen? Please, just commentary around both those items. Thank you. Indeed. Thanks a lot, Lucas. Indeed, so you're commenting, first of all, and let's start with the LNG one, specifically. So in terms of the volatility and what we expect to see coming into this quarter. So strong pricing. Now if you go back to what happens, we've talked about supply, seasonality and, in effect, the dislocations. So in terms of the supply, you typically see us being a bit longer in terms of Q4 and Q1. And we would expect to see that playing out as well. Hedging will work as intended. I have enough sense to not try and go anywhere on that because it will depend on where the markets will play out at the same time. But seasonality and the supply side, we hope and expect to work for us on that. Of course, it also comes down to how much third-party volumes we can actually access as well. And that's -- as Wael already discussed, it's going well. And of course, the performance of our equity production as well. It's great to see Prelude up and running and performing well at the moment. In terms of the gas and referring to, basically, we talked about -- last quarter, I talked about how we had been injecting into storage as well. We've seen some being drawn out of that, particularly around Austria, so that has come out in this quarter, but we still have quite a bit in storage as well. Of course, it's mild at the moment in terms of the winter warmer, if you want to put it that way. So that will have to play out as it goes through as well. I hope that helps. Two questions, please. First, Wael, as the new CEO, first, congratulations. That how you look at Europe in the long term as a part of their long-term portfolio given the political environment for your legacy business, I mean, you've been reducing your Upstream exposure in Europe by half over the past 5 years. The Downstream still has a lot of operations there. So I mean how do you look at that? And secondly, that if we look at in the past, both Shell and your peers sort of target or accept the wind and solar on an absolute return will be lower than your legacy business, like that you will target 8% to 10%. But is that acceptable going forward? And as a new CEO, when you look at it, will you be willing to accept just because there's no carbon that we generate a much lower return than your legacy business? Thank you very much. Thanks for that, Paul. And let me take both. So on Europe, you're right. We don't have a huge amount of Upstream left in Europe. We still have, of course, positions in the U.K. We still have positions in Norway and Italy. But the majority, in particular, when you think deepwater is in the U.S. and in Brazil. And then we have strong positions, of course, in Kazakhstan, in Oman, in Brunei, Malaysia and so on. So you're right to point out that it has shrunk over time. And we still have, indeed, in particular, when you think about our Energy and Chemicals Parks, we have the Energy and Chemicals Parks in the Netherlands as well as the one in Germany. It is fair to say that there's a couple of considerations around Europe. We see Europe much more going forward as an energy transition play. We see a lot more in terms of the incentives that play into Europe. We see our ability to be able to leverage our German and Dutch position in a way as well as our marketing positions in Europe in aviation, in commercial road transport, in passenger transport. Those lend themselves very well to be able to play in the energy transition, and it is in line with where Europe wants to go. So I see a strong part of our focus, and you see it. You see it with the investments we're making, for example, with offshore wind in the Netherlands, green hydrogen in the Netherlands looking at opportunities to continue to decarbonize customers in Germany, in Italy and so on and so forth. So there is more of that while we continue to be committed to our oil and gas businesses in other parts of the world as well as whatever we still have here. But definitely, I think the disproportionate share of capital that's going into Europe is an energy transition theme. The important thing I keep trying to remind the government in Europe is that, that capital that really needs to be -- or I need to be comfortable that we see investment stability in the climate in Europe. And I have to say 2022 did not reinforce that confidence. We have seen ad hoc interventions in windfall taxes, in price caps, in some areas, nationalization and the like. Of course, these are extreme conditions. I fully understand that. But any time you start to move from trying to manage risk to trying to manage price creates all sorts of concerns in a company like ours that's investing for the long term. So I would just leave that out there as well. I think on low carbon, let me be, I think, categorical in this. We will drive for strong returns in any business we go into. We cannot justify going for a low return. Our shareholders deserve to see us going after strong returns. If we cannot achieve the double-digit returns in a business, we need to question very hard whether we should continue in that business. Absolutely, we want to continue to go for lower and lower and lower carbon, but it has to be profitable. And so I recognize there's a different risk profile. Let's be clear, Upstream hasn't always been in the 20% returns. On a commodity -- or on a commodity basis, you find that the risk typically plays between the 10% to 15%. We need to be able to see those sorts of returns on an integrated value chain basis in the renewables as well, and that's what we're focused on. And we have great examples of that. We'll share a bit more of that in Capital Markets Day through getting in at the right time, through diluting, through creating more value all the way down the value chain, but it is important to say we will continue to focus on value and returns. A couple of questions from me. The first one is looking at your operating expenses. It seems like it's been creeping up across the group. So could we get a bit more color on what's happening with underlying OpEx and whether management has plans to address that? And then my second question is unrelated, but it's related, and it's more about your Upstream and Integrated Gas business, particularly your exploration strategy. It's not an area we hear a lot about on your exploration there. I mean a couple of years ago, you told us that you had a commercial resource base of over 20 years of production. I'm just kind of rolling that number forward. Where do we sit there? Sure. So on the OpEx or operating expenditure, Amy. So for this year, it has gone up, where it's sort of some 39 billion. What we're seeing there is, number one, there's a bit of a Q4 effect, which is always there related to just some of the costs that tend to come through. But if I take a step back because, of course, it's one that I watch very closely. When you look at it for the full year, what are we seeing for that increase? We're seeing inflation hitting. It really is. We're seeing that come through in just across the different cost bases. We're also seeing, of course, our D&R or decommissioning and restoration. We're spending more in that space as well. That's good expenditure, but it's also an element of inflation in there as well. We're also growing. So a number of those new investments that have come in, that OpEx for those new ones at the start is just more. We have to get on top of that, and it's higher than we're seeing in terms of the divestments that are coming through. So that's flowing as well. And then finally, just the same as everyone else, the utility costs, of course, have increased this year. We're seeing it flow through our own results. Are we happy with it? No. Will it be an area of focus? Yes. In terms of your second question, which was really around our exploration strategy, we have a great exploration team. And they're still very much focused on various areas. You're seeing some of the progress coming through in terms of Namibia and some other aspects as well. What you we're talking about specifically, I'm going to take it back to sort of our reserves numbers there as well. So you'll see our reserve replacement ratio, of course, at 120% for this year as well. But what I would look at there is we've often talked, of course, and you've heard us say many times about volume over value. But fundamentally, we want to see the longevity of our Upstream and IG businesses. These are fabulous businesses, and they're generating great returns, and we're very much focused on that. The reserves numbers that we see coming through, those are very much around the requirements that you have, the SEC reporting, and we adhere very, very closely to that. Of course, it does mean that some of the things just don't flow through in those numbers but are still producing and making us money. So very clearly, it is value over volume. Yes, so I hope that helps. Congratulations, Wael, for your excellent start of the new tenure here as CEO. Two questions left. First one is on Chemicals. We have seen a disappointing numbers and losses getting larger. Just wanted to understand whether there's anything you can do there on the cost side to mitigate some of these effects and whether what you're seeing in terms of the market right now if you start to see a little bit of an improvement. The second question is on liquefaction. You give us a liquefaction guidance for the first quarter. And it looks just over the -- what you reported for this -- for Q4, and it's -- which was a quarter where you had quite a bit of hiccups. So I'm just wondering what shall we expect in terms of if this range you give for first quarter, it should be a reliable level of liquefaction that we can apply for the following quarters in 2023 or whether we could see an improvement there. Sure. I'll be very short on the liquefaction. We put it out quarter-to-quarter, of course, because it is the best estimate that we have at the time, Giacomo. So it's a good estimate for where we are seeing for Q1. We obviously have a different phasing for turnarounds, et cetera. We don't tend to bring -- go out with those in advance. So you'll see that play out over the year as it's phased. But what you're seeing is a very good estimate for Q1. Thanks, Sinead. And Giacomo, with your question around Chemicals. I think there's a couple of things that we're looking at. Firstly, of course, we're at the bottom of the cycle on Chemicals. So it's painful where we are, but this is a cyclical sector, of course. The structural, there's little we can do about at this stage. The performance we're very focused on. So indeed, we're looking at all opportunities to be able to pull levers that we can, whether that's from a cost perspective or how do we enhance the top line. That's what the team is focused on and continuing to drive hard at the moment. In addition to that, we continue to play out the strategy that we have, which is shifting more and more away from commodity chemicals to intermediate and to performance chemicals. That's an important part of it, and we have some good opportunities to continue to do that. Earlier, we talked about Shell Polymers Monaca. The whole point of continuing to certify these 40 grades is to continue to actually add value to the molecules we have and to the pellets we have and to be able to make sure that we maximize the return that we get from selling those. So all sorts of ideas being worked to ensure that we counter the cyclicality and are ready when we start to move back up the cycle to be able to maximize value for our shareholders from that. Just one and one more on Integrated Gas. Clearly, a very strong result. Is [indiscernible] say to help us try and quantify the contribution from trading and optimization. I guess what I'm trying to gauge to what extent this was an exceptional quarter versus being within the range of normal volatility you actually expect within that business. So yes, any color around that would be very helpful. Sure. I would say Q4 was a very strong trading quarter. It was exceptional in isolation, absolutely. But we tend to, as I've said before, really is good to look at it across the 12 months. So when you look at it across the 12 months, our Integrated Gas as an entirety to both the physical assets and the trading and optimization part have had a great year. It really is fabulous. And when you look at that, of course, trading and optimization has played a key role in that, but I wouldn't look at it from quarter-to-quarter. As I said, it's much, much better to look at it across the 12 months. My phone actually cut out on the part of that question, so I may be asking the same question I was just asked, and if so, I apologize. I actually have 2. The first one is on Integrated Gas. And there's clearly an elevated seasonality in the business, as you alluded to, that seems kind of underappreciated by the market. And I'm trying to understand how to quantify that. And I guess I'll ask the question in this way. 4Q was very strong. If we had a similar environment in 2Q or 3Q, do you have any sense of how much different the earnings would have been? Can you give us an order of magnitude on that? And then my second question is on the... Business model. The way it was kind of communicated was add a lot of options in optimizing those electrons [indiscernible] value chain, which I would have guessed included this retail energy business. If you decide to move away from retail energy in Europe and that removes one of the avenues to optimize those electrons, does that change how you think about the return profile potential of the renewable power business? Thank you for that, Jason. I think I picked up the second one. Let me take a shot at both and build off what you said there, Sinead, on the first one. So Jason, I think the way to reflect on this and what Sinead had mentioned earlier is the importance of looking at this across 4 quarters. And what's important is that we typically have a portfolio that is geared towards the Northern Hemisphere winter. So we try to go -- to try to go longer in the Q4, Q1 months. And the way we do that typically is through supplementing our equity production with third-party volumes. So the best way to look at some of the underlying performance is just look at the volumes we provide on a -- over the last 2 years. And what you will see is quite some differences quarter-to-quarter in terms of that volume. Now I think what's important to recognize is there's different ways we create value in the Integrated Gas value chain. Of course, there is at the asset side, and you can see how much equity production we're selling. We then create a significant amount of value at the T&O side. And then there's a small piece that is also opportunistic as we play it. My best advice is just look across the different quarters, look at the prices there, and you'll get a good sense of it. This is not about us trying to not be transparent, but of course, as Sinead also said earlier, our hedging, the way we price manage our exposure is such that we look at it over an entire year and not simply quarter-by-quarter. We don't manage it on a quarterly basis. And that's why you can see sometimes the disruptions on a quarterly basis as you did in Q3. It doesn't mean the fundamental business is not strong. It simply means that you have to look at it in a broader perspective. On the -- on our decision around Shell Energy Retail and the broader value chain, the strategy continues to hold, which is we believe we can create more value out of a green electron than simply selling a green electron through a PPA. We do that through a few ways. One is we have a balance sheet, and we have a trading organization that can take merchant risk -- measured merchant risk, maybe 20%, 30%. And that allows us to be able to use that exposure to create incremental value beyond what a smaller operator can do. We also have a huge B2B business that allows us to also cross-sell beyond the current molecules we're selling those businesses. We could also provide them green electrons. And so that's another avenue. A third avenue is indeed something like what we used to -- want to do with Shell Energy Retail. That works in other markets. It works for us in Australia. It works for us in the U.S. at the moment. It is not working in the U.K., and that's more to do with the structural nature of the market. So this is not a condemnation of B2C. It's more a fundamental issue in the structure of the market that we are currently operating in, which has, therefore, necessitated this review that is still ongoing without any firm decisions taken at this stage. Wael, can you talk a little bit about the Nature Energy acquisition, just the strategic rationale and any framework to help us think about the financials? And then as a follow-up, I'm not sure I quite got the point you're making on Upstream longevity. I guess the question is, do you think you can or want to grow your Upstream business? And I say that across the combined Upstream and IG [indiscernible]. Happy to. So indeed, thanks, Alastair. Glad we managed to fit it in. With respect to Nature Energy, so what do we see there? It was just a very logical strategic fit. When you look at the business that we have, so we have just such a huge customer base that is out there who have a strong need to decarbonize. And of course, you see that with both the convenience retail. You see that with aviation and stuff like that, but you also see beyond that. So what we're seeing, of course, is that with Nature Energy when we bought it, it is both cash-accretive and earnings-accretive as well. So those 2 things play out as it goes through. It has a range of projects in the hopper, which are coming up to both FID, and the team has just set it up very well for growth. So we're going to be able to take the amazing capability that they have in terms of actually generating these projects and be able to link it into the customers and create value in that sense. Thanks, Sinead. Alastair, to the question around longevity. We will go after the most attractive projects that come our way. We don't have a specific restriction where we're not going to go into oil or into gas. Clearly, we think we have more gas opportunities at the moment because we're able to add a lot of value. So yes, we are looking at growing our production in gas. And you can see it through our efforts on Integrated Gas, for example, what we did last year. On oil, what we're looking to do is to have just a much longer period of ability to be able to produce our oil profitably simply given where the world is. We continue to believe that oil has a role to play. A big part of what we announced a few years ago was how are we going to be able to move to actually prune the portfolio to high grade what we have as an Upstream business. I think we have done a lot of that, and therefore, what you see right now is a lot more strength and stability in that business, and I'd like to extend that strength and stability into the coming years. Let me pause there, and thank you, Alastair, for the last question. And thank you all for your questions and for joining the call. Wishing you all a very pleasant end of the week and hope that you can join my team at our LNG outlook later this month as well as our annual ESG update in March. Thank you, everyone.
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EarningCall_771
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Good morning. My name is Rob and I will be your conference operator today. At this time, Iâd like to welcome everyone to the Chubb Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakersâ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Karen Beyer, Senior Vice President of Investor Relations, you may begin your conference. Thank you and welcome everyone to our December 31, 2022 fourth quarter and year end earnings conference call. Our report today will contain forward-looking statements, including statements relating to company performance, pricing and business mix, growth opportunities and economic and market conditions, which are subject to risks and uncertainties and actual results may differ materially. Please see our recent SEC filings, earnings release, financial supplements which are available on our website at investors.chubb.com for more information on factors that could affect these matters. We will also refer today to non-GAAP financial measures, reconciliations of which to the most direct comparable GAAP measures and related details are provided in our earnings press release and financial supplements. Now, Iâd like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Peter Enns, our Chief Financial Officer. Then we will take your questions. Also with us to assist with your questions are several members of our management team. Good morning. We had a strong finish, which contributed to another record year. Our quarterly underwriting results were excellent, with an 88% combined ratio despite a true-up to the projected â22 crop insurance full year results. We had good growth in net investment income that led to a record result and double-digit premium growth with strong contributions from our commercial and consumer P&C lines globally and our international life business. More important, the quarterly results led to what was the best full year financial performance in our companyâs history, including record operating income on both a per share and dollar basis from record P&C underwriting and investment income and another year of double-digit premium revenue growth, including the best organic growth in our international P&C business in a decade. All areas of the company contributed to the outstanding results last year. And I want to congratulate and thank so many of my colleagues around the globe. Core operating income in the quarter was $1.7 billion or $4.05 per share. Crop results reduced our expected agriculture earnings by $0.39 per share. For the year, we produced core operating income of $6.5 billion or $15.24 per share, up 21% and again, a record. Quarterly P&C underwriting income of $1.1 billion was impacted, as I said, by an underwriting loss from crop as we trued up our projection for the â22 crop year. This change of view for the full year result was due to the late season emergence of losses from drought conditions in certain corn belt states, which overshadowed average to excellent growing conditions in many other areas, leading to what we now know is a below-average year overall for that business. Agriculture is a weather exposed business with nat cat like characteristics. Itâs about growing conditions and commodity prices. And each year, you start over. For the year, we performed well, all considered. We published a 94.2% combined ratio and produced $165 million in agriculture underwriting income. Back on the quarter, excluding agriculture, the combined ratio was 85.9% and speaks to the strong broad-based underlying performance of our business, which produced an amazing 82.9% ex-cat current accident year combined ratio. Full year P&C underwriting income was a record $4.6 billion, up 23%, with a published combined ratio of 87.6% and thatâs with $2.2 billion of catastrophe losses in what was one of the costliest years yet for the industry in terms of cats. On the investment side, adjusted net investment income topped $1.1 billion for the quarter, up about $215 million from prior year and $4 billion for the year, both records. Our reinvestment rate is now averaging 5.6% against a portfolio yield of 3.6% and thatâs translating into annualized run-rate growth, simply going into the first quarter of 13%, which will continue to grow as we reinvest cash flow at higher rates. Our operating cash flow for the quarter and year was $2.7 billion and $11.2 billion respectively. For perspective, I want to touch on capital management. As you know, our policy is to maintain, is to manage for capital flexibility. After all, we are a balance sheet business in the risk business and we are a growth company. We maintain flexibility for risk and opportunity and return the balance to shareholders simple and consistent policy. The last 2 years are instructive. We have organically grown our P&C premiums 21.5% and that requires capital. We have deployed $5.4 billion for the Cigna acquisition and invested a further $1.4 billion and increasing our Huatai ownership together key strategic acquisitions with an emphasis on Asia. And at the same time, we have returned over $10.5 billion of total capital to shareholders through buybacks, over 9% of outstanding shares and dividends all the while maintaining capital adequacy for risk and future opportunity and we have capital flexibility given our strong earnings generation power. Peter will have more to say about financial items, including cats, prior period development, investment income, book value and ROE. Now turning to growth in the rate environment, consolidated net written premiums for the company increased nearly 12% in the quarter on a published basis or 16% in constant dollars to $10.2 billion. This includes growth of 9.8% in our P&C business and over 100% of growth in life premiums, reflecting the addition of the Cigna Asia business. P&C premium growth in earnings in the quarter were balanced and broad-based with contributions from virtually all commercial and most consumer businesses globally. Agriculture aside, North America commercial premiums were up almost 9%, while our high net worth personal lines business was up 6%, a very strong result. Overseas general grew 9.7% in constant dollars, but declined 1.3% after FX, with commercial up 9.4% and consumer up 10.3%. We are a major multinational company and are impacted by currency movements. After reaching a 20-year high in September, the dollar has been weakening and that will benefit our growth in the future. In North America, growth this quarter in Commercial Lines was led by our major accounts and specialty division, which grew 9.1%, followed by our middle-market and small commercial business, which grew 8.7% and renewal retention for our retail commercial businesses, was over 96%. In our international general insurance operations, retail commercial P&C grew 9% in constant dollar, while our London wholesale business grew about 7.5%. Retail commercial growth was led by Latin America, with premiums up nearly 13%, followed by growth of 8.5% in Asia-Pac and 6.5% in our UK, Ireland division. In terms of the commercial P&C rate environment, pricing conditions remain favorable for most lines of business. The vast majority of our portfolio is achieving favorable risk-adjusted returns. So like I said last quarter, in most lines, additional rate is required primarily to keep pace with loss costs, which again are hardly benign in both long-tail and short-tail lines. To illustrate, in the quarter, pricing for total North America Commercial P&C which includes both rate and the portion of exposure that supports rate increased 6.5%, with loss costs up 6.5% as well. Now thatâs the headline. And letâs drill down further, because I think itâs more insightful. Pricing for commercial P&C, excluding financial lines and workersâ comp was up 10%, with loss costs trending 6.9%. Breaking P&C down a step further, property pricing is firming in response to catastrophe exposures, inflation, reinsurance pricing and availability. Short-tail pricing was up 14.7%, while loss costs were up 6.8%. Property insurance is an opportunity for us. For the majority of casualty lines, pricing is adequate. In the quarter, pricing for North America Casualty was up 7.5%, while loss cost trends were 6.9%. Now given casualty loss cost trends, rates in most classes need to rise at an accelerated pace. There is little to no room for forgiveness. And here a special mention to excess casualty and auto-related liability is warranted. For Chubb, our minds are clear, and our playbook is consistent. In some lines like professional liability and workersâ comp, which includes risk management, the competitive environment is quite aggressive and rates have been falling for a number of quarters now in recognition of favorable pricing and favorable experience. However, if not careful, the market is in danger of overshooting the mark. In the quarter, rates and pricing for North America financial lines in aggregate were essentially flat. They were up 0.2%, while loss cost trends were up 5%. And in workersâ comp, which includes both primary comp and risk management, pricing was up 2.3% against a loss cost trend of 5.5%. Internationally, we continued to achieve improved rate to exposure across our commercial portfolio. In our international retail business, pricing was up about 9.5%. Rates varied by class and by region as well as country within region and loss costs are trending 6.2%. Turning to our consumer businesses, in our North America high net worth personal lines business, again, net written premiums were up about 6%. Our true high net worth client segment, however, grew 12.5%. There is a flight to quality and capacity. In our homeowners business, we achieved pricing of about 12.5%, while the homeownersâ loss cost trend is running about 10.5%. International consumer lines premiums grew over 10% in the quarter, again, in constant dollar. Our International A&H division had another strong quarter, with premiums up about 21%. Asia-Pac was up nearly 40%, with half of the growth coming from the Cigna acquisition, while Latin America and the UK each were up about 13.5%. Premiums in our international personal lines business were up less than 1% in constant dollar. In our international life insurance business, premiums doubled in constant dollar while life income overall was also up over 100%, both positively impacted by the addition of the Cigna Asia business, which is on track. As we enter â23, while early days, growth in our Asia consumer business including non-life, life and A&H is widespread and strong, a combination of a strong external environment and our capabilities and presence. Consumer lending, increasing foot traffic across retail and banking operations and the resurgence of leisure and business travel are all contributing to strong growth. Leisure travel alone was up nearly 400% over prior year. And as China reopens from its strict pandemic controls, it will further stimulate growth in the region. Think trade, which benefits commercial lines and business travel and think tourist travel as the Chinese begin to travel again on holiday. As regards China, as you know, last quarter, we have received regulatory approval to increase our ownership in Huatai Insurance Group, to 83.2%. Since then, the transfer of shares from a number of separate shareholders has taken place and we have increased our ownership to 64%. The remaining 19% is expected to close in the next weeks or months. In summary, we had an outstanding year. And looking ahead, we are starting off on a strong foot in the first quarter overall. Conditions remain favorable in terms of continued growth for our businesses globally and then add the strong trajectory of growth from investment income. Despite the challenging macro environment, I am quite optimistic about our future and confident in our ability to outperform. I will now turn the call over to Peter and then we are going to come back and we are going to take your questions. Thank you, Evan and good morning. As you have just heard, we continue to deliver strong underlying business and investment performance in the fourth quarter, leading to another year of record results. Book value and tangible book value per share increased 6.2% and 9.5% respectively since September. The increase reflects strong operating results, $544 million in dividends and share repurchases as well as net realized and unrealized gains of $1.6 billion after tax, including $1.3 billion in this income portfolio from declining interest rates and foreign currency translation gains of $594 million. This quarterâs mark-to-market investment gains follow prior quarterâs losses from a rising rate environment, reinforcing our view that these fluctuations in valuation, particularly on a high-quality fixed income portfolio are largely transient and donât represent real economics for a buy and hold insurance company like Chubb. For the full year, book and tangible book value per share decreased 12.9% and 23.5%, whereas excluding AOCI they increased 5.3% and 3% respectively, including the dilutive impact on tangible equity of the Cigna acquisition. Our core operating return on tangible equity for the quarter and year was 18.6% and 17.2% respectively, while our core operating ROE for the quarter and year was 11.9% and 11.2%. Turning to investments, adjusted net investment income for the quarter of over $1.1 billion topped last quarterâs record by more than 6% and was 24% higher than the prior year quarter. We anticipate this to continue to increase in 2023 through portfolio growth and a continuing attractive rate environment. And as such, we expect our quarterly adjusted net investment income to now be in the range of $1.135 billion to $1.155 billion. The quarter included pre-tax catastrophe losses of $400 million, principally from winter storm Elliott. There were other weather-related events in the quarter, offset by changes from prior quarterâs cats. However, there was no change in our aggregate Hurricane Ian estimate. Catastrophe and crop insurance underwriting losses together added 6.6 percentage points to our P&C combined ratio. We had favorable prior period development in our active companies in the quarter of $254 million mainly in the short-tail lines, primarily from commercial P&C lines of property, marine and agriculture from 2020 and 2021 accident years. In addition, there was adverse development of $87 million in our legacy runoff exposures, including $62 million related to asbestos, which was recognized as part of our annual reserve review. Our paid-to-incurred ratio for the quarter was 102% of which about 8 percentage points related specifically to payments in our crop insurance program, which are typically higher in the fourth quarter each year. The paid-to-incurred ratio was 85%, excluding crops, cats and PPD. International Life Insurance segment income post the Cigna acquisition is as expected, except for an adverse non-recurring $52 million adjustment in the quarter related to Huatai, the companyâs partially owned insurance entity. This adjustment was to better align our accounting policies and procedures. In addition, the Life Insurance segment in total benefited from a reserve release of $60 million in the quarter related to our combined North America business. Our core operating effective tax rate was 17.5% for the quarter and 17.8% for the year, in line with previously guided range. Our expected annual core operating effective tax rate for 2023, we expect to be in the range of 18% to 19%. On a final note, Chubb is adopting long-duration targeted improvement accounting guidance, or LDTI, as of January 1, 2023. This changes the accounting for long-duration contracts, which relates to our Life Insurance businesses. And this is an accounting change only, having no impact on the underlying economics. In the 10-K, we will disclose the historical book value impact as of 1 and 2 years ago, but as of year-end â22, we expect a net favorable but immaterial impact to book value. Hi, good morning. Thanks for the detail on the rate by line of business and loss trend by line. I thought that was helpful. Iâm interested in the casualty market where it sounds like price is still above loss trend. Hearing again the need for additional rate here. Iâm wondering if youâre seeing what the marketâs discipline is in terms of getting that additional rate? Or if competition is picking up here at all, interest rates are higher. Weâre obviously seeing some competition picking up in professional liability. So just wondering what youâre seeing in North America casualty. Yes. Look, I donât think there is an increase in competition related to interest rates. And remember, look at the yield curve, what the market expect rates to be going out a couple of years. No one misses that. And rates are not at such a level that it would have a material impact, if you were thinking about cash flow underwriting the business and you have liability durations in your question that runs somewhere between 7 years and 25 years, depending on the line of business. So I would â I donât think thatâs â Iâm taking time to talk about that because I listen to those â that kind of thinking, and youâre a smart guy, and others are I think you guys should think that through a little more. Itâs more to do with them. And I donât see an increase in competition. I see a pretty steady market. But what I do note in certain lines of business is either a lack of recognition of the loss cost environment naive at around loss cost environment, or just a failure of management to be in touch and drill in and show leadership, take action. And I just am concerned about that in certain lines where â when you think about it on a risk-adjusted adequate return basis, and thatâs why I spiked out two lines in particular. I donât think there is a recognition among most that to maintain discipline, you better keep pace with loss cost because there is no room and, in some cases, overshooting the mark and this can get away from you pretty quickly. Weâre not in a benign inflation environment in casualty, and that has nothing to do with general inflation that has to do more with everything around so-called social inflation. And you can see it. Itâs a trend that has footprints that go back a number of years, and itâs very, very clear. Then you have a couple of other lines, which I spike out separately from casualty where market condition â where pricing has been very good. And loss cost has been reasonable. And so you can understand rate adjustment, give back but be careful. Itâs not endless. Right. Okay. Thatâs helpful. I appreciate that answer. And then just following up, maybe a question for Peter, could you talk about the drivers of prior period development in North America commercial between short tail and long tail lines? I think all Iâd say is if you looked at the prior year quarter there was a significant COVID-related release. So if youâre comparing, I think you just need to adjust for that. Last year, last quarter had a large COVID adjustment. So thatâs why itâs hard to compare. You canât compare quarter-on-quarter that way from year-to-year within North America commercial. Hi, good morning, Evan. My first question relates to your own reinsurance book. Weâve heard about some pretty strong rate increases at January 1. Did you guys choose to write more property cat reinsurance yourselves? Yes. Elyse, just so you know, youâre breaking up a little bit. I think I got it, but youâre just be aware that itâs hard. Youâre not coming through really clearly. I think you were talking about property cat and whether we see it as an opportunity. Look, we have a very clear mind about our standards, adjusted returns we would expect to see in property cat to increase our exposure. And weâre in the middle of the market. And so Iâm not going to comment any further than that, except that if the conditions are right, from â in both terms and in pricing, then Chubb is a risk taker in property cat. We will increase. However, itâs not a business we need to chase by any means. And so we will only deploy additional capital to take more exposure if we like the trade. Beyond that, I know you want to know specifics and Iâm hardly going to look forward and talk about it while weâre on the field of play. Youâll see the footprints after the fact. Okay, thank you. And then my second question, Evan, you mentioned commercial property rates picking up following Hurricane Ian. I would think as reinsurance rates move, there would be a trickle-down impact and perhaps rates get better there as we move through â23. Would you agree with that statement? Elyse, I think if you listened to my commentary, I just said that. When I talked about the 14.8%, I believe it was increase in pricing. I mentioned the cat environment, I mentioned availability, I mentioned reinsurance availability and reinsurance pricing. Okay. And do you think â as you think out, do you think property is probably one of the stronger growth opportunities within your commercial book in â23? I think I already made my comment about that property is an opportunity for Chubb is what I said only 10 minutes ago. I canât stand on it any further than that. Good morning. Thanks for the call rest of the year. I was hoping you could give us a little bit of additional color on what weâve seen at Chubb from exposure changes over the last, say, couple of quarters, is that we move into 2023. And there are some folks including our strategists, that thinks weâre going to be in a recession sometime this year. I was wondering if â so what are the sensitivities among your books, what parts of your business would we see if it happens in the future and what parts would be less sensitive to assessments and exposure changes? Yes, Iâm not going to go deep into that, but you â I will relate you back in my commentary where I said that the industry in casualty needs to get more rate to keep pace with loss cost and one of the things that is in my â on my mind in that regard is you canât rely on price as much going forward in casualty, which is about sale, you rate off of sale or you rate off of payroll, you rate off of human for business-related exposures. It could be square footage and to measure traffic of consumers coming through. These are all economically related exposure movements. And that will â whether we have recession or we donât have recession, I donât think thatâs the point. The point really is as economic activity relative to â22 and â21, certainly, is going to be slower. And so you need rate, pure rate and can rely less on the exposure on the percentage of exposure to help the performance when you think about rate to exposure and inflation and loss cost. That is more of whatâs on my mind when I think about exposure. I donât think about it as much in terms of growth overall and the support of our growth rate. And I think our growth rate will be just fine. Then maybe as well, can you talk a little bit about the ability of both Chubb and the industry to pass on higher reinsurance costs to sort of primary commercial lines. Things have changed a little bit, I think, structurally over the years. And I think Iâm not sure what the sensitivity is today in terms of how quickly the primaries lines will respond to higher reinsurance costs in todayâs environment. But any thoughts there would be great, I think just to help us out? Well, I canât speak to everybody else. And so youâll just have to stay tuned and figure that out, Paul. But beyond that, I know when I think about short tail lines where youâre seeing reinsurance price increases, Iâm not worried from a Chubb point of view of achieving rate and price to both keep pace or exceed loss costs. What we expect for cat and to manage increased reinsurance costs. I think that â and thatâs why I gave you the fourth quarter pricing I think itâs â I think that speaks for itself that way. Good morning, everyone. So obviously, you commented this on your comments. So just letting you know I heard your comments, but Iâm looking for further clarification. Well, you didnât say much about this. So hopefully, I can get a little more out of view. But I was I intrigued by your comment about the retention in commercial at 96%. And maybe you could give us some historical context and then more importantly, you talk about the moving pieces of the market, financial lines, workersâ comp? Do you have a view of how that might trend over the near-term? Are you willing to share with us should add? Yes. On your first question, itâs on a premium basis, the 96%. So itâs both policy count, customer retention in terms of unit count, and it has the impact of price of rate in there in the 96%. So on a policy count basis, on a customer retention basis, it is a lower number, but itâs â but on historic earns basis, itâs very high. Itâs very stable our renewal book of business. And I think thatâs reasonably true for the industry given where you are, there was so much movement of customer during the hardest part of the cycle in COVID and all of that. And as people pulled back capacity and so many accounts had to find a new home. And then you find that there is more stability in retention of customers, both distribution do they want to move it, the customers themselves donât want. And so you have more of a stability that way. So, thatâs running at a high level. When I look forward on financial lines and comp, look, I can only give you â if I am going to prognosticate to you, I can only prognosticate what I would think would be logical and markets are never logical. There is all kinds of players. I do see in financial lines, more of the established players really know the businesses are more stable and showing more stability and recognizing that, okay, there has been â where are we on a risk-adjusted and at an expected loss cost basis. They have more insight into that and then a lot of small one of Visa [ph]. And so it creates a little chaos in the market that way, but I see a little more stability that way right now beginning to emerge. In comp, I donât know what to tell you. The market has to draw a line and I think that moment of truth is coming. Yes, that makes sense. Another area that Peter commented on, it seems kind of important. And I am going to have to review the comments in the transcript. But Peter, maybe you can go back. The gives and takes out of the life insurance, you talked about assimilating the accounting and then you talked about some other headwinds that happened in the fourth quarter. Can you go through that and maybe give us a little additional color on that? So, the one-time charge I have mentioned, and itâs a non-recurring charge was related to Huatai as it relates to aligning our accounting policies as our ownership levels increased and that was $52 million. There was an additional, which I didnât say about $8 million of FX impact. And so thatâs how I think about it. If you are looking at the international life insurance business, the reported income and adjusting for those two things, that would give you more of a sense of how we view ongoing income coming out of that business, which is why we spiked out the largest of the two, and I will just highlight the one other one. Excellent what it will be. But to be very clear, the $52 million, we view very much is one-time to align policies as we have gotten closer to and more insight. Thank you. Good morning. I would like to go back to the discussion on casualty. I fully understand that rate needs to increase to keep up with loss cost trends. But there are things you could do on the structural side, are you making any meaningful changes in attachment points or deductible? One of your competitors mentioned an inflation is causing more losses to creep into the excess layer? Yes, of course. Thatâs all that â listen we can track attachment point changes and all of that and ventilating of layers and all that good stuff. So, yes, and thatâs all baked into our thinking, of course. Okay, got it. And we actually got more color from you on loss cost trends by business line this quarter. And you mentioned just sticking with North American casualty that loss costs were 6.9%. Can you give context how thatâs trended versus prior quarters? And if you could also seeâ¦. Stable, okay. And if you could tease out if this is a level you are observing right now, are you using a higher projected loss trend when you think about risk-adjusted returns? I am really not going to overly dwell on this subject now. So, I am going to move along. But what â the only other piece of information I will give you is that the loss cost trends we have, I gave you an overall and that means it is a mix of primary in excess and all of that baked into it. It is stable. Our view is stable at this time and we constantly look at it, and I gave you a lot of information in the second quarter and third quarter around inflation and how we adjusted for our views and forward views on inflation, both in the pricing and in our actual reserving. And so I am going to stop right there. Hey, thanks. So I am just curious, given where your rate is and loss trend is there more room here as we look into 2023 for underlying margin improvement in the business, or are we getting close to kind of a good, solid acceptable return in the business? I think you â I mean look at it by ratios, Brian. I think they are just stellar. They are world-class returns and I am very happy with the returns in our portfolio. And as far as whether they would get any better, well, stay tuned. Okay. The second one, I am just curious â thanks for the comments on capital management. I know you guys have done a ton this year, and itâs great, but it did slow in the fourth quarter. Was there anything going on? Anything with respect to thoughts thatâs why you slowed the share buyback in the fourth quarter relative to call it the third quarter? No. And thatâs why I really did want to take time and step back and we all look at perspective together of our capital management policy and how it translated to numbers. And I mean itâs a stunning amount of capital that we have used. I mean it speaks to our stewardship of capital and our earning power over the couple of years. And I wanted to create that context and perspective, nothing has changed at all in how we manage, think about managing capital and buybacks is just one dimension of that as you know. And we have a buyback authorization. And we have a bunch remaining within that. And we say that as we do, when you read it, that we will repurchase up to that amount. And we are just steady as she goes. Nothing has changed about how we view it. Brian, maybe to revisit the context just to what Evan said, so we have about $1.6 billion left, so up to $1.6 billion through the first half of this year. And one more point in context as we looked at it. And this is not the framework we use this has come up on a prior call. But buybacks and dividends of $4.4 billion aggregate to about 75% of our income for the year, which we think is a reasonable way to compared to others. But itâs not actually how we manage it. Hey. Good morning. First one I had is actually a follow-up on the last question. On the capital front, when you think through how strong the margins are, as you pointed out, and price adequacy across a lot of your business in a pretty strong place balanced with some of the comments you are making about the forward-looking casualty markets and so forth. How does that make you feel about your capital and your willingness to deploy into organic business at the moment, when we think about strong starting point, and the comments you have made about the next year in casualty potentially? Look, we have plenty of capital and firepower to support organic growth on our appetite, and I already said it around property, and it extends to any line of business. If we like the terms and the pricing on a risk-adjusted basis, we will grow our exposure period. Is that something to say. Volatility, if I am paid to take it. Understood. Second question was also a growth question, but on the life insurance business. Just wanted to see if you could help us think through now that you have completed the Cigna acquisition and you get into some of the integration and so forth, what does that look like and thinking out over the next year or 2 years in terms of being a growth engine for the company? Yes. I think it is both in earnings and it is both a source of earnings growth, and it is a source of revenue growth, particularly in Asia. And it is in both the risk ends of life insurance, which think about more accident and health oriented, which I have gone into detail about that. As well as protection, more traditional protection and savings business, think about it through a variety of distribution channels, agency direct marketing, telephone-based and the fast emergence of digital channels. Think about it in partnership with our non-life business, which are very active that way and thatâs a competitive advantage for Chubb in life and Asiaâs. Our integrated capability and distribution and product among life and non-life together to the same customers. Think about the growing consumer base. Middle income, in particular, and then high net worth, particularly in certain territories, China and Hong Kong based and the middle income from Korea to Thailand, Vietnam, Indonesia and think about this is the most dynamic region in the world when you think about long-term wealth creation. And I think the next 1 year or 2 years, sure, look good, but thatâs not whatâs on my mind. Itâs the next 5 years to 10 years and how itâs now 20% of our business, Asia, and the majority of it is consumer, not commercial. And when I think across all lines, including the life and that business, to me, will represent a greater percentage of Chubb. And over time, you canât measure it just quarter-to-quarter. But over a period of time, when you look at it, we will out â its growth trajectory will outpace the rest of the company. Hey. Good morning. First question is on the helpful paid-to-incurred ratio comments you provided us on the call, and obviously, we get them from the Qs and Ks too. But I was looking back, I can see that the underlying paid-to-incurred the items you called out has increased to 85%, up year-over-year from 81%. But if I look kind of back at pre-COVID years, pre, I guess substantial rate increases in terms of conditions changes, too, obviously, it was running in the low-90s. So, just curious at a high level, if you feel this ratio is kind of running kind of a little better than you expected? And maybe thatâs for a good reason given the substantial changes in the marketplace over the last few years. Well, I think it tells you a few things. We have grown our exposure a lot. And your first incurred losses and we are in a fast, we have been in a faster growth trajectory. So, when you conceptualize, we have grown more quickly exposure, incurred losses come and grow at a certain pace before the paids come through. So, on one hand, you have that. And then on the other hand, you have the strength and maybe it speaks ultimately to the strength of our reserves. And letâs just wait and see over time. Itâs nothing, but good news. Thanks. Thatâs helpful. Follow-up is just I am curious if you could provide us with a kind of update on strategic priorities as regards to North America commercial kind of moving down market into small, medium-sized employer competitive sandbox. Is that still an inorganic strategic priority? And is M&A also on the table there? Thanks. I will try to have M&A on the table. No, there is no M&A. I am looking at a table that is empty at the moment. Itâs organic growth and we are endeavoring along and it is very digital and modern centric. And in concert with our middle market and lower middle market business. And the two of those, while the small commercial itself gets modernized into a digital enterprise, it is a consistent and very intense strategy in terms of management focus, resource and attention. I am looking at John Lupica, I am looking at John Keogh and we have the most senior executives with their eyes and Julie Dillman, who runs all of our IT and Ops and drives our transformation. From that end, we have got so much executive talent just focused and committed that this is an important future business to Chubb. And it is just â itâs consistent and itâs â you grind it out, yard-by-yard. And there are no further questions at this time. Ms. Karen Beyer, I will turn the call back over to you for some closing remarks. Thank you everyone for joining us today. And if you have any questions, follow-up questions, we will be around to take your call. Enjoy the day. Thanks.
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EarningCall_772
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Ladies and gentlemen, good day and welcome to the Tech Mahindra Limited Q3 FY â23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C.P. Gurnani, MD and CEO for Tech Mahindra. Thank you, and over to you, sir. Good evening, everyone and again thank you for joining us on the Q3 FY â23 earnings call. We began 2023 with a special milestone that enterprise verticals have reported $1 billion quarterly revenue. I want to thank all my employees, customers and more importantly, the technology leaders in the company, which have continued to invest on connected enterprise and connected solutions. I am grateful that some of our leaders have remained focused on building tools and technologies in the world of AI and data, in the world of metaverse and Web 3.0, in the world of newer solutions with 5G and AI and cybersecurity. Our team at BORN have continued to deliver record performance on customer experience management and customer experience management extends to our service offerings in BPS and BPS also continues to deliver a record performance. I am also proud to thank my technology team, which has now delivered a cloud-based tech platform. Itâs a sector-agnostic platform which will help our clients improve their digital absorption, digital acceleration, and more importantly, cloud consumption. So â and this we have done it in a partnership with all the hyperscalers. Itâs just a sector agnostic and we will create value for our clients. We will partner with hyperscalers. On the CME side, 5G continues to fuel the growth. 5G in enterprise, which is one of the focus areas, we have announced with Mahindra Group, a 5G rollout and one of the largest and the most modern factory, an auto factory at Chakan in â near Pune. So it is clearly a tri-party performance, as I call it, client, a telco provider like Airtel and a value integrator like Tech Mahindra. We do believe that this will unlock a lot more opportunities for us and it will also be good for our clients, because they will improve productivity, they will use intelligent and more importantly, AI-driven network solutions. And it will help our clients innovate and it will help our clients run their operating smoother. On the quarter three performance, $1,668 million, I think it translates into quarter-on-quarter growth of 1.8% for enterprise and for CME, it translates into 1.9%. I mean, clearly, in a normal situation, quarter three, what is internally known as December quarter, is seen as a softer quarter, I think the company has delivered good performance. In general, I can only say that our leader in our vertical service â in our service offerings is BPO. They are one of our largest and the fastest growing businesses. They probably are one of the best performing BPO companies if they were a standalone company. And they have done remarkable in Q3 and overall also, their year-on-year growth is close to 21%. On the operating margin side, I know there is a lot of work to be done. We are right now at 12%, but itâs a commitment, that are focused on EBITDA improvement or margin improvement and us being able to work on the levers, I think our confidence is reasonably high. Our large deal team has done overall a great job. They delivered deal wins of about $800 million. We have had good large deal wins in the Americas and both in telco, doing even the platform for the future versus we have signed a multiyear partnership with a digital wellness and a health technology company. So overall, digital transformation and business transformation has been the key to the wins that we have had this year. I know there are broadly questions regarding the macroeconomic environment. I can only say that the company has decided that we are going to become a lot more agile. We will be looking at our operations alignment with 1,290 customers now on a monthly basis. Earlier, we used to do it on a quarterly basis, but â and the reason is very simple. On one end, when I look at my deal pipeline, when I look at my three main value offerings, which is cost transformation, digital transformation and business transformation, we are still seeing probably record high deal flows. At the same time, we have seen a few clients hit the pause button for the discretionary spending. We obviously want to remain better with the customers, better aligned with our back office operations and we want to be more responsive to our customers and hence, we are going to go into the monthly demand and business plan management. So again, inherent strengths of the demand is strong. Drivers for the demand are strong. And the impressions that we are getting in that our investments in metaverse, Web 3.0, blockchain, 5G and some of the platforms will be helpful. Cloud continues, AI-enabled metaverse continues to be the best service offering right now. So we do recognize the near-term challenges, but more important is we are confident that our customer base is our biggest asset, our workforce is our biggest asset and we will create a much more agile organization. Good evening, everyone. Let me now cover the company financials for the quarter ended December 2022. We ended our third quarter with the revenue of $1,668 million versus $1,638 million last quarter, up 1.8% quarter-over-quarter. Adjusted for FX, the growth comes at 0.2%. Growth was broad-based with CME growing at 1.9%, enterprise growing at 1.8% over the quarter. Revenue in INR terms was INR13,735 crores versus INR13,129 crores in Q2, up 4.6% Q-o-Q. The EBIT for the quarter was at $200 million versus $184 million in Q2. The EBIT margin was at 12%, an improvement of 60 basis points. We got some tailwind from the currency which helped drove operational rigor as we have committed, which is partially offset by certain SG&A increase. Moving now from EBIT to other income for the quarter, we had $30 million of other income versus $36 million in Q2. ForEx gain was $15 million compared to $16 million. The tax rate for the quarter was at 27.3%. The PAT for the quarter is at $157 million. And the net profit margin for the quarter is at 9.4%, which is a 40 basis point drop from Q2, mainly because of the rate of tax at a lower point last quarter versus this quarter. Our free cash flow for Q3 was at $31 million, which is 20% of PAT since some of the billings were impacted by furloughs. We had some FX impact of revaluation as well. We had also said during the last quarter that we had some movement from Q3 to Q2, which â due to which the Q2 cash flow is very high. That has got normalized as well. So when you look at the year-to-date FCF number itâs closer to $350 million, which is approximately 3% of the PAT conversion. For the full year, we still have a very strong view of FCF conversion to PAT as we move into the fourth quarter. DSO was similar to the last quarter at 98 days. As mentioned earlier, we continue to consistently follow a rule-based hedging policy. As of December â22, the total hedge book is $2.5 billion versus $2.4 billion in Q2. Based on hedge accounting treatment net mark-to-market gain on 31 December was approximately $7 million, which was taken to the P&L $6.6 million and the rest went to reserves, which was $0.3 million. We had a cash and cash equivalent of INR780 million, which is INR6,449 crores. We are committed to prudent capital allocation and returning back to the shareholders as per our earlier committed outlook. In summary, I would like to reiterate that we committed towards executing the planned targeted actions of improving profitability even amid the near-term demand headwinds. Thank you very much. [Operator Instructions] We have our first question from the line of Abhishek from Nomura. Please go ahead. Mr. Abhishek, can you please⦠Thank you. Good evening to the management. I basically had two questions. Rohit, first is on your margins. Look, this quarter, we had good improvement on utilization and the subcon expenses going down. And we had earlier thought about exiting Q4 by this 14% EBIT margin. So maybe you could give us some of the additional levers what you think you have from here on to improve the margins further? Yes. Sure. So as I said earlier, our focus on margin expansion continues. From a lever standpoint, our subcon cost is still high. We have actions lined up to get that normalized, so that will continue to be an area of focus for us. Again, from a comparable entitlement position perspective, we will continue to drive offshoring as an action item also. So thatâs the second lever we will continue to drive. We had also articulated earlier that we are looking at non-strategic assets where the margins are not favorable to us and shutting those businesses or divesting them will help us. So we continue to execute on that plan. So that action will also continue from a structure standpoint. And overall from automation in delivery and how we optimize delivery, this is going to be a critical lever as we do more and more engagements on fixed price and as you see a large deal volume going up, an important part of that is driving efficiency, but driving more tools and automation. So, delivery excellence, Iâd say, we have the bucket that will continue to drive margin expansion. Then the last and not the least is our portfolio companies or the companies that we acquired, I think our synergy with them continue to drive actions both on the revenue side as well as on costs. So I think as we move forward, thatâs another area that we will continue to work on to drive margin expansion. Sure. Thank you, Rohit for the detailed answer. My second question is on the demand comment, both CP and you mentioned that the near-term demand environment is challenging. While if I look at your order booking for this quarter at least, itâs still hovering in the range of around $800 million. So are you seeing any kind of delay in execution or the TCV to ACV translation is elongating in your deal book which might be an additional thing to keep in mind while we model our growth numbers? Yes. So maybe I will answer it on what we are seeing and maybe CP can add on as well. So from a demand environment standpoint, as CP also mentioned, versus the first half of the year definitely, there is a slowdown. The decision-making is relatively slow. People are taking more time to close transactions. Also, while our deal win number is still good, I think when we look at the current book of business, which is with existing customers, there is a lot of areas where we continue to work with them on smaller assignments and delivery engages with the clients on driving growth there as well. I think those budgets are getting squeezed as well. And those incremental small deal sizes or opportunities are reducing as well. So that conversion to revenue is much faster versus typically what you see on a large deal conversion standpoint, right. So I think thatâs also playing out as the squeeze from each and every customer depending on where they are, how their financial outlook is, how their customers are reacting to the current situation. So as that environment is panning out, everybody is reacting differently. And hence, the point that C.P. made that we are being very agile to monitor our actions conditional to those customer behavior. So thatâs kind of a few points there. C.P., if you want to add something more on the demand environment? The best is to hear it directly from Manish Vyas and Jagdish Mitra and CTL if he is on the call. Manish, you want to go first? Absolutely, C.P. So I think, Abhishek, the demand scenario can best be described as thereafter having spent significant amount of money on digitizing both the customer experience as well as the network. I donât think broadly speaking, strategically, there is going to be any slowdown in those areas. The modernization of the telco, modernization of the IT stack and as they continue to work on finding out where exactly is the monetizing opportunity that will come. In all of this, I think what will happen and what is happening is there will be a little tightening of the OpEx budgets to basically find new ways of delivering services. So we are going through that process of change. There are other inflection points in many ways. And as we do it, what will happen is the demand cycle will slightly change in the sense we will start seeing lot more of cost takeout opportunities yet again, which we saw few years ago. I think we are going to start seeing those opportunities over the next, itâs difficult to try and regard a guess on timeline, but maybe about 6 to 7 months from now, we will start seeing some of these deals rectified. While I think we have maintained that the digital spend will continue to happen in agile fashion in small â bite-size projects as they have been happening. So thatâs really the qualifier behind how the demand is going to be happening. Functioning of OpEx, slower â or smaller deals as far as digital transformation is concerned, followed by as we are working on some large cost takeout opportunities in the industry. I hope that answers your opportunity. So, hi, Jagdish here. So Abhishek, pretty similar to what Manish talked about in terms of the generic trends that we see in the industry, but there are obviously going to be some market and industry nuances, but we will see, I think, for example, we already know that there has been a fairly good quarter-on-quarter deal signing for us. So from the demand side, we still see a similar robust growth on the enterprise verticals. There will be good growth expected on some of these verticals, especially retail, manufacturing, and similarly, on banking and financial services, Vivek, my colleague, can comment on that. We will see some slowdown or rather tepidness in high-tech, as you know, as they start to reorganize and look at where the spend and the allocation will be. But broadly, we see demand being quite robust, large deal inflow is quite strong and the decision-making, as Manish also mentioned, will be spread over a little more time than what we see now. So thatâs how I see the overall segment plays. Yes, hi. I mean, Rohit, to your comment on the margin side, I mean, when I look at some of the matrix right here with the kind of growth that we saw last year and the kind of traction, which we might see given the macro we are in. How some of these are factors that you are saying are really doable in this environment, because utilization is already high for you and then you expect the subcon also to go down? And some of the factors which you are saying in terms of divesting non-strategic thing or even offshoring, what kind of impact those elements will have on the revenue growth if those are the margin levers? Yes. So I think maybe just take it sequentially, from a subcon perspective, we have articulated is that earlier from our perspective due to travel restrictions and certain large deals, a requirement to have a specific skilled subcon requirement, we had a higher subcon as a percentage of revenue, right. And we have clearly articulated we have a transition plan as we move forward on substituting or replacing that or eliminating as relevant. So we will continue to work on that journey. And I think as we go forward, we feel we have significant opportunity on that area. They are not just current quarter, but even getting into the next year, right. So that will be a short to medium-term lever to continue to work on. When you look at offshoring, again, I think while we have taken actions on offshoring to drive more and more people from onshore to offshore, but somehow the way the reduction of headcount panned out, the mix from an offshoring perspective as a percentage of total headcount hasnât shown that change. So our view is entitlement perspective, we still have significant headroom to go there again is from short to medium term. So it impacted revenue on divestiture, I would say that we havenât really called a number. But broadly, I think weâve done some actions last quarter. We have similar or slightly more actions lined up as we move forward. And as we â because you would appreciate the action or some of these are a little bit structural and you have to line up a lot of aspects depending on are you divesting or discontinuing it? So based on that, how they pan out, we will continue to share the impact, but one thing is for sure, it will be favorable to the margin, and thatâs a big driver of our action around that portfolio, right? So those areas will continue to give us levers significantly moving forward, not just in Q4, but even going into the next year. So broadly, those are the areas that will work. Sure. And just one more question, which is related to your active plant data. Itâs been growing, but the pace of that has reduced significantly. So is this a conscious effort in terms of choosing the net new customer more in a different light altogether, given the margin aspiration, but these are also related to some demand side things? So we had a conscious process and a project where we were trying to make sure that we rationalize or right size our tail accounts, where the size of the business is expect â is that a particular threshold of threshold we expect, that we donât see a pipeline with that customer. So hence, our focus has been to continue to work on fight during that list, right? So thatâs a conscious effort because of which we have not, that you donât see the increase, right? While we have added a new customer, but weâve also taken out a lot which are suboptimal and below the threshold that doesnât give us the economies of scale for expansion. For those, in fact, turns out to be more managerial bandwidth diversion actions for us, right? So thatâs the reason why you donât see that significant increase there because of that action we drive. And lastly, from a more bookkeeping point of view, this split that we got this quarter in terms of dollar to CC was quite significant. Is it â any specific reason for that? Or is it general big move in the GBP or any other factor that led to this? And what we should bank for now based on the current rate? So I think it was predominantly â if you see, even last quarter, we had a headwind due to currency, which was significant due to the movement we saw in GPB and Europe predominantly. At this time, that has corrected with some of these currencies moving back a little bit, right, GPB and Europe both. So that is causing the fluctuations over last or this quarter, both negatively last time and positively this time. I donât think so there is a prediction of how it will pan out from an FX perspective. But as we move forward and as the rates change, we continuously to model it going forward and keep you informed on how things pan out as the quarter. Probably take it off-line because the difference still looks very significant compared to some of our peers. But thanks for the clarification and best left for the timeline. Yes. Good evening, everyone. So you may have mentioned it earlier, Iâm sorry if you have already done so, but C.P, Rohit, could you talk about the trends in the top five clients? The performance year-over-year as well as sequentially looks quite weak. And what is the outlook there? And what should we be expecting in the coming few quarters? Hi, Surendra, thanks for the question. Yes, I think from a year-on-year perspective, you see a reduction in the contribution by the top clients. I think we have a couple of customers there that are having their internal restructuring plan and focused projects that they are working on, we are partner to them on those actions and initiatives. Based on that, we see softness in those customers causing that impact. Some of it is obviously on a reported basis driven due to FX that you see last year rates versus now, itâs unfavorable, right? So on a reported basis, you will see a couple of points dilution due to that. But the second point is what I said earlier. There are certain actions that they are working on and be very closely working on that, but that is causing us a decline when we look at it. Going forward, I think we are estimating that bottom by Q4 probably as we move forward in terms of impact. And from there, we will have to work closely with them to see as C.P mentioned, the very agile resource management focus to see we are able to support has to change their plans on the other direction. Yes, we have stopped disclosing that. But broadly, itâs not much different than an overall average basis. Enterprise has a little lesser FX impact than comps, but not much different. Yes. Yes, we are seeing decision-making to be slightly longer than what we were seeing in the past. While the pipeline is still robust and a lot of them are towards mature state of closures, we see still from that point to final signing, itâs a little bit of a longer process because people really just want to be sure on what are they committing to. Is it fitting into a probable scenario analysis for them? So weâre working very closely with them. We can even modeling that for them, right? So I think there is an impact there in terms of â C.P also articulated, the decision-making is becoming slightly slower. And as we move forward, itâs important that we continue to be staying close to the customer so that in the thinking we are making sure that weâre close to that thought process as well as their planning as they look for the future. Rohit, my question was slightly different. Are we seeing less smaller deals and low relatively larger deals? So that was the context which I was trying to get to. The average deal size hasnât changed for us. Itâs similar number. Maybe in the last four quarters, we saw one or two probably large deals. But beyond that, I think as I look at the current quarter mix also, we have a similar, one large deal which is more than the average, which is similar to what we saw in the past. So not really a significant change in the average deal size for this time versus last few quarters. Hi, thank you. And first of all, I want to understand this headcount reduction and software side. We are now running at utilization I thatâs even higher than pre-COVID levels and considering that attrition still is kind of above pre-COVID and probably likely to remain slightly elevated. Wondering how much headroom we have in utilization? Yes. So I think our pre-COVID level â probably donât have the numbers, but I remember weâve operated at a utilization level of even 88%. I think â so thatâs maybe still headroom there. And generally, I think the view from a headcount perspective is more closer to â as you move forward, I think itâs very â as we said, the macro environment is relatively volatile. So we just want to make sure that we are actioning â and maybe while we are actioning closer and linking ourselves to the macro environment, the linearity of correlation between headcount and growth is also diluting a little bit. So from â maybe just to kind of clarify, we feel that there is not a direct correlation that you can apply or reduction to revenue while there maybe certain linkages, that correlation is not 100%, right? As we look forward, I think while we donât give a view on head count hiring, all we can say is that thatâs going to be very closely aligned and monitored with the demand environment that we see. And given where we are, while the pipeline is strong, overall demand seems pushed to a longer decision cycle, right? And what I had earlier articulated also the committed business that weâre working on the run basis with the customers there is a lot of smaller requests and change orders that keep on coming on that business. So that is becoming more and more squeezed, which is â doesnât show it the large deal win, but squeezes the revenue profile. I mean, this quarter, it looks like the growth has primarily come from the rest of the world, the core markets, Americas and Europe seems quite weak. Europe still then some slight addition, but almost all the revenue added $30 million or so comes from the rest of the world, excluding Australia to find customer AUD contribution there. Even that seems slightly negative. So any comments about what drove such strong performance in India, this contract that you guys are mentioning about this manufacturing plant being having introduced 5G IoT Work in India? So yes, I mean this quarter, rest of the world has grown, but weâve consciously said that we are very selective in India, which â with what deals do we make bread and choose. So I think from an India perspective, itâs a very margin-focused strategy. From the other issues within ROW that are seemingly doing well is, I will call out Middle East specifically, I think that weâre seeing some good momentum there, add significantly good digital deals that weâre working with the customer in that region, and thatâs driving the growth. And that region we feel from an outlook perspective, continues to be positive, right? And as you look at the global macroeconomics also next year, you will see much more pressure in U.S., UK. Generally, Europe, Germany, all the developed countries, when we look at GDP growth in all the ROW, Rest of the World countries including EMEA, Africa, Asia, etcetera, the pressure on GDP growth will be less. So as we move forward, I think itâs going to be very important from a margin management perspective, that as we grow in the growth-oriented regions where there is still demand, we pick and choose the right project to drive the right profitability outcome that weâve articulated to you guys. Sure. But that seems to be a thought to give a commentary from one of the larger peers who seem to say that U.S. and UK demand is still strong, and they are looking at those geographies really driving growth even in this calendar year? Yes. So as I mentioned, you look at the pipeline, right? The pipeline deal wins are still coming from predominantly U.S. and Europe. But as I mentioned, there are certain client-specific top accounts, restructuring that has been happening due to which we see a pressure in those geographies. I think thatâs also contributing for us versus maybe a general view that youâve got. So maybe thatâs a factor from a depreciation standpoint. Yes. Thanks for the opportunity. Rohit, my question is when I look into the segmental IT services margin for the last three quarters of FY â23, it has been remaining stagnated at 14.5% to 15%. Despite IT service utilization has gone up, subcontracting cost has come down. So is it fair to link this stable margin despite operational parameters are improving with the restructuring happening in the top five clients? And if yes, what is the nature of this restructuring, which is impacting the margin as a whole? Sandeep, maybe offline with the IRT, we can look at the last three quarters of IT. There is some play between FX that is playing out. Maybe last quarter there was an impact on FX, but the operational data higher and similarly the opposite way. So we can go through that with you quickly. But generally, as â from an impact perspective, as we look at the growth, right, one big area is if you look at the last two quarters growth overall in the IT segment versus the previous two quarters, there is a slowdown there, right? So that definitely says an impact from a margin actions perspective, while we have right-sized the organization over the last two, three quarters and improved utilization. I think because of the sudden change in the growth environment, that does play an impact, right? In terms of impact of some of the key customers and what they are doing. I think itâs more an internal kind of restructuring on how they are looking at their priorities and how they try to re-club that in a particular fashion. So we are ensuring that we are closely working and consulting with them jointly in that process. Beyond that, I think since the customer-specific information is very difficult for me to thing for. Okay. And just last question in terms of the business realignment or restructuring where you are cutting some of the low-margin business. Last time we rolled out the annualized run rate is $100 million to $120 million, of which half has been concluded in 2Q. So what is the status in 3Q? And is it fair to say the margin benefit of these rationalization of low-margin business may start coming from 4Q or FY â24? Or it has already started flowing into numbers in 2Q, Q3? So the one which has already started flowing from Q2 onwards, we have had limited impact in Q3. There are a few discussions which are in progress. And as we move forward in Q4, it will continue. Itâs not an end that we will have the action as we end the year. I think the point is we will continue to work on the fine-tuning and the pruning list going into next year as well. And as we do that, depending on the nature of the transactions, the margin impact will flow through immediately or the. So as we conclude those, we will communicate it appropriately to you. Hi, thank you for taking my question. So first question is the correlation between the deal wins and revenue growth. If you look at last year, we kind of end the year with a very strong growth in the deal win, which translated into almost double-digit revenue growth in constant currency terms. If you look at now trailing 12-month deal win numbers, itâs kind of stagnated at a particular rate of $3.3 billion. So how should one think about the deal wins stagnating versus revenue growth outlook over the coming 12 months? I know that you may not be able to give any guidance in the quantitative terms, but just trying to understand the correlation and conversion better. Thank you. Yes. So I think â I mean, I wonât talk about the guidance, but maybe I articulated earlier as well. While the deal wins is still in the range that we anticipated it to be, which is $700 million to $1 billion, we do see pressures on decision-making. So thatâs one area to think about. Second, as I mentioned, beyond the deal wins that we report all that new deal wins with new and existing customers, which helps us over and above $5 million, right? So when you look at outside of that in the quarter â in the next quarter, there is a lot of activity that happens with the customer on existing projects where youâre able to drive more revenue, right, through â maybe an add-on or bolt-on project, right? And that is what I was trying to tell you that the budgets have become pretty tight with most of the customers, and those opportunities are thinking ahead, the contribution that we typically is to get from those initiatives are diluting which is reflecting in the revenue profile as well, including the demand environment. So while the deal will look robust, there is a contribution dilution from these areas. And as we move forward, that pressure will continue kind of into at least the next couple of quarters as we see the demand by a peak the way it is right now. Got it. My second question is around margins. If you would be able to provide any margin walk of this 9 months versus last year 9 months, what would be those two or three key factors that really drag down the margins? In this context, if you see our attrition rates have actually come down below pre-COVID levels on LTM business for the last two quarters. So what could be the possible tailwind from lower attrition on margins one can think about over the next 12 months? Thank you. Sure. So broadly, from a margin perspective, the biggest impact for us is, of course, people cost in the supply chain pressure we saw, right, from last four quarters that has had a significant impact on the overall wage bill, right? So that is the biggest dilutor on that basis. And then also, there were certain other EBIT line items, which weâve articulated based on the acquisitions we did, the amortization impact flows into the D&A line item. So that also dilutes margin by broadly an 80 basis point or 1%. So that in my mind are the two biggest areas in terms of margin impact that we saw. And from a â from a go-forward perspective, as we mentioned a couple of quarters back, most of the impact of that had happened, pricing increases was happening with a lag and we have said that including other operating actions, we will continue to drive that to improve margin from here forth as we move quarter-over-quarter sequentially. In terms of attrition, it does â I mean attrition is also going in parallel while weâve done a lot of internal actions and maybe Iâll ask Harsh to comment it, but just the internal action, which helped us a couple of quarters, fourth. Now in the recent few months, the market is also easing out a little bit, right? So you would see the spread across. So from that perspective, the impact is going to be favorable or the base will increase. But relatively versus what we saw last year, that impact is kind of easing out. So Harsh can add on the said and what weâve seen in the past is just for you to get a better understanding... Yes. Thanks, Rohit. And as Rohit said, that weâve been diligently working on reducing attrition and itâs fairly under control. But if you look at the market while it is â we see it easing up a little bit, but the niche skills are still a bit of a challenge. And therefore, we will have to keep our efforts on and make sure that this doesnât shoot up. The other thing that we have to do to really make it translate into real savings is going to be to make sure that we increase our unitization. We look at internal rotation, as you will see this quarter internal fulfillment was much better than any of the past quarters. But we will have to keep those efforts up. So the battle is not really one. I would say the journey is still ahead of us, and we will concentrate all keeping this as is. Yes. Hi. Good evening. Thanks for taking my question. Rohit, just two set of questions. One is just wanted to pick you in a bit more on the BPO business. We have had very strong growth in the BPO business this period, this quarter, almost $20 million of the incremental, $30 million that we did in this quarter case from that business. So, any color on that, that what drove this growth? Is it just kind of a sustainable? Was it a large contract, which may be just started in this quarter, which led to the ramp-up and we might see the more non-organized growth rate post that? And just a question into that, is how do you tie up that very strong growth to a significant reduction in the headcount in BPO business, almost 4,800 reduction. So, how does that tie up for the overall BPO growth? Yes. So, from a growth in revenue perspective, this is typically a seasonal quarter for us where we see ramp up happening. And this time, it was significantly stronger than typically, we will see the trend on. So, I think I will ask Birendra to comment on that because the team has done a ton of good work in maximizing that opportunity. In terms of trend, yes, the seasonal â you need to look at the headcount movements and the impact there was a little bit of lag marginally at some point. So, we would have ramped up headcount in the previous quarter, which has now reduced in the current quarter, which is reflecting in your revenue growth. And as the seasonality goes away, that headcount is reduced, right. So, thatâs kind of the way to think about it. From an overall growth perspective, the BPS growth levers and actions are lined up very strongly for â as we move into the next year now. And I think the team sees a favorable opportunity set for this set of segment for us to continue to drive positively and be very accretive to the overall portfolio. Biren, maybe you want to add a couple of more lines on your growth journey? Thanks Rohit and hi everyone. I think on Q3, specifically, Rohit has covered it all, but if you just step back and look at what we are executing, our objective has been to lead the CX segment through AI and database automation and transformation and challenge the back office businesses through, again, tech and new delivery model. So, while there is overall softness in the environment, we will continue to execute well, and we should â reasonably confident of coming ahead of industry growth. Thank you. Sure, thatâs really great to get. Just my second question, Rohit, just a further clarification, you mentioned about the portfolio of pruning exercise that we had not taken just a couple of quarters back. So, could you just maybe quantify to some extent as to where we are in terms of that exercise in terms of our targeted â I mean you had mentioned the impact would likely be around $100 million. So, I mean are we through that exercise? And also in terms of margins, how much of margin approval have you already seen? And what is the kind of timeline that you are looking at maybe for the entire exercise to maybe end or substantially, if not completely? Yes. So, I think we had indicated that range, out of which I think last quarter, we articulated we executed annualized run rate of almost half of it, which gave a bump of possibly around 20 basis points in margin. As we look at the next set of actions, I think I probably wonât quantify the margin impact, but it will be â continue to be accretive from a margin standpoint and not just Q4, that action for us is going to continue as we move forward into next year as well because while we execute this, there is a continuous pipeline that we will evaluate even for next year for now. Right. But any timeline as to, letâs say, first half, second half that we expect this exercise to be over? I know, as you mentioned, it might be a continuous process. But the large part of the exercise when that would be over next year? So, there are a lot of external factors, dependencies around this, not just internal decision making. So hence, I think we want to make sure that we find specifically in the case of finding the right part. We find the right partner from a strategy fit perspective of that business where they are able to drive value, given our priority and our value from our focus perspective for the year. We just want to make sure that we hand it to the right set of partner. And if we are discontinuing, then there is a different sector of action, right, which we have to drive in terms of managing the size of the book, delivery commitments to the client, liquidating that as per the company timeline. So, I think from a timeline perspective, depending on how we go and which way we go, it might â it will vary because of that. Yes. Hi. Good evening. Thanks for the opportunity. Rohit, just if you could help me understand this better. So, you are suggesting that there is a continued weakness in the demand environment and the top five customers. But are you suggesting that â so this quarter, we had furloughs. So, one would assume that the furloughs come back, the board of furloughs has happened, should come back and should sort of hit revenue next quarter. Do you believe that there is going to be weakness despite that, or how should we think about this primarily? Yes, sure. So, I think two or three points that maybe I will ask Manish also talk about it. So, I think â in certain markets, we have seen the furloughs in fact continue not just December, but have gone through January also. So, some of the customers have extended it. So, it had been in fact, maybe we might see it in the same proportion as we saw last quarter. So, the impact had been and thatâs one. Second is, I think from a top customer impact perspective, we are seeing that evolved. And we â our expectation is that will kind of be effective and reached a particular steady state by the end of the next quarter, right. So, I think those are the two drivers that are happening. And overall, I think from a high-tech tech market standpoint, itâs all over the news, you would have also read it. I think there is a lot of focus on cost. There is a lot of actions that the companies are driving on the rightsizing their operations. And hence, at some point based on the customer profile mix, etcetera, that will continue to impact us, right. So, I think those are the broad headwinds that we see from a growth standpoint. As we move forward, of course, the new deals, all that adds on to help mitigate it. But on an average, right now, headwind seems kind of a little bit more in the current scenario, which is still very volatile. And with some changes, it changes very fast. So, our point on being very close to the market is the reference that C.P. was bringing on. Maybe comp side, Manish can give you also some flavor. So, absolutely, Rohit. Thank you. Look, I mean I think growth and demand, I hope we are discussing in context in reference of the timeline. So, broadly speaking, the trends in the HD [ph], and the telecom particularly is that there is already intense activity, large deals content. I mean this is one sector where in one of the previous questions that was asked to Rohit in terms of the deal sizes. We do expect that some of the larger deals will come back into discussions, and they are indeed already coming back. But that could be a mid-term to long-term, two to three quarters from now kind of discussions in terms of decisions, the discussions are going to happen now. Vendor consolidation is going to be a big growth trend for us in the tempo sector, particularly with the solid active price we have and the presence we have in most of the milder accounts as Tier 1 vendor with a smaller size telco-related positioning with that across major provider. So, that puts us in a pretty good spot to take advantage of the vendor console plus cost takeout. And as we continue to drive and the new budget start getting rolled out in different parts of the world for continuing the digital transformation because they are reassessing it as we have did. So, yes, I think the overall â directionally, I think these are things which always have held our relative solutions in cold. And there is no reason to feel any different about it now. In the very, very short-term, I think some of the decisions that the budget cuts will reduce, I think we will indeed be there. We just donât know how long will they last, it could probably be as shortly that will be another quarter. But we do believe that overall, the agile size transformation, vendor consolidation and the large deal, I think is going to be pretty positive in the long run for us. Hi. Thank you for the opportunity. And I know you have already pleased a lot of questions around the margin outlook and the margin levers. But just wanted to understand, Rohit, a couple of things. While you are saying that we will see further improvement in terms of subcontracting expenses, but this is an expense item, which for us actually has historically been higher than peers. So, is there a significant change in terms of our operating model that we are thinking about when we suggest that there is more room to reduce subcontracting expenses? And the second question was around the onsite/offshore mix or more around the utilization metrics. So, when we have operated, 88% to 89% utilization rate, our onsite/offshore mix was much higher. And now you are talking about a much higher offshore mix. So, do you think we have more room to essentially improve utilization despite a higher offshore mix of business? Yes. So, maybe sub-con first. I think on the sub-con, as I mentioned, we have gone head bear on each and every that we do, why we do it, whatâs the reason, do we have the skill internally and hence we are going for it, is it a customer-specific requirement. So, we have gone into great level of detail there through which we have made time-based action depending on dependencies on a project, customer deal, etcetera, through which we have articulated that we will start these actions starting a couple of quarters back, and you can see these back of that in the theater. We will continue to drive that. There could be some new deals that will again come with that consideration, which will get really bump up that requirement. But from an action focus and DNA perspective, of the company, we are changing that quite rapidly in terms of actions that drive us to get this metric as close as possible to entitlement that we feel be inductive. So, I think as for sub-con, you had tons of utilization and onshore/offshore. I mean if you look at our offshore/onshore ratio, I think we are â our gap of around significant headroom versus the competitive peer set. We discount some of it, because of the onsite acquisitions we have had in differences. But still outside of that, we feel there is a quite bit of headroom for us to work on. Again, we have created a work stream where we are going individual-by-individual, project-by-project on who wants the aim of process. We moved from onsite to offshore and how we will drive there project execution without change, right, because the reason I square into it pre-detailed. It is pretty well go-on and hence our view on driving these metrics is positive. Moving to utilization, again, we are also driving to drive that to the next level from a utilization perspective that is considerably increase in utilization percentage to finals the link and collection to the customer close looping the entire from order to cash. So, I think the governance we are going to drive that so that we get each and every person to increase that utilization reflect in the margin expansion will the regret going forward. You would have focus on calls specifically the demand stretch environment. The focus of cost delivery measure is going to be even more scrutinized. So, I think with that the constant level in dialing this is high is that the overall demand environment being reflected as positive, negative also drives some of the profitability outcome. So, I think we will mange through all of that as we look into next few quarters. Thank you for the detailed response Rohit. So, like through the course of this year, you had this target of getting or exiting FY â22 with 14% EBIT margins. Is there a similar target or the timeline that you want to set for us to see the margins going back to that 14%, 15% level? Yes. I mean we are working on this very strongly internally, this quarter steel set up to drive our medium to long-term expectations. We have a strong working group between operating team, transformation and finance teams that drive us. We do have an aspiration. But from a guidance perspective, not just giving any guidance or aspiration, all I can say is that we do have levers have articulated the levers and our lever is going to be in general to move in the right direction of expanding margins over the short, medium and long-term of how we drive our future strategy. Thank you. We will take our last question from the line of Girish Pai from Nirmal Bang Equities. Please go ahead. Yes. Thanks for the opportunity. C.P. in your media interviews at DevOps, you were sounding a bit more positive. Incrementally has the demand environment changed for the better over the last three months, or has it remained the same or a turn for us? Thatâs question number one. Second, the discussion on smaller deals seems to be like a little contradictory. Did I hear that smaller deals are pure in number conclusively now compared to, say, six months back? So, Girish, sorry, closed at 7:30, the scheduled time and to rush for a customer meeting. On DevOps comment, maybe you can send the note and we will just come back to you, okay. No, generally, if Manish or Jagdish can speak on, how has that moved on a three monthly basis? Has it improved, worsened, or being the same? Yes. I think â absolutely any inconsistency I â if you really play back about 10 minutes ago, what I said is the overall broad commentary in terms of â of course, we donât â I mean I donât think and again, like Rohit said, you may want to check with C.P. in the commentary he made in DevOps was keeping in mind two months, three months, a quarter in mind, obviously was a more strategic broad-based commentary, so is now. That, overall, the industry believe in continuing to transform to software I think is â itâs not a new term trade. I think the train is moving much faster and we will continue to see momentum in driving more and more digital transformation across the enterprises in all business processes. And we are very upbeat about it. So, I think from a long-term standpoint, that is great. From a budgetary standpoint, there will be a little reallocation that is happening. And that I think is segmental. It cannot be broad-based in every single industry. My commentary was more keeping in mind some of the Tier 1 service providers versus what will continue to happen. Even there, the belief is that both the 5G-related modernization, both on the network and the stack as well as the core takeout so that they could have more cash available to try and pump into the transformation initiatives. That also will be a very secular trend going forward. So, I donât believe there is any inconsistency there. It could just be in light of very specific timelines that we are talking about in the short-term. But otherwise, I think if things remain as promising as they were in terms of driving and helping both business process as well as the stack continue to bottom â almost all the enterprises. So Girish, this Jagdish. Girish, if you look at the enterprise side of the business, again, similar commentary that we have spoken the very beginning. It will â it is starting to, obviously, as we have said, the demand is growing. And as Rohit said, the decision-making is a little more delayed and discussed, which means that some of these will start to play out. But the demand for technology to drive the transformational changes that we have invested in as a company, and we called it out, whether it is connectivity related with 5G across CME and enterprise or whether it is cloud and experience on engineering or even sustainability, these areas have started to definitely create traction in the market. And I donât think there is any inconsistency in the commentary that we have given. What we see therefore is, as we said, some verticals especially on the enterprise side will drive a much better growth with furloughs not getting impacted for Q4, etcetera. But in certain cases, I mean in high-tech, etcetera, we still â we will see what the news is. So, thatâs going to have an impact on the growth going forward. So, thatâs how we see it. But overall demand from the client base on areas of growth, especially driven towards automation and cost efficiency goals seem to be quite robust. Thank you. I would now like to hand the conference over to Mr. Rohit Anand for closing comments. Over to you, sir. Thank you. Thanks to everybody for joining us for the quarterly results. Again, I will recap constant currency growth of 0.2%, reported 1.8% broad-based between comps and enterprise. Deal wins of $795 million, again, in the range we had articulated. Margin expansion as we had said, quarterly, sequentially continues. And with that, I think we will continue to make sure we drive the value creation points that we had articulated for our shareholders and investors. So, thanks for joining. I wish you have a good evening ahead. Thank you. Thank you. On behalf of Tech Mahindra Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.
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EarningCall_773
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Thank you for standing by, and welcome to the Transurban Group Half Year '23 Results Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. Great. Thank you and welcome, and good morning, everyone, and thank you for joining us at Transurban's results briefing for the first half of FY '23. And I think actually have some family and friends joining because of the announcements today. So thank you for supporting me. Today, I'm joined by our CFO, Michelle Jablko. And together, we will take you through the presentation we've lodged with the ASX this morning, and there's quite a lot of good news. Also on the call is our Investor Relations team as always will be happy to follow up with you if you have any questions. Today's presentation to take about 40-45 minutes, and then we'll allow time for questions. And hopefully, we'll get around to seeing some of you or most of you over the next few weeks. Now as many of you know, our roads and offices sit on the lands of many of the first nations people. So I'd like to acknowledge the traditional owners as the original custodians of the land and recognizing their connection to the land and to the waters and community. And our recent opening of the WestConnex M4-M8 Link and you'll see that on the first page of results cover. It was a great opportunity to highlight our long-term partnership with the indigenous organization, the Care Foundation, whose singers performed an acknowledgement of the country as part of the opening, and it was inspiring performance. And if you get a chance, I really would encourage you to look at that performance on our website; the WestConnex website that is. Now before we get started in the results, many of you will have likely seen the ASX release that came out this morning as well, announcing that this will be my final year at Transurban. And after 11 years and with the business in great shape, and we are gaining significant momentum now is the right time to transition the business to the next CEO and for me to pursue new opportunities. I'm obviously incredibly proud of what we have collectively achieved over the last 11 years, including the caliber of the executive team who are in turn supported by a deep depth of dedicated and talented employees. I'd personally like to thank everyone at Transurban and our partners who have made the last 11 years and most fulfilling of my career to date. And of course, I would also like to thank our security holders for all your faith and support over the years, and I really look forward to catching up with many of you during the coming year. This transition will allow plenty of time for an orderly transition and there are quite a few things that I still want to see through over the next year, including completion of the excavation of the West Gate Tunnel Project, the EastLink opportunity, commencement of work on the M7 and M12 Interchange project and a few other near-term strategic priorities. So with that being said and getting that out of the way. Today is really about our first half results. And you will see that the business, again, is in an excellent position to capitalize on our growth agenda. So I'll kick off now to the highlights slide, which is Page 4 in the investor pack. We have a lot of records this half, which is great. So we've achieved record traffic results for the period. And our average daily traffic in November exceeded 2.5 million trips per day for the first time, and we had freight volumes for the half up around 4% on our previous record. We also achieved a record revenue result for the half with proportional revenue up 43% year-on-year, and our group EBITDA margin at its highest level since pre-COVID at around 72%. So what this shows to us and what it's demonstrating is that our customers are seeing substantial value in utilizing our assets as we move past COVID and into a new period of growth. And on the project front, we opened our final stage of WestConnex, the M4-M8 Link last month, and we opened that ahead of schedule and on budget. We also expect to receive all final approvals for the M7-M12 integration project imminently, and we will commence construction shortly. And in Melbourne, we have made excellent progress on the West Gate Tunnel with more than 90% of the tunneling excavation now complete. With these results and many more of our delivered initiatives, both over the last year and some that have taken now 5 or 6 years to come to fruition, have allowed us to upgrade our distribution guidance to $0.57 per security. Moving to that slide. Our upgraded distribution guidance of the $0.57 per security is $0.04 above the guidance we gave at the full year and represents an almost 40% increase on the FY '22 distribution. Again, we continue to see record traffic performance in Sydney. In fact, it was 2 weeks ago, 1.5 weeks ago, the M4 recorded over 200,000 trips in 1 day for the first time, partly thanks to the Red Hot Chili Peppers concert, but we'll take it. And we've also had record traffic in Brisbane. We see continued strength in freight and an uplift in airport traffic around the country as well as ongoing improvement in Melbourne, including more people returning to the office. And this increased certainty around traffic performance across all our markets and particularly the outperformance in Brisbane and Sydney, where a couple of the key factors supporting the Board's decision to upgrade guidance and the major reason for the expected increase in EBITDA. And I think just a bit of more color on that. Clearly, when we gave guidance toward the end of last year, we still had work from home if you could in Victoria, it was our first guidance coming out of COVID, wet weather events in Sydney. We had a lot of volatility and a lot of uncertainty providing the original guidance. But obviously, this increased distribution highlights really what has become the structural strength of the business in a variable economic environment and the critical nature of our assets, and again, we point out the strength of our assets, particularly being located in growing urban environments. Now turning to our investment proposition. There's nothing new here. I'll quickly go through this. But just a reminder, we now have 22 high-quality assets in 5 markets with increasing volumes of traffic and a pipeline of development opportunity needs to drive medium- and long-term distribution growth in all of our markets. Our inflation-linked toll escalations debt hedging and active balance sheet management provide near-term interest rate protection, but not only that, EBITDA benefits in the near-term and medium-term. We're balancing growth in distributions and investment in our development pipeline and this will allow us to create long-term value for all of our stakeholders while continuing to grow our distributions. So Slide 7. Now this is nothing new and something we've been speaking about for quite some time now as we've come into this interest rate environment. And again, it's about our inflation-linked toll escalations coupled with our hedging profile. And again, as we said, this should and does provide a net benefit in the near term. Now as you can see from the chart, we're starting to see that actually to come through and we'll continue to see further benefit in the second half as some of the higher CPI numbers recorded are incorporated into our base toll prices. This, of course, then will compound over the full life of the assets. Remembering that in some cases, it can take up to 18 months for the CPI numbers to flow through to some of our escalations. Conversely, our exposure to short-term spikes in interest rates is minimized by our high rate of hedging with the cash rate likely to reduce as inflationary pressures will ease over the next few years. Coming back to one, our key driver, obviously, of the result is that traffic is at record levels for the group for the half. Brisbane and Sydney as well as the 95 Express Lanes in the U.S., all reached record levels in the period. Melbourne continues to show improvement and large vehicle traffic remained strong and reached a record level in the first quarter of the period. The results were particularly pleasing given the major weather-related impacts in all of our Australian markets over the period, including floods in Melbourne and Sydney. And in Sydney as well, these record traffic numbers were achieved as well if you exclude the impact of the newer assets, NorthConnex, the M8 and the M5 East. And in the U.S., the 95 Express Lanes, which is our longest toll road asset continues to perform well, mainly as a result of the additional trips from the 395 extension as well as weekend and interstate travel. One of the things we always like to include when we do our presentation is obviously a survey of our data and what's happening in the traffic and some of the insights that we use when we consider the business. And some of that data here on this next chart shows the ongoing strength of freight traffic and travels around the cities, and that travel and freight more than offsets the slower recovery that we're seeing in airport and some of the CBD-related trips. However, we all know that airport passenger numbers are increasing, and we're seeing a gradual improvement in airport-related corridors. We're also seeing CBD traffic continue to improve despite some of the recovery in public transport numbers. Again, our most recent research from January shows that respondents continue to prefer private transport over public transport. Of course, and it's a very topical topic, a very high topic. At the moment, the cost of living remains an issue for many of our customers and the country at large. And while large expenses, including groceries, electricity and mortgage repayments are greater concerns for most people, we understand the importance of providing support for our customers experiencing financial hardship. And our Link assistant program continues to provide support for those customers. But I would like to remind everyone that in relation to tolls, more than 80% of our Australian customers spend less than $10 on average a week and tolls represent approximately only around 1% of the average Australian monthly household expenditure. And again, as we look at our traffic insights and what's happening, we see this play out in Sydney with record traffic numbers that show that people clearly see value that the toll roads offer there. And over the past 20 years, Transurban has invested more than $25 billion in major road projects in Sydney, which has contributed to a more efficient and reliable movement around the city. And during this last half, customers have saved more than 200,000 hours in travel time every workday by using our toll roads compared to the alternative. And in New South Wales, we've long recognized that harmonizing and improving the efficiency of the tolling regime would make using the road simpler and easier to understand as well as it has the potential to improve traffic flows and increase safety across the whole of the Sydney Road network. So of course, we're very excited about the potential opportunity to engage with the New South Wales government after the coming election about meaningful toll reform on the other side. Now we'll get into some of the asset portfolio and project pipeline updates. We have the normal market slides in the appendices that you've normally seen. But we just have so much going on, we've done so much over the last few months. We've decided just to hit the highlights in the market slides in the appendix season, happy to take any questions on those. So the M4-M8 link completion, hopefully, some of you in Sydney would have the opportunity to drive through what is now Australia's longest underground motorway, and it's an amazing piece of infrastructure. And this 22 kilometers of tunnels, again, offer substantial benefits for the City motorist, not just the motorists, but now the surrounding communities who we appreciate have been through years of construction pain, but now they will get the benefits of the road as well. And opening the M4-M8 on January 20 was a defining moment for Transurban and our Sydney Transport Partners and this does mark the final stage of our part of the delivery of the project, with just the government-related Rozelle Interchange to come. I do want to point out that the project was delivered ahead of schedule and on budget, which was a tremendous achievement for the team, particularly given the challenging environment over the past couple of years. I do want to point out as well that all 3 stages have been delivered in line or ahead of our schedule and budgets that we determined at acquisition. It's now early days for the M4-M8 traffic, but so far, the numbers are in line with our original forecast. So we're very pleased that people are already seeing the benefits. So again, I'd like to thank the 12,000 people who worked on the project. And again, I think to those overall, which is close to 40,000 people who contributed to the WestConnex project overall. And the benefits of the consolidated WestConnex will continue to grow because this provides the central transport connection for a number of other major government road projects. And you'll see the map on the screen that shows there's still 5 major roads worth around $10 billion connecting to WestConnex. These are all being done by the government, and they're all scheduled to be open over the next 6 years and contribute to the traffic growth and the utilization of WestConnex. But just to show you, the scale of the project and what's being delivered. We're going to do a little bit something different. Instead of me just talking about it, we're just going to run a quick video that shows the benefits that WestConnex creates for Sydney. Thanks for that, it's an amazing project. I think when I was there at the ribbon cutting, I think somebody referred to a comment that Premier had made, I think a couple of years earlier, and I think he reinforced that he thought WestConnex would be a tourist attraction. I think for us, infrastructure certainly is a tourist attraction. I'm not sure for everyone. But certainly, for us, in infrastructure, it's an amazing piece of infrastructure and something that we're extremely proud of. Moving to Slide 14 and the West Gate Tunnel Project update. Again, it's making excellent progress. We're now around 90% of the way through the tunneling, we've taken a lot of risk out of the project now and very pleased how it's proceeding. We expect that the excavation of the tunnels to be complete by midyear with the breakthrough on the inbound tunnel in the next few weeks, so I can't wait to be there to watch that big piece of country fall through or the TBM pockets head up the other side. So it's a very exciting time, and we've achieved a number of milestones in other sections of the project including completing the structural frame of the bridge over the river in just 7 months and 14 of 18 lane kilometers on the West Gate Freeway, go back to that number, there are going to be 18 new lanes or 18 lanes, but 14 of those lanes have been completed, and all existing bridges have been widened and strengthened. Again, this is another project that offers substantial benefits for motorists in the freight sector in terms of safer, faster and more reliable travel. So we'll go from Sydney to Melbourne and back to Sydney, and we'll talk about that we've received the final. So we're waiting to receive the final regulatory approvals to widen the M7 and create an interchange with the government's M12 motorway after we received the Stage III approval from the government in December. And those final regulatory approvals are imminent and financial close should be here in the next couple of weeks, and we'll start construction. The project scope includes around 26 kilometers of widening works, including 2 additional lanes to M7 and is expected to be complete by the opening of the new Western Sydney Airport in 2026. Funding for the approximately $1.7 billion project includes just over 3-year concession extension and Transurban's contribution of the 50% of the NorthWestern Roads Group funding is roughly about $600 million, half of which will be through debt that's raised at the project level and half of it will be equity provided by the Group through other capital sources. Moving on to the Greater Washington area. In the U.S., work is continuing to progress well on our Express Lanes extension projects, and we now expect to open the Fredericksburg Extension by Q3 2023. So that's now 6 months earlier than we had been recently forecasting. This extension extends the 95 Express lines by 16 kilometers and will provide faster and easier access to major employment bases, including the Marine Corps base at Quantico supporting 28,000 workers. And during the period, we also reached the final step in the environmental review process for the Maryland Express Lanes, and we look forward to working with the new administration in Maryland. And the government and the Transport Secretary there have just been recently inaugurated, and we'll be working with the new team and administration to determine their strategic priorities and timing for this important project. If I move to the next slide, we're very excited today that we have also entered into an agreement to partner with CDPQ through the sale of 50% of our A25 asset in Montreal. And for most of you know, we've had a relationship now with CDPQ since we did the second tranche of WestConnex. They've been a fantastic partner and we're very pleased to be strengthening and deepening that partnership in their hometown of Montreal. For those of you who don't know much about CDPQ, they're one of the world's largest institutional infrastructure investors. And this agreement gives us a strategically aligned partner who brings valuable local capability again, and we're very pleased to have them on board, and we look forward to working together to pursue potential development opportunities in and around the A25. And Montreal continues to be well aligned to our investment criteria, having consistent population growth, a stable economic environment. And historically, it has been one of Canada's most congested regions. So we'll jump now from Montreal to Melbourne. We start moving around the map pretty quick and back and forth. But in Melbourne, investors in the cities only other Toll Road, EastLink, are reported to be looking to sell down their interest in this asset. And look, we're not yet aware of actually the percentage of interest on offer or are there any details around the potential sale process. However, clearly, as a Melbourne-based business for more than 2 decades in our hometown and where we were born, this is a market we know and understand comprehensively on every level, from operations to traffic forecasting and beyond. So should that asset come up for sale, we are obviously very well positioned to participate in the near-term opportunity. But always with any of our acquisitions, we would take a disciplined approach in the best interest of our security holders. But besides these projects that we've delivered or the larger ones that are presenting themselves, we still have a long-term project pipeline where you can see a range of opportunities. These include potential enhancements to our own assets as well as possible acquisitions and greenfield projects. So there's no lack of opportunity for growth. It's just about maintaining discipline and making sure we take the best of creating the opportunities. These will continue to give us options to grow the distribution and add value, we believe for decades to come. Now before I hand over to Michelle, I would like to highlight an automated truck trial that we conducted on CityLink late last year. And I don't know if some of you saw this, but actually for us, this is, again, for infrastructure nerd this is a pretty big deal. And the trial was the first of its kind in Australia, and this is going to help us prepare for the ways roads and on-road technology will be utilized. And this will have the potential to increase our asset utilization and significantly improve safety and community impacts over the next decade. The trial also builds on our experience of running other trials of connected and automated vehicles in all of our Australian cities. Again, by just showing you the picture, it's hard to explain. So we're going to try this again, and we're going to do a short video to show the truck in action. So as you can see from that video, it's a very exciting project for us and we think for the trucking community. And it highlights how our work with technology partners is keeping us, we believe, at the cutting edge of some of the road transport technology and better utilization of our assets. As Scott just outlined, a combination of strong traffic performance embedded inflation-linked toll escalations and a well-managed balance sheet showed the strength of our business model and provided great outcomes across the board. You can see some of the key metrics here on Slide 22. Traffic of 2.4 million average trips per day for the half was the highest on record as our urban assets continue to help people move around the cities in our core markets. This combined with inflation benefits, increased proportional toll revenue by 43%. Proportional EBITDA grew by 54% as margins expanded nearly 6 percentage points. Funding costs were stable despite higher interest rates and the strength of our balance sheet also continues to provide flexibility for near-term growth opportunities. All of this supported the Board's decision to lift our FY '23 distribution guidance to $0.57 per security. I'll now take you through some of the details. So starting with the 84% increase in free cash on Slide 23. Record EBITDA and well-managed funding costs underpinned $845 million in underlying free cash for the half. Our first half distribution of $0.265 per security was 104% covered by underlying free cash. You can see strong free cash generation coming through both our fully-owned assets in Melbourne and Sydney and from our joint ventures, where the investment that we've made over time is coming through in the form of record distributions back to the business, excluding capital releases. With stable funding costs, most of the EBITDA uplift across our markets went straight to free cash. So in other words, a 35% increase in traffic translated into an 84% increase in free cash given inflation benefits, 72% EBITDA margins and stable funding costs. If you now move to Slide 24, this shows in a bit more detail how strong revenue growth led to the 54% increase in EBITDA of $1.2 billion. Like-for-like toll revenue was up $437 million. And around 80% of revenue growth across the Group was due to higher traffic on our roads. We also had the benefit of higher inflation, which has started to come through. This forms a new revenue base for future years. Toll escalations can also lag inflation and so recently announced inflation is still to flow through on a number of assets. Costs for the half were higher as we spoke about at the full year due to our new assets, higher traffic and our continued investment in our business. I'll cover this in more detail on the next slide. Higher revenue more than offset these additional costs and our EBITDA margin increased to 71.8%, moving towards more normal levels. So if I take us now to cost details on Slide 25. Volume-related costs were higher as traffic on our roads and our proportional ownership in WestConnex increased. These costs are more than offset by the additional revenue we received. The numbers you can see on this slide are first half to first half and already include some cost increases that incurred in the second half of last year. This half, we've also seen some inflationary impacts including CPI-linked maintenance contracts, but these were also more than offset by additional revenue. We invested more in early-stage development spend, which we take to OpEx but is ultimately included in the economics of new projects. For the full year, we still anticipate cost growth to be higher than the 11% cost growth we had in FY '22. Full year costs will partially depend on decisions we make regarding our strategic growth projects. If I step back and consider costs overall, this has been a period of considered investment as we set up the business for continued success. However, we remain focused on managing cost inflation and maximizing value from our investments. If you move to Slide 26, I've included an outline of why we make this investment in strategic growth. Our historic investment in development has resulted in additional EBITDA of more than $600 million and more than $1.3 billion of additional free cash over the past 3 years. We've also maintained our weighted average concession life at an average of 28 years for the last decade, demonstrating the sustainability of our business model over time. While new assets and projects clearly have a cost, making this investment upfront in high-quality assets in our core markets allows us to continue to grow the business and realize value over the long-term. On average, we would normally spend around $20 million to $30 million per year in early-stage development OpEx, which we consider as part of the overall cost of the projects we deliver. As we flagged at the full year, we expect that this year the number will be higher, potentially up to around $50 million. And we're more than just a collection of concessions, we take a long-term view of the value of our business, and we make targeted investments that set us apart, help make us a partner of choice and support long-term growth and sustainability. We've set out some examples here on Slide 27. We invest in enhancing outcomes for our customers with 392,000 hours saved by our customers every workday and 97% of our customers choosing to interact with us through digital channels. We invest in road safety research with the results providing insights that help protect drivers on our roads and also on the wider networks. Serious road crashes on our roads have reduced by 12% over the past 5 years and recent data-led improvements to lane design and signage on CityLink in Melbourne, reduced rear-end crashes by 75%. Technology investments have also enabled real-time monitoring and response on our roads, again, all setting up our business for long-term success. Moving now to funding on Slide 28. Our balance sheet is in good shape, and there are 2 key benefits of this. Firstly, we've set up the business for the higher interest rate environment. We've continued to manage the balance sheet well with 97% hedging and an average maturity of around 7 years. We've completed the majority of our FY '23 refinancing and we've kept finance costs stable as the cost of new debt was largely the same as the cost of debt maturing. And if you turn to the next slide, you can see here that most of our existing debt is not due to be refinanced until post FY '26. Now of course, we'll see the impact of rising rates over time. but decisions we've made to set up the balance sheet will mean that this will largely depend on rates at the time of refinancing. And in the meantime, we'll see revenue benefits from inflation with almost all of the revenue base escalating each year. The second benefit of our strong balance sheet management is that we're well placed to fund our committed projects. We've got $3.6 billion in corporate liquidity today. We've previously flagged that we expect to receive around $1.9 billion in capital releases between FY '23 and FY '25. This expectation has not changed, although the nature of these may change if more efficient, as we've noted on the slide. And including the proceeds from the A25 partnership agreement we announced today, this gives us, in total, $5.9 billion in corporate liquidity overall. This compares to committed CapEx of $3.4 billion, which covers the Westgate Tunnel Project, the Fredericksburg and Northern Extension projects in Virginia and the M7 widening and M12 interchange project recently announced in Sydney. So our balance sheet position and our through-the-cycle approach should help support distribution growth and has given us the flexibility to continue to invest in our business for the long-term. Before I finish my presentation, I just want to point out that we've included some additional analyst notes in the back of the pack to assist with modeling of the impact of new assets, tax and debt amortization over the coming years. They start on Slide 34. So just to recap on the outlook slide. Again, it has been an excellent first half and after coming through the last 2 or 3 years of COVID and seeing Transurban back on track and with the strong momentum for the group, it's obviously very pleasing for all of us and quite good to be reporting to you that result today. So we've got record traffic. We've got record revenue right across the group, including near all-time highs in our freight volumes. And again, seeing the benefits of inflation-linked toll escalations, including increases of more than 6% in some of our markets and obviously further benefits to come. On the development front, we've achieved a number of significant milestones on our projects, and everything is on time and on budget at the moment, including opening our final section of WestConnex ahead of schedule. And these results have allowed us to upgrade our distribution guidance of $0.57 per security. And again, with the assets coming online with the stuff we're delivering, with what's been done with COVID, this is all going to position us well and deliver on long-term distribution growth for our security holders. Question about the announcement about the A25 transaction. Can you give us some background to how the transaction came about. And also, you've called the transaction, the start of a partnership there. Can you just clarify, does that include kind of development preemptive rights in that region kind of similar to your Transurban Chesapeake deal. Yes. So we already have a partnership, obviously, with CDPQ in WestConnex. And so really, our discussion started on the back of WestConnex and it's going so well there with both of us and like what can we do more, how can we work together. Obviously, we're in Montreal. We spent some time in Montreal. We were talking about what we wanted to do in Montreal with the business. Obviously, CDPQ invest heavily in infrastructure in Montreal. And so we just started with some discussions a couple of years ago, and then that came to fruition in the joint venture. But yes, hopefully, there's opportunities around the A25 or wider opportunities in Montreal, that would be the long-term plan as we've done in most of our markets and long-term partnerships with what has turned out to be. I think, one of the strengths of the Transurban Group, and I'm very grateful to our super -- to CPPIB to ADIA and to CDPQ because they've been great partners in our journey and a big part of our success. Okay. Great. Thank you. And then just turning to the M7 widening project. I just want to make sure I understand the sources and uses of funds properly, so you've got 100% project CapEx of 1.7 billion. And then, Transurban's share of that 600. So is it some government funding coming into the mix as well? Yes. So effectively, the NorthWest Roads Group is approximately $1.2 billion and then the government funding is roughly around $500 million, which is kind of equivalent to roughly, it's not exact, but it's kind of equivalent to what the M12 interchange valuation is. So that was just the arrangement that we came to. And the concession extension is just a little bit longer than 3 years. Good morning, guys. Can you just give us some more color around your dividend, especially given your return as you sort of flagged $0.02 to $0.03 of capital when you've got a pipeline of projects plus the EastLink which may require new equity? Yes. Well, I'll do a high level, and then Michelle can give you the details. Yes, but there's other things happening as well. I mean you see the FFO to debt, looking good. We've got obviously, some capital coming back from the A25, the revenue EBITDA is stronger. So we've got some more room on the balance sheet. EastLink, yes, is an opportunity. It may or may not occur. We did give that guidance when we did do WestConnex. So we would return the impacts of the dilution to those security holders over the next 2 years, which is roughly that $0.02 to $0.03. So we're just being consistent with what we told the market at the equity raising. And we do believe we've got a lot of capacity on the balance sheet. Part of EastLink will depend on, well, one, does it happen, two, what do they actually sell. So there's just a lot of variables, but we wanted to be consistent and do what we told the shareholders we would do at the time of the WestConnex capital raise. Yes. I agree with that, Scott. It's been consistent with what we said. In terms of absolute dollars, it's pretty small in the whole scheme of things. And we've also got the additional proceeds from the A25 transaction as well and corporate liquidity remains in very good shape. Okay. And on the cost performance, there was a fair bit of growth last half when you reported in February, upset about dividend, but more importantly cost. How do you think you're going there in a project across the Group to actually sort of reining cost or bring them down? I'll let Michelle. I mean we're working hard on it. So when all the market heads start screaming that you're doing a good job. So we've got that uncomfortableness around the Group. So we're working hard on it. But I think one thing I would say at a high level, and I know Michelle talk about it. We tried to on Slide 27. I think one of the things is, there's a lot of investment on things that we want to just show where the investment is going, whether it's customer technology, community. So a lot of things that make Transurban successful, but don't necessarily just show up on the balance sheet. And so we were trying to show where some of those costs go. We're very conscious. We see the margin improvement is very important and continue to expand that margin. But Michelle, who is managing that process, I'm sure we'll be happy to talk about the costs. Yes. Very consistent. About half of the cost uplift if you go first half to first half was volume whether that's because of more traffic on the road or WestConnex. And then, as we sort of spoke to through the presentation, we're being really thoughtful and disciplined about where we spend to make sure it is either on spending sensibly around our early-stage development works, which helps de-risk projects and also sets them up well for the future. And M7-M12's a really a great example of that. And also some of those other investments we're making because we don't see ourselves just as a collection of concessions, and it's how we continue to set up our success for the long-term. But Ian, absolutely, we're focused on it. And Scott sort of smiled at me when you asked the question because he knows how hard we're giving our Exco -- harder time we're giving our exco at the moment. Okay. And one final question. If you think about it from a COVID impact, do you think you can make the call at your earnings that sort of normalized from the COVID influence in this first half? Or you still think there's more COVID to come out? Look, I think it depends on the market. Brisbane clearly was the least affected market. So I would think most of COVID has come out of Brisbane, clearly, North America, the 495 in Melbourne. And we've been watching cities around the world like Toronto, you don't know the 470 and others. There are still those cities that had longer lockdown periods, more restrict lockdowns have just taken so much longer to recover, but they still continue to recover. It's just been much slower. So we still see Melbourne recovering. It's just a longer timing period. Sydney is just interesting for a couple of reasons. There's just a lot of, obviously, with WestConnex opening during COVID, parts of WestConnex, it's just really changing the city around quite a bit. So we'll see how that settles down. But NorthConnex is still performing very strongly in the M7. So I think partly Sydney is doing well economically. It's going to take Melbourne a bit longer to recover, but we think it will. And we see that in the strong freight numbers and it's not inconsistent with places like Toronto and elsewhere overseas, it just can take a bit longer. Yes. And we're seeing office, I think office occupancy, the latest numbers I saw, I get confused because there's so many different ways to calculate it. But I think Sydney and Brisbane are around the 60% and Victoria is still around the low 50s. But it's coming back. Good morning, Scott. Good morning, Michelle. First, congratulations on the results and congratulations on the job Scott and no doubt in the next -- the balance of the year as well. First thing I just wanted to ask was, Michelle did touch on the cost and the margin comments. How should we ultimately be thinking about where proportional EBITDA margins now see in the context of the results that you have delivered and some of those traffic trends that we are seeing. Yes. Thanks, Anthony, and thanks for your kind words. If you looked where the margins are, and obviously, we have a lot more tunnels now, which are more expensive from an operations point of view. But in our view and trying to push all the team is continuing to increase the margins. We should be, to Ian's point earlier, we're still recovering in some of the COVID in some of our places like Melbourne and the investments that we're making in like our controlled operations center in Brisbane, which have cost us a bit over the last 5 years. But pleasingly and all credit to the team and hopefully, some of you are listening, we've now gone live with our last asset in Queensland. So all of our operations in Queensland are done out of one center and the guys there have done a great job. But I mean that costs us money over the last 5 years, but hopefully, efficiency of operations cost better outcome on the road will occur over the next period of time. The only complication with all that is when you do start, obviously, the M7-M12, there's a little bit of disruption until the roads widen. But again, I'm pushing the team and continuing to have margin expansion. And surely, there is opportunities to continue to expand the margin. Yes. That's great. Second question I had was just with respect to freight. I mean that looks like it's extremely resilient and it really looks like it is underpinning that heavy vehicle traffic as well. In the context of potential cost of living concerns and a tough consumer environment, I mean, how are you sort of thinking about that trend going forward? Is that something that you think is now a structural trend that will continue or -- Yes. There's always sensitivities around the edge. But if you look at, I think Melbourne port is at a record level and continued to grow. I think all the ports on the East Coast are forecast to continue to grow even with the sort of economic. I guess people at the moment aren't forecasting a recession for Australia, but even an economic slowdown. Again, all we can point to is the history that we've seen in Australia or urban environments is that they do pretty well. So even as we said during the GFC, I think the ED was the only road that went backwards the rest of the roads, I mean, they grew slower, but they didn't go backwards. So we're pretty comfortable at those underlying trends. I mean there is a point, obviously, that compounding growth can only go so far because if it's growth off a much bigger number or a smaller number of a much bigger number, it's a bigger number than bigger number of a smaller number, there you go. So we're confident that freight will continue to grow and that the trends, the macro trends are certainly in our favor. And nothing's changed other than the timing also by a year or two in population growth. So you're still expecting the cities of Melbourne and Sydney to grow by 40% to 50% in the next 15, 20 years. So those are massive growth numbers. And again, I love the stat that 40% of Sydney is within 5 kilometers of WestConnex. That just tells you how important those roads are. So we do expect that macro trend to continue. But clearly, of bigger numbers, the growth will be smaller. The only other thing on freight is there's still quite a lot of infrastructure spend as well. So yes, it's definitely being helped by the economy, but also by the amount of infrastructure that's going on in our cities as well. Okay. Great. And look, final question for me, is just, in terms of the work from home and traffic trends, I mean, do those survey results that you have published in the presentation, does that give you a lot of confidence in terms of the stickiness and maybe some of the structural changes that we are seeing in terms of traffic? Or is it something that you do expect will normalize to pre-COVID trends in time as well? So I'm talking more the preference for private transport versus public. Yes. No, look, I think the move back to public transport will occur over time as people get more comfortable with the situation and as congestion builds. But then as congestion builds, our traffic will increase on those roads that are more centered around the CBD. I think, again, remembering, and it's hard because we come from a situation where most of us are commuting to the CBD when we go to the office. But the majority of people don't work in the CBD. They work -- and that's why we've seen such a good traffic on the M7 or the M2 because these people are commuting to work or the places that they need to get to around the orbitals. So I think long-term, there will be more of a trend back to the office. Will it go back like it was? No. I think there'll be more flexibility. We've always had agile working at Transurban. We see a little bit different trends that Mondays and the Fridays tend to be a bit weaker, but the weekends are stronger. Overall, we just see more kilometers significantly more kilometers being driven in these roads continue to add value. And I guess we even see that again through the last 6 months with the record traffic numbers. Hey, good morning, guys. Look, just firstly, Scott, thanks for your leadership of the business. And I just wanted to say I really appreciated your candor and engagement with the sell-side community over the years. Just on that point, you've set a very high hurdle for your replacement. Can you give us a feel for any sort of types of candidates that the Board are looking for? And are there any internal candidates in the mix. Yes. And I mean a lot of that is for the Board. But first of all, thank you for your kind words. But I like how you said the open and candor in transparency before you then ask me a question, you know I can't answer. So thank you for that. Look, the only thing that I would say is that, I'm just very excited about the shape of Transurban. This year is going to be a great year. It's so nice to be reporting all these positivities. And these things that we've been working on for 5 or 6 years like WestConnex operations consolidation. A lot of the stuff now coming to fruition. You see it starting to flow through the distributions. So the next few years, the Transurban are going to be fantastic. So at least I can say, I leave the company in good shape for at least a couple of years. So I can hopefully, when I walk out and say, it was okay, when I left it, and I'm sure it'll be okay with the next group as well. In relation to the process and one of the things we are trying to do is to be very transparent with the market. One of the things I didn't want to do was just walk out the door, particularly when I'm talking to partners and we're looking at potentially EastLink and all these things that we have time for orderly transition, there's a lot of relationships. There's a lot of important things going on. And I just wanted to be transparent when people are talking to me about it or talking to the executive team that we can do that on an orderly basis. There's some great internal successor candidates. But not only that, this is a great depth of management within Transurban. There's going to be no change in strategy. The Board is very clear about that. No change about how we approach things. It's just time for a new CEO by the end of this year. They're going to run an orderly process, as I've said, to look at external candidates, but there's a lot of great talent internally. And I mean that's all I can say about that until the Board provides further updates, but I appreciate your comments. And look, I haven't said I appreciate we've had a lot of fun. I've had a lot of fun with the analysts over the years. You make it interesting and challenging at times, but I really appreciate the relationships and support and the time that you've given Transurban, it's been a great time. But we'll have time to talk about that at some later point. But I think that's all I can say at this point. That's great. Can I just ask another question, just looking with this result, the A25 sell-down. You've only sold it at the book value after sort of 4 years of ownership. I just wanted to get what the Transurban view is on the bigger picture around that asset. Should we be looking at this as an exit strategy for what's been a difficult asset? Or is CDPQ bringing something material to the partnership and therefore, we should expect something to come in the short to medium-term? Yes. Thanks. And look, the assets performed accordingly ahead of our expectations, so we're pleased with how it's done. We want to do more in Montreal. We think there's a great opportunity to do more to the A25 in that market. And if you go to Montreal, you'll know how big CDPQ is in Montreal. So it's a behemoth in their home market who has a lot of in-depth knowledge and capability about particularly their home market and a mandate to invest in their home market as well and supported by, obviously, a lot of the citizens of Quebec and Montreal. So partly to strategic alignment and to, hopefully, again, with us, we'd rather have a smaller piece of a bigger pie than a big piece of a small pie. So it's just about trying to create more and bigger opportunities longer term. And we talked about, I can remember in my 11 years and some of you would have been around since then when I first came, there was comments about the U.S. and why there and it seems really small and what are you doing? And then, over time, we've been able to create one of the best express links networks in the world, the biggest one, I think, at this point in time, the longest one. Unfortunately, infrastructure takes time and takes investment in partnership stakeholders. And so hopefully, the next CEO will be the beneficiary of our investment into the A25, and they'll create a wonderful network in Montreal. One more question, if I may, just on EastLink. I think that's sort of an asset that sort of historically, we didn't really expect Transurban to look at. But you've raised it here that you are looking at a potential portion of that asset EBIT does come to market. Transurban hasn't traditionally taken minority stakes in assets. Is that something you'd be comfortable doing with EastLink? Or is it more of a controlling operating position you prefer with that asset? Look, I don't think we can talk about the specifics. I think we've never been a passive stakeholder. I think that's really -- we're not just going to sit there and watch someone operate an asset or yes, so we've never been a passive stakeholder. But clearly, in a Melbourne context, we think there's potential benefits for customers, stakeholders, long-term opportunities, it's a good asset. But clearly, with its ownership structure over the last decade or so, however long it's been, that they've had a different approach to a business and say, Transurban, which keeps reinvesting in the business and creating opportunities. So we just to see how it plays out at this point. And that's why we just didn't want to be surprised if our name was mentioned a lot of times in M&A and other acquisitions. Our name gets mentioned and we don't even know that's on because we're not interested. I think our name got mentioned Chicago Skyways and we didn't even pick up the IAM. But we just didn't want the market to be surprised that, yes, we would look at it if it were to fit our criteria. But I don't think you could ever see us being passive. I was going to sort of ask you about the timing of the transition because I think there's been a fair bit of speculation over the last few years of when you might decide to issue other projects or other challenges. But can you give us a bit in that regard, I was sort of a little bit surprised that the Board didn't have an announcement of replacement given the, I guess, your decisions probably not too much of a surprise. But can you give us any color on your discussion with the Board on that? I think I can say Paul, we're up and going through a couple of years of COVID and obviously, having been able to lead a fantastic team and partners and all the stuff we've done together. It's been a great run. And I clearly want to leave when the company is in a position of strength and with the momentum. And so in discussing with the Board, you always have discussions with the Board over the last couple of years and other things. But as I said, I think earlier, the main thing for me and for the Board is, we didn't want to surprise partners, we didn't want to surprise stakeholders in relation to just me walking out the door and someone coming in. And then that whole thing, we have some great internal candidates, but the Board wants to do the right thing by looking externally as well, which is, I guess, best practice, that's up to them. And if you conduct that process externally, and it's not public. The leaks occur and all kinds of nonsense can be played out. So it's just the Transurban way. We're just being very transparent, very open I've had a great time, a great run. I'm going to miss a lot of the people, but it's time for me to do something else, it's time for Transurban's transition, and I'm going to leave, hopefully, the company in a great position for the next executive team and we'll go about it in sort of best practice, and they can manage those relationships and stakeholders and all that over the next year. And there's a few things I want to do. I want to have a run at EastLink if that's what they're going to do. and I want to be there when the WestConnex tunnel breaks through and a few other very exciting things for the Group. And so I'll be focused very hard on my energy on the next year on delivering on those things and delivering on the transition and taking your questions at the full year results. And hopefully, you'll come up with some good ones. But yes, so there's nothing more to it than that, Paul. I think there's two ways to go, as you said. So some people just come out and say, "Hey, he's gone and this is the new person." That's pretty tough when Transurban is built on relationships, and again, infrastructure moves slowly. So we decided to do it this way and I think it's the right way. Okay. Thanks. If I can ask another one. Just on EastLink, if you combined a stake in that asset with your existing assets in Melbourne, it strikes me that's going to create a whole load of other investment opportunities that you could do with a similar process that you've done with the government, with West Gate Tunnel. Is that sort of set you up for a large investment pipeline in the future? One step at a time, Paul, one step at a time. So we'll look at EastLink first. I think that's all I can say. Okay. And then just finally, the New South Wales government road projects that you talked about, the 5 projects worth 10 billion investment. Are any of those going to be tolled and are there potential asset sales that would make sense from Transurban's perspective in the future? Yes. Well, you put me on the spot because we're running into an election in New South Wales. So we don't normally like to talk about it. But we have put on the slide on Slide 18, where we've talked about the potential monetization of the Sydney Harbor Tunnel and Western Harbor Tunnel. So those are potential longer term, the M6. So the M6 has one tolling point that just connects right into WestConnex. It's not going to be much of a toll, but it does have a toll. And then there's a long term, the beaches link. The Sydney Gateway project that connects WestConnex to the airport into the port, there's not a toll on it, but we actually are doing some of the management and operations for a new South Wales government because it connects into WestConnex, so it's just easier for us to do the management of the connections there. So there's a few that could be monetized over the year, depending on government of the years, depending on government policy. But those are only the Western Harbor Tunnel and the M6 at this point would have tolls on them. Thanks. Good morning, Scott, Michelle. Just firstly, on the M7 widening project, potentially, would you be able to talk through some of the impacts that you expect to cash flow during the 3-year construction period and specifically about potential traffic disruption. Should we be comparing it, for example, with the M2 widening project from a few years ago? I'll let Michelle talk about the funding and the arrangements and the timing on that. In relation to the traffic impact, so you'd be more compared to the M5 West. So the M2, if you remember, if anyone has driven the M2 was a very narrow corridor. We kept them to shift traffic back and forth and it was a nightmare. And we had the tunnel that we had to widen while it was under construction. So I think you're more compared to the M5 West, which was in the 5% sort of range as opposed to the M2. I think at times got down to 10% to 15%. So it's more of the sort of the 5% range. Remembering the M7 was always meant to be widen and is set up a little bit easier but Michelle, you can talk about the funding. Yes. So I agree. In terms of the construction, it's in that order, but then you get on opening just because of the congestion that already exists there. You get a pretty good step-up in traffic on opening, so it happens quite quickly. In terms of the funding, as Scott went through in the presentation, our equity contribution. So the debt piece is about 300 and the equity about 300. The debt CapEx facility were pretty much done already. So that's sitting there inside the business and the equity contribution will just come from our corporate liquidity. Just to follow up on that. Is the debt funding a subset of the capital releases that you already have filed, I see this comments about -- So the debt funding is just new CapEx facilities that we've pretty much already raised at the asset. The equity funding, yes, we were planning on a capital release from the M7, which will just effectively recycle into the project. Okay. There's also a comment in the pack around the M4 to M8. Now that it's open, that the cash flow impacts from it would be neutral until the Rozelle Interchange would be complete. Is that because of the operating cost coming online or potentially financing costs that were previously capitalized now being recognized? Or what's the offset there on the revenue benefit? It's mostly 2 things. There's potentially some other impacts on the broader network. We haven't really seen them to-date. But we're assuming that they come through over time. And then, yes, there are some costs, some maintenance and other costs. It might be a little bit conservative because we're not seeing any other impacts. But the issue is that it is, so you got to remember that the traffic between the M4 and the M8 doesn't really, I guess, meet strides until Rozelle and the Western Harbor Tunnel are open because a lot of the traffic that's currently on the M8 or the M4 will reach its toll cap when they get into the M4-M8 link. So even though it has the traffic, its revenue contribution is limited somewhat because of the toll cap, but you have the operating cost. Once you open Rozelle and particularly the Western Harbor tunnel then you get a lot more traffic that's using the Western alternative to the CBD or using that side of the CBD. So you really get a nice jump. So between the interest for that section that comes online, and the operating cost is not a huge contribution until Rozelle and Western Harbor Tunnel. But pleasingly, the traffic has been a little bit better than what we forecast. Okay. Great. And just final one should be a quick one. The $0.02 to $0.03 per share that you flagged as potential capital releases included in the FY '23 distribution. Can you just confirm that's the end of this period of time where the WestConnex capital releases would be used to fund distribution? Or is there potentially an impact as well in FY '24? So the statement we made at the time of the acquisition was that it would be the first 2 years, and I think it was $0.027 per share last year, and we're talking approximately $0.02 to $0.03 this year. So that's the first 2 years. Beyond that, the Board will have to make decisions based what's in front of them at the time. Yes. From us, that's the end of it, but it's the Board's decision, what they do with the capital at the time and the position that they see at the time and again, investments. So we're not going to limit the Board, but as far as forward guidance, that's the end, yes. Good morning, all. Congrats, Scott. Great 10 years. Question for Michelle, if I can start with the working capital benefit, I appreciate a lot of the increase in the guidance comes from the performance of the assets. But how does that working capital benefit in the first half profile to the second half, please? Yes. I wouldn't assume it's more one-off in nature. Most of it was when we spend money on some of our projects on behalf of our partners, sometimes we have arrangements where they pay us, and it's come through working capital. So I would expect working capital in the second half to be more normal, if you like. Okay. You mentioned in response to an earlier question that traffic upside once the M7 widening has been completed, it was pretty good. But what does pretty good look like in a percentage term, please? Well, okay. Thank you. Obviously, looking at growth projects. EastLink also a little surprised to see EastLink in that mix. But how do we think about an allocation of capital, obviously, a large pipeline of growth opportunities into the North American market. Is that still the focus and EastLink would be nice to do, but the focus certainly remains for a lot more growth coming out of the North American market. How do you think growth profiles with EastLink. I think, Anthony, we've always been, if it's in our core market, I mean, a little surprised people are surprised at EastLink. The reason we haven't looked at EastLink before is, it hasn't been for sale. So obviously, there's things we could do if EastLink was part of Transurban that would, we think, add a lot of value long-term to security holders. But it just hasn't been for sale. We didn't think it would ever go for sale. I think a couple of times, people have tried things, and they may not put anything up now. I'm not sure. But obviously, we know more about this market than almost any place else in the world. So we think we're set up and will provide significant cash and again, create more longer-term opportunities. As far as development's been and where we go, we just have the criteria around fitting our strategy, having the resources, having competitive advantage and then being able to fund it. So as long as it meets our strategy is in our core markets, we'll consider the opportunities, and we have a lot of opportunities. But again, it takes a long time for them to play out. And a lot of times, we don't pick the timing because government decides when they're going to do these things. So we don't specifically say, well, it's just here, it's just there, we put a focus on this if it meets our strategy and our criteria and we think it's good value for our shareholders, and we'll have a go. So it's not that we're prioritizing one over the other. Again, always trying to balance short-term distribution growth and long-term value. So the U.S. has been creating long-term value, something like EastLink and some of the other stuff is short-term distribution growth where the situation is. But we'll assess it within that portfolio and be disciplined. And one of the things I'm really pleased about is that essentially every one of the acquisitions that we've undertaken and developments we've done has performed in line or better than forecast since I've been here. And I'm really pleased the team has been disciplined in that whole time, and I don't see that changing in the future either. Understood. And lastly, if I could the New South Wales toll reform. What are the key aspects that you're pushing for? And related to that, have you had any discussions with the New South Wales labor party about what their view on toll reform looks like to New South Wales? Yes. Well, the New South Wales Labor Party was part of the tolling inquiry in the upper house in New South Wales. And I think there was a lot of discussions and a lot of options and other things put forward. So we have to wait till after the election to see whether if they want to pursue anything or whoever is in government, obviously, is the most important thing. I think both parties have talked about doing some form of substantial toll reform. It's really up to a matter for policy. I think both sides of government, if I go to the tolling inquiry, you've talked about things like new distance-based tolling and potentially tolling caps, very similar to WestConnex or whatever. But it's up to government to set the policy. We're happy to provide ideas around efficiency or fairness or equity or whatever it may be around the network and how to make the network perform better. But that being said, and you would have seen the slide in our presentation that we've got a lot of partners that we have to deal with. They've got their own assets that would be a part of that. So it's not going to be a simple fix, but it's something we're certainly up for and we think it would make a lot of sense for not only our security holders long-term, but customers and the efficiency of the network. So I'm actually pretty excited about hopefully kicking that off after the next election and working with the government on some options there. Hi, Scott, Michelle. Thanks for your presentation. Just three questions for me, if you don't mind. First, I suppose if I think about the DPS guidance for FY '23 being struck about the same time as the free cash flow long-term incentive targets. Now we've had the upgrade to the distribution guidance. I mean, how are you guys sort of viewing that LTI? Is that no longer a stretch. It's more of a base or low case? Can you just maybe just sort of put a bit of context around that? Look, forecasting 4 years for free cash flow in the current environment, we think it's a stretch, and it's something we'll work hard to do. If the business keeps performing like this and we keep delivering like this, can we make it? Absolutely. But setting those targets a year ago, and I mean, we had free cash flow targets for the 3 years prior, which the last 2 years have been zero. So you never know what's out there. But we're very focused as an executive team on making those targets and doing better. I think that's all I can say, 4 years a long time, unfortunately. Yes, absolutely. Okay. Second question, I suppose, is on the A25 sell-down, the $350 million for the 50%, so 100% is $700 million. My understanding is there's a $650 million bond at the corporate level in Canadian dollars. It hasn't been swapped back in dollars and you said my way, I think in sort of allocated against that asset. So is it kind of fair to say that from a look-through value there, there's really not much coming through to Transurban? The way I'd describe it is over the last few years, we have received cash, free cash from the business. And if you adjust for that and the concession length, you're pretty much back at what we paid for it. Some of the debt is at the asset level and some is more at the corporate level, which we've just refinanced actually. Okay. So can you pay down that bond, I mean, it's a bond right so you can't actually use the proceeds [indiscernible]? Okay. And final question for me is similar to a previous question about the M4-M8 on that Slide 34, about the free cash flow consideration from new assets. Can you just talk through what's going on there with the West Gate Tunnel project? Is that that literally just a step-up in finance costs going from being capitalized to expense in basically absorbing the EBITDA from the assets? Yes. So you've got to remember that with the West Gate Tunnel, a lot of the values come through CityLink as well. And the escalation. And so then in terms of incremental value, yes, you've got the revenue, the new revenue, but we've also got the capitalized funding costs, which will -- Yes. Okay. Thank you. Congratulations, Scott, for a fantastic career there at Transurban, best of luck in your next phase of your career. Thanks. I appreciate all the support. And just for people on the line, unfortunately, we could probably take maybe two more questions, and then we have to get on with our day. So I apologize if we can't get to everyone, but we can follow up later with those people we didn't get through. So we might take two more questions. Hi, Scott, congratulations on your contribution to Transurban. Just in relation to that, I wanted to get from your perspective what are the most important couple of things for the new incoming CEO to focus on from a Transurban perspective over the next couple of years? Yes. That's a good question and probably more a question for the Board because they're going to pick the new CEO. So I can't give much color in that the Board. We've talked about it, there's no change of strategy. So just continuing to build the partnerships, the relationships within the group, and I think just being -- just staying on strategy and remaining focus, which sometimes can obviously be a very volatile and very noisy market, particularly when you deal with the listed sector and then just having a passion for infrastructure, which everyone at Transurban has. So I think that's more of a question for the Board. So I think I have to leave it there. And the only other thing is they have to take my call every once in a while just to let me know how it's going. No worries. Thanks for that. Just another pretty easy one. I think at the FY '22 results, you said that you expected about $0.10 per share of capital releases in FY '23. I just want to confirm if that was still the case. Yes. So we haven't done any really of any material note in the first half. We are still intending about that in the second half. How and where we structure it, we're just working through the most efficient way to do that. But what I would say is, because we're sitting on so much corporate liquidity at the moment, there's always a balance between the carrying cost of the extra liquidity until you need it versus the certainty of, that's how we work through that. That was the original plan. It may still come through by June, but because of the extra liquidity because the business is doing well and the timing of our spend, it may be better to wait until the first quarter of the next year. So that money is still there; the $1.9 billion is still there. It's just the exact timing of when we bring it through might be pushed back, but we're still working through that. Okay. Then maybe I can just do one more then. Just based on the fact that you sort of talked about how good your liquidity situation is? And I guess, in terms of A25 assets starting to perform a little better. And I think previously also said that the sale value is consistent with your book value. Why you look to sell an interest in the A25 now? It's about creating opportunities for the future. Same with Transurban Chesapeake to get partners in to help us more with the capital there in the U.S. business because of the opportunities we see for growth. But in relation to A25, it's about having the right partner to help us cement the opportunities for the future there in Montreal rather than just being there with 1 asset. And part of that was that to be honest, 4 years, 5 years ago, when we first bid on WestConnex, CDPQ was our competitor, and for many years, CDPQ has been our competitor. And we're lucky enough that in the second WestConnex transaction, they become our partner now. And we had a great relationship in WestConnex. And again, that led to the discussions and opportunities and what we want to do. So it's always good to turn a competitor into a partner, and we're very pleased with that outcome. So it's a combination of creating more opportunities and then getting close to CDPQ through the WestConnex transaction. All right, everyone. We want take one more question. Is there one more question? Can we take one more question operator, sorry. I promised it, I want to deliver. Thanks for letting me back. Yes, I think a lot of people have said nice things about you, Scott. And now I feel like a tool for saying it on the second chance, but obviously, we congratulate you as well. I guess my question just goes to New South Wales toll rebates and there's been extra evolution on that. I guess, are you able to give us any sense of what the traffic impact is of those toll rebates? And then perhaps more meaningfully, how you then evolve that policy going forward? Yes. Look, obviously, the toll rebate policy or the [indiscernible] relief is a policy for government. And look, it has to have an impact. Obviously, the M5 cashback policy on the M5 has an impact. It's probably not as big as people think when we do the numbers and stuff, but it does have an impact. Again, a matter for government. As we said in our slide there in relation to New South Wales, we do have all the concessions at some point, there is some potential upside sharing with the government. And if any of those were to significantly impact our revenue, then we would obviously share that with the government. And clearly, during COVID, nobody was there to share the downside with us, but that's the risk we take and we accept that. So there is some impact, Rob, but again, a matter for government. It's interesting and speaking with the New South Wales Premier and when we did the opening of M4-M8, just reminding everyone, and it's a choice that governments make and policy makes and the bureaucrats make that I think there are subsidies for tolls for certain parts of the population, particularly in M5 and [indiscernible] relief. The New South Wales government subsidizes public transport by over $6 billion. There is electricity subsidies. There is housing subsidies. Again, that's all a matter for government. And we're happy to give our ideas on how to make the network more efficient. And sometimes, the policy might differ from what we think is the best to deliver for the outcome but that's a matter for government and happy to work with them and give them ideas. But it really doesn't have probably as big as an impact as do you think people choose to use the roads for various reasons, obviously helpful for the cost of living, but I don't think it changes the outcome much. And Rob, on your opening, thank you very much. I've enjoyed, we've had lots of discussions, and I know we will, and I appreciate you not calling me Mr. Charlton anymore. It took a long time for you just to call me, Scott. So I appreciate that, Rob. All right. Thanks, everyone. So I'll just wrap it up there. Thank you for your time. Look forward to seeing everyone. Like I said, I'm going to be around for the next year, lots of things to deliver. Very exciting time for Transurban. Lots of momentum, and we look forward to catching up with you shortly. Thanks.
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Good morning. My name is Emily, and I will be your conference facilitator today. Thank you for standing by, and welcome to the Janus Henderson Group Fourth Quarter and Full Year 2022 Results Briefing. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. [Operator Instructions] In today conference call, certain matters discussed may constitute forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements due to a number of factors, including, but not limited to, those described in the forward-looking statements and Risk Factors section of the company's most recent Form 10-K and other more recent filings made with the SEC. Janus Henderson assumes no obligation to update any forward-looking statements made during the call. Thank you. Now it is my pleasure to introduce Ali Dibadj, Chief Executive Officer of Janus Henderson. Welcome, everyone, and thank you for joining us today on Janus Henderson's fourth quarter and full year 2022 earnings call. I'm Ali Dibadj, I'm joined by our CFO, Roger Thompson. In today's call, I'll start with some comments on the year. Roger will then go through the results. And after that, I'll provide a strategic update. Then we'll take your questions following those prepared remarks. Turning to Slide 2. 2022 provided one of the most challenging market backdrops in history. As you undoubtedly know, since 1928, 2022 is 1 of only 4 years where stocks and bonds had combined negative returns. U.S. treasuries suffered their worst losses since 1988 and had back-to-back annual losses for the first time in over 60 years. This market backdrop translated into a difficult flow environment. For example, in the U.S. 2022 was the first time mutual funds and exchange traded funds experienced combined net outflows. Janus Henderson certainly wasn't immune to the tough market conditions, which our results suggest. As I reflect upon the year though, despite the industry headwinds, there are several tangible signs of progress at Janus Henderson. There was a tremendous amount of work done, and we have the foundation to achieve our ambitions over time on behalf of our clients, their clients, shareholders, employees and all our stakeholders. Over the summer, we brought together people in the firm representing different backgrounds, parts of the business and regions to create the Strategic Leadership Team, or SLT, as we call it internally. This group is responsible for establishing the strategic direction of Janus Henderson and members of the SLT will be leaders and partners in the implementation and execution of our strategy. We've also been successful elevating and adding to our talent across the organization in areas such as investments, distribution, operations and ESG, including seeing exceptional former employees return to the firm. To highlight a few of the additions in distribution, we hired Michael Schweitzer, who has extensive leadership experience in the global asset management industry as our Head of the North American Client Group. Michael will also be responsible for leading our strategic initiative in the U.S. Intermediary space. In investments, we brought in an emerging market debt team in September. Remember on our last quarterly earnings call, we said that we expected to have $500 million in EMD AUM by year-end. I'm pleased to share as of today, we have now crossed the $1 billion in committed capital in less than 6 months mark. $0 billion to $1 billion in such a short period of time is a testament to what Janus Henderson can do with renewed energy, focus and process. Additionally, we launched an EMD hard currency CCAP cab in December, making the EMD team even more accessible to a broader range of investors. There are many other examples on Slide 2 that demonstrate we are not standing still when it comes to building top talent and creating opportunities for existing and new employees. Our Board also experienced a significant refresh with 6 new members, including our Chair. That means 6 of 11 or 55% of Board members were appointed in 2022, bringing new energy and world-class and varied expertise. The new members provide backgrounds in client experience, strategic execution, ESG and culture change. We are also proud of the gains we've made improving diversity on our Board as 45% of members are women and 30% are from racially and ethnically diverse backgrounds. We spent a good deal of 2022 reviewing the business seeking ways to drive efficiencies and identified $40 million to $45 million in savings so that we can use those savings to provide the Fuel for Growth to reinvest strategically in the business. We announced that last quarter and that execution is on track. Finally, we simplified our operating model, which included the sale of Intech in the first quarter of 2022. We also made great progress in upgrading our order management system, which we expect to go live during the first half of 2023. Thank you, Ali, and thank you again to everyone for joining us on the call today. Starting on Slide 3, and I look at our fourth quarter results. Volatility in global markets continue to impact our flows. However, investment performance, ending AUM and revenue, all improved over the third quarter. Our long-term investment performance remains solid, with 67% of our assets beating their respective benchmarks over 3 years. December ending assets under management were $287 billion, up 5% from September due to better markets and U.S. dollar depreciation against other currencies, which is partially offset by net outflows. Net outflows were $11 billion, which includes $7 billion of previously communicated institutional redemptions. Adjusted financial results are flat to the prior quarter. And finally, the Board declared a $0.39 per share quarterly dividend. Turning to Slide 4 and investment performance. Longer-term investment performance results versus benchmark improved compared to the prior quarter with 67%, 70% and 75% of assets beating their respective benchmarks over the 3-, 5- and 10-year time periods. The 1-year number is being impacted primarily by the fixed income and multi-asset capabilities. In multi-asset, the balanced strategy, which is the vast majority of these assets, switched to underperforming the benchmark on a 1-year basis. This is due to short-term underperformance during the first half of 2022, especially Q1. The balance composite outperformed its benchmark during the second half of 2022 and as we sit here today, it's back above its benchmark on a 1-year basis. Absolute and relative fixed income performance was impacted by the historically tough year for bonds. The longer-term time periods remain very strong. For a few of our larger strategies such as Core+ and absolute return income, the level of underperformance to benchmark was minimal. Shorter-term periods of underperformance will happen. Our investment to teams remain professional, they stick to their knitting and they're disciplined in their approach and process with a focus on delivering positive long-term outcomes for our clients, which you can see delivered in our long-term track records. Longer-term investment performance compared to peers continues to be competitively strong with at least 60% of AUM in the top 2 Morningstar quartiles over the 3-, 5- and 10-year time periods. Slide 5 shows company flows. For the quarter, net outflows were $11 billion compared to $5.8 billion last quarter. This included the previously announced $7 billion of institutional redemptions and the impact of market uncertainty on the retail business for Janus Henderson and the industry as a whole. Turning to Slide 6 for a breakdown of flows by client type. Net outflows for the Intermediary channel were $3.4 billion compared to $2.5 billion in the third quarter. The decline is attributed to higher net outflows in the U.S., while SMA improved compared to the prior quarter. The U.S. outflows were roughly in line with the industry. According to [Sim] Fund data, Janus Henderson's fourth quarter annualized growth rate for U.S. mutual funds was minus 11. 6% compared to minus 11.1% for the industry as a whole, which speaks to a difficult flow environment that we saw last quarter. We did see some pockets of early wins with our AAA CLO ETF gathering $1.5 billion in flows in 2022, putting in the top 2% of over 1,000 active ETFs. Additionally, global equity income and the overseas strategies accumulated significant inflows during the year. Institutional outflows were $6.6 billion, which were primarily driven by the EMEA region and include the 2 previously announced low fee redemptions of $3 billion in the Sterling buyer maintained credit strategy and approximately $4 billion of equity AUM. Institutional flows were flat outside of these 2 large redemptions. We did have good gross sales this quarter from several mandate fundings. In fact, 2 of the last 3 quarters have been amongst the highest institutional gross sales results over the past 5 years. We are winning new business in institutional, and Ali will talk about our growth plans for institutional later in the presentation. Whilst last quarter, I had to inform you about $7 billion of known losses, I have no new large redemptions to tell you about today. Finally, net outflows for the self-directed channel, which includes direct and supermarket investors, was $1 billion. Similar to the intermediary channel, gross sales has slowed as retail clients remain on the sidelines. Slide 7 is flows in the quarter by capability. Equity net outflows for the fourth quarter was $7.5 billion compared to $4.1 billion in the third quarter. As I mentioned on the prior slide, the results include $4 billion from the previously announced institutional redemption. The remaining outflows were primarily driven by U.S. mid and SMID cap growth strategies and U.S. concentrated growth. Pleasingly, U.S. mid and SMID cap growth have both seen very strong performance in 2022. Fourth quarter net outflows for fixed income were $1.9 billion, reflecting the $3 billion sterling buyer maintained institutional redemption that I just mentioned. We're pleased that despite the challenging environment for bonds, our fixed income capability had positive flows elsewhere. Several strategies contributed to these positive flows, including Australian fixed income, U.S. buy and maintain credit, multi-asset credit and JAAA. And finally, emerging market debt, which Ali mentioned as of our early wins in diversifying the business. Total net outflows for multi-asset were $1 billion, driven by the balanced strategy within the retail channels. Whilst the net outflow is in part due to short-term performance, the medium- and long-term performance remained very strong. And as I said, the 1-year metric is now back above benchmark. Finally, net outflows in the alternatives capability was $600 million. Moving on to the financials. Slide 8 is the U.S. GAAP statement of income. Before moving on to the adjusted financial results, I do want to call out a few items impacting the GAAP results in the fourth quarter. First, during the quarter, we recognized a $36 million noncash nonrecurring impairment on certain intangible assets. And second, there was a $19 million in nonrecurring charges related to the implementation of the Fuel for Growth cost efficiencies that were part of the $30 million to $35 million that we told you about last quarter. These 2 items represent the main difference between our U.S. GAAP and adjusted financial results. Now turning to Slide 9 and to talk about those adjusted financial results. Adjusted revenue increased 3% compared to the prior quarter, primarily due to higher performance fees offset by lower average AUM. Net management fee margin for the fourth quarter was 50.7 basis points, which is higher compared to both the prior quarter and the same period a year ago and makes Janus Henderson stand out from its competitors. Fourth quarter performance fees of $14 million includes $31 million of annual performance fees generated primarily from the biotech hedge fund and a U.K. small-cap equity segregated mandate. Significant outperformance in the fourth quarter generated these annual fees. Partially offsetting this revenue was negative $17 million in U.S. mutual fund fees. Continuing on to expenses. Adjusted operating expenses in the fourth quarter were $282 million, up 5% from the prior quarter. Adjusted employee compensation, which includes fixed and variable costs, was flat compared to the prior quarter as higher profit-based variable costs were offset by lower fixed compensation as Fuel for Growth cost efficiencies were running ahead of the investment in our new strategic initiatives. Adjusted LTI was up 17% compared to the prior quarter due to mark-to-market. In the appendix, we've provided the usual table on the expected future amortization of existing grants along with an estimated range for the 2023 grants due to use in models. The fourth quarter adjusted comp to revenue ratio was 46.4%, up slightly compared to the third quarter, primarily due to the mark-to-market on LTI. Adjusted noncomp operating expenses increased 7% compared to the prior quarter, primarily due to higher seasonal marketing and G&A expenses compared to the fourth quarter of last year, noncomp expenses decreased 12%. On a year-over-year basis, adjusted noncomp expenses declined 1% compared to our original guidance at the beginning of 2022 of a percentage growth in the low teens. The quarter and the year-over-year comparisons show our commitment to strong cost management. Adjusted operating income in the fourth quarter of $123 million, was down 2% over the prior quarter. Fourth quarter adjusted operating margin was 30. 4%. And finally, adjusted diluted EPS was $0.61, flat to the third quarter. Skipping through Slide 10 to Slide 11 for an update on cost efficiencies and our outlook for 2023. Recall from our last earnings call, our philosophy has always been to maintain strong financial discipline and invest in the business where it strategically makes sense whilst looking to operate more efficiently to provide the Fuel for Growth. Last quarter, our Executive Committee reviewed the business and has line of sight to $40 million to $45 million in gross run rate cost efficiencies, which will be equally split between compensation and noncompensation expenses. We're on track to deliver those saves. Our intent is to reinvest all of these savings back into the business to fuel growth. Regarding expectations for 2023. Ending AUM for 2022 was 13% lower than the average for the year. All things equal, you should therefore expect management fees will be lower by this amount in 2023. We anticipate a compensation ratio in the mid-40s range, which reflects lower revenue, the denominator in this calculation. For noncompensation, we expect to increase our marketing and advertising where we have an opportunity to capitalize on good investment performance, especially in our U.S. Intermediary business that we want to not only protect but to grow. We also want to make investments supporting our other strategic initiatives. We anticipate noncompensation percentage expense growth will be in the mid- to high single digits. Of course, as we reinvest for growth, we'll continue to be mindful of our discretionary cost base. In addition to this effort to capitalize on areas where we feel there is a real opportunity, it's important to note that roughly 40% of the year-over-year increase in noncomp expense will be noncash. This primarily relates to the order management system transformation project that is anticipated to go live in early 2023, at which point we will begin amortizing previously capitalized costs of the project through our P&L. Finally, we expect the firm statutory tax rate to be in the range of 24% to 26%. The increase from the previous range is related to the U.K. corporation tax rate increasing to 25% from 19%, effective the 1st of April '23. Moving to Slide 12 and look at liquidity. Our balance sheet remains very strong during this period of earnings volatility. Cash and cash equivalents were $1.2 billion as of the 31st of December, which is roughly flat to the end of last year, as excess cash flow generation has been used to fund dividends and buy back shares. Given current market volatility and to maintain that balance sheet flexibility, we've been conservative and purposeful in our approach to capital management and elected not to buy back stock in the fourth quarter. We have a strong liquidity position and continue to balance the capital needs and the investment opportunities of the business with returning capital to shareholders. Finally, the Board has declared a $0.39 per share dividend to be paid on the 28th of February to shareholders of record as of the 13th of February. Thanks, Roger. Moving to Slide 13. I want to remind you of our discussions on strategy from prior earnings calls. First, we introduced our 3 strategic pillars of protecting Janus Henderson's core businesses, amplify our strengths that are not fully leveraged yet and diversify the firm where clients give us the right to win. Second, our strategic leadership team, along with input from clients, identified a broad range of opportunities which aligned with the 3 strategic pillars. The opportunities were filtered through a process designed to capture those opportunities that provide the best possible outcomes for our clients and will lead to organic growth and attractive operating margins over time. And third, the reduced list of opportunities was then evaluated along 2 dimensions. Janus Henderson right to win and how the opportunity measures against future client and industry importance to arrive at the final list of initiatives that we will look to execute on. I want to spend a few minutes walking through how we think about implementing and executing the strategy on Slide 14. On that slide, you can see the different steps of our strategic road map. The steps aren't entirely linear as each will have short-and long-term elements with bearing time horizon. But having done this before, one does need to create an environment for change before one puts a change plan in place. One of the first actions I took after starting was to assemble the strategic leadership team, which I talked about earlier. It was an important step in getting the best thinking and buy-in on our strategic direction. We've increased our communication, particularly to clients and employees, to provide transparency on the path forward for Janus Henderson. More accountability has been introduced at the senior levels of the firm to drive the right behaviors and measure progress. Lastly, the cost efficiency efforts have provided the Fuel for Growth so that we can strategically invest in the business. With the elements for change in place, we identified and developed the strategic plan, including initiatives that fit within the framework of our 3 pillars of Protect & Grow, Amplify and Diversify. Implementing the plan will happen over time. Our leaders are empowered to drive these initiatives and progress will be measured. On the bottom of the slide, you can see some of the metrics we will track to measure progress that are aligned with clients, employees, shareholders and other stakeholders. Over time, financially, we want to deliver consistent annual net new revenue growth with attractive operating margins. Our clients' results are measured with an investment performance and their experience with Janus Henderson. Organizationally, we will measure the ability to track and retain top talent and the level of engagement from employees. Delivering early wins will provide proof points that the plan is taking hold. And although we are seeing some successes like emerging market debt, JAAA, talent improvement, fuel for growth, client activity levels or a biotech hedge fund and more, it will take time to deliver consistently and results won't be linear. For example, over the next 1 to 2 years, we'd expect to deliver intermittent quarters with neutral or positive net AUM flows, which will evolve to more consistent net inflows and then net new revenue growth over the longer term. As we said before, we expect to see even more tangible progress during the course of 2023. Institutionalizing winning will be done by improving updating and automating systems and processes around metrics, measurements, talents and more. Now I'd like to give you an update on one of the initiatives we discussed last quarter of U.S. intermediary as well as introduce a few more initiatives that we'll be focused on. Turning to Slide 15. On last quarter's earnings call, we talked about the importance of protecting and growing our U.S. intermediary business and listed out 5 areas of investments to reenergize the channel, support the team further and capture market share. As I mentioned at the beginning of the call, in November, we appointed Michael Schweitzer as the new Head of our North American Client Group. Since then, Michael and his team have already implemented several leadership changes and reorganize the U.S. intermediary business that we believe has positioned us very well for growth in our North American retail business over the long term. Lastly, we started the process of properly aligning people's incentives with our growth strategy. On Slide 16, a business we want to amplify is the institutional business. Our institutional business represents just over 20% of our assets, and we are underpenetrated in global institutional markets, particularly in the U.S. In addition to differentiated insights and disciplined investments, there are several factors that gives Janus Henderson the right to win. We are seeing gross sales momentum in the business Unfortunately, it's been masked by a few large client redemptions in 2022, not related to our investment performance or our client service. Our gross sales have increased more than 35% in 2022, and we are winning mandates from sophisticated institutional clients. Consultant engagement is expanding. Meetings with consultants are up 40% and we have a great and growing consultant relations team. The institutional business is also complementary to other initiatives, including one that I will talk about in a moment, which is diversified alternatives. To capture market share in the institutional space, we'll focus on areas, including restructuring sales teams and covered models, to meet client needs better, improving consultant support, utilizing data for business development, elevating brand awareness and developing new products and solutions. As I mentioned, another business that we want to amplify is what we describe as diversified alternatives on Slide 17. Some of you know about this business, but many of you and many of our clients don't yet. This grouping of approximately $20 billion in assets includes multi-strategy hedge funds and equity and commodity enhanced index funds. Long-term investment performance has been excellent with a sharp ratio of 1.7 since obsession, and this performance has translated into growth with $2 billion of net flows in 2022 and a strong pipeline as we enter 2023. We believe that with investments in this area, we can improve our market share, which is currently less than 1%. There's also client demand to expand upon our existing capabilities just taking a sleeve of their multi-strategy capability and launching as a single product. An example of this is our successful dynamic trend strategy. Areas of investment that we believe will position these strategies for growth are building out the investment team to improve and diversify the investment capability. By the way, if any of you on the phone are looking, give us a call, developing more scalable infrastructure and globalizing marketing and distribution functions for our broader alternatives business. Wrapping up on Slide 18. As I look back on 2022, I'm proud of the progress we made in repositioning Janus Henderson to meet our clients and their clients' needs and thus, for future growth. We established the strategic leadership team that created and will now implement our new strategy. We welcome new talent to the firm and open up opportunities for existing employees with new and expanded roles. We entered 2023 with a refreshed and highly driven Board with exceptional breadth and depth of experience, which will be critical in leading Janus Henderson into its growth phase, and we've created Fuel for Growth to allow us to reinvest in the business and we have simplified our operating model. As I said previously, we are still in the early days and the path will be a market-dependent one, not linear, whether we like it or not. We have a strong balance sheet good free cash flow generation, and our focus will be on controlling what we can control to deliver desired outcomes for our clients, shareholders, employees and our other stakeholders. Let me turn the call back over to the operator for your questions. It's actually Craig Siegenthaler from Bank of America. So my first question is on capital management. Just looking at what the stock did in the second half of 2022 and also how much excess cash Janus has today and how it's grown, we're just wondering why not buy back more stock? Craig, let me -- this is Roger. Let me take that first. I mean, I guess, first, most important thing is there's no change in our capital management philosophy. The Board takes a very active approach to the management of cash and capital and balancing those capital needs against the investment that's needed in the business and returning cash to shareholders. So the focus is to use that excess cash generation to reinvest in the business organically first, potentially then inorganically, we talked on that a little bit, I may talk about that a bit more in Q&A. But then where we don't have a need to return cash to shareholders. As we did in '22 in the first half -- first half 2022 through buybacks. But given the current market volatility, the opportunities we see, we were conservative and prudent in the second half. But again, over the year, we repaid $358 million in dividends and buybacks. And just for my follow-up then, if you're not using excess capital for buybacks and you're building it up, I'm just wondering, can you update us on your thoughts behind M&A, both kind of larger scale deals that may possess some redundancies and also smaller strategic transactions that can potentially fill in product gaps? Sure, Craig. Let me take that. So look, our philosophy on M&A has not changed either and nor is the change for me for a number of years. Remember, our view is that M&A where there is a significant amount of overlap and cost savings is the vector of driving value is typically unsuccessful. The markets have said that -- you have said that, others have as well, and we agree with that. That's unlikely to be the major thrust of M&A that we do. On the flip side, M&A that brings in a new set of skills, large or small, is at a higher chance of being successful. And that's what we're going to look at, and there are plenty of opportunities out there, and we'll continue to look, but we're going to be disciplined. And the reason we're focused on the complementary-type M&A, the puzzle piece type M&A, is that that's client led. We are going to be client way we bring on teams, the way we buy, build and partner with others will be driven by bringing something new and better to our clients. And that's part of our diversified strategy prong. It's very importantly not a strategy unto itself, but we want to buy and build partner to deliver what our clients' needs are and that will be more complementary. First question, reading between the lines, and I think this has been confirmed by some headlines we've seen, there does appear to be quite a bit of portfolio management and distribution changes going on. You highlighted some of that in the deck. And I'm sure this is all an upgrade from a longer-term perspective. But historically, so much disruption in fund management and distribution has led to accelerating outflow for asset managers. So I guess, firstly, is this a fair observation from the outside? And secondly, why or why not should we be concerned about accelerating outflows as a result of all these kind of rapid changes you're making? Yes, it's a great question, Patrick. Thank you. So you're right that we've made a lot of change in 2022, which we'd characterize as a transition time. I would argue that from the outside, and it's tough to see our hypothesis, I hope is right. I think is right is that it's also a year of tremendous progress. Tremendous progress in repositioning Janus Henderson to meet our clients' needs and meet their clients' needs and set up for the future, whether that be bringing new talent, whether it be developing the Fuel for Growth, doing the reorg, simplifying our business, adding new teams, you're correct, where it doesn't serve the client and our current teams, changing those teams. That was part of our Fuel for Growth, building the Strategic Leadership Team, creating a strategic road map, which we're now executing. We're doing a lot. And when we speak to clients, to your point, they want stability but they understand that we are -- stability does not mean stagnation. They want improvement, and we are improving for them. We are improving along all those dimensions. And honestly, I couldn't be happier with my colleagues at Janus Henderson. I'm very grateful to the efforts that they've made and the steps forward that we've made. So the changes are well thought out. They're well thought out to deliver better for our clients. We don't see any of these changes driving the outflows that we've seen so far. And I feel pretty comfortable saying that we're on track. Pat, if I could just add to that, just a couple of facts as well because -- we're excited to talk about the changes. We're excited about the people joining and rejoining. But again, I don't want to make sure that we're very clear. We've got some very strong established teams and particularly portfolio management teams. Our global portfolio management team has got an average of 23 years in the financial industry, 13 years of which Janus Henderson and our analyst team is 14 years in the industry, and 7 of those with the firm. So we've got some really strong roots in the team. But yes, we're pretty excited about some of the joiners across the organization as well. And then a quick follow-up on the expense savings. I think last quarter, you expected one-third of that to be realized in 4Q, but maybe you hinted it was more than that. So as we try to pack maybe how much that acceleration helped the fourth quarter result? Where did you come out on that number? And how should we think about the cadence through the rest of 2023? Yes, we're on track for that delivery. I think as I said on the call, the delivery of the -- we've been very clear that we're excited about the opportunities we've got, and we're investing -- reinvesting that fuel for growth. And as I said on the call that ran slightly ahead the savings ran slightly ahead of the investments we're making in Q4. Patrick, just to add a little bit to Roger. It's more of a timing question than being ahead or behind the track. Just the first one, can I just have a follow-up on the first question on the call, just a clarification. Are you saying despite the strong capital position while you doing stuff organically and potentially looking at doing stuff inorganically, but it's going to be disciplined. We shouldn't think about you restarting the buyback anytime soon and even future buybacks, you're really focused on both organic and organic opportunities. So buybacks are really off the agenda at the moment? I think it's just a priority -- sorry, Ed, I think it's a priority of is what we're talking about. And again, that hierarchy has never changed. We're always looking at how do we -- can we get a bigger return in terms of investing in the business, either organically or inorganically. So -- and the buyback is from excess from once we've satisfied all of those things. So no buybacks are not off the agenda, but we're pretty excited about some of the things we can do organically and inorganically at the moment. And maybe just to clarify that a little bit further. I understand what you're saying. But is this just -- obviously, we're talking about the '23 strategy was that the time frame we should think about and you potentially relook at this in '24? Yes. I think again, we will give -- we will continue to give more clarity on the strategy as we go through further calls. Again, this is a Q4 call. We'll update on capital with Q1 and buyback as part of that. Can you just touch on -- you talked about obviously changes in the industry. You've seen markets very strong at the moment. Are you seeing any change in flows coming into different segments of the market? And then from there, can you just talk a little bit more about your pipeline, what you're excited about or any spots that you're concerned about the potential flows going forward, please? Sure. Let me start that, and Roger can chime in. Look, it's clearly a very dynamic marketplace right now. Dynamic from a pure stock and fixed income markets perspective, but also from an industry perspective, things are changing. And look, that offers opportunity for us. That offers opportunity for us to deliver better for our clients where they have needs that aren't met. And we'd like to capitalize on that. And we're putting investments to the earlier question, significant investments to try to capitalize on some of the movements that are there. I wouldn't say we're seeing massive changes in the channels right now just from what's happened in the markets recently. Maybe if you squint a little bit, the intermediary markets are a little bit better. But again, that could be quite volatile quite quickly, depending on what happens in the markets. I'd say in the institutional channel, there's clearly more activity. Part of the reason we highlighted it today is that a lot of our clients and potential clients are putting more money to work in that area, and we're investing to be able, again, to support them in those endeavors. So a little bit more activity in institutional, particularly, I'd say, around the fixed income area, not unanticipated by all of us that when rates change, fixed income becomes a lot more interesting. And there is money in motion there. And we do see similarly some opportunities within equities, obviously. And we are seeing some signs of a shift away from passive in some institutional businesses to something more from an enhanced index view. And so those are some of the areas that we're looking at, clearly, institutional, always intermediary. You've seen it be a very big focus for us globally and certainly in the U.S. And again, we want to invest and make sure we can capitalize that by delivering for our clients. I wanted to dive a little bit into Asia distribution. You highlighted in one of the earlier slides in the deck, you appointed a new Head of Asia Distribution. And we're seeing success by some of your peers in the industry. So maybe as a region, how is Asia performing in terms of net sales to Janus? Was it an inflow or outflow in '22? And can you give us a sense of magnitude? As we look forward, what are the opportunities for you to grow your presence in Asia? And what products may be most interesting? And then maybe lastly, life after Dai-ichi, since they sold their stock in '21, what impact has that had on your business in Japan and Asia more broadly? Thanks for the question, Ken. So let me start and Roger can chime in and redirect. So I'm glad you pointed out Asia. Asia is something that we have had presence in more broadly from a very, very long time ago. And we think it's a great opportunity to upgrade and invest in that region. If you think about it, our strategy is really based on delivering on clients' needs. And there are 2 prongs effectively for that strategy when it comes to Asia. The first one is that many of our clients are going into Asia more and more, think of our intermediary clients, think of our broader private bank partners, et cetera, et cetera. And so serving them in that region is one of the things that we think is a great opportunity for us, and that's one of the areas that we're investing. The other opportunity, obviously, is to provide investment capabilities from the broader APAC region to the rest of the world. And that is the other prong that we're investing in as well. So effectively, an export of local investment skill sets that we have that, in some instances, are actually quite unique. We put that in the amplify category of our strategy to the rest of our client base and future client base. So those are the 2 prongs that we're really focused in on. And you focus in on, Ken, the distribution changes that we've made there that obviously helps with both of those, both the inbound and the outbound. And we see enormous opportunity for us to continue to grow. It's not, as you know, an overnight success region. The good news is we haven't been there just overnight. We've been there for quite some time, but we need to continue to invest in that region to make sure that we deliver on the expanding client needs around that region, both locally and externally. From a Dai-ichi Life perspective, gosh, they are a great partner of ours. I've gone to know them a little bit. And I will say that the interactions there are very, very strong, and we have great relationships and thinking through the needs of that client base and of their Japanese clients. And more broadly, their global presence. It really is a global firm. Great relationships there, thinking about how we can serve them better and thinking how we can collectively take advantage of the industry's changing dynamic, as I mentioned at the outset, and try to deliver best for them as a client and their clients as well. Just again, just adding some meat to the bones there. It was not a great year for flows for Janus Henderson. We were $30 billion Asia-Pacific as a whole was slightly positive. So it's just there. Within that, Australia has seen some very strong growth, both in the intermediary and the institutional channel. So we've got a great business that's growing well in Australia. Ali and I visited Japan, I think we mentioned it on the call the last one we had. We got some real, real opportunities in Japan and are excited there. Ali -- I think, Ali is going to Japan -- going to Asia in a couple of weeks because again, we've got a business there that, yes, as Ali said, we've been there for a while, but our business there is relatively small. And we'd like to see that grow significantly and some of the investments that we're talking about in the SLT investments that we've mentioned on the call and before. One of those is growing the Asian business. So I hope I look forward to telling you more about that in the future. And just a quick one. You wrote down intangibles this quarter, I think, $36 million. Can you give us a little more information on the nature of those write-downs? Ken, they're noncash accounting adjustments for intangibles on prior acquisitions. So we can take you through that off-line if you want in more details, but I say, noncash accounting. Ali, I was hoping we could maybe dig into a little bit more in your comments regarding intermediary distribution. It's a fairly competitive channel as, of course, we all know understanding that it's growing, so you guys would like to add incremental resources there. But maybe talk a little bit about which products you expect to really lead in this channel that you think you could really sort of lean into to drive incremental net flows? And does that also expand beyond the existing intermediary channels into new ones or kind of doing more with the platforms that you already have? Yes. Thanks for the question, Alex. So we understand that it's competitive in that marketplace, and that's good because we're pretty strong competitively, and we are a big believer, I'm a big believer in the U.S. intermediary market, our brand, our team, our products, your question I'll get to, and our partners, current ones and ones that we're developing over time, we feel very comfortable that we can over time again till build that business even more strongly than it is today. I mentioned a new hire to lead that group, North America Client Group, gentleman by name Michael Schweitzer, you may have heard his name. He came from a very strong competitor in the space, and he just arrived in November and already changes are happening, changes organizationally, changes to particular people One of the ones that we're most excited about is that we've brought marketing right into the operating unit of the North America Client Group to be integrated in the way we go to market with our clients -- for our clients to improve accountability, collaboration, urgency, all those things that we talked about almost back to day 1 for me. And we've also spent some time to realign the incentive structure. If you think about that structure, it's a sales force heavy structure for us. We have people all over the country, delivering our products and supporting our client base and our adviser clients and their clients in a very active manner. And we've changed the incentive compensation there compensation, looking at market share, looking at what assets are stickier and delivering on those, activity levels. Again, it's all going to be about having the metrics, measuring them and paying on that. That's tied to our strategy. So all those changes on a very, very strong foundation make us feel quite comfortable. When you think about what we've seen successful from a product perspective, look, it's our bread and butter, right? It's our bread and butter. U.S. equities platform to begin with, whether it be the U.S. Mid-Cap range or SMID Cap Growth or overseas or Core Plus or multi-sector global life sciences and go down the list. These are all names you know. These are all names others now. Then we have more things beyond just protecting and growing those businesses, whether it be the biotech hedge fund, whether it be property. We think there is a future for diversified alternatives in the U.S. as well. From a product perspective, we have a gamut of things to deliver, especially again in our core business in the U.S. equities. But I would note that it's not just about the product, right? It's about the form factor, what's digestible by the client and our clients' clients. Think about JAAA, which is a pretty good success, I would argue, AAA CLO ETF, where we've done quite well. We're on the league table is relatively high. It's about delivering things in SMAs and CITs for the right spaces and the right clients. It really is a little bit of earlier question, a dynamic marketplace, and we think with what we have as a foundation and the changes that we're making, we're going to be over the time, again, not tomorrow, but over time, well positioned to continue to deliver and gain market share in this competitive market. A quick one, Roger, for you, on the expense guide and particularly the comp rate guide. Sorry if I missed it, but are you assuming sort of year-to-date market performance, or what kind of beta assumptions do you guys have baked into the comp rate? That's all -- that is also at year-end markets. So obviously, markets pleasingly have started the year well, but what I've given you in terms of guidance is based off 3112 market levels. The first one is just on the noncompensation growth rate. You said mid- to high single digits. Obviously, you also mentioned that a big chunk of that is in relation to some amortization step-up. If it is a challenging market and you do pull back on spend again in '23 and all concerned that you're sort of underinvesting in the near term? Or do you feel that the cost efficiencies that you'll generate will sort of really help you invest in the business near term, despite whatever is going on in the market? Yes. I think there's a number of things in there list, so let me try and pick it up. And if I miss them, please follow up and Ali chip it as well. But yes, I think there's a number of pieces in there. First is, we've always looked to run the business efficiency -- efficiently, and we had another good hard look in Q4. And as we said, we had line of sight of $40 million to $45 million of savings. And we're on track for those. And as I've just said, those savings probably ran a little bit ahead of the investments we're making. And then where are you investing? Or where are you spending that money? And I put that into 3 categories. The first one -- those 3 categories are sort of intentional, nonintentional, if you like, and accounting. So the intentional stuff is the exciting things. That is where we believe we have real opportunity to grow to see those -- to see flows for the future, to grow in some of those areas that Ali just talked about. That's primarily -- there are people pieces in there. We're investing in new people. There is certainly marketing in there that is getting out and seeing clients. So our T&E will be higher, It will be lower than it was in '19, but higher than it has been over the last 2 or 3 years. So we're excited that we'll be doing more conferences, more higher-quality conferences, things like that, where we're seeing real interest in talking to our portfolio managers and our broader teams. So that's the exciting piece. And then like you say, there were 2 other pieces. One is the sort of unintentional. That's inflation, which is real, particularly in some areas like technology, where you've got contractual contracts with inflationary uplifts in them. And FX as well, and some of that is sterling -- sorry, the U.S. dollar has weakened a little bit relatively from its real strength, then that's benefited our AUM and our revenue, but that will increase some of our sterling and euro costs in dollars. And then like you said, that accounting piece, which is about 40% of the increase, that's real, that's unavoidable. It's good. That's again, is a very important piece of work that we've done over the last couple of years that will go live shortly. And so we're excited by that, but we have to pay for it now through the P&L, so it's being capitalized. That unintentional piece in the accounting piece. Yes, they're fixed, if you like. So then you've got to be even more careful. We really want to make those investments. We're excited by those investments. So we'll continue to look at how we can make sure we're doing those right and how we can be more efficient in everything else that we're doing. And then just a second question is just on performance fees. I mean, obviously, we're hardly a month in. But are you able to sort of characterize how you think the business is placed on a performance fee perspective, whether it be around high watermarks or that sort of stuff just because the last couple of years, we've gone from some pretty sizable performance fees to -- in FY '22 negative? So getting a sense of where we might be tracking potentially in the next year would be helpful in terms of what your place. Yes, I can help a little bit, but not a lot there because, as you say, it's very early in the year, and a lot of those are either midyear or year-end. Crystallizations, again, to give you the facts, there's 2 pieces of performance fees to look at. There's the U.S. mutual funds, which is about $50 billion of assets, which are subject to performance fees. There, you can see that their 3-year rolling, you can see what's dropping off. We've got a couple of areas, and they're these so they're negative at the moment. We'd have to add some good performance to improve those with flat performance. So you know what's dropping off, you don't know what it's adding. But with flat performance, you can calculate that we would or we would expect to see about $60 million, $63 million of negative performance fees in in 2023 without any alpha. Outside of that, there's about $29 billion of AUM with performance fees on it. As I say, that's difficult to predict what's going to happen. But we are in a -- it's in a range of products and a good number of those are at or above their high watermarks. So sorry for not being able to help fully hopefully, as we had some good alpha and those numbers can come in, but that will depend on what we do in the year. First of all, thanks for moving the time of the release for us. That's helpful. So first question, just maybe picking up on noncomp. If I think about your gross savings and then your net increase in your year-on-year noncomp of mid- to high single digits, it would sort of impute to a high single, low double gross spend rate. Is that the right way to characterize it? And B, if that's correct, I know it's early, obviously, for '23. But where are you in the spending cycle maybe on the sort of intentional spend as we start to think about '24 and beyond in terms of that noncomp growth rate? Yes, as you said, so in Q4, we were running ahead on saves over spend. Those things will start to materialize more in Q1. So that will normalize that. So as Ali said, that's really just timing. And then -- so I wouldn't -- I think Q4 is a little bit artificial probably is what I'm saying, which is why you should look at the full year, and that's a mid-to high-digit growth rate. As we just said on the on the call with Liz, who probably doesn't agree with you with the call moving by an hour to -- an hour later. So sorry for our Australian friends. Then 40% of that is accounting. So as I said, you're going to split that into 3 pieces, there's the accounting, there's the inflation and FX and there's the investment. And that investment piece, yes, we we've got plans for those. We're trying to get out of the blocks in the right places as soon as we can. And Bill, just to the pure math of how you're describing it, I think that makes sense. If we didn't have the cost savings, our investments would be significantly higher. You mentioned low double digits, that's probably in the right range. And just a follow-up for you. So now you've had another 3 months in the seat and make nice progress. As you think about some of the shape shifting that's going on in the industry, sort of the acceleration of the retail democratization, fixed income over equity, et cetera, maybe non-U.S. opportunity set. How is your thinking between sort of the footprint that sits today and the improvements you can make versus the bolt-on opportunities? And what I mean by that is, is the sort of the mindset here that M&A may be more important, all else being equal? Or is it so you need to see what's under the hood first or a combination of the two? I'm just trying to get a sense on how you're thinking about using that free cash flow. Yes. Thanks for the question, Bill. Look, the industry is dynamic, but it's never dynamic in the same direction or else it would be easy to predict. I don't think coming under the hood, I've seen anything different than what I saw last time we spoke. In fact, if anything, I feel much more confident about our ability to deliver for the current client and the future client needs, whether it be having delivered the Fuel for Growth savings so far, whether having it be bringing in really strong talent, whether it be some of the early wins we've had in emerging market debt or JAAA or what have you. I feel much better actually now that I have more comfort with what we have that we are very, very well positioned. That solid foundation I talked about way back when is absolutely here and we're able to grow from it. That doesn't mean that we have everything that our clients want from us exactly as you described it. We are looking to buy, build and partner across the board to find areas where we can deliver better service for our clients and our clients' clients. And that may be investment strategies that we have gaps in. We've talked about some things in the private world, for example, that may be other tools that we can bring to bear to our clients within client service or distribution more broadly. I wouldn't say that the importance of M&A has gone up or down. I'd say that my confidence in the foundation that we have to buy, build or partner on top of has certainly gone up. Just wanted to return, if I could, to the comments you've made on SMID and Mid. I mean, obviously, you're saying that there was very strong performance in '22, yet it's still a big contributor to equity outflows. Is that just a matter of time? Or is there something else going on that's sort of not really connecting the performance with the flows? I would -- look, having a product that is a very high-quality product does not always mean that you will be successful financially or from a P&L or growth perspective in those products. There are different drivers obviously. The two most important of which is that it has to meet up to client demand, and you have to be able to deliver to those clients. So think about step number one. Over the past 10 years, deciding between haves and have-nots, particularly in Small and Mid-Cap, maybe wasn't quite as important because money was free and they have and have not companies that one would invest in had a pretty good shot at doing okay. And so the differentiation skill set that we have as Janus Henderson, our portfolio management teams, our analysts, our associates spent all their time understanding which companies a have and have not kind of less important in the past 10 years. Now where money is not free, and it doesn't sound like it's going to be free for a while, differentiating between the good companies and the not so good companies is a skill set that we are extraordinarily good at and will be in high, high demand. It just hasn't been for the past little while. And so in this location that you've seen in the marketplace, I'm not surprised that our flows would be impacted negatively because it's effectively a baby with a bath water, so to speak, from a savings perspective that you've seen. But going forward, feel very, very confident, very comfortable that our investment teams know how to differentiate that has and have not and that the market going forward will see even more differentiation between those 2 groups and create real alpha. So my view is that the client demand will be there. Then it goes to the second point, which is can we deliver from a distribution perspective, these products to those clients. Well, some of our products, certainly the ones in the U.S., were actually closed for a while. They're at their limit from a capacity perspective. Well, they are not at those limits anymore. We have opportunity to deliver them, and we have a distribution force as to some of the earlier questions in U.S. intermediary and EMEA intermediary, APAC intermediary that are very, I guess, thoughtfully targeting which clients to bring this to and can deliver those to our clients that want them. So it's both of those prongs, and it's a very good question and hopefully give you a little bit of color how we think about things. And then just maybe as a follow-up, just, I mean, obviously, the fulcrum fees to get raised before, but obviously, there are 2 funds there that are causing the main negative. Is there any sort of hope that alpha will start to be delivered in those funds and reduce the negative? Or is that just a matter of wait and see? Well, your guess is a little bit as good as ours, right? We certainly will try to consider to improve our performance. That's what we're focused on. You can't win every day, every time every portfolio. But certainly, over time, we'd like to improve the performance there. And that should back from a future perspective. But to be clear, that's nothing that we model or put into our expectations. Well, thanks, Emily. Thanks, everybody, for joining the call today and for your interest in Janus Henderson. I hope you get the feeling that we believe we have a great foundation to work from. We're making thoughtful changes to reposition the firm to deliver better for our clients and their clients, for our employees, our shareholders, other stakeholders and this will take time, but we are on track. Thank you for joining.
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Good day and thank you for standing by. Welcome to the Allegro MicroSystems Q3 Fiscal 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you, Tanya. Good morning and thank you for joining us today to discuss Allegro's third quarter fiscal 2023 results. I joined Allegro at the beginning of January and with more than two decades in semis, I'm thrilled to join at such an exciting time in Allegro's life cycle. I look forward to working with the team as well as with all of you. I'm joined today by Allegro's President and Chief Executive Officer, Vineet Nargolwala; and Allegro's Chief Financial Officer, Derek D'Antilio. They will provide highlights of our business, review our quarterly financial performance and provide a summary of our outlook. We will follow our prepared remarks with a Q&A session. Our earnings release and the accompanying financial tables are available on the Investor Relations page of our website at www.allegromicro.com. This call is being webcast, and a replay will be available on our IR page shortly. Please note that comments other than statements of historical fact made during this conference call including forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include projections and other statements about future events that are based on current expectations and assumptions and as a result, are subject to risks and uncertainties that could cause actual results to differ materially from anticipated results and projections. Please refer to the earnings press release we issued today and other documents filed by us with the SEC including the risk factors discussed in detail in our most recent 10-K filed on May 18, 2022, as amended on Form 10-K/A filed on August 29, 2022, and subsequent 10-Qs. While we may elect to update forward-looking statements at some point in the future, the company assumes no obligation to update any forward-looking information presented even if our estimates or assumptions change. Unless otherwise noted during the call, all references to income statement-related financial measures other than sales will be to financial measures not prepared in accordance with generally accepted accounting principles, or GAAP. Please refer to the press release posted to our website for information regarding our non-GAAP financial results and a reconciliation of our GAAP to non-GAAP financial measures. The non-GAAP financial measures that are discussed today are not intended to replace or be a substitute for the presentation of Allegro's GAAP financial results and may be calculated differently than similar measures used by other companies. We are providing this information because it may enable investors to make meaningful comparisons of core operating results and more clearly highlight the results of our core ongoing operations. Thank you, Jalene, and welcome to the Allegro team, and good morning and thank you all for joining us this morning for our fiscal third quarter conference call. I'm pleased to report that Allegro had another record quarter with sales increasing 5% sequentially and 33% year-over-year to $249 million and near the high end of our guidance range. Our growth continues to be driven by ongoing momentum in our e-mobility and industrial markets with sales in these strategic focus areas, increasing 11% sequentially and 56% year-over-year. Gross margin also expanded in the quarter due to higher sales of feature-rich products as well as continued favorable foreign exchange. This allowed us to deliver record operating margins of 30% in the quarter. Further highlighting our operating leverage, earnings per share increased more than 80% year-over-year on revenue growth of 33%. Coming off the strong quarter, along with the fourth quarter guidance, we're increasing full year sales growth expectations to 26% over fiscal 2022. In support of this growth, we are also making progress in alleviating the supply constraints that have limited our ability to serve our customers over the past several quarters. Let me expand on this with some proof points. First, while our overall backlog remains strong, our past due backlog is beginning to decline as we ship more products to fulfill a portion of prior outstanding orders. We view this as a positive step as it improves order lead times for our customers. We have also continued to work with our customers to allow for reschedules and cancellations within certain parameters. Second, channel inventory has begun to normalize with certain distributors approaching historical levels. Finally, we've been able to grow our internal supply of wafers and die banks during the quarter to support anticipated growth. An another positive and very important step in down last week, our U.S. based fab partner, Polar Semiconductor is expected to receive $150 million equity investment to expand its 200-millimeter wafer fabrication capacity, which positions Polar and Allegro to support anticipated growth in customer demand. Shifting to key business highlights for the quarter. Sales in our automotive business increased 8% sequentially to a new quarterly record and represented year-over-year growth of 80%. Our focus on the secular mega trend of e-Mobility, which includes the increasing electrification of vehicles and the higher adoption of ADAS feature sets, continues to drive Allegro's growth above market. In fact, e-Mobility applications expanded to a record 43% of Allegro's third quarter automotive sales, reflecting the combined contribution from our sensing and power products. In addition, the majority of third quarter automotive design wins were in e-Mobility. We continue to focus efforts across the company on the strategic fast-growing opportunity. Notable design wins included a large ADAS application for our power products in a steering system for a North American OEM as well as multiple wins with the Chinese EV manufacturer. We also achieved another record in our Industrial business with sales growing 6% sequentially and 60% year-over-year. Continued growth of Clean Energy and Industrial Automation end markets drove our performance in the third quarter. Overall design win traction has remained strong and well balanced across target markets as well as on magnetic sensors and power IC product portfolios. I'm equally pleased with our performance from a product line perspective. We continue to reinforce our market leadership in magnetic sensors, which grew 25% year-over-year. Our Power IC portfolio continue to see very robust sales growing 50% on a year-over-year basis. These results underscore our core value of innovation with purpose, the strong alignment of our R&D investments and portfolio with our strategic focus areas as well as our initiatives to accelerate new product velocity. And finally, punctuating our continued investments and innovation, last week we announced plans to open our newest R&D center in Richardson, Texas, which will expand Allegro's research and development efforts. I'll now turn the call over to Derek to review the financial results and provide guidance for our fiscal fourth quarter. Derek? Thank you, Vineet. Good morning everyone. Before we discuss the financial results, I'll again provide an update on what we are seeing in our business environment. As Vineet mentioned, demand and order patterns remain robust across our focus areas. We again exited Q3 with more than a year of backlog and extended visibility based on design wins. However, we acknowledge the macroeconomic uncertainty and as business conditions continue to evolve, we are continuing to monitor leading indicators for changes in our markets and sales channels. Looking at our end markets and beginning with auto, which represents nearly 70% of our sales, we continue to see significant opportunities for growth. According to recent third-party reports and adjusted to align to our fiscal year, global auto production is projected to be 83 million units, an increase of 8% compared to fiscal 2022 and is projected to increase by another 4% in fiscal 2024. Further, in highlighting the significant e-Mobility opportunity, EV production is projected to increase by 50% in our fiscal 2023 and by another 30% in fiscal 2024. We also continue to see growth in our targeted industrial markets, while demand in our other markets, which include consumer applications, has continued to soften as expected. Moving on to the supply environment, in Q3, we began to see additional wafer capacity, and towards the end of the quarter we started to rebuild our wafer and die banks. We expect to continue to build wafer and die bank in Q4 and believe this will allow us to improve lead times and further reduce our past due backlog. In addition, our supply chain team continues to make progress on securing capacity for fiscal 2024 and beyond considering technology, cost and fab location. Now turning to Q3 results, sales were $249 million; gross margins were 58%; operating income was 30.3%; and adjusted EBITDA was 35.4%. Record sales, combined with strong gross margin performance, contributed to EPS of $0.35 per share, an 84% increase year-over-year. Sales to our automotive customers were $170 million or 68% of Q3 sales, an increase of 8% sequentially and 30% year-over-year. Within automotive, e-Mobility sales increased 15% sequentially and 54% year-over-year. Highlighting the transition to EV and ADAS features are e-Mobility sales were 43% of Q3 auto sales, up from 37% a year ago. Industrial sales were $51 million, an increase of 6% sequentially and 60% year-over-year. And other sales were $28 million, a decrease of 14% sequentially, but an increase of 15% year-over-year. From a product line perspective, magnetic sensor sales were $154 million, an increase of 10% sequentially and 25% year-over-year. Sales of power products were $95 million, a decline of 3% sequentially and an increase of 50% year-over-year. The sequential decline was driven by data center where we allocated wafers to other areas of our business as we see some near term inventory consumption. Sales through our distribution remains strong with 39% of Q3 sales, and we continue to work with our partners to restock inventories to more normalized levels versus the trough levels we saw earlier this year. Once again, no single customer represented more than 10% of sales. And sales by geography were again well-balanced with 26% of sales in China, 24% of sales in the rest of Asia, 18% in Japan, and 16% in both Europe and North America. Turning to profitability, gross margin was 58%, an increase of 180 basis points compared to Q2, driven by favorable mix, continued positive foreign exchange and leverage at our assembly and test facility. Foreign exchange contributed an incremental 50 basis points compared to Q2, and 180 basis points compared to rates at the beginning of our fiscal year. Operating expenses increased by 2% sequentially on a dollar basis and declined as a percentage of sales to 27.7% compared to 28.3% of sales in Q2 and 31.7% in Q3 of fiscal 2022. The effective tax rate in the quarter was 9% lower than our guidance due to a change in the treatment of certain foreign R&D credits. We now expect our full year fiscal non-GAAP tax rate to be approximately 11%. The Q3 share count was 193.9 million shares. And net income was $68.8 million or $0.35 per diluted share, an increase of 13% sequentially in 84% year-over-year. Moving to the balance sheet and cash flow, we ended Q3 with cash and equivalents of $344 million. In terms of working capital, DSO was 47 days consistent with Q2. And in days of inventory were 102 days up from 85 days in Q2. Cash flow from operations was $54 million. Capital expenditures primarily for wafer probe and test equipment were $14 million, and free cash flow was $40 million. Finally, turning to our Q4 outlook, we expect sales in the fourth quarter to be in the range of $260 million to $270 million, and at the midpoint of this range, we are projecting a full year sales increase of 26%. We expect Q4 gross margins to be approximately 57%. And expect operating expenses to be between 27% and 28% of sales. Based upon current tax legislation, we expect our non-GAAP tax rate to be approximately 11% and our diluted share account to be approximately 194 million shares. Using these assumptions, we anticipate non-GAAP earnings per share to be in the range of $0.35 to $0.37. Thank you, Derek. We are pleased to have delivered another quarter of record performance. These results are a testament to our market focus, as well as our innovative product portfolio and considerable engineering talent. I want to thank our teams across the world for their hard work, and dedication and going above and beyond to serve our customers. The markets and applications that we serve are underpinned by strong secular trends, which we believe will continue to expand and drive growth for Allegro in both the near term and through the next decade. Our continuous innovation and differentiated solutions for our strategic focus areas gives us confidence in Allegroâs ability to outperform the markets we serve. I will close on a very positive and satisfying note. As evidence of her emphasis on customer intimacy and push to cultivate more direct OEM engagement, Allegro was recently awarded the Best Cooperation Supplier of 2022 by Wodeer, a Tier 1, and Geely, a major Chinese OEM. We are pleased with this recognition and will continue to find ways to get even closer to our customers as we help them tackle challenging problems. Thank you, Vineet. This concludes management's prepared remarks. We will now open the call for questions. Tanya, please review Q&A instructions. Good morning, everybody, and welcome Jalene. Itâll be good to work with you again. I wanted to start out by probing a little bit deeper into a comment Derek made with respect to backlog, still at a yearâs worth of backlog. Earlier this summer or I guess in the summer you stress tested the backlog, giving customers an opportunity to cancel or defer some of those orders. Have you stress tested more recently that backlog and what was the outcome if so? Yes, Gary. This is Derek. Thank you. Weâve continued to work with our customers throughout Q2 and throughout Q3 and continue to work with them to better align our lead times to deliver what the customers want and quite frankly to work down our past due backlog. As a result of that, we have continued to allow cancellations here into Q3. Cancellations in Q3 were slightly higher than Q2. And backlog is coming down as we expect it to come down but itâs not getting to normalize levels. Weâll continue to work with our customers on that. We still have well over a yearâs worth of backlog, and approximately 20% of that is still past due. Thanks for that color, Derek. I wanted to ask about gross margin in the outperformance there. I know in the first half of the year, there was a tailwind from foreign exchange, but if Iâm not mistaken. Foreign exchange wasnât as favorable throughout the third quarter or was it, and with 57% gross margin guidance for the fourth quarter, obviously, 200 basis points or a little bit less above your targeted range, is there a new view on the long-term targeted range there? Thank you. Yes. So foreign exchange continue to be a pervasive tailwind in Q3. And if I look at our gross margins in Q2, there were 56.2%. And if I took out foreign exchange, Q2 was about 55%. Q3 had about 180 basis points of foreign exchange if I compare that to rates at the beginning of the year. So excluding the complete foreign exchange compared to the beginning of this year, it was about 56.2%. So the mix did contribute an extra 120 basis points in Q3 here. Q4 still has some foreign exchange in there, Gary. So if I take out the foreign exchange in Q4, itâs probably somewhere between 55% and 56% gross margin on an operational basis. Hey, team. Thanks for taking my questions and congrats on another stellar quarter. I wanted to ask about the Polar investment. I know youâre working with UMC and TSMC to expand your capacity. Whatâs sort of a â I guess a realistic timeline where this incremental investment at Polar could start meaningfully contributing to your total output potential? And I guess, I assume itâs going to be a little bit. So could you update us on how youâre feeling about your ability to get more output out of TSMC and UMC in the shorter term? Thank you. Yes. Hi, Josh. Thanks for the question. So first on Polar. We are really excited about this new development. We believe that itâs going to be really important. Itâs a really important development for us and for our customers as we will be able to make the necessary technology investments and capacity enhancements to serve our customers for many years to come. The timeline in terms of getting the new capacity and technology online, we are still probably two to three years out. Itâs largely based on lead time for equipment and qualification of those lines. So we donât expect it to be a meaningful contribution to our wafer capacity for at least the next two to three years. In the meantime, we are working with our other foundry partners to get increased allocation for the coming fiscal year. And as we get into the guidance for the upcoming year, weâll shed more light on that. Appreciate the color. Thank you. For my follow-up, I wanted to ask about inventories. I think in the past, youâd spoken to sort of a 100 to 110 day target. It sounds like youâre making good progress on building up the die bank and slowly lowering lead times. But thereâs still work to do. So I guess, is it a fair assumption that at least for the near or medium term that a 100 to 110 day target is I guess too low? Thank you. Yes, Josh. Good question. This is Derek. Weâre going to continue to build wafer bank in particular here in Q4. And thatâs really an area that during sort of the pandemic and coming out of the pandemic, we struggled with being able to build any wafer and die bank. As a result, our lead times went up, our passed due backlog went up. So we have a real focus on trying to reduce that past due backlog, improve lead times. Weâre making allocation decisions to put product in the right place. So weâre not building inventory at customers. But Iâd expected our wafer bank in particular will continue to build here over the next the short term. Hey, good morning. Thanks for taking the question. I had two. I just want to ask one on the data center. You mentioned a bit of a pause and reallocating those wafers. Maybe you can just elaborate on where youâre seeing that? And then, the second one and just kind of youâre hearing more about 48-volt servers and some changes of data center plans, if any thoughts for that data center business as you look to the calendar year? Yes, Blayne, thank you for the question. So data center continues to be a really important growth vector for us. And we see some really strong momentum â continued momentum with our design wins. Having said that and weâve alluded to this before, we do see a little bit of an inventory digestion in data center. And so weâve made some very proactive and conscious efforts to allocate our wafer supply to areas where we have been stressed for a while. And as Derek pointed out earlier, full â we still have a significant amount of past due backlog that we are trying to serve. So thatâs really what went into making those decisions. When we think about the 48 volts trajectory in data centers, we donât really see any change in momentum there. And thatâs actually underpinned by the design wins we are seeing in that segment. Got you. And then, I just wanted to follow up on the prior question on the Polar investment. I think the prior arrangement kind of ensured you guys kind of positive transfer payments. So i.e., [ph] if Polar had lower utilizations, it wasnât really impactful to you. Iâm kind of curious with this new investment, would you be kind of sharing in the utilization and kind of, is the cost structure any different or is it similar to what you had in place before? Yes, Blayne, this is Derek. The cost structure we have, I would say market-based competitive pricing with Polar right now. Itâs probably in between the pricing of our other partners. And thatâs part of the reason why weâre excited about this. I think the investment will allow them actually over time to reduce the cost with scale with that fab. We have not been paying transfer pricing. The larger owner pays transfer pricing for Polar. And in fact, as a result of this transaction, we'll go from owning about 30% of Polar right now to around 14%, so it will be some slight benefits in accounting. And there won't be any transfer pricing. It's largely market-based pricing with a long-term wafer agreement that's market-based Hey guys, congratulations on the 30% op margin. Just one quick follow up on the Polar investment as, as a minority shareholder are you guys required to contribute any CapEx to this expansion or is that all handled separately by, by Polar? Quinn, this is Derek. No, we're not required to contribute any CapEx. We'll own about 14% of Polar. We've owned 30% right now and have not been required to contribute any CapEx. And that's really one of the wonderful things about this is the Polar Fab will get the investment they need to improve their technology from both One Equity Partners coupled with some proposed CHIPS Act funding. Got it. My question is with your lead time starting to compress as you build die-bank and you said in the near-term it sounds like you're going to be rebuilding some channel inventories. Can you just, I know you're not giving guidance beyond the March quarter, but how are you thinking about the next several quarters? Do you â as you see lead times compress, do you expect a period of, sort of a pause in sales? Or do you think you can continue to grow through this period of compression in lead times and the backlog normalizing over the next several quarters? Yes. Quinn, that's a really great question. I would say what we are trying to do with building wafer and die-bank is really about improving lead times for our customers. It's a customer service issue for us; having said that we would expect no real pause in our sales growth. As Derek pointed out, we have over year's worth of backlog. Our mission right now is to continue to improve lead times for our customers, keep reducing the past due and make sure that we are servicing customers the way we want to service them, and so that's really what the wafer and the die-bank is about. One moment. And our next question will come from Vijay Rakesh and Mizuho Group. Your line is open. And Vijay, your line is open. Yes. Hi. Good quarter and guide here. Just a question on the EV side. I think you guys mentioned EV growing 30% in fiscal 2024, is that right? I'm just wondering if that's conservative, if you start to see the EV side start to expand faster given all the price cuts in the channel? Yes, Vijay, that's a great question. We're just using third-party data at this point. So I think it remains to be seen if the price cuts actually accelerate the EV penetration. We think there's potential elasticity there. So at this point we're just relying on the third-party data here with the 30%. Got it. And in terms of applications, and I think you had talked about how your content is much higher on the EV side with the sensors. You talked about $90 per unit on the EV side. Do you see broadly that driving your market share higher as you go into calendar 2023 fiscal 2024? I guess the question is; do you see that application space expanding in EVs? Yes. Vijay, just to be clear, so the $90 is our content opportunity, and that includes our newest acquisition, Heyday, which brings to us isolated high-voltage gate drivers. I would say that broadly and directionally, our content opportunity on EVs is 1.6 to twice that of what we have in our standard ICE vehicle. And certainly, as you look at the application set, we believe that we have leadership in the applications that are specific to an EV, around current sensing, around motor drivers and then isolated gate drivers. And so we would expect to see share expansion as we â as EVs take off. The Heyday revenue is probably two to three years out at this point. So that's just the nuance there. Got it. And just a quick last question; I think in the past you've mentioned your foundry capacity has been one of the gating factors on your â in your top line. Are you seeing better capacity allocation now from your foundries? Yes. So it is incrementally getting better, Vijay, and I would say the long term looks really good. We have to work through the near term here as the increased allocation starts to make its way through our back end but that's the dynamic we are dealing with. I asked for the congratulations on the strong quarter, and Vijay took a couple of my questions on EV. So maybe, Derek, just one for you, a housekeeping question more so. Just on OpEx, you guys have done a tremendous job kind of getting OpEx down to that 27% to 28% of sales that you guys had alluded to at the beginning of the year, even with inflationary pressures. How should we think about that as we look forward to next year and maybe walk us through some of the puts and takes? Yes. Thanks Aless. Good morning. The way to look at it is that 27% to 28% that we had in both Q3 and going into Q4 still includes some elevated variable compensation as well, which will reset at the beginning of our fiscal year on April 1st. So that will be a natural decrease in that, at the beginning of the year. And as I said before we expect to invest significantly in research and development particularly in these focus areas where we have leadership and want to maintain that leadership so the target is to invest about 15% of sales in research and development, and we were about there in Q3. SG&A came down to about 13% of sales, and I'd expect that as a percentage of sales to continue to come down as that won't grow any more than inflation. What I mean by inflation is sort of normalized inflation. So that's the way to look at OpEx. [Operator Instructions] And I'm showing no further questions. I would now like to hand the conference back to Jalene Hoover for closing remarks. Thank you, Tanya. Before closing out the call, we are excited to announce that Allegro plans to host its inaugural Analyst Day event on March 14th at Convene Rockefeller Plaza in New York with virtual accessibility. Please stay tuned for additional information for this invitation-only event. We appreciate you taking the time to join us today. This concludes this morning's conference call.
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Good afternoon, everyone, and welcome to Snap Inc.'s Fourth Quarter 2022 Earnings Conference Call. At this time, participants are in a listen-only mode. Thank you, and good afternoon, everyone. Welcome to Snap's fourth quarter 2022 earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; Jerry Hunter, Chief Operating Officer; and Derek Andersen, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, slides, investor letter and investor presentation. This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both, GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release. Please note that when we discuss all of our expense figures, it will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and nonrecurring charges. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call. 2022 was a challenging year for our business as we continue to be impacted by macroeconomic headwinds, platform policy changes and increased competition. We've taken action to refocus our investments to support our three strategic priorities of growing our community and deepening their engagement with our products, accelerating and diversifying our revenue growth and investing in the future of augmented reality. We are focused on the most important inputs that we can control, delivering engaging experiences to Snapchatters and improving business outcomes for our advertising partners. We continue to drive strong growth in our community, ending the year at 375 million daily active users in Q4, an increase of 17% year-over-year. Our team continues to innovate rapidly in ways that support the growth of our community. For example, in Q4, we released communities to expand our content offering on-boarded several new media partners, double down on our progress with spotlight and launch new Snapchat Plus features each of which helps drive engagement across our service. For the full year, we generated $4.6 billion of revenue up 12% year-over-year and generated $1.3 billion in the quarter or flat year-over-year, reflecting the rapid deceleration in digital advertising growth. Direct response advertising is a critical way that many companies grow their businesses, as it is one of the most performant and measurable forms of advertising. We have made progress updating and improving our ad platform over the past year across three key areas, investing in observability and measurement, improving engagement and conversion quality, and increasing the volume of high-quality engagements and conversions. In the very near term, it will take time for these improvements to translate into improved top-line growth. Over the long term, we believe that delivering higher return on advertising spend and utilizing our inventory more efficiently are critical inputs to gaining share of wallet accelerating revenue growth and realizing the full ARPU potential of our business. We believe that the camera represents our greatest opportunity to improve the way people live and communicate. Over the last decade, we have made significant advances to our AR software and hardware that have enabled the growth of the sophisticated AR platform that we have today. Over 250 million Snapchatters engage with augmented reality every day on average, and we are investing rapidly and thoughtfully in the future of AR to further expand our leadership position. We continued our path to sustainable profitability by generating $378 million of adjusted EBITDA in 2022 achieving our third consecutive year of positive adjusted EBITDA. We also generated $55 million of free cash flow in 2022, achieving our second consecutive year of positive free cash flow. 2022 brought significant challenges for our business and we have emerged with a highly engaged and growing community, a more focused team and cost structure a clear path to delivering sustained adjusted EBITDA profitability and positive free cash flow and a strong balance sheet with $3.9 billion in cash and marketable securities. We begin 2023 focused on executing against our three strategic priorities of growing our community and deepening their engagement with our products, accelerating and diversifying our revenue growth and investing in the future of augmented reality. We look forward to sharing more about our progress and plans at our upcoming Investors Day on February 16, at our offices in Santa Monica. Thank you. And with that, we will begin our Q&A session. Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Justin Post with Bank of America. Great, thank you for taking my question. Clearly, it's a tough environment for the digital economy overall. Can you talk about one of the some of the bigger first quarter revenue headwinds from Snap from a macro perspective? And then, can you go into the monetization changes that you're making in the quarter that could have a positive longer impact on the model? Thank you. Thanks, Justin. Hey, its Evan. From our recent conversations with our partners, it seems like advertising demand hasn't really improved, but it hasn't gotten significantly worse, either. I mean, obviously, the brand spend is significantly reduced, like we saw in the quarter, but our direct response business continued to grow in Q4. And in general, it seems like our partners are just managing their spend very cautiously so that they can react quickly to any changes in the environment. I think as we look at Q1, the most significant impact thus far have really been the changes we're making to our ad platform. Maybe just like taking a step back here. It's really been on a journey re-architecting our ad platform. We shared a lot over the last year about our improvements to observability and measurability of conversions, things like our conversions API, or data cleanrooms, and multi-party computation, of course, our pixel implementation for e-commerce advertisers. I think we have made good progress there, conversion API adoption continues to grow nicely. And the majority of our revenue is now measured using signals from conversions API, pixel integration scan, or MMPs. And so a lot of what we've been doing is taking this improved measurability and using it to improve the value of those conversions. And so some of the things we've shipped recently in Q1 at the beginning of the quarter are big changes to our in app UI, which we believe will help improve consideration because it aligns the ad UI with the more organic content experience. We've done a lot of work to improve our in-app Web View performance, which we believe can help contribute to improved conversions on the platform. We've updated our user ID graph, which helps improve attribution as well. And some of the early results are promising. So for example, pixel advertisers utilizing one-zero attribution. For them clicks are 40% more likely to result in a conversion. We're also seeing stuff like higher dwell times, higher non-bounce rates, and higher third-party match rate. So overall, obviously, the results are early, but we're excited about these changes we are making. And then, what we're doing is, we're taking our machine learning models, and we're training them on these higher value conversions, which will hopefully help us scale the overall number of those conversions over time. But the net-net, the impact in the short-term is really, that advertisers are experiencing these higher value conversions, but there are fewer of them as our models retrain, and hopefully, as we progress through the quarter, we can improve and increase that volume overall. And obviously, in addition to larger advertisers, these changes really benefits smaller advertisers who are much more reliant on last click conversions for measurement, maybe because they haven't implemented our conversions API, or don't have a data cleanroom, for example. So, this I think, of course, is a near-term headwind to the business, but we're very excited about the long-term potential of these changes, and we're working really hard on it. Yes, thanks for taking the question. So it looks like time spent on content globally was off, I think led by â Hey. I've got a high-level technology question. You guys have been stating forever that you're a camera company. And we've seen an explosion in these new generative AI tools. How do you see those impacting your business? We have examples of Midjourney inside of Discord driving up engagement for them. Do you see the same kind of opportunity inside of Snap? Or do you view this as possibly a risk if people are going to the camera less? How do you see this impacting Snap over the next like, five years? Thanks a lot. Thanks, Ross. We're so excited about the opportunity around generative AI, it's a huge opportunity for us. And we're already investing a ton. A lot of our most sophisticated AR lenses use generative AI technology. And we also see a lot of opportunities just to make our camera more powerful with generative AI. I mean, some simple examples are like improving the resolution and clarity of a Snap after you capture it, or even much more extreme transformations or editing images or Snaps based on a text input. But, if we think longer term, five years, as you mentioned, this is going to be critical to the growth of augmented reality. So, today, if you look at AR, there's just a real limitation on what you can build an AR, because there's a limited number of 3D models that have been created by artists. And we can use generative AI to help build more of these 3D models very quickly, which can really unlock the full potential of AR and help people make their imagination real in the world. You can imagine playing around with your kids wearing AR glasses and pointing. âoh my gosh, there's a pirate ship and a big monster.â And we can bring those to life using generative art, which I think is really exciting. And then, of course, we're also thinking about how to integrate those tools into Lens Studio. We saw a lot of success, integrating Snap ML tools into Lens Studio. And it's really enabled creators to build some incredible things. We now have 300,000 craters who built more than 3 million lenses in Lens Studio. So the democratization of these tools, I think, will also be very powerful. Hi. Thanks for taking the questions. One, I guess I want to just follow back on the initial topic of this, DR was up 4% in Q4, which is actually a pretty encouraging number. But it sounds like you're talking about in Q1 based on your guidance. The changes you're making are going to drive that DR to go from, up forward to down something. Can you just help us better understand, as a DR flywheel and your investment start to kick in, why is it not driving sort of accelerated spend? Why is it actually hurting? I know you've heard a little bit about in the letter, but I think there's a lot of confusion of sort of why that inflection to the negative in DR as your sort of investing to improve it. And then, just on engagement, you made a comment that global time spent was up on content. Was that true in the U.S.? Or was that more of a global comment? And then on friends' stories, you said it was down in Q4? Is that TikTok reels, Shorts, just any color on what's driving sort of the pressure on friends' stories in Q4 would be great. Hey, thanks, Rich. There's a lot in there. So let me see if I can get to all of that. I think, at a high level on the DR business, as I mentioned, the key here is that we're really improving the overall value of those conversions. But, as a result of volume of those conversions has decreased as our models relearn on the conversions that were driving, and hopefully, obviously we can expand that volume over time. But it's also requiring advertisers to adapt, for example, so they need to see that increased volume show up, excuse me, that increased value show up in their third party measurement tools, for example. And then, go in and increase their bids to reflect that increased value. And so overall, that sort of disruption, and again, when you layer in, of course, the changes to the app UI, and even things like our sales reorg channel redesign this quarter, it's a lot all at once. But frankly, we'd rather rip the band aid. And so, we waited to release a lot of these changes. In q1, I know Jerry has been eager to make a lot of these changes. But we know that that Q4 is critically important for our advertising partners, it's just vital to their businesses. And so we held a lot of those changes to Q1, and we're making them all at once. So they're disruptive, but I think the really exciting thing is that, it is having the intended impact in terms of value to advertisers. And frankly, the expected impact in terms of the disruption to our business. So, we're going to continue to work through it but again, the improvements we're seeing in terms of third-party match rates, dwell time, non-bounce rates that's all really exciting. I think an overall an input to improving return on advertising spend for our advertising partners. And then, I think I said about content time spent so I'd say overall content viewers continue to grow content products, including Spotlight, friends' stories, creator stories, partner content. That's true in the U.S. as well where our content viewership is growing, and globally overall, time spent watching content on the platform continues to grow. But time spent watching friends' stories does continue to be a headwind to total time spent. So if you think about our investments here and what we're doing to re-accelerate time spent with content, the most important thing is really increasing Spotlight viewership and engagement. We think we've got a lot of headroom here. We're excited about the 100% year-over-year growth on time spent and 30% year-over-year growth in Spotlight MAU. We're also continuing to invest in new creator tools and growing our creator ecosystem to increase creator content supply and diversity. That was definitely a bright spot in the U.S. where time spent watching creator stories grew 10%, year-over-year in Q4. And then, we're making a lot of product improvements and innovations around friends' stories, including things like community stories, which we think are really valuable to our community. And then, lastly, obviously onboarding new media partners who are driving significant viewership and time spent as we shared in the letter. I do think short video competition is going to continue to be very intense. Our community loves watching entertaining short videos. So what we're really trying to do here is just play to our strengths around our camera and messaging. We benefit from the enormous amount of video creation happening on our platform. Over 5 billion Snaps created every day, and this network of close friends who really enjoy sharing videos across our platform. So I think we'll continue to play to our strengths there. It's part of what's contributing to the great growth we're seeing, in spotlight. Thanks for taking my questions. Just to kind of go back to the ad disruption in the near-term kind of laid out on Page nine. I guess one of the questions I have maybe I'm just not really understanding it, is the way to think about this, the value of the advertisers is going up, because in the near-term, you're sort of increasing the effective ad load. So we should think about platform wide pricing going down in the near-term. Is that right? Or am I sort of off there, is the first one. Then the second thing, one of the important aspects of driving direct response business and sort of data capture and being able to build cohorts of users? Can you just talk to us about some of the data capture that you already have and how you think about the potential to sort of cohort these users to drive a large DR business? Thanks. Hey, Brian. It's Derek speaking. I'll take the first one. Just in terms of what we're seeing in terms of inventory and the experience there, what you're effectively seeing is we've had some growth of impressions just as we've invested in the creator stories product in particular, that's been very popular, both from posting, and from an engagement perspective. And you've seen that contribute, sounds fairly an ad load is driven by positive engagement with their product. And then in terms of, what we're seeing in sort of the overall ecosystem of the auction, what we're doing here is using our inventory significantly more efficiently. And so that has the effect of actually returning impressions back into the auction, which have to be absorbed across other GDBs. And sort of puts downward pressure, all else being equal on the contestation and the auction. And so, obviously, that increases the opportunity for ROAs and return for advertisers. And all else being equal, we're seeing that do is translate into lower CPMs in the short-term. But the improvements that we're making to the DR platform and translating into longer dwell times, lower bounce rates, and some of the metrics that have been shared with you. Short earlier, really are improving the value of the auctions we're driving. And so that is more performative for the advertisers. So in the very near-term, this disruption comes through with the pressure on the supply and the disruption to the volumes that are being driven, but the value is clearly higher. And we can see that already coming through. So hopefully, that gives you a little bit more context on what's happening in the sort of supply demand environment there. I'll turn it over to Jerry, for the second part of your question. Yes. Thanks, Derek. Brian, thanks for the question. Let me just give you a little about how we think about this data. So we have a bunch of ways that we're collecting data. So conversion API, pixel, data cleanrooms. It's like Evan talked about earlier, multi-party computation, scan and MMP. And all of these signals feed into our system and give us a better view of what's happening with customers and conversions. Add to that the changes that we made to the Web View and to the ad format, so we get better signal about how our customers are interacting with our product. These all come together to train our ML. And that gives us better targeting over time. So the way we think about this is sort of a circle where there's constantly information that's coming in. We make changes in each of these products, as well as making changes -- customers make changes to their campaigns, and then we make changes to the ad format, we feed it into the ML and this sort of circle gives us better and better targeting over time, which we think still leads to better CPMs across the board and better ROAs for our customers. Okay, thanks. I think I just asked one question on the monetization of Spotlight. It's something that's gone back and forth on for a while now. What's the -- I don't want to see, what's the holdup in monetizing spotlight, but I do kind of want to ask that, like -- what are the factors that you're looking for, that allow you to be a little bit more aggressive in monetizing what's clearly a really strong growth asset for you? I know you don't want to under undermine the user experience, but when do you make that on-off decision or that full on decision? Thank you. Hey, Mark. This is Derek speaking. I can take that question for you. I think for context, just to start, and I hinted at this a little earlier in the prior question. We definitely believe that we are demand constrained and not supply constrained at the moment. And just sort of put a finer point on that, we saw 8% impression growth in the most recent quarter, and that translated into a 9% decline in eCPM. So clearly, demand is the sort of lacking portion of things there. And obviously, that's why so much focus is on improvement in the DR business so that we can utilize our inventory and monetize it, take share. I think we're pleased with what we're seeing also in the growth and supply already. The investments that we made in creator stories in the most recent quarter translated into really solid volumes on posting and that translated into really good engagement. And so that's driven from impression growth in the most recent quarter that we're really pleased about. In terms of Spotlight, though, to answer your question, specifically, we did share last quarter that we would be expanding the testing of Spotlight monetization. And we did do that in Q4 and we're pleased with what we saw. It remains really early in that testing. But in the testing, we've seen thus far, the yield we're getting on ad served in the Spotlight is equal to and in some cases, higher than the yield we're realizing currently for similar ads elsewhere in the app. So again, this is really early. But that's very encouraging data in terms of what it means for our optimism about the potential for Spotlight to become a really meaningful portion of our overall content business in the future. So we're going to continue to advance our testing on Spotlight in the months ahead and continue to optimize the ad experience for both our community and advertising partners. But as I said earlier, given we are demand constrained, the urgency to ramp up monetization, there is limited and focusing on the advertiser and the customer experience is the most important thing in the very near-term. Thanks so much for taking the question. Maybe if I can pivot to the cost side of the equation and just try to tie a few loose ends together. So it sounds like Evan earlier said, there's obviously some key areas to invest in, that will act as a headwind to margins, even as you exit '22 and go into '23. You've obviously done a cost cutting initiative coming out of '22. And then, there's elements of the business would improve on the back of the DR initiatives, as we move through 2023. Can we get a little more granular on some of the headwinds versus the tail winds and the cost structure and tying it back to how we should be thinking about leverage in the business when you think about your investment cadence versus sort of implementation of the cost cutting initiative, and then an improved revenue profile was removed through 23? Thanks so much. Hey, Eric. Itâs Derek speaking. I can take that one. I think to start off, when we approach the reprioritization, that we announced near the end of Q3, where we shared that we were going to be removing $500 million from the cash cost structure. I think it's important to just understand that we were very thoughtful in our approach about that, because we really wanted to achieve two goals. One is, we wanted to make sure that we were clearly building a path to adjusted EBITDA profitability and positive free cash flow, even at lower growth rates. But we also wanted to make sure that each of our three strategic priorities were fully funded. So that we were fully funding the efforts to continue to grow our community and deepen engagement, the work that we're doing to improve our DR platform in order to accelerate revenue growth, as well as the efforts around diversifying our revenue growth just see with Snapchat plus. And then also, of course, being able to continue to invest in the long-term AR business. And so what you can see as we've been able to make sure that we have a cost structure that fully funds those three priorities, but we're still on track to deliver all of the $500 million in cost reduction. So the first 50 million there is coming out of fixed content reductions. And you should see that fully reflected in the fixed component of the content costs in Q1. And similarly, on the cash operating cost structure, the objective there was to remove $450 million. And we were continuing to wind down various operations through the course of Q4. So you'll see the full benefit of that cost reduction again, in Q1, just as we anticipated. For example, our actual headcount numbers are -- at the end of the current quarter are down 20%, from the peak in Q2. So it gives you a sense of the progress we've made and managing down the cost structure and getting ourselves to the prioritized cost structure. So then going forward, first, it's like, we remain long-term oriented when we're thinking about the investments in the business. So there are going to be things that are incredibly compelling for us to invest in, in the business. And for example, we just made the investment in creator stories, obviously, a very compelling investment, immediately resulting in an 8% increase in inventory. So there are going to be investments like that along the way that are incredibly compelling. What we have to do is remain one very disciplined on the aggregate cost structure, and very focused on prioritizing our investments to make sure that we maintain that path to adjusted EBITDA profitability and consistent free cash flow generation. It's now our third consecutive year of adjusted EBITDA profitability, second consecutive year of positive free cash flow. And that's important to controlling, our financial destiny going forward and making sure that we can fund the investments in the future of our business. And also making sure that we have the cash and cash flow to manage any dilution that we experience in the business. But you see, we've been active in doing. So hopefully, that gives you a sense of like, where we are on the reprioritization of the cost structure and funding our priorities, but also how we're thinking about balancing that discipline going forward. Thanks. Two, if I can. First, you've talked a lot about the headwinds to time spent in friends' stories, but can you just talk about what you're seeing in the core chat experiences? Are you seeing growth in whether it's time per user, visits per day per user in that core kind of anchor engagement that feeds the whole business? And then, the second one was just in the letter, you mentioned, discover content, moving into more places? Curious if you expect this to be more of a driver of engagement or monetization, or both? Have you started doing anything that you can kind of share early learnings with us here. Thanks. Thanks, Lloyd for the question. Yes, we're incredibly excited about the momentum we're seeing around our messaging service, visual messaging is really core to the Snapchat experience, and what helps people connect with their friends and family, and of course, enhances their relationships. So we're really excited about that momentum there. And of course, the work that we're doing in our camera, around augmented reality and helping our community express themselves with AR lenses and try and get new utility out of augmented reality with things like try on as well. So those core experiences around the camera and messaging are obviously really exciting driving a lot of growth for us. And also things like the map, for example, as we mentioned, I believe in the letter, Q4 Snapchatters open places on the map more than twice as often as they did in Q4 of 2021. So, definitely a lot of strong growth engagement around the core product value of messaging and we're really optimistic about some of the new products we have come in around that as well. Thanks for taking the questions. I have two. First just to circle back on friends' stories and the strategy there. It sounds like part of the goal here is to get people to shift into Spotlight more? Is the idea to shift them into that tab in particular or to put Spotlight videos within friends' stories? And then can you also just talk about how revenue sharing with creators will work on Spotlight? Thanks. Yes, sure. So at a high level, what we're seeing with friends' stories is that people still really want to watch stories from their close friends and their family. It's more the longer tail of their friends where they prefer to watch a really entertaining video than maybe a story about somebody's day-to-day life. And so that's really where we're trying to understand where that sort of breakpoint is for different members of our community and help them discover Spotlight content sort of at that moment as they start to become less engaged with friends' stories. So some of that, for example, is creating entry points even in Discover, right, so that people can tap directly into Spotlight content from that four-tab content experience. And in addition, we're also helping drive folks to the Spotlight tab itself, especially. For example, if one of the creators they are following has posted a new Spotlight video, we can let folks know and bring them into spotlight that way. So that's, I think, kind of how we're thinking about driving more top of funnel to Spotlight at least in the near-term. As it pertains to revenue share with creators, we do a small amount of sort of content seating, for example, with sort of contests and things like that around Spotlight, but we have not yet rolled out sort of a large-scale revenue share. In fact, what we're seeing a lot of creators do is use Spotlight to get distribution for their stories, so to become discovered in Spotlight, drive people to subscribe to their creator stories where we then do revenue share with them. And that is actually, I think, quite beneficial both to our business and creators because that subscription model, it provides much more stable revenue for the creators. And I think that's something that they really value compared to Spotlight, which is a bit more hit driven. So if they've got a great hit video, they can use that to drive people to their story and then monetize that more durably over time and build that relationship with their audience. Thank you. This concludes our question-and-answer session as well as Snap Inc.'s fourth quarter 2022 earnings conference call. Thank you for attending today's session. You may now disconnect.
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EarningCall_777
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Good day and thank you for standing by. Welcome to the Full Year and Fourth Quarter 2022 Allegiant Travel Company Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you, Justin. Welcome to the Allegiant Travel Company's full year and fourth quarter 2022 earnings call. On the call with me today are John Redmond, the Company's Chief Executive Officer; Greg Anderson, President; Scott DeAngelo, our EVP and Chief Marketing Officer; Drew Wells, our SVP and Chief Revenue Officer, Robert Neal, SVP and Chief Financial Officer; and a handful of others to help answer questions. We will start the call with commentary and then open it up to questions. We ask that you please limit yourself to one question and one follow-up. The Company's comments today will contain forward-looking statements concerning our future performance and strategic plan. Various risk factors could cause the underlying assumptions of these statements and our actual results to differ materially from those expressed or implied by our forward-looking statements. These risk factors and others are more fully disclosed in our filings with the SEC. Any forward-looking statements are based on information available to us today. We undertake no obligation to update publicly any forward-looking statements whether as a result of future events, new information or otherwise. The Company cautions investors not to place undue reliance on forward-looking statements, which may be based on assumptions and events that do not materialize. To view this earnings release as well as the rebroadcast of the call, feel free to visit the Company's Investor Relations site at ir.allegiantair.com. Thank you very much, Sherry, and good afternoon, everyone. I'd like to begin by taking a moment to thank our team members for all their efforts this past year. 2022 was yet another difficult year. The operation was hit with countless challenges from COVID spikes to hurricanes and most recently, winter storms, but you stepped up and made sure our customers were taken care of. Your commitment to safety and service is remarkable, and I am proud of how you responded to these challenges. You likely heard the news that our COO, Scott Sheldon has made the decision to resign to pursue other opportunities. I want to thank Scott for his many years of service and dedication to our airline, and we wish him all the best in his future endeavors. With Scott's departure, Greg Anderson will continue to serve as President and will assume oversight of the Company's operational teams. As you all know, Greg has been with the Company for more than a decade. There is no better person to take on this role. He is highly respected both internally and within the industry, and I have the utmost phase he will execute on the numerous strategic initiatives we have in store this year. I'm pleased to report that despite the operational difficulties during the first half of the year, the last half of 2022 is a testament to the success of the challenges we implemented. We exited the year with a controllable completion percentage of 99.5%. Earlier this year, I noted we are a margin-focused company, and with operational improvements, margins would grow. This is exactly what happened we saw during the fourth quarter. We recorded an operating margin, excluding employee recognition bonus and Sunseeker special charges, just shy of 16% for the quarter. In addition, we generated more than $140 million in EBITDA during the quarter. Underpinning this strong financial performance is a robust demand environment that shows no signs o slowing. Fourth quarter TRASM of just about $0.14 with the highest quarterly TRASM in company history. This helped contribute to a record-setting total revenue for 2022 of $2.3 billion. We have great momentum heading into 2023. In regards to our ongoing negotiations with our flight attendants and pilots, it is our expectation to have an agreement in principle done with our flight attendants by midyear. To date, we have reached tentative agreements on 2/3 of open sections. The pilot negotiations are progressing as well with tentative agreements reached on about half the open sections. In an effort to expedite the bargaining process and secure an agreement in principle, the Company and the union jointly requested NMD mediation. We look forward to working collaboratively on an agreement that our pilots are proud to support while providing the Company with the ability to continue to fly a safe, reliable operation and remain positioned to grow profitably. It is our expectation to have an agreement in principle done by midyear. Touching on Sunseeker, we continue to make progress towards completion. Construction crews are back in full force. Much of the remediation work related to Hurricane Ian is now behind us. Further investigation necessitated an increase in total estimated damage related to Ian resulting in additional special charges of $5 million in losses. We continue to believe all Hurricane Ian damage will be fully recoverable by insurance. In addition, a significant thunderstorm followed Hurricane Ian in early November prior to Ian damage being fully remediated, resulting in additional damage as well as a small elevator fire in November. Losses related to these events were recorded in the amount of $10 million and $1.2 million, respectively. Both events are covered by insurance. Recorded losses were offset by $18 million insurance proceeds related predominantly to Ian damages. As insurance recoveries are received during the coming months, we will record these special charges offsetting the recorded losses. Also worth pointing out again, we have business interruption insurance, which we believe will cover the period May '26 and the pre-hurricane scheduled opening date to the opening date of the resort. Given the delays caused by Ian in the subsequent storm, we pushed the first accepted reservation date to October 15 of this year. We are still working through remediation time lines related to the recent storms, but intend to provide a firm opening date at our next earnings call in April. We have not provided any guidance in the release on Sunseeker operations due to uncertainty at this early stage on the opening date. In the Q1 2023 earnings call in April, we will provide guidance on preopening expenses leading up to opening the resort, revenue, EBITDA and operating income for the year 2023. We will also update final construction budget numbers and a business interruption update to the extent we have information. We also intend to extend to any of you who are interested, the opportunity to tour the resort in early May. Sherry Wilson will be happy to coordinate with you dates and times in April this year. In regards to our partnership with Viva Aeorbus, we still expect all the necessary approvals will be in place, including category one status in Mexico in the first half of this year. As you saw in the release, we are returning to providing annual guidance as we did in 2019. At the end of each quarter, we will update the annual guidance, if appropriate, given the results to date and future forecasts. As a reminder, we will be segment reporting as it relates to Sunseeker in 2023. In addition, we will be comparing to 2022 and not 2019. We have progressed beyond 2019 results and field moving to prior year or 2022 is a more comparable and relevant going forward. In closing, Allegiant has a strong history of shareholder returns, and I am pleased to report we bought back 377,529 shares during the fourth quarter at an average price of $78.94 a share, totaling $29.8 million. Furthermore, our Board approved increasing our repurchase authority to $100 million. This authorization reaffirms the Board's conviction in both future results and balance sheet strength. John, thank you, and I echo your sentiment around wishing Scott the best of luck in his future endeavors. He and I have worked shoulder to shoulder for nearly 15 years here, which has been an amazing and fun ride. One of the best compliments I can provide, Scott, is the organization is in terrific hands. We have an incredibly strong team with an incredibly bright future. As announced, Keny Wilper will take on the interim COO role. Over the past 20 years, Keny has demonstrated his strength as an operator and as an exceptional leader. Additionally, Tracy Tulle will serve as our Chief Experience Officer. Tracy has vast operations experience overseeing both flight ops and in-flight as well as sharing our customer experience leadership team. In this new role, she will focus on improving the customer-centric experience for our team members while also helping to develop leaders internally and drive organizational alignment. Finally, and I have to admit it's pretty awesome to be able to say, Robert Neal is now our Chief Financial Officer; and Drew Wells is our Chief Revenue Officer. BJ and Drew are both A plus leaders, the best of what they do, and I feel no further introduction is needed, given they are already well known to our investors. I look forward to working even closer with and supporting each of them in their expanded roles. While I have mentioned only a few names, the depth and breadth throughout this organization is the best and strongest it has ever been. As we look forward to the amazing opportunities in front of us, I can speak for the team when I say we are fired up in establishing Allegiant as the most exciting story in the space. While 2022 brought its unique -- its own unique challenges, we achieved a lot during the past year. We added more than 900 team members, bringing our total team member count to more than 5,630. These team members enabled us to grow our fleet by 13 aircraft and fly 14% more ASMs as compared to 2019. The first half of 2022 experienced unique challenges with the Omicron spikes. This resulted in labor constraints and unplanned absences during peak leisure travel periods, which led to elevated cancellations. The operating environment had a significant financial impact. This operating environment had a significant financial impact of over $100 million in IROP costs, including fuel and crew costs, lost revenue and going above and beyond by providing cash compensation to those customers impacted by canceled flights. To combat these challenges, our planning and operational teams worked closely together in refining the schedule to adjust for this environment. While this came at a cost to aircraft productivity, our operations strengthened quickly as the second half of '22 saw a meaningful improvement controllable completion was 99.5%, more than 2 points better than the first half of '22 and near our industry-leading controllable completion results of 2019. I am pleased to report these much improved operational results had a positive impact on our financial results. The impact from our irregular operations in the back half of the year had a total financial impact of $30 million. This is $70 million less than the first six months of '22. These improvements showed up in our financial report as we closed out the December quarter with a 16% adjusted op margin and this is substantially higher than our initial adjusted operating margin guide of 8%. These impressive results were achieved despite the impact to the quarter from the winter storm over the holidays. Another important element of 2022 is a significant progress we made towards our systems transformation. In 2021, we made the decision to move from certain core proprietary software systems to best-in-class systems such as SAP, Navitaire, Trax and NAVBLUE. We remain on track to go live with the first three of these key systems in 2023. NAVBLUE should follow shortly after. Such systems have been key investments to more efficiently scale the organization. In addition, we continue to track ahead of schedule on the incorporation of our new Boeing MAX aircraft as we expect our first delivery near the end of the year. We intend to place these MAX deliveries at these early MAX deliveries at our Orlando Sanford base. And as John touched on, one of our highest priorities remains finalizing labor contracts that our crew members deserve. So far, we have put a great amount of effort into updating our agreements with both our flight attendant and pilot unions. It is our goal to get both of these deals across the finish line as soon as possible. While we are unsure around the exact timing of getting these deals done, we have incorporated the potential cost in the back half of the year within our 2023 guidance. Please realize that the actual increases in cost will depend on the economic terms reached and the timing of the agreements. As a reminder, although these contracts will be cost headwinds, we expect them to increase momentum towards restoring staffing levels and optimizing aircraft utilization, but we are not assuming any improved productivity in our full year '23 capacity guide, BJ will provide more full year guidance detail momentarily. We will continue our focus on strengthening the operation and are excited about what's in front of us in '23. As we've highlighted on prior calls, we have laid the foundation for executing on these items and our teams across the organization are making steady progress on the implementations of the new systems and other initiatives such as labor contracts, Sunseeker, Viva and Boeing. These leadership changes announced will further support these initiatives. As we progress further into '23 and have better vision on the completion time frames, we expect to host an Investor Day to more specifically outline expected contributions from these strategic initiatives. More information will follow on that front. Thanks, Greg. Fourth quarter saw continued strong leisure travel demand for Allegiant across both web and app traffic to allegiant.com as well as passenger segments bulk, capping off a record-setting year for Allegiant on both measures. Surging awareness and preference for the Allegiant brand, along with our direct-to-consumer distribution approach, continues to give us an advantage in capturing demand by being able to satisfy the two most important buying factors for leisure travelers, low fares and non-stop flights. For full year 2022, 136 million web users came to allegiant.com, up 24% from 2019. And notably, despite the fact that no new route -- that new route grows limited, excuse me, new web users to allegiant.com were up by nearly 40% from 2019. Why? Because as I referenced the past two quarters, our addressable customer audience continues to grow as more new customers enter the ULCC category and consider Allegiant for their leisure travel needs. Their seeking relief from sky high fares and looking to avoid the risk inconvenience and time associated with connecting flights through crowded airport hubs. What's more, 77% of our allegiant.com users came via our most direct and lowest-cost channels. That's direct URL, our app, e-mail marketing or organic search. That's up 37% from 2019. It means we're relying less and less on paid advertising as awareness of and preference for the Allegiant brand continues to grow in a scalable fashion based on our fixed investments like Allegiant Stadium and our Live Nation partnership as well as our Always Rewards loyalty programs, both co-brand credit card and non-card. We continue to outperform expectations with our co-brand card program, ending the year with more than 400,000 active cardholders and more than 150,000 new cardholders acquired in 2022. That's more than 40% higher than we had acquired the previous highest year, which is 2021. As a result, the co-brand card program drove total compensation of more than $100 million in 2022. In addition, our non-card loyalty program, Always Rewards, added 2 million new members last year and now totals 15 million members. In 2022, 3.2 million customers, nearly 70% of our total unique transacting customers were active members of the Always Rewards program. And on average, they exhibited 39% greater booking frequency than non-members and an average spend per booking that was 36 higher -- 36% higher than non-members. This left in average spend was driven by higher take rates in air ancillary products as well as higher attachment of third-party products like hotel and rental car. This customer behavior reinforces the continued opportunity that Allegiant has to sell beyond the aircraft in order to achieve greater revenue per passenger growth that can outpace and is not constrained solely by capacity growth. In terms of our customer makeup, Alecensa elite subset of Always Rewards members and cardholders, just over 0.5 million customers, which is about 15% of our total unique transacting customers for the year, fly three or more times with us and drive roughly 60% of both total passenger segments booked and total revenue for the year. In the past week, we surveyed a representative sample with more than 3,000 respondents from this group of frequent flyers to understand why they traveled with us and what their future and travel intention was. And the news keeps getting better for Allegiant. Of these Allegiant frequent flyers, nearly 80% travel for leisure only and nearly 20% traveled for bleisure, both business and leisure. More than 40% said they stayed with family or friends and nearly 40% said they stayed at their second or vacation home. That means around 80% fall into types of travel that are the most resilient during negative economic climates. To validate this, we ask these customers the extent to which they expected their travel plans with Allegiant to be impacted given the prospect of worsening economic conditions. And here's what they told us. Basically, have said that economic considerations would have no impact on their flying behavior with Allegiant in the next 12 months and nearly one quarter said that they would be more likely to fly with Allegiant in the next 12 months. It's common for many to think that ULCCs have an infrequent and transitory customer base. But that's not the case for Allegiant. We have a core base of loyal frequent flyers who drive a majority of our revenue, while at the same time, we continue to add new customers that are defecting from other airlines, namely Southwest and legacy carriers to our customer base and record numbers. And in looking forward at forward-looking searches for travel at allegiant.com searches for our all-important travel season during spring break and summer are up by 40% to 75% versus last year, which, as we all know, was a historic high year for bookings and revenue. Put simply and in conclusion, Allegiant has a trifecta when it comes to our balanced customer base. We have a solid core of frequent flyers who show no signs of retracting their travel behavior with us in the upcoming year regardless of the economic climate. And at the same time, we are also showing lift across all existing repeat customers that are members of our loyalty programs. And we're seeing a continued surge in new customers that are coming to Allegiant in record numbers from other airlines because they're seeking low fares and non-stop flights along with our strong and growing assortment of asset-light, high-margin third-party leisure products that we make available at allegiant.com. Put another way, all of these customer segments are seeking to live what we at Allegiant refer to as the non-stop life. Thank you, Scott, and thanks, everyone, for joining us this afternoon. I'm extremely pleased to close out the year with a record $2.3 billion in total revenue, easily the best number in company history and 25% higher than the previous best in 2019. When accounting for seasonality, nearly all metrics improved sequentially through the year to produce the record results. And while we remain flexible through a lot of the year to find the right capacity levels, the teams continue to optimize incredibly well within shifting constraints to produce great results. The fourth quarter had the most stability throughout the year, and our results reflect that. Fourth quarter revenue came in nicely above the range at $612 million and 32.6% above the fourth quarter of 2019, despite ASMs ending approximately 2.5 points lower at the system level and 3 points lower for scheduled service. We did take a benefit of approximately $9.6 million associated with updated guidance on breakage factors for the co-branded credit card and the initial guidance for the Always Rewards program. Even excluding that benefit, the divergence between revenue and ASMs produced an all-time best TRASM just under $0.14 and nearly 20% higher than 4Q 2019. The yield performance in the quarter was the major upside catalyst, particularly in December. The roughly 75% sequential improvement exceeded our expectations and drove almost 6.5 points of upside to the quarter. Total ancillary per passenger exceeded $70 for the first time at the quarter level and total revenue per passenger of 151 was also an all-time high. On the weather disruption front, Winter Storm Elliott saw a revenue loss of $8 million and nearly 2 points of lost capacity. The close-in demand, some of which was rebooking of impacted customers and some incremental was exceptional around the holidays to round out the year. Further, while the rest of Florida bounced back quickly from Hurricane Ian, Monte Gordo did see continued softness through the quarter and was a headwind of just under the expected 3 points. The impact should temper a bit into the first quarter but we still expect a roughly 1.5 point headwind to total revenue as the region continues to recover. In November, we opened our 24th aircraft, crew and maintenance base in Provo, Utah. Since our entry to the market in 2013, we've been the low-cost option for Provo and the surrounding areas. We began serving our 13th route Nashville on February 15, which is coincidentally our 10-year anniversary in the city. As we turn toward the New Year, we have a somewhat different than usual story. Our midpoint year-over-year ASM growth rate of 4% would be lower than any full year other than 2011. First and foremost, continuing the successes of the second half of 2022 and ensuring a stable and solid operation is paramount to 2023. Second, our EPS guide includes a continued elevated fuel cost per gallon, which will temper the amount of off-peak growth as we continue to balance fuel and demand in non-peak periods. First quarter growth will be close to 1% year-over-year. The second and third quarter should be a bit higher than the first before a high single fourth quarter growth rate. Perhaps worth reminding that the first quarter is still slated to be 20% larger than the first quarter of 2019. The Omicron real comparison of 1Q '22, coupled with a continued robust demand environment and low growth rate should provide some runway for great unit revenue metrics. I'm expecting year-over-year TRASM growth in the mid-20% for the first quarter, and I'm extremely encouraged by the peak spring break outlook. Load factors are higher and the discrepancy between the search volumes Scott and Angela mentioned and available inventory bodes well for yield results. Through the rest of the year, we are not contemplating material changes broadly to the economy. While we read and hear the same headlines, we have not seen any booking impact from our leisure customer base and have forecasted as such. Additionally, the network will be the most mature of any time in Allegiant's history in terms of markets in their first 12 months. Approximately only 4% of the on-sale scheduled for the first half of '23 is in that maturing window. We should also see the rollout of our Navitaire commercial platform and the expansion of our Allegiant Extra program, both providing air ancillary tailwinds weighted more heavily to the second half of the year. Collectively, this leads to expect unit revenues in the positive mid-single-digit percent range over the last nine months as we hit more reasonable and challenging comps. There are significant catalysts for Allegiant's revenue capabilities through 2023 and beyond. We are setting an incredible foundation for us to continue to capitalize on what remains a truly remarkable leisure demand environment. Thanks, Drew, and thank you to everyone on the call for joining us today. This afternoon, we reported fourth quarter net income of $52.5 million. Adjusting to exclude the 2022 employee recognition bonus, special charges related to Sunseeker, earnings per share was $3.17 in the quarter, well above our initial guidance. Catalysts behind the strength of our fourth quarter results included, of course, the sustained strong demand environment, operational improvements, which brought decreased irregular ops costs, a favorable -- more favorable fuel cost than we had anticipated and a better-than-expected non-fuel cost performance. Fourth quarter unit costs, excluding fuel, employee recognition bonus and the Sunseeker special charge was 7.56 cents, up 12.2% as compared with the fourth quarter of 2019 on 10.9% more ASM capacity. The cost increase as compared to fourth quarter '19 was primarily comprised of 5.5 points for reduced aircraft utilization, 3.8 points in labor productivity and 1.5 points related to Winter Storm Elliott. As you've seen in our release, we will temper capacity growth in '23 to ensure that operational integrity is prioritized. Even with this reduced capacity, we are forecasting full year airline only earnings per share of approximately $7. On an assumed average fuel cost of $3.60 per gallon and increased labor cost assumptions related to pilot and flight attendant contracts, which for our guidance purposes, would begin midyear. With respect to Sunseeker, we expect to record our normal quarterly operating expense run rate of roughly $5 million to $7 million in each of the first two quarters of the year. We are not prepared today to provide -- to guide full year preopening expenses or operating income associated with the property until we have a firm opening date on our next earnings call. Turning to CapEx. We expect total CapEx for the airline in 2023 to be roughly $700 million, comprised of roughly $560 million related to aircraft, engines, PDPs and induction costs and the remaining $140 million coming from other airline CapEx. In addition, we expect deferred heavy maintenance costs similar to levels observed in 2022 or roughly $55 million. We expect to receive 2737 MAX 8200 aircraft during late 4Q '23. While it's certainly possible for these aircraft to be in service by year-end, we are not -- we are planning conservatively for operational requirements of onboarding a new fleet type at the end of the year and have chosen not to plant ASM capacity for these aircraft until the early weeks of 2024. We remain in discussions with Boeing to finalize our 2024 delivery schedule, but we can share that directionally, we're planning to take roughly two aircraft per month throughout next year based on what we know today. For 2023, we plan to induct 7 A320 aircraft into the operating fleet throughout the year, two of which have already entered revenue service in January and three of which were owned a non-property at the end of 2022. We expect the bulk of our CapEx spend during 2023 to be debt financed and have been pleased with the level of financing support and attractive terms proposed to us thus far. Although 2023 will be a heavy CapEx year for Allegiant, we plan to maintain total available liquidity of roughly 2x our ATL balance and expect to end the year with roughly $1 billion in cash and investments. In closing, I'd like to add my thanks to our more than 5,600 team members for their incredible efforts during 2022. After a very challenging first half of the year, the team came together in the back half to deliver results, which reduced the financial impact of the regular operations by over 70% as compared to the first two quarters. We're extremely proud of how the team turned the story around, particularly in the fourth quarter and excited about the momentum we have stepping into 2023. I just wanted -- so I just wanted to think about some of the puts and costs -- putting things across this year. Trying to think about what the impact adding the flight attendant and pilot contract for half a year and then slowing capacity growth will mean I think the last time we talked about cost was kind of flattish on high single-digit growth ex-labor contracts. So just trying to think about the walk from there, underlying your current EPS guidance? Hey, Catie, it's great to hear you. This is Greg. Why don't I kick it off here? So just on your point on the -- as BJ mentioned, beginning in the back half of the year, so July 1, we've incorporated labor deals, both CBA deals for our pilots and flight attendants. And for a half year basis, what I would expect this to be about 1/3 of CASM hit for a half year again basis. In terms of some of the other puts and takes, IROP, I think that would be a tailwind. So call it about two to 3 points year-over-year on the IROP side, we'll see there a slight headwind in inflation, the D&A, I think there's going to be a slight headwind there from about a point or two based on lower productivity. I mean you called out the ASMs being lower than what maybe we are anticipating at that 10%. I think that's worth roughly 4 points to year-over-year. But the other thing that's probably just worth mentioning is the bonus this year -- I'm sorry, last year '22. We carved out that recognition bonus, but this year, that -- in '23 that will be included in so that too will be a headwind. But really, if you kind of compare those two year-over-year, I think they kind of wash each other out. But I'll pause there. Obviously, we're not giving formal guidance, if anyone else wants to add anything or if that help to answer some of your questions there, Catie? Yes, that was great unless anything else to add. I do have a follow-up. So this might be front running some of the initiatives you're going to talk about at Investor Day. But now you set a new record ancillary per passenger over $70, should we think about growth from here being a little bit more tempered going forward? Like you hit a lot of little fruit or some of the new levers that get along with Navitaire? You think there's upside to that? Just kind of like, I don't know, blue sky like next couple of years type number, if you have it. Yes. Thanks, Catie. Glad to have you back. Yes, I do think that there are more step-ups to come. We have not yet rolled out Navitaire that will come likely in the second quarter. And I would expect a little bit of a tapering as that kind of builds into what it could become. Additionally, we talked about Allegiant Extra. There are only seven tails in that LOPA at the end of '22, we'll be up to 14 by the end of '23. A lot of these things would be back half loaded, but really -- fully pronounced at 24 stories. We will certainly get into those more at an Investor Day in terms of valuation and whatnot. Scott, I don't know if you would like to add any more? Yes. No. And I would say that even -- still to just say, as we think about our bundled ancillary, which has been a big driver of people being able to not just buy a la carte, but have that fuller ancillary. We are still at levels of penetration that we think have plenty of room for upside. And last but not least, as we just continue to leverage the technology foundation that Greg mentioned would be going in to create just a better user interface and user experience. We think there's small but material gains along the way as we make it easier to merchandise and easier for our customers to add these things to their card. Congrats to Drew and BJ. I've got a few questions here. I guess, first, just RASM up mid-single digits, second quarter through fourth quarter. Obviously, that's pretty strong. I'm just wondering if you can elaborate on that a bit. How big is the benefit that you just spoke to Navitaire and the, I guess, the Extra comfort, is there more from Navitaire that can help drive that? And then, I guess, secondly, related to that, if there is a mild recession, to what extent would that potentially change the forecast? Yes. Thanks, Dan. Maybe I have a slightly different perspective. I didn't view mid-single-digit positive and overly aggressive given kind of the growth cadence we have in place. It's been a long time since we had a series of quarters in the low to mid-single digits. And historically, we've had some really strong revenues along with that. If you remember back to last summer, we did have to pull out a material amount of our capacity. We actually did in April and took out 15% to 20% of our summer ASM, which did contribute some thrash as we think about final results, and I think that will be able to buoy this year a little bit more. Navitaire coming online will certainly support. Like I mentioned, we'll get into a bit more in terms of valuation, whatnot through Investor Day, but that will provide a little bit of upside there. So all in all, I do think it's a reasonable revenue target and not something particularly aggressive. Hey, Drew, and this is Greg. I might add, Dan. Just some other puts the items to think about last year, we talked about IROP already in our opening remarks, then $100 million full year, right? But a big chunk of that is lost revenue. So that's going to be a helpful comp year-over-year on these unit revenue numbers. The growth, although it's limited that Drew is looking at, it's measured, it's de-risked. It's in markets that already exist today. So we're not going out and trying to add new markets. There's already a maturation there. And then the other thing, maybe just to your point about potential recession is our utilization per aircraft going into this year is low, 6.2 hours, right? In 2019, by way of comparison, it was eight hours. And so we already have the lower utilization and our model is built to flex in those peak periods to capture that demand. So I think we're just very well positioned in the event we do see a slowdown. Yes. I think as we look at the next couple of quarters, the only 20% to 25% of our capacity likely be on off-peak day a week kind of going up what Greg was mentioning. So we're very well aligned with where the leisure customer wants to travel already, well positioned for that. And we know that the leisure customer is incredibly resilient. We'll see what that means for far kind of broadly across the industry in the event that, that happens. But -- so the leisure customer is still able to be stimulated to travel just finding that right price point to get there. And on the inflation front, I mean, we have great visibility on the first half of the year, for sure, the first quarter. So, to the extent there is any modest inflationary pressures, we just don't feel or see it, but it's going to be back ended in the year to the extent there is anything. Wow, that's a great perspective. I can get a second question in here. I guess, BJ, I'm already getting inbound on negative free cash flow this year. It's a solid outlook to be sure, but I'm just wondering if you can speak to that. And if the plan is to use cash on the balance sheet, potentially equity or additional debt if we could potentially just take that worry off the table? Yes. Thanks, Dan. Most of the CapEx this year is debt financed. Greg, I don't know if you want to talk to specific numbers here. We can -- if you think about where the CapEx is and just use sort of like rough historical LTVs, we can bring in north of $450 million in new debt that's at our discretion as we navigate throughout the year. But then there's between $150 and $200 million in principal payments. The thing I'd mention is we have a line of sight to really fantastic terms on attractive financing where all of the CapEx coming in. As you know, Sunseeker is already financed at an interest rate that's in the money now, something that we're really pleased with. And then on the aircraft, the appraisal values are up, I think, $3 million, $3.5 million since we placed our order at the end of 2021, which just gives us a great ability to go out and raise financing and draw a lot of interest for supporting the airlines. This is Greg. I was just going to add two things, just to BJ's point, maybe just to crystallize here. That's while we are going to add leverage, if you just take the midpoint of our guide for '23 that gives you about $500 million in EBITDA. If you take the net leverage, so I think BJ said, we'll end the year with $1 billion in cash and you kind of take the waterfall of debt that gets you $2.5 billion in debt; net debt, $1.5 billion. So three turns net leverage still comfortable. But these are -- this is a time when we're investing back in the Company. We're investing in assets that are yet to be revenue producing. We're doing it with a strong credit. And so -- but when we get on the other side of this '24 and beyond, you're going to see that that de-lever pretty quickly as our expectation. Two questions. One is, as you think about your ASM growth being so low single digits this year, how are you thinking about where to prioritize the growth? Or you -- in other words, is it new markets? Is it increased service in existing markets? How should we think about that? Sure. Thanks, Helane. It's not a lot of new markets. For the first half of the year, only about 4% of our ASMs will come from markets in their first 12 months. And within that, it's been -- we have a few new markets starting here in the first quarter, and that's about it. It's pretty minimal. I focus more on the restoration of a little bit of that frequency that's where we can get it. But when we're talking 1% in the first quarter and a small step up, there's not a ton beyond that. Okay. That's helpful, actually. And then my follow-up question is -- as you're thinking about the resort, Sunseeker, Punta Gorda, the region and so on, climate has been an increasing issue for a lot of companies. And obviously, it was a big issue last year for you guys. How are you thinking about hurricane seasons going forward in the hurricane season this year? Maybe it's how do you protect the resort from hits like this in the future? Helane, this is John. I'm stating the obvious when I say hurricanes have been around in Florida forever. And the state has reacted to those over time by changing building codes by doing a lot of things with technology that allowed buildings to be built differently in operations to be run differently. So when you take the resort, we thought about that when we were designing it, frankly. A lot of you probably didn't understand when we were first chatting about it, but we built the resort 16 feet above the mean height pipeline. So we wouldn't have had any damage, but we're falling cranes. If you look at the worst hurricane, a lot of people referring to, that's happened to the state of Florida. So put another way, if the resort was done and if the type of storm surge that hit Port Myers hit where the resort is, it would have gone underneath the building and out the other end. So we wouldn't have had any damage. So we're the only resort in the entire state of Florida that don't like that to be able to withstand it and also we're built to Category five standards. So I think that's how we reacted to what we've seen in the state of Florida, and I'm sure that's how others have reacted and whether they're building office buildings or anything else, they're building them differently. And I'm sure homeowners will build differently going forward as well after seeing what happened down in Fort Myers. So we like -- we obviously love what we did. We're positioned fantastic going forward to weather any kind of the storm in Florida. And I guess this was a test to that. Again, but for these hurricanes falling down in the building, we wouldn't have an issue. And it's also worth pointing out, the last major hurricane that hit Southwest Florida like that was Charley in '04. So it's not like these are annual events. They might be annual to a certain extent, somewhere in the state, but not always in the exact same region. So you went from '04 to '22 before it had the next major one. And that one, which was the worst, would not have hurt us at all that we were completed. Congrats on all the promotions. But John, I guess, as you look at 2023, you have had some leadership changes. You're pulling back growth, as noted in the earlier remarks, since I think 2011, so how do you put this in context? Like what are the strategic priorities for the organization this year? Is it preparing for the MAX? Is it really giving some figure up? What do you want investors to take away from this year? I mean you're hitting on them, a couple of them right there. We get touched on it a little bit, but we've been starting in '21, we started it in '22, significantly invested in it, which was all of our, call it, our plumbing and electrical, all the package, if you will, we've been spending significant sums of money to make sure that we are at the leading edge of technology in all of our systems. So by the end we will be at that leading edge with everything and all of them turned on in operating. So all the system investments, Greg touched on SAP tracks, Navitaire, NAVBLUE that's a heavy lift. You look at in '22, for instance, we spent in the neighborhood of about $50 million alone on all the technology upgrades, if you will. So that's a big initiative, which allows us to do everything from Viva, that relationship to obviously operate and yield what we're doing in a much better format. The Viva relationship is very strategic for us. We had to fix some of the technology in order to accommodate that. We reached to do that, and we're in great shape to do that. Now we're just waiting on all the regulatory approvals. Boeing in the MAX mean that's well understood. We know it's back-end driven, Q4 really driven. But there's a lot of work that has to be done leading up to the receipt of any plane. So that's all being done. So we're -- we like where we're at. I mean the resort is an obvious one. We've been working on that for some time. We've actually had delays that have and longer than what it has taken to build it. Obviously, I had nothing to do with anything we did, but we are scheduled to open that in '21. But all of these are major initiatives that are driving major CapEx in the last 1.5 years to 2 years that we're not going to see any revenue benefit from until the back end of this year. And BJ and Greg touched on that. But we are in great shape with all these initiatives. The team has done a great job. We have a lot of people focused on it. They're working burning the midnight oil, as I say. But we like where we stand. We're not falling behind on anything, and we're well positioned to be able to absorb all of this significant growth that the Company has taken on with all these new opportunities. And John, if I might add, and you hit on this in your opening remarks, and Brandon, maybe it's already stating the obvious, but the airline is at the heart of everything we do, operational integrity, as I hope you heard in the opening remarks, number one, too, that's top priority. And as John mentioned, getting a deal for our crew members, our flight attendants and pilots is at the highest priority our Executive Chairman, Maury Gallagher, continues to spend time or has been time trying to make sure we continue to move and advance this ball and get a deal done with our crew members as soon as possible. So I know that probably went without saying, but -- and all of that, that too is a very high priority for us as we think about '23. John and Greg, I appreciate that. And I guess specific to the growth this year because you had been planning for more. And I think, Drew, you spoke to this a little bit, but is this really demand-related cost related or operational integrity, what are the constraints right now? Is it really pilot availability that's constraining your ability to grow? Or is this commercial as well? The demand environment is still extraordinarily robust. So that is not a concern. We're generally scheduling up to our first operational constraints in many months. That's going to be our pilot headcount in others, it might be the number of available tails we have given our heavy maintenance lines and how we try to structure that with some peaks and valleys. So that's primarily the driver. As we get into the back half of the year, in preparation for the first MAX deliveries, we will have to start pulling some crew members off the line to begin training in order to be ready to fly those as early as possible. So we'll run into a little bit more of that being kind of the constraints as we get later into the year. And Drew, sorry, I might add, and the team is going to tease me here, Brandon, because I use this term that we're screen coiled and ready to go. And as you alluded to in your comment is that we plan for a larger organization. And so there's some pacing items, crude constraints being one. But when those loosen up, if you will, I mean, you were spring coiled and ready to go. The infrastructure is going to be able to support that, and that's how we're viewing it long term. So we're excited about that and we're working towards that. But you may see next year or in '25, maybe higher growth than normal like if you were to compare it to aircraft count because you'll take the idea as you have the potential to take utilization of -- so we're flying 6.2, 6.3 hours per day per aircraft per day in '23. If you take that up an hour, that's going to obviously improve capacity as well. So I just want to make sure we mentioned that also. I don't know if the one question was just meant for me, but I'll respect it. On the 4Q revenue outcome, you touched on the breakage, I guess if you could go into a little bit more detail on what were the drivers of the upside and on base fares in particular. Any particular markets and I think the pattern we've seen in the last couple of quarters is that there was kind of an inability or constraints to flex up in these peak demand periods, and that was kind of holding you back. Is there something that has changed or something you're doing differently that is helping you kind of flex back up in the peaks again unlike the last two or three quarters? Duane, I don't know that that's necessarily true. I mean some of our best performance before the holidays was in the summer and what we were able to do on a yield basis, it certainly wasn't to this extent. I think there's a little bit of a difference in -- there always has been in terms of the holidays and spring break versus summer, where we have this very tight window in which travel occurs, right? I think giving is very heavily concentrated around the holiday, same with Christmas and New Year versus a much kind of longer and drawn out summer that's good, but it's kind of the spread drawn out good. So we were really able to capitalize well on that very concentrated window of demand, probably in a way that you're -- at least I thought we were not able to be at the same level in summer. The opting stuff still looks good. October was healthy as well. So there's not necessarily any individual piece to call out. It all looked good with maybe some slight outperformance in the holidays, like I mentioned, tight windows. I guess -- sorry, I'm going to contradict myself. On the guidance, is that just airline EPS? Or is that consolidated EPS guidance? Congrats to the team on the promotions. Just one here. I guess Scott DeAngelo, you called out, you talked about the loyalty of your customer base and you provided some qualifiers around it. I thought it was interesting that you called out Southwest and other airlines of where you were getting passengers or picking up new customers. Is the Southwest mention? Is it because of the overlap that you have with them? Or more recently, are you actually seeing meaningful traction in the markets where you may compete head-to-head or just in their backyard? Thanks, Michael, for the question. It is more of the former. We've tended to overlap with them the most. So when you ask our customers, who did you last or most recently fly with about 1/3 of the time that answer is going to be Southwest West. And then the other carriers, even though it's convenient, I know for the market to classify us alongside other ULCCs, the reality is we don't have much overlap there. And so the next three airlines that are answered when asked who did you last or most recently fly with are always Delta, American and United in that order with, obviously, many of our customers actually flying the regional arms, but identifying with right, the overall brand of those airlines. And so -- it was meant simply to show that in this environment, even if there was some type of recession, I would just ask the market to -- in as much as there was any contraction at any point in leisure travel, also look at the slice of pie that is ULCC because our data would indicate that even if the overall pie were to shrink, our slice of that pie would continue to grow as customers of -- whether it's Southwest or other network carriers are increasingly buying down and/or coming into the ULCC category, given our brand of non-stop travel. Well, Scott, on the survey, when they give you the airline, what is the number one reason? Is it because of fares? Or is it because they had a lousy experience? I'm just curious. Oh, yes. No, great, it's usually non-stop flight and fares. And those can go one to two, but those are far and away the top two. Schedule is the third one, but it's usually way down and then preferred airport everything else ties for fourth and beyond. But we don't -- we haven't seen that there's just a swell given just one bad experience, but we undoubtedly know that right overall disruptions, especially when it involves connecting flights we'll draw someone now to look for non-stop flights. And as you all know, all of our flights are non-stop. So that's really the key driver, I think, in times of disruption, whether it's weather, whether it's just irregular operations over the summer, over the winter, it happens to every airline. But if there's one thing we know, it's one thing to potentially get canceled delay in your origin or your destination, there is nothing worse than getting stuck in the middle. And that's what we're seeing a lot of customers react to and be drawn in by an airline that only flies non-stop. Just a question on the CapEx, right? I think last call you said a floor of like $500 million on CapEx. I guess at the time I never thought it could be north of the $700 million you just guided to. I guess, one, what are the big buckets of CapEx kind of that are coming in this year ahead of plan, particularly on the non-aircraft side? And then when you think about the CapEx, and I know you can finance a lot of this. How do you think about minimum liquidity going forward? Because I would think with the MAX is pushed out to 2024 deliveries, CapEx will be pretty high next year as well. Andrew, it's Greg. I'm going to kick it off real quick and BJ will walk through a little bit more detail just because I think I'm the one that threw out that floor of $500 million of CapEx next year. And really, it was -- we just -- there was a lot of uncertainty around the timing of the Boeing aircraft being delivered in '24 and PDPs. And so -- we wanted to throw that out of the floor that will be no less than. And so we've had more time to work through that and understand the timing, which is now why we're updating you with those numbers. But with that, BJ? Yes. Andrew, just on that same point, I mean, if you think about a large portion of the aircraft are paid for in the calendar year prior to delivery, so with so many aircraft moving into 2024, you've got a lot of CapEx going out for PD this year. I think that's actually our largest CapEx commitment this year is pre-delivery deposits. And then you have the two aircraft delivering from Boeing in the fourth quarter of this year. And then remember, we also slid for placeholder aircraft from 2022 into 2023. So a lot of this CapEx was sliding from '22 to '23 and then paying PDPs for '24 and '23. And then liquidity, I think BJ mentioned it in his opening comments, 2x, roughly 2x ATL, which gets you right now, ATLs run at about $400 million. I think total liquidity would be around $1 billion is what we're targeting for the year at the end. Is that fair? Yes. And then maybe just mention that our revolver facilities are undrawn today, which are $225 million and then the better part of our $200 million PDP financing facility is undrawn as well. So, using those as necessary throughout the year. It's -- I think it's about $135 million in total non-aircraft million, $60 million $70 million, that's going to be that IT investment that we were talking about. You have some sims and simulators that we're going to be acquiring to take card delivery to the Boeing aircraft or fleet. And then the remaining would be just your normal kind of standard CapEx, maintenance CapEx, such as parts, tools, things like that. Just on the kind of the pilot and flight and an also on the pilot side. What have you seen in terms of attrition levels are kind of being able to staff that well? I'm just kind of curious with if you're only getting a deal by midyear that means as you head into the summer. You will be kind of having a headwind versus a lot of other airlines that have increased pay deals. So just curious on what you're expecting there and what you're seeing there? Savi, it's Greg. Why don't I give this one a stab, and what I would just say and the big takeaway is that I think as we plan the schedule for '23, we've taken a very conservative approach in terms of attrition and onboarding and making sure that we have the available resources and crews to support those peak flying season, such as March in the summer. Just to put some more color around that, for the full year '23, we're expecting about a 25% system attrition on the pilot side. To put perspective in that in '22, it was 17%. The last three months, however, it's been roughly 20%. But again, the point being we're expecting higher or we're planning and scheduling for it to be higher than what we've seen historically or at least in the past three months and past year. In terms of the school house and our ability to attract and bring on pilots, I think just to give some perspective there, we're -- every class, we're anticipating around 12 new hires or pilots. We had two classes in January. There's 30 pilots in that class. All in all just to kind of -- to bring this together, I think we're expecting roughly 200 to 250 new pilots join Allegiant during 2023. Really excited about what Tyler Hollingsworth and [Rod Hardisty], Rod, our Chief Pilot, Tyler, our VP of Flight Ops. They're also out there on the recruiting front and putting in additional pathway programs. So I think there's five creative pathway programs today. They're taking that to eight. And so we're really doing -- taking the appropriate steps, I think, to kind of protect and control our destiny. And -- but we're planning for kind of the -- we're planning for a down case scenario. And so far, we feel good about that plan. I am showing no further questions. I would now like to turn the call back over to John Redmond for closing remarks. Well, we appreciate everyone's time and questions, all great questions. You can see why we're excited about '23 in the out years. Great uses the term spring coiled as he mentioned for '24, we wouldn't be in a position but to the investments in '21 and '22. So we're jazzing. And of course, those investments as we touched on our -- not only all the IT infrastructure, et cetera, that we're doing. But all the employee investments, everything from pilots, flight attendants, everything else we're doing. So it's a heavy CapEx lift, but it's needed and required in order to take on the growth that we're doing going forward. So stay tuned, '23 is going to be amazing, but '24 will be really something else.
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Good afternoon, and thank you for joining the Fourth Quarter 2022 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are our President and Chief Executive Officer, Dan Arnold; and Chief Financial Officer, Matt Audette. Dan and Matt will offer introductory remarks, and then the call will be open for questions. [Operator Instructions] The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL's financial future financial and operating results, outlook, business strategy and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. Thank you, John, and thanks, everyone, for joining our call today. Over the past quarter and throughout 2022, our advisers remain the source of support and guidance for their clients against the backdrop of increased market volatility. In doing so, they reinforce the value of their advice and the important role they play for their clients. We thank them for their continued commitment and dedication as we focus on our mission, taking care of our advisers so they can take care of their client. With respect to our performance, our fourth quarter business results drove a solid financial outlook, while at the same time, we continue to make progress on the execution of our strategic plan. I'll review both of these areas, starting with our fourth quarter business results. In the quarter, total assets increased to $1.1 trillion as continued solid organic growth was complemented by higher equity markets. With respect to organic growth, fourth quarter net new assets were $21 billion, representing 8% annualized growth. This contributed to net new assets for the year of $96 billion, also representing an 8% organic growth. Recruited assets were $15 billion Q4, bringing our total for the full year to $82 billion. These results were driven by the ongoing enhancements to our model and our expanded addressable markets. Looking at same-store sales, our advisers remain focused on serving the clients and delivering a differentiated experience. As a result, our advisers are both winning new clients and expanding wallet share with existing clients, a combination which drove solid same-store sales in the fourth quarter. With respect to retention, we continue to enhance the adviser experience through the delivery of new capabilities and technology as well as the ongoing modernization of our service and operations. As a result, asset retention for the fourth quarter and full year was approximately 98%. Our fourth quarter business results led to solid financial outcomes of $4.21 of EPS prior to intangibles and acquisition costs, which brought our full year total to $11.52, an increase of 64% from a year ago. Now let's turn to the progress we made on our strategic plan. As a reminder, our long-term vision has become the leader across the adviser center market, which for us means being the best at empowering advisers and enterprises to deliver great advice to their clients and to be great operators of the business. Now to bring this vision to life, we are providing the capabilities and solutions to help our advisers deliver personalized advice and planning experience to their clients. And at the same time, through human-driven technology-enabled solutions and expertise, we're supporting advisers in their efforts the extraordinary business. Doing this well gives us a sustainable path to industry leadership across the adviser experience, organic growth and market share. Now to execute on our strategy, we have organized our work into four strategic plays, which I'll review in turn. Our first strategic play involves meeting advisers and institutions where they are in the evolution of the business, by winning in our traditional markets, also leveraging new affiliation models, which expand our addressable market. In our traditional markets, ongoing enhancements to our platform and the efficacy of our business development team led to continued improvement to our win rates and an expansion of the depth and breadth of our despite adviser movement in the industry remaining at lower levels. As a result, Q4 was our strongest quarter of recruiting in 2022 in our traditional markets with approximately $11 billion in assets. looking ahead, we expect to carry this recruiting momentum into Q1. With respect to our new affiliation models, strategic wealth, employee and our enhanced RIA offering, we recruited over $1 billion in assets in Q4. In each of these models, we continue to see growing demand and expanding pipeline, which position them for increased contributions for our organic growth. With respect to large enterprises, they remained a meaningful source of recruiting in 2022, including the additions of CUNA and People's United. Looking ahead, we expect to onboard Commerce Bank around the middle of this year and continue to see our pipeline build as demand for our model grows. And at the same time, we continue to have success recruiting in our traditional enterprise channel, including the addition of bank for [indiscernible] South in Q4. Within this strategic play, we are also seeing positive early momentum with our most recent innovation of liquidity and succession capability where we are providing a differentiated offer to meet succession needs of the advisers. Over the next decade, it is estimated that up to 1/3 of advisers will be retired and will likely address succession needs of their practices. To solve for this need, our first innovation was providing M&A support service to help facilitate the transition of practices from adviser to advisory. Our key learnings from that experience, there are many instances due to factors like large practice size or lack of an identified successor that will require a different solution. And without of this need, we created our differentiated liquidity and succession offering, which LPL will step in to purchase an adviser's business and serve as a bridge to the next entrepreneurial successor, all while preserving the principles of independent. The offering has been well received and we are encouraged our early momentum, having already executed on a handful of transactions with providers on our product. This year, we will also plan to take the capability to the external marketplace and look forward to sharing our progress. Our second strategic play is to provide capability to help our advisers differentiate the marketplace and drive efficiency in the back. In 2023, we will focus our development of new capabilities and solutions within this play across four key areas. First, we will continue to enhance our wealth management platform to help advisers provide their clients to differentiated advice, products and pricing. Second, we will continue to advance ClientWorks, our core operating platform, with additional digitized workflows to help advisers operate more efficiently and increase their scalability to serve more fun. Third, we will expand our banking and lending services to help advisers address a broader spectrum of the clients' financial needs and thus deepen their role as an essential partner. And the final area is to enrich the end client experience with additional digital solutions that increase personalization and self-service and enable advisers to create customized experiences for their business. We believe these evolving capabilities will help drive increased adviser growth, productivity and retention. Now let's move to our third strategic play, which is focused on creating an industry-leading service experience that delights advisers and their clients and, in turn, helps drive adviser recruiting and retention. As a reminder, over the past couple of years, we've been on a journey to transform our service model into an omnichannel client care model, including voice, chat and digital support. And as part of this journey, we have evolved the technology and instrumentation of our traditional voice channel while also making meaningful enhancements to our always- on digital support capabilities. As a result, approximately 75% of engagements with our digital channel fully resolve the service request and don't necessitate a phone call to complete the task. As we continue to expand and refine our digital support channel, we believe that an increasing share of advisers will leverage digital-first support for more flexible and efficient service experience. As we continue to evolve our service interface, we're also transforming the operational processing that takes place behind that interface. For example, last year, we began automating much of the processing for our core clearing, including money movement, account opening and account transfer, which collectively drive the majority of our operational process. And with these learnings from our transformation and service and operations, we are reengineering other areas of the business, including our compliance and risk management. Out of that end, we've applied robotics and AI capabilities through a number of our compliance review workloads, which has improved both the efficiency of the reviews as well as the efficacy of the overall risk management. Efforts on this front include automating the reviews of client communications, marketing materials and transactions. Now by automating more workflows, we continue to increase the scalability of our platform while also enhancing plan is good. Our fourth strategic play is focused on developing a services portfolio that helps advisers and institutions from driving businesses and deliver comprehensive advice to their client. As we discussed last quarter, we are encouraged by the seasoning of this business and the evolving appeal of our value proposition. As a result of solid demand, in Q4, the number of advisers utilizing our services group continued to increase. We ended the year at over 3,000 active users, up more than 30% year-over-year and generating run rate revenue of $36 million. Now when we started our services group, we focused on addressing some of the most complex challenges facing our advisers. We were often more acute for advisers with larger practices. With the insights and learnings from this initial client segment, we're now expanding our service portfolio to address the needs of a broader adviser base. As we continue to evolve the offering in 2023, we are focused on several key opportunities for our services group: first, addressing additional channels, specifically building solutions solve for needs of enterprises; second, leveraging our structured approach to innovation in order to continue to develop new services and evolve our existing portfolio; and third, contributing to the growth of our new affiliation models, Strategic Wealth and Linsco, as well as expanding our ability to serve high net worth. So, in summary, in the fourth quarter and throughout the year, we continued to invest in value proposition for advisers and their clients while driving growth and increasing our market leadership. As we look ahead, we remain focused on executing our strategy to help our advisers further differentiate and win in the marketplace. And as a result, we have long-term shareholder value. All right. Thank you, Dan, and I'm glad to speak with everyone on today's call. Before I review our fourth quarter results, I'd like to highlight our progress during 2022. Against an evolving market backdrop, we maintained our focus on supporting our advisers and their clients while executing on our strategic priorities. We continue to grow assets organically in both our traditional and new markets, successfully onboarded new enterprise clients, developed and piloted our new liquidity and succession capability and announced two strategic acquisitions. We accomplished this all while continuing to invest in our industry-leading value proposition and delivering record earnings per share. Now let's turn to our fourth quarter business results. Total advisory and brokerage assets were $1.1 trillion, up 7% from Q3 as continued organic growth was complemented by higher equity markets. Total net new assets were $21 billion or an 8% annualized growth rate. Our Q4 recruited assets were $15 billion. I would note, this included $11 billion from our traditional independent model, which was the highest quarter of the year. Looking ahead to Q1, our overall pipelines continue to remain strong. In particular, I would highlight that within our traditional models, the momentum we saw in Q4 has continued into Q1, and we are on pace to deliver one of our strongest first quarters in what is typically our slowest quarter of the year. As for our Q4 financial results, the combination of organic growth, rising interest rates and expense discipline led to EPS prior to intangibles and acquisition costs of $4.21, the highest in our history. Looking at our top line growth, gross profit reached a new high of $972 million, up $135 million or 16% sequentially. As for the components, commission advisory fees net of payout were $172 million, down $10 million from Q3, primarily driven by the seasonal increase in production mode. In Q4, our payout rate was 88.4%, up about 50 basis points from Q3 due to the seasonal build in the production model. Looking ahead to Q1, we anticipate our payout rate will decline to approximately 87% as the production bonus reset at the beginning of each year. With respect to client cash revenue, it was $439 million, up $136 million from Q3 as the impact of higher short- term interest rates more than offset a sequential decline in balances. Looking at overall client cash balances, they ended the quarter at $64 billion, down $3 billion driven by record net buying of $25 billion. Within our ICA As for Q1, we expect our ICA yield to increase to approximately 315 basis points, which include yesterday's 25 basis point hike at an assumed deposit beta of 25%. As for service and fee revenue, it was $120 million in Q4, down $2 million from Q3. This decline was primarily driven by lower conference revenue, following our largest adviser conference of the year in Q3. Looking ahead to Q1, we expect typical seasonal increases in IRA to be offset by lower comp charge, so we anticipate service and fee revenue to be roughly flat to Q4. Regarding Q4 transaction revenue, it was $47 million, up $4 million sequentially as trading volume increased. Based on what we have seen in Q1 to date, we would expect transaction revenue to be roughly flat with Q4. Turning to expenses. Our core G&A was $327 million in Q4, bringing our full year core G&A to $1.192 billion. This was in the middle of our outlook range and, for the full year, represents approximately 13% growth. As for our outlook for 2023, our long-term cost strategy remains unchanged. We plan to continue to prioritize investments that drive organic growth and create incremental operating leverage in our core business. As we shared at our Investor and Analyst Day, the current environment is creating opportunities to accelerate our investment plans. As such, we expect to grow our investments at a similar pace this year. More specifically, we plan to grow our 2023 core G&A in the range of 12% to 15%. To share a little more color on where our investments are focused, this expense growth spans the following three broad categories, with each driving approximately 4% to 5% growth in core G&A. First, to support our core business growth, including investments in technology and capabilities. second, to support growth in our expanded addressable market and to scale our new services. and third, to accelerate the timing of investments that advance our strategy. To give you a sense of the near-term timing of this spend, as we look ahead to Q1, we would expect core G&A to be in the range of $320 million to $325 million. As always, we will remain flexible and can adjust to shifts in the operating. Turning to promotional expense. In Q4, it was $84 million, down $15 million sequentially, primarily driven by lower conference spend. In Q1, we expect promotional expense will increase by approximately $25 million as we have two of our largest conferences of the year during the quarter. Looking at share-based compensation expense, it was $12 million in Q4, up $1 million from Q3. As we look ahead, we anticipate this expense will increase by approximately $5 million sequentially in Q1 as it tends to be our highest quarter of the year given the timing of our annual stock awards. As for interest expense, it was $37 million in Q4 and up $4 million sequentially as higher LIBOR rates increased the cost of our floating rate debt. Regarding capital management. Our balance sheet remained strong in Q4 with corporate cash of $459 million, up $35 million from Q3. Our leverage ratio was 1.4 time, down from 1.7 time in Q3. This decline was driven by a combination of our continued growth in a higher interest rate environment, both of which have meaningfully improved our earnings power. As for capital deployment, our framework remains focused on allocating capital aligned with the returns we generate, investing in organic growth, first and foremost, pursuing M&A, where appropriate and returning excess capital to shareholders. As we look ahead to 2023, the strength of our balance sheet leaves us with ample capacity to allocate capital across our entire framework. Specific to organic growth, we see opportunities in recruiting and continued investment in our technology platform. On M&A, we see opportunities in the succession offering where we are emerging from the pilot phase and closed four deals in 2022 for around $50 million. With regards to capital return, we plan to increase our share repurchases to roughly $250 million in Q1. And lastly, we plan to increase our quarterly dividend by 20% beginning in Q1. To summarize, our balance sheet is strong, and we are well positioned to drive value through our capital allocation framework. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we see to continue investing to serve our advisers, grow our business and create long-term shareholder value. Hi, guys. thanks for the question. So, Matt, maybe we can start with the question around just the cash dynamics. Obviously, it's an area that creates a lot of anxiety for investors still. Maybe talk a little bit about dynamics you saw in December that kind of let the balances being a little bit better than we saw with some of the peers, what you're seeing so far in January and then, importantly, the demand from the bank channel given that the fixed extensions you highlighted in the deck seemed pretty robust. So maybe kind of walk us through the current environment and cash. Yes, sure, Alex. So, I think in December, we saw the typical seasonal build that you see from tax loss harvesting and rebalancing. And I think as you pull that forward into what we're seeing in January, that cash typically goes back into the marketplace. So that $1.6 billion or so that we saw a build in December in January naturally went back into the market. I'd also highlight, from a seasonality standpoint, advisory fees for the three months of the quarter, the first quarter of the month, as I think you know well, is typically the highest month for advisory fees, and those are about $1 billion in the month of January. So, if you just look from a seasonal standpoint, you'd have a decline of around $2.5 billion, $2.6 billion in the month. And then in addition to that and just commenting on the overall market activity, we have seen just broad adviser and investor reengagement in the marketplace. I think a good way to summarize that is our customer net buying metric. The highest month -- if you look at our monthly metrics, the highest month we've ever had was back in August of 2022 at $10 billion for the month. For January, what we're seeing is just north of $11 billion, so the strongest engagement that we've had. And that money is really going back into the equity markets and, as you may expect, longer-dated fixed income securities and things like that. So that's naturally going to drive down balances when you pull those seasonal factors, and combined with the investment engagement, we expect January cash sweep to be around $60 billion -- in the $60 billion. I think specific to the -- I think the third question, the last part of your question, on the market for ICA contracts. The headline I'd give you is it continues to improve throughout 2022, continued to improve in Q4 and maybe break it up into two buckets. The market for the floating rate balances, the demand continues to be well in excess of the deposits that we have, and you're starting to see that lead to price improvement. So, for the contracts that we're putting from a floating rate standpoint now, they're more fed funds plus 10 or 15 as opposed to last quarter, they were plus five to 10 and then back in the heart of the pandemic, if we could place them at all, it was fed funds flat to down. So, the market there is quite good. On the fixed rate side, we're able to add $4 billion in balances this quarter ranging from two to six years. And I think when you combine that with the progress in the past few quarters, we're now not at our high but starting to get close to the high that we've had from a percent of the portfolio at 45%. And when we look ahead to Q1, we've got $2 billion of maturities coming up. And I think we feel quite good about being able to place those into new fixed rate agreements and, even beyond that, starting to be able to continue to grow the portfolio overall, just seeing the overall demand. Great. And maybe just a second question around the balance sheet. It's nice to see the leverage come down now below your guidance target, which I think you guys revisited recently to lower that. So, as you think about priorities between building out the lending practice, perhaps inorganic opportunities and maybe accelerating some of the share repurchases, how would you think about that? Yes. Well, I think, Alex, the key point on the lending side is it's not a big use of the balance sheet. So, it's really more about connecting the capabilities so our clients can use that. I think on the buyback, I think just going back to our overall capital allocation framework, I think we're focused on investing in organic growth first, M&A second and capital returns third. And I think from a pace of the buyback, it would just all depend upon the opportunities that we see. So, if the opportunities to invest in organic growth weren't there or M&A wasn't as strong as we would expect, I think that's a scenario where we could accelerate buyback. And then the opposite is also true. We can slow it down if opportunities would lead there. So, the key for us is really to be flexible. And maybe I'd just reiterate that our center of gravity is really that $250 million. Hi. Good afternoon Dan, good afternoon Matt. So, I really appreciated the additional granularity in terms of the expense guidance. Your prior expense guide was 15% growth in '23. This latest update appears better or at least a tighter range of 12% to 15%. Is that the right way to interpret the guidance, a bit better than what you offered up last time? And just looking beyond '23 and thinking about that longer-term expense growth algorithm, is there anything we can infer from those buckets that you offered as to what's a normal pace of expense growth, say, in a period where you're not accelerating your investment plans? Yes, Steve. I think on our plans, I mean they really -- they didn't change at all from Investor Day. I think the key is we gave our preliminary thinking there and really went through our typical year-end process to finalize those plans. And I think that's where the 12% to 15% comes from. So, I think the strategy that we have of using this environment really to advance our investments is just the same, and you're just seeing us now land the plane with a sharper pencil. I think specific to the three categories, I think the answer to your question is, yes, it is informative. I think when you look at the investments to support our core business growth, right, assuming that growth is continuing, I think that level of 4% to 5% supports that growth. When you look at the second and third categories, by definition, that's where we have flexibility. And we can adjust those based on the market and whether there's opportunity to spend in those areas or not, especially that third category where it's all about advancing things that we may have otherwise done in '24 and beyond that we're now going to do in '23. And just for my follow-up on organic growth, certainly encouraging to hear that the NNA momentum in 4Q has continued to start the year. I was hoping you could just speak to some of the factors that's driving that better NNA momentum? Just trying to gauge how much is environmental, so the strength in the markets, maybe increasing advisers in motion versus more idiosyncratic. And you were talking about the pipeline strength in institutional as well in your NNA remarks, how much of that strength is coming from larger institutions? So, let me take that one, Steven. There's a lot there, so if I missed something, you give me guidance after I finish. So, Look, I think if we start as a jump-off point, last year, 80% organic growth rate, $96 billion in NNA, which is a pretty solid outcome against a challenging macro backdrop. And I think irrespective of that backdrop, I think making the progress or working through sort of that environment, both in terms of our teams and advisers, you just continue to evolve capabilities, skills and operating in any potential environment. So, I think as we look forward and we think about going forward, we feel good that the sort of the acclamation to an upper macro, if it sustains itself, that we can execute in it better and ultimately contribute improved or better growth. So that's how I would sort of think about the environmental. It may influence what I might call short- term progress around our growth ethics. I think, probably more importantly, strategically, as we think about our opportunity those drivers of that strategy, right, those significant structural, big durable trends all remain in place. It's growing demand for advice. The appeal of receiving that advice through a financial professional, the attractiveness of the independent model versus other models all continue. And I think we sit at the intersection of all of those and believe we're uniquely positioned to capitalize on that opportunity. And whether that's through our market leadership, singular focus on what we do, robust platform of which to leverage and use and differentiate or even the capacity and commitment to invest, but that was just speaking of to evolve platform and continue to differentiate it. So, I think as we think about going forward, that comes up to that 7% to 13% sort of growth rates that we talked about across different macro environments, I think, is still highly relevant, still how we think about it. And I think last year demonstrated the ability to persevere through a tougher macro and still reside within that range. So that's how we think about the shorter run and the longer run. I think to your click down on the enterprises within that, look, it's a channel that we've talked about is a durable growth contributor. We've continued to evolve our capability set with more wins and with good success with those relationships, create better advocacy from our clients and that IP and insight from being on the court for a couple of years working on those large enterprises is certainly IP that's hard to replicate without that experience itself. And so, when we look at that going forward, it's a pretty appealing model that is finding a marketplace that is in need of that type of model, and we're pretty convicted around our solution. So, we do believe that, again, within those bookends of 7% to 13%, we do get some contribution from large enterprise. So, I hope that gives you a little color. Okay. Unfortunately, my connection cut out a little bit, Matt, while you're talking a little bit about the ICA dynamics. I guess my broader question is, as you think about what's been happening in the forward market and expectations softening up a little bit, how is that informing the opportunity here to potentially accelerate the ratio of fixing out relative to the float? And then you mentioned that demand is very healthy. How should we be thinking about reinvestment rate opportunity? Yes. I think, Bill, our perspective on fixed rates really to get into that target range we have of 50% to 75%. And I think the -- if you cut out while I was commenting, I think the comment on the market is it continues to improve, right? It's not perfect, right? We can't move exactly where we want. But I think if you look at the trends throughout 2022 and as we look ahead into what we're seeing already in Q1, demand continues to improve. So, I think we feel good about the maturities that we knew fixed rate agreements. You can see what we did in Q4 that we're targeting to go out in the five and even, in some cases, a six-year zone based on what the market will bear. And then when you look at the demand overall, in addition to those maturities, I think we feel like we've got the opportunity to grow it in some amount from there. so, the headline is the marketplace is strong. And I think with where the curve is, we still think it makes sense to target getting into that range if the market will allow us to do so. Terrific. And then just going back to expenses, again, I apologize my connection just cut out. Of the variability to this sort of more refined 12% to 15% and sort of bringing forward that growth, should we be interpreting that, as we look out into '24, all else being equal, that the absolute level of this growth rate would decelerate? Or might you be in the same kind of situation where you would have the opportunity here to sort of advance your organic growth? And is it really now a point of trade-off between organic growth and margin as you think about the business? Yes. I mean I think when you get to our long-term cost strategy, Bill, where that fourth principle is really adjusting our cost to the market, right, so I think, as you may expect, we'll make judgments about 2024 as we get closer to that year. But I would emphasize from an optionality standpoint, when you look at that third category of 4% to 5%, that is opportunistic. The market, especially for 2023 with the interest rate benefits that we have, allow us to make those investments. And you can look at our op margins with the tailwind of interest rates or op margins continuing to be quite strong, we're in a good place to do that. If the market does not allow us to do that, we've got the ability to adjust. So, I think I would definitely take away that we've got the flexibility. And when you start to look beyond 2023, we'll make those judgments as we get closer to that time period. Hi, thanks. Dan, Matt. I guess first question, as we think about the opportunity to move upstream with larger advisers and higher net worth over time here, what are the capabilities that you need to add to be able to do that? Do you have everything you need and just kind of investing and improving? Or are there other types of capabilities that are maybe incorporated in some of that expense growth that are coming that could really help accelerate that push? Yes. Devin, it's Dan. So, look, as we think about the opportunity set in the high net worth space, and I speak now of the end client segment when I refer to high net worth, that's a function of our advisers' overall evolving practices. And as they have clients or more clients that they have an opportunity to serve inside that category, that's really driven the demand for services and capabilities that traditionally may not have sat inside our overall sweet spot. And so, I think that's been the real catalyst for the driver of our contemplation of building out certain capabilities. And so, examples of that are us building out our own service around complex case design, right? And so that would be an investment that shows up in the core G&A reference that Matt was making, as an example, to your question. I think you also see that in extended financial planning support. It's not just the technology, but it's the Paraplanning services that sit around it, as an example. So those are things that we're building ourselves or organic capabilities that we're building ourselves. So, as we've gone on the journey, we will -- we have built and we'll continue to build certain things that are in-house. There's also other things that we think are important to serve high net worth types of clients, maybe that's tailored insurance offerings that we traditionally haven't done inside our own insurance agency or services like helping to sell a small or midsized business. And that's where we'll -- we are developing strategic partnerships of which to provide those integrated solutions and services inside our overall offering rather than building. And so that's how we're putting together what we think is a compelling set of solutions that position our advisers to serve and support their high net worth clients. Now as we built out those capabilities or we're in the progress of, it also challenges us then to say, well, how do we better deploy those to the marketplace or leverage those, if you will. And I think that's where we realized with the capability set that we have today, could we utilize that to even target what I might call advisers who specifically operate with only high net worth clients. And I think that would be an example of how we better leverage these capabilities, and that's something we continue to explore in terms of how we go to market with this capability. But think about it that way, is we're building some of these capabilities. We've been on a journey, we're not completely there, but we've made some significant progress. And then we'll look to the outside market strategic partnerships. And I'm doing that, I think we can take the capital-light model to what is a compelling value proposition, use it to support our existing advisers and help us potentially attract new. Okay. Great context, thanks Dan. Just a quick follow-up here on kind of the M&A market and conditions. You sounded reasonably optimistic around what you're seeing now. There was a big wealth manager or deal in the wealth management space announced today. I guess just what are some of the themes that you're seeing in the market that is kind of the catalyst for activity? I'm not sure if it's the same across channels, but any context around maybe what's making you feel like it's a reasonable M&A market right now. Yes. I think we'll continue to see that ongoing trend around consolidation. I think you're continuing to see innovation around capabilities as well, and so that leads to transactions around a certain type of IP or capability set that firms may want to deploy or utilize in a different way. And then we're seeing more robust activity around solving for succession planning at the individual adviser level and/or smaller practices level. And so, I think you're seeing a healthy amount of activity across the ecosystem. We continue to stay active in exploring all of those possibilities, right? And you see us deploying capital, as an example, the closings we did yesterday with Boenning & Scattergood and FRGIS. I would just remind you our framework for exploring those possibilities, and you know these, first, it's in sort of side that what I would call growth opportunities in traditional markets where we see opportunity for purposes of growth to potentially acquire a practice, and Boenning & Scattergood would be a great example of that, what would be a great example of that. We also look in that second category where we can add capabilities faster through an acquisition than building them ourselves. We believe we've got to stay open and agile and nimble around that framework. And then the final one, the third one, which is a little newer one and is aligned with this new capability of liquidity and succession, is putting capital work through acquiring these practices and being that bridge to that future successors. So, I think that's where we're active, that's where we're exploring potential possibilities. And we see pretty good activity going on in the consumer market. Hi. Good afternoon Dan and Matt. Thanks for taking my question. I just wanted to touch on -- just to kind of zoom out a little bit and touch on the pricing trends you're seeing in your business. I guess just given the environment we're all operating in, I mean, are there some areas where you're looking to either take price or actually invest in price as you look ahead given all the different initiatives that you're dealing out there with the business? Yes, Michael, I'll take that one, and certainly, Matt, you add anything you want at the end. Look, we look at pricing as above our overall offering. Think about such capability, services, technology. We look at pricing as part of our overall investment strategy, if you will. And I think as we shared in the past, we've created a reoccurring theme of investing back into the platform, specifically trying to use price to help our advisers differentiate and win in the marketplace. And so I think that places that we've been historically focused on for the past, call it, four to five years has been typically around the advisory platform, right, 70%, 75% of new assets -- sorry, yes, new cash is going to those types of solutions, and we want to make sure that we're enriching the appeal of them. And so as we look at 2023, you'll see us continue to lower pricing around our centrally managed platforms as a way to create more applications for advisers to leveraging middle all of those, refined with the enriched capability set that we're adding to them, more and more using them versus that was the type of purchase. You're also seeing us look at transaction charges in certain areas where we're being very tactical around that. Although this holistic sort of lowering of transaction, we're trying to be very tactical about where we make those changes, such that we actually make the adjustments on where they make the most sense for our advisers that ultimately help them. And so I think those are a couple of examples that we'll continue to pursue this year. So whatever we can do that we think is optimal to help our advisers differentiate and win in the places that matters most of them is what we're trying to solve for. Those are a couple. I hope that helps. Yes, it does. I appreciate the color. And then just one quick follow-up. Dan, I think you kind of referenced this just on the expenses. Just looking at the third bucket of expenses where we're talking about the accelerated portion. I guess, are there areas you'd call out that's going to receive those accelerated investments? Yes, this is Matt. I'll take that one. I think there's -- when you think about that third bucket, it's more about the timing of the investments. So there's no specific category. I think you go back to the investments that we're making in technology and capabilities that help improve our value proposition or help support and open up our expanded markets. And when you think about those plans, we've got multiyear plans on the things that we think are quite important. And that third bucket is really about, given the environment that we're in, accelerating some of those plans. So that's the headline there. I don't know, Dan, if there's anything you want to add. I would just give you an additional way to frame that. If you remember back at the Investor and Analyst Day that we did, we shared the framework around vertical integration and a lot of those investments are showing off that spectrum of opportunities that we have. So as we drive more and more solutions into sort of that lower in the ecosystem where it really helps the adviser operate at a local level, but you'll find it also coming all the way back to things that enhance our advisory platform. And so I think you're seeing an accelerated investment across that entire spectrum as opposed to any one specific play. So I hope that helps to keep your framework to think about how we think about the spectrum of investments and perhaps how that's been [indiscernible]. Hi, good evening. Maybe just another question on centrally managed platforms. You mentioned that, in a response on pricing, the organic net new asset growth there is still strong but it's been decelerating over the past couple of quarters. Just wondering if you could provide a little bit more color on the recent trends and then kind of where you see the opportunity to take that penetration rate to over time for the centrally managed business? Thank you. Yes. So obviously, with respect to our advisory platforms, that fits inside that overall spectrum of offering. And as we think about enriching that entire platform, one of the places we've been focused on is centrally managed solutions. And we continue to add more capabilities and more value there. We think about the investment content that's available, the ability for advisers to use that in different ways, really turning that into a UMA and expanding the SMAs that are available on it. There's really cool enhancements and functionality that is materially improving the appeal and how one would apply it in more scenarios and cases. So we're excited about the potential opportunity and for it to continue to sort of grow share, if you will, in that overall mix of business, both with respect to advisory but we even think about it across a full spectrum of brokerage, because the more appealing we make this even at smaller accounts, where it's appropriate, and people feel that the plan is better served from that movement of brokerage to advisory, a lot of that would tend to move over to centrally managed solution. So that's one way to think about how we add capability to make it more appealing to drive utilization. And I think we believe that upside can be significant, certainly continuing to invest in the pricing helps also drive the appeal and demand for it. And think about, as you think about last year and rightfully so, still good demand but the trend was down. Historically speaking, centrally managed usually reacts more or is more impacted, if you will, by a challenging macro environment. The more volatility, the more sort of a downward trend in equity markets, and in fact, we had the combination of tough fixed income markets last year, and that's where we'll many times see an adviser sort of more want to put their hands on the wheel and drive that. So you're seeing some of that sort of volatility in the marketplace, the macro marketplace noise occurring in that trend. I think structurally speaking, we continue to invest in the appeal of it. And the more appealing we make it, the more it should drive up utilization on a relevant basis. I hope that helps. Good. Thank you. And then for a follow-up, maybe just a modeling question here for Matt. The DCA yield came in a bit above our expectation. I know that's formulaic really. But just wondering maybe you could provide an update on the number of accounts that flow into that program currently and how or if that number has grown recently? Yes. I mean I don't have an update on the number of accounts. I would emphasize, though, I think the point you're making, it is a fee per account. So the -- so we quote it in basis points, but it's a little hard for it to be predictive, just given balances to move up and down. So it's the account, I would emphasize they haven't changed materially. But when you get a pop perhaps like you've seen in this quarter, that may not be something that you would expect to see going forward just because it's not really rate driven, it's fee per account driven. Thank you. On recruited assets, I'm just curious how the recruiting environment for advisers looks right now. I know you mentioned it is pretty strong for you. But are you seeing any competitors get more aggressive on pricing just with organic growth down for the industry, maybe they're trying to look for growth? Yes. So look, I think the recruiting environment, I think it's well documented over the last three years, the churn in the industry has slowed, right, from 2022 to -- sorry, 2020 to 2022, primarily driven on the backs of the pandemic and then the macro volatility last year, which are pretty extreme impacts. And so certainly, with less sort of swings in the batter's box, I think you have competitors that will tend to respond to that in different ways and some have gotten more aggressive on the transition of systems. That's what we're talking about, about being more aggressive. And then certainly, when you add to that the rising interest rates that can be more robustly monetized, and thus so in underwriting around deals, you'll see transition systems get more aggressive in those types of environments. And I think it -- logic would have it, that's what would occur, and that's what we've seen over last three years. I think, look, for us, we don't see any changes in the opportunity set. I think the -- as we think about it, the ongoing evolution of our capabilities, the expansion of our market opportunity set with our expanded affiliation models, introduction of our services group, advocacy of existing advisers from good experiences, are really the key drivers of that opportunity set and our ability to drive win rates regardless of what the churn or opportunity set is in the marketplace. We did see the -- sorry, the market stabilizing more in the third and fourth quarter and more advisers now getting past that volatility and reengaging and exploring their strategic options. And I think to the extent that there's not some big shift in the macro, we continue to expect to see that trend occurring. And you'll continue to see folks explore that movement from an employee-based model to independent model. We continue to see with more and more capabilities, folks in the independent model, looking for something that can serve and support them better and taking care of their clients. And finally, even with being able to help with their own succession planning creates another catalyst of opportunities. So I think we think those things are much more important and bigger drivers of the ultimate sort of size of the movement, but certainly in the short run, there's been some noise or in immediate term, pretty extreme scenarios, right, of the macro, given the pandemic and the first equity markets last year since 2008. Yes, absolutely. Thank you. And then a question on the brokerage assets organic growth rate up 7% in the quarter. How much of that was driven by bank outsourcing? And I guess, like what deals specifically, any breakdown of that would be helpful. Yes, it's relatively minor. I mean the growth rate was 7% for the quarter. Prior to that, it'd be 6.5%. So a relatively minor part of it in the quarter. Maybe to add to that, if you're curious around why the trend or better growth in brokerage over the past three to four quarters, I think that's the evolving interest rate environment and advisers using solutions that may be more brokerage-oriented solutions, whether that be fixed income or whether that be annuities of which to help clients seeking higher yield or higher rates. And so that's where you're seeing some of that growth come from that wasn't necessarily the trend prior to last year. Thanks. Maybe one for Matt. The leverage ratio of 1.4 coming down from 1.7, I think you said it kind of continue to grow in a higher interest rate environment. What do you feel is maybe sort of an optimal sort of long-term leverage ratio? I think some peers, both public and private, tend to run at a bit of a higher number. And just sort of want to get a little bit more color as to how you think this might be best set up to optimize the business, I think, kind of in a long-term environment? Thank you. Yes. I think the 1.5 to 2.5 times, I think, is really the leverage ratio that we think makes sense in a range of different economic environments. And I think the ability to maintain a strong balance sheet and have the capacity to invest for growth in a range of different environments, I think, is a key part of our value proposition. I think it's a key part for our advisers and clients knowing that if the macro moves against us, and we're not at a leverage ratio, we're going to have to immediately pull back on investments or immediately pull back on being able to serve and support them and the host of capabilities that we have, recruiting and succession being an example. So I think the 1.5 to 2.5 times, we landed on that with a view that that's the right leverage ratio in a range of environments. And I think it certainly a key part of the value prop that differentiates from some of the firms that you mentioned. And I think where we are today, being at the low end or just below the low end of that, with a fair bit of capital deployment coming our way in Q1, including the acquisitions that we closed, as well as being positioned at that point in a macro that's, I think, anything but certain at this point, I think we like where we're sitting. Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dan Arnold for any further remarks. Thanks much, John, and I just want to thank everyone for taking their valuable time out to join us this afternoon, and we look forward to speaking with you again next quarter. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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Good day, everyone, and welcome to today's Nomura Holdings Third Quarter Operating Results for Fiscal Year Ending March 2023 Conference Call. Please be reminded that today's conference call is being recorded at the request of the hosting company. [Operator Instructions] During the presentation, all the telephone lines are placed for listen-only mode. A question-and-answer session will be held after the presentation. Please note that this telephone conference contains certain forward-looking statements and other projected results, which involve known and unknown risks, delays, uncertainties and other factors not under the company's control, which may cause actual results performance or achievement of the company to be materially different from the results, performance or other expectations implied by those projections. Such factors include economic and market conditions, political events and investor sentiment, liquidity of secondary markets, level and the volatility of interest rates, currency exchange rates, security valuations, competitive conditions and size, number and timing of transactions. Good evening. This is Takumi Kitamura, CFO of Nomura Holdings. I will now give you an overview of our financial results for the third quarter of the fiscal year ending March 2023, using the document titled Consolidated Results of Operations. Please turn to Page 2. Group wide net revenue for the quarter was JPY393.7 billion, up 24% from last quarter. As you can see on the right, income before income taxes increased 165% to JPY83.6 billion, underscoring a rebound in performance since bottoming out in the first quarter. Net income was JPY66.9 billion. EPS was JPY21.5 and ROE came in at 8.5%. The market was clouded by uncertainty in October as central banks in Europe and the U.S. shifted to monetary tightening and concerns grew over a recession. This gradually eased as the pace of rate hikes slowed, and there was a pause in appreciation of the U.S. dollar, leading to higher risk appetite among investors and a rally in equity markets. December brought a surprise move from the BOJ in yields curve control. Investors rushed into the bank and insurance sectors while selling real estate and export related stocks. The yen appreciation and the bear market prompted investors to buy on the dips, and sales increased as expectations rose over a revival in Japanese equities. So on the whole, we saw an improvement in investor sentiment during the quarter. Amid this backdrop, three segment income before income taxes rose 43% to JPY44.7 billion, as shown on the bottom right, driven by a rebound in retail and investment management. Income before income taxes from outside the three segments was JPY38.9 billion. In December, we sold a part of our stake in Nomura Research Institute and booked a realized gain of JPY28 billion, which is mostly included here. Before turning to results for each business, I will briefly touch on performance for the nine months to December. Please turn to Page 3. As I said, market uncertainty eased during the third quarter and investor risk appetite increase. But looking at the nine months compared to the same period the year before, market activity was generally sluggish across many product lines. Groupwide net revenue was roughly flat at JPY1,010.6 billion, supported by the precipitous drop in the yen. However, income before income taxes declined 28% to JPY126.8 billion, and net income slumped 24% to JPY85.4 billion. EPS was JPY27.44 and annualized ROE was 3.8%. As you can see on the bottom right, three segment income before income taxes declined 45% to JPY94.4 billion. Retail reported a slowdown in flow revenues, mainly from stock and investment trusts, while investment gain loss in investment management worsened. Conversely, retail recurring revenue and investment management business revenue, which represents stable revenues were both higher compared to the previous year. In Wholesale, the investment banking revenues slowed as corporates postponed share issuances and performance in our equities business was muted. Fixed income booked stronger revenues driven by the macro business. We also reported an improvement in gain loss related to transactions with a U.S. client in 2021. As a result, Wholesale income before income taxes increased 16% year-on-year. Let's now take a look at each business, starting with Retail on Page 6. By the way, the percentages I refer to from now on are all quarter-on-quarter comparison. Net revenue in Retail increased 12% to JPY81 billion. Income before income taxes grew 142% to JPY13.3 billion. By strengthening our segment based approach and providing detailed consulting services tailored to each client's needs and the changing market conditions, we were able to increase flow revenue by 22% driven by sales of stocks, investment trusts and foreign bonds. Recurring revenue was flat, but our recurring revenue cost coverage ratio remained at 50% as overall revenues increased, and we maintained expenses. Please turn to Page 7 for a breakdown of sales by product. Total sales for the quarter increased 7% to JPY4.9 trillion. Sales of stocks became more active each month as the market rebounds improved investor sentiment and retail investors bought on the dip in December. U.S. growth stock funds and high yield funds topped sales of investment trusts on the back of expectations for growth at U.S. corporates and higher bond yields. Sales of insurance products also increased as we made successful proposals for solutions for retirement funds and estate planning needs. Please turn to Page 8 for an update on KPIs. Net inflows of recurring revenue assets shown on the top left, increased slightly to JPY7.6 billion as there was a large investment trust redemption by corporate clients. Excluding corporate clients, net inflows were JPY190 billion, with contributions from discretionary investments, insurance and loans. As you can see on the upper right, recurring revenue assets stood at JPY18.1 trillion at the end of December, down due to market factors, although recurring revenue remained flat. Please turn to Page 9 for Investment Management. Net revenue increased 118% to JPY57 billion. As shown on the bottom left, business revenue, which represents stable revenues, increased by 5%. The Asset Management business remains solid and Nomura Babcock & Brown performance improved on the back of a recovery in the operating environment for aircraft leasing. Investment gain loss was JPY25.6 billion, a significant improvement compared to negative JPY3.7 billion last quarter. American Century Investments gain loss made a substantial contribution and Nomura Capital Partners reported unrealized gains and recognized realized gains on the exit of some private equity investments. Expenses increased 15% to JPY23.7 billion due to share sales and the origination of aircraft leases. And these are transaction related costs, which won't occur every quarter. Income before income taxes was JPY33.3 billion, the highest level in six quarters. Now turning on to Page 10. As shown on the top left, assets under management were JPY64.7 trillion at the end of December, down JPY100 billion due mainly to market factors. Net inflows on the bottom left show outflows of about JPY100 billion from the investment trust business due to JPY350 billion of outflows from ETFs. MRFs, where retail investors talk idle funds, reported inflows of JPY200 billion, and core investment trust also booked inflows of JPY44 billion. The Investment Advisory business reported inflows of JPY57 billion on inflows into foreign stock funds in Japan. As shown on the bottom right, alternative assets under management declined due to yen appreciation, but inflows continued. Please turn to Page 11 for Wholesale. Net revenue declined 8% to JPY189.1 billion. As shown on the bottom left, Global Markets revenues slowed by 15% to JPY154.3 billion, mainly due to a slowdown in rates and ForEx emerging markets. Investment banking revenues increased 24% on a recovery in the Japan ECM business. Expenses were JPY190.9 billion, up 3% due to yen depreciation, severance related expenses, platform enhancements and professional fees. As a result, loss before income taxes was JPY1.9 billion. Please turn to Page 12 for an overview of business line performance, starting with Global Markets. Net revenue declined 13% to JPY154.3 billion. Fixed income dropped to 25% to JPY86.7 billion. Macro products had a particularly slow quarter. Although rates revenues increased in EMEA for both the flow and structured businesses, agency mortgages in the Americas declined. ForEx emerging market in AEJ slowed from last quarter, which was the best in about six years. Spread Products revenues increased primarily in AEJ as China's economy reopened, but securitized products slowed due to muted client activity. Equities revenues increased 9% to JPY67.5 billion. Execution services revenues increased in Japan and the Americas due to primary transactions and a rebound in market volumes. We also recognized JPY9.1 billion in revenues related to prior transactions with the U.S. clients. Please turn to Page 13 for Investment Banking. Net revenue increased 24% to JPY38 -- JPY34.8 billion. Advisory remained solid despite a slowdown in global fee pools as M&A completed transactions and equity private placement transactions in the Americas contributed to revenues. As you can see here, revenue from financing and solutions improved markedly due to factors, including a rebound in Japan ECM and strong performance in the Solutions business for equities, rates and ForEx on demand for hedging a mid-market volatility. Please turn to Page 14 for an overview of non-interest expenses. Groupwide non-interest expenses increased by JPY24 billion to JPY310.1 billion, of which about 30% is attributable to yen depreciation. Other factors include compensation and benefits being impacted by severance related expenses in Wholesale. Other expenses increased by 32% due to a rise in professional fees related to transactions and because provision reversals related to progress in legacy transactions kept expenses down last quarter. Finally, please turn to 15, Page 15 for an update on our financial position. As shown on the table on the bottom left, Tier 1 capital was JPY3.2 trillion, down JPY36 billion from the end of September due to lower ForEx transaction value as the yen rose. Risk weighted assets rose by JPY770 billion from the end of September to JPY17.9 trillion. The waterfall graph on the bottom right shows credit risk declined by JPY460 billion, but market risk increased by JPY1.2 trillion due partly to a temporary increase in our position due to credit split widening and transaction origination. As a result, our Tier 1 capital ratio at the end of December was 18.1%, and our CET1 capital ratio was 16%, both lower than at the end of September. That concludes the overview of our third quarter results. This quarter, we finally saw market-to-market valuations turned positive after dragging down our results from the past three quarters. This, combined with the realized gain from selling shares in an affiliate company substantially lifted groupwide earnings. In our core business, we started to see an improvement in sentiment among investors and corporates and retail and investment banking revenues rebounded, giving us an ROE of over 8% for the first time in four quarters. Retail performance in January got off to a slightly slow start compared to revenue levels in the third quarter, but we are starting to see a bullish stance towards Japan equities as expectations grow over the reopening of the economy. Demand for a newly launched investment trust reopened Japan has been higher than expected. In Wholesale, fixed income, particularly macro products struggled in third quarter, but bottomed out in October and has been recovering. Overall, wholesale has gotten off to a good start in January. While maintaining this business momentum, we will manage cost stringently. As we said at our investment forum last year, we are working towards JPY20 billion in cost reductions in retail by end of March 2025. In Wholesale, we will see the impact of inflation globally, but we are reviewing our cost base in line with the current business environment, and we will continue to do so. This year, we expect inflation concerns and geopolitical risks to continue and we must remain vigilant. We will manage risk prudently while providing liquidity and solutions for our clients. Thank you. We have a question and answer session now. [Operator Instructions] The first question is from SMBC Nikko Securities, Muraki-san. Muraki-san, please go ahead. Thank you. This is Muraki from SMBC Nikko. Regarding the wholesale, first, on Page 11, the cost ratio 101%. And then this -- you say this includes some one-off factors, but how do you plan to bring this down to 80%? And the trend is revenue not growing so much, but meanwhile, expenses growing, increasing. So it's a reverse leverage situation. And looking back in 2019 and also 2016 April, you conducted a big cost reduction, and you announced a big reduction. And as a result, you were able to maintain share and reduce our costs. So at the moment, you have been making some cautious comments about -- or Morgan Stanley has making some cautious comments about reducing headcount, but they conducted a large-scale headcount reduction recently. And last December, Nomura, you said that you are not considering a major head count. But in April, which is an important timing for you, I'm looking forward to customers magic once again at Nomura. So could you give us some more color on that? And I don't think there are that many underperforming businesses, but compared to the past, it's getting quite hard to effective cost reduction. So could you also comment on the change in the situation, please circumstances? Second question is also about Page 11, the KPIs. If we divide the risk -- divide risk assets by net revenue, 5.9% of revenue divided by risk-weighted assets, you said trading was slow. But if you exclude the impact from trading, was the revenue over modified RWA slightly better? Thank you. Yes. This is Kitamura. Thank you, Muraki-san. Your first question and second question, they are -- they overlap to a certain extent. First of all, Wholesale and the cost income ratio of above 100%, which means we are loss making, very unfortunate. And we would at least like the bottom line profitable and that will be a high priority for us. And in terms of the restructuring, the U.S. players looked at the deal flow or the entertaining deal flow and market action. And two years ago, 2021, they hired a lot of people, which was almost like a hiring boom in anticipation of a pickup in market. So this was excessive expansion of their businesses. And then last year, the market environment changed abruptly. And they were forced to address the situation in several divisions. And compared to that, Nomura has almost not increased any headcount until last year. So we are not -- we were not forced to make major adjustments to our headcount. And the structural reform in 2019, as a result of that, we are now focused on our core products, and we have -- we are maintaining the top-ranked share. So we have a strong franchise, and we have a strong business platform. And you can see in the current performance in January of global markets, there has been a strong recovery. So the impact of the interest rate hikes, it's going to take a little longer for that to become clear. So we will -- the clients will continue to wait and see attitude in the structured business and finance businesses. So the question is how long this is going to last. And I think we can wait a little longer. So there will be some deferred demand -- pent-up demand at which point, we will have the franchise to harvest that. So we want to maintain the franchise. Meanwhile, last year, the people in the investment banking business shrunk significantly. And in terms of measures suggest the decline in profitability, we did do a cost reduction, which was quite large for Nomura. And this time, the cost income ratio being very high, was frankly due to more of a revenue issue rather than a cost issue. And this time, in Q3, the business unfortunately booked the loss, but GM earnings, JPY150 billion, which is quite tough. And in terms of client revenue increased or improved on a quarter-on-quarter basis. So we were not able to monetize from the revenue opportunities as well as we should have. October, with the dollar appreciation shifting towards dollar weakening and interest rate movement was quite choppy. And at that time, we were not able to secure revenues as well as we should have. And that was the major lesson that we learned from that period. And in Q3 -- at the beginning of Q3, especially October, things were quite tough. And as the months went by, wholesale, especially Global Markets earnings have improved, and that trend is continuing in January as well. So in the mid to long term we do have the platform to capture the upside in the future. Agency mortgage business in this quarter was quite tough. And revenue on RWA, 5.9%. And if we exclude those factors, yeah, it was as bad as that. And I can't give the exact number, but if we exclude the sluggish mortgage business, the revenue over RWA was reasonable. Thank you. Regarding the risk assets, this is Muraki again. On Page 15, you show how the risk assets has continued to increase. And you explained the reasons for this. But in terms of new risk taking, is that not that large or has that had an effect on this? And also, the FRB's additional regulations are -- last year, you have been reducing your risk assets in relation to the FRB's actions. But has there been any positive effects from that? This is Kitamura. For RWA, there was a slight increase. And in Q2, the increase in RWA was due to the currency levels. And this time, the JPY800 billion, JPY900 billion increase of RWA, and that was due to -- and I'm sure you know better -- you know [indiscernible] this was due to a technical stress SVaR that's what increased. And in the stress scenario, the positioning just happened to be that way. And so it's not like we have taken additional risk, the SVaR (ph) increased regardless of that. So the effect of that is the main cause for the slight increase in RWA. So again, it's not like we are taking some risk, which we haven't taken on in the past. And in fact, from a business perspective, we were quite cautious in Q3. But the SVaR increase caused the rise in the overall RWA. Thank you. This is Watanabe of Daiwa Securities. I have two questions. First of all, third quarter flow and position and the percentage on FIG revenue and rates and exchange rates changed. And I think you were in an environment that was quite easy to monetize. But why did you struggle so much macro products and what are your prospects? Secondly, IM investment loss JPY25.6 billion. That was an improvement. Major components would be unrealized of AEC and various unrealized gains. But can you give us a breakdown and ACI-related losses? -- volatility mitigation policy, I think you were taking some initiatives. This time, there was no impact from such policies. Thank you for the questions. First of all, on fixed income, third quarter flow. Yes, trading and -- this is Kitamura. On company-wide basis, fixed income, 9 versus one. 9 customers and risk or on position is one. That's the ratio. And as I said, inventory or position management we were not so successful. And therefore, in terms of proportion, the client revenue outweighs our own position. And there has been stronger bias towards client revenue than ordinary times. Why did we struggle in macro products? December was quite active. And that's our impression. October, the market reached a turning point. In October, we defended our positions without taking significant risk, and that's probably one of the reasons why we struggled. One of our core businesses is agency mortgage. And in the case of Nomura, macro or in the rates business, this is included in the rates business. Maybe the demarcation is different in our peers, but in our case, we include this in macro. And again, there was some activity slowdown and also the market environment was extremely tough. So we were not able to capture revenue opportunities in this area and fixed income, especially macro products was a big challenge for us. Having said so however, conversely speaking, we're not so much concerned. Yes, there was a dip in October, but then after we have been able to cause recovery. So if we look at just the three months fixed income and rates were poor in terms of performance. But that's only for those particular three months. And more recently, we are seeing robust recovery, and we are confident about our position. IM investment loss breakdown, regarding quantitative disclosures from the previous session, we decided not to disclose, but ACI occupied major proportions and NCAP unrealized gains and realized gains have been included. ACI hedging portion is increasing as part of our risk mitigation policy, but we're not taking full hedge. It's not completely hedged. This is a partial hedge. And that is why the unrealized portion increased. And that's part of the background. Yes, there has been impact from hedging, and there could have been upside if we hadn't hedged. But due to partial hedging, unfortunately, our hedging position booked losses. Thank you very much. I have one follow-up question. FIG revenue. If you look at the monthly on October, November and December, can you give us the proportion? October, November, December breakdown, this is Kitamura responding to that question. Fixed income, October 30%, slightly below 30%. November, about 30%. December, around mid-40s. So the performance has been improving month after month. Thank you. This time, for fixed income Japan, EMEA, U.S., could you explain the breakdown or the percentage? And I would like to have -- make a follow-up question. So why don't I stop there first? Yes, this is Kitamura. For fixed income, Japan, 20% or mid-20% -- 20% to 30%; EMEA, 30% to 40%; Americas, 10% to 20%. AEJ, a little bit less than 30%. Okay. Understood. So Japan is almost flat, easy to understand. EMEA was good and Americas went to less than half Q-on-Q big decline. And AEJ Q2 was too good. So there has been a decline. And you've been saying that October was the bottom and things are recovering, and you're almost asking us to forget about October. Yes, in terms of risk taking, perhaps you were not taking the risks and the hedging works in an adverse manner perhaps. But this going forward, is that going to repeat itself? Is there a list chance of something like that happening? How can we have more comfort in believing that? And the mortgage business is still slow. And early January, there were a lot of loan applications, but overall, the mortgage business remains slow and is expected to continue to be slow. And you talked about restructuring earlier and you said you don't need to do the restructuring and the wages has gone -- competition has gone up quite a bit Q-on-Q. Is it really okay, especially when we think about the FIG (ph) Americas, agency mortgage, could you cover those topics, please? That's my first point. Second, again, FIG, your Americas FIG is, there are deals which are related to Asia and also Japan and you are getting a lot of orders related to the Asian region. And with short-term interest rates moving in that way in the U.S. in October, the yen depreciation shifted to yen appreciation. So that had an effect on the Japanese financial institutions and various companies changing their investment policy. Did that lead to a decline in your revenue opportunity and are things going to be slow for a while going forward. Thank you. This is Kitamura. Your first point. And for agency mortgage, I can't go into details about each individual product. But for agency mortgage, October was tough, and that is true. And you can see that in all sorts of data, mortgage-backed securities issuance. There was a big decline. And so environment was quite tough as you know. However, I'd like you to recall how there's been a big decline. So the market has -- it's almost frozen and almost no volume. And so in terms of market outlook, if there is more clarity in the market outlook and if the FRB's monetary policy becomes more clear, then there could be some improvements in the businesses, which were weak last year. And one of those businesses is the agency mortgage business. At Nomura, we have the top share in agency mortgage. And so we have the strong platform or base to capture the upside. And we're not expecting a recovery overnight, but we are not expecting the current situation to continue forever either. So when things improve, we will make sure to capture that upside. And your second point, Americas and the relationship with Asia and Japan in some of the deals. If we look at the clients' activities, yes, it is starting to change, especially recently with the BOJ's policy actions and changing its monetary policy. So international investors, Japanese investors are focused more on the JGB market and client activity will remain high and strong for a while. So I'm just talking about expand at the moment, but there hasn't been much action in this part of the market for quite a long time. And the market share, our market share is quite high in this area. So the JGBs have started to move, and that's quite significant. Meanwhile, in the U.S., the yield curve in the U.S. at the moment, it's a negative yield in Brazil, but if that changes, there could be a shift from Japan to the U.S. partly because of the interest rates. So yes, we are expecting some movements. And Japanese investors are, as I said earlier, they are interested in JGBs at the moment, but the size of the market, the depth of market is much bigger in the U.S. So when things stabilize, then I think there will be a flow of money from Japan to the U.S. Thank you. Yes. Just one follow-up. Japan. For Q3, Japan FIG was basically flat. But in mid-December, there was some action in the business, but it didn't leads to an increase in the FIG. So in Q4, how should we see Q4, please? This is Kitamura. Thank you. I can't really talk too much in detail about the January numbers, but the fixed income in January is strong. That's all I can say. Thank you. This is Sasaki of Bank of America. I have two questions. First of all, in the Tanshin summary, Page 13 segment profits. And at the bottom of segment income, you have the quarterly disclosure. And about the segment income, negative equity method investment numbers and realized gain was positive. And those numbers are approximately the same. In the press conference, you said there are two transactions. What is the accounting treatment applied here? That's my first question. Thank you for your question. This is Kitamura speaking. As you see, 20.7% versus approximately the same. So on a net basis, it's JPY1.2 billion positive between unrealized and realized for policy holdings. On a regular basis, we monitor the significance or objective of policy holdings, and we're trying to reduce our portfolio, and we've begun to do so since approximately 10 years ago. You know that against our Tier 1 capital, the level of our policy holding only accounts for 45%, which is significantly lower than other financial institutions and more recently, we have continued to sell off those hoveringâs. And now I directly respond to your question, but in our Nomura's segment information regarding shares that we have sold, the amount of difference between the investment we have done and the sales proceed is shown as realized gain. So until the previous quarter, the accumulated amount, which had been booked as unrealized losses, that is reversed in one month. So that amount is therefore shown on two lines. And so what had been included in unrealized gain was realized and therefore, that had led to losses, unrealized losses. So that is how the accounting treatment works. And the same accounting treatment had been applied since the past, but there was a bit of a deformation because of the size of the amount. Thank you very much. And the second question, ACM business has improved. I will deviate from the performance results, but YCC disclosure -- do you think JGB is going to become very profitable there's higher attention, but I think it's only going to be security firms that will purchase. But do you think that environment will unfold so you can expect certain revenue or downgrading it can also be contemplated. But with rise of volatility, investment banking, can book revenues, is that too simplistic or to the extent possible, can you share with us your thinking? This is Kitamura. Frankly speaking, I talked about physician management not being so successful. And immediately, having made that comment, I don't want to reverse. But I don't think the investor will certainly place weight on the reverse side. So it will not be a case where the position will continue to accumulate. So as we make coordination and adjustment in our position when there is client activity, of course, that would mean venue opportunity for ourselves. So if there is volatility, no doubt that would lead to revenue opportunity. Thank you. This is Sasaki again. But if you have a recollection, when there was -- when negative interest rate kicked in or people stopped purchasing JGB that had led to a big difference or change in the JGB prices. You had experienced such events. Were you able to book significant revenues as a result of those events in the past? I apologize, I don't have the data at hand. This is Kitamura speaking. But in principle, when there is market shock, rate-related business would be improvement -- significant improvement in performance. That's a general comment. But sorry, I do not have data at hand, but intuitively, that's how it is. Thank you. This is Niwa from Citi. Two things. First is about retail and revenues, retail revenue. And the other is about the investment trusts and the launches of new investment trusts. And for retail revenue, in this quarter, the flow was strong. So things are quite good and it gives us more comfort. But I was wondering how to think about that period. And in the -- if we look at the past nine months, the level, revenue level seems to be improving. And -- but compared to the past, it's still not there yet. So -- and when compared to your peers, these three months, the recovery in this three months was quite strong at Nomura. So my question is, is there a difference in the client base between you and your peers? And was that how we should assess the improvement in retail revenues or were your operations too conservative? And are you now shifting more towards risk taking? And are you becoming more active in covering your clients' customers or are you getting used to the new business structure following the reforms? So could you give us some more color about the revenue improvement and whether we can have more comfort in revenues continuing to improve. So yes, the sustainability of the flow revenue, please? My first point. Second is this is based on the media coverage, but in the Asset Management division, there was successes in some of the inceptions of new investment trusts. This is especially for Japan equities. And my question is these newly launched funds are more popular in the markets. Is that right or are you focused more on your existing funds and is that lineup sufficient? My interest is when it comes to new fund assumptions or when you provide new products? I think they are becoming more popular among corporate clients as well as retail investors. So I was wondering what the market sentiment is for investment trust products, please. Thank you. This is Kitamura. Nomuraâs retail business outperforms our peers or at least it looks that way. And the reason for that is your first question, I believe. The customer base and also our proposals to customers were also -- were both factors. And previously, or I forgot maybe it was the previous one before that, but we learned from our past experience that we were somewhat hesitant in proposing to customers about our products. And in terms of proposing one product, we should propose various products, and that will deepen our discussions with our customers. So that's what we decided to improve on. And since then, we have become more proactive in introducing and proposing products. And that has -- we have got -- there's been a big improvement in terms of the contacts and the number of proposals with customers, there's been steady improvement and growth there. But just because we make our proposal to customers, it's up to them to decide whether to make the investment or not. So having a strong customer base is important. And on top of that, the way we promote our products, the way we behave has also changed, I think it's multiple factors which led to this improvement in the revenues for retail. I'm not so sure about what our peers are -- have been up to, and we are looking at their performance, but we don't exactly know what was behind their performance, but I think it was thanks to us strengthening our proposals and the customer base. These were the factors behind the revenue improvement. And your second point about the reopening the large investment trust and we were able to stimulate the demand for investments, and we were able to cater to the needs of customers. At the moment, in the Japanese stock market, retail investors are making net purchases. And on the January 6, we hosted the Japan equities event. We did a seminar to explain the investment environment of the Japan decrease. And more than 1,000 people attended this webinar. So there's very strong interest in Japan equities more so than in the past. And over the past few years, there was more interest in global equities, mainly U.S. equities. But I think there's this sentiment of heightened interest towards Japanese equities and people are coming back to Japan equities. And within the portfolios of customers, they had been underweight on Japan equities. And this time, that we have been proposing Japan equities to diversify their portfolios, and that has led to purchases. So we're not planning to launch these big funds continuously, but now it just happens to be the right time, and that's why we launched this new fund. And there are numerous financial products out there in the market, and we were able to address and we will address the customer needs and the market environment and promote the product, and we'll continue to strengthen our product proposals. Thank you. Thank you very much. Regarding the first point, may I make a follow-up, please. Over the three months, maybe there isn't much clear trend. But on Page 7 of the presentation, bottom right, you get the hit products, it's the U.S. growth stocks, high yield. And so these are somewhat contrarian, I think. But in terms of customer needs and customer characteristics, how do you see it at the moment? And yes, I understand how these products were popular among those customers. But when you look at the recent hit products, how do you analyze the appetite of investors. Thank you. This is Kitamura. For U.S. equities, the reason why they were popular is, as you pointed out, Niwa-san, it was more of a contrarian approach, I think. And there was a big correction in U.S. equities. In meanwhile, there is strong expectations for growth in the U.S. So when investors want to build their assets over the mid to long term, they wanted to add a position to their U.S. equities, U.S. growth stocks as part of their portfolio, I think. And as for high yields, we have a very strong track record in this area. And we have been diversifying our investments about 700 , I think, is the diversification and has been maintaining very strong performance and the interest rate situation is changing. And the currency has stabilized quite a bit from the past. So interest rates remain high and some investors want to buy these types of products, I think. [Operator Instructions] There is no more questions. We would like to finish question-and-answer session. Now we would like to make the closing address by Nomura Holdings. Yes. Thank you, everyone, for joining in Q3, if we look at the results, the Retail division, which had been struggling for the past three quarters and also investment management have seen some positive movements. And meanwhile, unfortunately, wholesale was loss making. And so the results for this three quarters were not that strong, which was disappointing. But recently, in January, the performance has been improving. And so we are going in the right direction. And we are not that -- we don't have a major concern about the situation. But a lot of people pointed out the cost level, which I, too, have a strong sense of urgency. And it's not like we haven't been controlling costs, but we will think about our cost strategies more strategically in the future. So we know what we have to do, very clear, and the themes we have to work on are very clear. And if we look at just this quarter or on a quarterly basis, there have been some ups and downs. But -- we don't want to be true carried away by that and focus more on what we have to do in the mid to long term. So we look forward to your continued support and understanding. Thank you very much.
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Greetings, and welcome to the ArcBest Fourth Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Friday, February 03, 2023. I would now like to turn the conference over to Mr. David Humphrey, Vice President of Investor Relations. Please go ahead. Thank you for joining us. On today's call, we will provide an update on our business, walk you through the details of our recent fourth quarter and full-year 2022 results, and then answer some questions. Joining me today are Judy McReynolds, Chairman, President and CEO of ArcBest; David Cobb, Chief Financial Officer of ArcBest; Danny Loe, ArcBest President of Asset-light Logistics, and Chief Yield Officer; as well as Dennis Anderson, ArcBest Chief Customer Officer. To help you understand ArcBest and its results, some forward-looking statements could be made during this call. Forward-looking statements, by their very nature, are subject to uncertainties and risk. For a more complete discussion of factors that could affect ArcBest's future results, please refer to the forward-looking statements section of our earnings press release, and our most recent SEC public filings. To provide meaningful comparisons, certain information discussed in this call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release. Reconciliations of the GAAP financial measures to the related non-GAAP measures discussed in this call are also provided in the additional information section of the presentation slides. As a reminder, there is a conference call slide deck that can be found on the ArcBest Web site arcb.com, in Exhibit 99.3 of the 8-K that was filed earlier this morning, or you can follow along on the webcast. Good morning, thank you all for joining us. I would like to begin by acknowledging a few tremendous milestones for ArcBest. First, we exceeded $5 billion in annual revenue for the first time in company history, with year-over-year revenue growth of $1.3 billion. We also achieved the highest earnings per share in our company's history. These important accomplishments could not have happened without the hard work and dedication of the entire ArcBest team. The other important milestone I want to highlight is a celebration, 2023 marks our hundredth anniversary. ArcBest has flourished over the past century, and we are positioned to continue driving this momentum forward into the next century. The road to 100 years has been paved with resilience, flexibility, innovative thinking, cutting edge solutions, and a commitment to our core values. We know who we are, and because we have stayed true to our values and focused on our strengths, we've been able to innovate and successfully navigate enormous amounts of change. Nothing intimidates us. We have a saying, "We'll find a way," which means we'll stop at nothing to get the job done well. I'm incredibly proud of what we've accomplished together. Our results remain strong, as does our growth opportunity, regardless of the obstacles facing our industry. We are on track to achieve our long-term financial target of $7 billion to $8 billion in revenue by 2025, and will continue to manage the business in the short-term as market conditions evolve. As we've shown time and again, we are a company that thinks ahead and plans for the long-term. We continue to strengthen our competitive edge through our diverse portfolio. The breadth of modes we offer our customers allows us to make the most personalized and strategic decisions for them; decisions that will help them grow. In fact, I recently connected with a customer whose supply chain we started managing last year. They initially saw ArcBest as an LTL company, but after learning about our additional solutions they selected ArcBest as their logistics partner. Within a fairly short amount of time, we developed a deep partnership, managing their transportation, and creating exceptional value for them As a result, we're expecting double-digit growth wit this customer in 2023. It is deep, trusted, customer relationships like this that have and will continue to contribute to our success in any operating environment. Throughout 2022, we continued our strategic investments in technology and innovation. Innovation isn't just a buzzword for ArcBest; it's embedded throughout our long-term plans, and in the way that we approach our daily work. We started and completed numerous technology projects in 2022, which allow us to run our business with more precision, better identify issues, and quickly address the root causes with a tailored solution. Looking ahead, we are advancing our use of technology to strengthen our business and better serve our customers. We bring our innovative mindset to every partnership, building processes and digital capabilities that make it easier and more efficient to do business. We prioritize investments in these critical parts of our business to stay ahead and succeed now, and in the future. Building on that, you've heard us reference an innovation investment we've made which includes patented handling equipment, software, and a patented process to load and unload trailers. In addition to being used in parts of our network, we are currently piloting this program in several customer locations. We're encouraged b the early value it's delivering, and we have several large customers already interested in broader deployments of this solution. We believe it has the potential to be an industry game changer, and look forward to sharing more, later this quarter. Of course, none of our innovation or our results this year and over the past 100 years would have been possible without great people who work hard every day to solve logistics challenges for our customers; a sincere thank you to the ArcBest team. And now, I'll turn it over to David who will take you through the quarter and the year in greater detail. Thank you, Judy, and good morning, everyone. I'll begin by highlighting our consolidated results. Fourth quarter 2022 consolidated revenues were $1.2 billion, a 5% increase over last year. On a non-GAAP basis, consolidated operating income decreased 19% to $83 million. And our adjusted fourth quarter earnings per diluted share was $2.45. For all of 2022, our consolidated revenues were $5.3 billion, a 34% increase over 2021. Non-GAAP consolidated operating income was $473 million, a year-over-year increase of 49%. 2022 adjusted earnings were $13.66 per diluted share, an increase of 60% over 2021. The 2022 effective tax rate that was used to calculate the fourth quarter non-GAAP EPS was 26.3%. And under current tax laws, we expect our 2023 non-GAAP tax rate to range from 26% to 27%. Of course, this may be impacted by discreet items throughout the year. We're pleased that our business momentum this year produced solid cash flow, with our 2022 EBITDA totaling $572 million. ArcBest's cash balance and total liquidity are also at strong levels. And as of the end of 2022, we had net cash of $61 million, an improvement of $13 million since the end of the third quarter. Total liquidity of $566 million remains at a very healthy level. And despite rising rates, the composite interest rate on the company's outstanding debt at year-end was just under 3%. ArcBest's strong balance sheet and the operating cash flow generated in 2022 allowed us to invest in a business through new equipment purchases, real estate additions and improvements, and technological innovations, all of which will strengthen our competitive edge and ability to serve customers. We regularly review external growth opportunities and are pleased to have returned capital to shareholders, with enhanced share repurchases in the quarterly cash dividend, which the Board increased by 50%, in April of 2022. We will maintain our balance approach to capital allocation, targeting investment-grade credit metrics, while prioritizing returning capital to shareholders through share repurchases and dividends, and considering M&A opportunities when appropriate. Additionally, in the current environment with reduced business levels, we're especially focused on effectively managing personnel, equipment, and other resources to provide superior customer service while controlling costs and improving profit margins. Turning to the key metrics in our Asset-Based business, our Asset-Based fourth quarter revenue was $711 million, an average daily increase of 5% over last year. The fourth quarter non-GAAP Asset-Based operation ratio, of 88.6, is a year-over-year increase of 170 basis points. As mentioned last quarter, repairs and maintenance have been elevated due to inflationary costs, and in part due to delays in receiving replacement equipment. Those costs are in the Asset-Based line for fuel, supplies, and expenses. Also as I mentioned in the last quarter, we were able to make good progress on optimizing our usage of outside resource costs with purchase transportation declining as a percent of revenue. Fourth quarter tonnage per day decreased 5.5%, and daily shipments increased by 1%. Total fourth quarter build revenue per hundredweight increased 9.3% including fuel surcharges. We secured an average 5.4% increase on Asset-Based customer contract renewals and deferred pricing agreements that were negotiated during the quarter. In 2022, total Asset-Based revenue was $3 billion, a daily increase of 17%, and the highest ever for ABF. Total tonnage and shipments both grew approximately 2%. Total revenue per hundredweight increased 14.5% with an average 7.3% increase on customer contract and deferred pricing agreements renewed during the year. The full-year non-GAAP operating ratio was 86.4%, reflecting an improvement of 240 basis points year-over-year, and 1,150 basis points over the previous six-year period. As we look at January trends, the slowdown in the general economy has impacted customer order quantities and resulting shipment sizes compared to January 2022. On a preliminary basis, our January 2023 Asset-Based tonnage increased 1%, and shipments increased 7% year-over-year. For additional details on our January 2023 trends, please refer to our Form 8-K exhibit to the press release. In ArcBest Asset-Light business, total fourth quarter revenue was $572 million, a daily increase of 7% versus fourth quarter of 2021, and reflecting a full quarter of MoLo operations in 2022, compared to only two months in last year's results, but also offset by a slowdown in customer shipping volumes, softness in market rates, and changes in business mix. In the FleetNet segment, events and revenue per event increased over the prior-year period. And for all of 2022, Asset-Light revenue increased 60% over 2021, to $2.5 billion, reflecting the impact of the full year of MoLo and strong customer demand for our logistic services, particularly in the first-half of 2022. Fourth quarter Asset-Light non-GAAP operating income was $11 million, and for full-year 2022, totaled $90 million, an increase of 82% over full-year 2021. Fourth quarter Asset-Light EBITDA was $13 million, and totaled [technical difficulty] 2022, a 74% year-over-year increase. We provided preliminary asset-light business trends for January 2022 in the Form 8-K exhibit to the press release filed this morning. The current trends in that business continuing to be softer, reflecting the recent demand slowdown. In 2022, net capital expenditures including equipment financed totaled $211 million. 2022 expenditures for revenue equipment totaled $93 million, most of which for ArcBest's Asset-Based operation. Depreciation and amortization cost on property, plant, and equipment totaled $127 million. In addition, amortization and tangible assets was $13 million in 2022. As in 2021, manufacturing delays and part shortages impacted us in 2022. And as a result, we had to reduce some trailer orders in a portion of our asset-based equipment. And real estate projects were pushed out during the year and into 2023. For 2023, we expect total net capital expenditures of $300 million to $325 million including equipment purchases of approximately $175 million. A majority of which is for ArcBest's Asset-Based operation. As I mentioned, our 2023 investment plans reflect catching up on some 2022 equipment and real estate projects as well as 2023 investments above last year's levels in equipment, to support our growth plans through long-term targets. 2023 depreciation and amortization cost are estimated to be approximately $130 million. This does not include amortization in tangible assets which is estimated to be around $30 million for 2023, primarily related to purchase accounting amortization associated with the MoLo acquisition. We are very pleased with our financial results in 2022. Our financial street and century loan commitment to effectively meeting customer needs positions us to navigate market challenges effectively while focusing on our strategy for long-term growth and sustained profitability. Thanks, David. Good morning, everyone. I'll provide an update on the asset-light side of the business and give a high level over view on yield. We continue to see benefits from an improved truckload offering as well as benefits from the MoLo acquisition. The timing of that acquisition has been particularly favorable as it brought us more contractual business and better procurement in the spot market. While truckload spot rates declined sharply in the fourth quarter, we still grew shipments, which is a testament to the strength of our truckload solution. We continue to focus on profitable shipment growth in pursuit of our long-term financial targets despite market pressures that impacted us in the fourth quarter. Shorter term, we are also focused on what we can control. And part of that is managing cost. We continue to invest in our existing team with a focus on employee productivity. Additionally, we have better capacity capabilities, and are continuing to benefit from MoLo's career management approach. On the asset-based side, pricing has also remained rational. And our focus continues to be on profitable growth and effective cost control. We estimated our general rate increase in early November. And we will price appropriately to reflect our high quality service offering. As we entered our 100th year, we continue and evolve to better serve our customers which positions us well in any market environment. We have diversified our solutions and worked diligently to integrate them so customers have seamless access to our services. We are streamlining our business from the initial interactions with our customers to the day-to-day execution and are seeing the benefits of this strategic work. We have built additional revenue streams through solutions like dynamic pricing and U-Pack, which supplement our published LTL business and allow us to flex based on customer needs and market dynamics. In times like these, we strategically use these tools to fill empty capacity with profitable transactional shipments, which up to this point has enabled us to avoid furloughs or layoffs and provide a more sustainable service offering, while being better positioned for profitable growth toward our long-term targets. In short, a big win for our ArcBest, our employees, and our customers. There is debate in our industry about a technology-centered versus a human-centered approach. We believe the key having a blend of both, using technology to improve efficiency for employees while giving our customers the choice and the ability to seamlessly switch from technology driven solutions to human driven ones based on their needs at that moment. We are pleased with the progress we have made, and the feedback we have received from our customers. Having productive employees is critical. And we are pleased with the productivity improvements we are seeing with having all of our truckload employees on the same operational platform. With the hundred years of experience, we are uniquely positioned to help our customers find the best solutions for their supply chain needs. Taking a broader logistics partnership has benefited both segments of our business. It has enabled ABF to have a better selection of freight with the ability to choose shipments that fit best within that network. And has allowed us to say yes to customers who move freight another way but want ArcBest to coordinate and centralize the logistics experience. So we began a pilot that would expand brokered LTL to transactional shippers. And through this, we learned some important lessons. As a result of our close relationships, we were able to gather valuable feedback from customers and our LTL carrier partners and learned that there were some places that experience could be much more efficient. Using our internal tech team and leveraging our 100 years of experience in the LTL industry, we quickly stood up a proprietary system to address the inefficiencies identified. While this project is still in pilot phase, we are encouraged by the early results, and look forward to expanding the pilot to serve more customers. Thank you, Danny, and good morning, everyone. Our focus remains on creating value for our customers, and we have taken important steps to help us advance this goal, including strengthening our organizational alignment and collaboration, and making strategic investments in technology. We have tightened coordination across our sales, marketing, operations and service teams, which enables us to be more productive and efficient while providing a more seamless experience for customers. You hear us talk a lot about our customers. And we're celebrating our 100th anniversary this year because they continue to trust us to solve their logistics challenges. When they win, we win. And we strive to make decisions with a customer focused mindset. Of course, that means having a superior service offering that they value, but it also means serving them efficiently. Technology is a big part of making that happen. And over the last few years, we have been diligently working to build systems to give our customers a best-in-class experience. We view this as an investment that strengthens every point on the customer journey. Providing a best-in-class experience throughout that journey starts by giving our employees the tools they need. So we work with a disciplined approach to improve system and process efficiency. An example of this is our city route optimization project, which has already been rolled out to about a third of our service centers, which handled nearly half of the freight in the ABF network. This deploys advanced analytics to dramatically reduce the amount of time it takes our people to plan pickup and delivery routes so that they can focus more on managing the operation in real time. Locations using this technology were 80% more effective at reducing cartage in the fourth quarter. This is just one example of how we are relentlessly pursuing better, more efficient ways of doing business. Customers also want better supply chain visibility. And based on their feedback, we began building a platform to enhance that visibility across all of our solutions. This is no small feat given our breadth of mode options and capacity sources. But we know it's important for our customer success and an opportunity to enhance our value proposition for them. So, we will begin testing with customers later this year. Additionally, we just launched a redesigned website at arcb.com and we'll be rolling out enhancements there throughout the year improving the sites functionality and enhancing the user experience. Our customer needs drive our strategy and innovation investments. We're in a strong position both to listen to and act on customer feedback. The pilots we've been running with our customers to transform the way they handle freight are providing encouraging results. And we're excited to share more with you about that solution later this quarter. In short, innovative technology is an important driver of growth and efficiency for our company and an important differentiator for ArcBest with our customers. Despite the softening occurring in our industry in the economy, this designing and running efficient and effective supply chains have never been more critical. The opportunity for us is as significant as it has ever been. Shippers have largely shifted their focus from just securing capacity to improving supply chain efficiency. And we're in prime position to capitalize on that opportunity as our integrated solutions and our managed transportation offering in particular are designed just for that. Additionally, our customer pipeline is robust. We're closing more and larger deals, and more customers are using more than one of our solutions. Customer retention remained strong. And with our diversification across multiple industries, we are positioned better then ever before to perform through any cycle. It's not uncommon to have customers who change companies, even take us with them as their logistics provider. Just recently, I was talking with a customer who did this. They had used us to manage their transportation at their prior company. But when they joined a new organization, the solution they needed help with the most was truckload. So, that's where we started. Hearing these stories from customers is a testament to the deep relationships we have with them as we partner to build the best supply chain for their business. I am very proud of what our entire team accomplished this past year. Our long-term focus on customer value creation, our breadth of integrated solutions, the expertise of our people, and our tech-savvy and innovative spirit mean that we are poised to capture the large market opportunity ahead of us, and reach our long-term financial targets regardless of the environment. Thank you, Dennis. Before we conclude, I first want to take a moment and thank David Cobb for his contributions to ArcBest. David recently announced that he will be retiring later this year, and we are actively working to identify his successor. When David joined the organization 17 years ago, we had $1.9 billion in revenue, and 97% of our revenues came from the Asset-Based side of our business. David has worked alongside me and other leaders every step of the way to help transform ArcBest into the integrated logistics company it is today. He has led with integrity and skill, helping us navigate many changes. And on top of it all, working with David has been a pleasure. We will miss working with David when he leaves, in October, but wish him the best in his retirement. As we close, I want to reflect one last time on our strategy and position. Supply chains have never been more critical or complex. We regularly revisit our strategic to make sure it's sound and that we're executing well against it. When customer needed capacity, we were positioned to serve them and grow with our own assets and a network of currently over 95,000 carrier partners. And now, with customers looking for efficiency, we are well-positioned to deliver. We have an incredibly talented group of employees who are experts in our field, including a nearly 500-person in-house technology team building and implementing systems to make us and our customers' businesses more efficient. Our breadth of solutions and our innovative mindset allow us to build flexible, resilient supply chains. While there are some macroeconomic headwinds, ArcBest has demonstrated resilience throughout its history. We are ready for what's ahead both this year and beyond. I'm going to close by thanking our current and past employees, our customers, partners, and shareholders for helping us reach our 100th anniversary. Thank you for the opportunity to serve you. We are proud of what we've accomplished, but we are just getting started. We're committed to keeping the global supply chain moving, delivering on our goals, and driving growth as we look forward to our next 100 years. I guess I wanted to start on demand trends and what you guys are seeing in the Asset-Based business. So, if we look at the monthly tonnage, looks like it decelerated a bit over the course of the quarter. But then the January number, I think, was plus 1. So, maybe it looks like a little bit of a reversal of that. So, don't necessarily want to get too hung up on any one given month, but wanted to get a sense of what you're feeling in terms of rounding the corner on 2022 and coming into 2023, in terms of customer demand in LTL? Hey, Chris, this is Dennis. First of all, we did see a deceleration as the quarter progressed. Certainly in a weakening environment, retail led that. But, of course, we have seen some softening, as the quarter progressed, in manufacturing as well. Really, as we progressed into January, where the trends are similar, I mean when you look at the year-over-year number. But the demand environment feels very similar to where it ended the fourth quarter, and certainly I'll let Danny comment if he has any other things to add. No, I think that's -- what Dennis said is consistent. It's broad-based. Dennis said retail is leading it, but I think we felt leanness across. Maybe a great representation of what we see is really with our managed customers. We have a very high retention rate, really can't remember the last time we've lost a customer necessarily in that. But that we've seen a deceleration in top line revenue for that, which is meaning our customers aren't shipping as much inside that business because we see the whole supply chain. So, I think that's representative really of what we saw across all of our business through the fourth quarter, and into January, at this point. Yes, that trend is consistent across Asset-Based and Asset-Light. Customer retention is still terrific, but the customers, in general, are shipping less across the board. Okay, yes, that's helpful color. And just a follow-up on pricing, so I noticed in the 8-K you mentioned that the increases ex fuel, in January, are coming in on the LTL side in the double digits, kind of getting a sense just what your feel is about the sustainability of that level of pricing power? And I know comps clearly have something to do with that as well as the year progresses. But wanted to get a sense of how you're sizing up the sustainability of really good pricing power in the LTL business as we move through some of this softer tonnage environment over the next several months or maybe several quarters? Sure. This is Danny again. The pricing [indiscernible] is still rational. We really haven't seen weaknesses across that piece of it. It's obviously not the same as last year, but if you look at our increases in the fourth quarter on deferred contracts, like you mentioned what we're seeing in January with the revenue per hundredweight. We're comfortable that we can continue to price and price above inflation as we go forward. Our trends -- our actual business that we talk about gives us strength to -- helps us have more confidence in the core business and what we can do with the price levels there. But right now, we, again I would say that it's consistent with what we've seen through the fourth into the first quarter so far. Thanks for everyone. Congrats, David, and congrats to everyone, wish best with the 100th anniversary. I think this is the perfect catalyst to host another Analyst Day and give us some limited edition swag, but that's just me. Then yes, and that will be a good catalyst. So, just to follow-up on the previous question, how do you think about that algorithm between tonnage growth and pricing? Kind of at what point -- like is there such a thing as too much price that you dial down to get some more volumes to drive up the operating leverage or just a little bit of some background with that process would be helpful. Sure. Ravi, this is Danny again. I'll start, and maybe Dennis may have some more. We are seeking the right balance, but I think the key to that is we have more visibility than we've ever had. We're able to make decisions. My yield team meets with the operations team with ABF really every week, but really conversations going on every day. And we're able to make decisions about what we want into our network. And again, having the ability to have the core business, that committed long-term business and then fill in where we're having capacity with transactional is really unique and gives us an advantage in how we approach the market place. And so, one of the biggest things that we're able to do, we mentioned not -- that we haven't had a need to furlough or lay off employees. That puts us in great position for our long-term targets. If the market turns with that, we can move from transactional to core business as our customers' demand comes back, and they approach us. And that business is at a higher revenue per hundredweight than the transactional business. But the transactional business is profitable and puts us in a great position right now. So, that's really how we're thinking about it. We kind of adjust as the market goes. And so, the flexibility is the key there, that as the market dynamics change we're able to bend and flex to the right answer for our company. Hey, Ravi, this is Dennis. Just adding there, when you look at what our pipeline looks like for LTL business, that's strengthened. And we have more opportunity really than we've seen in a long time to grow that demand base. And we think about where we're positioned as an integrated logistics company, we're seeing more opportunities and able to manage, as Danny talked about, what business we really can take and want in that Asset-Based business. And so, we have the capability with that integrated logistics approach to be able to really optimize that answer for us. Got it, that makes sense. And maybe as a follow-up, can you just parse some of the differences in the outlook you are seeing out there between your retail customers and your industrial end customers. I think there's some expectation that retail customers might see normalization fairly soon, but industrials might take longer. A, can you remind us of your mix of the two of them, and also what the outlook difference might be between them? Yes, certainly. The manufacturing is still the leading part of our customer base, and it's about a little over a third of our customer base. And then retail follows behind that. But in the retail industry, we're seeing some normalization of inventory levels. Certainly what we're hearing from most of our customers is that they're back either at or near pre-pandemic levels, but that does vary within the -- that does vary within the retail space, certainly by the type of retailer. And so, we see some different -- different trends within that. But on the manufacturing side of things, I mean certainly, as I mentioned, that that's lagged a little bit, the retail weakness. And so, we saw retail weakness probably a little bit before we saw the manufacturing weakness that showed up early, as the fourth quarter progressed. So, that's really what we're seeing there. Oh, you're so welcome, David. Well deserved, sir. Want to go to pricing a little bit here. We're still seeing, I think, what you would call a good and rational marketplace. But you did see some sequential drop in terms of your contract renewals. I think, in your slides, it said 480 BPS. Are we getting it close to the point where we're starting to worry about being able to price above your cost inflation, which everyone's seeing a lot of cost going up right now? And number two, are we fearing that you could see a drop-off in volumes if the economy slows, that could be a detriment to the pricing market as you move throughout the year? Yes. Jason, this is Danny. So, two things; one, just the levels we've talked about, 5.4% in the fourth quarter, if we go back, it's still probably a top 25th percentile for us, so -- on increases. It's still a rational market. And as far as continuing ahead, yes, we feel confident we can price to cover inflation and also capture value in our service offering as we go forward. I think the other piece is to look back at over the two-year stack of the pricing improvements that we've had. It puts our core business at a really great level. And that takes pressure off of trying to get larger increases if you're just trying to cover the inflationary pieces of it that you go forward. I think your other question with regard to does declining demand put pressure, is kind of what I mentioned before. I think we feel confident right now that we have a transactional lever that can keep us -- keep our employees active and keep profitable shipments into our business that takes some pressure off of the price on the core business. And again, we will keep it going, and we will keep focusing on and pricing above inflation. And we also have the network and the employees, so that as demand returns that we're positioned for it. The other piece is we're a logistics company. So, as customers come back to us from, on a pricing standpoint, if cost is the immediate thing they want to, we're going to have a supply chain discussion with them and talk about our managed operations and what they're trying to accomplish with their business. And so, if it really is to a point that we can't handle that in ABF at the price level they want, we're going to move the business into our managed operation, we'll service the customer, and we'll make margin off of it using our logistics partners. And so, we're just well-positioned no matter which way the customer turns. Well, that's good color. Wanted to get my next question here on MoLo, I guess, Judy, where do you think it is relative to your prior expectations when you guys bought it? And then looking forward, the market is what the market is for brokerage. But are there any other - any levers on the cost side or any things you guys can do to sort of improve the productivity there? Well, it has met our expectations in the initial year, and a little bit here. We were -- that the performance, last year, for all of Asset-Light, but in particular the truckload solution was good, and one of the critical areas -- or actually two things, one, just the knowledge of the capacity and buying, and the approach, the business model that was really used there, and it fully adopted into what we're doing today, and successful. And then the opening up of customer opportunities by having a greater truckload solution at scale has really helped us. And we are on track with the EBITDA targets as we closed out the year, and that's what we had predicted. And so, we feel good about that. But I do hear what you're saying about the current environment. It is certainly depressed, just an absent spot market. And we're navigating through that. We do have some cost reviews going on to better position us with costs that are appropriate. I think we've already talked a little bit about the technology areas of advancement, trying to enable our people to be more efficient. And all of that is going to help us as we move forward. But I want to say this; we're focused on those 2025 targets. We want to grow this. And we're going to position ourselves to be able to grow. And this environment that we're in right now is not going to last forever. And we feel like we're in a good position as we come out of it. Hi. Yes, just on the cost side for the Asset-Based, so maybe can you talk to some of the lines that you may be able to lever as we -- in this demand slowdown, are you doing things on headcount, additional stuff on purchase transport, just trying to get a sense for the ability to maintain your OR over the course of the year, and, at least for the start of the year, what could be a softer demand situation? Thanks. Yes, this is David. I'll start off here, and if others have something to add. But I mentioned a couple things in the opening comments just about our progression in the quarter, where we made some ground on outside resource utilization. And that comes with, as we mentioned, having that good employee base, and we're able to do more of that internally, which we like do. And so, we see opportunity there as we move forward, as we get our team more productive. We did a lot of hiring in 2022, and so we expect that team to improve in their productivity as we move forward. So, that's one area. I think the other area is the repairs and maintenance is one of those items that I called out, where we had some elevated costs. Some of that is due to the equipment replacement cycle and timing of that. But some of that is just the inflationary cost in the repairs and service side of it that we were seeing. But we could make some progress on that as we have a good CapEx plan in place, and as we bring on some of this -- some of that equipment didn't get delivered until late in the year, and into 2023. And so, this is our 2022 orders I'm talking about. So, that has opportunity there as well. But those are probably some of the, as we move forward, areas where we could see improvement. And on the headcount front, I mean do you expect it to stay relatively static for now or what's your thoughts on that? Well, I think that's obviously going to be dictated by our business levels to a certain extent. But we're -- look, I would say, just moving from December to -- we've been hiring through the year of 2022, but moving from December to January, roughly kind of flattish right now. And then we're certainly going to monitor that as business levels prove some. And that that's something that we're focused on, and making sure that we have people in the right places, but we -- we really have that opportunity as we go. And then our visibility into the network about the business volumes that we have at given locations has never been better. It's one of the reasons why some of the transactional business, Danny's talked about already, works well for us. And really provides an opportunity for us to better manage our costs, and we have a pilot of our city route optimization technology, and initial results of that improved productivity by a 1.5% and also, we had 67% reduction in cartage in those locations, and that's better than 25% reduction in some other locations. So, not only do we just have the pure matching of the headcount to the business levels, but we also have this type of work that's going on to optimize as well as the ability to attract, that transactional or quoted business to best serve our needs when we have those in the network. Okay, great. Good morning. And David, I'll add my congratulations to the others. Thanks for all the help over here. So, I guess maybe kind of -- for you on this, David. I mean, as you sort of think about the business here in the first quarter, you guys have really highlighted all the efforts that you've undertaken to make the business more resilient through cycle and make it more dynamic in terms of its operations. I mean, as you sort of think about, as we hit in the first quarter, you highlighted in the 8-K, I think a average, sequential deterioration fourth quarter to first quarter about 400 basis points, it's greater than that during periods of economic uncertainty, should we think about you guys performing kind of better than you would historically, based on all the items you just flagged in terms of the business processes that you've implemented? Yes, Jack. There's we give that point of reference as a historical sort of number. And that would be our intention to try to beat that, we certainly would try to, we think it's achievable to get our cost per shipment, kind of in a lower place. So, there's opportunity there. And in those areas, that Judy mentioned from technologies, and then as I mentioned, around, our stable workforce. Certainly, the macro though is going to dictate a bit of things, and so and have an influence. And so, we'll manage carefully through that. But just it's not about managing quarter-to-quarter, it's really about staying focused on these longer-term growth targets. And I'm excited about that for the business. Okay. Okay. So, just sort of assure to watch how that unfolds this year. And then I guess, my follow-up question, as you sort of think about the second half of this year, you have the labor negotiations, I know you don't want to bring the bargaining table to the fourth quarter conference call, but is there anything you can kind of maybe help us kind of think through in terms of timing? There was another large union employer that reported last week, that doesn't feel like they're expecting a significant step-up in their expenses related to their new contract, they feel like they've sort of towards the market there and that their businesses has been sort of keeping up with inflation. Is there anything you can maybe help us think through because I know that's a point of concern for investors, just that there could be some labor inflation in the second half of the year? Thank you. Well, as we always are, we're prepared for what's coming in terms of the contract negotiations, I feel like our team has prepared and planned, and we're in a good place, and our leaders are regularly in the field with our employees and hear directly from them, about what's on their minds. And so, we're in a good place, I feel like that we're very experienced, I've been through a number of these, and they're all different, but as long as you're prepared, and you have the good approach, and intentions and information, typically, we can work our way through this. And so, obviously between now and the expiration of the contract, there's a lot of work to do, and so we're going to stay focused on that. Okay, would you expect it to be a win-win-win? I think is what UPS framed it up? Is that your expectation as well? Well, I mean, I really rather not comment on that because it's still has yet to be worked through. But certainly you always want winning situation and winning outcome. Hey, guys, this is actually Erin on for Scott. I just wanted to follow-up a little bit on the January tonnage comments, the deceleration throughout fourth quarter. And then it's like year-over-year pickup. I'm just curious like how that is versus normal seasonality. I know that you said that the December versus January trends are pretty similar. But I'm just curious, like how that is, versus seasonality and what you're kind of expecting seasonally, we're trying to throughout the quarter? Yes, there's I'll just back up a little bit. And just talking about fourth quarter, certainly some month-to-month changes. But when you think about sequentially fourth quarter compared to third quarter, it was one of the worst sort of periods in terms of tonnage in kind of our past 10 years, but sequentially versus December, January tonnage and shipments are up about 1%, when typically, that's a sequential trend. That's lower from December to January. So, this is -- it's hard to comment really about one particular month. But I would say it's trending above normal seasonality. I mean certainly the customer demand environment is similar, though. Got it, okay. And then just quickly on fuel and how should we think about the net impact of fuel this year? I know that there's some tougher comps later in the year, I guess how do you guys think about that in the second half, could that be potential headwind by mid-year? Yes, certainly fuel is a big part of the overall revenue, that we'll have and it'll impact the dollars per shipment. We're not sure where the price will go. But as you mentioned, I think the fuel prices in 2022 kind of peaked in the spring, and so yes there's from this level, there's it's lower now versus when it was in spring of last year of 2022. So, that'll be a little tougher comp, our fuel surcharge mechanism works really well in terms of for the customer, as well as for us. And so, just really, there's a lot of impacts of fuel in our business, in our cost. And so, that fuel surcharge mechanism serves to cover those costs. Hey, great. Thanks and good morning. So, I guess I wanted to ask on the growth plans, I know in the CapEx, you've got I think it's like $55 million to $65 million earmarked for real estate, in this environment, I know you've talked about expansion going back over the past year or so, but as the environment changes, how much flexibility do you have on expanding out the network at this point, and maybe could you just talk about the cadence and your thoughts around expansion in the environments? Thanks. Yes, I mean, Todd, that real estate plan for '23 is similar to what we did in 2022. And as we've talked about, we haven't invested in that area in a number of years, and it's great to have the cash flow and the great balance sheet that we have to position ourselves in a better way. And so, we're looking to be able to, to have the capacity to expand our shipment count by the mid-single-digits again, and by the end of 2023, with that, from just the capacity that we're adding from a real estate perspective. And so, like Judy said, we're positioning ourselves to grow. And with every recessionary freight recession, there is an eventual upturn. And so, we want to be positioned for that, and that's what our plans call for and we're taking a measured approach around our CapEx program and replacing equipment in our timely sort of total cost of ownership perspective on our equipment side. And so, as we said, this is a little heavier year because of some of the spillover from 2022 and some catch-up that we needed to do there. So, hopefully that helps. Yes, no David it makes sense and certainly we appreciate the short-term versus the long-term, you're just kind of thinking about the startup costs in that piece of it. But that makes sense. Maybe just for a quick follow-up, Judy, I'll take the bait. I think you teased about it a couple of times with the handling technology that you have and maybe some more details later in the quarter. But what are you willing to share with us now, it sounds like maybe partnering with some customers and having them use that technology, is that something that would be a fee based service or they'd be paying you for that or what are you willing to share with us now with the teaser that you put out here today? Well, I mean, I think it's the technology and equipment and process that we talked about before. And not only are we piloting that within the ABF network, but we have opportunities that have presented themselves with customers outside and within the work that they're doing. And so, we're excited about it. And obviously, if it's work that we're going to be doing for a customer, once we work through the pilot, we would eventually be paid for that. And so, sometimes when you're in a pilot scenario, you have to have some flexibility over the things that you do with them. But it's an exciting thing. It will be later in the quarter when we talk more about it. But it is connected to the, again, the technology equipment and process that we've referred to before. And so, look forward to sharing more. Hey, great. Good morning, Judy, David and team and David again, thanks for all the discussions over the years and congrats. Yes, you got it, Dave. If you could talk about the shift in pure pricing ex-fuel, I mean I've heard the discussion through the Q&A. But maybe I'm just a little confused here. It seems like you talked about low-single-digits in the fourth quarter. Now it's double-digits in January in the face of what's still tough pricing comps from early '22. Am I missing something there or you talking about different categories? So, when we talk about double -- or double-digits that's really on that core business that we're talking about. That's the long-term committed price that we've offered to our customers kind of we may have call it published at some point in the past. And it's year-over-year in January, that's what we're referring to. And then the other piece is just the contracts that renewed in the fourth quarter were at 5% year-over-year. And so, really, it is different. It's different categories, but it's just indications of the strength of the pricing environment is what we're trying to give you, just give you color in a couple of different areas on that. But then on a revenue per hundredweight, it looks like, if you're low-single-digits and then you remove, I guess the contract, are you saying it is holding firm or is it decelerating as you're moving forward into January? So the core business, like we said, we kind of get those numbers, I think when you look the overall piece, you get mix involved in that. And so, the transactional business that we are bringing on to fill some empty capacity could be at a lower revenue, but like I mentioned, it's profitable. But from a revenue per hundredweight standpoint, it could be that factors into the mix that you're getting to. So, Ken let me try this. What we call our core customers, that's our regular customers that are shipping. And those are they have published rates. And so, that's what we're referencing there. What Danny just talked about was when in particularly when those business levels are weaker, and when the network needs to be filled in certain lanes, we are supplementing that with transactional business that comes at the market. And so, you can have some differences in the revenue per hundredweight comparisons, both because of that, and also because of the profile of the freight that's involved. But I think Danny made the comment earlier, we're seeing the pricing environment be strong and we're not seeing any real change to that. That's a really helpful clarification because I think there was some concern on what is going on in the pricing market. And Judy, if I could follow-up on Jack's questions before I just want to understand the kind of run through on costs and your expectation now I guess for operating ratio, you made a structural move, it seemed like into the 80s, I think after kind of 20 plus years in the high 90s. How do you view this? Maybe David with kind of, as volumes decelerate, you talked about some of the costs and then the cost of leverage you've got, but with a sequential, normal historical sequential shift, do we see that bounce back up above that 90 level and I guess what your thoughts are as we go into '23? Yes, just in reference, short-term, kind of a short-term comment here, and just talking about fourth quarter to first quarter. You think about that 400 basis points and if you added that to our fourth quarter, that would give you a first quarter, that's probably the second best first quarter in the past 20 years for ABF, despite it being a weak freight environment, and so I know that's a short term, like I said, we're building this business for even a longer-term perspective and to operate in those long-term targets, operating profit margin targets of 10% to 15% in a more consistent basis, and that's for an annual kind of OR or operating profit margin perspective. And we know that first quarter is typically our weakest quarter of any given year. So, I'd share that with you from a quarter perspective, we're not trying to manage this quarter-to-quarter again, we're trying to build for longer-term view. It's helpful, I guess, I'm just trying to understand given that fourth quarter was such a maybe a flattish seasonal business, and I know you're not typically as retail exposed, but given it was flat, or if that first quarter then becomes even better than that seasonal shift becomes a little bit different than normal, sequential shifts between 4Q and 1Q. Well, I mean, I think it's a -- I think all of this is really hard to read right now. I mean, I really do, but I think we're better positioned than we've ever been to see what the opportunities are, and where we need to business and help customers navigate through that. And then also benefit ourselves as a result. So, but it's an interesting environment to try to predict for sure. Looks like we're going to go over just a few minutes, but I got a couple more that want to ask some questions. So, we'll go ahead and proceed. Great. Good morning. And I'll just echo everyone else's comments in saying congrats to David, on the pending retirement. So, one of the things and we've kind of been talking about it throughout the call, but one of the things I think that was noteworthy was in the context of a challenging volume environment, we saw your shipment declines less than competitors. It sounds like, maybe the reason for that was you were using some of these transactional opportunities to fill empty capacity. I'm just curious, could you kind of confirm whether or not that's the case and then also, how easy is it to then clear out that business from the network when volume returns or when demand returns? Hey, this is Danny, I'm glad that you got our point. Yes, we are using transactional business to fill the empty capacity we have in our network. And again, I want to reiterate this profitable business, as Judy pointed out is market price business. We are making a shipment-by-shipment commitment on those. And so, as the ability to move that out of our network and bring on additional of the core business is by day basically, as we see the demand from our customers, we can turn our dials and we will pull back on some of the transactional business to fulfill the needs of our demands of our shippers as it comes back in. Got it. That's super helpful. And then just I wanted to ask one, I guess modeling question, perhaps. But you mentioned the profit sharing bonus that's going to be paid to employees. How does that get reflected in results, should we expect to step-up in compensation expense than in first quarter or how should we model for that? We'll just say that we were glad to be able to pay for 2022, the highest earn out on that bonus OR incentive. And so, we think that's a good thing for our employees. And we're glad to be able to do that. Typically as we -- when we have those programs, we accrued for those throughout the year as we as earnings are made in a particular quarter relative to the full-year and so that's the way we do that, it's accrued throughout the year is the process. Thank you very much. Well, congratulations. And, David, going to miss talking to you, so I guess I'll have to ask you a question before you go. Judy and Dave, a more strategic question, so we're at $5.3 billion in revenue, you expressed your confidence in achieving the long-term targets by 2025. I'm just going to assume 2023 may not push that all that much forward. So, when I think about '23 to '25, we got to grow revenue 35%-40% to hit the low-end of that range. Organically, I don't know if it gets it there. So, can you give us an idea of what types of potentially acquisitive growth would make sense the way you're building the franchise? And then the David part of the question is, with the CapEx bump, there's not as much free cash this year, but your balance sheet looks very strong. How high would you go leverage-wise for the right strategic opportunity? Okay, well, we -- Jeff, as you've seen us do with the approach that we're using, is we'll look for opportunities that add scale to our already existing solutions that we're providing customers. We're constantly listening to customers to see what they need. We have opportunities to advance our tech platform and what we're doing on some of these customer pilots. And we also are always involved in the startup space, looking at disruptive sort of technologies that are going to be either something that could help us better execute and perform or better achieve results on the top line, and then also to benefit our customers. So, we have all those things. We're very active in looking at what comes on to the market, and excited about how that could make its way into the results for 2025. But I'll say this; we don't have to have an acquisition, as we see it, to achieve those -- those targets. But again, just like we did with MoLo, if you see a company that's out there that has an approach that's advantageous we're in a position where we can go after that. But we do see robust opportunities to invest organically which gets you to David's question. And I'll just say that, generally speaking, we would like to stay within an investment-grade credit and metrics. And so, that's going to -- we had a strong EBITDA, and we've got -- for the year. And if you were just to go one-times that EBITDA you could borrow up another $400 million or so just under our additional facilities that we have place. And so, with total liquidity of $566 million at the end of the year, we feel like we're in a good place, and have a good, solid CapEx plan for the year, and investing into our business there, and with good returns. And so, we're excited about where we are. Hey, good morning, everyone. Just want to follow up on some of the comments around having some of those broader supply chain conversations with your customers. And maybe understand a little bit more about how pricing works in the cross-selling process. You gave us a good rundown of all the benefits of cross-selling in the slide. So, I guess thinking about all of those, philosophically, is there any inclination to maybe incentivize cross-sold growth or growth in one part of the business versus another? Or is that just an entirely separate RFP and sales process? Yes, thanks, Bruce. This is Dennis. I would say that we look at our customers holistically. And so, we think about what their supply chain needs are. We're not typically going in and prescribing a specific service for them until we understand their needs. And so, as we learn about their needs, and their needs shift, and so we get into these conversations about what's going on in their supply chain today, and what might be happening tomorrow, and understanding their pain points. And so, that that becomes -- then, once we identify the need, then we step into the process of understanding what solution needs to be built and how those need to be priced. Yes, just to follow up on what Dennis said. When we think about the supply chain you think about supply chain optimization. Really, the -- what we're seeing in that is, if we had the right conversations we could eliminate cost from the supply chain, which takes pressure off of price. And so, there's not a need at that point to kind of -- kind of, I think, you described. We were able to lower the overall by taking inefficiencies out of supply chain. And so, customers are excited, and that allows us to have the margin that we need on our business there. Yes. To add to that, Danny, it's an order of magnitude different; having a rate conversation for cost reduction for a customer versus changing the way that their supply chain works, and so, if you're able to optimize how their -- the frequency and the distribution points that they're shipping product, that that is a significantly different cost savings conversation than a rate conversation. Okay, no, that's helpful color. And I guess maybe just to clarify and put it simply, as your business is growing and as your service lines are growing, are you now managing or optimizing more towards an all-in kind of fully baked price for customers? Bruce, I would say that kind of as Dennis described, we're having an overall conversation. There's still individual pricing components underneath the structure, but those vary depending on what the solution is to it. And so, yes, we think overall, holistically with the customer. But then it still drives down to individual components after that. Okay. Well, I think that concludes our call. We appreciate everybody been with us this morning. We ask you to disconnect now. Thank you very much. That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line. Have a great day, everyone.
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Ladies and gentlemen, thank you for standing by, and welcome to the Deluxe Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode and today's call is being recorded. We will begin by opening remarks and introductions. At this time, I would like to turn the conference over to your host, Vice President of Investor Relations, Tom Marabito. Please go ahead. Thank you, operator and welcome to the Deluxe fourth quarter and full year 2022 earnings call. Joining me on today's call is Barry McCarthy, our President and Chief Executive Officer; and Chip Zint, our Chief Financial Officer. At the end of today's prepared remarks, we will take questions. Before we begin and as seen on this slide, I'd like to remind everyone that comments made today regarding management's intentions, projections, financial estimates or expectations about the company's future strategy or performance are forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. Additional information about factors that may cause our actual results to differ from projections is set forth in the press release we furnished today and our Form 10-K for the year ended December 31, 2021, and in other company SEC filings. On the call today, we will discuss non-GAAP financial measures, including comparable adjusted revenue, adjusted and comparable adjusted EBITDA, adjusted and comparable adjusted EBITDA margin, adjusted EPS and free cash flow. To streamline discussion of our ongoing business operations, today and going forward we will discuss both revenue and EBITDA on a comparable adjusted basis which will exclude the inconsistency caused by acquisitions or divestitures in the prior periods. For purposes of full year 2022 this will exclude the partial year impact of First American and impact of the divestitures done throughout the year. In our press release, our presentation, and our filings with the SEC, you will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under U.S. GAAP. Also on the presentation we are providing additional reconciliations of GAAP EPS to adjusted EPS, which should help with your modeling. Now I'll turn it over to Barry. Thanks, Tom and good morning, everyone. Deluxe delivered strong results for both the fourth quarter and full year 2022, further proving we have become a payments and data company. As I expect payments -- will become our largest segment by revenue during the first half of 2023. This will be a key milestone in the company's history. Before reviewing the results, let me take a moment to reflect on what was another strong year for Deluxe. Four key highlights from the year include; first, reporting our second consecutive year of sales driven revenue growth, an achievement not seen over a decade, showing the strength of our One Deluxe model. Second, the accelerating success of our payments and data business. In payments, First American continues to perform well in its second year as part of Deluxe and we're expanding blended margins across the segments. In the data business, we recorded record revenue. Third, strong performance in our print businesses Promo and Check. Promo strongly rebounded after the impacts of COVID and supply chain disruptions and Check has delivered its strongest top line performance in over 10 years. This performance shows the durability of demand for these solutions. Fourth, our ERP implementation went live with its last major release earlier this week. This key milestone marks the completion of our major corporate infrastructure modernization. We also just announced the exit of our North American web hosting business, which was a non-strategic business line allowing us to further focus on payments and data. Chip will provide more details on the transaction. We've also changed the name of our Cloud Solutions segment to Data Solutions to better reflect the more focused operations of that business. Let me also take a moment to thank my fellow Deluxers for another strong year, for their endless dedication to our customers, and for their continued commitment to making Deluxe a payments and data company. The sales team gathered last week for our sales kickoff, and the energy and excitement about 2023 was palpable. Now on to the results. For full year 2022, comparable adjusted revenue was $2.1 billion, up 5.2% year-over-year. Reported revenue increased 10.7% above our guided range. Once again, this is our second consecutive year of sales driven revenue growth. This is a key milestone. We continue to demonstrate the success of our One Deluxe model. For 2022, all four segments demonstrated comparable adjusted revenue growth, an accomplishment, which has not been seen in a very long time. So long ago it's outside the range of available data. Total adjusted EBITDA dollars increased 2.5% from 2021 and comparable adjusted EBITDA was down 4%. Going forward, we remain focused on driving growth in revenue, adjusted EBITDA, and free cash flow for the long term. All of our actions drive towards these goals, which in turn we believe will drive greater shareholder returns. Moving on to some segment revenue highlights. For the full year on a comparable adjusted basis, payments revenue grew 4.7% and adjusted EBITDA dollars grew 8.3% with margins expanding 70 basis points from 2021. Merchant services revenue increased 4.4% on a comparable adjusted basis, in line with our longer-term expectations of mid-single-digit growth. The rest of payments, which includes our receivables and payables business, grew nearly 5% with growth across our product lines, primarily in digital payments and treasury management. Our pipeline continues to grow and we continue to gain wallet share from existing customers as we remain on track for payments to be our largest revenue segment in the first half of the year. As I said earlier this will be another key milestone for Deluxe as we've now become a payments and data company. Data had a strong year, growing comparable adjusted revenue 8.6% year-over-year as we continue to expand the business into non-interest rate sensitive verticals. Promo had a solid year on the top line, improving comparable adjusted revenue 6.1%. We were also pleased with the improvement in margins as the year progressed, which Chip will detail later. Finally, our Check business improved 3.7% year-over-year, an incredible accomplishment. However, we are expecting this segment to return to traditional secular decline rates this year as we've now lapped the growth from key wins in 2021. As discussed on prior calls, our strategic investments in new Print-on-Demand technology will help us manage costs to match volumes, allowing us to maintain our strong margin rate in this segment as we return to normal secular declines. We're about halfway through the implementation of this new technology. We're proud of both our fourth quarter and full year results which highlight our progress. Deluxe is now a fundamentally different company than what we were just a few years ago with payments, a strong secular growth business soon to be our largest revenue segment. And we've proven our One Deluxe model delivers top line growth. This was achieved while simultaneously modernizing the company's entire infrastructure, navigating COVID and inflation, executing significant portfolio optimization, and more. Now I'll turn it over to Chip who will provide more details on our financial performance. Thank you, Barry and good morning, everyone. Before we review the results for the quarter, I'd like to elaborate on the pending sale of our North American web hosting business. Last year we sold our Australian web hosting operations and upon completion of the latest transaction we will have completely exited the hosting business. As a reminder, this business has historically been largely a white label service offered through telecom partners which did not allow for material cross selling opportunities and did not fit within our overall portfolio. This pending deal also includes our logo business. For the trailing 12 months these businesses generated approximately $66 million in revenue with adjusted EBITDA margins in the mid to high 30% range. The web hosting business was previously fully impaired due to its capital intensive nature and recurring revenue declines. This was further evidenced in the fourth quarter where revenue declined 8% year-over-year. 2023 revenue will be impacted by approximately $45 million and adjusted EBITDA and free cash flow each will be impacted by approximately $20 million. These impacts are included in our guidance, which I'll discuss in a moment and mostly affect our data segment with a very small impact to the promo segment. I know there have been many changes to the portfolio recently, but they reflect a methodical effort to simplify and focus the business. For more information about the business exits and impact to guidance, please refer to the reconciliations in our press release and presentation. Additional details of the transaction can also be found in our recently filed Form 8K with the SEC. Now let's go through the consolidated highlights for the quarter and year before moving on to the segments. For the fourth quarter, total comparable adjusted revenue improved 1.2% to $564 million. On a reported basis, revenue declined 1.2% year-over-year. We reported fourth quarter GAAP net income of $19 million or $0.44 per diluted share, up from $14 million or $0.32 per share in the fourth quarter of 2021. Adjusted EBITDA came in $112 million, down $3 million or 2.8% on a comparable adjusted basis from last year. Improvements in payments, data and promo were offset by checks and employee benefit costs on the corporate segment. Comparable adjusted EBITDA margins were 19.9% and in line with our expectations. Fourth quarter adjusted diluted EPS came at $1.04, down from $1.26 in last year's fourth quarter. This decrease was primarily driven by interest expense. As a reminder, nearly 60% of our debt is fixed rate, which should help insulate the company from future rate hikes. For the full year, on a reported basis, we posted total revenue of $2.24 billion, up 10.7% year-over-year and above our guided range. As Barry mentioned, comparable adjusted revenue increased 5.2% year-over-year. We reported full year GAAP net income of $65 million or $1.50 per share for the year, up from $63 million or $1.45 per share in 2021. Full year adjusted EBITDA was $418 million up $10 million or 2.5% as reported from last year. Adjusted EBITDA margins were 18.7%, down from last year's 20.2% due to business mix and the impact of pass through price increases to offset inflation. On a comparable adjusted basis, EBITDA dollars declined 4% for the year and EBITDA margins were 18.5% down from 20.3% last year. Full year adjusted EPS came in at $4.08, down from $4.88 in 2021, primarily due to higher interest expense, depreciation, and amortization. Now turning to our segment details, starting with our growth businesses, payments and data. Payments grew fourth quarter revenue 2.5% year-over-year to $171 million, with merchant services growing 3.3% year-over-year. As we indicated on the last call, we anticipated slower growth for a few quarters as all of payments was up against tough year-over-year comparisons. We do, however, expect growth rates to improve as the year progresses. Payments adjusted EBITDA margins were 21.6%, up from last year's 20.6%, largely driven by operating leverage in our treasury and management business. For the year, payments grew revenue 33% year-over-year to $679 million, driven by the acquisition of First American and sales driven growth for standalone Deluxe. For the year and including First American adjusted EBITDA increased 36.9% and adjusted EBITDA margins were 21.3%, up 60 basis points. On a comparable adjusted basis for the year, payments revenue increased 4.7%, EBITDA increased 8.3%, and EBITDA margins were 21.4% up from 20.7%. For 2023 we expect to see mid-single-digit revenue growth and adjusted EBITDA margins in the low to mid 20% range. Data's adjusted EBITDA margin in the quarter increased 340 basis points year-over-year to 27.6%, which again relates to timing as well as operating leverage from strong DDM volume. On a comparable adjusted basis, EBITDA margins improved 300 basis points. For the year, the Data segment comparable adjusted revenue increased 8.6% year-over-year to $268 million. On a reported basis, Data grew 2% for the year. For 2022, Data's adjusted EBITDA margins declined 130 basis points versus prior year to 25.5%, driven by business mix and the investments in our Data platform. On a comparable adjusted basis, EBITDA margins declined 170 basis points. For 2023, we expect to see low single-digit revenue growth on a comparable adjusted basis. We also expect to see comparable adjusted EBITDA margins in the low 20% range. Turning now to our Print businesses, Promo and Checks. Promo's fourth quarter revenue was $154 million, up 3.1% on a comparable adjusted basis, driven by new sales wins and pricing actions. On a reported basis, revenue declined 1.5% year-over-year. Promo's adjusted EBITDA margins increased 100 basis points year-over-year to 19.3%, but improved nearly 600 basis points sequentially as we benefited from continued pricing actions, stable supply conditions, and normal seasonal upticks. On a comparable adjusted basis, EBITDA margins improved 50 basis points from the fourth quarter of 2021. For the year, Promoâs revenue was $563 million, up 6.1% year-over-year on a comparable adjusted basis or 3% on a reported basis. Adjusted EBITDA margins for the year were 14.1% and down 150 basis points and on a comparable adjusted basis were down 190 basis points. For 2023, we expect to see low single-digit comparable adjusted revenue growth and adjusted EBITDA margins in the mid-teens. Check's fourth quarter revenue decreased 4.6% from last year to $176 million as the business returned to expected secular declines with Q4 results now lapping all the major new customer wins from 2021. Fourth quarter adjusted EBITDA margins were 42.5%, down 270 basis points year-over-year as we experienced off-cycle supplier price increases for both materials and logistics inputs, some of which are temporary seasonal base surcharges. We have factored these and future expected increases into our 2023 customer price increases. As a result, we believe the margin rate will improve in Q1. Check's full year 2022 revenue was $729 million, up 3.7% year-over-year and adjusted EBITDA margins were 44%, down 210 basis points, but consistent with our long-term expectations of mid-40% margins. For 2023, we are expecting mid-single-digit revenue declines and adjusted EBITDA margins in the mid-40% range. As Barry mentioned, our print-on-demand technology will help maintain margins, and we are about halfway through the implementation. Turning now to our balance sheet and cash flow. We ended the year with a net debt level of $1.6 billion, down from $1.64 billion last year, demonstrating our continued commitment to pay down debt. Our net debt-to-adjusted EBITDA ratio was 3.8 times at the end of the year, improving from 4 times a year ago. Our long-term strategic target remains approximately 3 times. Free cash flow, defined as cash provided by operating activities less capital expenditures, was $37 million in the quarter, up from $34 million in the fourth quarter of 2021 due to improved working capital and lower cloud computing arrangement or CCA spend, partially offset by higher interest payments. This was also a sequential improvement from the third quarter. First quarter 2023 free cash flow was expected to be negative as it will be impacted by incremental interest expense, onetime expenses from our ERP implementation, and annual employee compensation payments, but should improve as the year progresses. For the year, free cash flow was $87 million, down from $102 million in 2021 due to higher interest payments, cash taxes, and working capital. Our Board approved a regular quarterly dividend of $0.30 per share on all outstanding shares. The dividend will be payable on March 6, 2023, to all shareholders of record as of market closing on February 21, 2023. We are focused on taking a balanced approach to capital allocation and as a reminder, our capital allocation priorities are to responsibly invest in growth, pay our dividend, reduce debt, and return value to our shareholders. Turning now to guidance. Today, we are providing our expectations for 2023, keeping in mind all figures are approximate and reflect the expected impact of the web hosting and logo divestiture. Revenue of $2.145 billion to $2.21 billion, adjusted EBITDA of $390 million to $405 million, adjusted EPS of $2.90 to $3.25, and free cash flow of $80 million to $100 million. To be clear, on a comparable adjusted basis, 2023 revenue represents a range of negative 1% to positive 2% growth. The comparable adjusted EBITDA range represents negative 2% to positive 2% growth. To further clarify, EPS is expected to decline year-over-year due to the full year impact of rising interest rates, incremental depreciation and amortization and an estimated $0.25 impact from the announced divestiture. However, factoring in the impact of the divestiture, the free cash flow guide is an increase year-over-year on a comparable adjusted basis. Also, in order to assist with your modeling, our guidance assumes the following; interest expense of $120 million to $125 million; an adjusted tax rate of 26%; depreciation and amortization of $170 million, of which acquisition amortization is approximately $75 million; an average outstanding share count of 43.7 million shares, and capital expenditures of approximately $100 million. This guidance is subject to, among other things, prevailing macroeconomic conditions, including interest rates, labor supply issues, inflation, and the impact of other divestitures. To summarize, we are pleased with the fourth quarter and full year 2022 results. Our sales pipeline continues to expand with new customers, and we continue to see increased growth from our existing customer base. We look forward to continuing the momentum in 2023, a year which we expect to be highlighted by continued revenue growth, increased operational efficiencies, and increased free cash flow. Operator, we are now ready to take questions. Hi guys, thanks very much for taking the questions. A lot to unpack here. But let me start with the web hosting and logo divestiture. Did you call out the EBITDA margin on the asset sale? We did. We said that it was mid to high 30s. And as you know, Lance that is a business that was a consumer of capital, and it was in decline. We also mentioned that in the fourth quarter revenue in that segment declined 8%. So right. So $665 million of revenue and kind of like $25-ish million of EBITDA, something in that range, or in that general vicinity. And I guess -- and that was for the trailing 12 months. Where I'm going with this, Barry, is I'm thinking about your adjusted EBITDA guidance of $390 million to $405 million, which right on the face of it, it looks like it's down versus the $418 million that you printed this year or for 2022. But if we add the $25 million-ish, right, from the asset sales, then we're sort of -- we're getting to that slight EBITDA positive that you talked about in the 8-K filing, is that sort of the right way to think about it? This is Chip. So as you have time to digest this, you'll see at the back of our earnings release and slides, we have provided some information that will reconcile that for you, especially on the guidance side. But your back-of-a-napkin math is roughly right around $25 million of EBITDA for a full year. We are, of course, modeling into our guidance only three quarters of impact, that's where we get the roughly $45 million revenue impact and approximately $20 million EBITDA impact that I just referred to on the call. But all of those things plus the impact of last year's exits rolling forward are reconciled in the back. And that's why we thought it was important to move just favorable adjusted dynamics so that it can be much more transparent on how the business is doing on an apples-to-apples basis. Okay. Great. Maybe moving on to the Data segment that continues. You mentioned during the call, continued diversification into noninterest rate-sensitive verticals. And I'm wondering how much of the data segment, again, on a go-forward basis, how much of that Data segment currently is in noninterest rate-sensitive verticals? Lance, I don't think we've ever provided sort of the sources of revenue at that level. But the reason that business continues to perform well in a period of rising interest rates, I think, is because those noninterest rate sectors or categories are experiencing really attractive growth rates that are more than offsetting things that were highly sensitive like mortgage. And if you look back in our history, you can see previous interest rate cycles like this, that business was pretty significantly impacted and we're actually showing growth. And so I think that gives you a good sort of direction that it's increasingly about noninterest rate-sensitive categories. Is it possible to talk a little bit about which of those noninterest rate-sensitive verticals present the most obvious or most compelling opportunities for Deluxe? And are there any examples of recent wins to call out anything like along those lines? Yes. So we have two parts to this. The business historically was focused on financial services industry. And within the financial services industry, dollars are being shifted in those financial services companies away from interest rate sensitive things like mortgages towards things like certificates of deposit, normal DDA accounts, high-reward credit cards, other solutions that the financial institutions is attacking to deliver their own growth. And we've shown an ability to move into those sectors away from the interest rate sensitive area. But beyond that, we've also moved into and are providing now campaign services to a very wide range of solutions. Everything from one of the largest online retailers to insurance companies and others that are interested in growing and finding new customers. And the focus on all of this really are businesses that have high lifetime value for a customer. And the reason the solution is valuable to them is that it's giving -- we are providing to that company a very, very high converting lead list so that company can invest materially in its marketing plans with the confidence that it will turn into new customers. And we're growing the business because we're just really, really good at it. That's helpful, Barry. A quick question on the check side. Margin was a bit weaker than we had expected. How has the margin performance compared to your own expectations? And was there anything going on in there that drove -- in the quarter that drove margin performance one way or the other that's worth kind of calling out? And I apologize if I missed that during your prepared remarks. It's Chip again. So you're right, the 42.5% for the quarter was a bit below our expectations. We mentioned kind of two factors. There were two out-of-cycle supplier price increases that we experienced both on the material side and logistics side. Logistics specifically was more of a seasonal-based surcharge that will correct itself now in the start of the year. But the out-of-cycle price increases obviously happened. They're out of cycle, which means as we set our final forecast for the year, we didn't see them yet. And so that was a bit of a surprise. But as I said, we'll be able to make those increases into this next price increase early in the year. And obviously, it's very great that the overall portfolio was able to offset that issue and deliver the results exactly where we thought they would be. Thanks. Just last one for me, I promise. Just on the corporate expenses, they were up again about 5% year-over-year. Is that just sort of the inflationary environment or is there anything in particular going on there? And really more to the point, I guess, it looks like you're running close to 9% of revenues on that corporate line, and it might even be higher on a comparable adjusted revenue basis. But I'm just wondering if that's sort of the right -- is that the right percentage for a company this size or is there -- is it -- should we be thinking that maybe there is some improvement there to come or no, is this just kind of a good level that you guys are happy with, anything you could say there would be helpful? Thanks guys. Sure. So turning to the quarter, I think you got to recall, we've mentioned a few times throughout the year that we restored our 401(k) match earlier this year, that's been weighing on the corporate segment. So when you really look at the growth year-over-year, mostly a function of that, there's puts and takes across the other areas, other increases related to inflation, offset by operational efficiencies. But net-net, the real driver year-over-year in the fourth quarter was that 401(k) match. As we look forward to 2023, you are right. I would tell you, as you're thinking about your guidance and your modeling, you have to roughly model somewhere around $200 million or roughly 9% of revenue to get to the ranges we provided. And let me just give you a little bit of context what's going on there. We continue to deal with inflation, it's a factor of the environment that we've got the investments and the technology we've mentioned a few times. We also have the function of the divestiture. And once we divest those assets, there will be some stranded costs that are corporate in nature that will come back to the corporate cost center. And so all those things equally look like we are kind of staying flat, which we know is not where we need to be. So I'll just reiterate that this remains a major focus area for us. Getting cost out of the corporate segment is one of the most strategic factors for us as we get into the year and look to over deliver our results and overdrive our internal plan. And so I would just advise you to kind of model it as this 9% roughly or $200 million for now. But know thatâs major focus of ours. And we think we can make progress as the year goes on to try to bring this spend down. Hi, good morning. I'd like to talk a little bit about the divestiture yesterday in the hosting business. And if you look at the sale earlier in the year of the Australian piece, it seems that the sale -- kind of the all-in sale price was below where this business was bought back in May of 2008. And seems the price tag is a little bit low, but wondering there what transpired in terms of what potential kind of shopping kind of a go shop, if you will, in that process? So Charlie, you're right. The company acquired those assets before quite a while ago. But you'll recall that in 2019, we had fully impaired between 2019 and early 2020, we fully impaired the asset entirely because the market for that business had changed so materially. And as we look to the future, really recognize that those businesses, web hosting really weren't a fit and a match with becoming a payments and data company. And we went to market looking for suitable buyers, a very robust process, a very robust process. And we came out with what we think is a fair transaction. And it avoids for us the ongoing need to put significant capital into the business in a business with secular declines and a much better fit for the acquirer because they're in that, that's their core business. And they have leverage and scale from adding our portfolio to their business, something we just -- it was a profile and an opportunity we didn't have. And so we took the opportunity to divest that. We think it will be very focusing for the company. You heard us say that we're changing the name of this segment from cloud because it was a distributed set of assets. And now it's very, very focused on our data business, which is what we've been saying is the jewel in that business for some time. And we think that makes it much more clear, and we think it's a good outcome. Got it. And then staying on the topic of divestitures, are you planning to potentially invest more businesses going forward here or are we kind of at the tail end of that process? We will continue to look at the portfolio for pruning opportunities. But Charlie, if the question really is, are you going to look to us to lap off one of the four legs check, promo, data or payments, I think we're at the place where we feel confident that that's not on the horizon here. Makes sense, thank you very much on that. And then looking at the guidance for the year, pretty wide range of outcomes there at the high end on revenue growth, given that we're going into potentially a recession here with inflation and higher interest rates kind of in the forecast, what gives you confidence there at the high end of that range and kind of what are some of the assumptions behind the guidance overall? Yes, I appreciate the question, Charlie. It's Chip. I would just say, I think the high end of the range, what gives us confidence is just the execution and success we've seen over the last two years, the ability to cross-sell within the portfolio, the way we've invested in the products over the last few years to improve the functionality, the market attractiveness of it, to build a robust pipeline, and just continue the sales momentum. So if I think about from a revenue side, I mean, obviously we did our range responsibly for all the right reasons you mentioned, there still is uncertainty and you don't know what's going to happen. But we look at that top end and I think it's very achievable. As you flow it down, obviously, the ranges get a bit wider as you go down my list of things I guided because of the uncertainty and room for variance can get larger and larger. But we just feel good about where the company is positioned, the internal plan we've established, and just being able to execute on the momentum we've had the last two years from a top line perspective. And then when you get to the EBITDA, it just can't be said enough how much we're going to focus on cost out, cost efficiencies, operating leverage, the corporate cost center as I said, and just get very maniacally focused on our cost profile so that we can make sure we deliver that EBITDA result and start to grow EBITDA even more, and that will obviously help our deleveraging. Got it. Great. Quick housekeeping on the Check side. Just in terms of volumes, how did the declines look there and then what should we think about in terms of volumes for the full year? On checks. So I mean, checks did return to secular declines again in the quarter. So if you think about kind of volume-price dynamics, it's a little bit more difficult to describe here. Obviously, price continues to be a function of the revenue because we took pricing actions throughout the year that rolled forward. But after we lapped all the customer wins, we did return to kind of normal secular decline. So we still had volume increases despite that, but when you net it all out, net reduction in revenue, which is what we're anticipating will be the same for 2023. So we're forecasting mid-single-digit declines, but the ability to keep margins in that mid-40% range. If I take checks aside and look at the other three segments, we are continuing to see a nice blend of volume and price. It was actually nearly 50-50 once again for the quarter. So just excluding the secular decline aspect of the business, we are just continuing to see a really good healthy mix of volume and price and that gives us confidence going into 2023 as well. Great, thank you very much on that. And then lastly, just can you repeat on the -- what you said about payments growth for the year and margin expectations there, I missed that? Yes. So payments we see as a mid-single-digit grower for the full year. We do think it's going to be maybe a little bit lower in the first quarter, and then it will pick up some steam as it gets into Q2 and beyond, and that's a function mostly of just some year-over-year comps that we're coming up against. But we do believe it's going to be mid-single digit on the revenue side. On the adjusted EBITDA margin side, this is an area that this business is finally really starting to show the value of why we love it so much as it's starting to get operating leverage. So low to mid-20% margins, I think if you look at the trend of that business over the last few quarters, you're starting to see this operating leverage that we've been talking about. And so we're feeling pretty good about the ability to, of course, grow the mid-single digits and then also just get EBITDA expansion, which would be nice to help hit that overall EBITDA guidance and offset the declines in checks that we're planning. Great, thank you very much. And then just lastly, what should we be thinking about assumption-wise for share-based comp for the year? Hey, good morning everyone. So I was wondering if you could talk a little bit, and I appreciate all the details that you've already provided. I was wondering if you could talk a little bit about thoughts on potential headcount adjustments for the year. You've talked about trying to keep the costs under control, but I was sort of wondering about maybe where you might stand as far as adding headcount and sort of maybe talk a little bit about any investment initiatives for the year? Sure. So on headcount, we are very disciplined about managing headcount, and we go through periods of pruning, including one earlier in January, but we are not a company that has historically just done across-the-board reductions. But we're very disciplined at managing particularly professional staff. So I think that the rest of the question really is how do we think about cost management for the rest of the year and going forward. And the thing I would really tell you is we really focused on getting revenue growing in the company, and we've now proven the company is capable of that. Some people didn't think we would actually deliver that, but we've now delivered it for two consecutive years. And the next big thing we do, in fact, is profitability and particularly the corporate cost center is a particular target. And we're going to be very disciplined and thoughtful just like we have on the portfolio and just like we have been on growing revenue and to attack that next to help us expand the profitability of the company from here. Great. And then I was wondering if you could talk a little bit about it, and you touched on some of the customer behavior that you're seeing given the environment that we're functioning in here. So I wonder if you could talk a little bit about if there are any particular industry verticals or pockets that are a little stronger than others or is pretty much the behavior that you're seeing largely across the board with customer verticals? Well, what I would tell you is, overall, we're seeing very durable demand across our entire portfolio of services. We are seeing some shift between verticals or between different periods, where volume is up or down modestly by sector or time period. But in aggregate, we continue to see strong and continuous demand for solutions. And that's -- you can see that in our performance from a revenue perspective. Great. And then I guess the last thing I was sort of thinking about is, I wanted to sort of circle back on the commentary that you had on the divestiture and sort of the opportunity for future pruning. I was wondering if you could talk a little bit about maybe on a bigger picture, maybe what you're seeing with the opportunities of within the M&A pipeline, sort of thoughts on current valuation, and whether that's -- if you've seen any changes there, any greater willingness of folks to engage or if that's changed much over the last few months given the recessionary environment? Thank you. The broader M&A market, I think, has been fairly frozen for some period of time. We're seeing maybe a little bit of a slight pat in that. And I think our perspective for our business is, we really like the core assets that we have in payments and data. And we feel like we've got plenty of runway there. And our first objective is of course, invest in the company for its success and continue to pay down debt. So are we going to be active in the M&A market to acquire assets, which is where I think you're going, the hurdle rate for that kind of a transaction would be really, really high right now with interest rates. And I think that we believe that valuations are still a little bit frothy. So you never say never, but we like the businesses we have, and we like our pathway to continue to pay down debt, and we see that sort of as the first and primary path. Hi, this is Alex Newman on for Chuck here. Sorry if I missed the call, but did you give expectations for revenue growth for the data segment in 2023, given some of that pull forward of revenue from Q1? And then just some of the drivers behind that revenue growth for the year, that would be great? Yes, Alex it's Chip. Yes, we did. So for the full year, we're expecting low single-digit revenue growth. And it's important to note that we refer to that as on a comparable adjusted basis because that one will obviously have the change in the divestiture occurring over time. So we'll continue to reconcile that and give you guys that. But for the full year, we see low single-digit growth. That's a bit slower than what we saw across the data segment this past year, but that's because this past year was such a large growth year. I mean that business grew north of 20%. It's obviously we just know that it's a high hurdle to clear. The first quarter specifically, we're expecting to be a little difficult just because of those handful of campaigns that shifted into the fourth quarter out in the first quarter at kind of depleted the pipeline just a bit. The team continues to work their pipeline list of deals, but we do know that the start of the year may be a little slower, but we don't see any reason that, that business can't grow low single digits for the full year. Okay. And then just within the merchant services, could you speak to what you see in terms of what's on the ground from your SMBs and what volumes are looking like and just the overall health? So I think in the merchant business overall, we continue to see robust volume and there's lots of media attention about and speculation what's happening in SMBs. But I think overall, we're seeing pretty solid volume there. And our fourth quarter delivered exactly what we expected it to do. I'm sure you've seen the commerce department numbers for December, but we didn't experience that. We delivered the quarter and the way we expect it to deliver it. So we feel like the variety of business we have there and the -- verticals where we compete, help balance each other out in good times and in tough times. We feel like that's a pretty solid business right now. Yes, hi, good morning. I think I have a first question would be on your free cash flow forecast and then I'd have a maybe a more strategic question about SaaS-generated revenue. Regarding your free cash flow, the $80 million to $100 million range you provided, I mean, I've noticed that, that's kind of in the range of the last two years. And I think the term is kind of maybe a flywheel, but is it the case that should operating results exceed your budget, you may increase your discretionary spending and kind of keep your free cash flow within that targeted range? Or alternatively, if results fall a little below target, would you cut back on investments, let's say, either capital spending or working capital, again, to kind of keep that free cash flow within a targeted range, I mean, how should we think about that free cash flow target in terms of flexibility there or how inviolate it might be? And then secondly, on your CAPEX spend, let's say, of $100 million. Can you remind me what the sustaining portion of that is versus what you would consider discretionary spend? Thank you. David, it's Chip. So on your first question, so the guidance of $80 million to $100 million, keep in mind, we're kind of approximating that the divestiture is roughly a $20 million impact to that. So all things equal, that's a guidance range of more $100 million to $120 million based off apples-to-apples, which you'll see is getting us back to kind of our -- towards our historical range that we were two to three years ago despite all the increases and interest costs. So I think that's a good place to land. To hopefully answer your question though, when we set the investment target for the year, whether it's the $100 million CAPEX or anything we may do inside the P&L, we actually look to achieve those, if not underspend those. We don't look to throttle up discretionary investment just because the results are trending better. We view those as kind of starting points, and we're going to do our best to spend our money wisely, come in under and make sure we can over deliver the free cash flow the best way possible because there's many of other -- interest expense or taxes. We know we have to manage this. So I wouldn't be concerned that if operating results trend better that we're going to throttle up investment. That's not what we would do. And to answer your last part of the question, in the guide of $100 million, I would think of it as kind of roughly $40 million to $45 million of that is kind of the sustaining. We call it KBR, keep the business running side with the rest of it, the kind of 55 to 60 being growth related. So high level, 60-40 growth to maintenance capital. And as you know, we're doing the print on-demand upgrade in check. So that's something that we're halfway through. So over time, that work will go down. And we just continue to invest responsibly in our growth products with payments and data and to try to make the company more efficient. Thank you very much for that. My next question is maybe a little more strategic or philosophical. But Barry, you've taken a number of steps over the last couple of years to transform your company into as you pointed out today, you're a payments and data company. But I'm just wondering, underneath that, there's different kinds of revenue generation. And I think in your slide deck, the emphasis on SaaS-driven revenues has been increasing pretty steadily over time. And I'm just wondering, beyond the headlines or the column headings of payments and data, whether underneath that, there's also targets or goals for SaaS-driven revenues, which I consider more stickier and more relationship-based versus maybe transactional sales of onetime sales of services to companies that might handle the service themselves. So what are your goals maybe for that maybe more differentiated SaaS-driven revenue where maybe there's a service, differentiated service component in there that could make for more durable revenue streams, stickier customers, and that kind of thing? Thank you. So that is a really insightful question, and it goes right to the very core of our sort of corporate strategy, which is we are trying to build the payments and data businesses because by their nature, they are stickier businesses. So for example, in our receivables and payables business, customers choose and adopt one platform to run their -- and build their business upon and increasingly they're choosing our platform. So we have a number of banks that are reselling our receivables platform as a branded version of their bank. So you don't know that it's Deluxe providing the solution. You know that it's the bank providing a solution to their customer. That is extremely sticky because once the customer has a commercial bank relationship with the bank and they are using our platform to manage their receivables and payables, that customer doesn't attrite and that's driven by delivering a great experience and set of tools, a software-as-a-service type model where that customer is building their business on the platform. And that's obviously where we're making our investments as a company. We are going to launch later this year, improved tools for our receivables business that will give us really attractive, really easy-to-use tools for the customer. We've invested in our platform for our data business, which someone was asking earlier about how we're diversifying the business, it's because we've invested in our platform that's allowed us to grow that business into new business verticals. So we're not here to say that we're a Software-as-a-Service company. We're absolutely clear, though, that we are moving the company towards a much bigger percentage of revenue from recurring revenue where businesses are building their business on our platform. It's completely true in our receivables payables business. It's a foundation in our merchant services business, and that's the very foundation and core of what's happening in data. So it's absolutely where the company is going and going forward and we're making our investments for growth. Yes, okay. No, thank you for all that color. I mean I've just noticed with a number of my companies, there is difficulty in procuring sufficient IT resources. And I thought the way you're already interacting with them, it would kind of be a natural opportunity for your company over time. Thank you for that. Thatâs all I had. Hey, thanks guys. Just two quick follow-ups that I forgot about. The first is on the proceeds from the web hosting sale. I know that there's about $10 million or so in the 8-K that sort of deferred, I think, over a 6 to 12-month period from the time you close it. And I'm just wondering, are there -- is that like an earn out, are there any sort of performance-related contingencies there that we should be aware of? And then my second question is just with respect to the payments business. I'm wondering if you could kind of step back and walk me through the margin outlook in 2023 and I apologize, I think you mentioned that you had some opportunities there, but if you could recap that for me, that would be great? Thank you. This is Chip, I'll take both of those. So, on the sale of the web hosting business. So we announced a base sales price of $42 million in our 8-K the other day. $32 million of that is kind of a payment to occur at time of closing with the other $10 million 180 days later and 360 days later, I believe, neither of those 10 million are contingency-based. There is up to another $10 million, which could take the total sale price up to a max of 52. Those are contingency base subject to performance obligations. And so look at the sale price as a range of 42 to 52. The 42, it will happen, and it has the second and third payment which is just a timing factor as the business transitions over. The question about payments, you're right, we did talk about that a bit. So, we are forecasting EBITDA margin rates in the low to mid-20s. But I think what I said is if you look at the last few quarters, you're starting to see that business realize operating leverage, margins are expanding. That's a function of the volume growth. We like that business because as volume grows, it can come at an incremental margin rate because of the way the platform business work. We were -- we've got operational efficiency in our treasury management business, specifically lockbox, that's improving profitability there. And then, of course, as we continue to take price to keep up with inflation, that's helping as well. So all things equal, this is a business that we believe will expand margins nicely in 2023. And there are no further questions at this time. Mr. Tom Morabito, I turn the call back over to you for some closing remarks. Thanks, Rob. Before we conclude, I'd like to mention that management will be participating in the Truist Securities Technology, Internet & Services Conference on March 7, 2023, and the Sidoti Virtual Small Cap Conference on March 22nd. Thank you again for joining us today, and we look forward to speaking with you in May as we share our first quarter 2023 results.
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EarningCall_782
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Good afternoon everyone, and welcome to the Altigen Communications First Quarter Fiscal Year 2023 Results. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. Thank you. Good afternoon and welcome to our first quarter fiscal 2023 earnings call. Joining me today is Jerry Fleming, President and Chief Executive Officer; and Carolyn David, Vice President of Finance. Earlier this afternoon, we issued an earnings release reporting financial results for the period ended December 31, 2022. This release can be found on our IR website at www.altigen.com. Please note that we have added some supplementary tables with revenue breakouts and metrics. We believe this will help improve transparency into our business and we will continue to evaluate additional metrics as our new products begin to contribute to our results. Weâve also arranged a replay of this call, which may be accessed by phone. This replay will be available approximately an hour after the call's completion and remain in effect for 90 days. The call can also be accessed from the IR portion of our website. As a reminder, today's call may contain forward-looking information regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and actual results may differ materially due to certain risks and uncertainties that pertain to our business. We refer you to the financial disclosures filed periodically by the company with the OTCQB over-the-counter market, specifically, the company's audited annual report for the fiscal year ended September 30, 2022, as well as the safe harbor statement in the press release the company issued today. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Altigen assumes no obligation to revise any forward-looking information contained in today's call. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures will help investors gain a more complete understanding of results. A reconciliation of GAAP to non-GAAP measures and additional disclosures regarding these measures are included in today's press release. Thanks Brian, and good afternoon everyone. Thank you for joining us on today's call. So, Iâm going to begin the call today with a review of our first quarter business followed by a general business update. After that, I'll turn the call over to Carolyn to review our financials in more detail. As we reported earlier today, revenue for our fiscal first quarter was approximately $3.5 million with a small non-GAAP profit. The expenses in the first quarter were roughly $400,000 higher, compared to the same period a year ago, due primarily to higher headcount expenses resulting from our acquisition of ZAACT Consulting. Now, we did expect the business consolidation to take anywhere from 6 months to 12 months to complete. This consolidation we believe will largely be accomplished in this current quarter, which now will result in a lower expense rate going forward. We also experienced a small quarter-over-quarter decline in cloud revenues, but I do want to point out that nearly 70% of that total was due to lower SIP trunk revenues, which we attribute to traditional seasonality in this business, due to the holidays, combined with a bit of churn in our legacy Cloud PBX customer base, which we do believe occurred because some of our customers simply couldn't wait for our new MaxCloud UCaaS platform [to be fully available] [ph]. As we've discussed on prior calls, MaxCloud does represent a significant upgrade to our legacy MaxCS hosted PBX solution. MaxCloud introduces a complete new suite of unified communications features, including real time presence, instant messaging, desktop sharing, HD video conferencing, and new mobile apps, none of which were available on our legacy MaxCS hosted PBX and all of which are required by today's [modern businesses] [ph] and which we do now have in the MaxCloud platform. In addition, MaxCloud is a complete multi-tenant solution, which enables Altigen to host thousands of customers in a single geographically redundant platform. This not only provides much greater scalability and reliability, compared to our MaxCS PBX platform, it also greatly reduces our data center and our cloud administration expenses. So, we are first targeting for conversion of our approximately 500 on-premises legacy MaxCS PBX customers since they represent the highest incremental revenue potential. Of course, we also want to make sure that our current base of MaxCS hosted PBX customers are taken care of and we will prioritize the migration of these customers to the new MaxCloud platform based on their desire to add the MaxCloud UC functionality to their environment. As of the end of December, we had approximately 10 customers on our new MaxCloud UC platform, which was roughly split evenly between current and new customers. The MaxCloud UC platform has also now been fully deployed for three Fiserv customers, two of which who have also deployed our front stage contact center. Additionally, our third customer has also deployed front stage contact center on a standalone basis. MaxCloud and FrontStage are both new technologies to Fiserv and as such they are still ramping up, Fiserv meaning they, still ramping up in terms of both sales and support. However, each deployment brings Fiserv further down the learning curve and as they move down that curve, the momentum will continue to build throughout the year. Now, in addition to the net new customers I just referenced, Fiserv is also charging their base of approximately 100 legacy MaxCS cloud and on-premise customers for migration to both MaxCloud and the Fiserv UCaaS platform. All of these customers represent incremental revenue to Altigen in terms of both additional UCaaS revenue, CCaaS revenue, or in most cases both CCaaS and UCaaS. Now, during the fiscal first quarter, we also rolled-out our first Fiserv secure SIP customer. This new service authenticates callers by verifying the caller's ID and telephone device, which reduces the possibility of fraudulent colors and [personating] [ph] a legitimate customer in order to gain access to their account. Now because the secure SIP service requires integration to multiple Fiserv core processing systems, we will be doing a phased rollout as each core system is supported, but ultimately, this plan is â the plan for this service is to be available for all 6,000 Fiserv customers. So, the good news is that things are progressing nicely with Fiserv across the board. All of our new fintech solutions that I referenced have now been deployed at least for initial customers. The plan in conjunction with Fiserv is to continue to add customers and additional value-add applications going forward for those customers. Now, turning to our Microsoft Teams solutions, we are making headway. While we do have a number of solutions for Microsoft Teams, our most significant opportunity still remains with CoreInteract, so I will focus on that for today's call. As a reminder, CoreInteract is the first true digital customer engagement platform specifically designed for Microsoft Teams. Since the inaugural release of what I'll call the basic CoreInteract platform, we have been working hard to add additional features and applications to CoreInteract based on feedback from our customers. Now, I will point out that as we prepared for our initial release of CoreInteract, my expectation was that 80% of the CoreInteract deployments would be for customer facing enterprise employees and 20% of those would be for departmental call centers such as the IT help desk, customer service center, and the like. As we went to market, what we found is that the customer demand has been that 80% of the interest is in departmental call centers and 20% for enterprise customer facing employees, okay. So when we translate that to business requirements, what this means is that we had to add more advanced call center features and applications much sooner than expected to CoreInteract. Now, many of these capabilities were first made available to customers in a major new release that we announced earlier this month. And after successful deployments for these existing customers, we've now started a number of new proof of concept or pilots with new customers as well. Now, we still have an extensive product roadmap loaded with new and exciting features, but we do have the base product that we need in order to advanced opportunities. Regarding CoreInteract, we do have well over 20 customers using the product in production, many of which are now starting small, but they have plans to extend the use of CoreInteract throughout the enterprise. In other words, this is a true land and expand opportunity with CoreInteract. Our fiscal first quarter revenue for CoreInteract was small as a result, but that does provide us with a foundation that we can continue to build on as our enterprise customers continue to expand CoreInteract throughout their businesses. Finally, regarding our services business, as I mentioned at the top of the call, this quarter we expect the consolidation of Altigen and ZAACT Consulting to be pretty much complete. The integration of our accounting and billing functions are done. We've also now integrated our sales, marketing support, and development organizations to better leverage our respective individual areas of expertise. So, everything that has been done, has been designed not only to benefit the synergies from our two companies, but also to enable us to derive additional growth in both software and services revenue. Thanks Jerry and hello everyone. For our 2023 fiscal first quarter, we reported total revenue of 3.5 million, up 27%, compared to the same period a year ago. Total cloud services revenue for Q1 was 1.8 million, compared to 1.9 million in Q1 last year. Professional services and other revenue increased 751% to 1.2 million, compared to the prior year quarter, reflecting the ZAACT acquisition. Our legacy and on-premise software assurance and software license revenue decreased 32%. Gross margin was 64%, compared to 72% in Q1 last year, representing a decrease of approximately 800 basis points. This decrease was primarily the result of a mix shift towards higher professional services revenue resulting from the ZAACT acquisition. GAAP operating expenses for the quarter totaled 2.4 million, 22% higher than the comparable period last year. On a non-GAAP basis, operating expenses totaled $2.3 million for Q1, compared to 1.9 million last year, representing an increase of roughly 26%. Now, excluding the impact of ZAACT, both our GAAP and non-GAAP operating expenses would have been slightly lower when compared to Q1 last fiscal year. GAAP net loss for Q1 was 187,000 or a negative $0.01 per diluted share, compared to GAAP net income of 11,000 or $0.00 per diluted share in the prior year quarter. GAAP net loss included 200,000 in depreciation and amortization, as well as 31,000 in stock-based compensation expenses that was adjusted out of our non-GAAP net income of 44,000 or breakeven diluted EPS. Now, let's turn to liquidity. We ended Q1 with 2.9 million in cash and cash equivalents, down 11%, compared to the preceding quarter. Working capital was 2.1 million, compared to 2.3 million in the prior year quarter, representing a decrease of roughly 7%. Okay, Carolyn. Thank you. So, in conclusion, we finally have all of our new platforms deployed and running in customer environments. Our business is stable, employees for growth. In addition, as a result of the completion of our business integration with ZAACT, we do expect to see reduced expenses and growing profitability going forward. We have the team in place, we have the products in place, we have the game plan in place, so looking forward, our focus is squarely on driving profitable revenue growth. Okay. Alright, operator. So, I'll take it back then and I would like to thank everyone for joining the call. I do believe we are on the right path here and we look forward to updating you on our next quarterly earnings call. Thanks again. Thank you. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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EarningCall_783
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Good morning. My name is Stephen and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And the after the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Mr. Ken Cook, Investor Relations Officer. Sir, the floor is yours. Good morning, and welcome to the UPS fourth quarter 2022 earnings call. Joining me today are Carol Tome, our CEO; Brian Newman, our CFO; and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements within The Federal Securities Laws and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2021 Form 10-K, subsequently filed Form 10-Qs and other reports we file with or furnished to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results. For the third quarter of 2022, GAAP results include a non-cash after-tax mark-to-market pension gains of $782 million, a onetime non-cash after tax charge of $384 million resulting from accelerated vesting of restricted performance units in connection with the change in incentive compensation program design, a non-cash after tax charge of $58 million from a reduction in the residual value of our MD11 aircraft and after tax transformation and other charges of $41 million. The after tax total for these items is $299 million, a benefit to fourth quarter 2022 EPS of $0.34 per diluted share. Additional details regarding your pension adjustments are included in the Appendix of our fourth quarter 2022 earnings presentation that will be posted to the UPS Investor Relations website later today. A reconciliation to GAAP financial results is available on the UPS Investor Relations website, along with the webcast of today's call. Thank you, Ken. And good morning. Let me begin by thanking UPSers for delivering what matters to our customers this holiday season. In a quarter, we were faced with choppy demand, continued COVID lockdowns in China, a threat of a work strike in the United States, and a bomb cyclone in North America. But no matter what came our way, our team delivered. We executed another outstanding peak and delivered industry leading service for the fifth consecutive year. I'm very proud of our team and what we accomplished, not just in the quarter, but for the entire year. Looking at our fourth quarter results, we expected volume levels to decline from last year and they did, but more than we planned due to macro conditions that Brian will discuss. We responded by managing our network with agility and a focus on service. Consolidated revenue was $27 billion, down 2.7% from last year, and operating profit was $3.8 billion, a decrease of 3.3%. While our consolidated operating margin declined by 10 basis points from last year, to 14.1%, our U.S. operating margin expanded to 12.8% and reached the levels not seen in 10 year. Reflecting back on 2022, much changed from when we originally set our plan. We experienced geopolitical tensions, including a war and global inflation drove food and energy costs higher. We saw both relief and concern as China pivoted away from its zero COVID policy. Global supply chains continue to adjust and demand and pricing for air and ocean freight softened accordingly. Consumers returned to pre-pandemic shopping behaviors, as retailers have been successful and attracting consumers back into stores. And we won't even talk about the weather, which candidly presented challenges throughout the year. Even in the face of so much change, UPSers remained focus on controlling what we can control. And we delivered our full year consolidated operating margins and return on invested capital targets. In 2022, consolidated revenue increased 3.1% to reach $100.3 billion. We missed our revenue target by about 2%, but as Brian will detail, nearly all of this mess was due to a stronger dollar than originally anticipated. Consolidated operating profit in 2022 totaled $13.9 billion, 5.4% higher than last year, and consolidated operating margin reached 13.8%. We generated $9 billion in free cash flow and diluted earnings per share were $12.94, an increase of 6.7%. During the year, we stayed on strategy, customer first, people-led, innovation-driven. As we've discussed, customer first is about creating a frictionless customer experience targeted at certain customer segments including SMBs and healthcare. Since its inception, we've had huge success with DAP, our Digital Access Program and making it easier for SMB customers to do business with UPS. In 2022, we generated more than $2.3 billion in DAP revenue exceeding our targets. We expect the momentum to continue and plan to generate around $3 billion in global DAP revenue in 2023. And with the launch of Deal Manager in 2022, we've made progress towards dynamic pricing. Deal Manager digitizes the pricing process, and applies pricing science to present the right offer to our SMB customers the first time, so we are able to close deals faster and with better revenue quality. In 2022, our U.S. win rate with Deal Manager was 22 percentage points higher than the baseline. So we are moving quickly to expand access to Deal Manager to more than 40 countries in 2023. Additionally, we recently launched a pilot that enables systematic day or week pricing, which is good for our customers and good for UPS. Early feedback is promising, and we'll share more updates on this pilot on future calls. Looking at SMBs, they made up 28% of our total U.S. volume in 2022, an increase of 120 basis points compared to 2021. Turning to healthcare, in 2022, our healthcare portfolio reached $9.2 billion in revenue, and the quality of our offerings was best-in-class. Our goal is to become the number one complex healthcare logistics provider in the world. Today, we have nearly 17 million square feet of healthcare compliance distribution space globally, with leading cold chain logistics capabilities. In 2023, we expect our healthcare portfolio to generate more than $10 billion in revenue. We don't just look at volume and revenue to measure our success, we also look at our net promoter score. In 2022, the improvements we saw in our net promoter score outpaced the competition. We made strong gains in all 16-customer journeys, including the three most important, negotiate value, reroute a package and resolve a claim. We are well on our way to our NPS target of 50. Turning to People led. Here we are focused on the employee experience, and making UPS a great place to work. For our frontline employees, we made organizational design changes to address certain work-life balance challenges. We've stepped up maintenance spending in our buildings, including updating break rooms and restrooms, refreshing paints, improving lighting, and adding cooling stations. And for our management employees, nearly 40,000 around the world, we've been laser focused on improving our likelihood to recommend score, or LTR. When I started with the company LTR stood at 51%. It is now 60%, and we would like it to be 80% or higher. And looking at the drivers of dissatisfaction, the largest area of concern was pay, not the total amount of pay, but rather than pay mix structure. So we've taken action to fix it. Beginning in 2023, we are changing the pay mix structure by increasing the cash component. This shift does not change total compensation for our management employees, but does increase cash. We also accelerated the vesting of stock rewards associated with our annual bonus plan. This was a onetime non-cash charge. Beginning in 2023, management incentive plan annual bonuses if earned will be paid in cash. Regarding our upcoming labor contract negotiations, we are well prepared for negotiations, and are focused on achieving an agreement that is a win for our employees, a win for the Teamsters and a win for UPS and our customers. We have great jobs with industry leading pay and benefits. Now, I suspect many of you listening today, we'd like to tell about our negotiating strategy. Well, we believe the best way to achieve a win win win outcome is for us leave the details of the negotiations at the bargaining table. So let's move on to the last leg of our strategy, innovation-driven. We believe innovation is one reason we've been able to provide our customers with industry-leading service for five peaks in a row. By leveraging the agility and efficiency of our integrated network, our engineers and operating teams quickly make decisions to adjust the network and keep service levels high. This year, we supplemented our engineering tools with our total service plan, which further improved our on-time network and drove productivity. In the fourth quarter, hours deployed in the U.S. dropped 5.3% which was greater than a decrease in volume. And in terms of cube utilization, our efforts in the fourth quarter enabled us to eliminate nearly 1,500 trailer loads per day. We are relentlessly focused on making our network even more efficient. We were very pleased with the initial results of our Smart Package Smart Facility RFID Initiative, where we are seeing fewer missed loads and higher productivity. As a result, this year, we plan to complete the RFID deployment in the more than 900 remaining buildings across the U.S. In 2022, we created a new growth platform we call logistics-as-a-service, which combines digital capabilities with our best-in-class global integrated network. Under this platform, we launched our Delivery Density Solution, where we continue to add customers and are seeing positive results. Lastly, we can't talk about innovation without speaking into the progress we are making against our environmental sustainability targets. In 2022, we took delivery of over 2,300 alternative fuel and advanced technology vehicle, bringing our rolling laboratory to more than 15,600. And in 2023, we plan to add more than 2,400 vehicles, as we move toward carbon neutrality by 2050. We think the best way to measure innovation driven is by delivering higher returns on invested capital. For the full year 2022, we delivered a return on invested capital of 31.3%, 50 basis points above 2021. Let me close with a few comments related to 2023. The outlook for economic growth is cloudy at best, geopolitical tensions are rising, and we have a labor contract to negotiate. For us, it is a year of resilience. What does resilience mean? It means we will plan conservatively and pivot quickly. It means we will balance defensive and offensive mode and it means we will execute what we call our wildly important initiatives. Specifically, we will balance efficiency moves with growth opportunities. Think of that as better and bolder. We will stop certain initiatives and accelerate other thereby increasing investment in our business. Relative to 2022, we are increasing our 2023 expense and capital budget by over $900 million. Finally, we will focus on three widely important initiatives, improving the customer value proposition, increasing talent development and employee engagement, and leveraging our physical network with our digital platform to drive logistics-as-a-service. Given the uncertainty ahead, we are providing a range for our 2023 revenue and profit outlook. Brian will provide the details. As a demonstration of competence in our business going forward, and in concert with our capital allocation principles, the UPS board has approved a $0.10 increase in the quarterly dividend from $1.52 per share to $1.62 per share. This is the 14th consecutive year, we have increased the UPS dividend. Additionally, our board approved a new $5 billion share repurchase authorization replacing our existing authorization. In closing, for the past two and a half years, we have fundamentally improved nearly every aspect of our business, and we're just getting started. Uncertainty creates opportunity, and this team has proven that it's up for the challenge. Thanks, Carol and good morning. In my comments, I'll cover three areas, starting with our fourth quarter results. Then I'll review our full year 2022 results including cash and shareholder returns. And lastly, I'll provide comments on expectations for the macro environment and our financial outlook for 2023. In the fourth quarter, the macro environment was challenging. In the U.S. inflation-sensitive consumers returned to more pre pandemic shopping patterns and holiday retail sales were lower than expected, especially after Cyber week. Internationally, demand in Europe remained under pressure. Ocean and air freight rates declined and exports out of Asia worsened due to COVID conditions in China. Despite these conditions in the fourth quarter, we responded quickly and again delivered for our customers and shareholders. In the fourth quarter. Consolidated revenue was $27 billion, down 2.7% from the fourth quarter of last year, and operating profit was $3.8 billion, a decrease of 3.3% compared to the fourth quarter of last year. Consolidated operating margin was 14.1% for the quarter, down 10 basis points from the same time period last year. For the fourth quarter, diluted earnings per share was $3.62, up 0.8% from the same period last year. Now let's look at our business segments. In U.S. domestic, revenue quality initiatives more than offset the decline in volume and drove strong fourth quarter results. In the fourth quarter, average daily volume was down 3.8% versus the same time period last year, with about half of the decrease coming from our largest customer, per the mutually beneficial contractual agreement we reached some time ago. In the fourth quarter, volume in October and November came in as we expected, including a surge in late-November from Black Friday through Cyber week. In December, volume fell short of our expectations, reflecting consumer spending cutbacks at the height of the holiday season. B2C average daily volume declined 3% in the fourth quarter compared to last year. B2B average daily volume in the fourth quarter was down 5.2% year-over-year, driven by declines in retail and industry sectors that are more sensitive to rising interest rates, like manufacturing and distribution. In the fourth quarter, B2B represented 35.3% of our volume, which was down slightly from 35.8% in the same time period last year. Looking at customer mix, SMBs made up 26.5% of our total U.S. domestic volume in the fourth quarter, an increase of 70 basis points from one year ago, and the 10th consecutive quarter of increased SMB penetration. For the quarter, U.S. domestic generated revenue of $18.3 billion, up 3.1%. Revenue per piece increased 7.2% driven by revenue quality, which more than offset the decline in volume. Improvements in base pricing more than offset a small decline due to product mix and together drove about half of the revenue per piece growth rate increase. The remaining half of the revenue per piece growth rate increase was driven by the combination of higher fuel price per gallon and our fuel pricing actions. Turning to costs, total expense grew 2.5%. First, higher fuel costs contributed about 150 basis points of the total expense growth rate increase. Second, higher wages and benefit expense contributed 150 basis points of the increase. Total union wage rates were up 5.6% in the fourth quarter, driven by the annual wage increase and cost of living adjustment for our Teamster employees that went into effect in August of 2022. Productivity initiatives help partially offset the increase in expense. For example, total service plan has improved driver dispatch time by 7.9% since its launch in July 2022. This is helping us run an on-time network. And in the fourth quarter we increased total productivity by 1.6% as defined by pieces per hour. Lower purchase transportation expenditures reduced the total expense growth rate by around 140 basis points, primarily from utilizing UPS feeder drivers to support our fastest ground ever and continued optimization efforts. And the remaining expense growth rate increase was driven by multiple factors including maintenance and depreciation. Looking specifically at our peak period, our sales, engineering and operating teams planned and executed another successful peak. We used our technology to maximize the agility of our integrated network, including our newest regional hub in Harrisburg, Pennsylvania. All of which enabled us to respond to changes in volume levels and difficult weather as winter storms rolled across the country close to Christmas. Our network never stopped and we provided industry leading service to our customers for the fifth year in a row. The U.S. domestic segment delivered $2.3 billion in operating profit, up 7.5% compared to the fourth quarter of 2021. And operating margin was 12.8% year-over-year increase of 60 basis points. Moving to our international segment. The macro environment was challenging and resulted in lower volume than we anticipated in the fourth quarter. We leveraged the agility of our global network to quickly adjust capacity while delivering excellent service to customers. In the fourth quarter, international average daily volume was down 8.6%. The decline was primarily driven by a 12.9% decrease in domestic average daily volume and weakness out of Asia due to COVID. Total export average daily volume in the fourth quarter declined 4% on a year-over-year basis. Asia export average daily volume declined 10.3% driven by lower global demand and disruptions to manufacturing output from the changes in China's COVID policy. In response, we quickly adjusted the network and cancelled over 200 of our China and Hong Kong origin flights maintained high service levels and achieved a payload utilization of over 98% on our Asia outbound intercontinental flights. In the fourth quarter, international revenue was $5 billion, down 8.3% from last year, due to the decline in volume and a $321 million negative impact currency. Revenue per piece was relatively flat year-over-year, but there were a number of moving parts including a 660 basis point decline due to a stronger U.S. dollar, a 540 basis point increase from fuel surcharges and the remaining increase of 100 basis points was due to the combination of multiple factors including favorable product mix, base price increases and lower demand related surcharge revenue. Operating profit in the international segment was $1.1 billion, down $240 million from last year due to $139 million reduction in demand related surcharge revenue and a $98 million negative impact from currency. Operating margin in the fourth quarter was 22%. Now looking at Supply Chain Solutions, in the fourth quarter revenue was $3.8 billion, down $846 million year-over-year. Looking at the key drivers in forwarding, software global demand drove down volume and market rates more than we expected, resulting in lower revenue and operating profit. Logistics partially offset the declines in forwarding and delivered double digit revenue in operating profit growth driven by gains in our complex healthcare business from coaching and clinical trials customers. In the fourth quarter, Supply Chain Solutions generated an operating profit of $403 million and operating margin was 10.5%. Walking through the rest of the income statement, we had $182 million of interest expense. Our other pension income was $297 million. And our effective tax rate for the fourth quarter was 22.4%. Now let me comment on our full year 2022 results. In 2022, we remained focused on controlling what we could control and provided excellent service to our customers, which enabled us to deliver our consolidated operating margin and return on invested capital targets. A few consolidated highlights. Revenue reached $100.3 billion, an increase of $3.1 billion over 2021. This was $1.7 billion below our $102 billion revenue target, but included a $1.3 billion year-over-year negative impact from currency. In 2022, we generated operating profit of $13.9 billion, an increase of 5.4% over full year 2021 consolidated operating margin was 13.8%, an increase of 30 basis points. We increased our ROIC to 31.3%, up 50 basis points compared to last year. We generated $14.1 billion in cash from operations and continue to follow our capital allocation priorities. We invested $4.8 billion in CapEx. Additionally, we acquired Bomi Group, a delivery solutions and made an investment in Commerce Hub. We distributed $5.1 billion in dividends, which represented a 49% increase on a per share basis over 2021. We've repaid $2 billion in debt that matured during the year and our net pension liability decreased by over $3 billion. Both of which helped us reach our targeted debt to EBITDA ratio of 1.4 turns, giving us ample financial flexibility to continue deploying capital to create value for our shareholders. Lastly, we completed $3.5 billion in share buybacks in 2022. And in the segments for the full year, a U.S. domestic operating profit was $7.6 billion up 12.8% and we expanded operating margin to 11.8%, a year-over-year increase of 70 basis points. The International segment generated $4.4 billion in operating profit and operating margin was 22.4%. And Supply Chain Solutions delivered operating profit of $1.9 billion, an increase of $153 million and operating margin was 11.3% an increase of 150 basis points over 2021. Moving to our outlook for 2023. We expect 2023 to be a bumpy year, due to rising interest rates, decades high inflation, recession forecasts, a war in Eastern Europe, COVID disruptions in China, and our U.S. labor negotiations. While we anchor our plans to S&P Global economic forecasts, we have developed multiple plans scenarios that will help us quickly pivot in an uncertain macro environment. Further, given our financial strength and solid cash position, we are increasing strategic investments to enhance our ability to capture growth opportunities, as we come out of this cycle. I'd like to share two of those scenarios with you now, which are the basis for the guidance we are providing this year. The first is our base case that delivers the high end of the target range. And the second scenario includes additional top-line risks and represents the low end of the range. Let's start with our assumptions for the base case at a segment level. In the U.S., we expect a mild recession in the first half the year, with a moderate recovery in the second half of the year. In the U.S. domestic segment, we anticipate average daily volume will be down slightly due to our continued volume glide down from our contractual agreements with our largest customer which will be nearly offset with growth from SMB and other enterprise customers. And we expect volume growth to be better in the second half of the year compared to the first. We also expect the revenue growth rate to be low-single digits. On the cost side. While we will manage the network to match volume levels, we have increased both capital and operating expenses for projects that drive efficiency and growth. One example is the accelerated deployment of our smart package smart facility initiative to all remaining U.S. facilities, which we plan to complete by the end of the year. And on the growth front, we will continue to invest in improving customer experience. Putting it all together, we expect to grow revenue per piece at a faster rate than cost per piece, and expand full year domestic operating margins to 12%. Turning to international in 2023. In our base case plan, we expect a recession in Europe in the first half of the year. And in China, we expect weak demand in the first quarter with recovery beginning in the second quarter. We are accelerating initiatives like international data to help us gain share and partially offset macroeconomic softness. We anticipate international average daily volume will decline by low-single digit, with volume growth better in the second half of the year compared to the first. We expect revenue to decline by low-single digits, including reduction in demand related surcharges. We will continue to manage our costs with agility and expect to generate an operating margin of around 21%. Turning to Supply Chain Solutions, we expect revenue to be around $14.6 billion as forwarding volumes will remain challenged and market rates will fall from year-end 2022 levels. We expect to partially offset declines in forwarding revenue from double digit growth in our healthcare business, resulting in an operating margin of nearly 11%. In our downside plan, which represents the low end of our range, we start with our base case assumptions for all segments and layer in the following. In U.S. domestic, we reduced expected enterprise and SMB volume growth rates, resulting in a full year volume decline of around 3% versus 2022. In international, we layer in weaker demand out of Asia for the entire first half of the year, and a slower recovery in Europe in the second half of the year, resulting in a mid-single digit decline in average daily volume. And in Supply Chain Solutions, we lowered our assumptions for air and ocean freight forwarding market volume and rates, which reduced full year revenue for supply chain solutions by around $200 million. Bringing it all together for the full year 2023, we expect consolidated revenues to be between $97 billion and $99.4 billion and consolidated operating margins to be between 12.8% and 13.6%, with more than half of our operating profit coming in the second half of the year. Now turning to pension. There are a couple of factors to keep in mind as you update your models. First, beginning in 2023, we froze our defined benefit pension plan for U.S. non-union employees and have replaced it with enhanced 401(k) benefits. Second, high discount rates at the end of 2022 will result in lower service costs in 2023. Above the line, we expect the combination of these two factors will reduce operating expenses by approximately $420 million in 2023, with around 90% of the reduction in the U.S. domestic segments. Below the line, we expect pension income of around $260 million for the full year 2023, which is $930 million less than in 2022 primarily due to higher interest rates, resulting in an increase in pension interest expense and a reduction in the value of our pension assets for market performance in 2022. We've included a few slides in the Appendix of today's webcast deck to provide you more detail. The webcast deck will be posted to the UPS Investor Relations website following this call. Now let's turn to full year 2023 capital allocation. Our capital priorities have not changed and we will continue to make the best long-term investment decisions that will keep us on strategy and enable us to strengthen our customer value proposition and capture growth coming out of this cycle. We expect 2023 capital expenditures to be about $5.3 billion. And here are a few project highlights. We will invest $2.4 billion in buildings and facilities to add automated storage capabilities and increase efficiency across the network. And we'll add 2.4 million square feet of healthcare logistics space to our global network. We will invest $1.3 billion in vehicles, including adding more than 2,400 alternative fuel vehicles to our fleet. We will invest $745 million in our air fleet, including taking delivery of seven 767 aircraft in 2023. And in terms of IT, we will invest $830 million, which includes accelerating the rollout of smart package smart facility in the U.S., continuing to develop our delivery density solutions, and building out our logistics-as-a-service platform. And lastly, across these projects, and others, over $1 billion of investment will support our carbon neutral goals. Now, let's turn to our expectations for cash and the balance sheet. We expect free cash flow to be around $8 billion in our base case. Consistent with our policy of a stable and growing dividend, the board has approved a dividend per share of $1.62 for the first quarter, which represents a 6.6% increase in our dividend. We are planning to payout around $5.4 billion in dividends in 2023 subject to board approval. We plan to buy back around $3 billion of our shares. And finally, our effective tax rate is expected to be around 23.5%, with a tax rate higher in the first quarter compared to the rest of the year, due to the timing of our employee stock awards. In closing, we are focused on controlling what we can control, but we will continue to invest in our business to balance efficiency and growth opportunities under our better and bolder framework. The fundamental changes we made to our business, coupled with the continued execution of our strategy will help us navigate what's ahead in 2023. And Stephen, one note before we do that, we did experience a technical difficulty with a webcast this morning. So apologies to those of you who've missed a portion of our prepared remarks. We plan to post the full recording of today's call to our Investor Relations website shortly after the completion of our call. Thank you. We will now conduct a question-and-answer session. Our first question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead. Thanks, operator. Hi, everyone. Brian, that was really helpful guidance framework. So appreciate that. A couple just clarification points. I guess the net service cost benefit is zero in domestic, if I look at the service component, I'm just trying to understand how much of that margin uplift is absolutely gross and net service. I don't know if you talked about -- I might have missed it. Sorry, there were a lot of numbers there. If you talked about the financial impact from what you're assuming on a new labor deal. So if you could just talk about those two items. And then Carol, there's a lot of rhetoric that's heating up on a labor contract. Seems like every day we wake up, there's a new big article about it. Wondering what your message is to enterprise customers that may start to get a little bit uneasy with all the rhetoric that's heating up out there. Thank you. Thanks, Amit, I'll get started. We had about $420 million benefit to our consolidated operating costs, and that Amit, is being offset with investments. So that 420 specifically, I think you were talking about the domestic business, which is 380 of the 420, which is worth about $0.07 on a CPP. So when you think about the investment we're going to make into the business, which are about $400 billion, as I mentioned in my prepared remarks, that basically offsets the pension service cost impacted domestic. So it's more of a one for one. On the labor front, so we've modelled in rates in both our base and our downside scenario, Amit. And I'm not going to get into the wage and benefit component of that. But I guess there's a broader labor question in there. Upon, I'm happy to address the labor question. Without getting into the details of what will take place at the bargaining table, I think it's important to remember that Teamsters have been part of the UPS family for more than 100 years. So over 10 decades, we've negotiated many, many contracts. This is not our first rodeo. Our approach with the Teamsters is a win win win. Win for the Teamsters, win for employees, and win for UPS and our customers. Now, I mean to your observations, there have been a lot of articles and headlines recently, that with my cost so much a question whether or not a win win win is achievable. But I would submit that a win win win is very achievable, because we are not far apart on the issues. And let me make this real for you by giving you a few examples. First, both Teamsters and UPS agree that a healthy and growing UPS is good, good for Teamsters, good for our people and good for our customers. In fact, we've added more than 70,000 Teamster jobs since 2018. So we're aligned that are growing and healthy UPS is good. To be growing and healthy, we need to be competitive and make sure that our offerings meet the needs of our customers. Then a lot has changed since the last time we negotiated our contract. Now recipients want their packages delivered when where and how they want them delivered, which means we can delivery well, it's become table stakes. Teamsters fully acknowledge that, but have worried about the pressures placed on our workforce with weakened operations. And they refer to that to the sixth punch, which is when people work six days a week, or 22.4 drivers. We share the same concerns. I don't want people working six days a week unless they want to. So we're aligned on this. We just need to get to the bargaining table and work it out. And candidly, we think with just a few tweaks to our existing contract, we can work this out. So we're not far apart, we're aligned, we just need to work it out. Another matter that's come up is heat. There can be no disputes, sadly, that the earth is heating up, and that puts an uncomfortable situation on our employees in the height of the summer. Safety is our number one priority for our people, so we're not a part on this issue. In fact, we're not waiting for the bargaining table. We've already kicked off a total revamp of our safety program, bringing in new technology, hydration, cooling systems, and a whole lot more to address heat. So we're not a part, we're going to do the right thing for our people. So those are just a few examples of where I see a win win win is achievable. In fact, I'm committed to delivering with the rest of the team and win win win contract before the end of July. Yeah, good morning. I wanted to ask if, Brian, if you could run through the productivity programs, and give -- put some ballpark around the impact that you expect, smart package smart facility, TSP if you have other programs that are notable, so we can have a little more visibility and how to think about productivity in. And I'm thinking in domestic package in 2023. Thank you. Sure, Tom. Well, look, Nando and the team have done a great job in pivoting and really driving productivity in the fourth quarter, they did an outstanding job. And we're calling for low single digit CPP in 2023. I referenced some of the investments that I think you're talking about in terms of smart pack smart facility, maybe if I unpack those, you'll get a sense of where we're investing. So smart pack smart facility that really drives productivity inside the buildings, but it also improves the customer experience by reducing misloads. I think misloads today are running about one in 400, post the smart pack smart facility we will be up in one in 800. And there's a path to something higher or beyond that. And then there's accelerating pilots for Phase 2 which is sort baggage car. Another area we're investing in, probably the second largest is healthcare. That's a great growth business for us. We're going to be adding about 2.4 million square feet in warehouse space next year. Some of that outside the U.S., half of that in the EU and half in the Americas. And then DAP has been a great performer for us. We're going to continue to invest in the DAP program, both domestically and internationally, enhancing the plug and play and adding brokerage in UPS access points in terms of capability. And then there's further investments into the customer experience and next gen brokerage. So Tom, I think we have a lot of confidence in terms of the ability to drive total service plan, the investments we're making in smart pack smart facility, healthcare, DAP, and that's what's contributing to the low single digit CPP in 2023. And maybe just to dimensionalize that a little bit more, in the fourth quarter alone in the United States productivity reduced our expense by $271 million. I mean, that's a lot. That's a lot. I'm really proud of the team. And just on smart package smart facility because I was just so enthralled with this project. We have of the 100 buildings that we're in, we have 50 buildings, where the misloads are now one in 1,000, that's six sigma perfection. So we're really excited about rolling out to the 940 remaining buildings in the United States. And here's the cool thing. We're going to roll out the first part of those buildings with wearable devices. But then we got plans to move away from the devices and actually make the car smart. And last week, I was able to load a package, this is in the laboratory. I was able to load a package onto a smart car and saw that car actually check in the package. No human being did that. So this is way cool technology and we're excited about the productivity that that's going to be as a result. And to Tom just from a seasonality perspective, we have planned productivity gains year-over-year in every quarter in '23. And so now the team will be reducing hours more than volume in the U.S. through the programs Carol and I just alluded to TSP and the automated capacity. So it's a balanced program. Hey, good morning, and thanks for the time. So if you step back from the guidance at the midpoint, your EBITDA number is down, call it 6% from 2023 levels. And obviously, we are coming into a choppy macro. And Carol or Brian, can you talk about, the levers that you need to pull to kind of get reaccelerating growth? And how much of that is going to be sort of macro dependent as we think about the bridge from wherever we end up at '23 to '24. I'm just curious to get your perspective on what are the catalyzing agents that would reverse the trend in overall EBIT growth? Well, I think there are a number of catalyzing agents. We need to get through this choppy economic environment for sure. But if you think about where we've had some huge homeruns, let's talk about our Digital Access Program. We have seen enormous growth in this. When I started, it was less than $150 million, now over $2.3 billion in 2022 on its way to be $3 billion in 2023. And we're growing outside of the United States, had been just a U.S. program, now we're going outside the United States. And this is one area of investments for next year. So that's a catalyst for growth, because we're investing in a customer that's underserved today. Another catalyst for growth is what we're doing on the customer journey. As we continue to move the needle on improving the experience with us, we see every year increasing penetration in our SMBs. Brian, that's part of the plan for next year. That's right. So we'll be adding about 100 basis points, Carol, from a volume mix perspective on the SMB front. So that customer experience translating into continued growth on the SMB front. And from a macro perspective, obviously built into the guide is an improvement in the back half of the year. So we need to see a bit of a pickup in Asia, and the U.S. rebounding somewhat through a backdrop perspective. Another catalyst for growth, of course, is healthcare logistics. Couldn't be more proud of the progress that we've made in this space. And we're just getting started. There's a huge opportunity for growth here around the world. And Kate and her team are doing a masterful job of leading us there. And as you think about the OpEx that you're putting in to offset some of the above the line sort of service costs. Is that sort of one time in nature? Is that just project-based work around implementing RFID in the facilities? Is there some cost drag there that that comes away, or is that just cost drag that moves on to the next initiative? I'm just trying to think from a puts and takes perspective. Now, some of the investments, international DAP for example, we're investing in the first part of the year, that'll start to pay back latter part of the year. And then the deployment of smart packs, smart facilities, that's probably more of a payback in '24 than '23 as we phase, complete Phase 1, and start to move on to Phase 2. And to dimensionalize the investment that we're making in smart package smart facility, it's about $140 million of expense this year, which will not repeat the following year, and about $106 million of capital. Hey, great. Good morning. Carol, great to hear the target to have the contract done by the end of July. I think last year we had talked to you, you weren't even planning on sitting down early. So I think that's encouraging to hear. Maybe you could talk a little bit about what the largest customer kind of represented full year for '22, your thoughts? I know you talked about the pace of the loss of that business, but it sounds like it's accelerating into '23. Maybe you could talk a little bit about that in perspective of your countering SMB wins. Sure. On the Amazon front, Ken, we finished up a year ago at 11.7% in terms of the percentage of Amazon as a percentage of our business. That came down to 11.3% in last year. So it was really a decline of about 40 basis points. We'll continue on a mutually agreed path to glide that business down in 2023, and that's factored into our guide. So we feel good about being able to manage that down. On the international front, Ken, it was the second part of your question. So we've got an assumption that Asia comes back in the second half of the year. So that's -- they're going through some challenges right now in the early part of the year. There was a two-week lunar holiday. We had some COVID challenges, particularly out of China. So Kate and the team, they've done a masterful job in the fourth quarter and also in the beginning of this year in terms of pivoting our air network. I think Kate took down about 200 flights in Asia, which was really remarkable that they were able to do that in such a short period of time. So the air network, seeing a little bit of a rebound in China and then getting after the opportunities that we're investing in. International, DAP was one I just mentioned and then going after the premium side of the market. So lots of encouraging optimism for the back half of the year. And agility really is the name of the game, isn't it. Here it is. It's the end of January. I would say our crystal ball is pretty murky, but I can tell you what we're seeing in the business today. The U.S. is actually doing a bit better than the base case. And International is doing a bit worse because we're in a now a two-week Lunar New Year holidays, who would have thought. But with herd immunity coming, we believe in China, things should get better outside the United States. And just to clarify, that 11.3. I think, Carol, you had mentioned that you were targeting maybe less than 11% on Amazon for '22. So it sounds like maybe it's not drifting away as fast as an accelerating decline. No, Ken, it's really is a function of currency. FX impacted our top line by $1.3 billion. So having not had the pressure on the top line, the percentage would have been different. Does that make sense? And just a reminder, please limit yourself to one question, so that we can get through as many participants as possible. Hey, thanks. Good morning, guys. So I just want to make sure I'm understanding the guidance piece this year. So I think you said in the base case, Brian, the U.S. margin is 12%. And can you talk about where you see it in the downside scenario? And then you talked about more than half of the operating profit in the second half of the year. I mean it's typically somewhere between 50% and 55%. Should we think anything differently? I don't know if you want to give us a little bit more color on first half or second half profit margins and any color there? Thank you. Yeah, Scott. Good to hear from you. So I'll start with the latter question first. We expect about 56% of our profit to come in the second half of the year relative to 1H. And then I would also just give you a little bit of color. There will be a similar bathtub effect in the first half between 1Q and 2Q stepping up in 2Q. From a domestic guide perspective, the other half of your question, Nando and the team are focused on 12%. That was actually the same number that we had guided to back in our Investor Day, and I'd say the world has changed a little bit since then, but we're getting after the 12% margin in 2023. The low end is based on 11%. And so there are a number of things that are factored in there. The biggest change would be a change in the top-line relative to volume. If the macro doesn't come back as quickly as we think it might. There's labor negotiations going on. So we thought it was prudent to put a floor in. Hey, great. Thanks and good morning. And thanks again for the detail. I wanted to ask on the expectations for revenue per piece in U.S. Domestic. If I kind of -- Brian you teased out kind of the comments, you've got revenue in the base case up low single digits, volume down slightly. So revenue per piece maybe low to mid-single digits, a bit of a deceleration from where you've been over the last two years. You've obviously done a good job of moving that up. But can you talk about the ability to see continued improvement in revenue per piece as you move through '23, how much of that's base pricing and mix and then the opportunity longer term? Thanks. Yeah, it's a great question. So the GRI, as you know, was 6.9%. And with the service rates, we'll keep a decent amount of that. The guide for RPP that we're building in our base case is mid-single digit for RPP, and that is facing two headwinds off of that number. You've got product mix and fuel, which are each combined, about 150 to 200 basis points off of that mid-single digit. So that's how we're thinking about it. And the product mix is really less air, more sure post, so a shift in the product mix. And then the fuel component, fuel is not going to have a big net impact to the business in 2023. But obviously, there's a cost component versus a revenue component. Hi, good morning. I just want to turn to health care. You're quickly approaching sort of that original target of $10 billion in revenue there. Obviously, investing some more this year in that vertical. Is there a way to think of what kind of outgrowth you're seeing there? Sort of what's the base market case growth for health care this year versus what you guys are seeing or growing above? Just any color there. Yeah, absolutely. Thank you, Allison. So we've really been able to grow healthcare beyond even lapping the vaccine distribution that we did over $1 billion. And that was because with that service that we're delivering and the capability around the globe, we're actually selling more into biologics and some of the developing treatments. So that continues to fuel us for the future growth. We've seen double-digit growth, and we're planning for double-digit growth this year as well with very strong margins. Yeah, hi. Good morning. Knowing that the SMB penetration continues to be an important part of the strategy, just sort of curious in an environment that's tougher, does it get more difficult to penetrate them? And do you find it maybe when you do, they're sort of trading down in services? Just sort of curious, especially given your large customer will continue to sort of shrink over the coming years. Thanks. Well, we've been investing in the experience because we think that's the way to not only grow, but to keep that very important customer. And I couldn't be more proud of what we -- the team has delivered in this regard. So if you think about customer journeys, if you will, there are three really big pain points. One was negotiate value. And that's why we're so thrilled with deal manager because deal manager is a huge home run. Iur win rate is 22% higher than we thought it would be with better revenue quality and the customers are happy because they're getting a deal with us within seven days. It used to take weeks. So negotiated value is an important part of continuing to serve this customer. Another is reroute a package. We had some issues systemically that needed to be addressed, and we fixed that. So now we can reroute a package. And then finally, resolving a claim. Here, we had a broken link. So when you had a claim, it was not a good experience for our customers. And we've seen our net promoter score in this area alone improve dramatically. And the speed to pay, if a claim needs to pay, has improved by 10 days. So we continue to lean into the experience. Thanks, Carol. Yeah, I would just follow up and say we're putting some OpEx investments, $400 million, into the business this year. We invested in a similar capacity in fastest ground ever and SMBs, et cetera, a couple of years ago. And as I think about the SMB journey by investing in those customer experience points Carol was talking about, those investments are paying off. That's what gives us confidence. We are seeing 40% higher SMBs today than in 2019 when we started that journey in that investment. And we're actually -- we've increased penetration, Carol, for the last 10 consecutive quarters. So it's a bit of a proof point on the SMB front in terms of the investment and the payoff. I guess maybe I had a question on volume. I wanted to understand a little bit better sort of the growth outlook for some of the SMBs, the non -- sort of Amazon business because it sounds like that's going to be up. So kind of curious about sort of what gives you confidence there, how much market share you've been able to win sort of us around that. And then Brian, a quick point of clarification as well. I think you talked about sort of the first half, second half dynamic of profit being leading to the back half. And then again, in 1Q and 2Q, should we be using sort of similar numbers like 44 -- 56 somewhere in that ballpark is a reasonable way to think about that first half as well? Maybe on the SMB question, let's look at our Digital Access Program. It's been a huge home run for us. Year-over-year, we saw $1 billion of growth in this program. Here's the important part. It's 3.5 million customers. It's -- these are very small customers who are shipping with us through the platform, and we see continued growth opportunities ahead for us. In fact, we think our DAP program will be over $3 billion in 2023. On the seasonality, yes, so you should consider a similar step-up in mix from a Q1 to Q2 perspective. From a Q1 perspective, Chris, we've got some Q4 trends coming out from a consumer and a macro perspective that are challenged. We're seeing that product mix headwinds, and we're making some of these investments in the early part of the year. So you should apply that same bathtub effect for Q1, Q2. Hey, good morning. Thanks for the time. Just want to come back to pensions real quick. Brian, can you talk about maybe any changes to the sensitivity? It's a little bit different than what we thought maybe not as big of an impact to change expected returns assumption or anything along those lines? And then maybe if you can just wrap up with a bit of commentary on pricing and yield and productivity. And how all those really relate and it can trend throughout the year in an environment where you're seeing volume decelerate. You talked about all the different sort of headwinds or uncertainties, some of which showed up in peak. So really just looking to see if you're seeing some demand destruction out there. And if you're able to drive these productivity gains, if the volumes don't necessarily show up where you think they could and surprised a bit to the downside? Thank you. Happy to, Brian. So on the pension front, look, we've been on a path to derisk the pension. And we actually feel good about the glide path there. We're up in the high-90s, about 98% funded level, which is great for our employees. From a liability perspective, we've taken that down from about $16 billion a couple of years ago to $4 billion, $4.8 billion now. So overall, the glide path has been good. The challenge we have is that we've seen historic rise in interest rates. And so that $900 million plus number that I gave you below the line, that is a non-cash number, but it moves up and down with the market. So we try to give you the transparency. We do tend to look through that as it's a non-cash number when we think about our capital allocation vis-a-vis the dividend, et cetera. So net-net, I think we're doing the right thing for the company. Given the volatility in the interest rates, it is a challenging environment and will move up and down on a relative basis. The way I think about productivity, it's a virtuous cycle here at UPS, and I couldn't be more proud of what our team has done quarter after quarter after quarter to drive productivity. And Nando, maybe you could share a few of the action items in 2023 to continue that flywheel. Sure. Just if you look at the shape of the volume, especially in the fourth quarter and quarters before that, we've shown tremendous agility making sure we're matching the hours and the activity in our operations to the actual volume and the revenue. That will continue. And quite frankly, our people are masters of efficiency. So as we rollout the second iteration of our total service plan, which kicks off on March 3, we're learning a lot about our network. And there's cost to be had in not just on-road activity or inside our facilities, but across the entire network. And we're laser-focused on those initiatives. And whatever volume and how it comes into us in different shapes and sizes, we'll make sure that we're prepared to handle it effectively. And hopefully, we're building up a little bit of a track record to show that, that's exactly what we have been doing. So I appreciate it. Excellent. I want to thank everybody for joining the call this morning. We look forward to talking to you next quarter, and that concludes our call.
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Ladies and gentlemen, welcome to the Julius Bär 2022 Full Year Results for Media and Analyst Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Philipp Rickenbacher CEO of Julius Bär Group; and Ms. Evie Kostakis, CFO of Julius Bär Group. Please go ahead. Good morning and welcome. It's great to have you here for our full year 2022 results presentation. I'm very glad that together with our CFO, Evie Kostakis, I can present on behalf of the whole bank and our employees our successful results. 2022 was the second-best year in Julius Bär Group's history. Evie, in a few minutes, will walk you through the details of our strong financial performance which was particularly notable given the wide-ranging sets of market environments in 2022. And once again, not only underscores the resilience of our business model but also our ability to grow. Even more important, we can report today that we have fulfilled all targets for the just closed 2020 to '22 strategic cycle of Shift, Sharpen and Accelerate. We also reaffirm our strategy for our new strategic cycle, '23 to '25, Focus, Scale and Innovate, as presented last May. And I will run through how we have begun to implement it, supported by the momentum derived from the last cycle. Before handing over to Evie to discuss our results, let me quickly run through how we scored against our 3-year financial targets for the full strategic cycle of 2020 to 2022. Our cost income ratio today is at 65.9% against the target of 67%. Our pretax margin is at 27 basis points at the upper end of the target range of 25% to 28%. Our profit before tax over the 3-year cycle has grown at 10.3% annually, exceeding the 10% objective. And we are producing an industry-leading return on CET1 of 34%, exceeding our 30% target, as we said we would. Let me reiterate that these targets were achieved under a mix of operating conditions that would have been hard to imagine in February 2020 when we set them; a global pandemic, pivots in fiscal and monetary policies, extreme market gyrations and geopolitical escalations. The track record of the past 3 years reflects the passion our staff brings to our business, their dedication to our clients and I would like to thank them for that. And I would also like to recognize and appreciate those who supported us on this journey. I will discuss the many qualitative achievements behind these results in a moment. Thank you, Philipp and good morning, everyone. Let's start with an overview of the market developments on Page 7 of the presentation. 2022 was a year of significant macroeconomic surprises and overall unidirectional falling markets, leading to a combined double-digit percentage decline in global stocks and bonds, something we haven't seen in over a century. The dollar rose for most of the year before falling back quite a bit towards the end of the year, while the euro continued its long-term decline, breaking parity versus the Swiss franc, albeit recovering slightly towards year-end. Much of this was, of course, closely linked to the root cause, i.e., the rapid succession of meaningful Central Bank rate hikes as you see in the graph on the right, thus ending the era of very low or even negative rates. Yesterday, the Fed delivered another 25 basis point rate hike and let's see what the ECB does later today. Moving on to the AUM development slide -- development on Slide 8. Unsurprisingly, the market and currency movements drove a quite meaningful decline in assets under management on top of which we had a number of divestments. These impacts were partly offset by a significant recovery in net inflows in H2 to which I will return in a minute. All in all, AUM declined by 12% to CHF424 billion and monthly average AUM which is important for our margin calculations came down by 6%. The total client assets tally amounted to CHF491 billion, 9 billion short of the CHF0.5 trillion mark. Moving on to net new money on Slide 9. As I mentioned, net inflows recovered meaningfully from around CHF1 billion net outflows in H1 to almost CHF10 billion net inflows in H2, of which close to CHF6 billion in the last 2 months for a full year net new money result of close to CHF9 billion. We saw strong inflows from our clients in Europe, particularly in our key markets, Germany, the U.K. and Ireland and the Iberian Peninsula, as well as from clients in the Middle East, particularly from Qatar, where we opened our third Middle East advisory office in Doha just a few months ago. As you may recall from our presentation of the half year results, the main driver of the net outflows in H1 was the deleveraging, especially in Asia. It was therefore very pleasing to see net inflows turning positive in Asia in H2, thereby partly offsetting those regional net outflows from the first half of the year. In addition, close to 60% of net new money came from relationship managers who have been with us for over 3 years. As you can see in the appendix, we have definitively gone back into disciplined net hiring mode which should bode well for net inflows over the next years. So now let's go to revenues on the next slide. The overall revenue development underscores the resilience of our business model. While the fall in global markets led to a decline in recurring fee income and lower client activity-driven income, the higher rates that caused those market declines led to a significant rise in net interest income as well as in treasury swap income which is essentially quasi net interest income. So going through the revenues line by line. Net interest income grew by 31% to CHF823 million as higher rates benefited both the income from loans, despite lower credit volumes and the interest income from our treasury portfolio which additionally benefited from higher reinvestment volumes. These interest income benefits were partly offset by an increase in deposit costs as clients moved cash from current accounts into call and time deposits to take advantage of the higher rates. Net commission and fee income fell by 15% to CHF1.962 billion, recurring fee income declined in line with the decrease in monthly average AUM and the slowdown in client activity led to lower transaction-driven commission income. Net income from financial instruments at fair value through profit and loss or trading income grew by 19% to CHF1.051 billion. As the higher rates led to a significant increase in treasury swap income, i.e., the quasi net interest income to which I referred to before, the benefit of which comfortably outweighed the decline in structured products related income. Other income fell to CHF17 million as dividend income on financial investments declined and as net credit provisions ticked up slightly following some IFRS 9 driven model factor changes. These continued low levels of credit provisions reflect our careful management of credit risks and the high quality of our credit exposure across the cycle. On Slide 11, in gross margin terms, one can see the different moving parts in a different and perhaps clearer way. The left-hand graph shows the development of the gross margin over the last 6 half year periods and you can see the full year numbers in the table below the graph. The 2022 full year gross margin increased by 5 basis points to 87 and the H2 gross margin went up to 93 basis points, an increase of 12 basis points from the level in H1. The light blue stack at the top of each of the columns represents the NII gross margin which recovered strongly to 22 basis points in H2 and to 19 basis points for the full year, following the rise in interest rates. The larger blocks in the middle of the columns represent the commission and fee gross margin which came down quite a bit following the decline in client activity. We will see this a bit more clearly when I move on to the next slide. The gross margin contribution from financial instruments at fair value to profit and loss or trading income rose to 27 basis points in H2 and to 24 basis points for the full year. We show on the right-hand side how the increase in treasury swap income, the quasi NII component contributed to this. From 6 basis points in H1, it more than doubled to 13 basis points in H2. Year-on-year, it also more than doubled to 9 basis points. The H2 NII and treasury swap income gross margins are particularly relevant as a basis for the interest rate sensitivity to which I will come back later. On to Slide 12. Here we show in a bit more detail the developments in the commission and fee gross margin. In H2, it declined to 43 basis points and on a full year basis to 44 basis points. When we look at the recurring fee component within this, you see clearly that this component has been quite stable. It is up from the levels in 2020. And while it came down slightly from 2021, it is probably worth reminding you that the corporate disposals we did in H1 had a slightly negative impact on the recurring fee gross margin as did a lower contribution from Kairos. So the underlying trend is moving in the right direction. And as we told you in our strategy update last May, we are aiming to get this recurring fee margin up to at least 39 or even 40 basis points by 2025. The nonrecurring component came down quite a bit in '22 as clients took a much more passive approach in the uncertain environment and stood at the sidelines in line with our guidance. If we see more constructive markets in '23 on a sustained basis, then I'm fairly sure there will be room for upside in terms of client activity. Other commission and fee income at 6 basis points for H2 '22 was the lowest print in the last 6 half year periods. So with China reopening and more benign market conditions, the upside is possibly there. Turning to Slide 13. The rate environment in 2022 was unique as we came from a 0 or negative rate situation and then saw, in rapid succession, a number of very meaningful rate hikes. Last year, in May and again in July, we tried to guide the market as best as possible for our sensitivity to these rate hikes. For me, as the incoming CFO, it was very reassuring to see how well our internal finance specialists have done their job because the realized margin uplift in H2 indeed ended up quite closely in line with our guidance, not only in terms of the estimated benefit to NII and swap income but also in terms of the partial offset from client shift in cash from current accounts into call and time deposits. Indeed, on the balance sheet slide later in the presentation, you can see that the volume of call and time deposits rose by CHF27 billion to CHF33 billion or 45% of our total deposit base. That net rate hype benefit is now largely in the H2 numbers. And from here on, we expect a little further benefit compared to the H2 gross margins in terms of swap and NII contribution. Important to understand, this is a sensitivity given our balance sheet at year-end with a potential loan volume increase and given the fact that our balance sheet reprices faster and higher on the asset side, there could be further upside. Yes, there are still some income benefits to come through from the rate hikes last year but there are also still some deposit incomes to -- deposit impacts to come through. So on a steady-state basis, the combined gross margin contribution from NII and treasury swap income is likely to be close to what we saw in H2, again, assuming balance sheet as at end of '22. Of course, steady state is purely academic now because yesterday, the Fed rates by 25 basis points and the ECB will deliberate later today. But as you can see on the left-hand side of the slide, we're now at a point where further rate hikes are expected to have an essentially neutral effect basically, because we would expect, based on our experience, that further rate hikes will lead to further shifts in time and call deposits. Let's turn to operating expenses. Adjusted operating expenses grew by 5% but this included a 70% increase in legal provisions and losses, mainly driven by the settlement in the summer of an old legacy litigation case. Excluding provision and losses in both periods, operating expenses went up by 3% to just over CHF2.5 billion. That increase reflected further investments in strategic long-term recruiting after 3 years of quite meaningful restructuring as well as the lifting of COVID restrictions in many of our key regions, the combined impact of which was balanced by disciplined cost management, especially considering the uncertain environment in 2022. Personnel costs which represent almost 2/3 of the total expense base, rose by 2% to CHF1.684 billion. Payroll costs were up 2%, exactly in line with the year-on-year rise in the average number of staff. Performance-based remuneration declined but other personnel expenses went up driven by higher costs related to recruitment and the Swiss pension fund. Excluding provisions in both years, general expenses rose by 8% to CHF652 million, mainly due to IT-related projects and software expenses as well as an increase in costs related to travel and client events following the relaxation of COVID-related restrictions in certain key jurisdictions. Depreciation and amortization went up by 3% to CHF205 million following the rise in IT-related investment in recent years. So while the increase in pre-provision cost was rather limited, the unchanged total revenues meant that the cost-to-income ratio went up to 65.9%, thereby clearly meeting the target of less than 67% that we had set for 2022 at the start of the strategic cycle and in line with the updated guidance we gave you at the half year results. Moving on to profit development on Slide 15. Even though adjusted profit before tax declined by 10% to CHF1.2 billion, with an average PBT growth of 10.3% over the cycle, the more than 10% profit growth target was just about met. The pretax margin fell 27 basis points at the upper end of the 25 to 28 basis point range that we had set as a target for 2022. Adjusted net profit decreased by 8% to CHF1.050 billion, not quite reaching the record high level of 2021 but still the second highest net profit in the group's history and a result that we can all be proud of. And thanks to the buyback, the decline in adjusted earnings per share was limited to 6%. Our guidance for the adjusted tax rate is unchanged from what we indicated in February, i.e., for 2023, we're currently expecting something around 14% and for next year, at least 15%. On to the balance sheet. Our largely deposit-driven balance sheet remains solid and liquid. Deposits decreased by 8%, slightly less than the percentage decline in AUM, combined with a 20% year-on-year decline in the volume of structured products issued from our balance sheet, our overall size of the balance sheet shrank by 9%. On the asset side, you see that the loan book came down by 12%, exactly in line with the percentage decline in AUM, meaning that the loan-to-deposit ratio fell to 58%. And next to that, we saw a clear shift from cash into the treasury portfolio. On to capital development on Slide 17. Starting with the CET1 ratio on the left-hand side. Above the graph on the left, you see that risk-weighted assets increased by CHF1.4 billion or 7%, mainly following an increase in market risk positions. You can find the details in the appendix. CET1 capital came down as the profit for the period was more than offset by the combination of the dividend accrual, the share buyback execution and of course, the negative OCI move following the sharp rise in rates and the resulting fall in the market value of bonds held in our treasury portfolio. As I mentioned last summer, we've started to make a change in how we book those bonds in our balance sheet which should dampen short-term volatility. So looking at the development in CET1 ratio terms, you see that from a starting point of 16.4%, the main drivers were profit which contributed 470 basis points. The dividend and the buyback which reduced it by around 400 basis points and the OCI impact by around 300 basis points which is expected to reverse, taking the CET1 capital ratio to 14% at the end of December. That is, of course, still very significantly above our group floor of 11% but at the buyback threshold of 14% which means we will not launch a new buyback after the current one and at the maximum approved level of CHF400 million at the end of this month. It is important to note that this OCI impact is temporary, transitory and will reverse over the next few years. On the right-hand side, you see the pull-to-par estimate based on which we would normally expect to see around 1/3 of OCI loss reversing in '23, around 1/4 in '24 and 1/5 in '25 and the remaining small balance in the following years. One final point on our risk density guidance. Last May, in the strategy update, we provided you with some guidance for the risk density which at that point was based on the balance sheet structure at the end of '21. In the meantime, as we have seen the balance sheet size has decreased and its structure has changed with a shift out of 0 risk-weighted cash into higher risk-weighted treasury portfolio. At the same time, revenues which under the standard approach to determine operating risk went up relative to the size of the balance sheet. Market risk, as expected, increased as well. Based on where we are today, from 20.5% at the end of '22, our new guidance range is 21% to 23% for the next 3 years. This is not expected to be a gradual increase. We currently estimate a density rather towards the lower bound of this range in '23 and '24 and towards the upper end in '25, as we assume the impact of the Basel III fundamental review of the trading book will apply as of 1st of January '25. There still is a small chance that this could come into effect 6 months earlier. And in that case, obviously, the upper end would in our current estimates apply from mid-2024. Moving briefly to the Tier 1 leverage ratio on Slide 18. The development of Tier 1 capital is very similar to the one for CET1 capital in the previous slide, except that the Tier 1 capital benefited from the net CHF0.1 billion increase in additional Tier 1 capital. The leverage exposure fell by 10%, broadly in sympathy with the balance sheet shrinkage. And as a consequence, the Tier 1 leverage ratio increased to 4.3%, well above the regulatory floor of 3%. As we have now completed the 2020-2022 strategic cycle, it might be useful to take a step back and summarize a number of key achievements over the past years. First of all, compared to the preceding 3-year cycle, we have seen a very clear step-up in profits and a step-up in profit growth. Whereas adjusted net profit grew at a CAGR of 3% in the 2016 to '19 period, this increased to an 11% CAGR over the last 3 years when we shifted our focus from an asset gathering driven emphasis to sustainable profit growth. Our wealth management focused business model is naturally capital accretive and we have been able to raise the returns on CET1 capital deployed. Our return on CET1 which is among the very highest in the sector went up to 34% in the past 2 years, significantly and sustainably above the 30% target that we had set for ourselves. Finally, at least for me, on Slide 20. Apart from a step-up in profit and profit growth, the last 3 years have also delivered a step-up in distribution to our shareholders. We increased the dividend payout ratio from 40% to 50% last year and we enhanced the deployment of share buybacks. As a result of our capital distribution policy changes and the strong profit growth, we were able to deliver a total capital distribution CAGR of 36% in the 2020, 2022 cycle, up from 11% in the preceding 3-year cycle. Thank you very much indeed, Evie, for the in-depth view into our 2022 from a numbers perspective. Now let me take a step back to review the 2020 to '22 strategic cycle of Shift, Sharpen and Accelerate and recap its important qualitative achievements. The last 3 years have been truly transformative for Julius Bär. The sizable expansion of the past decade has now been fully digested. Today, we are more resilient and profitable than ever before and sustainably so. We are the leader in our field and in excellent shape and poised to gain from further profitable growth. Let's first look at how in 2020, we began to shift our focus to sustainable profitability. We started with lowering our costs by CHF200 million with a structural efficiency program that we completed successfully already by the end of 2021. But the improvement in the cost-to-income ratio from 71% at the end of 2019 to below 67% was not simply driven by cost cutting. Close to half of the improvement or CHF150 million run rate was driven by stronger revenues. The greatest impact was delivered by the introduction of value-based pricing for our services. We have repriced more than 20,000 accounts over the course of the last 3 years, working closely with our clients who ensure mutually beneficial outcomes. The resulting attrition was minimal. This has been a crucial exercise. And together with a broad range of other revenue-generating measures, has built further muscle for revenue generation that should sustain us well into the future. At the same time, we overhauled a cornerstone of our business model which is the compensation model for our relationship managers. The model, aligned with our financial targets and entrepreneurial aspirations as well as our risk standards, ensures that today, some 90% of our eligible relationship managers are rewarded for performance in a transparent and consistent fashion. The results have been remarkable. The model has created strong buy-in and positive impact on the work culture. It adds attractiveness to our employer value proposition and supports the overall profitability of the bank. At the same time, we have upgraded our team head and group head compensation as well as implemented a new model for intermediaries, thus coming full circle on the upgrade of our compensation system. A next key point. We successfully closed most of our legacy legal cases. This shows our commitment to deal with and address issues head-on and create certainty for our stakeholders. With these steps, we significantly derisked Julius Bär and further strengthened our reputation. But in fact, we have done even more than that. We have fundamentally over the past years transformed risk management at Julius Bär, top to bottom and front to back. Starting with our overall framework and governance, risk appetite and tolerance, we have worked our way through people, processes and our organization across all the risk disciplines and ending with our risk culture as embodied by our new code of conduct. We had started this work already prior to the FINMA enforcement in 2020. And in fact, the halt the regulator imposed on large-scale transactions was lifted within only 1 year. During this period, total investments in risk management processes and systems amounted to more than CHF200 million and we have boosted risk resources across all lines of defense. We now have a strong and scalable foundation for sustainable profitable growth in the years to come. The last point I want to raise under the Shift strategic goal covers the streamlining of our legal entity portfolio, closing or selling small offices and noncore businesses, consolidating and restructuring our footprint where it made sense. This was not only important in connection to costs but also key in terms of reducing complexity. Second, let me recap how we sharpened our value proposition. More than ever, we are laser-focused on high and ultra-high net worth clients and intermediaries catering to such clients. We have further focused our market strategies, ensuring that the largest investments go to geographies with the higher strategic and profit potential, building on local critical mass. This creates the base for the coming cycle where we will pursue growth to scale at a global and local level while maintaining a well-diversified international footprint. Turning to our clients. Over the past 3 years, we have made important steps to sharpen our value proposition for core client segments of Julius Bär. These include ultra-high net worth individuals but also intermediaries or more granular segments in key markets, such as executives or entrepreneurs. In all these segments, we upgraded our service models and delivery introduced new touch points and added solutions, with the objective to add even more value to our clients. Examples of this are family office services, structured lending or philanthropy advisory for ultra-high net worth, the extension of the Swiss-based real estate and mortgage offering with the integration of KMP, our direct private market offering or cybersecurity consulting for some of our institutional clients. We continue to systematically extend our offering in line with client needs. At the end, investment performance is central to the value we deliver to clients and we have done so across a turbulent period. Our investment strategies ranked among the top quintile of our competitors in this tough 2022 vintage and consistently outperformed over the medium to long run. Of our 25 rated in-house funds, a total of 14 funds, scored a 4 and 5 star Morningstar rating. Sustainability is a key part of our client value proposition. First, we walked the talk as a company and we have been taking strides forward to achieve net 0 for our own operations as part of our climate strategy. Equally important is our focus on enabling our clients and we have been innovative in this field. As an example, in '22, we introduced ESG client reports to eligible clients in Switzerland and Luxembourg. This has been an industry-leading step. We have also constantly upgraded our offering leading, for example, to an almost doubling of sustainability mandates between 2019 and 2022. I'm very proud that this has been recognized externally with MSCI upgrading our rating to a AA. This is just an interim step and our action-oriented work will continue. One final point worth touching on under Sharpen is the resilience of our operational model. During the pandemic, we seamlessly shifted to a work-from-home mode practically overnight with zero losses. Since then, we have further developed the technology and processes for a flexible and value-added way of working at Julius Bär. In '22, we had to handle the notable operational fallouts of the war in Ukraine, its resulting sanctions and wider geopolitical shifts. We have done so, again, successfully, diligently and efficiently and are ready to master an even more complex world in the future. Let me move to the third point. We have accelerated our investments in technology and in people, as we said we would in February 2020. We considerably upgraded our digital channels to clients, including new e-banking, content distribution and even the possibility for digital client onboarding. We have continuously invested in technology for our relationship managers, such as our digital advisory suite or the mandate solution designer, both industry-leading tools crucial in scaling our business in a flexible yet regulatorily compliant way. We continue our strategy to be the most digital bank for our relationship managers. Over the past 3 years, we've also made our business even more effective to a relevant part, thanks to the introduction and application of new flexible ways of working and of agile business practices at scale. Business transformation and technology change in investment solutions, in markets, in channels, in client lifecycle management are delivered today by applying the Julius Bär agile approach, representing close to 50% of all change initiatives across the bank and many more are implementing agile principles in their daily routines. Our pragmatic nondogmatic approach to agile increases our effectiveness at creating innovation and our attractiveness as an employer. Turning to people. I'm very happy to announce that we have successfully returned to relationship manager hiring in 2022. After the conscious restructuring of our front configuration in 2020 and '21, we have returned to growth mode. The RM headcount is up by 18% in 2022 once the divestments of smaller entities are excluded. This trend will continue and accelerate into 2023 and is an important ramp-up for our profitable growth strategy moving forward. As a last point, we have progressed our diversity and inclusion efforts. We are getting close to 30% female representation in our senior management ranks, thanks also to our in-house programs. Key and also worth flagging, as of this year, we are included in the Bloomberg Gender Equality Index, a public index that tracks the performance of companies that disclose their efforts to support gender equality through policy development, representation and transparency. This was a long recap but I felt strongly that at the end of this important strategic cycle in our company history, it was key to stop a moment and take stock before moving on to the next chapter. When developing our strategy for the next cycle, we have a firm view on what we want to achieve in the longer term. You remember our strategy update in May last year, where I started my presentation by outlining our aspiration for the next decade. There is nothing in our way to stop us from thinking we could reach more than CHF1 trillion of profitable assets under management by the end of this decade or the beginning of the next. This continues our path to extend our position as the world's leading international wealth manager for wealthy private clients. Many things will change along the route. We may face -- we will face unexpected curves but the map we are following is clear. Our focus on pure wealth management with the absence of conflicting lines of business like corporate or investment banking will not change. Our absolute focus on ultra-high and on high net worth clients and our total dedication to those clients will not divert. We will remain to the core bank base and build on trustworthy personal connections in an ever more industrialized wealth management sector. This does not clash with our investments in technology on the contrary. It will drive them in order to address the needs of a new generation of clients that are digitally savvy but still look for authentic relationships. We want to drive local critical mass in our focus markets because more and more of our business happens locally where our clients are domiciled. We will continue to drive a guided open architecture which allows us to bring the best of the market to the client but also to develop value-added solutions where we can truly differentiate ourselves from our peers. And finally, our safety and stability as a bank is our bedrock; the foundation on which not only our past success was built but also is the base for the rest of this decade. Let's zoom in on our new strategy for the coming cycle, '23 to '25, Focus, Scale and Innovate. It will guide us in the years to come and as I will show you in a minute, it is already in action as we speak. Focus is all about focusing on driving sustainable profit growth with a continued evolution of our pure wealth management model. We place particular emphasis on generating recurring revenues by achieving the right balance between transactional and recurring income. And we drive efficiency and cost management with a keen eye on creating room for selective reinvestments, especially in technology, something I will discuss further shortly. Scale is about driving our next phase of profitable growth. We are positioned to benefit from attractive high-quality growth opportunities in our most important markets. Scale is also about moving from linear to exponential economic profit growth in our focus markets, creating operating leverage through growth beyond critical mass. And Innovate is about digitalizing wealth management through investments in technological advancements designed to change our business in the coming decade. All of this will be underpinned by a result-oriented sustainability strategy and very strong focus on risk management. Turning now to the concrete actions that we are already working on and our list of priorities for 2023. Focus starts with a systematic program to grow the adoption of discretionary mandates, driven by our conviction that discretionary mandates, besides being a driver of recurring revenue are a better way of serving many of our clients today and in the future. In May, we spoke of our ambition to increase the recurring revenue margin from today, 36 basis points to around 40 by 2025. Discretionary mandate penetration should move to roughly 25% of assets under management in the same period. This is why we call this part of the program 25 by 25. How are we going to do this? By simplifying and modularizing our mandate offering, by thinking in core satellite approaches where discretionary and advisory modules complement each other, by upgrading the experience and interaction for delegated solutions and through a systematic review and upgrade of each client situation one by one. It's a big task but we want to make investing in discretionary mandates as exciting as participating actively in financial markets. Beyond mandates, we continue to work on solutions such as private equity, funds or trusts that complement our efforts on recurring revenues. Work on all of this is already underway. Focus also contains efficiency measures to generate gross run rate savings of around CHF120 million by 2025. We have built efficiency measures already into our '23 budget and are planning for opportunities to structurally further streamline our portfolio and simplify our operational model in '24 and '25. Scale. Scale is about profitable growth and looks at our most important markets, 9 to be precise, Germany, the U.K., Switzerland, Iberia, Singapore, Hong Kong, Brazil, the Middle East and India. These are the markets where the growth potential from the market position we have today is greatest. We will provide you with updates and deeper insights on our position in these key markets throughout the cycle. But let me specify here that this does not mean we will not be investing elsewhere but rather, we will continue to use an 80-20 model to calibrate growth investments across our different markets. As the starting position we have is different in each market, capturing the growth potential to scale covers 3 key routes: First, successful strategic recruiting focused on senior talent but also harnessing the next generation of up-and-coming relationship managers. This includes systematic hiring and pipeline management of front staff. As flagged earlier, I'm happy to repeat that we've moved to a net positive increase of 18 relationship managers in 2022. Our hiring pipeline for this year is full and we are running at full steam. We will continue to apply the highest quality standards to hires and make sure that the business cases work in our context. I can say with confidence that Julius Bär is a highly attractive employer and that this will be an important route for us to develop in years to come. At the same time, we have also significantly ramped up the second route, our capabilities in terms of organic talent development. Organic development means on the one side, talent intake, for example, through graduate programs which we have once again doubled in '22 and plan to develop further but even more importantly, a new internal development path for relationship managers. Last year, we launched a new associate relationship manager program which will be scaled up over the next years. This program will not only provide front talent at capacity but also introduce generational change to our frontline workforce. As a final yet important point, we will continue to support growth through disciplined and targeted M&A. As I said in May, M&A is clearly part of our growth path and we continue to follow a consistent playbook to realize repeatable value-added transactions that create shareholder value. We actively look for deals that fit Julius Bär strategically and culturally. While we execute on our fundamental plan of organic growth, Julius Bär is ready to create value for all stakeholders through industry consolidation. Turning now to Innovate. On the innovation side, we have already announced a substantial increase of business transformation spending over the next 3 years. An additional CHF400 million aggregate on top of today's technology budget of CHF600 million for the full coming cycle will drive and accelerate the required digital evolution. This will not be spent all in one go but will be ramped up intelligently and cautiously over the 3-year period. This investment will enable the growth we envisage over the next decade. It will also enable further product innovation and time to market. We will upgrade our business in a modular fashion. This will include specific projects looking at both technology and our operating model with the aim to upgrade our effectiveness and efficiency. Looking specifically at the back end. This is about our core banking, trading and ERP system. In the middle about automating lifecycle management, KYC and AML and in the front, we will continue to improve the digital interfaces to our clients. We'll be reporting on these as we progress but I reconfirm that this investment will be supported by our cost management efforts and by the scale and volume benefits we will be able to realize through the program. We will also continue to innovate products and services in line with evolving client needs. We will continue to work in private markets, real estate, mortgages, loan bar and structured lending in funds and derivative capabilities. We will extend our service range in sustainability and philanthropy and continue to smartly push the boundaries and learn to harness the benefits of Web3 in the experience for our clients and in the solutions we offer. This will entail in a measured manner, continuing our exploratory path in the field of digital assets as decentralized finance continues to find its way to regulatory convergence with traditional finance. Our strategy '23 to '25 also comes with ambitious financial targets. Today, we reconfirmed the targets laid out in May '22. We believe we can bring our cost income ratio below 64% by '25, thus further pushing ahead our industry leadership. We aim to increase our pretax margin into a 28 to 31 basis point bracket, maintain the 10% profit growth over the cycle per annum on average and continue to exceed our RpCET1 target again with an absolutely industry-leading threshold of 30%, underpinning the capital efficiency of Julio Bär's model. Let me end my part with a recap of what I see as the essence of Julius Bär's success story. At Julius Bär, we have a truly unique position in the wealth management market with our pure wealth management business model and sole focus on high net worth and ultra-high net worth clients. We have demonstrated the resilience of our business model over the past cycle and we've seen ourselves thrive in times of negative and positive interest rates with growing and shrinking markets, low and high volatility. This gives us the confidence that we'll be able to thrive under different and yet uncharted market conditions in the years to come. We have proven time and again the solidity of our balance sheet and the quality of our capitalization. We are a high capital generating business. This is obviously important for our shareholders but also for our clients as we place our balance sheet for their use. Our strategy for years to come is crystal clear. It is all about profitable, high-quality growth. And last but not least, we are a purpose-driven company. Creating value beyond wealth is our purpose. And with our 132 years of history, we benefit from a strong and unique corporate culture. This culture is both the foundation and the secret ingredient that will help us be successful. Thank you very much. This concludes my remarks and we are now ready to hand over to the floor and the phone lines for our Q&A. A lot to talk about. Can you maybe focus on 2 related topics which is the sort of organic growth drivers of adviser hiring and also flows. So firstly, could you talk a bit about the sort of people you're hiring, the sort of regions and the profile of people that you're bringing into the firm? And then secondly, the impact on flows. You're back in the sort of 5% a year net new money zone. What expectations can we have for 2023 in terms of continuing around that level? Can we model flows linked to the adviser hiring? Is that a sensible thing to do and to expect that you remain at a strong pace of net new money? I think in terms of quality of people of the kind of people, obviously, I think the focus of our model will be on hiring experienced relationship manager target -- talent in our key markets. We have a strong pipeline all across the globe, I'd say here in Switzerland and Europe, in Asia, that will materialize now once these markets open again, especially the hiring velocity in Asia has been very, very slow still in '22 with the pandemic still having effect and we expect this to change moving forward. The second thing we do, as I said, we are also hiring alternative creative talent. We are hiring new talent into our organic development program, for example, through the graduate program and by other means that will allow us over the course of the next years to develop a new generation of relationship managers internally. But I'd say in the near term, the balance is clearly on hiring experienced talent. As to the velocity, I think we still -- we continue not to give external net new money targets. But if I look at the dynamic of 2022, there is nothing in the way of continuing and extending on that dynamic as we go into the new year, given our very strong market position, given the opening of China, I think this gives a good environment for continued growth -- for accelerated growth for Julius Bär. Yes. Just 1 quick follow-up on the net new money and then 1 on the fee margins and 1 on M&A. So just quickly on the net new money, very strong in the second half. Is it possible to disaggregate the underlying trends. So let's say, market -- I guess, strong underlying performance versus idiosyncratic market share gains given the recent events? And then on fees. So the recurring margin has stayed flat but I note that the discretionary mandate penetration increased to 17%. Just curious if that mandate penetration is reflective of genuine increasing sales or is it an effect of lower market and some currency? And I guess what we see that tailwind or fee margins into 2023 as you meet towards your 39 to 40 basis points margin target? And then finally, just on M&A. You are very, very positive on M&A potential. Clearly, the large market drawdown last year will have increased pressures on all managers, especially smaller ones, you have [indiscernible]. So just curious what you're seeing in the market and if there are signs of buyers and seller price expectations converging? Let me take the first and the third and I'll give the fee question to Evie. On net new money, I think we've mentioned that growth in '22 has been based on a very broadly diversified basis. That is true geographically. We talked about Europe, Switzerland, Middle East, Asia, that is also true from the source. I think single idiosyncratic events among market participants may have contributed but have not been the dominant part of contribution to our new money in 2022. And that will continue like that into '23. On M&A, I've said this multiple times, I think there are 2 elements to it. On the 1 side, there is the market propensity to act and to move. We are coming out of many years of very, very little to no activity in pure wealth management M&A, driven, of course, by the markets in the late 2010s and then now by the turmoils, the pandemic and everything in the last few years. I still believe that the fundamentals have not changed. And the pressures, as you said, on small and midsized industry players continues to increase. And again, there's the second part, to Julius Bär readiness to do M&A. I think this is a muscle that we have. We know how to integrate wealth management businesses and we are in an excellent position to create value for all stakeholders from industry consolidation. That's how our board view the next few years. And Nicholas, thank you for the question. I'll try and tackle question number 2. So let me remind you again that our overarching goal is to increase the proportion of our gross margin that's associated with recurring fees from roughly 36 basis points to maybe 39 or even 40 by 2025. Increasing discretionary mandate penetration is 1 lever to do so but of course, there are many, many others. And that recurring fee income line, you see things like advisory fees, fund management fees, private equity management fees, et cetera, et cetera. The discretionary mandate penetration ticked up slightly, 17% is rounding. So I wouldn't read too much into it. And what I would also like to say is as we're pushing ahead for 25 by 25, this probably won't happen linearly. We probably expect to see more back-ended increase in discretionary mandate penetration as we traverse the strategy cycle. Yes, I have 2 questions. The first 1, if you could maybe just talk a little bit about Asia. You mentioned the flow around -- turnaround in net flows in the second half but could you also talk about deleveraging, has that stopped? And what is the outlook for loan growth opportunities? And in that context of clearly, transaction margins, how they're developing in Asia, considering the improvement in the exchange data. And then the second question is slightly different. If I look at your pretax margin target and I compare that with some U.S. peers, on a same basis, they're already at over 30% targeting higher than that. And I just wanted to see why would you not be significantly higher than 31 basis points plus over -- in terms of target, considering that ultimately, we all know the cost structure in the U.S. is much more difficult and additionally, clearly much less of an ultra in some of these brokerage numbers that we are seeing. So just trying to understand why it would not be, as a stretch, significantly higher than 30%? Or should we think that's kind of what you think you can actually make significantly more than 30%? Thank you, Kian, for the questions. Let me start first with Asia and Philipp, please feel free to supplement. So if we look at the H1 last year, as you know, we had significant deleveraging in Asia. In H2, deleveraging continued, albeit at half the pace of H1. So that was encouraging. And important to note that in the second half of the year, Asia had positive net flows. I will draw your attention to the slide where we talk about commission and fee margin. And you will note, I think I mentioned it also in my opening remarks that transaction-driven income, the gross margin associated with that was around 6 basis points. I think if the benign market conditions that we've seen in the last couple of months, particularly in Asian stock markets continue, we will see Asian clients coming back and transacting more as well as potentially leveraging. As far as I can tell, our credit pipeline is relatively healthy looking into this year. On the second question with regards to the pretax margin, I'm not quite sure which competitors, U.S. competitors or market players you are referring to. We have put out a rather ambitious target range out there but there's nothing that precludes us from exceeding that. My name is Noele and I'm with Reuters. I wanted to ask to what extent are you exposed to Adani? And the second question is whether you are still accepting bonds of Adani's Group of companies as collateral? I have more near-term questions. If we look at the exit margin for November, December, if I calculate it correctly, it seems to be like 96 basis points. If you can maybe just tell us a bit about the mix of the exit margin if it's more towards NII or on the trading line? And then how should we think about costs into 2023? I guess there's an element of annualizing inflation, there's hiring on the tech investments. And clearly, that there is room given where your return is. So could we see the cost-to-income ratio deteriorating into 2023 versus '22? Obviously, understanding that it's all a function of the top line as well. But if you can give us a bit more of an indication of what we should expect in terms of costs in '23? Let me start with the second 1 strategically. I think as we start a new cycle, we will invest. We will continue to invest. We are talking about the technology and the ramp-up which will happen cautiously but we obviously talk about investments in frontline staff. On the other side, I think we have a track record of being very cautious on the overall cost development. And as we have tactically managed the cost line also now during '23, we will be watching very closely the market environment -- in '22, we will be watching very closely the market environment in '23. You said it right. It's a balance between revenue and costs at the end. And Anke, your first question, your calculation is absolutely correct. The exit margin for November and December was 96 basis points. I can provide you with a breakdown, you can probably back it out yourself with calculations. It was about 41 basis points for commission fee income, 24% for NII and 30 for trading which, of course, includes the FX swap income. I have 2, please. The first 1 is on the follow-up on Asia. If we were to assume APAC client returning to a more normal run rate of client activity and leveraging, what kind of revenue benefit we could expect from current levels? That's the first 1. And then the second 1 is on your share buyback. Would it be a possibility if you were to see some improvements on the CET1 ratio, notably driven by the OCI recovery but maybe a bit of help on the bond markets that you would be open to a new share buyback program in 2023? Nicolas, let me try and take on these 2 questions. So again, on Asia, we don't quantify the regional contribution of transactional-driven income. But I think you can surmise from my remarks that we do think there's potential upside there. And then on the share buyback, our capital distribution policy that we laid out in May is pretty clear. At the end of the year, if our CET1 ratio is meaningfully above 14%, then the Board of Directors will allow for a share buyback. I've got 3 questions. Firstly, your cash on your balance sheet fell to CHF12 billion at the end of the year and I think it was CHF20 billion in June. Is there still potential for further deployment from the cash into its treasury book to come or you expect cash at this level to be a little more stable? That's the first question. The second question is on net new money growth in LatAm. I see that continues to have negative flows in the quarter in Latin America despite you're seeing inflows in Mexico. Just give us a little bit more insight as to what's happening in that business in Latin America. And last question is just a follow-up on the cost income -- on costs. You -- currently the cost income was 66%, you're targeting below 64% by '25. How should we think about the progression to that level, considering investments hiring, et cetera? Should we expect to be leaner or a little bit or should be a little more stable before or more back-end loaded question? Hubert, I'll quickly take number 2. I think we've seen promising developments in LatAm over the entire year. And obviously, the net number is masking a series of inflows. On the other side, I think there still have been sort of the last legs of restructuring and also integration work around our different operations in Latin America. But I think the business is fundamentally healthy and we'll continue to develop it further from that base. And Hubert I will now try and do number 1, number 3, you're right, cash did fall from fell to CHF12 billion from a much higher number at the end of last year. Of course, we grab the opportunities that the market gave us and deployed more firepower in our treasury book. I always say this, we try and always triangulate capital liquidity and profitability considerations. The balance sheet is a moving thing. So perhaps, yes, depending on how the balance sheet moves and what interest rate opportunities or credit opportunities are out there, you might see a smaller cash balance. You also see our LCR, it's pretty healthy. The balance sheet is liquid. So that's all I can say on that. On the cost-to-income glide path, what I would say is that for this year, given the investments we're intending to make, the strategic recruitment side, on RM hiring, et cetera. We envisage cost-to-income ratio around the levels where we ended up this year, going down in the outer years as our cost measures come into full force. I've got -- I've got a couple of questions. They're all quite straightforward. So on the NII, well, thank you very much for the new sensitivity. But can we talk about the underlying kind of dynamics here from a perspective, particularly of kind of growth and the EBITDA numbers that you may have put into the model. Because I'm particularly interested in your kind of broad assumptions, maybe ranges of the loan growth, particularly on the Lombard side. Also the mix of deposits and how far do you think that, that kind of shift towards term savings is likely to go for you because, of course, the private banks tend to see it in a much more accelerated way? And I suppose all-in, should I assume that the kind of -- that the annualized run rate in 2023 should be broadly similar to what we've seen in the second half? So that's the first question. And the second question is -- so a little bit on the RM side, you've talked about those very strong pipelines but can I ask geographically where do you see your recruitment as the strongest? What's the mix of that recruitment pipeline? And my last thing very, very quickly is on MENA. You singled it out as a source of flows and of course, also as a source of your expansion. Could you kind of give us a sense what you see in the region and how important it may become going forward? Maybe, Philipp, you want to take 2 and 3 and I'll take the complex number 1 question that Magdalena just posed. Let me take a stab at that. MENA, I think a strategically important region for us and where we've actually opened the first office, as Evie said, in a very long time with Qatar that is meaningfully complementing our footprint. We see strong core growth in Dubai itself, where we hold license number 1 and have an excellent market position. We do see inflows from all across the region. And I think our Qatari presence will help us and we continue to see order inflows on the non-resident business that we also manage out of Dubai. I think this region will continue to have strategic relevance for us moving forward. In terms of geography of RM hiring, we've mentioned the 9 focus markets moving forward. You should expect us to have a full hiring pipeline actually in all of those markets. We have a very strong understanding of the local market and we intend to grow actually across our entire network. That's our ingoing position for '23. And Magdalena, let me try and do question number 1. So let me clarify the following. On Page 13 of the presentation, you see the interest rate sensitivity assuming an instantaneous a 100 basis point parallel shift in the yield curve with an assumption of a switch from current accounts to call and time deposits, 20% for the dollar, 25% for the euro and 25% for the Swiss franc. It's important to understand that this is based on the balance sheet as of December 31, 2022. Our balance sheet, of course, will evolve. I don't know what numbers you're penciling in your models for net new money flows and AUM growth for us for next year and what numbers you're penciling in for credit penetration. But you should assume that there is some potential upside to the numbers we gave you, given the fact that our balance sheet is going to be growing, hopefully, with benign market conditions. In terms of the shift from current accounts to time and call deposits, what I can tell you is that at the end of last year, our time and call deposits globally was around 7% of total and now it's around 43% of total deposits. I hope that helps. We don't give out specific lending growth targets. However, I think you can triangulate that based on your AUM projections for next year and the historical credit penetration that you've seen in our business. I've just got one kind of follow-up question actually relating to Slide 13 on the rate sensitivity. And just kind of curious as we go into, say, next year 2024, if rates start to go the other way, U.S. dollar sensitivity, I'm just curious, do I kind of just reverse the impacts or are there other reasons why the contribution would be a bit more stable, essentially based on swaps benefits and so forth? Amit, look, it's hard to say. The 1 thing I can tell you for sure is that we will keep on updating you on interest rate sensitivities in our half year results and full year results. The elasticity of moves in both directions is not necessarily fully linear. And I think that the question obviously is very speculative. I have 2, please. The first goes back to Slide 17, the CET1 waterfall for 2022. You mentioned there a 1 percentage point benefit from other factors. Can you maybe remind us what that is, please? And the second question on deposits. You have seen quite a bit of a reduction of deposits since June and some of it is probably just the FX translation from the dollar but there were certainly also real outflows of deposits. Could you maybe add a little bit of color on what drove this? Is it just clients basically disintermediating into direct investments or was there anything else that would work? And do you expect this to continue? Do you think that the deposit balance in your balance sheet will continue to decline? With respect to the details on the 1% other, may I refer you to the capital development slide in the appendix of number 36, where you can see the detail and the reconciliation between equity at the beginning of the period, equity at the end of the period and CET1 capital. With respect to deposits, I think on the deposit side, the FX -- so we lost about CHF6.8 billion and on a FX-neutral basis, we lost about -- or the deposit balance was down by 5.4%. So the FX effect is around CHF1.3 billion. With respect to whether we expect to see an inflow of deposits or outflows of deposits, it's hard to tell. Generally, in risk-off environments, generally speaking, we get flooded with deposits because we're deemed a Safe Harbor. Can I draw down a bit more into Slide 13 and the assumed switch from current accounts to call time deposits. Is that based on natural behavior? And I know you've given some data down on how much quartile deposits actually account for the total. But is that the same kind of behavior that we should have seen going forward? And I'm a bit surprised actually that you've seen 20% versus 25% for euro and Swiss rates. My expectation would be that for the higher rates available in -- on the dollar that may be the migrated behavior might be stronger versus euro and Swiss rates. So some color there would be appreciated. And then on to M&A. How much of the CET1 ratio would you be willing to seed in any kind of M&A transaction. Would you be able -- would you be willing to see the CET1 ratio go down more towards 11% in any kind of transaction there? And then, just in terms of like overall view of the landscape. I remember when you joined Philipp as CEO that you seemed may be a bit skeptical maybe on M&A because maybe although you had pressures on the wealth management landscape, it was still a high return business that a lot of banking groups would like to retain. But it seems like you're being a bit more constructive on consolidation in the current environment. And I would just like to ask more about your thinking here. Okay. Let me try and tackle the first question with respect to Slide 13. So the reason why we're assuming a 20% shift from current accounts to call and time deposits for the dollar is because the Fed moved faster and higher and we've seen a higher percentage of shifts from current accounts to call and time deposits so far. At the end of the day, you have to consider that clients will never fully go a 100% into call and time deposits because they need dry powder and firepower to invest. So that's why for the interest rate sensitivity, we've -- we're talking about a 20% assumed switch from current accounts call and time deposits for dollar and 25% for euro to Swiss franc, where we have a higher proportion of current accounts today. On the second question with respect to CET1. Again, I'll refer you to our capital distribution policy that we announced in the strategy update in May, 14% is the buyback threshold. 11% is the threshold, the CET1 internal floor that we never want to go below. You can surmise, we ended up the year at 14% CET1 -- so from a CET1 perspective, we have about 3 percentage points excess capital that we could deploy for the right accretive M&A opportunities. Obviously, for anything bigger than that, we would have to go back to our shareholders. And I'll pass it on to Philip for the broader comments on the M&A environment. Thank you for that. And yes, indeed, I might sound a little bit more constructive today than 3 years ago but I don't think our perspective on it has fundamentally changed. I think what's still the same is the ability of Julius Bär to generate value through M&A that has been the case 3 years ago and is today, maybe even a tick more so, given the additional scalability we've brought into our business through the transformation of the last 3 years. I think when it comes to environment, I believe we are now seeing a changing environment. I was a bit cautious 3 years ago looking at the absence of any pure wealth management transactions looking at still the -- if I may use the word, the hype around tech-related M&A activities in the market. I think in the meanwhile, this curve has ebbed off quite substantially. And again, looking at the development out there in the market, the fundamental cost to do business in our field has not gone down, the complexity keeps going up. And I do believe that keeps creating additional pressure for either midsized and smaller players but also for wealth management units of large integrated banks, to ultimately create more value. And that, in principle, should increase the opportunity set. Now still it's hard to time this. And we are updating you as we go forward but I tend to take a constructive approach to it. And the last point, in terms of financing, I think, obviously, there is firepower in our CET1 ratio but there's obviously also the market that I do believe would finance a value creating and accretive transaction for Julius Bär. A couple back on NII and swap income and then 1 on cost. The easy 1 on costs first. You mentioned cost income ratio for this year. Can you just give us kind of an idea of the controllable versus noncontrollable, i.e., inflationary impacts year-on-year for 2023. So what's kind of the underlying inflation impact? Secondly, you've given color on deposit assumptions. Can you give us that by currency? Obviously, in previous cycles, you've had maybe 40% deposits turning out. But clearly, that's probably because there's been no moves in euro and Swiss franc. Can you just give us some color about where we are by currency in terms of volumes that have termed out? And then finally, on the swap income implied is very, very high. I can't get to that number on the basis of your swap volumes on just the pure cross-currency swaps. So, I'm just trying to work out what else is given your swap income. Are you adding any duration? Are you kind of running a basket of long-dated hedges that is driving up effective NII there? What is driving the additional NII coming through that line over and above a pure kind of dollar to Swiss franc cross currency swap? And just on that point, I noticed your cash balances are down into year-end, does that put a little bit of put on swap income into the first half of this year? Okay. That was quite a litany of questions. Let's see what I can do. Let me start with the cost-to-income question. So I think in the past, we have said -- first of all, as you're well aware, a big chunk of our cost base is in Switzerland, right, where inflation has been compared to other jurisdictions, relatively benign. So that's point number 1. In the past, we would assume a roughly 1.5 percentage increase in personnel expenses, ceteris paribus. This year, given the bout of inflation, several jurisdictions, we're talking about 2.5% which I think is still relatively benign in the general environment. So I hope I answered that question, NII. Then the question on swap volumes, so -- and cash balances. We do believe that there is further trading income to be made from FX swaps that the treasury does. And in terms of the volume associated with the FX swap income that we show in the interest rate sensitivity at year-end. And obviously, this number fluctuates quite a bit. It was about CHF14 billion or so. Okay. I'll give you current accounts and then you can subtract the fine call and deposits, if that's okay. So on current accounts for dollar deposits, we were at roughly 44% at year-end; Hong Kong dollars, 50%; for Swiss francs, 86%; and for euro 62%. I think that should do it for you. A follow-up question. About the exit margin, sorry, I should have asked the 30 trading the step up from the 27 to the 30 in the fair value of how does it split with treasury and other income? And your comments about stable balance sheet, there could be upside. I assume that also refers to the exit margin and not just to the H2 margin? Anke, what I can tell you is that it was a little bit more than -- the swap income was a little bit more than half the trading income, gross margin contribution in the exit margin. Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to the management for any closing remarks. Thank you very much and thank you all for listening in and thank you for your questions. Let me close by saying that all of us at Julius Bär are proud that over the past 3 years, we've been able to produce 2 of the best results in our history. We've delivered on our commitments and our targets and made immense progress by transforming our organization. We've started '23 with great motivation to build the next chapter of our success which is great because now it's not a time to rest but one to create value for our clients.
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At this time, I would like to turn the conference over to Jessica Kourakos, Vice President of Investor Relations and ESG. Please, go ahead. Thank you, Lynnette. Good morning and thank you for joining Aptiv's fourth quarter 2022 earnings conference call. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at aptiv.com. Today's review of our financials exclude amortization, restructuring and other special items and we'll address the continuing operations of Aptiv. The reconciliations between GAAP and non-GAAP measures for our Q4 financials as well as our full year 2022 outlook are included at the back of the slide presentation and the earnings press release. During today's call, we will be providing certain forward-looking information, which reflects Aptiv's current view of future financial performance, and may be materially different for reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the COVID-19 pandemic, the ongoing supply chain disruptions and the conflict between Ukraine and Russia. Joining us today will be Kevin Clark, Aptiv's Chairman and CEO; and Joe Massaro, CFO and Senior Vice President of Business Operations. Kevin will provide a strategic update on the business, and Joe will cover the financial results in more detail before we open the call to Q&A. Thanks, Jessica, and thanks, everyone, for joining us this morning. Let's begin on slide three. 2022 was another year with record new business bookings and strong growth over market, driven by our industry-leading portfolio of advanced technologies, as well as our continued flows execution that's kept our customers connected in this challenging environment. Highlights for 2022 included $32 billion of new business bookings, driven by significant active safety, high-voltage and smart vehicle architecture awards. $17.5 billion of revenues, representing 15 points of growth over vehicle production during the quarter, bringing our full year growth over market to 11 points. Operating income and earnings per share for the full year of just under $1.6 billion and $3.41, respectively, reflected the benefit of strong revenue growth and customer recoveries, partially offset by costs related to COVID and ongoing supply chain disruptions, which Joe will cover in greater detail a little later. We also enhanced our portfolio of safe, green and connected technologies with the additions of Wind River and Intercable Automotive, both of which closed during the fourth quarter. I'll expand on these, as well as our enhancements to our operating model on the next slide. As the industry transitions to fully electrified software-defined vehicles, we continue to enhance both our operating model and industry-leading portfolio to further strengthen our capabilities to solve our customers' toughest challenges. As legacy functional and domain-based architectures are increasingly replaced by approaches aligned after smart vehicle architecture, it impacts both the way we design and sell our solutions. This means further strengthening our One Aptiv account-based model, positioning us to engage earlier in the development process and, therefore, more effectively design, specify and deliver optimized solutions across our portfolio, resulting in stronger customer relationships and greater ability to capture value from all our full system solutions. We further enhanced our regional operating model, by increasing local capabilities and empowering those closest to the customer to address their needs quickly and efficiently. Additionally, the continued rollout of our Net Promoter System has resulted in actionable insights to improve our efficiency, our resiliency and service levels, thereby increasing customer intimacy. Lastly, proactive initiatives and risk mitigation actions related to our supply chain have contributed to our ability to keep customers connected through significant disruptions, giving them confidence in our ability to execute on current and future platforms. At the same time, we recognize that the software defined electrified vehicles consumers are demanding will require innovative new solutions and we're investing organically and inorganically to position ourselves for that future. Our acquisition of Wind River significantly strengthens our capabilities in software with an industry-first cloud data software platform that speeds development, streamlines deployment and enables full life cycle management for the software-defined vehicle, significantly reducing cost and time to market for our customers while also unlocking new business models. The acquisition of Intercable Automotive enhances our portfolio of high-voltage busbar and interconnect technologies and provides near-term synergies as we expand Intercable's manufacturing capacity in North America and in China. Lastly, we're also investing organically in solutions that further expand our portfolio of industry-leading high-voltage electrification solutions such as integrated power electronics and battery management systems. To help fund these initiatives, we've implemented structural cost reductions that will save roughly $100 million in annual expense, which will take full effect throughout 2023. These actions further improve the efficiency of our underlying cost structure while allowing us to make investments that better position Aptiv for long-term outperformance. As shown on Slide 5, nowhere is the strength of our track record and portfolio more evident than in our new business bookings performance. 2022 bookings reached a record $32 billion, an increase of over 3% from last year's record of $24 billion. advanced safety and user experience bookings totaled a record $12 billion, driven by $4.2 billion of customer awards for our smart vehicle architecture solutions across three different OEMs, including central vehicle controller and Power Data Center Bookings with the Volkswagen Group, bringing cumulative customer awards for SBA products since our launch to over $5 billion with five different OEMs. Active safety bookings of $5.2 billion, representing a combination of next-gen hardware and perception software building blocks as well as full system turnkey awards, including an award from a large European-based global OEM as well as the Chinese OEM BYD, which represents the seventh customer to select Aptiv scalable platform to efficiently support a wide range of advanced safety features. The strength of our portfolio of active safety solutions is reflected in the $20 billion of cumulative bookings since 2018. Signal Power Solutions new business bookings reached a record $20 billion for the year, the result of strong growth in low voltage vehicle architecture, including a $2 billion like commercial vehicle booking with a major North American OEM in the fourth quarter and continued strong bookings in adjacent markets. A record $4.2 billion of high-voltage electrification bookings, up from roughly $2 billion just a few years ago, including awards from several North American, European and China-based OEMs, representing both traditional and new mobility providers across our electrical architecture and engineered components product lines, bringing cumulative high-voltage customer awards to $14 billion since 2018. Our industry-leading portfolio, combined with our unparalleled ability to execute highly complex programs, even in today's challenging environment positions us to continue to win new business, resulting in clear line of sight to roughly $32 billion of business awards during 2023. Moving to Slide 6 to review the segment highlights. Beginning with the Advanced Safety & User Experience segment. This past year, we became the first technology provider to successfully launch a full stack hands-free Level 2+ ADAS system with a European-based global OEM. This is a great example of our full system capabilities applied to active safety as well as our flexible business model and open platform approach, which allows OEMs to leverage their own innovations, as well as those from Aptiv and other third parties to deliver a unique, high-performing driving experience. We're also deeply engaged with several customers regarding Wind River's cloud-native software platform, which we're confident will lead to commercial awards over the course of 2023. Turning to Signal & Power Solutions segment. We continue to be perfectly positioned with an industry-leading portfolio of electrification solutions that span multi-voltage distribution, connection and cable management. Reflecting the accelerating demand for battery electric vehicles, the $4.2 billion of high-voltage new business bookings I referenced on the prior slide, accounted for over 20% of the segment's total bookings, and high-voltage revenues increased 33% over the prior year, 28 points over vehicle production. In addition, our new offerings in power electronics and battery management systems are gaining traction as demonstrated by a significant integrated power electronics and BMS award from a North American-based global OEM, where a solution will be used across all their bet platforms beginning in 2025. And the pipeline of customers evaluating the deployment of a similar solution is growing. Our customers recognize our track record of flawless execution, which is a driver behind the customer service, quality and supply chain awards we received. The cost recoveries we negotiated and the record level of new business bookings we've been awarded. Our full system edge-to-cloud vehicle architecture solutions have enabled us to pursue high-growth margin accretive opportunities that position us to continue to deliver outsized revenue growth and margin expansion for years to come. Moving to Slide 7. At this year's CES event in Las Vegas, we brought the software-defined vehicle to life, showcasing Aptiv's unique full stack capabilities. We debut Wind River software platform, fully integrated with a vehicle powered by SBA. Designed vehicle demonstration of the industry's first end-to-end cloud-native DevOps tool chain and vehicle software platform, showed how these solutions improve development speed, quality and efficiency, unlock new business models and enable software functionality to evolve and improve over the life cycle of the vehicle. We also showcased our turnkey Gen 6 ADAS platform, including differentiating KPIs and a public road demonstration. Our radar-centric solution, which is vision agnostic, utilizes artificial intelligence and machine learning to increase the availability, robustness and efficiency of the perception system, resulting in a solution that can be up to 65% more energy efficient, and 25% more cost effective than equivalent vision-centric solutions. Lastly, we continue to highlight the commercial readiness of our Smart Vehicle Architecture solution. First, by deeply integrating it into a production vehicle, which enabled us to demonstrate a wide range of in-cabin user experience features as well as the fusion of our interior and exterior sensing, resulting in greater safety, comfort and convenience for passengers. And second, through our SVA demonstrator, which enabled guests to see firsthand how these advanced architectures reduce complexity, weight and mass, while also showcasing our latest high-voltage electrification solutions. With over 400 customers, 150 partners and 75 suppliers visiting the Aptiv CES pavilion this year, we reinforced our growing pipeline of commercial opportunities and set the stage for the deeper, more tailored engagements, which I referenced earlier. Moving to slide eight. Before I turn the call over to Joe, I wanted to touch on our outlook for 2023, which Joe will cover in more detail. Building on the foundation from 2022, we expect a very strong year for new business bookings, revenue growth over market and margin expansion. Our robust business model and portfolio of advanced technologies are resulting in sustainable value creation. We continue to widen our competitive moat with investments in advanced technologies and capabilities that drive our operational excellence. This has enabled us to demonstrate strong outperformance even in a weak production environment, as demonstrated by our 2023 outlook, where we continue to expect 8 to 10 points of growth over vehicle production, and 140 basis points of operating margin expansion and strong cash flow growth. Thanks, Kevin. Good morning, everyone. Starting with a recap of the fourth quarter on slide nine. As highlighted earlier, the business drove strong growth in the quarter, with revenues of $4.6 billion, up 19% over prior year and representing 15 points of growth above underlying vehicle production. The outgrowth was across both segments, despite continued semiconductor supply chain constraints and COVID disruptions in China that negatively impacted customer production. Adjusted EBITDA and operating income were $674 million and $523 million, respectively. OI margins expanded 380 basis points versus prior year, reflecting strong flow-through on incremental volumes, the benefit of customer recoveries of direct material cost increases and cost reduction actions taken earlier in 2022. Supply chain disruption costs were favorable by approximately $25 million from the prior year, and foreign exchange was negative in the quarter, reflecting approximately 20 basis points of headwind. EPS in the quarter was $1.27, an increase of 87% from the prior year, driven by overall earnings growth and interest income from higher cash balances maintained prior to the closing of Wind River, partially offset by interest expense and tax expense on higher earnings. The notional EPS impact was a loss of $0.29, an $0.08 increase over last year. Lastly, operating cash flow totaled $933 million and capital expenditures were $178 million for the quarter. Looking at the fourth quarter revenues in more detail on slide 10. Our growth was broad-based across all regions, despite the disruptions in China and continued supply chain constraints. Price downs net cost recoveries and commodities was favorable by approximately $100 million. Foreign exchange negatively impacted revenue by approximately $300 million in the quarter and late quarter shutdowns in China was a negative $60 million. From a regional perspective, North American revenues were up 21%, or 13% above market, driven by our active safety and high-voltage product lines. In Europe, which continues to be impacted by acute supply chain constraints and macro concerns, adjusted growth was 22%, driven by strength in both segments. And in China, revenues were up 8% or 14 points over market. Moving to the segments on the next slide. Advanced Safety and User Experience revenues rose 15% in the quarter or 11 points of growth over underlying vehicle production. Segment adjusted operating income was $77 million, up over 100% year-over-year, reflecting strong flow-through on incremental volumes as well as favorable net price and recoveries, partially offset by the negative impact of foreign exchange in the quarter. Signal and Power revenues rose 20% in the period or 16 points above market. Segment operating income improved by 64%, driven by strong flow-through on incremental volumes, favorable net price recoveries and commodities and lower supply chain disruption costs that partially offset the negative FX impact. Turning now to Slide 12 and our expectations for global vehicle production in 2023. Based on customer schedules, we are forecasting a decrease of 1% for the year reflecting approximately 85 million units of global production. Regionally, we expect North America flat at approximately 15 million units; Europe, down 2% or approximately 16 million units; and China flat at approximately 27 million units. As we discussed during the fourth quarter of last year, we remain cautious about the impact of macroeconomic considerations, particularly in Europe as well as the impact of customer supply chain disruptions, including continued constraints of certain semiconductors. Although the overall supply of semiconductors has improved sequentially, we continue to see acute constraints, particularly in Europe and North America that impact overall customer production levels. Moving to Slide 13, you'll find our 2023 full year outlook, which now includes Wind River and Intercable Automotive. We expect revenue in the range of $18.7 billion to $19.3 billion, up 8% at the midpoint compared to 2022 with 9 points of growth over market. Note that our growth over market excludes the impact of acquisitions. As noted previously, we remain confident in our multiyear growth over market target of 8% to 10%, supported by continued success in our key product lines and high demand for our portfolio of advanced technologies. EBITDA and operating income are expected to be approximately $2.7 billion and $2 billion at the midpoint, reflecting strong flow-through on volume growth, continued margin expansion in high-growth product lines and lower COVID supply chain disruption costs. Adjusted earnings per share, excluding amortization is estimated to be $4.25. EPS growth of 25% is driven by strong earnings growth, partially offset by an increase in the expected tax rate of 14.5% and higher net interest expense. The loss related to Motional of $310 million, represents a $0.07 increase over last year. We expect 2023 operating cash flows of $1.9 billion reflecting the higher earnings as well as improved working capital during the year. Capital expenditures are expected to be approximately 5% of revenues or $950 million for the year. With respect to capital deployment in 2023, we will continue to maintain a well-balanced approach to capital allocation as we continue to prioritize organic investments in the business to support our portfolio of advanced technologies and record new business awards. Execute our M&A strategy and focus on transactions that enhance our scalability across both the brain and nervous system of the vehicle, accelerate our speed to market with relevant technologies and access new markets. And while we will continue to maintain our current financial policy, as it relates to our balance sheet leverage profile to the extent we can take advantage of market disconnects, we will be opportunistic in our share buybacks, returning cash to our shareholders. To that end, our 2023 guidance assumes we offset the impact of stock compensation dilution in 2023 via share repurchase, a practice we had in place prior to 2020. On slide 14, we provide a bridge of 2023 revenue and operating income guidance as compared to 2022. Starting with revenue. Our growth over market, combined with the decrease in global vehicle production, resulted in a net contribution to revenues of over $1 billion. The full year benefit of direct material cost recoveries will effectively offset changes in index commodity and price downs. FX is estimated at a negative $300 million. And lastly, we expect Wind River and Intercable to contribute approximately $700 million for the year. Turning to adjusted operating income. We expect margin expansion of 110 basis points before the benefit of acquisitions, driven by continued strong flow-through on incremental volumes of approximately 30% and the negative impact of price downs, commodities and incremental inflation are partially offset by customer cost recoveries and higher direct labor and other indirect costs are more than offset by increased operating performance, including the benefit of cost saving actions, improved manufacturing performance, as well as a reduction in supply chain disruption costs, which are estimated to be $180 million in 2023. The addition of Wind River and Intercable will increase 2023 operating income to $2 billion, or 10.5%, reflecting margin expansion of 140 basis points and incremental margins of over 27% for the year. Thanks, Joe. I'll wrap up on slide 15 before opening the line up for questions. As the management team reflects on 2022, it's clear that we strengthened our competitive moat and accelerated our commercial momentum, supported by a highly differentiated portfolio of safe, green and connected technologies. Together with our strong track record of operating execution, Aptiv has never been better positioned to provide our customers with full system solutions that advance the industry's vision of the software-defined vehicle. As a reminder, we're hosting our 2023 Investor Day on February 14 in Boston, where we'll provide our view on the industry and how we plan to usher in the next phase of our business strategy. In closing, I'm proud of what the Aptiv team accomplished during 2022 and have never been more excited about what we will deliver in the years ahead. As you'll see in here on February 14, the best is yet to come. Yes. So, I guess my first question is on your bridge for 2023, you have $400 million of additional labor depreciation economics price. You offset that with $400 million of performance and it was either $135 million or $180 million of lower disruption costs. I'm just wondering about -- just in light of the still inflationary environment that we're seeing pricing is still negative. And at what point do you think you start to kind of get ahead of this and recover some of these disruption costs or headwinds. Well, Rod, it's Joe. I'll start. I mean I think we have gotten ahead of it, to be honest with you. I mean, our business equation is working, right? Performance is offsetting labor inflation and the pricing and the material inflation, you see in that $100 million. We've vetted out from a top line perspective, customer recoveries this year, which are obviously benefiting from a full year effect or effectively offsetting price downs on the top line. So I think our view, and Kevin can jump in. I think our view is that the team has done a great job of pushing direct material costs through. And we've started to get performance up, including working hard to get the supply chain disruption costs out of the P&L. Yes, I guess, to just maybe clarify my question, Joe. Like I think that you had talked about $295 million of disruption that you'd start to recover over six quarters. And when I say ahead of it, in my mind, at least that means the positives are greater than the negatives. It looks like they're sort of matching at least when optically, when you look at the bridge? Certainly offsetting. Yes, we ended 2022 with about $330 million of supply chain disruption costs. We've taken that down to $180 million in the outlook. So we're still assuming $180 million of disruption costs. It continues to be a difficult operating environment for certain customers, and we're still seeing some disruptions, obviously, China in Q4, December, in particular, was heavily disrupted with COVID. So I think we continue to work through it. I think you're right. We had always talked about sort of four to six quarters. So we've got some to continue to work through, but feel like we've made a pretty big step here in 2023. Yes. Maybe if I can add on, I think it's a great question. I think one of the challenges when you talk about getting full ahead of it, you need to have better predictability of what you're getting ahead of. I think Joe's point on the fourth quarter of 2022 in December, specifically to give you an example, roughly 90% of our employee base in China was suffering for COVID. That's tough to predict. Yet at the same time, we were able to keep our factories running and keep our customers connected, which has been our ultimate objective, right? So operating in a less efficient way and being somewhat reactive in an environment where we can't always predict what's going to happen from a supply chain standpoint or COVID stand. Thanks for that. And just secondly, when you announced the closing of the Wind River deal, in your release, you talked about some recurring operating expenses and costs that led to changes in the terms. I was hoping you can maybe talk a little bit about what you meant by that? And what were the implications financially going forward? Yes. I think the net results for Wind River from a revenue growth standpoint, a margin standpoint, accretion dilution standpoint remain largely unchanged. We're not going to get into all the specifics, but operationally, there were some changes that we needed to make. And in light of that, we are in a position to renegotiate the transaction. Yes. Well, the only thing and it's a nuance, but I think it's important, particularly as it relates to the magnitude of the costs, the price reduction we said was in part due. So it's not a direct correlation between sort of the increase in expenses and the amount of the reduction. So to Kevin's point, it gave us an opportunity to talk to the sellers about pricing we did, but the deal remains accretive in this year. And again, as we said in our press release, it's no changes in sort of the strategic outlook or our view on the long-term â long-term opportunities Wind River. Hi. Just wonder â I want to follow-up on Rod's question about production disruption because the guide for down 1% does seem -- it seems surprising to some people, given if you look at like the PMI shipping index back to pre-COVID levels in terms of implying logistics costs and shipping timing more back to normal chip companies are taking down supply because they've seen that kind of just in case channel buildup is kind of running its course. And so you are highlighting a couple of companies, and I respect that there's still some choppiness, but it seems like you're implying that production disruption in 2023 gets worse. I mean, you're implying net headwinds, right? So you're implying it gets worse than in 2022. Help me understand that because that's a pretty weak comp, pretty [indiscernible] comp in terms of how bad things were last year. Yes. Adam, listen, as we've talked about in the past, when we provide our guidance and build our forecast, it's off customer schedules. And when you look at the nature of our business, especially our SPS business, we're on one in every 3, 3, 3.5 vehicles globally. So we get a very good view to the underlying market. We also, given the nature of our ASUX business get a very good view to what's going on from an overall semiconductor availability and supply chain standpoint. And I think when you look at the semiconductor challenges as they've evolved from 2021 to 2022, then 2022 to 2023, it's really much more focused on rather than a general supply constraint standpoint, specific suppliers who are causing constraints. And we expect that to continue into 2023. It certainly was the case in 2022. And those two factors are effectively, they're impacting our overall outlook for the full year, which again, as Joe said in the past, is based on the customer schedules that we received. All right. Appreciate that. And just a follow-up. Imitation is the ultimate form of flattery. Qualcomm wants in on software defined and kind of the kinds of products you're doing in safe and connected. Mobileye wants to compete with you. I seem to recall you used to quote a 70% type win rate in ADAS and ASUS broadly. I think that sounds familiar, right. I always felt that was a bit too high, kind of a high watermark, but how has that trended in recent quarters now that you're seeing the competition may be creeping in on the forward X? Yes. I think it depends on your baseline and what comparison you're trying to make, whether it's a full system solution, a platform solution or it's a unique to a perception system, as an example, a radar solution. Obviously, ADAS penetration has accelerated and continued to increase over the last several years. I haven't seen or we haven't done the math on the pursuit relative to win. I'd say, it's still relatively high on a platform basis. I would say we're very focused on investing our efforts in those areas where we have a high likelihood of winning. So based on that sort of approach to pursuing ADAS platforms, I would say, it would continue to be relatively high. I'm not sure if it's quite at 70%. But we still continue to have a very strong position. And again, it's reflected in our bookings in 2022, our outlook in bookings for 2023 and our revenue growth relative to market. And I mentioned in my comments, the next-gen Gen 6 ADAS platform, which we'll launch in 2025 will be available for SOPs in 2025. We've already had one customer award. It's an open system. It provides -- it's modularized. It provides a lot of flexibility for ourselves, as well as for our OEM customers. And importantly, it's very cost effective. So we believe we're going to continue to see significant demand. Good morning, guys. There's been a lot of price action recently by some of your customers on EVs that are probably going to drive significantly higher volume relative to initial expectations. I'm just curious how you think about that and what kind of opportunity there might be here in 2023. Well, listen, we've been talking about high-voltage electrification and what we've been doing from a portfolio standpoint, bookings continue to be strong, right? Obviously, we had another year of record bookings, and it wouldn't surprise us if we had 2023 even stronger bookings from a high-voltage electrification standpoint. So, we'll see, we're optimistic. Having said that, as we've said in the past, we're very, very focused on pursuing opportunities with those OEMs who have battery electric vehicle platforms that they're taking globally, that we have a high confidence level that they're going to meet their schedules and effectively generate significant revenues over a platform, which ends up a better financial proposition for ourselves and obviously, lower risk. Yes. John, it's Joe. I'll just add. We've talked a lot about being north of a 30% growth rate in high voltage. 2023 is as well north of 30%, based on the customer schedules we're seeing today and, obviously, got additional opportunities as we add in the Intercable portfolio. So continue to see a very strong schedules today to extent the price actions, sort of increase the mix or increase the take rates on that technology, I think, we'll be very well positioned to take advantage of it. Got you. Okay. I mean, if you look at stuff like the Model 3 and the Y, I mean, it's kind of the here and now. I mean given the price cuts, I mean, those guys might be doing another 500,000 units relative to expectations. I mean are you thinking that's possible, and that's in your numbers at this point. And the action by the Chinese manufacturers well. I mean it's a real heavy stuff here. I mean we're not talking about like three to five years on backlogs. We're talking about like hundreds of thousands, I mean, if not millions more EVs this year than expected? Yes. I think as you heard me say and Joe say in the past, our forecast is based on customer schedules. So to the extent those schedules go up, we'll benefit from a revenue standpoint, but when we pursue business, when we put initial capacity into the ground, obviously, there's some flexibility, it's based on what we see from a customer standpoint, customer schedule standpoint. And again, so if we see a big uptick in demand for players like Tesla and others, our volume will scale with them. And to date, John, those actions have happened in the last couple of weeks, we have not seen big schedule moves yet. Not saying they won't happen, but haven't seen material changes at this point. And then just one quick follow-up on the bridge. I mean on the recoveries, I mean, it does seem like some of the automakers have almost a little bit remorse that recoveries were a little bit high last year, whether it be for commercial sentiments around volatility on schedules or raws. I mean, what is your kind of expectation there in these customer discussions this year? Do you expect them to be a little bit tougher. I mean they were -- I wouldn't call them generous last year, but they were more realistic last year than I have been in decades. Do you think they're going to be a little bit tougher this year and there might be some reversal there? I mean what are those discussions like at the moment? John, as you said, they're always tough. It's an industry with a tough pricing environment all the time. So those conversations are -- they're never easy. And what we've done in the past and what we are really focused on continuing to do is to bring value to our customers, one by keeping them connected; and then two, providing them with solutions that solve their toughest challenges that are cost-effective solutions. And to the extent you're able to do both of those, I would say those conversations are less difficult, but they're never not difficult. And our outlook -- the team did a great job. Joe mentioned, the team did an outstanding job in 2022, both having those discussions and negotiating those â those price increases and at the same time, delivering record bookings. And that's a process we'll continue to go through in 2023. A couple of questions on margins, if I can. First one for the quarter. I think the margins were quite a bit softer than maybe we had anticipated, especially of very solid revenue outcome for the quarter. Can you please go back over some of the factors of this? I obviously heard you speak about COVID disruption in China, anything else? And specifically within us and U.S., it seems to be quite pronounced. Yes, Emmanuel, it's Joe. You're right. I mean we continue to deliver on the top line, and I think this speaks to sort of a little bit around Rod's question. It just continues to be a very disruptive environment, right? So we're working through China, $20-plus million of impacts at the very near end of the quarter from both customer shutdowns as well as just us. As Kevin mentioned, we had 90% of our staff of 30,000 people come down with COVID in the fourth quarter. So it was a very disruptive production environment. We saw some of that in the US as well, as customers wrestle through the supply chain challenges, and we still got a lot of the stop-start production. So that, combined with sort of the FX impact call that, I think you mentioned 20 basis points, call that about $40 million in the quarter. And, again, some of those disruptions fall heavily into ASUX. So I think to some extent, it's more than the same. I think what you saw us be able to do this year, which, to some extent, compounds the disruption cost perspective, we were able to come back, run over time, run the businesses hard and push the revenue out at the end of the day, or most of the revenue out at the end of the day. But it's just an inefficient operating environment. And that's as part of the guide, again, north of $300 million of disruption costs for 2022. We left about -- we certainly don't think it will be as bad next year, right? We're hoping for sequential improvement. We're seeing sequential improvement. But we did leave $180 million of COVID and disruption costs in the P&L for 2023, just to give ourselves some room to continue to deal with this. Okay. That's helpful color. And then, I guess, as a follow-up, I think one of the ways you, I think, encourage us to look at it, I guess, this upcoming year was, maybe, compare the performance versus the second half of 2022 to the extent that some of the price recoveries and commercial agreement you had with customers who are benefiting you more in the second half of 2022. I guess, what do you feel is sort of like a good clean base in terms of second half margin, for which to build off, as we try to understand your 2023 guidance? And what would sort of like the puts and takes versus that. Yes. I think that's a good question, and we've spent time looking at that. I think the way to think about it, we talked about originally 10% to 10.5%, and then with some of the FX, 9.5% to 10%. So we think about probably 10 as a good jumping off point. I think what you see with -- you can -- and I think we've sort of captured it, quite honestly, within the range of the guide, right? You can sort of -- if you look at some of the benefits of pricing, if you look at the reduction in the COVID supply chain cost, you can get up to sort of that, call that, that 10.7%, 10.8% level. You then work down some of the FX and some of the volume changes, which is really how we sort of think about that sort of mid-10s, that 10.5%. I think we're sort of there. I think 10 sort of ended at the right jumping off point, and we sort of built back from there. And I think we have it covered generally speaking, within the guide. Great. Thanks. Good morning, everyone. Just two questions for me. One, Joe, I was hoping you could share our expectations for margin cadence throughout the year. And secondly, on active safety. Maybe talk about what you're expecting this year for both top line growth, as well as if you talk about booking expectations after a very strong 2022. Yes. Let me start with bookings. I'll work my way down. As Kevin mentioned, we think -- it was in Kevin's presentation, we see line of sight to, call it, another $32 million -- $32 billion of bookings in 2023. I would say mix should be generally consistent with 2022. They always can be a little lumpy, but continue to expect growth in SVA and active safety, obviously, in high voltage. But I think that profile, the sort of the current profile is probably a pretty good proxy. Again, bookings are lumpy. They always have been. But that, I think, is probably the best proxy, and we did want to provide a target, obviously, for next year, which is something new, but we've got a lot of confidence in what we're seeing. From a segment perspective, if you want to talk sort of growth or growth over market, full year, I'd have ASUX at around 12% growth over market full year. SPS at about 8% growth over market full year. And then I'll give you -- I'm not going to go quarter-by-quarter, obviously, on the margin cadence. But if you think about sort of full year margins by segment -- and again, we got to work through the disruption costs and some of the FX we've talked about. But I would think about SPS in that 11% to 12% range, and ASUX in that 8% to 9% range, full year OI margin. Yes, good morning. Thank you for taking the questions. First, on margins to the extent the stop start schedule volatility and the input cost inflation environment were to moderate. Do you think Aptiv could get back into that historical target of 12% to 14% type EBIT margins, or given how pricing discussions with customers have evolved in the last few years with more things now on pass-throughs. Do you think some of those lower costs may actually get passed out to the OEMs. Listen, I think if the disruptions and the significant material inflation that's over the last couple of years goes away, we definitely get back to what our historical margin trajectory was. And then when you overlay what we've done from a portfolio standpoint, and where we sit, whether that's mix of more high-voltage electrification, more advanced ADAS solutions, the benefits of Wind River and Intercable actually have the ability to go above that. So it's a combination of both. That's helpful. Thank you. My second question was on Wind River. You spoke a bit on this already in the prepared remarks, but could you elaborate more specifically on what Aptiv will do this year to help Wind River have improved customer dialogue with the automotive types of companies, in particular, given all of Aptiv's expertise and relationships with that industry. Thanks. Sure. So in reality, going back, we signed a commercial agreement with Wind River over a year ago well and over a year ago. And in reality, our teams have been working closely together, both in terms of developing the final product for automotive applications as well as in commercial discussions. I'd say the traction we've hit over the last quarter or so has hit a significant level at this point in time. So a number of introductions across the various regions. I think as I mentioned in my prepared comments, there's a deep level of engagement with several OEMs in every region at this point in time. And we're very optimistic, and I'm very confident that you'll see meaningful announcements in 2023 with respect to Wind River's penetration of the automotive space. Thanks so much, team. Basically, follow-ups to what's been already asked. On the ADAS wins, $20 billion, could you talk about just the diversification of some of the Tier 2s? I think historically, you've been a majority installer of one perception compute system. But obviously, there's various out there. $20 billion is such a big number. It seems like you're probably winning business with multiple computer perception providers. I just want to confirm that. Yes. Chris, just to be clear, our ADAS business, I put into kind of two buckets. One bucket is a platform solution, which to-date has traditionally been with the Mobileye vision solution. Then there's another bucket where our perception system -- perception systems are integrated into an ADAS solution. And in those particular cases, it could be a variety of vision providers and in fact, actually is. So it's a real mix. The Gen 6 ADAS platform is a platform that we've developed -- first, we've developed to be vision agnostic. So OEMs have the ability to select what vision provider they would like to utilize for the overall platform. No, I would say, it's probably a little bit closer to 50-50. I'd say, it's 50-50. If you go back four years ago, we had roughly 14 ADAS customers. Today, we have 21 ADAS customers, and that's a mix of growth in that platform solution, as well as providing a portion of the overall ADAS solution to OEMs. Okay. That's super helpful. And then, just on the production, question for Joe, and this is going to be a little bit of a nit pick. Just can you remind us how you guide global production? Is it a weighted average by your customers, by your revenue? One of the reasons, obviously, minus 1% looks maybe low to what we all think, but when I look at also 2022, you called production 4%. We look at a global average of 6% or weighted average of 5%. So I just wanted to sort of understand, if we get a 3% or 4% global production, am I able to flow through a full 4%, 5% type of revenue upside? Yes. It's weighted towards our production. That basically means for us, Chris, high level, taking out Japan production basically and weighting it towards the markets where we're strong. We obviously don't do a lot on for Japanese OEs in Japan. So that -- and call that 20-plus million units, right, that we sort of weight away from that. And that's the same -- we've been calculating that the same way for -- since the IPO for 11 years now. Very consistent. Yes No, that's very helpful. And I think that weighted number obviously is for most western suppliers who we don't have, the Japanese customers in the same way. Okay. Thanks so much, team. Appreciate it. Hi. Good morning, guys. Also, a couple of follow-ups from my end and maybe starting with kind of the semiconductor discussion and impact on AS and UX. Curious if you're seeing any signs of plateauing pricing there or even potentially to take back some price from your suppliers. And obviously, timing is difficult to predict. But given your traction and value-add with customers, is there maybe an emerging opportunity where you could see some sticky pass-throughs for AS & UX as your own pricing starts to come down? Yes. David, that's a great question. I'd say with respect to the level of bookings we were awarded in 2022, we've been put in the position to have discussions about no price increases and in some situations, that's been effective. I'd say we're not at a point though where we're actually seeing year-over-year productivity or lower price increases from the semiconductor players. We'll see how that plays out as based on volume outlook for automotive and the other places that those players play. But at this point in time, we're not seeing it, and it's not in our numbers. Okay. Got it. And a quick follow-up on S&P. The product line margin expansion, you referenced, I think you mentioned kind of in high-growth areas. So a, can you confirm that that's high voltage or maybe it's kind of non-autos or CVs, or maybe just give us a bit more color on some of the specific product lines where you're seeing some nice movement. Yes, I would sort of characterize, David, the margin profile in that business overall is very strong. But high voltage, the adjacent market, particularly commercial vehicle accretive. But also, we're very strong. If you think about engineered components, right, sort of the connect the interconnect type business. That business just has traditionally a very strong margin profile and â and certainly scales well with volume and is accretive with additional volume. So it's really a -- it's a pretty balanced portfolio in that business. Hi, guys. Just a quick one on the key business vertical growth. So active safety, user experience, high-voltage electrification, non-auto, can you share what the growth rate expectations are for this year within the guide? Yes, sure. No, generally very consistent, James. I mentioned high voltage to John. We still continue to see that north of 30%. That's excluding Intercable. As you mentioned at the time of the deal, Intercable we're -- obviously, the M&A deals aren't in the organic growth numbers at this point. But Intercable in and of itself grows well above 30% per year, so consistent with our high voltage business. We're actually seeing some active safety acceleration growth this year. It had been in, call it, the low to mid-20s over the last couple of years. We're actually seeing that accelerate close to 30% in 2023. As we launched to Kevin's comments, just launched a number of new number of new full systems. So I think those -- we've talked in the past about what the CAGRs, the multiyear CAGRs for those product lines are sort of high 20% to 30% for active safety, north of 30% for high voltage. Those continues to â that continues to be the case. Infotainment, we've talked about it, user experience. We are going through a product transition there. We expect that business to grow, sort of, high single digits this year, as we move from legacy systems to these more robust integrated cockpit solutions. And eventually, we see infotainment being sort of up integrated into the SVA systems, which is what we're working on with our customers now. So -- but again, continue to grow above market, and it's an important part of the business. But, obviously, the higher growth coming from active safety, high voltage. Got it. That's super helpful. And then, just with respect to the $135 million in lower disruption costs for this year, can you confirm what that overall cumulative impact is entering this year? I believe the number was -- something like $295 million was the expectation as of last quarter. Seems as though the fourth quarter incurred some additional challenges tied to China. So, yes, if you could share maybe the time line to fully recapture this all-in bucket, what that is, that would be great. Yes. I wish I could give you the full -- the time line of recapture. We've had $180 million in. We finished last year at a little over $300 million. So that's what's coming down from. We're taking the $135 million down to the $180 million._ Yes. No, listen. Rod in his comment was correct, right? We said at the -- we think four to six quarters from the beginning of 2023; we're going down over the next four quarters, that $135 million, working hard to get them down. Again, its things like premium freight, its things like plant downtime that are either COVID or supply chain disruption related. We're seeing sequential improvement. I would expect to continue to see sequential improvement. But it's what you saw in the fourth quarter this year, right? There are things that pop up that make it an expensive operating environment. Yes, I think it's important to note, setting aside fourth quarter COVID, when you think about car and inputs to a car, supply chain disruption can start with just a shortage of one part. And the issues related to excess labor, premium shipments, manufacturing, loss of manufacturing productivity. And that's all it takes. And there's a ripple effect and those dollars, obviously, are those inefficiencies and costs obviously add up. So, although it does, to Joe's point, overall, the supply chain situation is improving. There are still continue to be some unique situations that were outstanding or occurred in 2022 that are going to continue in 2023, with specific semiconductor suppliers. And then periodically, there are surprises that affect the industry, the players like ourselves need to react to. And our real focus has been, how do we make sure we keep our customers connected. So we've consciously made the decision to absorb a portion of that cost near term, go back to the customer for relief once we've addressed the issue, and we've kept them connected. And we think that's translated into the -- quite frankly, the bookings that we've had in 2022, we expect to have in 2023. And, quite frankly, their posture on price recovers. So it's tough to predict. That does conclude the Q&A portion of today's call. At this time, I would like to hand the conference back over to Kevin for any additional or closing remarks.
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EarningCall_786
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Thank you, and good morning, everyone. I'm joined today by Bill Waltz, President and CEO; as well as David Johnson, Chief Financial Officer. We will take your questions after comments by Bill and David. I would like to remind everyone that during this call, we may make projections or forward-looking statements regarding future events or financial performance of the company. Such statements involve risks and uncertainties such that actual results may differ materially. Please refer to our SEC filings in today's press release, which identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. In addition, any reference in our discussion today to EBITDA means adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure. Reconciliations of non-GAAP measures and a presentation of the most comparable GAAP measures are available in the appendix to today's presentation. Thanks, John, and good morning, everyone. Starting on Slide 3, Atkore is off to a solid start for 2023. Volumes for the quarter were up over 5%, and adjusted EPS increased 1% year-over-year in the quarter. We continue to execute our playbook for capital deployment and strategic growth. As previously discussed, we expanded our HDPE product operating with the acquisition of Elite Polymer Solutions in November. HDPE represents a significant growth opportunity for us, and I'm pleased with the progress and integration so far. During the first quarter, we repurchase $150 million of shares, and in the second quarter, we've already repurchased over $100 million. Collectively, this brings our year-to-date total for repurchases above $250 million. With our solid start to the year, we are increasing our full year outlook for adjusted EBITDA and adjusted EPS. It is my pleasure to also announce the release of our 2022 sustainability report, which was published this morning and posted on the ES&G section of our website. This report covers a broad range of topics, and I believe it demonstrates and articulates why Atkore is a great place to work and truly a special company. I would like to thank all of our employees for everything they do to support our customers and all of our stakeholders, is because of their tireless efforts that Atkore is able to achieve the results and successes that we have. With that, I'll turn the call to David to talk through the results from the quarter and our outlook for the full year. Thank you, Bill, and good morning, everyone. Moving to our consolidated results on Slide 4. In the first quarter, net sales were $834 million and adjusted EBITDA was $264 million. As we have mentioned several times, we expect our business to normalize in 2023 as compared to the past several years with our performance. That being said, we're nonetheless pleased with our margin performance in the quarter with adjusted EBITDA margins of 32%. This was down year-over-year, but still a very strong and healthy level. Even with the decline in net sales and the adjusted EBITDA, we are pleased to see that our adjusted EPS increased in the quarter up to $4.61. Turning to Slide 5 in our consolidated bridges. Volumes were up over 5% in the quarter, and our recent acquisitions contributed an additional 7% of growth. These gains were offset by the decline in our average selling prices. Our average selling prices have declined as we continue to see normalization of pricing and a continued downward trend for several of our key input costs. During the quarter, we saw very strong pockets of performance related to data centers and several large chip fabrication projects globally. In addition, we are very pleased with the execution and integration performance from our recent acquisitions. Moving to Slide 6. Those segments had positive volume growth. Margins compressed in our electrical segment with the previously mentioned normalization of pricing, however, we saw very strong margin growth on the S&I side. Our S&I business had 22% growth in the adjusted EBITDA. Turning to our outlook for fiscal year 2023 on Page 7. We continue to expect volumes to be up mid-single digits for FY â23. We expect net sales to be down approximately 5% to 10% in 2023. As prices normalize and we see declines in several of our key input cost categories. However, with the strong performance in the quarter and the resiliency of our Atkore business system model, we are increasing our outlook for adjusted EBITDA and adjusted EPS. For FY â23, we expect adjusted EBITDA of $1 billion at the midpoint with a range of plus or minus $50 million. This is an increase of $100 million versus our prior outlook. In addition, we are increasing our expectations for adjusted EPS up to a range of $15.85 to $17.75. As we mentioned last quarter, this outlook does not include any expected benefits from the tax credits associated with the Inflation Reduction Act, as we expect majority of these credits will flow through to our customers. With the strength of our cash flow and our commitment to returning cash to stockholders, we are also increasing our expectations for share repurchases in the fiscal year. Thanks, David. We are very pleased with what we've accomplished in this quarter and our outlook for this fiscal year, but we're even more excited about all the opportunities ahead. Moving to Slide 8, as we've said before, we believe that sustainability is central to the strength, safety, and longevity of Atkore. This morning, we released our third sustainability report and seeing all the great work that our team has accomplished truly inspires me. This report details our initiatives involving our products, customers, and employees, and I would encourage everyone to read it. Inside the report and highlighted here is the progress we've made against our four external sustainability targets. As you may recall, we introduced these four targets last year and set very smart goals that we believe will help guide and focus our efforts to enable sustainable value creation. We are making good strides for our targets for each of these goals, and we are confident in our ability to meet or even potentially exceed some of these items by 2025. Turning to Slide 9. We sincerely appreciate the external recognition that we've recently received from several leading independent organizations. We believe these acknowledgements demonstrate that we have a company culture and employees who are able to truly make Atkore a great place to work and a compelling investment opportunity. I'm confident in the team, strategy and processes we've put in place to continue Atkore strong trajectory, and I firmly believe that best is yet to come for our company. So, Bill, you recorded good volume growth, as you said you would, based on data center chip fabrication demand, is what you highlighted. But could you talk about the resilience of those end markets? Obviously, we've seen a bit of a slowdown in the tech sector. But we know non-restarts have been very strong over the last year. So is that helping? And what is the duration of customer backlogs and how much confidence do they give you in extended volume visibility for Atkore? Yes, we're still optimistic or consistent on volume going forward in the -- let's call it, the mid-single digits for the rest of the year. When I'm out talking with our customers -- I just flew back from a convention here late last night. 6 months, 9 months, a year of backlog with our distributor partners. So I would continue to see others. As you mentioned, there's going to be a delayed job here or there, either because of somebody getting equipment in or someone reconsidering things, yes. But there's enough volume there. There's enough Atkore capabilities to drive our fair share of growth beyond the market that I would estimate mid single digits. So nothing has really changed, Andy, which is kind of nice. And then, you recorded just over the high end of your guidance for the quarter, I think at $264 million in EBITDA, but you raised your '23 guidance by $100 million without adjusting volume as we just talked about. So what is it about the price versus cost equation that has changed to allow you to adjust your guidance pretty early in the year, pretty significantly? Are you retaining more price so far than that waterfall chart that you gave us last quarter? And does that potentially change the trajectory of the $600 million or so in price giveback you gave us in that waterfall? Yes. I would say for this year, we are seeing more price that we're holding on to, and/or just commodity costs drop them faster, different things like that and our value equations, that we are able to raise, as you mentioned, our whole year forecast for EBITDA of around $100 million. To sit here and project out further, I think -- we're not giving comments on '24. We're still comfortable as we can be on the $18 plus for the long term. But for this year, Andy, there's enough comfort in the year to raise the guidance by the $100 million. Yes. And Andy, as you know, the second half is usually a little bit stronger as construction season starts in full force. So when you look at the first half after first quarter actuals and our second quarter guide, we felt comfortable in raising that full year guide. And then, just one more question for me. You mentioned the rebound in metal electrical conduit volumes that you're seeing. Is that because demand is improving? Or was that more of a supply constraint issue that's now being relieved? And then just asking the same question on PVC markets. Pricing there still looks like maybe it's been dropping a little but stabilizing, but how do you define demand in PVC as non-resin demand outweighing resi weakness? Yes. So I'll do in reverse order there. I think there is enough opportunity -- well, let me back up. There is residential weakness. That should not be a surprise already, right. But that's single-family home. Multifamily homes, we're telling -- so going really strong. And then there's enough other markets, all those electrification trends, [Car G], the grid in the varying lines and 5G networks, that for all of our products. Almost Andy, to your first question, we're still cautiously optimistic for growth, both for the industry and for Atkore going forward. And then from there, with steel conduit, yes, I think it was a good quarter, but I won't overplay any one market for a short time period. Yes. I mean, to me, the -- only 2 things may be there, Andy, is the fact that we feel very strongly destocking and for steel conduits over. And so, what we're seeing right now is the real demand in the market. And then also, you're starting to see steel costs rise in the future and expectations rise. So folks are getting ahead maybe a little bit and getting their orders in and probably a more typical way than they were in the last 3, 6 months. I appreciate all that color through Andy's questions because that really does strike at the storyline here. And certainly, we like what we've seen for the first start of the year. And maybe we can just drill down a bit because -- on what normalization is and whether we have a clear read? And I know it's still early in the year, but here's kind of the way I think investors have been looking at it, versus fiscal '22 and your prior guide on EBITDA. It was looking at a 33% decline. And there was this worry it would be falling off a cliff in January. And obviously, that's not happening. You've boosted. It's now a 25% decline using the mid-point. But it's also $1 billion, which I think is interesting in terms of that mid-point you and I talked about, how that's an important milestone. So look, it's still early in the year. Where does that normalization trend line go from here in -- for fiscal '23 on an EBITDA basis? Deane, it's like, if you want to follow up, we're comfortable with the mid-point of the guide. I think there will be some pressure continuing on some of our pricing. But I think there's enough other things that we're doing well, i.e., the volume growth, new product development or new products that typically have higher margin, our value equation for customers that are driving -- in some places we're getting margin, even more as we go forward, that we're comfortable raising our guide for the year, but -- and also very comfortable still on the FY '25 guide. Now, could some product lines continue to have some drop in margin quarter-over-quarter and so forth? Yes. But overall, I would tell you almost where you started, we're comfortable enough 3 months in to say, you know what, pricing is holding better. Your whole -- the beginning of 33% drop and 25% drop, that $1 billion like you mentioned, sounds good to me and it was good how we would offer that in the $18 EPS and then we'll talk about how we continue to drive it forward from there. So hopefully, I answered, but it's hard to say product by product being with that much crystal ball. And for David, it came up a couple of times about the decline in input costs and it looks as though that is bigger than what the decline we've seen in pricing. So just kind of take us through that dynamic, the key input costs, how much they've gone down and how that factors into your pricing? Sure, Deane. So if you look at Slide 5 of our deck and you look at the bottom in the EBITDA bridge, you'll see that cost changes year-over-year for Q1 were down $70 million. Now obviously, pricing was down more than that, and that has a lot to do with the normalization we've been talking about, that you have seen from where we were a year ago, especially in things like steel, tremendously lower now than they were a year ago. Now, sequentially, you're starting to see steel, like I mentioned earlier, come up a little bit. And so, there's different dynamics in S&I as to when price changes in some of our other pipelines of how long we hold on the price versus the commodities coming down and what have you -- But in general, I would say that, that $70 million is a pretty significant reduction year-over-year. Sorry, Deane. I don't know if it was part of your question, but I know there's -- especially on the buy-side questions out there, on the whole dynamic of cost versus our price. Just as a reminder, I know you understand this Deane, but that -- the things that drive our ability to price are supply-demand competition. So what are your competitors doing compared to how much demand is in the industry, and then Atkore's value prop, which I think is bar-none the best in the industry with our ability to co-load in one order, one delivery, one invoice or electronics, our customer service, those types of things. So as sometimes buy side looks at commodity costs, yes, that's a factor, because maybe one of our competitors is out there thinking, well, if my cost went down, I can lower my price and still make a margin, and we have to react. But that's just not a major contributor to how we price in the market for any of our product cost. Yes. Bill, you and I had this exact discussion last quarter, first question, and you gave a, what I thought a comprehensive tutorial on the dynamics and how you have to look well beyond just the input costs. And so, Iâve been referring people to that transcript and sending it, and thank you for the reminder. And just last question for me. Talk about the pipeline of M&A? And are you seeing any other competition coming in? Because, obviously, this is a really attractive niche and the surprise for some investors to say, how come you havenât seen anyone else trying to elbow their way in? Yes. So, to that great question, Deane, and for whoever also thinking of those questions. But no, we havenât -- letâs put it this way. There is no increased trend that weâve seen as people bought other companies that weâve passed by, yes. But again, I think Atkore is unique that most companies we buy are privately owned family enterprises, small enough on the radar that a large private equity firm wouldnât have the management structure to put in place with them, are large electrical peers to have different niches than we do in this set of, call it, Raceway products, that I think we are uniquely in a position to acquire most of these companies as they come up to market. So they never say never or something hasnât been sold to somebody else, of course, but no increased trend and the market is still active. Weâre actively pursuing things. Weâve actually increased the size of our M&A team here in the last month, just to continue to expand, whether different products in the States look more aggressively into Canada, look more aggressively into Europe. So we are deploying our capital well between M&A, internal investments, and obviously, stock buyback. So itâs a good time to be with that corp. I guess, first off, in safety and infrastructure, in particular, volume was up nice, and obviously, the comp was a bit easier. But anything in particular you'd call out on the demand side kind of fueling that volume in S&I? Yes. So whenever we reference a little bit about data centers and fab plants, a lot of that, when you start thinking about the metal framing, our wire basket products -- even in a different part of their business, security was pretty strong this quarter. So pretty broadly speaking, they've had solid growth across all their product lines this quarter. And then, maybe to follow up. Obviously, there's a lot of different governmental actions going on right now. You've got the IRA, infrastructure jobs, RDOF, et cetera. I guess, first off, what impact is baked into that kind of mid single digit volume guide from those at? I know it's hard to -- break it hard that way, but if you can kind of give any sense for, is that more of a 2024 dynamic, I assume, for the majority of it, but any sense on is some of that showing up? What's based in the guide? And any comments on just kind of that environment. Yes. I think, Chris, I'll just paraphrase back what we said. I think it will be more impactful in 2024, just because a lot of these things like the Inflation Reduction act with credits and so forth, just literally kicked in, in January. But there's probably a little bit in there, but nothing major, but we are definitely knowing that these things are coming along, positioning ourselves, and that's again where I say Atkore is a company to invest in and grow with as we go forward. And like the fiber investments and all that dynamics, how these -- I think the deadline is pretty soon and they can sign up for the money and see what their need is. So we're still a little ways before that actually gets to action. So to this point, a little bit, but not the majority of our volume growth this year. Most of it is covered. I was hoping maybe you could just give some updated thoughts on the HDPE market opportunity. You talked about it a little bit, but obviously, lots of acquisitions there and a lot's going on that front. Maybe just any updated thoughts you have there? Yes, Chris, really excited for that market. Every facet of it, first, almost -- the other Chris had just asked the question. I think the best is yet to come here with funding for and getting things ready for fiber optic and so forth. And without mentioning specific customers, we have a great general manager that was just talking to some of the largest electrical distributors in the nation yesterday. And while they're optimistic for '23, they're even more optimistic for 2024, and we are well positioned, and we have a kick ass team that very much reminds me as a complement to Atkore, the PBC division of a decade ago where you take 5, 6 of the best run companies and you bring together those management teams. They get to compare now best practices, manufacturing, how we have a national footprint, how we can, therefore, work with national customers that a lot of other people can't, just because they're regional. And this is why, almost back to the previous analyst questions, we have high comfort at this stage with our 2025, $18 plus EPS. So economy is going in the right direction, secular trends going in the right direction, and Atkore is getting well positioned. So long-winded answer and say we're excited for HDPE. Last one for me, just kind of cash flow related. So cash flow from operations, I think just under $200 million for the quarter. Inventory was down a little bit, but $11.5 million. What are kind of your thoughts in terms of inventory levels for the balance of the year? I mean, I think from a days standpoint, we're kind of where we want to be, but you will see a little bit here -- as we talked about in the back half of the year, we expect a lot more solar volume coming up with our new facilities. So we will have a little bit of an inventory build there. So when you look at it on, say, a day's level, it's going to be fairly level between now and end of the year, but that does mean a little bit of a dollar increase for the next, I'd say, quarter or two. To follow up on that last question, can you comment on sort of the trend in solar demand in the near term as well as telecom conduit demand in the near term, appreciating the very positive long-term outlook? Yes. Both short term and long term, really optimistic. It almost ties back to some of the other questions with what are we seeing. Again, some of the background that David talked about in our prepared remarks, is, solar credits are out there. They just started with Inflation Reduction Act. So I think it is something that -- the people that make the solar arrays, the people that buy them for the solar farms are aware of, and that is a great stimulus, and well, I'll kick on here on January 1. But we're for Atkore well positioned. I think we've talked in previous conference calls where we actually -- some intelligence, quite frankly, some done lot, but we had started up a whole facility dedicated to making the solar torque tubes, and that's coming online for us here kind of in the beginning of Q3. So another quarter out, but that will both help with organic growth, help with our EPS, and the demand is absolutely out there, both just people wanting to be green. And these tax credits are probably shipped on a lot of business that used to be made offshore to U.S. manufacturing. So good for the economy, good for the U.S., good for green and good for Atkore. Yes. So, Alex, one way to think about it is, like the solar industry itself could stay flat year-over-year. The volume for domestic torque tubes is still going to be up substantially because it just doesn't make any financial sense to import torque tubes anymore compared to buying someone domestically. I'll just say -- I don't know what to say. And if you -- for the thought process on the optimism, when we get to the 10 multiple on that, then we'll talk about where we go as we continue to drive forward. I will say, because we have great management teams literally across the board -- like, you look at what David spoke about with S&I, just an amazing quarter that for David, myself and the executive staff, we're having an all-day media on Thursday, and it's all about 2025 and 2028. That's the focus, how do you keep this fly wheel spinning faster and faster. So who knows. I don't think we're going to do -- re-up our numbers for a while, Alex, but it's definitely a thing of how we continue to grow and take it to the next level. November like we normally would. But I just would remind you that we did put a greater than signed in front of the '18. So we were thinking about that as we were putting that together. Before we conclude, let me summarize my 3 key takeaways from today's discussion. First, Q1 was a solid start to the year, with volumes up over 5%. Second, we are increasing our expectations for the full year earnings and share repurchases. Third, we're excited about the progress we've made in regards to sustainability and ESG, and we're very excited about what lies ahead in this area for our products, customers and employees. With that, thank you for your support and interest in our company, and we look forward to speaking with you during our next quarterly call. This concludes the call for today.
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Welcome to the Franklin Resources Earnings Conference Call for the Quarter Ended December 31, 2022. Hello. My name is JP and I will be your call operator today. As a reminder, this conference is being recorded and at this time all participants are in a listen only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin. Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties and other important factors are just described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the first fiscal quarter of 2023. I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We're pleased to answer any questions you have. But first, I'd like to call out a few highlights from the quarter. Despite the challenging market backdrop in our first fiscal quarter, we saw a number of positive developments to further diversify our business. This quarter, we continued to see net inflows into key growth areas such as into our three largest alternative managers, Benefit Street Partners, Clarion Partners and Lexington Partners as well as multi-asset strategies, ETFs and our custom indexing solution platform, Canvas. We were also pleased to see additional positive indicators impacting our business, including an increase in our institutional won but unfunded pipeline and improving overall investment performance across our strategies. I'll cover all of this in more detail momentarily. While the industry landscape remained under pressure, we have continued to benefit from our diversified mix of asset classes, geographies, client types and investment vehicles. Turning now to flows. We generated total net inflows of $6.6 billion this quarter, inclusive of $17.5 billion of net inflows from cash management. Long term net outflows were $10.9 billion and included reinvested distributions of $12.1 billion. This quarter, we saw net inflows into key growth areas of client demand. Starting with alternatives, as mentioned earlier, our three largest alternative managers, Benefit Street Partners, Clarion Partners and Lexington Partners each had net inflows for the quarter totaling $2.4 billion. Multi-asset net flows increased almost fivefold from the prior quarter to $2.4 billion. Driving the interest in the multi-asset category was our flagship Franklin Income Fund with its flexible approach to changing market conditions, the $70 billion US fund is now rated four stars overall by Morningstar and continues to have strong performance. Our broader multi-asset solutions strategies were also in net inflows. Fixed income net outflows of $13.3 billion were primarily due to certain US taxable and global opportunistic strategies. Client interest, however, continued and we benefited from having a broad range of fixed income strategies with noncorrelated investment philosophies, including net inflows into certain Core Bond, US Income and tax efficient strategies. We are pleased to note that Western's performance reverted back to its leadership position during the quarter. At quarter end, 89% of the firm's strategies outperformed the benchmark on an AUM basis for the quarter and Western's two primary core bond funds were ranked in the top decile on a quarter-to-date basis versus their respective peer groups. Equity net inflows were $300 million and included $9 billion in reinvested distributions. This quarter, the risk-off environment continued to impact investor sentiment on certain growth strategies, which were offset by positive net flows into strategies such as large cap and all cap value, large cap core and emerging markets. Cash management generated the highest net inflows in over a decade, with $17.5 billion of inflows were driven by institutional demand for low risk assets at a higher risk free rate and diversified across client type. As a leading SMA provider, particularly in model delivery, we ended the quarter at $105 billion in SMA AUM. Canvas has achieved net inflows every quarter since the platform launched in September 2019 and AUM increased over 25% in the quarter. ETFs had $1 billion in net inflows and reached $13.3 billion in AUM. We launched the ClearBridge Sustainable Infrastructure ATF during the quarter and added specialized sales resources to strengthen our ETF efforts. We were also pleased to see our institutional pipeline of one but not funded mandates increase by $8.8 billion to $23.8 billion and included a $7.5 billion fixed income institutional mandate. Turning now to performance. Our investment teams have remained true to their distinct disciplines and time tested approaches, relentlessly searching for those long term investment opportunities that market dislocations often present. We saw an uptick in relative investment performance in nearly all standard time periods. This quarter, the majority of our strategy composite AUM and mutual funds' AUM outperformed their benchmarks and peers, respectively, on a one, three, five and 10 year basis. In addition, 51% of mutual fund AUM was in funds rated four or five stars by Morningstar. As I've said time and again, the next decade is not likely to look like the last and we continue to invest strategically in areas that are shaping the future of our industry. Alternative investing is one of those areas. During the quarter, we closed the acquisition of Alcentra, a leading European alternative credit manager. This acquisition increased our alternative credit AUM to $78.5 billion. And as for secondary private equity, as of November 30th, Lexington had raised $12.8 billion for its latest fund and continues its fundraising efforts. Alternative assets now account for $257 billion or 19% of our total AUM and a higher percentage of adjusted revenue. We are now one of the largest managers of alternative assets and are realizing our aspiration to be one of the few diversified firms globally that offers the major categories of alternative assets. One of the lessons that 2022 taught many investors is that diversifying beyond traditional asset classes to solve for their long term goals is probably a good idea. We think this will drive increased adoption of alternative assets in the wealth channel where we've made progress. We continue to focus on product development and suitability, sales and marketing and client education and the distribution of alternatives and wealth management. For example, Benefit Street Partners announced the launch of Franklin BSP Private Credit Fund, investing in US middle market private credit seeking to generate strong current income and superior risk adjusted returns across market cycles. In November, the Franklin Templeton Academy announced the launch of its alternative education program as part of our ongoing effort to build knowledge and proficiency around the alternative investment landscape. The program offers a comprehensive curriculum on various types of alternatives, including courses on private equity, real estate, private credit, infrastructure and hedge strategies. Touching briefly on our financial results, which reflect two months of Alcentra given its closing on November 1st. Ending AUM was $1.39 trillion, an increase of 7% from the prior quarter, primarily due to market appreciation and the addition of Alcentra. Average AUM decreased by 1.5% to $1.35 trillion. Adjusted revenues were $1.44 billion, a decrease of 6% from the prior quarter. The decrease was driven by lower adjusted performance fees and lower average AUM. However, the effective fee rate, which excludes performance fees, was 39 basis points, a slight uptick compared to 38.8 basis points last quarter. Adjusted operating income was $395.1 million, a decline of 20% from the prior quarter or 12% excluding annual deferred compensation acceleration for retirement eligible employees of $37 million. We continue to benefit from a strong balance sheet with total cash and investments of $6.6 billion at quarter end after reflecting the purchase of Alcentra and payment of fiscal year end cash bonuses. Let me wrap up by saying that over our 75 year history, our north star has always been the clients we serve. We are committed to continuing to seek opportunities to expand our capabilities to provide investors with financial investments that are important in reaching their goals. Finally, I would like to thank our global employees without whom our progress would not be possible. Their work is greatly appreciated, and I thank them for their many contributions to our organization. I guess a question on the fixed income side. We saw outflows in the fourth quarter, but the outlook for '23 should be a lot better for the industry. Just curious on that thought overall and how you think Western in particular is positioned in the year ahead? I mean, first of all, as we mentioned in the quarter, the core bond portfolio Western had net flows. We continue to see really strong sales on the gross sales for Western products. 89% of the strategies outperformed. Actually, Core Plus and Core ranked second and eighth percentage in there against our peers for the quarter. So really good -- I think, good recent performance. The pipeline -- over $10 billion of the pipeline is Western. As we mentioned, the $7.5 billion mandate is part of Western. But beyond that, they're just getting great support. But here's what makes us really excited. Many of the institutional players have been a little bit slow, that's why I think we've seen real strength in our institutional money funds and a lot of flows going there, both in the last quarter and continuing through January. As you see institutions waiting to figure out kind of when the rates peak. But as they ventured back into the space, we have three phenomenal brands between Franklin, Brandywine and Western. And to just punctuate that the Brandywine Global versus Western Core Plus and Franklin Core Plus from their excess returns, only correlate 0.12 and 0.17. So regardless of what type of view people have on fixed income, we've got really, really great brands in that area. Adam, do you want to add anything to that? I would just add, Jenny, that the performance turnaround is really across the board. If you look at where our global bond fund is, that's now top decile as well. So really good performance everywhere. On top of that, I would say that one of the things that differentiates us is the breadth of fixed income we offer. We see a number of DB plans now more fully funded. We're able to offer them liability based fixed income. You can look at what we do in high yield and global bonds and munis, it's really a breadth of capability in fixed income and we're seeing demand grow in all of those sectors. Jenny, maybe I'd keep it at the high level because look, the margin compression is impossible to manage when the market drops as much as it did. Again, as you think rolling forward, we got the benefit of the market lift in the fourth quarter and early this year. Just curious on how you're thinking about what you do actively and proactively in '23 and where you think we can get to, and I quote, normal backdrop if there's such a thing? I'm really talking about the adjusted margin and expenses, just expenses up, revenues down, it's hard to do in the short term when the markets drop. But how you're approaching that margin or is that an outcome? In other words, do you manage towards it or is it an outcome of environment? So I don't think we manage [gross] margin. I'll let Matt jump in on this. But you're absolutely right. I mean this is one of those businesses where you get a disproportionate benefit to the markets going on the upside because your margins can expand and then you're slammed on the downside, because you can't possibly adjust your expenses quickly enough. I think the good news is the work we've been doing, part of it is just when you do the amount of M&A we do, you're naturally kind of reinventing how you work and figuring out where you can take out costs. And so we've been able to absorb a lot of the expenses that we've had in the M&A. But Matt, you want to talk about kind of expectations on margins going forward based on where the market is. I mean, I'll just say a few things on that, and I'm happy to provide the guide. Maybe that would be another question that come up. But generally speaking, 35% to 40% of our adjusted expense base, as we've communicated in the past, is variable in nature with the market and performance. And we're always very much looking at the other 60% to 65% of our expense base to see if we can be more efficient and effective in particular in a difficult environment. And frankly, some of the transactions we've done on the M&A side have prompted further reviews of those sorts of activities. So we're very active around that. In the down market, as you alluded to, Glenn, that we've experienced, it takes some time for carefully considered adjustments to keep up with revenue declines while making sure that we remain competitive in terms of compensation and investing in the business, and we've done both of those things, competitive in comp, and we continue to invest in the business in a significant way, in our opinion. But we've also taken or in the process of taking significant action across the business to make sure that we're being disciplined and continue to be disciplined with our expenses. So we paused nonessential hiring. We've just completed a voluntary buyout process, excluding our investment staff. We've got an execution plan in place to introduce additional operational efficiencies across the firm. As you know, in the last three years, in addition to savings from our merger transaction, we've already outsourced operational activity that's created efficiencies for our funds, first and foremost, but have also lowered future CapEx expenditures for our firm, while frankly, also simplifying our company operations. And what this has enabled us to do is to continue to invest heavily in the business where we need to in the areas of growth that we've talked a lot about. But at the same time, it's also enabled us to keep our expenses very much in check, including the margin. So Jenny, you mentioned fixed income performance has really improved. Is one quarter of great performance enough given the more positive backdrop for fixed income and credit? And what is the risk that there's a lot of money movement in the industry in fixed income for 2023 and Franklin misses it due to weaker performance from last year. Well, again, I mean you have the Core Bond, which was the net flows of I think of $1.5 billion this quarter, and Core Plus is one of our top selling selling funds. So even though it's still in net outflow, it's dramatically improved in outflows, Templeton Global Bond, I mean, it's amazing when you look at that, as Adam mentioned, it is beating its benchmark and peers in all four time periods. So it's a pretty massive turnaround. I think it's outperforming its benchmark by 1,200 basis points for the quarter, which you carry that back. So performance is always going to predict the future. If you look at that 87 of 134 fixed income composites. So this is across the firm in the one, three, five and 10 year periods is only underperforming in one period. So we actually think we're incredibly well positioned. And again, as I mentioned earlier, the diversification of the excess returns between Brandywine, Franklin and Western gives people a chance to frankly heads themselves within our own enterprise or if they have a view, can express it with one of our managers. And as we've said that Western has been a little bit more viewing that I think that rates will probably decline, maybe towards the end of the year, which the Franklin side probably would say it's more like in 2024. So the key is that I think we have great opportunities wherever you want to be in the fixed income, and we think that people now that you can get actual returns in fixed income, you're going to see more allocations there. That's not just the public markets that's the private markets also. So benefits for our partners, Alcentra. So they've got some very strong performance and interesting funds and both in demand. I was just going to say we've seen clients build multi-fixed income fleets with different Franklin components and oftentimes adding additional assets because they see how uncorrelated the various strategies are with each other. I was hoping we can dig into your alt franchise for a couple of minutes. If we look at the AUM, excluding Alcentra this quarter, AUM seems to be kind of flat, actually down a little bit sequentially. So I'm just curious what's offsetting sort of the good fundraising momentum that you mentioned. Now I know the convention of AUM is not the same as fee pay AUM. So maybe just kind of help us unpack what fee pay AUM has done over the last couple of quarters, what it is now and what are the drivers of fee paying AUM in alts over the next several quarters? The core of the question and then Jenny and Adam, you should answer more, is the outflows and the softness that we've experienced in alternatives, Alex, is driven by the liquid alts area of the firm. It's not our primary kind of private market specialist investment managers in BSP, Clarion and Lexington of all experienced positive flows in organic growth. So I think what you're referring to is the overall number when you exclude Alcentra, where that is, it's slightly negative, that's driven by outflows and softness in both performance and flows on the liquid alts side. So that would be K2 and Western Macro would be the two areas that you're seeing. Everything else has actually grown, and the Lexington, Benefit Street Partners and Clarion have all grown. And can you help us just break down fee paying AUM, kind of what's liquid versus what's illiquid? And as you sort of think about the pipeline of opportunities on the more private side of things. It would be helpful just to get a little more granularity. So for instance, like the Lexington $12.5 billion or $12.8 billion fundraise, is already all in the fee paying AUM number? And is it a management fee or is that going to turn on once the fund is closing? So just a little more granularity, that would be helpful. The Lexington fund that's being raised so far, that's all fee paying. So it's the future raise that they're continuing to work on that isn't yet included. But the number that we put into the executive commentary is included. And basically, when you ask for liquid versus illiquid or tied up -- I'm assuming you're talking about tied up assets. Essentially, most of BSP, Clarion and Lexington Partners are all long term tied up assets. Obviously, K2 has their liquid alts. So those have more flexibility, and you see that in redemption numbers as well as macro ops. Maybe just for a quick follow-up. I was hoping you guys could hit on the institutional pipeline. Very nice to see an improvement sequentially. Can you talk to the fee rate on the overall institutional pipeline? And the timing of conversions as you expected today? I would say that the timing is going to be typical of what we've seen in the past. I think it's usually about half of that pipeline or so converts in the quarter. I wouldn't see a real change in that. In terms of the fee rate, we tend to have scaled fee schedule. So when you have larger mandates, those price a little cheaper than smaller mandates. We have a big chunky one in there right now. But in general, I don't see that the fees we've been charging on institutional asset management changing all that much quarter-over-quarter. I was wondering if you could just talk a little bit about where you see exit base fee rate at the end of the year versus what you sort of reported. And then as you think about your commentary about sort of money continue to go into institutional cash management, and some of these larger fixed income mandates. How does that sort of play off against what's happening on the alternative side? So on the fee rate, we expect it to remain around 39 basis points and it may be slightly higher than that for the year as a whole, but that's where we expect it to be, as we've discussed in the past. And you know this well that the upward pressure on the fee rate is if we are more successful in expanding our alternative asset business and if equities continue to come back that pushes up. If we get this continued flow into money market funds and broader fixed income on the institutional side, in particular, that could push the fee rate down. But as we've modeled that and looked at the mix of our business, we think that 39 basis points is a very reasonable, excluding performance fees is a very reasonable guide for the year. And as a follow-up, I was wondering, Matt, if you could talk a little bit about maybe update us on expenses and how to think about maybe the run rate numbers. So a couple of variables looking at the quarter, sort of unpack the $37 million on the deferred comp side. Does that pull forward expenses? And then your guidance last quarter was much more elevated for some of the [non-conference] what you reported. Can you talk a little bit about any timing issues there or how to think about the rest of the year? There was some movement with respect to some of the numbers in the different components from one [indiscernible] to another. But what I'll do is, I'll walk through where we see the second quarter of '23 in terms of different components. And then I'll give you a high level of where we think we're going to be for the entire year also, which hopefully would be helpful for modeling purposes. So I already mentioned to you about 39 basis points for the effective fee rate, that's where we see things remaining in the next quarter. All these numbers obviously are inclusive of continuing to invest in the franchise and a full quarter of Alcentra, last quarter was just two months. This quarter, of course, it's the full -- it will be the full three months. For comp and benefits, assuming $50 million of performance fees, and I'm happy to answer a separate performance fee question. But assuming $50 million per quarter of the performance fees, the comp and benefits should be back down to between $700 million and $710 million. This is inclusive of salary increases and the 401(k) and health plan resets. So again, comp and benefits $700 million to $710 million. We expect IS&T to be between 115 and 120, so it's relatively flat. We expect occupancy to be around 60%, relatively flat and this is inclusive of continued normalization of return to office that we're seeing on a global level. G&A, we guide to a high 140, so 147, 148 something in that area. This is inclusive of our estimate of where we expect placement fees to be and also reflects continued normalization of T&E expenses, which we put in the [$15 million], $20 million per quarter one. So we expect the tax rate to remain in 25% to 27% area. If you think about annual guidance, again, inclusive of continued important investments in our organic growth strategies, it's obviously still pretty early in the year, and we're experiencing slightly market uncertainty as we've all been talking about. But all else remaining equal, despite the improved market conditions in the quarter, which has been somewhat of a surprise, I think, to us at all, we're going to stay with the annual guidance that I provided last quarter, which is for the year, adjusted operating expenses between $3.95 billion to $4 billion, we will probably be on the higher end of that, frankly, because of where markets have gone to over the last month or so. But we're keeping the guide between $3.95 billion and $4 billion, excluding performance fees -- performance fee compensation there. Just a reminder that this includes a full year of Lexington. Last year's numbers was only six months. It's an additional six months of Lexington Partners plus an 11 months of Alcentra as we closed on [November 1] and our fiscal year end is [9/30]. So on a net basis, our expense cost [remaining] equal or projected to be lower than last year, taking into account the Lexington and Alcentra additions, lower by low single digits, 2%, 3%, something in that area. So thinking about what drove the variance, Matthew, to the fee rate last quarter. What do you think caused that to work out to be different than you had expected and a little bit lower? And how should we think about potentially those factors playing into the outlook for the fee rate to be stable at 39. So we decided to or our partners at Lexington Partners decided to hold off on a closing from what they're expecting to do a little bit more in December and they decided to hold off until this quarter that we're in now. So that was probably something like a 0.4 basis point difference. And then product mix was something like a 0.3 difference from where we were thinking that we could be on the high end at the time. And so I think I said we expect it to be more in the mid-39s. It could have been as high as 39.7 or 39.8 or something like that, could have been as low as $39 and I sort of guided in the middle of that, we ended up being a bit above because of those two things. The reason for the increase in the [indiscernible] from 38.8% to 39% was because of we increased alternatives we added Alcentra, that probably added something like 0.3 basis points. And then as we've mentioned, we added quite significant money market assets, which is not a really low fee, by the way, but it's obviously a lower fee than alternative assets is probably something like 0.1 or 0.05 of the difference. And the reason why we feel comfortable with 39 is when we roll the business forward and we look at the projections for our alternative asset business, reasonable market assumptions around equity and even with the significant opportunity in fixed income, one is neatly sort of offsetting the other and we cut out to around 39 basis points. So we think that's a reasonable guide. Appreciate that forward-looking comments on fee rates are challenging. Thanks for that additional color, that's helpful. When we think about -- you guys have spoken a lot about the bond outlook and the increased interest. So that's all very, very helpful context. One of the components of concern that I hear from investors is the deterioration that we saw last year in Western's performance track record. Can you speak to whether or not this interest is pertaining to some of those strategies that do tend to be larger that has fallen on to tougher times on the performance end of things, or is it into other products? Or is the interest happening despite that setback in performance because there's a focus on different sort of time frames and whatnot? Any additional color would be great. I mean I think the message that we've given is there's a lot of interest in Western. I mean their Core Bond and Core Bond Plus, are some of our biggest grossing sales funds and Core Bond netted $1.5 billion this quarter. So Brennan, I think we feel really good about Western and the flows there. I would say that also Core Plus is still our biggest selling fund, right? They had some performance challenges but clients stuck with them, they've been doing this for a long time. And again, 89% of their AUM outperformed for the quarter. The other thing I was going to add to that is again, maybe it's an obvious statement. But on the institutional side, in particular, investors expect to have a consistent process and a view from a portfolio management perspective and Western is stuck to what they said they're going to do and this is the outcome from that. But we have a very broad range, as Jenny mentioned, of other views internally. And so we have a lot of fixed income opportunities, whether one works well or not, there's others that will offset that. So a lot of opportunities across the franchise, both public and private markets. So my question is on retail alts. Many peer alt firms have been building out their retail distribution efforts pretty aggressively in â20. But Franklin has always had a very strong retail effort going back kind of more than 20 years. So I wanted to hear you articulate how you're using your global retail distribution really as an advantage for your alt affiliates like Clarion, Lexington, Benefit Street? And also how the affiliates are also leveraging their own local sales teams versus Franklin at the center? So I'll start and then, Adam, why don't you jump in. So I think look, retail alts is really complicated. And it's really complicated because you have to start by, one, you have to have the right products that sit in the right vehicles, which is tougher in these illiquid asset classes. Then you have to educate and convince the gatekeepers essentially at the distributors. And then you have to educate your entire sales force to be able to understand it. It is a different sale than say, a traditional mutual fund. And then you have to be part of the educating financial advisers on why this particular product with its characteristics make sense in the portfolio. And unlike an institution, I always say that one of the things I think many of the alt providers who sold historically to institutional channels, it is a -- convincing itâs institution, why this fits in, a financial adviser has to understand every end clientsâ liquidity needs, which makes it really tough at the tip of the spear. The good news for us is we have very good product offerings now with all of our managers between. BSP has multiple products with their BDCs and their integral funds. Clarion, with their CP Reef and their opportunity zone. We already -- K2 has quite a few products in liquid alt space. We actually also have -- and the Lexington is now just getting launched on iCapital. So we've been able to get quite a few products now Kace and iCapital, which is really important for the RIA channel so that they can handle the paperwork and the follow-up capital calls, which is one of the great pain points for advisers. But when we look internally, it was clear to us that you couldn't have a wholesaler necessarily take it all the way to the end sale. And so we've created -- we've talked about, it's been probably almost a -- it's probably been six months itâs kind of joint venture between our alternatives teams and our distribution team where we are hiring specialists to support the traditional distribution on the retail channel or the wealth channel to be able to drive that very end sale. And we've been in a phase of doing a lot of hiring there. And I can tell you that we feel good about the traction we're getting. Adam, do you want to add anything more to that? Well, you took most of it, Jenny. But what I would say is that on top of that, this is a great example of where we're able to use our unique structure in terms of brand. So our alternative firms have great brands in the institutional or less known in the wealth channel. So we're still really putting the brands forward the BSP, the Lexington, the Clarions and the institutional channel. But when we go to market in the wealth channels, we're going to the market at alternatives by Franklin Templeton. So that is really playing off of the brand name that resonates so well in those channels. And again, it's another place where we're using our general specialist model so that where our salespeople who have longstanding relationships and significant AUM in the wealth channel, they're going in as the lead, but they're introducing our alternative specialists, which we build out, its over 35 people now, and those people are just focused on the wealth channel. The other thing I would add to that is that we've invested really heavily in education because we think that the first way to get growth in the channel is product development, having the right product and the right wrappers. Soon after that, it's building education. So advisers understand how to use these products. After that, it sales, and that's where we have the alternative specialists working with our field force in concert with each other. And I'll just add one other thing from a finance perspective what it's worth is this is not a short term project or something like that in turn, this is a very long term, very strategic decision that we've made to invest in this separate group basically is between two other major areas of the firm, that requires its own separate marketing, sales, product strategy, education, as Jenny mentioned. This is a very expensive endeavor that we've thought through very carefully and we justified it by the fact that we have acquired leading businesses in the alternative asset markets that we think long term are highly interesting and applicable to the broader markets. But just as a reminder, we acquired these businesses because they had their own institutional growth and what we're talking about here on top of that is additional growth in the long term that we think we can capitalize upon. And as a mark of progress, we are currently in market with Clarion, with BSP, with Lexington and our Venture Capital Group, all of them in the wealth channel are actively raising assets. Thank you for the very comprehensive response there. I have a follow-up, and it's more of a CFO type question for Matt. But I wanted to get a little more color on your alt net flow definition in the $2.4 billion that you highlighted in the quarter. Is the inflow the initial sale, or is it when the fees actually turn on with the product? And then also, do you include realizations in the outflow or are they included in the market appreciation and other line of the AUM roll forward. No, the realizations are included in other marketsm, they're not particularly material for us itâs why we do it that way. As we continue to expand our alternative asset business, we'll continue to review that. I don't actually know off the top of my head on the $2.4 billion of positive net inflow what is fee paying, itâs probably 80% of it, but we'll come back to you on that specifically. But I'm pretty sure it's like 80%, something like that. I wanted to have another question on fixed income and understanding or acknowledging your comments on Western and those funds still being on the gross sales side quite strong. But if I look at gross sales since you've owned the Legg Mason, this was the second lowest quarter for gross sales. So maybe talk about where you're seeing the traction in gross sales outside of maybe the Core and Core Plus. Just fixed income, this was the second lowest gross sales number since you've owned Legg Mason. So we've already talked about Western. So I assume there's something else maybe having some slowdown. Well, what I would say is that if you take a look at where the yield curve is right now and look at the shape of it and look how much you can make on the short end, and it's a record quarter for us in cash management. So a lot of that really is just, I think, a temporary phenomenon where fixed income investors are able to park money on the short end, get a pretty attractive yield and wait for the right entry point. But munis, we're getting good traction in munis. We have some -- in the SMA channel. We have some muni ladders that are very successful for us. I mean actually, from a diversification, 11 of our top 20 net inflows are outside our largest 20 funds. So it's actually a pretty broad diversification. And US income, some of the multi assets have components in them, obviously, that are fixed income that are getting flows too. And then just thinking about performance fees, I know obviously very hard to predict, but it seems like you are seeing redemptions in your liquid strategy. So maybe get a sense of kind of where performance sits broadly within the alternative universe and how we should, I guess, maybe performance fee eligible AUM today versus a year ago, high watermarks, other kind of maybe numbers or things you can put around to give a sense of this year's outlook for performance fees maybe versus last year or other time periods? So performance fees, as you know, as you just said, difficult to predict. But given the strong performance in related funds, and we do have strong performance I think literally, I mean, I think it's in 90% of our alternative asset funds are in the area where they're outperforming or in strong performance territory, let's say, in the performance fee zone. We expect to continue earning performance fees on a fairly consistent basis at this point. And that's why we've guided to $50 million per quarter, up from -- you may remember, several quarters ago, we used to guide 10 to 25 or something like that, but that's now up to $50 million per quarter, and we think that we can achieve that on a fairly consistent level. There are, however, as you alluded to, there are some episodic characteristics within performance fees related to time and redemption type activities. So for example, in the last quarter that we reported, I highlighted, I believe, on the call that we had a redemption that led to a $55 million additional performance fee for the quarter out of Clarion. So our guide is going to remain at $50 million. And all I'd say is that we have, based on our performance and our mix of assets and the time horizon with the funds, we have potential to exceed that as we continue to grow our alternative asset business. But I'd certainly say forward looking performance is looking strong, both in absolute and relative basis. We've expanded alternatives significantly, it's the reason why we guided higher to $50 million per quarter. But as you know, last year, we had $500 million in performance fees. So it shows what the potential is. But again, we think $50 million is the right guide for the quarter. I just have one kind of broader philosophical question. You're obviously getting really good traction with your ETF suite and news flow kind of suggest that you've been more active converting mutual funds to ETFs than some others. Obviously, bond ETFs appear to be getting a lot more traction over the last year or so. So could you speak to your willingness to get more aggressive with ETF conversions for some of your more larger strategies? And what is the debate kind of for and against going down that road? So first of all, we're really proud of our ETF franchise. And the team that we have -- they're all very experienced, they were originally with BGI back then. And we've launched the suite today in our -- I think at the end of the quarter, we announced it was about $13.3 billion in ETFs. We had 44% were active, 30% passive and 26% smart beta, and we were really one of the first multifactor smart beta managers. In this quarter, even though on $13.3 billion in AUM, we had $1 billion in net sales. So clearly, one of the fastest growing. Of that $200 million was essentially a conversion from mutual funds. But the other $800 million came from actual sales in it globally. So US, Europe, Canada, Australia. So what we do is, we'll look at a strategy, and we consistently hear that distributors don't particularly want an ETF and a mutual fund to be exactly the same because that can cause suitability issues. And so you have to be really careful about differentiating the ETF and the mutual fund. And in the case of the two that we converted, we thought they were really well positioned funds but probably not getting traction in that channel. Many advisers sell just ETFs, so they won't sell a mutual fund. And so in order to get traction with those advisers, you actually have to have ETF. So we're always looking at our lineup and deciding whether or not it makes sense to do a conversion. There's a little bit of complexities in doing a conversion because sometimes the existing fund holders may not be able to -- want to hold an ETF, and so you have to go through that process. But anywhere where we think there's well performing, but not getting traction in mutual fund, we will consider whether it should be converted into an ETF. And the only add I would add to that is we have to look at who holds the mutual fund to the extent, for instance, that it has a large retirement or 401(k) holding that can sometimes make the conversion a little more complicated. As Jenny said, our ETF strategy, I think, is pretty differentiated with the 44% in active. It's also global, that's the other thing I would add to. So when we look at that $1 billion flow, about half of that came from outside of the US. And we're also willing to put differentiated asset classes like our infrastructure income into an ETF. I think that's a little different. And then the final piece I would add is that even when we're in passive, which is the minority of our ETFs, they're in niches where we think we can be highly cost competitive and differentiated like single country ETF. And I think the other thing I'd add, and I think we put this into our prepared remarks. But it's not insignificant point that we've reorganized this group in ETFs to be more focused with their own sales effort embedded within the team. And it's similar, frankly, to what Jenny has reorganized around our multi-asset solutions area. These are the areas where we are heavily investing with resources and focus as opposed to them being part of a very large group that's attempting to do lots of different things. And we're seeing some green shoots from that reorganization work and focus across the franchise, and I point out both multi-asset solutions and ETFS in that regard. So I wanted to ask on real estate. So with Clarion's just over $80 billion or $80 billion or so, there's clearly some challenges facing the industry. Can you just provide us with an update on what you're seeing from this asset class and how you think investor sentiment could progress from here? And then if possible, could you just touch on how much that contributes to the performance fees and other revenue? Yes, I'll take the first part of that question. Matt, I'll have you touch on the performance fees. So remember, Clarion has primarily been an institutional manager. So it's only been recently that we've brought them into the wealth and retail channel. And so with respect to that, it's a very small -- CP Reef is a small fund that is growing quickly and there's been minimal redemption requests there. From the institutional side, first of all, Clarion's real estate portfolios have focused on industrial, multifamily, life sciences, self storage, that's 85% of their portfolios and those have held up incredibly well And as a matter of fact, I think their performance has only dropped about 1.5%. With respect to redemption cues, you have seen them move from positive cues to now negative requests. And in those they're not, at least from institutional clients, there's a real recognition that you don't want to hurt the value of the portfolio by creating false liquidity. And so they actually can choose whether or not they want to meet any of those redemption [requests]. And on average, they target to try to meet about 10% of the redemption cue and that's off at about 5% to 6% of the NAV per quarter. So it's very different than the issues that you have in the wealth channel. And again, they're really new to that wealth channel. CP Reef, I think, is structured very similar to BREIT as far as the kind of [integral] nature of those redemption. We think that's the right way to do it for that channel. But again, their clients today are really primarily institutional clients. And the redemption cues mostly have been -- it has not been performance issues, because they've done very, very well in performance. It's been the fact that other parts of the institutional clients portfolios haven't performed well and they needed to rebalance because now they're overweighted on real estate. Matt, do you want to touch on performance fees⦠One very important correction, Jenny, -- sorry to correct you. But one very important correction is that when Jenny mentioned about basically the 10% of the cue being paid out, that's doesn't translate into 5% to 6% of NAV per quarter, it's 5% to 6% of NAV per annum, that's for the year. So I just want to make sure that's very clear. And that's their choice. Just to be clear, as Jenny also mentioned, there isn't any forced liquidation in an industry like this where it wouldn't necessarily be the most productive for the portfolios or for the investors. So in terms of performance fees, frankly, Clarion is quite significantly above the threshold. So we would be surprised if we didn't see continued performance fees being paid on a meaningful portion of Clarion funds over the next year or plus. Matt, a question for you. I wanted to come back to expenses. So I hear you on a net basis that it's about 2% to 3% lower. I was hoping you might be able to elaborate on how you're able to achieve that? What would you say are the top three to five areas that are most meaningful in driving that decline. And do you view this as a one year efficiency drive or would you envision limited to declining expenses as you look out beyond this year? I think we certainly look at these expenses being structural expenses beyond the year. Obviously, there's always a portion of variable expenses do you expect to come down as a function of the market, and we're very disciplined around that. So it's almost a mix of those two things. But because we've been through a meaningful merger involving hundreds of millions of dollars of expense reductions and efficiencies, it basically forces you to look very carefully at all of the operations. And look, we've doubled the size of our company from an assets under management perspective. We're much more diversified across the franchise. Our operation is, therefore, quite a bit more complicated. But at the same time, there's some interesting synergistic work that can be done to gain leverage from having that type of operational expertise across the franchise. We also are very fortunate to have sense of excellence in Hyderabad and in Poznan, in Poland, and we intend to further capitalize on the fact that we've been in those places for many, many years. It's not a new thing for us to have those centers of excellence. So we're very focused on that. It's really a combination of being obviously, in a difficult market being more disciplined around who do we really need to hire, who do we really need to replace when we have departures. It's executing upon the voluntary buyout and reducing layers in the organization and expanding and analyzing span and layers of control. And it's the execution plan around our transactions where we've really been able to take more cost out than we anticipated. And a lot of that's gone to the margin and given us margin expansion opportunities on the upside, but also reasonable amount has gone into investing in the business. So we're always careful to balance getting the margin right and managing to keep investing in the business. We've also -- while we've done the largest outsourcing already on the operational side with fund administration and transfer agency, the other big project, for example, we're looking at across the firm now is our investment technology operation. And that's a really major one, multiyear project. And all of our specialist investment managers are on board with it. We believe that having a consistent system and vendor across the firm makes a ton of sense. We can have specialization still in the individual groups. But it's things like this that makes a material difference in how efficient we are, how effective we are and candidly, how we work together across the company. This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO, for final comments. Okay. Well, I just want to thank everybody for participating in today's call. And once again, we'd like to thank our employees for their hard work and dedication, and we look forward to speaking to all of you again next quarter. Thank you.
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I've often said to many of you during investor meetings that building mines is not easy and the last couple of months for Jervois certainly demonstrated that. But despite the recent winter challenges in Idaho, I'm nonetheless pleased with our overall progress as a company. Following the USD150 million equity raise in November 2022, we're now well capitalized. Clearly, like you, we're disappointed with how our shares have traded since albeit the cobalt price has decreased from $23 per pound since we commenced the institutional wall crossing process to $17 per day, largely associated again with China and China's oversupply. But let me be clear that we remain extremely positive on the outlook for the cobalt market. Whilst we're cognizant of investor feedback to reduce cobalt inventories, we do not believe that this is the right time and the price or demand cycle to aggressively pursue this in a commercially unbalanced way. The financier of our physical cobalt and substantial shareholder, Mercuria remains supportive of this strategy. And we strongly believe it's the right approach to maintain pricing and product upside for our shareholders to when China does turn back on and the cobalt market rebounds. We placed material sales tonnes into a European gigafactory in Q4, and the OEM inquiries for 2024 and beyond are now large numbers, far more than what we can provide today. This is very encouraging, and it's an early endorsement of our strategy to maintain 100% ownership of all assets while over November equity raise. At ICO, mine development is now complete. Surface construction is in the final stages. As I noted, whilst it's been a difficult 6 weeks in terms of construction, not being where we would like, we will be producing concentrate by the end of this quarter. Jervois Finland, the physical cobalt did reduce over the quarter, and we expect this to continue across 2023 until we're back at target levels. James will touch on that later in the presentation. The financial results have been -- continue to be affected by the flow-through of feed costs associated with purchases in a higher price environment. The reality is that Jervois Finland and its commercial structure wasn't as well placed coming into a cyclical downturn in the cobalt market as we would have liked. I'll touch on steps we've initiated to improve this situation later. Sales have largely been in line with expectations with revenue impacted by the lower cobalt price. SMP Board approved FID to restart the refinery during the quarter. Carlos Braga has been appointed to lead and he's continued to expand the breadth, capability and depth of the owner's team, Ausenco, are well underway in their early works. Detailed 3D scanning at the plant is now over 3 quarters complete, tenders for long-lead items are on track. There's been a number of site inspections recently and the main site contractor award is proceeding and will be awarded towards the end of February. The market continues to be extremely supportive of Sao Miguel Paulista. Customers are interested in the product. Nickel cathode premium and underlying element prices are both strong. Mixed Nickel Hydroxide or MHP and cobalt hydroxide are both trading significantly below the assumptions underpinning Jervois' decision to restart. And finally, on highlights, our engagement continues with the U.S. government. In March, Treasury will issue its regulations interpreting how the Inflation Reduction Act will be applied. With the right support, Jervois is well positioned to materially support the United States deliver on its desire to better protect critical mineral supply chains for its industry, environment and national security. The benefits to America and its industry of having domestic supply of critical materials is utmost importance in a world, which unfortunately seems to be growing more geopolitics complex. In the United States, there is an increased understanding of locally sourced critical minerals extracted with high ESG standards or to command a premium. There is also a rising comprehension of the importance of domestic cobalt refining, of which Jervois is also eager to step up with the right partnership model. If you can move, Ashley to Slide 5, please, financial overview. Group revenue for the quarter was $73 million, leading to full-year 2022 turnover of over USD350 million. Q4 was a disappointing quarter in terms of earnings with negative EBITDA realized. This led to full-year 2022 adjusted EBITDA for Jervois Finland of USD19 million, partly due to the unwind of higher-priced inventory purchased in prior periods on the current quarter as the price decline as well as several one-off factors. Our internal forecasts are expecting a return to positive and increasing EBITDA progressively across 2023. We have a strong balance sheet, which is important in a period of market uncertainty. We ended the year with more than USD150 million in cash and USD110 million in physical cobalt. Turning to Slide 7 on cobalt markets. I mentioned in my introduction, the cobalt market, as we do believe the outlook is increasingly positive despite recent and current trading commissions. OEM automaker, direct order requests have increased markedly and from their suppliers. Jervois is also actively delivering cobalt to new gigafactories. Business and buying from traditional cobalt consumers outside batteries remained stable but subdued with much dependent on how China leaves COVID-19 behind at June 2023.Catalyst sales continue to be solid into the oil and gas sector, with customers expecting growth in purchasing requirements. Ceramics has been weak, is the uncontracted sector highly exposed to Chinese competition. High energy costs in Europe have reduced furnace utilization rates of cobalt demand, which is using pigments. Chemicals and powder metallurgy broadly remained stable across Jervois' customer base. Aerospace remains an outlier in terms of performance, outperformance. Markets are exceptionally strong, which is great news as we move forward toward a restart of Sao Miguel Paulista. Turning to Slide 8, sales performance. I'll touch briefly on this slide. Sales volumes were pleasingly stable, I guess, given the weak market backdrop, helped by increased sales to the battery sector that I mentioned earlier, with inventories deliberately remaining above normalized levels for now. And James will touch on that later in his section. I'll now pass across to James for the financial performance of Jervois Finland. Thanks, Bryce. Turning to Page 9. We can see the quarterly revenue chart on the left-hand side showing revenue for the quarter of USD73 million. Revenue was 14% lower than the prior quarter and was in line with the lower cobalt prices quarter-over-quarter. Sales volumes for the fourth quarter were good against a weak backdrop and substantially in line with Q3 and the prior guidance range that we issued in October. Adjusted EBITDA was lower in Q4 '22 with a loss of $7.1 million. 4 factors impacted the EBITDA result. Firstly, lower cobalt prices, which as noted, declined in the fourth quarter with the FastmarketsMetal Bulletin SG low price at 31 December sitting at $18.75 per pound. Secondly, feed costs are realized in the profit and loss account based on the average cost of inventory at the time when finished goods are sold. For the current period, costs realized in the profit and loss account included raw material costs linked to purchases settled in prior periods at higher cobalt prices. As we showed in our last quarterly update, back in October, temporary margin compression has occurred through the second half as the cost of cobalt raw materials purchased in higher price periods and how will inventory flow through into the P&L. We managed price risk for our raw materials inventory based on how purchases are priced under the structure of our supply contracts, including QPs. However, a proportion of our inventory is fully priced at any point in the cycle, and therefore, we do generate inventory gains and losses that flow through to EBITDA. Bryce will touch later on steps we are taking to improve our flexibility in commercial outcomes comparing to future cobalt price volatility. Thirdly, we recorded a one-off assay adjustment for Umicore, the refinery operator at the Kokkola Industrial Park. The adverse impact of this was a $3.7 million adverse impact to adjusted EBITDA. Umicore are conducting a review of assaying procedures and Jervois Finland is engaging with Umicore as their audit progresses. Finally, higher consumable costs also adversely impacted the results. A key example of this is caustic soda prices, which reached multiyear highs in the fourth quarter. Caustic soda is the largest consumable cost in the Umicore operated refinery process. Jervois Finland's share of refining consumable costs are incurred as part of the tolling charge under the refining capacity agreement that we have with Umicore. Despite the impact of these severe headwinds in the market, our operations continue to perform well. We retain a sharp focus on addressing cost pressures, maximizing efficiency and managing our product mix to generate the best possible margin outcome for the business. Full-year 2023 sales volume guidance for Jervois Finland is 5,300 to 5,600 metric tonnes a year. The outlook for 2023 will be influenced by the pace of the expected demand recovery, including links to the post-COVID restart in China and demand from the growing battery segment. A return to positive EBITDA is expected if cobalt prices stabilize or rise. Turning to Page 10, cobalt inventory volumes were approximately 155 days, representing a 5% decrease relative to the prior quarter. We have previously guided the market that the optimal range is to add 90 to 110 days of inventory on hand. Our 2023 business plan for Jervois Finland is underpinned by commercial and operational initiatives that are expected to support delivery of a reduction to around 110 days prior to this calendar year-end. We plan to execute this inventory unwind in a disciplined manner. And as we release cash from working capital reductions, we intend to use our cash to repay the Mercuria loan. The key purpose of the Mercuria facility is to buffer temporary working capital increases due to higher cobalt prices or spikes in inventory volumes, and we draw on the loan for that purpose during 2022. As working capital normalizes, it is prudent to pay down the loan and reduce leverage in the business. Finally, in accordance with accounting standards, we reviewed the inventory recorded in our balance sheet at 31 December to assess whether the cost recorded was in excess of the inventory's Net Realizable Value. We determined that the cost was more than NRV at that point and recorded a USD23 million non-cash charge in the quarter. These types of accounting adjustments are rare in the history of the business and have only occurred historically during environments with extreme price volatility, such as what occurred this year when the price fell from historical highs of near $40 a pound in May to cyclical lows at the end of December of around $18 a pound. In view of this and the non-cash nature of the adjustment, we have excluded its impact from adjusted EBITDA. A reconciliation of statutory profit to EBITDA and adjusted EBITDA is included in the appendix of the presentation. Bryce, back to you. Thanks, James. Turning to Slide 11, with regard to -- I thought it appropriate to pause a little now and provide context in terms of how we're looking at Jervois Finland, given the performance of the business over the last 6 months, the results of which have clearly disappointed all of us. Firstly, and most importantly, the Kokkola cobalt refinery manufacturing complex remains the leading site globally in this industry. It is without peer and changing world geopolitics makes it even more important. We have taken away learnings from the cyclical downturn. Our commercial team has taken steps to improve the flexibility we have for supply arrangements into Jervois Finland. Many of you will remember when we raised equity purchased the business from Freeport, we disclosed that Jervois Finland had 70% to 80% volume protection against cobalt hydroxide movements. And then in the years preceding our purchase, the average cobalt payability the business had achieved was around 70%. Including supply contracts that were linked to the index, the volume protection approached 90%. This level of volume protection provided security in a normalized cobalt market, but at the expense of flexibility during a downturn. Jervois has been contractually obliged to accept deliveries of raw materials, which it did not require and at prices above market. Our commercial team is putting steps to adapt supply and [deferment] to better reflect the changing market conditions. We're also seeing this philosophy flowing across into SMP, where we have not yet signed an MHP contract. It's easy to buy materials in a buoyant market than it is to sell or renegotiate them during a downturn. You'll also remember during the third quarter last year that when the Chinese market collapsed, Jervois' spot cobalt sales essentially evaporated. Spot business is typically priced and not ESG sensitive. And when Chinese producers were unable to sell domestically, that flooded export markets. It will not happen overnight, but with the rise of battery demand and the contractual nature of its purchasing, we will be able to switch a higher proportion of our sales to contract over time. The above supply and sale circumstances led to an involuntary buildup of a long inventory position at a time when Jervois' traders would have preferred otherwise. The CME is establishing itself as a platform for the industry to manage risk and we expect this will be a tool now for our future, but it wasn't available to us last year. Finally, Finland is also restructuring. Whilst we did reduce production across recent market weakness, we are also planning to introduce greater operational flexibility to ramp up and down in the future as customers require. Turning to Slide 13, just on to Idaho. So, Peter and I have both traveled through site in recent weeks to witness first-hand the challenging conditions the construction team is experiencing at 8,000 feet. The good news is the mine is ready. Underground shop infrastructure, sumps, fuel services are complete and sufficient development in all phases are opened to support ramp-up across the first half of this year. The surface progress has been extensive, but overall disappointing. Prior to the Idaho winter arriving, we're making excellent progress in November and remained on target. Unfortunately, persistent Idaho winter exposed our vulnerability to the extraordinary pressures affecting construction activity in the United States today. Whilst we had the accommodation camp operating, it still meant that much more than half of the surface workforce was commuting each day from Salmon, a 2-hour drive at the start and the end of each shift. Even by Australian standards, turnover and staff retention challenges we had were staggering. 50% of the work crews scheduled to return after Christmas did not. Concrete productivity was materially impacted over the winter, just 25% of an already conservative plan. This had follow-on impacts on the mechanical, electrical, piping and instrumentation work streams. All equipment and buildings are thankfully now almost installed and enclosed with the concentrator finally due to be shut up this week in Idaho. And this will be the first time that all piping and instrumentation crews will be working in heated buildings. Productivity in the last 2 weeks has reverted back to November levels and the site staffing levels have improved markedly. Retention of trades and productivity are affecting every major work site in the United States. For us, turnover remains high and the winter is not behind us, but we do have a plan to ensure that commercial concentrate is produced at the end of March, and the operation ramps up the capacity by the end of the following quarter at midyear. Delayed schedule means more costs, and we now estimate that the final capital cost will be 15% to 25% above the budget of USD107.5 million. Turning to Slide 14, please. Idaho expansion drilling. I'd just like to touch briefly on drilling at Idaho because despite our recent challenges, we still consider the outlook for the site is unique and its future economics are enormously levered to the price of cobalt. Outside the DRC, there simply aren't ore bodies of this grade and our conviction remains that the region of potential geological upside is significant. In 2022, we drilled another 60-plus infill holes with all intersecting the modeled and targeted ore body. 6 step-out or expansion holes were also drilled, again, with all encountering visible mineralization. Assays from 2 of the 6 holes were just returned and were published in a stock exchange release today. We have an extensive program planned in 2023, including the Sunshine deposits, where historic resource was defined by over 100 holes and 19,000 meters of drilling. The RAM deposit remains open at depth and we are looking forward to having as many drills underground as possible in coming years. Often here is the example that a cobalt or where [F mine] is not like iron ore or zinc. Understanding the full extent of the mineralization as rapidly as possible is very important for host governments and sponsors alike. Turning to Sao Miguel Paulista, Slide 15, please. So, I touched on San Miguel in my introduction. It underpinned our recent equity raise. The macro is working for us, not against us as it has in other parts of the business. And we are genuinely excited to be restarting such an important facility for each of Sao Paolo as a city in a state and Brazil as a country. I spoke in the introduction around current nickel markets. During our recent equity raise, we also spoke around how we believe these changes are structural, not cyclical, and how they represent a tailwind for Sao Miguel. We continue to strongly hold this view. The current LME nickel price is USD13 per pound. Our feasibility study used 8. Current nickel 4 by 4 premiums into the U.S. Midwest are around USD1.50 per pound. Our feasibility study is nil. The key input, MHP is currently trading in the low 60% of LME. We used 75. Thanks, Bryce. Turning to the next slide on Slide 16. The cash position for the Group, as you can see on the chart at 30 September was $52.3 million. The completion of the equity raise significantly enhanced our financial strength and flexibility, as Bryce referred to, underpinning the SMP refinery restart and so the ramp up of ICO in 2023. And you can see those cash coming to the company through $149 million bar on the chart. Capital expenditure at ICO continued during the quarter with approximately $40 million of cash spend linked to the advancement of ICO and related activities. Other notable items included the $15 million drawdown from Mercuria facility in October and $6 million allocated to restricted cash account to fulfill our regulatory requirements for an environment bond at ICO in October. Overall, we continue to maintain a balanced funding strategy that supports our growth objectives and provides flexibility to navigate market volatility. In relation to our assets and our portfolio, while our focus remains predominantly with the delivery of our business plans for ICO, SMP and Jervois Finland, we are progressing Nico Young. Relevant land access agreements and permits in place for the drilling program are scheduled to take place this quarter. Jervois has been awarded $0.5 million grant from the New South Wales Government's Critical Minerals activation fund and will use this grant for the progression of studies. Thanks, James. So, just on Slide 15. At our last quarterly call, I noted how excited I was about this year for Jervois. Nothing in that regard has changed. We undertook an equity raise of scale to ensure we could retain 100% of each of our assets and we'll be in a position to optimize the commercial terms on how they product order into the market. Our balance sheet is strong. As our share price is in Australian dollars, for context, we had around AUD370 million of cash in physical cobalt at year-end. Despite the impact of the cobalt price across the second half of last year, we remain increasingly optimistic on the 2023 outlook. Let's see what the latter half of the year will bring, especially as the rise in cobalt demand into EVs continues to grow at pace. I was just looking at the Idaho Concentrate Offtake agreement. I guess that's one of the key catalysts that we'll look for this year. I guess, how many parties are you sort of talking to here? And what's the time line that we could expect on an offtake agreement? I think numerically, in terms of externals would be half a dozen, but they're not all equal in terms of the intensity negotiations. And obviously, we would be looking to place product over the course of the year. Now clearly, we have a little more time given the delay in Idaho, but equally, the discussions that Greg and his team are having are progressing. And we're balancing in terms of how we place material for short term versus potentially longer tenures, et cetera. And clearly, I mean just we're bullish on the cobalt market. And so, we're not necessarily rushing today given where we expect the market to move over the course of the next 3 to 6 months. Yes, want to get through here, just looking through the results. Maybe just a quick comment on the cobalt market, if I may. Are you seeing anything there? We've seen that the copper price runs quite strongly this year, but it hasn't seemed to translate into the cobalt market with China reopening. So, just wondering if you guys are seeing anything on the demand side of things yet and you're hopeful that, that will improve into 2023, but has there been any indications is that occurring yet? Thanks, Adam. I think if you look at forward cobalt prices on the CME, there's been a significant uptick in activity and the price is above the spot price that we're talking about. This is largely OEM buy, which is positive. And we're -- again, we're seeing that those inbounds and starting to place material in volume into that part of the business, which is growing as well. So, we're extremely optimistic across 2023, particularly beyond in terms of what it means. I don't think that China can reopen and cobalt doesn't move. There's no reason why cobalt on copper to use your example, should be materially disconnected. I think that once China reopens, it will restock and some of the pressures that you've seen in the last months as they've shut their economy, et cetera, will rebound and, we believe, rebound aggressively. Clearly, we're not banking on that. Our internal budgets that James and his team prepare don't include aggressive assumptions. But we're positioning the business and deliberately in the positioning the way that we're managing the inventory as well to ensure that we're not giving up too much at what we perceive to be close to the bottom. And maybe just on Jervois Finland, I know you alluded to looking into changing some of the costs there. Just wondering if you could give more color around that? Where we could expect a turnaround here? I see that you mentioned that you expect EBITDA prices, EBITDA to come back positive if prices stabilize through the year. So, what other optimizations can you do there to just get operating costs down? I think let me just say, the Jervois Finland results that you've seen in 2022 are largely a result of an inventory position, not of the operating performance of the site per se. That said, James did touch on some of the pressures that are coming through on the cost side, particularly through the tolling arrangement with our partner. The flexibility that the site has it's -- obviously, it's boxed in by seasons. And so we're looking at ways where we can kind of improve the flexibility there, introduce more workplace flexibility within, obviously, the structure that's committed in Finland and introduce mechanisms to really allow us to have much more flexibility on the commercial side in terms of when those supplier contracts are managed and when declarations are made. The book that we've got now in terms of supply and also on the sales side, actually looks very different to what it did when we took over the business and we believe that's going to provide -- it's going to allow the actual fundamentals of the business to come through more clearly in the operating results of Jervois Finland over time. James, is there anything you'd like to add to Adam's question? I mean maybe just a bit of color as well that some of the consumable prices, there are some cyclical factors to do with multiyear highs for caustic prices and some other consumables. And I think realistically, most would expect some of that to normalize over time as well. So, what we've seen in the fourth quarter doesn't necessarily translate into 2023. And we believe that there will be a normalization in terms of pricing of some of those commodities and consumables, particularly the geopolitical situation stabilizes and we should see some relief to get translated through to the operating results of the business in due course. And maybe just at ICO, if I may, a bit of an issue ramping up production there. There was some mechanical piping electrical instrumentation. Is that mainly due to the winter that you've had up on site? Or is that something else that has occurred? And is this something you think you've got rectified now or is that still ongoing? Winter was a significant factor. So, this is work that shouldn't have been occurring outside, but for a number of reasons was. The U.S. construction environment is applying. So every site, whether they're at 8,000 feet under snow have retention issues and cost escalation issues. But certainly, what we've realized is we're certainly at the wrong end of the stick just given we are at 8,000 feet and anyone who's on our site can go and work at another site at a more temperate climate if they so choose. If you looked at the productivity we had in November, most of those mechanical, electrical instrumentation, piping, that they're running kind of, I mean 4%, 5% progress per week. And then December, you will recall that there was an exceptionally severe winter period across all of North America. And we essentially lost December, first 2 weeks of January because of the retention issues. So these are trades, which typically don't work in these conditions and with the commute and it's just really compounded a lot of the issues which are affecting all projects in the United States. But certainly, we weren't able to manage them as effectively through that winter period as we thought we were able to with the introduction of a camp just through sheer lack of beds. And we've got -- obviously, we've got people doubling up so we have a day shift and a night shift in the camp, by putting bunks, we're paying people to double up to try and keep as many people up on site as we can for this last push to commission the facility. Mid this week, we will have the concentrator finally being closed, fully enclosed. The mill has been enclosed, obviously, for a significant period of time, you would have seen from the opening. But having the concentrator farming close and all of these trades working inside, that's going to -- that's what -- really what we need to give us the final push to the finish line and just get the project done, commission and everyone off the hill who's not on the operations team. Just on ICO, you clearly answered it slightly there. But just with regards to workforce availability, you said how you're addressing it, but can you sort of tell us has that stability? Have you -- have those measures being able to stabilize some of that workforce turnover at this point in time? They're better. Still not great, Mitch. It's still not great, but we've doubled up on the bonuses, which is part of the capital increase that you're seeing, so the retention and balloon payments that the site team received now as they leave are significant and we have seen a moderation in the last 2 weeks. Productivity has picked up in the last 2 weeks back to where we would needed to be in the November type area. And if they maintain that to the finish line, then that's what we're hoping. And it's really just around keeping people there as long as possible. Every time we lose someone, they have to come -- their replacement has to go through 5 days of inshore training. It's just a disaster for productivity. And the turnover rates have been pretty exceptional. And then obviously, the inclement weather is not helping. Should we think -- and the plant will be designed to break through that. But should we think about any cyclicality to production once it reaches steady state? Will the winter months impact our access to site and/or any productivity? I think winter will always impact access to site because I mean right now, we shut down access when there's a storm coming through. And right now, there's -- we're in the midst of the storm coming through this weekend. So -- but equally, once you're in operations, there's -- we're only producing 1,200 tonnes of oil per day and that amount of generated concentrate coming off of the hill is because we're allowed to, so there's plenty of makeup capacity. And so I don't anticipate that we will have similar type issues once we're in operations. But it's -- let's be clear. I mean this is -- I spoke in my comments around the DRC like ore body that the logistics to get into this are not what we're used to in Australia. It's a great ore body of small scale with significant upside potential and there's nothing else in the United States like it, but equally, this isn't going to sit at the bottom of the cost curve. It's not going to produce as much cobalt per year as some of the sites that team members of Jervois had stewardship in the past like [Miniere du Haut-Katanga] produce per month. So, it's just not going to sit on -- it sits at different end of the cost curve. And this also underlays the discussions that we're having with the customers in the United States. ESG matters and if ESG matters, this product should get paid for. Thanks. Just to close on cobalt, just to reiterate, we are extremely optimistic in terms of what we're seeing from terms of -- with regard to inbound inquiries and what cobalt, where it does look like it's going to move to. And we're on the verge of having three operating assets that are 100% owned, and it's now on our horizon. So, thanks for your support. And if you have any other further questions, don't hesitate to reach out. Thank you, Ashley.
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Good day, and welcome to Exponent's Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. All participants will be in listen only mode [Operator Instructions]. Please note this event is being recorded. Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate Web site at www.exponent.com/investors. This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent's most recent Form 10-K or 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our fourth quarter and fiscal year 2022 business performance, Rich will then provide a more detailed review of our financial results and outlook for 2023, and we will then open the call for questions. We delivered solid results in fiscal year 2022, growing net revenues by 7% year-over-year and expanding earnings per diluted share. In a year marked with evolving macroeconomic challenges and uncertainty, we continued to showcase the strength and resiliency of our business model. We saw strong demand across the business for Exponent's diversified portfolio of services through 2022. On the proactive side, our work in the consumer products, electronics, automotive and life sciences sectors were key contributors for the year. On the reactive side, we saw robust litigation related activity and a diversified portfolio of product safety and recall related work spanning multiple industries. As innovation and technology become increasingly complex, the critical nature of our insights uniquely positions Exponent to address our clients' needs throughout the product life cycle. Turning to our engagements in more detail. Within our proactive services, we saw strong demand for our working user experience research and machine learning data studies across multiple industries. Clients look to Exponent for our expertise in understanding the human machine interface from the cognitive impact of virtual and augmented reality to the interactions between vehicle operators and advanced driver assistance systems. They come to us when they need to acquire the most sophisticated, high quality and curated training data sets to drive machine learning algorithms because getting it right matters when it comes to product performance and safety. We saw increased activity in the life sciences sector related to regulatory issues as well as the safety and efficacy of health care products and treatments. Within the automotive sector, our work with electric vehicles around batteries was a key contributor to our growth year-over-year. Looking at our reactive business, we continued to experience robust demand for our domestic litigation and international arbitrations related work, particularly in the toxic tort and environmental litigation arena as well as advanced driver assistance system litigation. We saw strong growth in engagements around product safety and recall, particularly in the transportation, life sciences and consumer products industries. Clients are turning to us earlier in their investigation processes in order to benefit from our insights as they make critical product recall decisions. We saw our accelerated recruitment efforts materialize with 6% headcount growth year-over-year. While the landscape for top-tier talent remains highly competitive, we successfully increased headcount in key areas of the business where we have identified the greatest need and opportunity. We are encouraged by our momentum and are focused on strategically building our world class team to position Exponent at the forefront of innovation and to meet the dynamic needs of the market. Turning to our segments. Exponent's engineering and other scientific segments represented 83% of our net revenues in the fourth quarter and for the full year. Net revenues in this segment increased 10% in the fourth quarter and 8% during fiscal year 2022 as compared to the prior year period. Growth during the quarter and full year was broad based with continued strong demand for Exponent's services across the consumer products, electronics, life sciences and automotive sectors. Exponent's environmental and health segment represented 17% of the company's net revenues in both the fourth quarter and fiscal year. Net revenues in this segment decreased 2% for the fourth quarter of 2022 and were flat during the full year 2022 compared to the same period in the prior year. Excluding the impact of foreign exchange, net revenue for the Environmental & Health segment increased 2% in the fourth quarter of 2022 and increased 4% during fiscal year 2022 as compared to the prior year period. Growth in this segment was primarily driven by Exponent's safety related work, evaluating the impacts of chemicals on human health and the environment. Since our humble beginnings in 1967, Exponent has harnessed the power of technical excellence, objectivity and disciplinary diversity to help unravel the complexities of innovations as they become reality. Looking ahead, we will continue to evolve our differentiated portfolio of services to be at the cutting edge of our clients' needs. We remain focused on advancing our long term strategy by positioning Exponent to capitalize on disruptive trends and rising societal expectations for safety, health, sustainability, reliability and performance. I'll now turn the call over to Rich to provide more detail on our fourth quarter and fiscal year 2022 results as well as discuss our outlook for the first quarter and the full year 2023. Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the fourth quarter of 2022, total revenues increased 12.2% to $127.4 million and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 7.9% to $112.6 million as compared to the same period of 2021. The quarter's net revenue growth was negatively impacted by 0.7% from foreign exchange. Net income for the fourth quarter increased 10.5% to $22.5 million or $0.44 per diluted share as compared to $20.4 million or $0.38 per diluted share in the prior year period. EBITDA for the fourth quarter increased 3.1% to $31.1 million, producing a margin of 27.6% of net revenues, which exceeded our guidance. We expected the margins as we return to decline as people return to in-person engagement, both our employees and clients. Billable hours in the fourth quarter were approximately 354,000, an increase of 5.7% year-over-year. The average technical full time equivalent employees in the fourth quarter were 989, which is an increase of 7.3% as compared to one year ago. Highlighting our focused recruiting, utilization in the fourth quarter was 69%, down from 70% in the same quarter of 2021 as we continue to balance headcount growth and utilization. The realized rate increase was approximately 2.5% for the fourth quarter as compared to the same period a year ago. In the fourth quarter, compensation expense after adjusting for gains and losses in deferred compensation increased 7.7%. Included in total compensation expense is a gain in deferred compensation of $6.7 million as compared to a gain of $4.7 million in the same period of 2021. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock based compensation expense in the fourth quarter was $4.3 million as compared to $4 million in the prior year period. Other operating expenses in the fourth quarter were up 6.8% to $9.3 million, driven primarily by increased activities as our employees continue to return to our offices. Included in other operating expenses is depreciation and amortization expense of $1.9 million for the quarter. As expected, G&A expenses were up 49.5% to $7 million for the fourth quarter. The increase in G&A expenses was primarily due to half the cost of our in-person managers meeting and increased marketing and recruiting activities. Interest income increased to $1.3 million for the fourth quarter. Higher interest income was driven by an increase in interest rates. Miscellaneous income, excluding the deferred compensation gain was approximately $500,000 for the fourth quarter. Moving to our cash flows. During the fourth quarter, we generated $40.6 million in cash from operations and capital expenditures were $2.9 million. During the quarter, we distributed $12.2 million to shareholders through dividend payments and repurchased $13.2 million of common stock at an average price of $87.76. Turning to the full year results. For the year 2022, total revenues increased 10.1% to $513.3 million and net revenues increased 6.7% to $463.8 million as compared to 2021. Net revenue growth was negatively impacted by 0.5% from foreign exchange. Net income for the year increased 1.1% to $102.3 million or $1.96 per diluted share as compared to $101.2 million or $1.96 per diluted share in 2021. The tax benefit associated with accounting for share based awards for 2022 was $5.8 million or $0.11 per diluted share as compared to $10 million or $0.19 per diluted share in 2021. Inclusive of the tax benefit from share based awards, Exponent's consolidated tax rate was 22.6% for the full year as compared to 19.6% in 2021. For the year, EBITDA margin -- I mean, EBITDA increased 3.8% to $137.2 million, producing a margin of 29.6% of net revenues, which exceeded our guidance as expenses were still below normal in the first half of the year. Billable hours for 2022 were approximately 1,465,000, an increase of 4.2% year-over-year. Utilization for the full year was 73.8%, down from 75.1% during 2021. Utilization for the full year was in line with expectations, as we increased head count following the pandemic. Average technical full-time equivalent employees for the year were 955, an increase of 6.1% as compared to 2021. The realized rate increase was approximately 2.5% for the year 2022. Compensation expense, after adjusting for gains and losses and deferred compensation, increased 5.7%. Included in total compensation expense is a loss in deferred compensation of $14.1 million as compared to a gain of $14.7 million during 2021. This results in a $28.8 million change year-over-year. Stock based compensation expense in 2022 was $20.4 million as compared to $19.3 million in the prior year period. Other operating expenses were up 7.6% to $35.1 million. Included in other operating expenses is depreciation and amortization expense of $7.1 million for the full year. As expected, G&A expenses were up 54.8% to $23.7 million in 2022. The increase in G&A expenses was primarily due to the cost of our in-person managers meeting and increased marketing and recruiting activities. Interest income increased approximately $2 million to $2.1 million for the full year. Higher interest rates was driven by an increase in interest rates. Miscellaneous income, excluding the deferred compensation loss was $3.4 million for 2022. Moving to our cash flows. During 2022, we generated $93.8 million in cash from operations and capital expenditures were $12 million. For the full year, we distributed $49.2 million to shareholders through dividend payments and $155.9 million of share repurchases at an average price of $88.69. As of year end, the company had $161.5 million in cash. Turning to our outlook for the first quarter and full year 2023. We expect first quarter 2023 revenues before reimbursements to grow in the high single to low double digits and EBITDA to be 27.5% to 28.2% of revenues before reimbursements. For the full year of 2023, we expect revenues before reimbursement to also grow in the high single to low double digits and EBITDA margin to be 28% to 28.5% of revenues before reimbursements. While this is a step down from 2022, it exceeds our pre-pandemic EBITDA margin of 27.4% in 2019 by 60 to 110 basis points. During 2023, we expect the year-over-year growth in technical full time equivalent employees to be 6% to 8%. We are having success in accelerating our recruiting and are pleased that our turnover declined to approximately 16% in 2022 and we expect it to be approximately 15% in 2023. The increased headcount will likely lead to slightly lower utilization. We expect utilization in the first quarter to be 73% to 75% as compared to 76.5% in the first quarter of 2022. We expect full year utilization to be 72% to 74% and as compared to 74% in 2022. We still believe our long term target of sustained mid-70s utilization is achievable as we continue to build critical mass in offices and practices and increase the amount of proactive work. We expect 2023 year-over-year realized rate increase to be 3% to 4%. We expect the realized rate increase in the first quarter will be at the top end of that range. For the first quarter, we expect stock based compensation expense to be $7 million to $7.3 million and each of the remaining quarters to be $4.8 million to $5.2 million. For the full year 2023, we expect stock based compensation to be $21.5 million to $23 million. For the first quarter, we expect other operating expenses to be $9.5 million to $10 million. For the full year, we expect other operating expenses to be $40 million to $41 million. as we continue to grow our head count and return to our offices. In many of our offices, we are experiencing an increased presence of employees. We believe our office environment provides long term value as it supports collaboration for our interdisciplinary teams and staff development, which result in higher value for our clients and retention of our employees. For the first quarter, we expect G&A expenses to be $6.4 million to $6.8 million. For the full year 2023, we expect G&A expenses to be $27 million to $27.6 million. As a reminder, travel was still very low in the first half of 2022. So the year-over-year growth in G&A expenses is related to increased headcount recruiting, business development and travel. We expect interest income to be $1 million to $1.4 million per quarter. In addition, we anticipate miscellaneous income to be $600,000 to $800,000 per quarter. For 2023, we estimate based on our current stock price, that our tax benefit associated with share based awards will be approximately $3 million for the first quarter and full year. As a reminder, we had $5.8 million of tax benefit from share based awards in 2022, so this difference will reduce net income by $2.8 million and earnings per diluted share by $0.06. The tax benefit from share based awards is determined based on the change in value of share based awards between grant and issuance date. For 2023, we expect our tax rate exclusive of the tax benefit for share based awards, to be approximately 27.5% as compared to 27% in 2022. For the first quarter of 2023, we expect our tax rate inclusive of the tax benefit from share based awards to be approximately 18.5% as compared to 9.7% in the same quarter a year ago. For the full year 2023, the tax rate inclusive of the tax benefit associated with share based awards is expected to be 25% as compared to 22.7% in 2022. Capital expenditures for the full year 2023 are expected to be $12 million to $15 million. We are pleased to have delivered another solid quarter in fiscal year 2022, further emphasizing the strength and durability of our business model. As we look to the year ahead, we remain confident in our ability to continue to grow profitably. I will now turn the call back to Catherine for closing remarks. Thank you, Rich. For decades, Exponent has stood firmly at the forefront of engineering and scientific excellence. Our fiscal 2022 results demonstrate Exponent's resilient business model and financial strength in a challenging and uncertain macro environment. Our exceptional talent, coupled with our diversified and growing portfolio of services positions us as a vital partner to help address the evolving needs of our clients. As we look to the year ahead, we remain keenly focused on positioning the company for continued success and creating long term value for our shareholders. Operator, we are now ready for questions. This is Jasper Bibb on for Tobey. So I just want to ask about the margin guidance. Like how would you frame your assumptions for '23 with respect to office occupancy, business travel and recruiting versus your pre-COVID rates? On a per employee basis, other operating expenses for '23 looks pretty similar to 2019. So would you say you're effectively assuming things returning to normal there? Yes, we are. The guidance that weâve provided around other operating and G&A costs here as well as the structure is what we think will return us to a normalized level in 2023. And then following up on that, could you comment on what you're seeing with respect to consultant compensation rates and the ability to pass those along in your realized rate gains? So we are entering our period of time of doing our recognition and reward process that we do each year during the first quarter of the year. We expect, just as we've seen that we're going to have stronger pricing increases than we did a year ago, so that our realized rate will go up. We are expecting to deliver equal or thereabouts growth in the compensation or raises in salaries for our consulting staff. Last one for me. Are you seeing any impact from economic conditions on the proactive business at this point where clients might be pulling back spend or maybe postponing some projects that have been in the pipeline? Jasper, we're very attentive to looking for signs of impact to our client base. And so far, what we found essentially is that the critical nature of our work to our clientsâ operations has really continued to support the demand across the business. And what I mean by that, if you think about the elements that drive our proactive work, innovation, it's the urgency of that next feature set in the electronics industry or in the life sciences industry that they've got to get there for their next product launch if they want to be able to compete, right? So it's not so much about how many units they're selling, but it's about being able to get that new product out there, performing reliably and safely. We are driven by transformation in industries in terms of product complexity. The regulatory frameworks continue to raise the bar on safety and on health. And so what we're seeing, even if the clients are downsizing themselves, they still need to get their products through that regulatory framework, and that bar is going up. And so same is true of our risk related work on the proactive side. This is driven by climate change and extreme weather and increased demand on a stressed power grid. These are things that have to be managed even whether we're in a recessionary environment or not. So do we see clients potentially tightening their belts, looking more closely at scopes? Of course, we're not completely immune to that. But as we've seen historically, it really is the critical nature of our work that allows us to see that continued demand and that strengthen in the demand. A really, really nice top line guide. And what seems like a -- it's all relative, but a normal year in '23, at least relative to the past several. I'm just wondering if this growth algorithm of 6% to 8% headcount growth with 3% to 4% price and kind of rolling that up in the high single digit, low double digit top line growth? Is that a good way for us to think about the business over the medium to long term now? Is that your expectation for growth, or are there unique things about 2023 specifically that would have it be higher or lower than that expectation? So maybe I'll start off and respond to that quantitatively. And I think Catherine may want to add in qualitatively about why we're confident in this. But look, I think we are overall to believe that where we need to be is obviously, the pull in the market needs to be there that we are confident we can achieve over a long term. But we think that is going to come with growing that head count in that 6% to 8% range. And at times, hopefully, even striking above that. We do think that pricing will vary over time on the realized rate that we get out of that. The realized rate has a lot to do with turnover and hiring rates and things of that type. But we are -- will that always cover up near the 4%? No, I think it could be 2.5% to 3.5% would probably be a long term normalized realization range. But I think we can be slightly above that or at the higher end of those ranges this year, and that's why we provided that guidance around the 3% to 4%. And then in the utilization area, this year we have the utilization flat to down but I think over the long term, we view that, that utilization is actually gradually growing. You're going to have years of some fluctuation on that. But as I stated, we think that the overall utilization where it might be approximately 73% this year, give or take, over time that, that's going to move to the mid-70s and be sustained in that range. So that's going to be even to a plus over a year period of time that we can hopefully achieve there. So overall, that's why we believe that it is something that we can get up performing around that high single to low double digit mark and hopefully performing on the upper end of that. And just to add on to that, Andrew, from the standpoint of the marketplace, right? We've got to have, of course, the work for all of those folks to do, and that comes across many different sectors of the economy in terms of opportunity, right? It's industries and transformation that can create tremendous opportunity for us. Innovation creates opportunity. I mean if you think about the macro trends like the energy transition that we are facing, this is going to drive engineering expectations to the limit. This is a place where Exponent thrives in understanding the behavior of these innovations across the product life cycle, whether that's proactive or whether that's reactive. You think about life sciences, things like digital health, the emphasis on value demonstration with medicines and therapies. It's our job -- you think about automated vehicles and electrification, the complexity associated with those innovations is going to continue to drive work to Exponent. Our job is to understand what's coming around the bend, position ourselves with the talent, with the capabilities and with the relationships to win the business. But I think the opportunity landscape absolutely supports the model that Rich is talking about over time in the sort of high single to low double digit range. And then maybe just for my follow-up. You touched on it a couple of times, Catherine, on kind of digital health pharma space. I know it's a major growth focus for you and the organization as a whole. You've done a lot of hiring there over the past couple of years. Can you just give a little bit more of a detailed update on how that's going? I think it's only a couple of points as a percentage of revenue today, but you have ambitions for that to be much larger as a percentage of your revenue base. So I was just wondering if you could give a more detailed update on that effort? We continue to invest, as you mentioned, on the talent side, but also in the building of the client relationships, getting those relationships established so that we can be able to get those engagements started when the issues arise, and we are absolutely getting increased traction around that area. We have some public work that we're doing for the Center for Disease Control around data and COVID vaccine efficacy and safety. And so there are some very tangible and very forward-looking kinds of projects that we have won in that space. So you're right. It is still a relatively small percentage of the portfolio, but I'm pleased with the progress. Look, this is a long term opportunity and we are in the investment phase but we are seeing some of those early returns in terms of those performance indicators. So very pleased to see that and we'll continue to report back on that. Ladies and gentlemen, this concludes the question-and-answer session as well as today's presentation. Thank you all for your participation. You may now disconnect your lines.
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EarningCall_790
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Welcome to the Silicon Labs fourth quarter 2022 earnings release conference call. All participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After todayâs presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. At this time, Iâd like to turn the floor over to Giovanni Pacelli, Silicon Labsâ Senior Director of Finance. Giovanni, please go ahead. Thank you Jamie and good morning everyone. We are recording this meeting and a replay will be available for four weeks on the Investor Relations section of our website at silabs.com/investors. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are Silicon Labsâ President and Chief Executive Officer, Matt Johnson, and Chief Financial Officer, John Hollister. They will discuss our fourth quarter financial performance and review recent business activities. We will take questions after our prepared comments, and our remarks today will include forward-looking statements subject to risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future. We encourage you to review our SEC filings which identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Additionally during our call today, we will refer to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP results is included in the companyâs earnings press release and on the Investor Relations section of the Silicon Labs website. At our analyst day last March, I spoke about our singular focus on the IoT market and my confidence in our ability to lead and scale in this large and fast-growing market. In 2022, our strategy took hold. We achieved strong gains in market share and our growth accelerated. We surpassed $1 billion in revenue for the first time, which is a great milestone for the company. More importantly, in just two years, weâve doubled our revenue organically and have significantly improved our profitability and earnings per share. Iâm incredibly proud of the team for these achievements. We continue to secure major greenfield design wins and remain well positioned to outperform the market even amid macro uncertainty. The IoT market has incredible potential with thousands of new applications on the horizon. Silicon Labs is unmatched in the breadth of our product portfolio, the depth of our wireless expertise, and our singular focus on wireless connectivity solutions for the Internet of Things. Our leadership is driving an acceleration of growth in our design wins. Our design in lifetime revenue for 2022 is up more than 50% over 2021âs level, which is a leading indicator of future revenue growth. Design wins indicate that a customer has selected us for their socket and our metric requires us to have shipped at least $1,000 of parts into that design before it counts as a design win. Our opportunity pipeline is approaching $17 billion, nearly double the level of 2020. We strengthened our customer and supply relationships by the way we navigated the supply crisis together. Our singular focus on the IoT market proved to be a competitive advantage. As supply and demand come into alignment, we are well positioned to scale and capitalize, serve an increasingly diverse customer base, and capture future market share. Thanks Matt. Revenue for the fourth quarter was above our guidance range, ending at $257 million, up 23% year-on-year. Our industrial and commercial business ended at $157 million, up 36% year-on-year and establishing a new record for the I&C business. In terms of industrial end applications, we saw strong results in the fourth quarter in connected equipment and smart meters. As expected, the home and life business declined in the quarter on a sequential basis and ended at $100 million, up 8% versus the prior year. Smart home products had the largest sequential decline in the fourth quarter. Sales of products for life applications declined slightly. Geographically, we saw the strongest performance in the quarter in Europe, which grew slightly. The Americas and Asia-Pac were both down sequentially from the third quarter. Distribution sales were 81% of our total revenue, consistent with prior quarters. The absolute amount of channel inventory declined in Q4 and we held GSI flat at 59 days versus Q3, which is an excellent outcome. As Matt mentioned, we are very pleased that revenue for the full year exceeded $1 billion for the first time in our corporate history. Revenue in 2022 grew 42% over fiscal 2021, exceeding the top end of the growth goal we established back in March at our analyst day. As a reminder, we raised prices in late fiscal 2021 in response to meaningful increases in input costs from our suppliers. We believe that our price increases have been in line with similar actions from our competitors and we have approached commercial terms with our customers responsibly and fairly. Iâd like to highlight that a significant portion of our ASP strength and top line growth is due to the strength of our Series 2-based product cycle and the growing diversity of our customer base and product mix which are durable, positive developments. We also continue to increase design win velocity. Fiscal 2022 design win lifetime revenue grew more than 50% across a broad range of applications, which is an important indication of continued growth and share gain. Q4 non-GAAP gross margin ended above our expectations at 61.3% due to strong product, pricing and customer mix. Non-GAAP operating expenses were in line with our expectations at $109 million. R&D expenses increased slightly in the quarter to $70 million, and SG&A expenses declined by about $4 million to $39 million for the quarter. Non-GAAP operating margin was also above expectations, ending at 19% for Q4. Our tax rate was favorable in the quarter due to a combination of factors, including a lower than expected impact of capitalized R&D in the quarter and amplified by the catch-up effect within the fourth quarter. Our non-GAAP effective tax rate was 15% for the year--for the quarter, excuse me, and 23% for the full year. For the full year, our non-GAAP operating margin was 21%, which is above our profitability model for this level of revenue. Non-GAAP earnings for the full year were $4.72 per share, which is approximately a 230% increase over fiscal 2021. These results are truly remarkable and demonstrate the focus and execution we have been able to achieve following our successful divestiture transaction roughly 18 months ago. On a GAAP basis, gross margin was 61.1%, GAAP operating expenses were $133 million for the fourth quarter, GAAP operating margin was 9% for the fourth quarter and 12% for the full year, GAAP earnings per share were $0.76 in the fourth quarter and $2.54 for the full year. Turning to the balance sheet, we ended the year with cash and cash equivalents of $1.2 billion. Operating cash flow for fiscal 2022 ended at $141 million, an increase of around 55% from the prior year. Our accounts receivable balance in the year ended at $71 million, representing days outstanding of 25. As expected, we increased our inventory balance to $100 million or about four turns. We expect to continue to strategically manage our inventory balances to ensure we have the supply chain capacity to deliver our growth objectives. During fiscal 2022, we repurchased approximately $880 million of our common stock, bringing our total share repurchase activity to more than $2 billion since we announced the divestiture in April 2021, retiring more than 25% of our outstanding shares. This outcome will provide a long term benefit to our earnings power going forward. We expect to continue our share repurchase program, and today we have about $200 million in remaining authorization through the end of this year. Our debt balance remains unchanged with our 2025 convertible notes outstanding with a par value of $535 million. Overall, our balance sheet continues to be very healthy. We expect revenue for Q1 to be between $242 million to $252 million. We expect both business units to be down sequentially. We expect non-GAAP gross margin in Q1 to be approximately 63%. Late in the fourth quarter, we implemented limited price increases on a subset of our portfolio in response to ongoing input cost increases. We view this as a one-time phenomenon in the first quarter and do not have plans to raise prices further. We expect non-GAAP operating expenses for Q1 to increase slightly to $111 million with the increase largely attributable to the payroll tax reset in January. We continue to closely manage our operating expenses by leveraging flexible non-structural spending and carefully pacing our hiring. We will also have take steps to optimize our investments across certain areas to achieve further operational efficiencies. We expect our non-GAAP effective tax rate to be approximately 23% and non-GAAP earnings to be between $1.07 to $1.17 per share. On a GAAP basis, we expect gross margin to be 63%, we expect GAAP operating expenses to be approximately $139 million, and GAAP EPS to be in the range of $0.36 to $0.46. In addition to our outstanding financial results in fiscal 2022, we also made tremendous progress in our business and technology initiatives. From a business unit standpoint, the industrial and commercial business achieved its ninth consecutive quarter of record revenue in Q4, demonstrating resiliency amid current economic uncertainty. The value of wireless connectivity is increasingly clear in industrial applications such as connected equipment, where we hold a leadership position and grew revenue at double digit pace, both sequentially and year-over-year. Smart pallets are an example of a connected equipment application, and our FG23 sub-gigahertz SOC enables long range communication for logistics use cases. The FG23 is a single die, multi-core solution that offers industry-leading security, low power consumption with fast wake-up times, and an integrated power amplifier. Additionally, revenue from smart city applications grew by over 50% year-over-year with smart metering as a standout. We secured a significant design win with an industrial customer in the smart metering space, also using the FG23. Our chips RF range of performance and energy efficiency were key factors in winning the socket. Despite market softness in home and life attributable to certain consumer-oriented end markets, we remain bullish about the long term growth prospects in home and life. Specifically, we are seeing strength in the healthcare space with double-digit increases on a quarterly and annual basis. We recently secured several important design wins for portable medical devices, further bolstering our position in the life segment. We are also very excited about the launch of Matter 1.0, a significant industry achievement. Matter enables interoperability across major IoT ecosystems to offer developers and consumers a simpler, better experience which should boost demand for connected devices. Silicon Labs has played a significant role in Matterâs development. There from the start, we have contributed more code than any other semiconductor company. As of the end of the year, 87% of the products certified for Matter over thread are built using Silicon Labsâ SOCs. Another promising development related to Matter is the momentum we are seeing with our previously announced 917 SOC, with dozens of alpha customers currently sampling. At this point in the launch cycle, the 917 has the largest opportunity funnel of any product weâve ever released. The 917 is the first Wi-Fi 6 combo chip in the Silicon Labs portfolio and is a Matter-ready, fully integrated single chip solution. Itâs ideal for ultra-low power IoT wireless devices with secure cloud connectivity. We believe that its combination of exceptional compute power, best-in-class security, and ultra-low power profile will be instrumental in developing new use cases and applications. Matter will be a huge growth catalyst for our industry and we are proud to play a large part in it. I want to conclude by thanking the entire Silicon Labs team for their great execution amid economic and geopolitical uncertainty. Iâd like to give special recognition to our operations and sales teams, who navigated complex supply chain challenges, allocations and escalations with transparency, grace and perseverance. We also want to express our gratitude to our partners and suppliers who navigated unprecedented market conditions with us. While we are certainly not immune to macro risks, our impressive design win momentum gives us confidence and conviction that we will come out of the cycle ahead and well positioned to continue leading the IoT market. We have now delivered back-to-back years of more than 40% revenue growth and believe this is just the beginning. The strength of our Series 2 product cycle has helped accelerate our design win velocity, positioning us to continue outperforming the market. We continue to strategically manage our day-to-day operations while making the investments necessary to drive innovation, long term profitable growth, and solidify our leadership position in the IoT. Thank you Matt. Weâll now open the call for questions. To accommodate as many people as possible before the market opens, I ask that you limit your time to one question with one follow-up inquiry if needed. I guess for my first question, just thinking about the big picture in the model and in the business, I think the majority of the 40% growth or so that you guys showed in 2021 was unit-based, and a much smaller contribution from ASPs. This past year in â22, I think it was essentially the opposite, right - the ASPs were up quite a bit and volume up maybe less than that. Matt, as you look forward to this calendar year, I think ASPs are up a bit in the first quarter again in the guidance, but how would characterize the year that you see ahead? Is this one more evenly balanced of growth between the two, any sort of characterization of the year you see coming on those two dynamics because we get asked about that, that mix of growth a lot. Yes, I think the simple and fast answer is 2023 will be much more characteristic of 2021 with a majority of the growth coming from units, not ASPs. As John mentioned in his remarks, we definitely have done some limited price actions on some increases that weâve seen, but in general we expect the year to be vast majority driven by unit growth in 2023. Hey Matt, this is John. I want to add another quick comment here. If you look at 2022, the ASP strength that we realized in the year actually had a combination of factors. We did increase prices, as weâve talked about, but we also saw strength in the product and customer mix and on the back of the product cycle. I wanted to make that point as a contributing factor as well. Yes, I was just going to make sure everyone understand what that means, because itâs important. Our customer mix expanded in the sense that not only did we see more customers, over the years we gained market share. We gained some large customers but we also gained a lot of customers in the tail, in the mid of the market which gave us some strength in our ASPs, and then the product cycle piece is with our Series 2, as weâve mentioned multiple times, we have an unprecedented amount of products coming out in â22 as well as â23, which gives us a lot for our sales team to work with and in a lot of cases, there is no alternative to these leading products in the marketplace, so that helps give some strength to the ASPs as well. Thanks guys, really appreciate it. Just as my follow-up question and then Iâll get back in the queue, I wanted to ask about China. Given the changes in COVID policy and the timing of Chinese New Year and whatnot, some of your peer companies have talked about some acute weakness in sort of sell-in to distribution in China for the first quarter, and you guys are guiding for a fairly strong quarter all the way around. I just wonder, how would you characterize that impact from whatâs going on in China in your first quarter guidance, and if things normalize, how much of a tailwind could that be when things turn back on over there? Thanks. Yes, understood. On China, China has been relatively weak for us in the last few quarters, and as weâve mentioned, itâs down to around 15% of our total revenue. We havenât seen any significant change in that or the outlook there, and our expectation for growth on the year is not predicated on a return in China. Of course, if there is increasing strength there, that would be a tailwind that weâd be happy to see, but our plan does not depend on it. Hey guys, good morning. Thanks for taking my question, and let me extend my congratulations on a strong fiscal year â22 and similar to the good results. I wanted to ask about orders, order lead times, and whatnot. Can you give us an update on the uniformity of orders? I think last time, you mentioned week-to-week volatility - is that still the case? Maybe if you can give us an update on order lead times - I believe they were 26 weeks last quarter. Yes Gary, no change in the lead time dynamic - itâs roughly in that neighborhood, and we have seen signs of greater stability in recent weeks, a bit less volatility. Itâs, I would say, largely characteristic of what weâve seen over the last quarter or so, but getting better, I think is a fair way to say it. Weâve seen that the order patterns show a bit more stability in the week-to-week experience. Thatâs good to hear. I wanted to ask about your distribution inventory, since it is more than 80% of your revenue. You mentioned that 59-day metric for distributor inventories, flat sequentially so obviously no benefit quarter to quarter as you wrapped up the year, but what can that distribution inventory go in terms of days? Just trying to get a sense of the tailwind for distribution restocking, knowing that youâre benefiting to the tune of, what, $2.25 million a day in inventory. Yes, similar dynamics, Gary, as what weâve seen. Still see a bit of a geographical divergence with China high, rest of the world in pretty good shape. I think we can see this come up a bit and be comfortable with that, given that weâre seeing the revenue down a bit with expectations of growth ahead, so that would be normal and okay, not dramatically but thatâs something that could happen. Yes, thank you, and congratulations on the results. I wanted to come back to the ASP topic, and I do understand obviously youâve had to increase prices because of your suppliersâ input costs. But itâs pretty clear that you are selling more value, right - I mean, youâre selling more security features, obviously you talked about the product cycles, especially with the Series 2, so can you just maybe elaborate a little bit on that, perhaps how much is coming from just pure price increases versus how much is coming from selling more value? Sure. Itâd be good to hear from John on specifics, Tore, but I think on Series 2, itâs really important that--itâs exactly what you mentioned, that this portfolio is really hitting the market at the right place and the right time with not only an unprecedented number of products coming out but itâs also what those products bring to the industry that wasnât available before. That includes power consumption that is industry leading. Think about the solutions weâre talking about, where weâre talking about running a wireless solution on a watch battery for 10 years, or think of the latest Wi-Fi product we mentioned, the 917 that has half the power consumption of alternative solutions, so you can literally double the battery life of a battery-powered application, which is remarkable. Then in addition to that industry-leading RF performance, not just for that one technology but for all the technologies to work together, which is incredibly important for our customers. Itâs not just about having one and working well, but to have all those different RF technologies working well together. Then security continues to take an increasingly important role in our space. Simply said, if our customers and consumers canât trust the devices, it will stall the IoT growth, so this is elemental for us and weâve been proud to be leading in that space for some time. The confluence of all these things coming together really creates a strong position that is, simply said, fueling the revenue growth weâve seen over the last couple of years, which is, I think, a strong testament to the strength of that portfolio, but itâs also fueling that design win momentum that I mentioned in my earlier remarks, where thatâs grown over 120% over the last two years, which is remarkable. Thatâs been almost entirely fueled by Series 2, so the combination of those speaks to that, I think, momentum and credibility of the portfolio. As Iâve said, weâre still midway through the product cycle with a lot more products to go that will give us even further lift, so weâre excited about it. Yes Matt, I would just add--I just want to quickly add, that all resonates, and what you see in â22 is contribution to ASP coming from, you could think of it as pure cost increase-driven, where we see ourselves in line with our competitors, weâre not unique in that regard, and what Matt was just referring to, the strength in the value, also the strength in the customer mix. Great, and as my follow-up, the last two years have been a lot about share gains, especially with your new Bluetooth products. I know youâve worked a lot at getting established more in Wi-Fi, you talked about the 917 probably having the largest opportunity going forward. Should we think of 2023 as being that first year of really big growth in Wi-Fi, or would that still be more like 2024? John, a question on the order trends. I know last quarter, you did see order volatility and lead times came in specifically around the home and life, and then you also kind of mentioned in the industrial commercial, some of the customers were more of in a holding pattern. I wanted to get a sense of whatâs changing now in terms of where youâre seeing greater--where youâre seeing more order stability over the last few weeks. Do you see any potential risk as the lead times come in, as more supply comes online, that you kind of return back to some sort of order volatility that you saw in the last quarter? Raj, thanks. Itâs hard to call it on the last point. Of course, we could see more volatility, but weâre very encouraged by the strength of the design win momentum. As weâve said, that is the best indicator we see of continued strong revenue performance. The supply chains are normalizing. We continue to see pockets of shortage, but we have nodes that are really more in balance between demand and supply now - thatâs a good outcome and allows us to serve the demand. Back to the top of your question, simply put, weâve seen more stable order patterns in the last several weeks. I wouldnât say itâs completely, quote, back to normal, but getting better and weâre encouraged by that as we see it. And on the gross margins, the gross margins have been kind of above plan for several quarters, above your long term plan. You did mention that this year, the growth will be less dependent on ASPs, more on unit growth. Wanted to understand how we should think about gross margins trending throughout the year, and with respect to that, what are your expectations for wafer costs? Is your main foundry, TSMC increasing capacity for Series 2 products? Just any thoughts in terms of your wafer cost expectations and how to think about the gross margins. Thank you. Yes, thanks Raji, thatâs good. As we said at the beginning of last year, we had a one-time effect, if you will, in the first quarter of 2022 that then bled off through the course of the year, and we saw gross margin sequentially declining throughout the year. We see a very similar pattern this year with a more modest version of that, but I guess similar effect as we see a lift in the first quarter, we expect that to moderate sequentially as we work our way through the year. Weâll have to stay tuned to the overall input cost landscape. Not aware of more forthcoming - that could change, but at this point we believe weâre reaching a degree of stability on the cost side as well. Yes, I can comment on the capacity side. Itâs important, first of all, to mention that we still have supply constraints in the coming quarters, so as John said, itâs more mix. In some lines, weâre at parity, and in some lines weâre not, so weâre still working through that. Big picture, one thing that maybe more unique to us than the industry is because of our rate of growth, weâre hyper-focused on that capacity and supply not just this year, but in the coming years. Because of that design win momentum, one of the things thatâs critical to our customers is an assurance that we can provide the supply that comes with that business. Weâve been fortunately very successful at partnering with our suppliers. As we said in the remarks, weâve actually seen our relationships with our customers and suppliers improve over the last couple years through all this challenge, and thatâs allowed us to position ourselves to continue scaling very quickly in the coming years, which is a key component to a lot of these wins. We couldnât secure some of this business unless we could give our customers assurance that weâll be able to do that. Never take it for granted. Weâre watching it closely, weâre paranoid about it because of the rate of growth, but we do see a path and our customers see that path as well. Hey, thanks for taking my question. I just want to follow up on Rajiâs gross margin question. I thought last year, you had some one-time charges, you got some benefit, so Iâm just kind of curious, in that 63, because I think you said limited pricing increases but youâre seeing two points of gross margin uplift, so is that just timing like you saw the prior year, and is there any kind of one-time benefit as well? Yes Blayne, thanks for the question. No, thereâs not a one-time aspect of that. Itâs very similar to what we saw one year ago. Got you, and then I wanted to ask, not to keep asking on pricing, but you do give the annual metric in the carryout. I was wondering if you would give us for the year in â22, if you have that number for units and ASPs. Yes Blayne, the contribution for revenue growth is mainly on ASP, which has a couple of components, as we talked about, both in terms of cost, input driven, price increase, as well as value, higher ASPs on strong product and customer mix, but it is fair that more than half of the contribution on revenue is from ASP. Great, and then if I could just ask one last question on home and life, you mentioned the smart home down the most. Iâm assuming thereâs some component of inventory correction because that segment is down 19% sequentially. Iâm just kind of curious, your projected margin said both down, so has that kind of correction that you saw in December cleared through and itâs more normal seasonal for the business? Just some color on that correction, particularly in the smart home. Yes, sure. This is Matt. I think the most accurate and honest answer I can give you is that it varies quite a bit. We see some customers that are sitting on a lot of inventory and working their way through it. We see other customers who managed this really well and theyâre still worried about their demand and working through that. But on a whole, we definitely see our customers in that space working down their inventory, but the key there is what does the demand profile look like and how long is that going to take for them to work through that. But like I said, pretty variable customer to customer, depending on how theyâve managed it and how their end markets are doing. Yes, thanks. I just had one follow-up question. I wanted to ask about the pace of the share buyback. If Iâm not mistaken, in the past you mentioned that you would ideally like to maintain a billion-dollar cash position, gross cash position, and that would indicate that maybe thereâs $200 million to $300 million of available buyback capacity. Am I summarizing that correctly? Yes Gary, you have that exactly right. Weâve done a bit better than we contemplated at the onset, immediately following the divestiture. We have actually generated stronger cash flow in the intervening time period, and that is what has allowed us to both surpass the $2 billion goal and have another $200 million available for continued share repurchase. Looking further ahead as we continue to generate cash, we believe that will continue to be the case, and weâll continue to work with the board of directors on capital allocation relative to this use versus strategic M&A, which we also continue to evaluate. Yes, thank you. Just a housekeeping one. John, tax rate 23%, still pretty high, right, and I know itâs got a lot of different elements to it, but anything happening this year that could potentially cause that tax rate to come down? I know youâre working on some capitalization on R&D and so on and so forth, but any view on the tax rate for the year would be great. Yes, you bet, Tore. As we called this a couple years ago, the capitalized R&D aspect of the Tax Cuts and Jobs Act has an inflationary effect on the tax rate. Thatâs true for us, thatâs true for other companies and entities with a relatively high R&D spend. Thatâs kind of the fundamental situation. All things considered, it is down a little bit from last year and we expect over the next couple of years, it will come in a bit further, come down a bit further as the amortization ladder builds, and you can essentially build up that stack of amortization periods into the future. But thatâs the main thing thatâs going on. Ladies and gentlemen, with that, we will be concluding todayâs question and answer session. Iâd like to turn the floor back over to Giovanni Pacelli for any closing remarks. Ladies and gentlemen, with that weâll conclude todayâs conference call and presentation. We do thank you for joining. You may now disconnect your lines.
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EarningCall_791
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Good morning. My name is Devin, and Iâll be your conference operator today. At this time, Iâd like to welcome everyone to the PulteGroup, Inc. Q4 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you for your patience. Great. Good morning, Devin. Good morning and thank you, Devin. Look forward to discussing PulteGroup's outstanding fourth quarter earnings for the period ended December 31, 2022. Iâm Joined on today's call by Ryan Marshall, President and CEO; Bob OâShaughnessy, Executive Vice President and CFO; and Jim Ossowski, Senior VP, Finance. A copy of our earnings release and this morning's presentation slides have been posted to our corporate Website at pultegroup.com. We will post an audio replay of this call later today. Please note, that consistent with this morning's earnings release, we will be discussing our reported fourth quarter numbers as well as our financial results adjusted to exclude the benefit of certain insurance reserve adjustments and JV income as well as the write-off of deposits and pre-acquisition spend and a tax charge recorded in the period. A reconciliation of our adjusted results to our reported financials is included in this morning's release and within today's webcast slides. We encourage you to review these tables to assist in your analysis of our business performance. And finally, I want to alert everyone that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Thanks, Jim, and good morning. We ended 2022 on a high note as we closed almost 8,900 homes and delivered all-time fourth quarter records with homebuilding revenues of $5.1 billion and earnings of $3.85 per share. These results, in turn, helped PulteGroup finish the year with over $1 billion in cash and a net debt-to-capital ratio below10%. Bob will detail the rest of our Q4 results in a few minutes. Driven by the company's exceptional fourth quarter performance, PulteGroup delivered another year of great financial results. For 2022, our home sale revenues increased 18% over the prior year to $15.8 billion, our reported pre-tax earnings increased by 37% to $3.4 billion and our reported earnings increased 48% to $11.01 per share. These results provided us the flexibility to invest $4.5 billion into the business, while returning over$1.2 billion to shareholders, dividends and share repurchases. Let me just pause right here and thank our entire organization for their efforts in delivering such a great operating and financial results under some challenging market conditions. We are truly fortunate to have such an outstanding team. In assessing our 2022 financial results, we fully appreciate that gains in volume, pricing, gross margin and earnings reflect the stronger demand environment that existed earlier in 2022. As we all know, the Federal Reserve decision to hike rate 7x in 2022 and its fight against inflation is successfully slowing the economy, including housing. For the full year, national new and existing home sales across the country fell 16% and 18%, respectively from 2021. Consistent with the trend of these national numbers, our 2022 net new orders were down roughly 27% from 2021. The softer demand we've experienced as a result of consumers priced out of the market by higher prices and higher mortgage rates, along with those individuals who have moved to the sidelines given market uncertainties and risks. Despite the higher rate environment dominating the national conversation, we saw buyer demand improve as the fourth quarter progressed and can confirm this strength continued through the month of January. We will have to see how things progress from here, but I think this improvement attests to the ongoing desire for homeownership that exists in this country. Net signups both in absolute number and absorption pace increased as we move through each month of the fourth quarter and through the month of January. While seasonal trends have been distorted over the past few years, monthly sales moving higher as the fourth quarter progressed is atypical. In short, we're encouraged by the recent improvement in our new home sales. Based on feedback from our sales offices, buyers have been responding to the decline in mortgage rates. Consistent with this idea, I would add that rate buydowns remain among the top incentives for our customers. Along with the decline in mortgage rates, actions we've taken to help improve overall affordability appear to be gaining traction. In alignment with our strategy to find price and turn our assets, we continue to implement programs that enable consumers to buy homes in today's higher rate environment. The cost of these programs which might include rate buydowns, lower lot premiums, or even price reductions can be seen in our higher Q4 incentives. In the fourth quarter, incentives increased to 4.3% of sales price. On a sequential basis, this is up from 2.2% on closings in the third quarter of 2022. Beyond just adjusting incentives in many of our active communities, we have already introduced smaller floor plans to help lower future prices and associated costs. The introduction of smaller floor plans is just part of a comprehensive effort to lower overall construction costs to help offset the pressure on sales price. The obvious question now is will this strengthening of demand continue? Like all of us on this call, I've heard strong arguments on both sides. But the honest answer is that no one really knows. Home Builders are optimist by nature. And I want to believe that the Fed can orchestrate a soft landing, but the risk of a recession is real. We're currently seeing buyers respond to lower rates, and better pricing. But what happens is fed actions weaken the employment picture is uncertain. With today's volatile market dynamics, one of our frequent conversations with investors is around how Pulte plans to operate its business over the near-term. Given the long timelines associated with land development and home construction, we need to set a plan, but be prepared to adjust as market dynamics require. At a high-level, I'd like to share how we plan to operate the business for the foreseeable future. At our core, we remain a build order builder, but our system operates best with a steady volume of production. As such, our plan for the -- our plan is for a consistent cadence of new starts. This would include starting spec homes on a pace consistent with spec sales. We've shared on prior calls that in the current environment, buyers are showing a preference for homes that have near-term delivery dates. As an example, in the fourth quarter, spec sales represented over 60% of our new orders. Our recent sales show that we are finding the market clearing price using our strategic pricing tools to set price and incentives. Within today's sales environment, we will be intelligent about the process as we optimize our production machine and turn through our land assets. As always, our primary focus will be to deliver strong relative returns on invested capital through the cycle. In planning for 2023, we have assumed our current cycle time of 6-plus months will remain the reality for the next several months. Combining our planned starts, with our 18,000 homes currently in production, we expect to have a production universe that will allow us to close approximately 25,000 homes in 2023. We have goals in place to reduce cycle time, and our procurement and construction teams are already realizing success in cutting production days, but a lot of work remains to be done. Buyer demand will ultimately determine what the coming year looks like, but this is our operating plan. We see this as a prudent, balanced approach that checks key strategic boxes, namely; we maintain a level of production in our communities, which is critical when negotiating with local trades and suppliers. We keep an appropriate level of specs in production while seeking to control finished inventory, and we continue to turn our assets, generate cash and position the business for the next leg of the housing cycle. Given today's market dynamics, at this time, we will be providing guidance for our first quarter, but not the full year. In sharing our operational approach for 2023, we have hopefully conveyed a thoughtful process and conceptualize the opportunity we see for our business. Thanks, Ryan, and good morning. PulteGroup completed the year by delivering a strong fourth quarter results, the benefits of which can be seen throughout our financial statements. In my analysis of the company's operating and financial performance, I will review our reported numbers as well as our financials adjusted for the specific items Jim noted at the start of this call. PulteGroup's fourth quarter home sale revenues increased 20% over last year to $5.1 billion. Higher revenues for the period were driven by a 3% increase in closings to 8,848 homes in combination with a 17% increase in average sales price to $571,000. The increase in average sales price in the quarter was driven by double-digit gains in pricing across all buyer groups. Our closings for the quarter came in above our Q4 guide as we benefited from higher spec sales that closed in the quarter and a faster-than-anticipated recovery in our Florida operations following the impact of Hurricane Ian. The mix of closings in the fourth quarter was 36% first-time buyers, 39% move-up buyers and 25% active adult. This compares with last year's closings, which were comprised of 33% first time, 42% move-up and 25% active adult. The increase in first-time closings is consistent with changes in our mix of communities and the greater availability of spec homes in our first-time buyer neighborhoods. Our spec strategy emphasizes production within our Centex brand as almost 60% of spec units are in communities targeting first-time buyers. In the quarter, we recorded net new orders of 3,964 homes, which is a decrease of 41% from the same period last year. The decline in orders for the period reflects the ongoing softness in buyer demand caused by the significant increase in interest rates realized in '22 in combination with higher cancellations experienced in the period. As a percentage of sign-ups, the cancellation rate in the fourth quarter was 32% compared with 11% last year. Cancellations as a percentage of backlog at the beginning of the quarter totaled 11% in the fourth quarter this year compared with 4% in the fourth quarter last year. I would note that in the 4 years prior to the pandemic, quarterly cancellations as a percentage of beginning period backlog averaged 10%, so Q4 cancellations in relation to backlog were in line with historic norms. In the fourth quarter, our average community count was 850, which is up 8% from an average of 785 last year. Community count growth reflects new community openings as well as the slower closeout of certain neighborhoods. Based on planned community openings and closings, we expect our average community count in the first quarter of '23 to be flat sequentially or approximately 850 communities. For the remainder of '23, we expect quarterly community count to be up 5% to 10% over the comparable prior year quarter. By buyer group, fourth quarter orders to first-time buyers decreased 28% to 1,574, while move-up demand was lower by 56% to 1,241 homes and active adult declined 36% to 1,149 homes. As has been widely discussed, housing demand remains under pressure as higher interest rates and years of price appreciation have stretched affordability for buyers. We ended the quarter with a backlog of 12,169 homes with a value of $7.7 billion. This compares to the prior year backlog of 18,003 homes with a value of $9.9 billion. As Ryan discussed, our objective is to keep turning -- keep inventory turning, which requires that we start an appropriate number of homes. In the fourth quarter, we started approximately 4,000 homes, which is down 50% from the fourth quarter of last year, and, on a sequential basis, down about 40% from the third quarter. We ended the fourth quarter with a total of 18,103 homes in production, of which 10% were finished. Of our total homes under construction, 43% were spec. This is slightly above our target of having specs comprised approximately 35% of our work in process, but given buyer preference for a quicker close, we are comfortable having a few more homes in production. Based on our production pipeline, we currently expect to deliver between 5,400 and 5,700 homes in the first quarter of the year. As Ryan indicated, for the full year, we will have the production potential to close approximately 25,000 homes. These production numbers assume a continuation of current construction cycle times. Given the price of homes in backlog, the mix of homes we expect to close and the anticipated level of spec closings in Q1, we expect the average sales price for Q1 closings to be between $565,000 to $575,000. At the midpoint, this would be an increase of 12% over the first quarter of '22. In the period, we reported gross margins of 28.8%, which remain near historic highs for the company. This represents an increase of 200 basis points over the comparable prior year period, although down sequentially from the 30.1% gross margin we delivered in the third quarter. Looking ahead, we expect to deliver another strong quarter with Q1 gross margins of 27%, which includes the benefit of lower lumber costs due to the fall in lumber prices in the back half of '22. Any savings from ongoing renegotiation of labor and material contracts will be realized in future quarters, and we will have to see how much of this work benefits our '23 versus our '24 closings. Our reported fourth quarter SG&A expense of $351 million, or 6.9% of home sale revenues, includes a net pre-tax benefit of $65 million from adjustments to insurance-related reserves recorded in the period. Exclusive of this benefit, our adjusted SG&A expense was $415 million or 8.2% of home sale revenues. In Q4 of last year, our reported SG&A expense of $344 million or 8.2% of home sale revenues included a net pre-tax benefit of $23million from insurance-related reserve adjustments [ph]. Exclusive of that benefit, our adjusted SG&A expense was $367 million or 8.7% of home sale revenues. With the pullback in overall housing demand, weâve worked hard to ensure our overheads are properly aligned with today's tougher operating conditions. As such, we expect SG&A expense in Q1 to be in the range of 10.5%to 11% compared with 10.7% last year. In other words, even with lower closing volumes, we are in a position to realize overhead leverage that is comparable to '22. Reported fourth quarter pre-tax income from our financial services operations was $24 million, down from $55million last year. The decline in pre-tax income reflects both lower profitability per loan and an overall decrease in loan origination volumes as mortgage capture rate declined by 10 percentage points to 75%. In the fourth quarter, we walked away from 21,000 option lots and an associated $900 million in future land acquisition spend. As a result of these actions, we incurred a pre-tax charge of $31 million for the write-off of related pre-acquisition costs and deposits. This charge was offset by a pretax gain of $49 million in JV income associated with the sale of commercial property completed in the quarter. Our reported tax expense for the fourth quarter was $282 million, which represents an effective tax rate of24.2%. Our Q4 taxes included a $12 million charge associated with deferred tax valuation allowance adjustments recorded in the period. We expect our tax rate in the first quarter and for the full year in '23 to be 25%. On the bottom line, our reported net income for the fourth quarter was $882 million or $3.85 per share. On an adjusted basis, the company's net income was $832 million or $3.63 per share. These results compared with prior year reported net income of $663 million or $2.61 per share, and adjusted net income of $637 million or$2.51 per share. Moving past the income statement, we invested $1.1 billion in land acquisition and development in the fourth quarter, with almost 65% of this spend for development of existing land assets. For the full year, we invested a total of $4.5 billion in land, including $1.9 billion of acquisition and $2.6 billion of development spend. Given recent decisions to exit certain option land positions, we ended the year with 211,000 lots under control, which is down 8% from last year and down 13% from the recent Q2 peak of 243,000 lots. With the decision to drop option lot deals over the past two quarters, owned lots currently represent 52% of lots under control. As weâve discussed on prior earnings calls, given the slowdown in overall housing activity, we plan to dramatically lower our land spend in 2023. At this time, we expect our total land investment to be approximately$3.3 billion, with an estimated 65% of these dollars going toward development of owned land positions. Along with investing in the business, we continue to allocate capital back to our shareholders. In the fourth quarter, we repurchased 2.4 million common shares at a cost of $100 million for an average price of $41.81 per share. PulteGroup continues to maintain one of the most active share repurchase programs in the industry, having repurchased 24.2 million shares of common stock in 2022, or almost 10% of our shares outstanding, for $1.1billion at an average cost of $44.48 per share. In 2022, we returned over $1.2 billion to shareholders through share repurchases and dividends. After allocating capital to the business and our shareholders, we ended the quarter with $1.1 billion of cash and a net debt to capital ratio of 9.6%. On a gross basis, our debt to capital ratio was 18.7%, which is down from 21.3% last year. Thanks, Bob. For all the financial success that we realized in 2022, I can tell you it was a hard year to navigate. When the year started out, we had almost unlimited demand, but supply chain disruptions resulted in countless bottlenecks and extended build cycles. As the year progressed and rising interest rates push more and more consumers to the sidelines, we initiated a series of operational changes as we quickly adapted to the more competitive market conditions. If there is a silver lining in today's challenging demand environment, I think we have what can be viewed as favorable supply -- as a favorable supply dynamic. Recent figures from the National Association of Relators show the inventory of existing homes for sale at 970,000, or only 2.9 months of supply. Existing homes are our industry's biggest source of competition, so such limited supply is certainly advantageous. As we sit here today, Iâm incrementally more optimistic about the year ahead, but as the expression goes, hope for the best, but prepare for the worst. I think what weâve done -- well, I think that weâve done that in terms of how we've setup our business. We head into 2023 with enough units in production to meet demand and with production plans will allow us to continue turning assets. At the same time, we don't have an excess of spec homes in the system that will cause incremental self-inflicted pressures. We are in a strong competitive position within the markets that we serve. We are typically among the biggest builders in our markets, and our ability to serve all price points provides opportunities with land sellers and municipalities. And finally, we are in exceptional financial position with plenty of liquidity, no debt maturities for 3 years and expectations for another year of strong cash flow. There are opportunities to be seized upon even in challenging market conditions. When the time comes, PulteGroup will have the flexibility to take advantage of those opportunities. I will close by again thanking the entire PulteGroup organization for their work this past year to build outstanding homes and to provide an exceptional customer experience. Let me now turn the call back to Jim Zeumer. Thanks, Ryan. We are now prepared to open the call for questions so we can get through as many questions as possible during the time remaining. We ask that you limit yourself to one question and one follow-up. Devin, if you will open it up for questions, we are all set. Good morning, guys. Thank you for taking my questions. The first one is, can you just give us an idea of the margin on quick move-in homes compared to the company average? Yes. It's interesting. It depends, and I hate to give you the mix, but geographically, it makes a difference. Obviously, we are going to see stronger performance in markets where we are seeing stronger sales activity, I think the Southeast of Florida, specs out West are a little bit more challenged. So it really does matter where. On balance, we've seen -- interestingly, if you think about our Q4 guide for margins, we outperformed it. Part of that was that geographic mix. We've talked about getting more volume out of Florida which is one of our better margin performances, but also because of the relative strength of spec sales, we did a little bit better on those than we anticipated when we gave the guide. Got you. Okay. And then it was the commentary on demand getting better through the quarter and into January was interesting and encouraging. Can you just give us an idea of how broad based that demand was? I mean, was it limited to certain markets? Or was it pretty much across your footprint? John, the improvement really came across the footprint on a relative basis. Speaking geographically, we continue to see strength in Florida and the Southeast. As Bob just highlighted in the last answer, we continue to see great performance out of the Texas markets. And probably one of the more encouraging signs that we've seen as we started to see our Western markets, Phoenix, Las Vegas, Southern California, Northern California, we started to see those markets come back to life. So kind of broad based improvement across the footprint. Hey, good morning, guys. Thanks for taking my questions. First question, you have lower lumber costs beginning to flow through the P&L and perhaps some other stick and brick cost savings. We also have likely higher land costs and perhaps some uncertainty around pricing. I'm hoping you can help us think through first quarter gross margins. Do you think it will be likely the low point for the year given the kind of sequential improvement in demand that you've seen? Truman, I think you've highlighted the variables that are out there. And at this point in time, we've given a guide for Q1. And as I mentioned in my comments, that's the extent of kind of what we are going to provide at this point. Okay. Got you. Understood on that. And how are tertiary submarkets within metros performing relative to closer end communities maybe in entry-level move-up segments? I'm thinking that the prior remote worker or work-from-home tailwinds might be leveling off here, which might negatively impact the tertiary markets, but at the same time, affordability is a bit squeezed and the tertiary markets provide a better value proposition. Well, Truman, I think, as we've talked about with our land acquisition strategy over the years, we've attempted to stay closer into the core, closer to the job market in some of the retail sectors. We certainly have a sizable first time entry-level buyer business and affordability there matters. So we do have communities that are more in the growth rings and on the -- in the tertiary areas, but I don't believe that our land footprint goes out quite as far as maybe some of our competitors. So what I'd tell you is it kind of depends on -- it's a community-by-community situation that is, as much as anything, from a margin standpoint, dependent on the structure of the land deal. And like, I think, you've heard from us in a lot of situations, we don't underwrite the gross margin, we really focus on underwriting to return. But going back to the question that John asked, we've seen relative strength and improvement in kind of sales across the board, that's not just geographically speaking, but that's community by community as well. Hey, guys. Good morning. Nice execution, and thanks for the time here. Ryan, just on the margin, I know you're not guiding beyond 1Q, but I'm just curious if you could talk through a little bit. When I compare you guys to some of your larger competitors, your margins right now are outperforming by a pretty wide level 400, 500 basis points. And while I understand there might be a little bit of a lag there given they're maybe more spec focused than you are, it's still a little bit surprising to see the outperformance. So could you talk a little bit about my understanding you're not going to give guidance, is that just a timing issue? Or is there something you guys are doing that is resulting in that outperformance, in your opinion? Yes, Alan, thanks for the question. I appreciate it, and I think, for those that have followed us for years, yourself in that category, I think everybody is aware that we've implemented a number of really important kind of changes in the way that we operate our business that has driven higher returns over the housing cycle, and certainly, higher margins have been part of that. Those initiatives have touched everything from the way that we design our homes and communities to how we price and sell homes. And a really big part of it is the quality of the dirt that we're buying. A little bit back to the question that Truman announced a minute ago. And the way that we have evaluated and underwritten risk and the associated requisite returns that we ask for as part of the risk associated with those communities. So I think you're seeing -- I think you're certainly seeing that pay off. We have highlighted on this call, in my prepared remarks, the way that we are going to run the business in this environment, which is a tougher operating environment. And we really feel it's important to turn our inventory to get good flow-through and to sell and define kind of a market clearing price. So while we believe that the operating model that we have is a great one, and we are really reaping the rewards from it, we won't be immune to some of the market pressures that are certainly out there. But we think that we are an efficient homebuilder, and we are going to continue to be very disciplined and prudent in the way that we are making pricing decisions. Great. I appreciate all the thoughts there. Second question on the cost side. I think, over the last few months, we've heard a lot of optimism from homebuilders about their ability to renegotiate costs lower, especially as starts have pulled back as much as they have and what was shaping up to be a pretty volume outlook in '23. And your comments are similar to what we've heard from others that the market seems to be showing some improvement here. I can't help but look at lumber costs up 40% year-to-date and imagining that perhaps that might be filtering through to some other inputs as well. So what's your current thinking on the cost side? Are you feeling a little bit less bullish about your ability to kind of push back on costs now given what seems to be a strengthening marketplace? Or do you still feel like you can find some relief there as the year goes on? Well, Alan, it's going to be tricky, and I will break down a couple of components that we are looking at on the cost side. We've talked a lot about affordability being the biggest challenge that we've had over the last several quarters. And I think affordability is going to continue to be the theme as we move through kind of 2023, not just in housing, but I think in all consumer spending, consumers are feeling the affordability pinch, and it's part of the reason that we've worked so hard to find prices that we believe help to address some of that affordability pinch. With that comes the cost side that you're appropriately highlighting. We have certainly seen and we've gotten very positive reception from our trade partners around the front end of the house as they've started to see a slowdown in new starts and kind of permits pulled. We've been collaborative in talking about what we're seeing and hearing from consumers. And they really -- they've worked to help reduce costs kind of as we've reduced our prices as well. We've seen a lot of progress with lumber. That's certainly a commodity and those things can kind of change. So we'll keep an eye on that. Probably the thing that I would tell you is going to be hardest on the cost side is the labor side of things. And that's the piece that I think will be sticky. Those wage increases have been real, and I think once those wage increases have been provided or given, they're hard to get back. Not impossible, but the material side -- not saying the material side will be easy, but I think we will likely have more success or easier success on the material side than we will labor. So time will tell as the year plays out. As I highlighted in some of my remarks, we've got some really aggressive goals that our procurement teams are working on to reduce overall costs. Got it. Just if I could squeeze in one last one there. So on the lumber side, I just want to make sure I understand the timing of this. You mentioned that you're benefiting now on 1Q deliveries from the pullback we saw last year. Assuming this 40% increase kind of holds here or maybe even goes a little bit higher, when would that eventually be a headwind to your margins? Would that be kind of a second half of this year type impact? I wanted to circle back to the gross margins in the fourth quarter and the first quarter guide. And as Alan referenced, youâve a significant gap positively in your favor, obviously relative to the rest of the industry at this point. And it's interesting that, obviously, one or two quarters doesn't make a trend, but when you look back in prior years, the historical gap of gross margins was in the 200 to 250 bps range, and now we are talking double that, if not more. I just wanted to make sure because I think it would be helpful for investors to kind of understand. If there isn't any type of kind of short-term actions or things within the mix or relative to what you have in backlog that if there's any reason that there's some unusual short-term items that are helping the gross margins. Because we all kind of remember the comments you made last quarter of not being margin proud, and you didn't have a significantly lower order growth number than we were looking for, but just wanted to understand kind of some of the puts and takes there, and if you're doing anything significantly different in the industry in the marketplace that might allow this larger gap to continue. Yes, Mike, I think I understand your question. Hopefully, you appreciate, when we provide commentary on our results, if there are unusual things happening, we tell you about them, whether it's in the form of an adjustment or when we present adjusted data. And to answer your question as directly as I can, there's nothing unusual happening in our margin in the fourth quarter. We are not projecting anything unusual to happen in our margin in the first quarter other than the homes that we are closing. I think if you reflect on the answer that Ryan gave, and I can't comment on the relativity to other people's margins, what they're doing pricing lines, what we're doing pricing wise. We can only comment on what we are doing, which is trying to run a thoughtful business, get to a point where we can offer affordability to the consumer where we can earn a return. So I don't know if that gets where you need to be, but there's nothing unusual happening in our margins. Yes, Mike, and let me maybe just pick up on the comment you made about the comment I made last quarter about not being margin proud, that's still 100% accurate. And we've tried to reflect that in the way I laid out, we are going to be operating our business, which is to find a market price that will allow us to maintain a predictable and consistent turn of our inventory. It's the way that we can keep this business running efficiently and deliver the high returns that Bob talked about. So while we are -- we would certainly endeavor to do much better from a comparable sales standpoint than what we had in the fourth quarter. I think relative to our peer set, you can see that we are selling homes. And we are going to continue to make sure that we are priced competitively with our market offerings. Yes. No, I appreciate that. I mean, I guess, I was trying to get to something you don't want to give, which is second quarter guidance, and we understand that. But I think people would kind of think, okay, you have a significant positive gap here as there were [indiscernible] drop maybe in the backlog that might allow that gap to revert to normal, but it doesn't sound like that's the case. I guess secondly, the SG&A guidance was pretty encouraging as well given the decline in closings yet the midpoint being similar to a year ago. So just wanted to delve into that a little bit. If you could kind of talk about what you're doing on the cost side there in terms of either headcount or other cost management? And if we were to expect a similar type of percentage decline in the coming quarters, given what you've been able to do in the first quarter, is that something where we could see a similar SG&A in spite of a 5%, 10% or, let's say, 10%-ish decline in closings? Yes, Mike, hopefully, you can appreciate we -- on our most recent call, had highlighted we would be looking at our overheads to make sure that they are efficient given the scale of the business that we are operating today. We have taken actions on costs, and they are varied by market depending on how that particular market is performing. I think you can and should expect us to always do that, right? I mean we are always looking at it. Are we running an efficient business? As it relates to beyond the first quarter, like everything else, there's -- it's a volatile -- not a volatile, but it's a market in flux. We haven't provided a guide on that. But I can tell you, we will be looking at our overheads as part of -- as we see the business develop, we will develop our plans around overhead spend as well. Right. Just one last quick one, if I could. It's actually kind of also in response to clarification on a prior sneaking question. When you talk about the lumber costs being up year-to-date and that impacting maybe the back half of the year, just wanted to get a sense from you. I mean, on a dollar basis, it's significantly lower than it -- the percentage is kind of obfuscates the dollar amount, which is somewhat lower on an absolute basis when you think about where lumber was. And secondly, I would presume there's also some amount of potential labor savings that might come through in the back half just given where the market has gone over the last 6 months and a 40% increase in lumber, all else equal sounds one way, but, to me, there's potential offsets to that. Just wanted to know what you thought if that makes to you? Yes. So in real math, our lumber load was down about $10,000 in the deliveries. Q1 will have that benefit in it. That obviously impacts the margin guide that we gave. I think you heard Ryan say that labor is actually likely to be a little bit stickier so we don't really know if we're going to be able to drive those costs down. So -- and Ryan, I think, said it well. Lumber is a commodity. We typically have the pricing of the lumber impact our closings two quarters in the future, right, because when we order then build the house so the pricing we feel in the market, we feel in our income statement two or three quarters later. And that's true for most of our commodity pricing. And I would tell you, other than lumber, it's been an inflationary market, so we've seen pressure on pricing. Again, Ryan talked about labor being a little bit sticky. Obviously, we are working with our trades, and it's how we build, where we build, can we help them be more efficient in order to offer us a better price, and that's what our procurement teams are working on right now. And as we highlighted in the prepared commentary, that process, whatever it yields, will impact our margin profile likely late in '23 or even into early '24 by the time those price changes get negotiated and then start flowing into houses that would close with a 6-month build time, again, two, three quarters from now. Thanks. Good morning, everybody. [Indiscernible] you mentioned, Ryan or Bob, the mix of deliveries 36% first time, 39% move up, 25 active adult. Is your expectation for '25 -- or '23 on that 25,000 unit guide to be much different than that mix or shift in any meaningful way? It's interesting, Carl. I don't know that meaningful, but certainly, you heard a couple of things hopefully from us. 60% of our sales have been spec. They are -- our spec inventory is largely in our first-time communities. Our community count, which was up 8% year-over-year, the preponderance of that is in first-time communities. The mix of our lots looking forward is a little bit richer towards first time. So I wouldn't call it a big shift. But yes, I would tell you that first-time has been -- even if you think about the sales paces in the quarter, the decline was the lowest in that first-time space. So that's where the activity is today. Okay. Thanks for confirming that, Bob. And then just on active adult, I'm curious how that business has trended. Has it been over the course of the last four months or so given that customer is more likely to pay cash, less worried about rates? We had a thin existing home sales environment, but the stock market has been tough. Could you just maybe chat a little bit about how that customer seems to be faring in an environment like this and contrast them with what you're seeing in the first time in the move-up market just attitudinally? Thanks. Yes, Carl, it's a great question. And as I think you're aware, we are really proud of our Delaware business and what it adds to kind of the overall mix of our portfolio. You highlighted that buyer tends to be probably most reactive, positive and negative, to volatility within the broader market. And there's certainly been a fair amount of kind of volatility lately. That tends to cause that buyer to maybe pause as opposed to stop. On the positive side, you highlighted it's a thin resale inventory market. And so I certainly think that buyer has been able to sell their home. They've been able to sell their home, but I think at pretty good price. And on the buy side, they're not necessarily looking for a mortgage or the mortgage they're looking for is pretty small. So there are some puts and takes. A couple of other things that I'd highlight, relative to the other two buyer groups that we serve, they were -- the active adult was in the middle. They weren't quite as strong as the first-time buyer. Again, I think because they don't have to move, they've got options, they can be a little more patient. They were certainly more strong -- or did better than the move-up buyer, I think, mostly driven by the fact that they're not as rate sensitive. So on balance, Carl, we feel pretty good about the active adult space, kind of all things considered. And I think it will continue to be a strong benefit to the overall enterprise. Good morning. Just following up on affordability, when we look at net order ASP, I guess, down 5% quarter-over-quarter, is it possible to break that out between incentives based price reductions and kind of any mix shift that you saw? Yes. I mean, directionally, is there a way to think about mix shift as being significant or not significant? I don't know if there's any kind of parameters you can put there? Yes. Anthony, I think what I would tell you is that it's fluid. And sometimes things that start as kind of discounts off of a price or adjustments to lot premiums, sometimes those are rolled into kind of base price changes or base price reductions. And so the discount gets embedded over time into kind of what the new market price is. So, to Bob's point, we are not going to probably break it out at this point. But you can see, based on the incentive load that I talked about as well as the kind of reduction of base price, we are finding what we think is the market-clearing price to continue to sell homes. Okay, okay. Understood. And then just I think your selling homes on land that was partially or maybe even largely put under control prior to the pandemic. Just how long kind of roughly before you sort of exhaust that cost basis? And then can you just touch on impairment risk? I mean what kind of -- what level of margin or price pressure would you need to see before a community would come under review for impairment? Yes. So in answer to the first question, I think we, on average, been buying 3 to 4 years of land. When you add in development time lines, land is going to be hanging around 4 -- in the neighborhood of 4 years. And so if you think of that, pre-pandemic land would be kind of working its way through the system now. In response to the impairment question, obviously, we do impairment reviews every quarter. We are coming from a pretty strong margin position, but we always look and, for instance, in this most recent quarter, we actually looked at 16communities for impairments and impaired 4 of them for about -- it was about $2 million in costs that flow through the quarter, the other 12 did not. And so I think, absent some real structural shift in the market, I wouldn't anticipate a widespread kind of remark of our book. I think you will continue to see us as we look at this, evaluate communities one by one. And depending on the market conditions for that community, if we are in a position like we were with these four communities in the quarter, we'll adjust. Good morning. Thanks for taking my questions. Ryan, Bob, appreciate the color so far. A couple of follow-ups here. In terms of the incentives, I think -- and maybe I'm mistaken, but I think the incentives, given we are on closings, the increase to 4%. Can you just help us understand, you talked about the improvement in demand, but also making further adjustments on price incentives. What's your current incentive load on orders, if you can give us that? Yes, Mike, we haven't. And to the comment that Ryan just made, I think he said it well. Pricing is dynamic in the market, right? And so if you adjust base pricing, it doesn't show as an incentive, it's just a lower sales price. And so on a relative basis, over time, we are in a position where we haven't given a guide on margin. We have given you what the incentive load went to, which was 4.3%, which is almost double, but there were price changes embedded in that, too, right? So all those things factor in, so the guide we've given for Q1 margin reflects everything that we've done to this point, and I think we will leave it there. Got it. And then in terms of the improvement through the quarter, I appreciate, like to get into the specifics here, but since you gave the commentary about orders progressing through the quarter in January, can you just enlighten us on a year-on-year basis? Where did you -- where have you stood month-to-date in January? Help us understand the magnitude of improvement versus what you saw through the fourth quarter? Yes, Mike, we don't -- we've never kind of given that type of kind of inter-quarter trajectory. So we are going to leave it probably where we're at, which is we are optimistic and encouraged, not only based on what we saw things kind of progressed through the fourth quarter, which, as I mentioned, is pretty atypical to see the fourth quarter build strength, but we've certainly seen that strength also continue into January. So cautiously optimistic and rates in that period have certainly been lower. So we think that has contributed. We will see kind of what the Fed does here in the next meeting. But all things considered, the operating environment, which we've -- I think we've talked at [indiscernible] is going to be more difficult. We are pretty pleased with what we are seeing in the sales for [ph]. Yes. Thanks very much, guys. Encouraging stuff regarding your comments on the market, and that certainly aligns with what we're hearing as well. I wanted to follow-up on your comment about rates being a major driver to the improvement that you've been seeing. At this point, what share of would you say prospective buyers that you're seeing are having their mortgage application rejected? So you're actually not seeing them able to qualify compared with, let's say, what you would have seen in 2019. And when you think longer term about your business, I think you said 25,000 starts or something like that. How much of that production do you expect to be used for rental purposes relative to, again, a normal time, let's say, 2019. So, Stephen, let me grab the first piece of that. I will let Bob take the mortgage side. I would tell you rate -- the first, your comment on rate, rate is part of it. What's really driving kind of the sales trajectory right now is affordability, and rate is part of that equation. We've also done things in the way we've repriced, the way we've created incentive loans that have helped so affordability as well. So I think that's a big part of it. I will skip to a couple of things that you said about production. Just to clarify so everybody is on the same page, we've got enough production based on what was already in production, plus what we intend to start that will deliver in this year such that our universe -- our production universe will be big enough such that we'd expect to have enough homes to close, approximately 25,000 homes. So -- and then from a rental -- your rental question, we've targeted -- if you go back to the announcement we made a few years ago that we want to do -- have roughly 7,500 homes over a 5-year period, kind of works out to be about 1,500 homes a year once we get fully kind of ramped up. So fairly small piece of our business, which is kind of how we strategically designed that. And I'll flip it to Bob, and he can talk about the mortgage piece. Yes. I guess the good news is, Stephen, we haven't seen a change really in people's ability to qualify, or we haven't seen people not being able to qualify increasing in a disproportionate way because of the rising rates. And I think more often than not, people know what they can spend. They're prequalifying as they go through the process. So over the -- I won't say that I know that versus 2019, but if you look back over the last year or 2 we have seen a pretty consistent cadence of the percentage of people that are canceling contracts because they can't qualify. It has not moved materially with the change in rates. Yes. That's really -- that's interesting and encouraging. I guess, Ryan, you just mentioned you sort of were more specific about your comment about that 25,000 unit mark, and that's helpful. And what I gathered from your comment is that you may actually start fewer than 25,000, correct me if I'm wrong, and so you're addressing sort of your ability to sort of scale down your starts as you have because you actually, I think, peaked at like 35,000 starts in 2021, I think it was. And so I guess my question regarding how you're thinking about the size of your business when things sort of normalize whenever that happens. How quickly could you reattain that level of35,000 starts? What would it take? Is that something that you think that you could do relatively quickly if market conditions permitted it? And then along with that, your lot count, owned lot count declined again this quarter. And I'm curious, do you expect it to decline further into the first half of 2023? Well, Stephen, so there's a lot to unpack there. I will try and touch on as many as I can, and I will ask Bob for a little bit of help here. I'll maybe start with your starts question. We've got 211,000 lots that we control, half of those are owned. We've highlighted with the amount of land that our land spend for the year, which is going to be down substantially from 2022 with the lion's share of kind of what we're going to spend in 2023 be in development. Soon stuff that we've owned and we've purchased and we've underwritten and we're -- and we've got it in the kind of entitlement pipeline, we are going to spend the money to get those communities developed and open. So assuming the market cooperates and we see continued strength, I think that we've got the land pipeline such that we can ramp our production in concert with the consumer behavior. So I feel pretty good about that. And then there are a couple of other pieces there that you asked, Bob, -- maybe help me out here if there is anything that is the answer. [Indiscernible] lots and what we are going to see in Q1, if there would be further decline. I think it was the ⦠Well, like anything else, it depends on the demand environment, how many homes we close for lots, as an example, part of it will be things that are under option today. Are we able to negotiate? If we so desire a deferral of that. So it's hard to give you an answer on that, Stephen, because we are negotiating contracts all the time. Okay. All right. And what I was also asking, Ryan, was how quickly could you reattain a level of 35,000 starts? Yes. Stephen, that's what I was trying to address with my commentary around land. We have the land pipeline such that we can do it. So really to be dependent on how deep -- how deep is the consumer demand, and can we get the trades back on our job site? It's part of the reason that you've also heard us say that we are going to continue to maintain a level of production that allows us to retain those trades on our job sites. So I think they're linked. It's a hard question to answer because I don't know the answer on when demand is going to return to that level. But suffice it to say, I think we've got a production machine that's capable of delivering that if demand is there. Thank you. This is actually Charles [indiscernible] for Susan. I guess my first question is looking at the improvement in activity that you've seen through January, is it fair at this time to expect to sell space in Q1 to be in line with the pre-pandemic historical seasonality kind of a 30% to 40% improvement sequentially from 4Q to Q1? We haven't provided any commentary on the sales environment. And what we've highlighted is that it's variable. So I wouldn't want to try and answer that question for you. That's -- you can decide that? Okay. Okay. And second, you highlighted the potential to improve cycle times through the year. What are some of the key factors that could lead you to improvements in 2023, maybe between the material supply chain issues versus addressing labor availability challenges in the production? Well, there's less production overall in the supply chain. So I think we can be more efficient with the labor that's there. And then the biggest issue that contributed to an elongation of cycle times over the last couple of years was impacts to the pandemic. A big part of that was supply chain related. There was also a decent sized piece of it in terms of the work environment, work-from-home, safe work environment, less inspectors in the job sites -- on the job sites, less permit reviewers in municipal offices. I mean it was really a combination of things, but probably the biggest variable that is really -- I don't want to declare victory, but it's probably better than it's been over the last couple of years as the supply chain environment is healing. Appreciate everybody's time today. We are certainly around for the remainder of the day if you've got any questions. Otherwise, we look forward to speaking with you on our next call.
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Welcome to the Fourth Quarter and Full Year 2022 Stanley Black & Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's 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 the Vice President of Investor Relations, Dennis Lange. Mr. Lange, you may begin. Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black & Decker's 2022 Fourth Quarter and Full Year Webcast. On the webcast in addition to myself, Don Allan, President and CEO; and Corbin Walburger, Vice President and Interim CFO. Our earnings release, which was issued earlier this morning and the supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of this morning's webcast will also be available beginning at 11 a.m. today. This morning, Don and Corbin will review our 2022 fourth quarter and full year results and various other matters followed by a Q&A session. Consistent with prior webcast, we are going to be sticking with just one question per caller. And as we normally do, we will be making some forward-looking statements during the call based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate and, as such, involve risk and uncertainty. It's therefore possible that the actual results may materially differ from any forward-looking statements that we may make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent 34-F filing. Thank you, Dennis, and good morning, everyone. Our fourth quarter performance marked another meaningful step forward on our journey to streamline and optimize Stanley Black & Decker. Building on our number one worldwide market position in Tools & Outdoor, as well as our leading Industrial business, we continue to focus on advancing our simplification and transformation strategy. Across the second half of 2022, we improved customer fill rates significantly, reduced inventories by $800 million and realized $200 million in efficiency benefits from our leaner organizational structure as well as enhanced cost control in the back office and the supply chain. These actions generated more than $500 million of free cash flow in the fourth quarter, which supported a corresponding similar amount of reduction in our debt, a key objective of our capital allocation plan in the second half of 2022. Overall, we are making progress, and I am confident that our strategy and priorities are positioning the company for a strong, sustainable, long-term growth, cash flow generation, profitability enhancement and shareholder return. This transformation journey has just started, and significant efforts are still ahead of us. Our success will be dependent on staying agile while maintaining a disciplined approach, which ensures we stay focused on our key set of priorities. Our team has seen significant changes over the second half of 2022, and they will lead us through the next phase of the transformation in 2023. I would like to take a moment to thank all of our leaders and employees across the globe and recognize them for their focus, commitment and hard work, especially over the last 7 months to 8 months. Our 2022 full year revenue reached $16.9 billion, up 11% versus a record of 2021, led by the outdoor power equipment acquisitions as well as 9% organic growth in the Industrial segment, and a 7% improvement in price realization. However, these top line growth drivers were partially muted by significant retractions in consumer and DIY demand, as well as certain supply chain constraints we experienced in early 2022. Our margins were significantly impacted by inflation, and when we chose to prioritize inventory reductions by lowering manufacturing production levels in this last four to five months of 2022, this was to allow us to generate solid free cash flow as we experienced in the fourth quarter. These negative profitability impacts resulted in a full year adjusted diluted earnings per share being down year-over-year to $4.62. For the fourth quarter, revenues were in line with the prior year at $4 billion. Demand from our professional end markets remained healthy. With our differentiated offerings and improved product availability, we successfully executed our promotional plans in support of the holiday season for our retail partners. Adjusted EPS for the period was a loss of $0.10, a result of our planned prioritization efforts around inventory reduction and cash generation. Notably, we lowered inventory by $500 million as compared to the end of the third quarter. We entered 2023 prepared to navigate a challenging macroeconomic backdrop as interest rate hikes begin to yield their intended effects. That said, we are committed to advancing our transformation. While there is more work to be done, we have a clear road map forward. We are watching the demand environment and global economic dynamics very closely. Although, current demand remains consistent with levels experienced in the back half of last year, we are planning for all scenarios, which balance the potential continuation of the current trends with the prospect of a further demand slowdown due to intensifying macro pressures. While changes in demand are difficult to predict, our base case or midpoint of guidance assumes a decline in volume versus 2022 as we believe markets will continue to be challenged during 2023 as new housing starts are projected to decline 15% to 25% and repair and remodel activity will decline modestly year-over-year, we are also prepared to respond if revenue impacts are worse or better than our base case to ensure we appropriately manage the risks and opportunities that could arise. This guidance will have a P&L loss in the front half, which is impacted by our strategic choice to continue to reduce our inventory levels. For the full year, we are guiding an adjusted EPS range of zero up to $2. Our free cash flow guidance is much stronger at $500 million up to $1 billion in 2023, well ahead of net income as we drive another $750 million up to $1 billion of inventory reduction during the year. As you have heard me say many times over the past year, we believe the long-term view for the industries, which our products serve is very positive with powerful generational shifts in the housing, more time at home due to hybrid work, an aging housing stock that needs repair and remodel, the continued improvement in aerospace demand and the acceleration of electrification within the automotive markets. We also have powerful secular drivers in Tools & Outdoor from the shift to cordless power tools and electric powered outdoor equipment as we leverage our brands and innovation to gain market share. Our priorities in 2023 will continue to be aligned with our messaging over the last six months; one, strong focus on cash flow through inventory reduction to assist with ongoing debt deleveraging; two, sequential improvement in our gross margins as we drive further supply chain transformation initiatives; and three, get back to gaining market share in all major categories of our Tools & Outdoor business. Our 2023 guidance base case is planning for an improved profitability performance in the back half of the year as we see more benefits from the transformation program. We believe our annualized EBITDA will achieve a run rate of close to $1.5 billion in the back half. That will be a major step forward in returning our company back to 2019 EBITDA levels, which were just above $2 billion. Given the significant benefits expected to be realized beyond 2023 from our supply chain transformation program, there appears to be a very reasonable glide path to exceed 2019 levels for EBITDA. Our teams around the world remain focused on executing our primary areas of long-term strategic focus, continuing to advance innovation, electrification, and global market penetration to achieve organic growth of two to three times the market growth, streamlining and simplifying the organization as well as shifting resources to prioritize investments that we believe have a positive and more direct impact for our customers and end users; accelerating the operations and supply chain transformation to return gross margins to historical 35% plus levels, while improving fill rates to better match inventory with customer demand; and then prioritizing cash flow generation and inventory optimization. We are making deliberate strategic investments in our businesses to position the company to fully capitalize on these long-term opportunities to gain share within the industries that we serve and to accelerate our organic growth. With that in mind, last year, we invested approximately $350 million in research and development, up over 25% versus 2021 and well ahead of our total sales growth. This increase in R&D will ensure we continue to fund incremental investments beyond our core and breakthrough innovation, electrification across the portfolio, and market leadership, including digital and end user activation. This is an area where we have a long legacy of key investments to maintain our market-leading innovation ecosystem. We clearly took another step forward in 2022 and we will again in 2023. Our business transformation remains on track and we are building momentum towards delivering approximately $1 billion in annualized savings by the end of 2023. That will support both gross and operating margin expansion once our inventory destock is complete. Let's spend some time on the topic of innovation. We are continuing to release new products and bring advancements and innovation to our industries. Today, I will highlight a few exciting launches. As it relates to outdoor electrification, we are introducing new CRAFTSMAN and DEWALT outdoor offerings. For the 2023 season, CRAFTSMAN will carry a new range of lithium-ion electric ride-on mowers and an expansion of our 20-volt CRAFTSMAN Outdoor Essentials, notably new brushless string trimmers and blowers as well as a new cordless pressure washer. For the PRO, we are continuing to expand the DEWALT FLEXVOLT 20-volt MAX system, including the addition of a new pruning chainsaw that is lightweight and compact with an 8-inch bar and a high-efficiency brushless motor. Shifting to professional job site products and solutions, this is another key area for long-term growth. We recently debuted a range of revolutionary tools, accessories, and storage solutions for pros in the commercial concrete and construction industries as we continue to electrify the job site. We are expanding the FLEXVOLT product family with the launch of the world's first cordless in-line SCS MAX Chipping Hammer and Cordless Hexbreaker Hammer. We are also introducing the most powerful cordless DEWALT large angle grinder. All three of these new cordless tools include Perform and Protect safety features as well. Additionally, we have a new DEWALT ToughSystem Solution for storing, charging, and transporting DEWALT 20-volt and FLEXVOLT batteries. And lastly, our DEWALT product team partnered with CONVERGE, a leading concrete material and operations optimization company, to develop and unveil new concrete DNA compatible sensors. This new product allows DEWALT pros to begin work sooner as users can directly measure concrete hardening using advanced artificial intelligence rather than relying on estimations. In addition, this product helps reduce cement consumption by tailoring the exact amount needed. Together with CONVERGE, we are helping to tackle the challenge of reducing carbon emissions through our product innovation. As the worldwide leader in tools and outdoor, these are prime examples of the types of core and breakthrough innovations that we expect to continue to introduce to our customers and deliver for our end users. Now, diving a bit deeper into our business transformation. The team has made great progress. We realized $200 million of savings in the second half of 2022 from efficiency benefits, including our organizational changes, as well as indirect cost savings. We expect to deliver cumulative SG&A savings of $500 million by the end of 2023, covering simplification of the corporate structure, streamlined leadership spans of controls and organizational layers and the reduction of indirect spend. Our new organizational structure is now in place, and the teams are activating our priorities. As you saw in our recent announcements, we have brought on two new business leaders who are critical for our transformation. Patrick Hallinan was named our incoming Chief Financial Officer. Patrick is a seasoned executive who has led global high-performing finance functions across top consumer brands. Patrick joins us in April from Fortune Brands Innovations, where he currently serves as their CFO, and is the ideal candidate for the next leader of our finance function. John Lucas joined us as our new CHRO and brings a highly distinguished track record with world-class experience in organizational and human capital management. John will be instrumental to enabling our culture and values and to the long-term success of our business. I want to thank Corbin Walburger and Deborah Wintner for their leadership and significant contributions during this critical transformation period for the company. I look forward to continuing to work with them as key Stanley Black & Decker leaders. Turning to our supply chain transformation. We have line of sight to deliver cumulative savings of $500 million by the end of 2023 and $1.5 billion by 2025. Building off the momentum from last quarter, we activated our transformation with a sense of urgency to optimize our operations, which better serve our customers while also being efficient and agile with our footprint and cost structure. After approving and initiating action on our SKU reductions, we now have approximately 50,000 SKUs that we are no longer manufacturing and are approved for decommission. Throughout 2023, we will work to transition our customers to the products that deliver the most value for our end users. As we shared last quarter, the strategic sourcing team activated quick wins. We are pleased to share that, this early traction has already generated $40 million in savings. Wave one is now fully activated and addresses approximately $2 billion of spend, which is covered by 20 RFPs that are due back this quarter. We also successfully advanced our facility optimization and distribution network planning. The detailed feasibility analysis nearing completion this quarter, with execution of the plan to follow shortly thereafter. Lastly, we have heightened our focus on manufacturing excellence, reemphasizing SBD Kaizen and Lean manufacturing practices at our factories. Activation at four plants will be complete this quarter. And in March, we will initiate the next wave. We have exited the acute phase of pandemic-driven supply constraints. And as such, refocusing our plans on continuous improvement rigor will enable the acceleration of value across the network. You can expect us to continue to take strides forward, and we will provide you with updates towards achieving our cumulative $1 billion of savings by the end of 2023 on our path to delivering total program savings of $2 billion by 2025. I will now pass it to Corbin, who will take you through more detailed commentary on the fourth quarter and full year performance as well as our 2023 guidance. Corbin? Thank you, Don, and good morning, everyone. Let me walk through the details of our business segment performance. Beginning with Tools & Outdoor, fourth quarter revenues were in line with last year at $3.4 billion, benefiting from a 7% improvement from price actions and an eight-point contribution from the MTD and Excel outdoor acquisitions. Both of these acquisitions are now a part of organic growth beginning in December. These factors were offset by a 12% decline in volume and a negative 3% impact from currency. From a full year perspective, Tools & Outdoor achieved record revenue of $14.4 billion, driven by a 7% improvement from price actions, and 21% growth contributed by our outdoor acquisitions, which was offset by softer consumer demand and currency. Looking at the regions, Latin America achieved 4% organic growth. Although Europe declined 3% organically, performance improved sequentially from the third quarter, and we believe the more significant impacts from UK channel destocking are now behind us. North America was down 7% as a result of lower consumer and DIY market demand, as well as the third quarter carrying heavier holiday promotional shipments compared to last year. US retail point of sale was supported by price increases and professional demand. Compared to a pre-COVID 2019 baseline, the fourth quarter POS growth was consistent with the growth levels experienced in the third quarter of 2022. Aggregate weeks of supply in these channels ended 1.5 weeks below 2019 levels. Adjusted operating margin for the segment was 1% in the quarter as the benefit from price realization was more than offset by commodity inflation, higher supply chain costs, planned production curtailments and lower volume. For the year, operating margin was 8.4%, down versus prior year. Turning to the strategic business units. For the full year, Power Tools declined 5% organically due to weakness in consumer and DIY and front half constraints related to electronic components. These volume impacts were partially offset by the benefits of our price increases and the continued performance of our strong DEWALT cordless innovation across our FLEXVOLT, ATOMIC and XTREME product families as well as our new and differentiated power stack battery packs. Hand tools declined 5% organically in the year. Consumer related headwinds were partially offset by price realization as well as new product innovation, notably the DEWALT Impact Connect, which consists of accessories that attach to an impact driver, allowing up faster cutting than standard hand tools. We also benefited from innovation in storage solutions such as mobile tool storage within the DEWALT Tough system and the CRAFTSMAN Premium S2000 metal storage platform. The Outdoor business declined 7% organically on a pro forma basis for 2022 due to the difficult outdoor season outlined earlier in the year. The fourth quarter marked the one-year anniversary of the MTD and Excel acquisitions, and we're pleased with the progress made to advance the outdoor platform integration. We now have a combined dealer channel sales team and launched one go-to-market approach to grow share. We've activated a brand portfolio strategy, leveraging DEWALT, Cub Cade,t and Hustler in the Pro and high-end resi market segment while targeting CRAFTSMAN, Troy-Bilt, WolfGarden, and Black & Decker for the residential end user. I want to acknowledge and thank the entire team for their dedication to this process and ongoing commitment to delivering the best products for our customers. Now, shifting to Industrial, which had another strong quarter, recording 10% organic growth and double-digit adjusted operating margin. Segment revenue declined 1% versus last year as nine points of price realization and one point of volume were offset by five points from currency and six points from the oil and gas divestiture. The team leveraged the price increases and volume growth to overcome commodity inflation and higher supply chain costs to deliver adjusted operating margin of 11.5%, up sequentially 40 basis points and up 220 basis points versus last year. Looking within the segment, Engineered Fastening organic revenues were up 9% in the quarter, led by aerospace growth of 37% and auto growth of 14%, which were partially offset by industrial markets. Aerospace fasteners delivered its sixth consecutive quarter of sequential revenue improvement as the recovery in commercial OEM production continues. The auto fasteners' strong quarter, demonstrated by the business' ability to gain share in a dynamic environment and outpaced global light vehicle production in the quarter and for the full year. Attachment tools organic revenues were up 18%, driven by strategic pricing actions. While orders particularly from our dealer channel partners have been moderating, our backlog remains above 2019 levels. We continue to make progress with our inventory reduction in the fourth quarter, taking out nearly $500 million and resulting in a total second half inventory reduction of $775 million. Our production curtailment actions have been successful, helping to reduce DSI by approximately 20 days in the quarter and it was good to see the significant inventory reduction in the second half translate into free cash flow generation in the fourth quarter. As we look to the front half of 2023, we are targeting another $500 million reduction with the majority of this progress to be made in the second quarter. Although we typically see a seasonal inventory build as we prepare for the outdoor and spring selling season, we have the ability to work down our input materials and components as well as drive commercial actions to sell through finished goods. Our full year 2023 inventory reduction target is $750 million to $1 billion, which will drive significant cash flow generation that will be used to pay down debt and further strengthen our balance sheet. The timing of this reduction is demand-dependent. In a few moments, I'll cover how these assumptions impact the 2023 guidance range. Turning to gross margins. We expect the impact of planned production curtailments and higher cost inventory liquidations will continue to weigh on margins through the first half of 2023, resulting in margins in the low 20s. Production curtailments in the fourth quarter were down approximately 30% versus the long-term average and impacted gross margins by approximately six to seven points in the quarter. In our base case, we expect to improve from these levels but not fully eased production curtailments until the third quarter of 2023, which should support a gross margin recovery into the mid to high 20s in the back half. The normalized production and better gross margins could potentially shift earlier or later in the year depending on the overall demand environment and the speed of destocking. We have the teams focused on inventory reduction, cash generation, and balance sheet health as we work to drive gross margins to our historical 35% plus target level in 2025. I'll now walk through how the company is planning for three demand scenarios for our 2023 guidance as the macroeconomic outlook remains dynamic. Our base case scenario assumes a modestly unfavorable market demand environment, compared to what we experienced during the second half of last year. In this scenario, we are assuming total organic growth to be down low single digits with the first quarter being the toughest comp. Tools & Outdoor total organic revenue, inclusive of positive price is expected to be down low single digits, while Industrial is planned for low single-digit growth. Specifically, for Tools & Outdoor, this would imply a full year volume decline of approximately 5%, ahead of our forecast for the market. For the second half, volume is expected to be down 3% to 3.5%. In this base case, we would maintain our production curtailments with the goal of returning to normalized levels in the third quarter. As a result, the under absorption of fixed manufacturing costs would continue to constrain first half 2023 operating margins to low single digits. As production returns to normalized levels in the back half of the year, we expect operating margin rate to improve to the mid to high single-digit range. While our teams are aggressively focused on capturing deflation, this scenario does not include moderating commodity prices benefiting the P&L until late 2023 after the destock, and can be a positive driver heading into 2024. As we monitor the demand environment, we will be measured in the timing and magnitude of our investments, reinvesting into our businesses at the point of impact as part of our transformation strategy, and our base case scenario includes approximately $125 million of annualized reinvestment targeted at commercial leadership, driving innovation and complexity reduction. Shifting to our second half acceleration scenario. This contemplates the possibility of a stronger demand environment supporting organic growth in the second half of 2023. Total organic growth would be relatively flat for the year. To support the improved second half demand, production levels would normalize towards the end of the second quarter. This scenario would position us to deliver high single-digit operating margins in the second half as well as an elevated level of reinvestment to accelerate our transformation. Lastly, we are preparing a downside case that reflects a deceleration of demand due to elevated recessionary pressures. In this case, we expect full year organic revenues to decline by mid-single digits with volume declines in both the tools and outdoor and industrial segments. If this were to occur, our production curtailments would likely continue through the end of 2023, extending the time line of our gross margin recovery. Under this scenario, we would opt to conservatively meter the level of reinvestment until we had more clarity on the extent and duration of the macro impacts and economic cycle. Overall, we feel it's prudent to consider this range of potential 2023 demand possibilities production and reinvestment levels as we continue to prioritize inventory reduction and cash generation. As such, we are guiding full year adjusted earnings per share in the range of zero to $2. On a GAAP basis, we expect the earnings per share range to be negative $1.65 to positive $0.85, inclusive of one-time charges from the global supply chain optimization and the remaining outdoor integration-related expenses. The current pre-tax estimate for one-time charges is approximately $225 million to $325 million with $50 million to $100 million in non-cash charges. Now some added quarterly context from our base case. For the first quarter, we're expecting similar levels of operating profit to what we delivered in the fourth quarter. However, we do not expect the discrete tax benefits to repeat, resulting in a first quarter adjusted loss of $0.75 per share at the midpoint. We believe profitability can improve sequentially into the second quarter, resulting in a stronger performance. In total, we expect our actions [Technical Difficulty] but will translate to positive first half free cash flow driven by $500 million of inventory reduction, most of which will come in the second quarter. As we get through the first half destock, we expect earnings to inflect positively in the second half of the year, generating an annualized EBITDA run rate of approximately $1.3 billion to $1.7 billion. We view this as a jumping off point to further improve with our transformation. Our guidance calls for $500 million to $1 billion of free cash flow in 2023, primarily from inventory reduction. We're focused on our key priorities; number one, generate strong cash flow through inventory reduction to assist with ongoing debt deleveraging; number two, sequential improvement in our gross margins as we drive further supply chain transformation initiatives; and number three, focus on gaining market share in all major categories. We're planning for the dynamic operating environment to continue and feel we have the strategy in place to successfully navigate our path forward as we remain focused on driving above market long-term organic growth. Thank you, Corbin. So in summary, we successfully advanced our cost reduction and business transformation strategy over the last quarter and made meaningful progress on a number of key objectives, including inventory reduction, cash generation, debt reduction and streamlining our organizational structure and supply chain. We have given you an indication today of what annualized EBITDA could be on the first step of this journey. We believe we can build from 2023's back half as our supply chain savings continue to accrue and contribute to the restoration of our gross margin to the 35% plus level. As we look ahead, we aim to get our levels of EBITDA back to 2019 levels and beyond as we continue to transform our business. While the macroeconomic environment is uncertain and 2023 will clearly bring us challenges, we are prepared to navigate forward and believe our actions to reshape, focus and streamline our organization, as well as reinvest in our core businesses will enable us to deliver strong shareholder value over the long-term via robust organic growth and enhanced profitability. Thank you. [Operator Instructions] Our first question comes from the line of Julian Mitchell with Barclays. Your line is now open. Good morning. Maybe just my question would be around -- I guess, two quick parts. One would be, it looks like you're guiding for positive price, I think, in Tools this year, maybe the conviction in that given what seems to be a lot of inventory kind of out there at customers and competitors. And then also, the second part would just be I heard what you said on the annualized EBITDA run rate. Are we still assuming a sort of $7 plus or so of EPS potential at Stanley in the medium-term based off that, or has that view changed? Yes. So I'll start and then Corbin probably will add a little color too on both of those topics. But I would say that our price model has about 1.5 to 2 points in it for the year for 2023. And based on where we are now with commodity prices, which you've seen some improvement or reduction, but overall, when you look at the basket of commodities for us, we really don't see any significant deflation and a little bit of inflation here in the first half of the year. So we still see based on that, that we can maintain price throughout the year. Now your question on the angle of there's a lot of inventory in the channel, and therefore, we're going to have to take specific promotional actions that might be unusual to drive inventory out of the channel, which, therefore, would impact our price. We don't really see that in our plan today. So we see normal promotional activity in the spring and the Father's Day season and then, of course, in the later stages around Thanksgiving and other holidays at the end of the year. And so at this point, we do not believe there's a need to do anything unusual around pricing activities to push things to the channel. One thing I'll just point out related to inventory levels in the channel. For us specifically, we actually feel where the inventory is in our customers is pretty reasonable at this point, and it's actually down a little bit from 2019 levels. And so probably about a week to two weeks down from those levels, which is a good place to be. And we feel like we've gone into the year with the adequate amount of inventory in their stores. And what we're dealing with is higher levels of inventory in our own distribution network that we have to work through during 2023 and probably some early stages of 2024. But the vast majority of that reduction is going to happen this year in 2023. Long-term EPS and the $7 and some commentary around that. So I think as you start to dissect the guidance we're providing at the midpoint, you'll see that the back half is getting itself close to a couple of dollars EPS for this year. And if you annualize that and factor in seasonality from the outdoor season that happens in the first half of the year primarily, you're probably trending something for 2024 that's closer to $5. And now that assumes that we deal with an environment that we have guided here, which is the midpoint is pretty muted from a volume perspective. We -- as you heard from Corbin in his presentation, the back half is assuming for the Tools & Outdoor business that the organic performance will be down about three points. And as a result, that's really us seeing a continuation of current trends on the consumer side, but also likely some slowing on the pro side as you start to look at lower housing start numbers, lower repair remodel numbers year-over-year and as -- and we think this year, we'll see a negative organic performance at our base case. Now if that doesn't play out, and the performance is stronger, you heard from Corbin that it could be two to three points better for the year, and obviously, the back half would be a better performance as well. If that played out, and then you went into 2024 with that type of momentum, there could be a case where you actually do work yourself closer back to the $7. So I think we're probably, at this point, somewhere around $5, with it eventually having the possibility, if the volume and demand is stronger than our base case, where it could be higher than that. No. The only thing, Julian, maybe for your model from a pricing standpoint, we're going to have some price carryover in the first half of a point or two, and then that obviously anniversaries out by the second half. Yeah. Hey, good morning everybody. Thanks for all the details. Don, maybe just following on to your question, or to some of the answers from the last question. Just what are you seeing from the Pro today? And I guess, what -- within the scenarios that you've outlined, I mean, what are you assuming that the Pro does as you work through 2023? Yeah. I would actually say coming out of the gate here in 2023, it was just one month under our belt, we're actually not seeing any slowing of the Pro. So the Pro business continues to be healthy. As we talk to our customers, they say the same thing. What we are, though, forecasting in our model is a slowing down of some of that activity. And when you look at the organic projection that we have for our Tools & Outdoor business, we expect it to slow down as we get deeper into the year and for that to continue in the back half of the year in a modest way. And so I think that's a reasonable assumption when you give -- when you start to look at things like housing starts and the projections for housing starts, repair, remodel, what our customers are saying and their expectations are around likely performance year-over-year and what you hear from many of the peers in the space as well. I mean, everybody seems to be thinking that the market will probably be down somewhere 3% to 5%. And that's kind of where we are with our Tools & Outdoor business. And it aligns very much with the trends you're seeing in construction. And I think it is a good base case to start with, but as I said before, it could be better than that if the Pro doesn't weaken as much as I just described. It also could be worse than that, which I think our downside case covers that as Corbin articulated very well in his presentation. Thanks. Good morning and thanks for the question. Don, on the inventory reduction, I think you're still going to be carrying $5 billion of inventory at year-end. So just wondering why not be even more aggressive on that inventory reduction? And is there a risk that, that this could carry forward into 2024? And maybe just address the dividend. We've got a few questions this morning. Just is there any scenario you look at/or any scenario where you might have to revisit the dividend this year? Thanks for asking the questions. Sure. I think on the inventory part of your question, I feel like going after $1 billion, $750 million to $1 billion is the reasonable level that we should pursue given where our business model is today and our supply chain is today. Could we, over time, over the next 12 months, get to a number above $1 billion? Yes, that's possible. It probably wouldn't be dramatically above that number, though. Now as you go into 2024, I don't think there's a need for another major step down in inventory. I think what we're going to see, if things go the way we would like them to go in 2023, we'll get a substantial chunk of inventory out in the first half of the year, a lot of that probably in Q2. We'll do some more at the end of the year in the fourth quarter, which tends to be part of the normal routine of our company. And beyond that, I think it's just going to get back to managing and optimizing the supply chain to maximize the efficiency of it. And we'll continue to drive down inventory. But it won't be at the -- having an impact on our production. It will be more managing it efficiently, looking at how we do certain types of activities that drive reductions of $250 million to $500 million each year for maybe the subsequent two years, more in that magnitude. And I think that's the right way to look at it. I really would like to get production levels back to normal in the back half of 2023. That is our goal. We think it's achievable based on our base case right now. And we'll continue to look at that. Obviously, Corbin articulated at the downside case, if we saw demand being even worse then the production levels would have to stay lower probably through the remainder of the year. But in our base case, I think there's a good chance we can get production levels back to normal in the summertime of 2023. On the dividend, very good question. Thank you for asking that. The dividend continues to be a very important part of our capital allocation strategy. We believe that it's a necessary thing for us to maintain the level of the dividend that we have today. We'll continue to evaluate that through the remainder of the year, but there's no change in that strategy at this stage. Obviously, buying back stock is not an opportunity for us given the leverage we have on our balance sheet. And so therefore, returning value back to our shareholders, the main lever we have today is our dividend. Thank you. Our next question comes from the line of Mike Rehaut with JPMorgan. Your line is now open. Mike Rehaut with JPMorgan, your line is open, please shut your mute button. Sorry, about that. Appreciate the taking my question. Just wanted to make sure I fully appreciated the base case in terms of -- I think you said earlier that it incorporates a view around repair remodel activity being down also low single-digits. I just want to make sure I understand that's right. I mean, obviously, you have existing home sale turnover trending down 30% year-over-year currently. And I think that might be, at least in our view, a little optimistic. But just wanted to understand your assumptions behind that? And also, if I could just kind of shift gears on the modeling side, I appreciate any views on some of the other line items from a guidance standpoint, corporate expense, interest expense, other net, some of those line items would be helpful? Thanks. Hey, Mike, I'll take that. On the base case, as we said, the whole company we view in the base cases being down two to three points organically. Volume is more than that. There's some coverage from price. If you look at tools organically, tools will be down about three to five points, volume down a little bit back from price. And then the second half, as Don mentioned, volumes down in the kind of 3% to 3.5%. And from an Industrial standpoint, we see that being up low single digits, both from price and from volume. So that's the case for how we got to the base case. I think the other thing that I would add is we â if you look back at history of Stanley Black & Decker and if you put the Great Recession in 2009 in a totally different category, because we had a significant amount of overbuild residential inventory, in particular, in housing and say that's an unusual situation that's probably not indicative of where we are today because we don't have that type of overbuild situation and we don't have the same type of leverage issues within the consumer in the housing market as well. The other recessions that Stanley Black & Decker has historically experienced, the average decline has been about 3% to 5%. And so when you think about it from that perspective and recognize that we just went through a period of time where we're dealing with supply constraints and then a bit of a consumer dip in the back half of 2022, now we believe we're going to see a bit of a pro dip here in 2023, we're kind of aligned with our 3% to 5% in 2023 with that historical point of view. There hasn't been many recessions that have impacted housing beyond the 5% except for the one that I mentioned, which was the Great Recession, which is very different than usual. So it's just something that we need to keep in mind as you factor all the different scenarios that Corbin went through in the presentation and really center around our base case. Our base case is very consistent with what history would say. Hey, Mike, just to touch on your other question around specific line items. As we said, the corporate expenses, we've really targeted to get back to 2019 levels. That's where we expect them and then interest because rates have gone up and the quantum has gone up, you'll probably see an increase in interest expense of about 20%. To the extent you can comment, how was your pricing in Tools & Storage achieved in 4Q compare with your channel partners, your home center pricing achieved? I mean, is there still a risk of major discounting to clear out inventory or otherwise reflect an environment, or do you think that we've come close to balance there? I think as we look at the pricing dynamics in Tools & Outdoor, we are monitoring all the different things that are happening across the different product families and categories related to price. And we really look at what our competitors are doing. We're obviously paying attention to monitoring what we're doing as well and making sure it's consistent with our expectations. But we didn't see any major turbulence in the market around pricing from our competitors during the fourth quarter. We do see here random, kind of, what I would call promotional activities to move inventory through some of our customers' stores. So you saw some of that happen in the fourth quarter. But it didn't dramatically shift the pricing dynamic, the list pricing dynamic in particular in that time horizon. That's something we will continue to monitor here going into 2023 and make sure we stay focused on that throughout the year. And it's always something that we have to factor into our decision-making. But we think the promotional calendar that we've built with our customers so far for this year. And the other activities that we're able to do will allow us to achieve the level of inventory reduction we would like to get to, which is $750 million to $1 billion. And we obviously have to be agile and flexible and look at what happens in the market. But at this stage, we're not seeing any irrational pricing activity. Thank you. So I wanted to ask about the gross margin recovery during 2023. When we see gross margin going from the 20% currently to the mid to high 20s by the back half of the year, could you provide just a bit more color on the buildup here between the improvement of just getting past the destock versus some of the benefits of the Phase 1 supply chain transformation plan starting to come through? Thank you. Yes, you bet, Chris. So the gross margins, as we said, in the second half of 2022, on average, we're around 22%. And there was probably about four-point penalty driven by the production curtailments and liquidating the high-cost inventory. As we go through the course of 2023, that four-point penalty slowly starts to decline to about 3.5 and then to 2.5 points by the end of the year. And again, it's a mix between -- we don't -- as I mentioned in my view on our guidance, we don't expect production curtailments to continue throughout the whole course of the year. So that will help us. And then as we liquidate the high-cost inventory, that also helps us. So by the end of the year, on an incurred basis, we will see margins slightly above 25%, but there will still be a little bit of penalty that would get us into the high 20s. Great. Thanks very much. I was wondering of the plans in different scenarios in terms of inventory, where you've talked about those situations and what -- how it impact production, but it doesn't seem as though you would change your goals in terms of that $750 million to $1 billion reduction of inventory. Why not think about reducing inventory by more? Is there something in the supply chain that's leading you to thinking about keeping a higher level than where you've had historically? What's the overall thought there in terms of why not more inventory reduction? Yes. I would say the range actually is indicative of the range of EPS. So if the low end of range of EPS played out that Corbin articulated, then we'd probably be looking at $750 million of inventory reduction. Even though we would be continuing curtailments, the demand levels would be much lower. And so you have two or three points lower demand versus the base case. On the high end of the case, I think the $1 billion becomes very achievable because you're dealing with much higher levels of demand where organic for Tools & Outdoor would probably be flat year-over-year. And therefore, the $1 billion feels more achievable in that environment, and you're getting your production levels back to normal levels in the back half of the year or maybe sooner. And so that's where the range kind of plays out. As I mentioned earlier in response to Nigel's question, I do think if demand is stronger in the back half, we could see a possible improvement above the $1 billion. I don't think it would be a dramatic number, but a few hundred million dollars above that, it certainly makes sense. And so that's really where that range comes from. It really correlates well with the EPS range, which correlates well to the demand associated with those three different scenarios. Just to maybe piggyback on one of the earlier questions. Can you just give a little bit more color on the ramp of the cost savings that you guys expect to achieve throughout 2023, would take into the base case? And then any help at all on as we think about 2024 and 2025? It might be a bit early to give us explicit numbers. But is more of the plan coming through in 2024, or is it more back-end loaded towards the end of the three-year period? Thank you. Hey, Nicole, it's Corbin. I'll take it. So as Don mentioned, in 2022 in the second half, we've got about $200 million of savings. And as we look into 2023, from an SG&A standpoint, we expect to get about $300 million. About 70% of that will come in the front half and about 30% will come in the back half as you lap 2022. And then on the COGS side, we expect about $450 million, and that will build throughout the year. So Q1 will be a little bit higher and then it will build in 2Q, 3Q, and 4Q will be pretty even. Yeah. And I think for 2024 and 2025, I mean, we're trying -- obviously, with the numbers that you just heard, we believe we'll have $1 billion of value creation by the end of 2023. And then there's another $1 billion related to the supply chain transformation in the subsequent two years of 2024 and 2025. Right now, based on the plan we have that our operations and business teams have collectively worked together on, that $1 billion has a specific level of detail and actions that are associated with it that we believe are close to being rock solid. And, therefore, we do think in those two years, we'll probably get about $500 million or so of that in each year. And we'll see as we get deeper into 2023, whether more comes in 2024 versus 2025, time will tell. But at this stage, it feels like the way that we're phasing this because it is a pretty significant level of transformation that we're doing across our supply chain, and we need to be thoughtful as to when we do different phases of it, so we don't cause any major disruption to our customers, which is why it's going to take three years to do. At the same time, it's also why the value probably would be pretty evenly prorated over a three-year time horizon. Good morning. Thanks. Curious on, Don, you talked about 2024 of $5 to $7 in rough frame. And I know six months ago, that was the concept for 2023. What's so notably different in 2023 that pushed out that level of earnings to 2024? Yeah. I would say there's a couple of dynamics. I mean, obviously, volume continues to be challenging. We think volume is going to be challenging for 2023. I talked about what I think is going to happen with the Pro market in 2023, and we'll see a modest recession aligned with what the historical recessions are for Stanley Black & Decker of down 3% to 5%. Clearly, that's a significant factor in all of this. We're also -- we've decided to be much more aggressive in the inventory reduction than we were thinking three, five months ago, where we were going to be more methodical in that reduction. We're being more aggressive. We're really trying to get a large part of this done by the middle of 2023 to get production levels, as I said, back to normal in the back half of 2023. And those are probably the two main drivers of the difference in the timing. Shannon, thanks. We'd like to thank everyone again for their time and participation on the call. Obviously, please contact me if you have further questions. Thank you.
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Greetings. Welcome to Dynatraceâs Fiscal Third Quarter 2023 Earnings Call. [Operator Instructions] Please note this conference is being recorded. At this time, I will now turn the conference over to Noelle Faris, Vice President of Investor Relations. Noelle, you may now begin. Good morning and thank you for joining Dynatraceâs third quarter fiscal 2023 earnings conference call. Joining me on todayâs call are Rick McConnell, Chief Executive Officer and Jim Benson, Chief Financial Officer. Before we get started, please note that todayâs comments include forward-looking statements such as statements regarding revenue and earnings guidance and economic conditions. These forward-looking statements are subject to risks and uncertainties depending on a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these uncertainties and risk factors is contained in Dynatraceâs filing with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the companyâs view on February 1, 2023. Dynatrace disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non-GAAP financial measures during todayâs call. A detailed reconciliation of GAAP and non-GAAP measures can be found on the Investor Relations section of our website. Unless otherwise noted, the growth rates we discuss today are non-GAAP, reflecting constant currency growth. To see the reconciliation between these non-GAAP and GAAP measures, please refer to todayâs earnings press release and financial presentation under the Events section of our website. Thanks, Noelle and good morning everyone. Thank you for joining us on todayâs call. I am very pleased with the teamâs execution this past quarter amidst a difficult macro backdrop. Dynatraceâs strong third quarter results solidly beat expectations on the top and bottom line. Adjusted ARR growth and constant currency subscription revenue growth were both 29% year-over-year. Non-GAAP operating margin in the third quarter was 27% and free cash flow margin on a trailing 12-month basis was also 27% of revenue. These results continue to demonstrate our ability to run a balanced business that delivers high growth, coupled with strong bottom line performance. They are a testament to the strength of our market, the significant customer value of our platform and the ongoing durability of our business model. Jim will share more details about our Q3 performance and guidance in a moment. In the meantime, Iâd like to share my view of the current market environment, our platform leadership and differentiation and our investment priorities to support future growth. To start, our market opportunity has never been stronger. We recently conducted an independent global survey of 1,300 CIOs and senior DevOps managers, 90% of whom indicated the digital transformation within their organization has accelerated in the past 12 months. They also said that their DevOps teams spend on average over 30% of their time on manual tasks involving code quality issues and security vulnerabilities, which reduces the time spent on innovation. These research findings support our perspective that observability is increasingly moving from optional to mandatory. Digital transformation and in particular, cloud modernization initiatives, continue to grow rapidly. Consequently, the volume of data is exploding as is its complexity, making manual troubleshooting and analytics based on dashboards nearly impossible. Organizations need answers and intelligent automation from data to streamline their processes and maximize employee productivity. They expect Dynatrace to provide deep situational awareness to keep their businesses operating while radically improving their innovation, efficiency and responsiveness. As a result, our solutions are becoming an indispensable part of our customersâ cloud ecosystems. It is worth noting that the hyperscalers, AWS, Google Cloud and Microsoft have started to speak more broadly about an increased focus from customers on cloud optimization as an element of their digital transformation initiatives. This is a trend that directly benefits Dynatrace. Cloud optimization is about ensuring that cloud deployments deliver a compelling ROI. Itâs about effectively managing the exploding number of cloud workloads to ensure high availability and resource efficiency. Dynatrace facilitates such optimizations by providing trusted insights based on causal AI-powered analytics and automation to enable substantially higher software liability. This is reflected in our mantra of cloud done right and it is consistent with companyâs efforts to work smarter in the cloud. Our ability to provide insight and visibility drive efficiencies and optimize spending across our customersâ IT ecosystems is unique. Industry analysts consistently agree. As we previously shared, we were selected as a leader in the Gartner Magic Quadrant for APN and Observability as well as the ISG provider lens for cloud-native observability and security. Then in December, Dynatrace received the highest score overall in the Forrester 2022 Wave or AIOps report, topping all other solution providers reviewed. The author later published a blog saying, âthe vendor best able to demonstrate a strong and differentiating offering across all 35 capabilities was Dynatrace.â And we continue to invest in our innovation engine to further differentiate ourselves and enhance our leadership position. So turning to our roadmap for R&D innovation, Iâd like to talk next about three focal areas. The first is increased automation, including AIOps, DevOps, DevSecOps and the concept of shift-left. Our customers aspire to deliver a software environment that works perfectly and one with an exceptional user experience. We already enable customers to move away from manual monitoring and dashboarding to automated answers. The next step is to increasingly integrate the Dynatrace platform directly into code to allow proactive automated remediation of issues before they become visible to end users. The second is real-time data management and analytics with Grail. AIOps and automation are the foundation to manage, process, store and analyze data in real-time. Keeping all data including traces, metrics, logs, real user data, open telemetry, etcetera in context, is mission-critical. This requires us to store and manage petabytes of customer data and it mandates highly efficient analytics against that data in near real-time. With our October launch of rail, our massively parallel processing data lakehouse purpose-built for observability and AppSec use cases, we now have the core technology in place to deliver against this sizeable challenge. Itâs still early yet we are now engaged in over 160 active POCs and a growing community of paying customers for our first use case of log management and analytics. This remains a market that we believe is ripe for disruption through improved performance and scale as well as the deep inclusion of logs with other observability data types in AIOps analyses. We closed several 6-figure deals in the quarter and we only just started. That leads me to our third R&D focal area, application security. Observability and AppSec are inextricably converging driven by the growing need for organizations to better understand threat and vulnerability activity inside their environments. Customers are looking to operationalize the observability data being generated to understand and assess these threats in real-time in their infrastructure and apps. We added 85 new AppSec customers in the quarter, again, including several 6-figure deals. Our application security offering and Grail are excellent examples of our product teamâs ability to anticipate where the market is going and develop solutions that meet customer needs. Later this month in Las Vegas, we are looking forward to hosting Perform, our first in-person global customer conference since 2020. We plan to share our most comprehensive set of technology and platform announcements to-date, which will set the tone for the year ahead. Investors are invited to attend in-person or tune-in virtually to our main stage presentations. And members of our leadership team will be on hand for a moderated investor Q&A breakout session. In addition to our relentless commitment to innovation, we also continue to advance our go-to-market efforts. In particular, we have grown our direct sales force by nearly 20% year-over-year, while at the same time, gaining leverage and scale by dramatically increasing our focus and investment in partners, most notably with hyperscalers and global system integrators or GSIs. In addition to the formal alliance agreement between Deloitte and Dynatrace we announced last May, we have expanded our relationship with DXC as well as 8 other strategic GSIs that are striving to help customers digitally transform their businesses and reduce cloud complexity. Our objective is to participate in digital transformation projects earlier in the purchasing cycle and in so doing enable customers to establish more resilient cloud deployments from the start. Strong partnerships are consequently a critical element for us to construct a flywheel momentum in new logo growth as well as expansion in our installed base. As I mentioned previously, we also continue to enhance our pricing and packaging structure, which we believe will help unlock the full potential of the Dynatrace platform and accelerate expansion. Our installed base has significant growth potential amidst a rapidly growing solution portfolio and we believe a more extensible and simplified licensing model will help us capture that opportunity. Our Dynatrace platform subscription or DPS model is already used by roughly 100 of our largest customers and enables an ARR accretive, frictionless licensing experience through a committed spend with flexible usage across the Dynatrace solution set. To emphasize the power of these investment priorities and delivering customer value, Iâd like to share some recent wins to highlight why organizations choose Dynatrace. We partnered with AWS to land a 7-figure, 3-year deal with a major airline. They are leveraging 6 of our modules, including logs on Grail, having discovered that their existing dashboard tool provided little value on Cyber Monday due to blind spots and unpredictable cloud resource spikes. Now, the customer has insights with root cause analysis across their workloads and can more effectively and proactively solve problems with AI and automation. We also landed an 8-figure multiyear deal with a large U.S. insurance company that is transitioning to SaaS and leveraging AWS. This company had been dealing with a recurring SevOne issue, impacting tens of thousands of insurance agents. In the past, the companyâs application would cease to work multiple times a year for hours at a time, affecting agents, policyholders, IT resources and future customers. The company estimated that the cost for downtime was millions of dollars per year. With Dynatrace, they quickly found the root cause of the highly complex problem, eliminating application downtime, saving teams from additional waste of time and helping increase customer satisfaction. Another customer, a major bank, expanded its existing 7-figure commitment with us, bringing its total annual recurring revenue up to an 8-figure relationship due to Dynatraceâs ability to scale and drive efficiency across its entire technology ecosystem. And finally, one of the largest European producers of premium and luxury automobiles in charge of multiple car and truck brands signed a 7-figure land deal using DPS licensing, placing Dynatrace as the number one solution for observability within their internal marketplace. With this agreement in place, all their brands can simply sign on or observability with a pre-negotiated rate card without the time consuming negotiations and approval chain. This is a great example of the frictionless expansion opportunity that the DPS model can create for us. In closing, I am grateful to our customers for their feedback on significant value that we provide in achieving their business objectives, not to mention the positive relationships they have with our team. We have proven our ability to deliver growth in a challenging environment while consistently managing the business top to bottom line in a balanced way. We remain highly motivated by our market opportunity as well as our platform leadership and we continue to innovate to meet our customersâ evolving needs to further differentiate ourselves in the market. And finally, we remain focused on solid execution, even through turbulent economic conditions to be in an even stronger position when the macro environment improves. With that, let me turn the call over to Jim. Jim, it is great to have you on board for your first Dynatrace earnings call. Thank you, Rick and good morning everyone. I couldnât be more thrilled to be at Dynatrace. As Rick said, Q3 was a quarter of solid execution across the Dynatrace team. In a dynamic macroeconomic environment, we delivered strong results, meeting the high-end of our guidance across all of our operating metrics: ARR, revenue, subscription revenue, operating margins and EPS. Overall, the value of the Dynatrace platform, the resiliency and predictability of our subscription model, the strength of our enterprise customer base and the disciplined execution across the business drove our performance. We have continued to demonstrate a durable and attractive business model and we expect to continue to deliver a balance of strong growth, profitability and cash flow. Now, letâs dive into the third quarter results in more detail. Please note that the growth rates mentioned will be on a year-over-year basis and in constant currency, unless otherwise stated. As we have shared in the past, ARR is a key performance metric of the overall strength and health of the business and we delivered 29% adjusted ARR growth in the third quarter. Please keep in mind, adjusted ARR growth normalizes for currency and the wind down of perpetual license ARR, a reconciliation of which can be found on our IR website. Total ARR for the third quarter was $1.16 billion, an increase of $233 million year-over-year and $98 million sequentially. Foreign exchange was a $29 million headwind year-over-year and a $19 million tailwind sequentially. Excluding the impact of currency and perpetual license roll-off, the net new ARR added in the quarter was $81 million, roughly $20 million higher than the expectations we shared in our last call, driven by strong new logo additions. Moving on to the building blocks of ARR growth for the business, we added 215 new logos in the third quarter, up 4% year-over-year and exceeding our expectations. The average ARR for new logo lands was around $120,000 on a trailing 12-month basis, consistent with second quarter. In the third quarter, over 60% of our new logos landed with three or more modules supporting the shift towards a platform approach for observability. The value of the Dynatrace platform continues to resonate with prospects as they look to deliver rapid operational efficiencies in a tight budget environment. Dynatraceâs ability to quickly drive greater automation and efficiency that deliver strong ROI positions us well among strategic IT investment initiatives. Our net expansion rate for the third quarter was just shy of 120%, driven by ongoing budget scrutiny and elongation of sales cycles. To be clear, the demand environment remains healthy. It just takes a bit longer to close deals. Gross retention rates remained strong in the mid-90s for the business, a testament to the value of the enterprise customers see in the Dynatrace platform. From an existing customer standpoint, we continue to see strength in multi-module adoption, with nearly 60% of our total customers now using 3 plus modules at an average ARR of nearly $500,000 per customer. And we continue to believe that as more and more customers adopt new modules and expand coverage over time, the average ARR per enterprise customer can grow to be north of $1 million. Moving on to revenue, total revenue for the third quarter was $297 million and subscription revenue for the third quarter was $279 million, both up 29% year-over-year and exceeding the high-end of our guidance by $11 million, of which FX was $4 million. With respect to margins, which I will discuss on a non-GAAP basis, we have a very healthy margin profile, reflecting the value and efficiency of the Dynatrace platform. Gross margin for the third quarter was 84%, up 1 point from last quarter due to the growing scale of our subscription business and improved services gross margins. As Rick indicated, investments in innovation and targeted go-to-market initiatives remain high priorities for us. For the third quarter, we invested $42 million in R&D or 14% of revenue. As many of you know, the vast majority of our engineering organization resides outside the U.S., providing us with much greater cost efficiency when compared to our competitors. On the go-to-market side, we invested $98 million in sales and marketing this quarter or 33% of revenue, down 200 basis points year-over-year and up 50 basis points sequentially as we ramp seasonal marketing program spend and continue to prioritize targeted investments in expanding our partner programs. Our operating income for the third quarter was $81 million, resulting in an operating margin of 27%, exceeding the top end of the guidance range by over 150 basis points driven primarily by revenue upside and disciplined spend management. On the bottom line, non-GAAP net income was $73 million or $0.25 per share, $0.03 above the high end of our guidance range. Turning now to the balance sheet, in December, we announced a new $400 million committed revolving credit facility that replaced the prior $60 million facility that was due to mature this August. We were very pleased with the execution of financing and used cash on hand to repay the remaining $221 million loan balance, rendering us debt-free. As of December 31, we had $422 million of cash, an increase of $14 million compared to the same period last year, and thatâs after we paid off $311 million of debt over the last four quarters. Our free cash flow was $58 million in the third quarter and $301 million on a trailing 12-month basis or 27% of revenue. We believe it is best to view free cash flow over a trailing 12-month period due to seasonality and variability in billings quarter-to-quarter. We are extremely pleased with our continued healthy cash generation and believe it puts us in a strong position to make the appropriate investments to accelerate our growth in select areas. The last measure that I would like to discuss is our remaining performance obligation. RPO was approximately $1.7 billion at the end of the quarter, an increase of 24% over Q3 of last year. The current portion of RPO, which we expect to recognize as revenue over the next four quarters, was $983 million, an increase of 25% year-over-year. It is important to remember that seasonality associated with bookings and contract upselling will cause variability in the RPO growth rates. As such, we continue to believe ARR is the best metric to understand the health and durability of the business as it removes noise associated with timing of billings. Before I move to guidance, I want to give a brief update on the macro environment. Our ability to outperform in Q3 is a testament to the strong execution of the Dynatrace team. The demand environment remains healthy, the market opportunity is still growing, the observability ecosystem is still expanding, and deals are getting done, but with more budget scrutiny, and therefore, at a slower rate and pace. We are confident in the health of our pipeline and the teamâs ability to execute in this environment even as macro headwinds persist. At the same time, we are closely monitoring our investments to continue delivering attractive levels of profitability while investing in targeted areas for growth. We will operate with the same rigor in Q4 and are confident that weâre factoring in the appropriate macro trends into our guidance. Letâs start our guidance for the full fiscal year, again, with growth rates in constant currency. With more than 40% of our business denominated in foreign currency, the weakening of the U.S. dollar is creating less of a headwind than we had projected last quarter. We now expect the full year FX headwind to as-reported ARR to be approximately $30 million and approximately $45 million on revenue. This is compared to the nearly $60 million currency headwind to ARR and revenue guidance we expected last quarter. With that in mind, we now expect ARR to be between $1.216 billion and $1.221 billion, representing an adjusted ARR growth of 26%. This represents a $51 million increase at the midpoint on an as-reported basis. From a constant currency standpoint, this represents $21 million or a 200 basis point increase from prior guidance. Consistent with prior guidance, the perpetual license wind down for fiscal 2023 is expected to be approximately $8 million or 80 basis points. Underpinning our ARR guidance, we now expect new logo growth to be roughly flat compared to last year, where we added 706 new logos. This is an increase compared to the previous quarterâs expectation of a 5% decline for the full year. We expect net expansion rate to be in the high teens, reflective of the tighter budget scrutiny and elongation of sales cycles. We are also raising our revenue guidance at the midpoint by $27 million for the year on an as-reported basis or 150 basis points in constant currency. We expect total revenue to be between $1.148 billion and $1.151 billion and subscription revenue to be between $1.075 billion and $1.077 billion, both of which result in 28% to 28.5% year-over-year growth. From a profit standpoint, we remain committed to offsetting incremental macro headwinds with operational efficiencies and appropriate investment management. With that in mind, we are raising our non-GAAP operating margin guidance for fiscal 2023 to 25%, representing a 50 basis point increase compared to our prior guidance. We believe this will still enable us to make the appropriate investments in both R&D and sales and marketing. We are raising non-GAAP EPS guidance to $0.87 to $0.88 per share, representing an increase of $0.06 on the low end and $0.05 on the high end. This non-GAAP EPS is based on a diluted share count of 292 million to 293 million shares and a non-GAAP effective cash tax rate of 11%. And finally, we expect free cash flow to be between $315 million and $321 million, representing a free cash flow margin of 27.5% to 28% of revenue, down 25 basis points at the midpoint as we firmed up cash tax expectations, which are slightly higher than prior guidance. As a reminder, our full year free cash flow was positively impacted by a one-time tax refund of approximately $35 million in the first quarter. As we think about free cash flow beyond fiscal 2023, we generally expect to see non-GAAP operating margin and free cash flow margins to align on a tax-neutral basis. Therefore, we expect free cash flow margins on an as-reported basis to be slightly lower than op margins, given expected increase in cash tax rates as we fully utilize our tax loss and credit carryovers and generate increased levels of profitability. Looking to Q4, we expect total revenue to be between $304 million and $307 million or 24% to 25% growth. Subscription revenue is expected to be between $285 million and $287 million, up 24% to 25% year-over-year. From a profit standpoint, non-GAAP operating income is expected to be between $71.5 million and $73.5 million, 24% of revenue and non-GAAP EPS of $0.22 to $0.23 per share. Keep in mind that we have some seasonal expenses taking place in the fourth quarter, including incremental spend related to our Perform conference as well as a structural reset of payroll taxes. In summary, we are pleased with our third quarter fiscal 2023 performance where we saw solid ARR and top line growth, combined with healthy cash margins amidst a dynamic environment. We have a proven track record of consistent execution. And as we have consistently demonstrated, we are committed to maintaining a disciplined and balanced approach to optimizing costs and improving efficiency and profitability while continuing to invest in future growth opportunities that we expect will drive long-term value. Thank you. [Operator Instructions] Our first question comes from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question. Great. Thanks, guys for taking my questions. Congrats on the execution in a tough environment. Rick, for you. Your comment that Dynatrace directly benefits from cloud optimization, I found that to be a really fascinating comment. Obviously, many investors that we talk to are concerned that cloud optimization could actually hurt observability vendors. Could you talk a little bit more about that dynamic? Sure. Thanks very much, Matt. In many ways, I think the cloud optimization is precisely what Dynatrace was built to do. Digital transformation is obviously alive and well, and itâs driving a huge number of workloads, as we all know, to the cloud in terms of cloud migration and cloud deployment. But companies increasingly want to make sure theyâre getting an ROI. They want to make sure that they are delivering software that works perfectly. They want to make sure that theyâre delivering exceptional customer satisfaction and user satisfaction. And this is really all about cloud optimization. And in fact, thatâs what Dynatrace does. We bring â we like to think we bring order to the chaos of the cloud. And in many ways, I think cloud optimization is precisely what is going to drive Dynatrace from being optional to mandatory in cloud deployments as we look ahead. Got it. Thank you. And then maybe one for Jim, obviously, you didnât guide to fiscal â24 yet. It may be a bit early, but wondering if you have any just high-level building blocks, things like sales capacity expectations, new logos, etcetera, as we sort of fine-tune our growth and profitability estimates for next year? Yes. Youâre right. Weâre going to provide a lot more color on fiscal â24 in our May call. I will say, obviously, Iâve been here a couple of months now, a fantastic quarter for the company. And as I mentioned in my prepared remarks, relative to building blocks that we actually did a little bit better on new customer logos in the third quarter. And so, I think as weâve talked about building blocks in the past, call it, roughly third is going to come from new logos and call it two-third is going to come from expansion. And you can expect those, call it, approximate ranges going into fiscal â24. Yes, thanks. Hi, guys. And Jim, welcome back to your first Dynatrace earnings call. Iâm just going to ask one question, so you can fit as many in as possible. I think one of the questions that I get a lot is when Microsoft reported, they talked about weakening at the end of the quarter, in particular, in terms of Azure growth. Can you just talk about what you saw at the end of the quarter dynamics and how this quarter kind of started? Thatâs a great question. So, I would tell you that the linearity for our business actually kind of came in roughly in line with what we thought when we started the quarter. So Iâd say, no real change. I will â having said that, I will say that, as we mentioned in our prepared remarks, that there is no doubt that the current macroeconomic environment has certainly resulted in more budget scrutiny, and therefore, kind of sales cycles are certainly elongated, but I would say, not materially different than they were in the second quarter. And so, our linearity kind of came in line with what we thought. And going forward, we kind of expect similar elongation of sales cycles. I will say that the demand environment is quite healthy. Our pipeline is healthy. I think our coverage is healthy. I actually think that now that weâve been dealing with this for a few quarters, our sales team is much better at kind of responding and forecasting the business. And so, we have pretty good visibility and pretty good comfort kind of in our guide. Yes. Thank you. I was going to ask two, if I could. One, I wanted to see if you could revisit on the intent and how it might manifest over time of the change of pricing in packages â packaging, rather. Bundling has been done for years and years and years by many large organizations to try to gain share of wallet. But maybe describe, you said youâve had success. What are some of the attributes of that success? And what do you hope this accomplishes over a longer period of time? In particular, I am just hoping to get some more granularity on how this enables you to mix up, so to speak or gain incremental share of wallet? Sure, Iâll take that one, Keith. So our DPS pricing model, which is â I imagine what youâre referring to, we got, as I mentioned, approximately 100 customers or so on DPS. It tends to be our largest customers. They are all multi-module or virtually all multi-module and what they are wanting to do is they are wanting to have more flexibility in scaling up and down workloads and frankly, adding and subtracting modules in a very fluid basis. So what we have in DPS is essentially a committed model, but it enables a spend across multi modules and multiple workloads. And thatâs precisely what weâre trying to do. That model enables us to, therefore, remove friction in the selling process. And rather than having to go back and for example, into a customer and selling AppSec, in many ways, a DPS customer would already own AppSec. They only need to deploy it and turn up that workload whenever theyâre ready. So it really does create more fluidity in the selling and deployment process, and thatâs precisely why we see it as an ARR accretive model. And just to before ask my next question, do you have any evidence on kind of what that does to your net retention rate? I mean, is it too early to know? Or does it take your net retention rate to 30% or something along those lines? Retention rates, ARR, all of the metrics point positive with DPS deployment. Now some of that is probably biased by the fact that these are our largest customers. The ones who see Dynatrace being more strategic and so therefore, itâs probably a bit conflated in fairness, but it is a very positive set of metrics that we see in DPS deployments. Okay. And moving to my second question, you talked about your second kind of strategic areas, real-time data process, getting into log management and analytics. Could you just describe where youâre having success in that area? In particular, what are you displacing in order to generate that success? On the log management and analytics which is where Grail is really preliminarily focused as a massively parallel processing data lake house. The workloads that customers are looking to deploy are those that observe our observability-oriented workloads. And those are the ones where thereâs high analytic requirement. And in particular, that is where Grail really shines most. So thatâs where weâre seeing the workloads come to pass and fruition with Grail. They want to essentially reduce cost, improve performance and drastically move to faster near real-time analytics, and thatâs what we provide with Grail. Good morning, everyone and congrats on cloud results. I just want to follow-up on the new logo adds. I believe they were at an all-time high and I think the strongest sequential growth in 2 years. Can you provide some more detail around some of the specific drivers, whether around new product intros, ledges cycles or the go-to-market strategy that drove this uptick in wins despite a tougher macro environment? Yes. I guess Iâll comment on that. Iâll tell you that we obviously had a range of new logos in our pipeline kind of from a low to a high. And I would say we were prudent in the guide for the third quarter, trying to acknowledge that buying cycles are elongated and in particular, they can be even more elongated for a new customer than someone that is an existing customer. And I think itâs attribute to the value that customers see because in many cases, these customers have already gone through a POC. So theyâve already seen the value of the Dynatrace platform. And so, I think what we saw here was that â a couple of things. One, we started to see maybe better close rates than we expected as far as the quarter is concerned. I also think that there had been some adjustments in the selling model for the company earlier in the year to get a little bit more focus on, Iâll call it, hunting versus farming and I think youâre starting to see some traction as a result of that. Thatâs helpful. And a quick one on competition, have you seen any changes in the competitive environment whether around increased customer scrutiny on head-to-head deals or in terms of who you are seeing on these deals? No. I mean, if youâre referring to the competitive environment, Iâd say the competitive landscape is pretty similar. I mean, our win rates are quite strong, but no real change in kind of the competitive environment, still very competitive environment. And you got to win based on having the best offering. And I think when we go head-to-head we win the majority of the time. And I would just add to that, Kamil, that we continue to say that and see that the biggest competitor is DIY over and over and over again. We walk in, we see open source code, we see solutions that were homegrown, internally built, and it really is very consistent with our thesis of moving from data and dashboards and simple displays of red, yellow, green to something much more sophisticated in terms of answers and intelligent automation from that data that these days, we believe, are required to run modern cloud ecosystems. Thank you and also congrats on a strong execution and Jim welcome to the first call. Rick, a quick question for you, you mentioned app security. Itâs obviously a good focus. I know itâs very early days, but itâs really a pretty competitive environment out there. Love to hear what the customers are saying about Dynatrace and how youâre approaching that market and maybe some of the competitive differentiation you might bring to the table, considering a lot of the security-centric guys are trying to attack this market as well? Appreciate it. Right. Thanks Joel. The AppSec market, as you pointed out, is very crowded and this is why the strategy around Dynatrace associated with this market is really oriented to ensuring that the AppSec areas in which we participate are those that gain leverage from our overall platform deployment. Where observability and AppSec converge, those are the AppSec areas where we are going to be able do most significantly differentiate and add value to customers. And so thatâs precisely where we are focused, starts with areas like vulnerability management and extends from there into additional areas that we are investing in now. Hi. Great. Thanks for taking the question and congrats on the quarter. I want to ask you about just the performance across the different tiers [ph]. Did you see the challenging macro environment kind of spill over outside of Europe? Do you see it in Americas? And the second part of the question is just on the fiscal â24, since everybody is trying to figure that out. Another way of asking it, I guess what are you seeing or hearing from customers in terms of how IT budgets are being set for calendar year 2023 and observability within that? So, I want to make sure I have the two questions. So, one, you want to get a bit of color on kind of the geography kind of view of things. And then obviously, I understand your point about fiscal â24 not necessarily on our guide, but specifically around customers in their budget decision. So, I would say relative to kind of the geography dynamics, I would say that obviously, the macro environment is affecting all geographies. I will say for our third quarter, we did perform a bit better than we expected in our EMEA region. That certainly has been a region that we had called out previously as being a region thatâs soft. So, better execution in the EMEA region. And I would say a little bit softer in North America. But in general, I would say itâs a dynamic macro environment everywhere. But I would say our performance was a little bit stronger in EMEA in the third quarter and a little bit weaker in North America. But I wouldnât necessarily suggest that, that is a significant change from what itâs been. But I think that we just had better execution in EMEA in the third quarter. And relative to the customers and their budgets, I think your â the way I have kind of seen it, we are beginning our budget cycle. So, as you can imagine, I am dealing with it myself that I think customers are looking at their budgets. They are scrutinizing areas of their IT spend specifically and trying to prioritize areas that they believe are more strategic. So, I would say budgets are probably going to be conservative. But they are still spending, and they are spending on areas that help them optimize. And as Rick outlined, we believe that the space that we are in is actually an area that they are continuing to spend money on. And so to me, itâs not so much a budget question. Itâs more of a as you are going through deal cycles, you are just dealing with just a longer cycle, you are dealing with more approval levels, which just slows deals down. And so in particular for our specific guide for the fourth quarter, where you are acknowledging that deal cycles sometimes can push from month-to-month. But in general, the demand healthy is strong â demand environment is strong. Great. Thank you. Congrats on a great quarter. So, I guess I just want to ask maybe a higher-level question. If you look at your guidance for ARR and new logos and subscription revenue, it looks like that second cut to guidance you made last quarter turned out to be unnecessary. And I know FX is hard to predict, and itâs now less of a headwind. But I was wondering if you could put a finer point on what else may have changed in the market over the last three months that enabled you to bring that guidance kind of back to the original level you gave in Q1? Yes, I certainly wasnât here back then. So, I can comment a bit. I do believe that when the guidance was provided in the last call, I think there was a level of prudence to be very frank, on the guidance. So, I think thatâs one element of it. I will say that we did kind of exceed even our internal expectations in the third quarter. And as I have said earlier, I think that we had a couple of quarters earlier in the year where the sales organization was trying to figure out how do you forecast close rates in an environment where customer buying is a little bit uncertain and deals maybe take longer. And so, I think we have learned from that. We learned from that in the first half of the year. I think they are better at calling that. And so I think thatâs maybe a function of why you are seeing us kind of maybe glide back to what we said in the first quarter. And we have pretty good confidence that we can execute to the numbers that we have outlined. I would just add to that. Look, we saw increasing strength in Europe during the period relative to the prior quarter. That was good to see. We saw strong positive results in new logos. As Jim mentioned earlier, that gave us confidence as well. Of course, we delivered a strong Q3. So, we put those together and that leads us to the updated view of where we are today. Going back to the prior question, I would also just say that as in prior quarters, we are continuing to assume a fairly soft spend environment from a macro perspective overall through at least the first couple of quarters of our fiscal â24. And so we are going into this with a good amount of prudence. Thatâs great. Thank you for that color. And maybe just a quick follow-up on the GSIs, you have got 10 GSIs now in a number of different routes to market. So, you have got the GSI hyperscalers are a big contributor. Resellers and of course, your direct sales, I think capacity set is up about 20%. I am just wondering if you could maybe rank your various routes to market and how we should think about that in fiscal â24 as being the biggest contributor to your growth? Sure. Well, itâs â we have had a primarily direct model previously, but we have already reported in the past that more than 50% of our deals are partner influenced and partner delivered. So, we already have a very strong presence with partners. I would say that, that will simply continue. And where we believe we get the flywheel momentum and more movement in the model from a go-to-market perspective is really through partners. And as we indicated in the prepared remarks, we really see those as primarily coming from hyperscalers and GSIs. Hey. Thanks. Congrats from me as well. Could I go back to Mattâs question at the beginning, Rick. So, when you talked about the â when we talk about the optimization, I believe like from â like I was on the Maxo [ph] calls as well as their comments were more, like people had overcommitted maybe to their cloud. There were some big contracts and now you are kind of trying to think about how you run that. How do you see that play out for you? And you talked a little bit about that already, do you see that optimization as, like less workloads going to the cloud, or is it more the workloads I have, I want to run them more effectively? And then I have one follow-up. Well, Raimo, certainly, there is an element of cost optimization here as well as Sathya talked about in the Microsoft call, Azure. So, there is no question that, thatâs occurring as some cost rationalization. But there is also, as I mentioned, a key element, which is overall cloud workload optimization, which is making sure that you are getting the most out of the cloud deployments that you have made. And thatâs really where Dynatrace comes in play in making sure that you are really getting positive ROI, delivering exceptional end-user satisfaction, that that software works perfectly. And remember, sort of our overall thesis from the beginning is that cloud workloads make it easier to expand more rapidly. That creates an explosion of data, an increase in its complexity and it renders manual management and oversight of those workloads much more difficult. And we automate that. We automate that process to enable you to do more with less, and thatâs really what cloud optimization is about. So, we feel that that cloud optimization is a very consistent trend with cloud done right and our efforts to entre. Yes. Okay. Perfect. And then the other â and there were lots of positive numbers out here today, but the one â nice one that stood out to me was the customer add number. And you mentioned the global SIs. What do you see in terms of buildup of practice, people addition to what the global SIs are doing? And are there more â some that are spending out more? Is it a theme for a lot of them? Can you talk to that, please? Thank you and congrats from me as well. Sure. Thanks Raimo. The GSIs are, I would say, growing with us at different rates. But as you can see, we now have 10 that we are working with. And those 10 have trained literally hundreds and hundreds of people on Dynatrace. And the result of that is that we have more and more capacity in the GSIs to get Dynatrace deployed effectively for their customers. Now, GSI efforts are time consuming. They tend to be large digital transformation projects for typically larger companies that are part of overall workloads. In fact, we closed a very significant one that I referenced in the call down in LatAm last quarter is a multimillion dollar, multiyear deal as part of a large digital transformation deployment with a GSI. These are the kinds of deals that we believe that we will see over time and that will become a core component of. So, itâs going to take some time, but we believe that working with a number of different GSIs helps to get us there. Good morning guys. Thanks for taking the time here and Jim, looking forward to working with you. I just wanted to cycle back. I am trying to square two pieces here, and I just wanted to see if I could put this in front of you. I think in response to Kamilâs question, there was a comment that new logo adds partially benefited from close rates coming in better than expected. So, can you help us understand what Dynatrace is now assuming for its close rates as we think about Q4 and whatâs incorporated into the flat new logo adds that we are looking for on a year-to-year basis? And then I guess in conjunction with that as well, I know coming back to Andrewâs question, it sounds like your sales force is, I think the quote, was better at calling how those close rates play out. And again, just want to see what level of conservatism or prudence we are baking in here? Has that prudence in any way changed just given that you guys are operating in this dynamic backdrop? Happy to kind of follow-up on that. So, as I have said, that the new logo adds were better than we expected. As you can imagine, we had a kind of a range of outcomes. And as I said, that the close rates were just a little bit stronger. Relative to Q4, I would say we are not assuming a significant improvement in close rates. As a matter of fact, I think we are continuing to exercise prudence in close rates. Thatâs reflected in the guide. So, I donât want you to get nervous that we are getting ahead of ourselves here, given kind of a strong Q3. And I do believe that â I obviously wasnât here in the first half of the year. But I can tell you from the few months that I have been here that is quite significant rigor with the sales force around discussing and forecasting the business. And itâs just a general level of prudence across the sales force around deal cycles, deals being longer and we are expecting that. They are starting to reflect that in kind of the close rates and when they think things will close. And so, as you can imagine what that means is you need to have good coverage, you need to have good pipeline and you need to have good win rates. And I would say all of those things look quite strong. And so, the area we are being prudent on is close rates. But I would say, we certainly have a good funnel, a good pipe and good coverage. So, there is more than enough to be able to offset possible kind of deals pushing from one quarter to the next. Thatâs great color. I really do appreciate that, Jim. And if I could just have one follow-up for Rick. But coming back to Grail, just wanted to see, is there a way to compare how that â I know that there is the underlying technology and you have like log analytics and management sitting there. You announced power analytics. What are the adoption trends you are seeing or the customer reception versus maybe prior product launches? And really, what I am getting at is if we are talking about DPS and this bundling approach for your largest customers, is it fair to assume that newer product launches, like log analytics or power analytics, as an example, shouldnât we assume that they can potentially scale faster because DPS is enabling that greater flexibility for those customers? We certainly hope so. We certainly hope so that is the expectation around DPS is that it enables full module deployment. That includes infrastructure, which is where log management and analytics typically would sit. So, that is precisely the opportunity ahead. We did talk about a six module deployment in the prepared remarks, which included Grail. And thatâs a great example of enabling precisely that motion, Mike. So, we feel very good about where we are with Grail. As I mentioned, we have more than 160 POCs that are currently out there already, many paying customers that have converted those orders. Itâs very, very early in the Grail deployment, as you know, we just jaded in October. So, itâs still new, and customers are still testing it. But we are very pleased with where we are in Grail at this point. Thank you. Our final question will be coming from the line of Adam Tindle with Raymond James. Please proceed with your question. Okay. Thanks. Good morning. Rick, I wanted to talk about growth for fiscal â24, where Jim talked about expect one-third new, two-thirds from customer expansion from a mix perspective. On the expansion piece, you also talked about how budgets right now are generally pressured, their scrutiny. Itâs got a tight budget for existing customers, but we need to get a lot of growth from expansion with those existing customers. The two-fold question, one, how do you cultivate growth with the existing customers given that budget scrutiny dynamic? And two, maybe why not pivot more to new customer growth in fiscal â24 as a better vector? And I have a follow-up. Thanks. Well, the â I think the opportunity, Adam, is in both areas. And we focus on both of them equally. We need and want to close new customers. We also want to expand the existing workloads. And if I look at net expansion opportunities with the existing customers, there are a number of different areas. One is the expansion of existing workloads. So, of an existing workload, I am adding capacity and those tend to be a fairly normal order cycle. Then you have new modules. Well, this is where DPS might come in or partner selling could come in to expand those sets of capabilities as well. And then you have other adjacencies, AppSec, Grail and other areas as well that are significant opportunities and/or for new applications. So, we will look at all of those as expansionary opportunity as we look ahead. The other point that I would make on new logos is that we announced last quarter, more than 60% of new logos closed with multiple modules with more than three modules, three or more modules. So, that is something that we are also seeing is more platform selling into the new logo area. Got it. Okay. Thatâs helpful. And maybe just a follow-up, Jim. New ARR in Q3 was better than expected at down 13% fully adjusted. I think if I am backing into the guidance for Q4, it implies that metric is going to be down about 20% year-over-year. I am just wondering, we have got this kind of cadence of decelerating growth in that new ARR piece. But beyond Q4, I mean how do we think about the puts and takes to new ARR trends? Do you think Q4 could potentially be a bottom at that down 20%, or do we still have tough comps in the first part of next year? Just trying to get a sense of cadence of new ARR declines and when we might see the bottom. Thanks. Yes. I mean I will just â we obviously had a very strong Q3, effectively $20 million higher than our expectations that I think we had shared before that we thought net new ARR would be about $120 million in the back half, call it, split 50-50 between Q3 and Q4, came in at roughly 80%. So, Q4 is effectively consistent with what we shared before and it reflects prudence in our guide. Relative to fiscal â24, I certainly donât want to get ahead of ourselves and start providing guidance on fiscal â24 on this call. But I will tell you that we will build a similar level of prudence into our fiscal â24 guide when we talk to you guys about it in May. And I think we will have â obviously, we will have the benefit of another three months of seeing what the macro environment is doing. Itâs pretty dynamic. As Rick said, we donât expect any significant improvement in the environment. And we are actually managing the business with that in mind. And itâs one of the things that I will just end with that I really liked when I joined the company of the balance of very strong growth in this company with profitability. Itâs just a great recipe. And I think you are seeing kind of our peers were not as balanced. And so they are having to exercise some new muscles. These are not new muscles for Dynatrace. And so I think we are in a good position to continue to make the investments where we need to for the long-term opportunity. And as macro conditions improve, we should be able to capitalize on that. Okay. Well, thank you everybody for joining. I think that Jimâs remarks on balance of top line growth and profitability are exactly where we would like to finish the call because that is how we are running the company. And we are doing so with good prudence. We are delighted about the strong Q3 results that we just delivered and very, very bullish as we look to our market opportunity as we look ahead, not to mention our growing platform differentiation. For those of you joining us in person at Perform in Las Vegas, I look forward to seeing you there in a couple of weeks and I wish you all a very good day.
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Good morning. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITW Fourth Quarter Earnings Conference Call. [Operator Instructions] Karen Fletcher, Vice President of Investor Relations. You may begin your conference. Thank you, Cheryl. Good morning, and welcome to ITW's Fourth Quarter 2022 Conference Call. I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's fourth quarter and full year 2022 financial results and provide guidance for full year 2023. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2021 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our Chairman and CEO, Scott Santi. Thanks, Karen, and good morning, everyone. As you saw from our release this morning, in Q4, we delivered a strong finish to a year of high-quality execution in the face of some pretty unique challenges in the operating environment. Starting with the top line organic growth, was 12% as all segments delivered positive organic growth, and five of our seven segments grew double digits, led by Auto OEM, up 20%, Food Equipment, up 17%, Welding, up 15%, Polymers & Fluids, up 11% and Test & Measurement and Electronics, up 10%. Construction Products was up 4%, and Specialty Products was up 3%. Operating margin expanded 210 basis points to 24.8%, with 110 basis point contribution from enterprise initiatives and favorable price/cost margin impact of 70 basis points, which was for the first time in nine quarters -- which was favorable for the first time in nine quarters. Incremental margin was 52%, and operating income grew 18%. GAAP earnings per share increased 53% to a record $2.95, including $0.61 of gains from divestitures and $0.12 of negative currency -- excluding $0.61, sorry, of divestiture gains and $0.12 of negative currency EPS growth was 27%. For all of 2022, the company delivered organic growth of 12% for the second year in a row, best-in-class operating margin of 24.4% in our base business, after-tax return on invested capital of 29.1% and record GAAP EPS of $9.77, an increase of 15% versus the prior year. There's no question that our decision to stay invested in our enterprise strategy and then our people throughout the pandemic and the quality of our team's execution of our when the recovery focus coming out of it are powering the strong growth and financial performance, ITW is currently delivering. As a result, we are very pleased with our momentum and positioning heading into 2023. Turning to our 2023 guidance. Demand remained solid across the majority of our portfolio, and we are seeing meaningful improvements in supply chain performance and moderating input cost inflation. At the same time, there's no question that the economic outlook, let's call it, remains certainly dynamic. As a result, our organic growth projection for 2023 of 3% to 5% and our EPS guidance of $9.60 at the midpoint reflect current levels of demand and a risk adjustment for further slowing in certain end markets. And Michael will provide more detail on that in just a minute. Before I turn it over to Michael, I want to again thank my ITW colleagues around the world for their extraordinary dedication and commitment to serving our customers and executing our strategy with excellence. Thank you, Scott, and good morning, everyone. The demand growth that we've experienced all year continued into the fourth quarter as revenue grew 8% with organic growth of 12%. On an equal dayâs basis, organic growth was 14% as the fourth quarter this year had one less shipping day compared to prior year. We finished the year with strong growth momentum as evidenced by our sequential organic revenue growth of plus 4% from Q3 into Q4 on a sales per day basis as compared to our historical sequential of plus 2%. By geography, every major region grew double digit, with North America up 13%, Europe up 11% and China up 10%. Foreign currency translation headwind reduced revenue by 5%, and the net impact from acquisitions and divestitures was plus 1%. GAAP EPS grew 53% to $2.95 and included a $0.61 gain from two divestitures, which I'll provide more detail on in a moment. Excluding those gains, EPS increased 21% to $2.34, which included $0.12 of EPS headwind from foreign currency translation. So, on an apples-to-apples basis, eliminating both divestiture gains and currency headwind, EPS increased 27%. On the bottom line, operating income grew 18%, with strong incremental margin performance of 52% and operating margin improved 210 basis points to 24.8%. Operating margin in our base businesses, excluding MTS, was 25.2%. In the fourth quarter, we achieved favorable price/cost margin impact of 70 basis points. And as Scott said, this was the first quarter with favorable margin impact from price/cost since the third quarter of 2020. Enterprise Initiatives contributed 110 basis points. As you saw in the press release, we completed two divestitures in the fourth quarter, resulting in a combined pretax gain on sale of $197 million recorded in nonoperating income and an EPS impact of $0.61. By utilizing capital loss carryforwards to offset taxes on the divestiture gains, the overall tax rate for the company was 19.1%. So overall, for Q4, excellent operational execution across the board, strong financial performance and what remains a pretty uncertain and volatile environment. Okay. Please turn to Slide 4, starting with our progress on organic growth. And as you know, we've been aggressively executing a very focused growth strategy to build consistent above-market organic growth into a core ITW strength on par with our operational 80/20 front-to-back capabilities. As you can see from the data on the left side of the slide, ITW's 12% organic growth rate for each of the last two years compares favorably to our proxy peers at about 9% both years, suggesting that while we're not there yet in terms of realizing ITW's full potential organic growth performance, we're making some very solid progress. Moving on to the segment results, starting with Automotive OEM, which led the way with organic growth of 20%. Year-on-year revenue growth was, of course, helped by supply chain challenges in the industry last year. North America was up 15% and Europe grew 23%. China was up 17% with particularly strong growth in electric vehicles. On a full year basis, ITW Automotive OEM revenues were up 12% versus 6% growth in car builds. Looking forward, we expect Automotive OEM to grow 5% to 7% in 2023 based on a risk-adjusted auto build assumption in the low single digits plus our typical penetration gains of 2% to 3%. Turning to Slide 5. Food Equipment delivered another very strong quarter with organic growth of 17%. North America grew 25% with double-digit growth in all major categories and end markets. Institutional was up more than 40% with strength across the board, restaurants were up 30% and retail grew 20%. International revenue grew 7%, with Europe up 9% and Asia Pacific was flat with some near-term softness in China. The Food Equipment team also delivered excellent progress on margins, with Q4 operating margin of 27.6%, an increase of almost 500 basis points year-over-year. So obviously, strong momentum in this segment, and we expect Food Equipment to grow 8% to 10% in 2023. Test & Measurement and Electronics revenue grew 15%, with organic growth of 10%. Test & Measurement grew 12% organic, excluding the acquisition of MTS, with continued strong demand for capital equipment as evidenced by Instron, which grew 24%. Electronics was up 7%. While our semi-related businesses, which represent combined annual revenues of about $550 million or approximately 20% of the segment, grew 17% in the quarter. We are beginning to see a slowdown in demand after three years of very strong growth. So, embedded in our 2023 organic growth projection of 2% to 4% for this segment is anticipated further slowing in semi-related end markets. Moving on to Slide 6. Welding delivered strong organic growth of 15% in Q4, with equipment up 17% and consumables up 13%. Industrial sales remained very strong with organic growth of 25%. On the commercial side, which is more consumer-oriented, demand continued to slow and organic growth was down 1%. On a geographic basis, North America grew 15%, and international grew 17%, driven by strength in the oil and gas business, up 19%. Operating margin was up 160 basis points to 31.6%, a new record for the segment and for the company. Looking forward, we expect revenue to grow 5% to 7% in 2023, which includes some anticipated further slowing on the commercial Welding side. Polymers & Fluids delivered organic growth of 11%, with the automotive aftermarket business up 13% with some seasonal strength in wiper blades. Polymers grew 11% with continued strength in industrial applications, and Fluids was up 5%. North America grew 11% and international was up 10%. Looking forward, we expect Polymers & Fluids to grow 3% to 5% in 2023, which is based on current levels of demand and anticipated further slowing in the more consumer-oriented automotive aftermarket business. Turning to Slide 7. Overall demand in Construction slowed to an organic growth rate of plus 4%. North America was still up 9%, with residential up 11% and commercial construction was down 6% due to a tough comparison of plus 21% last year. Europe was up 3% and Australia and New Zealand was down 4%. As you know, Construction is our most interest rate sensitive segment, and we are projecting further slowing in 2023 and a negative organic growth rate of minus 5% to minus 3%. Specialty organic growth was 3% as supply chain shortages eased up in Q4, and the equipment businesses had a strong finish to the year with organic growth of 8%. Consumables were up 2%. And on a geographic basis, North America grew 1% and international grew 7%. Looking forward, we expect Specialty organic revenue of negative 1% to plus 1% in 2023, which is based on current levels of demand and anticipated further slowing in the appliance components business. So, let's turn to Slide 8 for a recap of a very strong 2022. As throughout the year, our teams around the world did an exceptional job of delivering for our customers, while responding quickly and decisively to rapidly rising input costs, navigating supply chain disruptions and aggressively executing our Win the Recovery strategy. As a result, for the full year, ITW grew organic revenue by 12% with double-digit growth in five of seven segments. And despite significant price/cost margin pressures and thanks in part to 90 basis points contribution from our enterprise initiatives, our base businesses expanded operating margin by 30 basis points to 24.4%. GAAP EPS of $9.77 was a record for ITW with EPS growth of 15% on top of 28% EPS growth in 2021. Excluding divestiture gains and negative currency translation impact, EPS grew 12% in 2022 on an apples-to-apples basis. In 2022, we also invested more than $700 million to accelerate organic growth and to sustain productivity in our highly profitable core businesses. Raised our dividend 7%, marking the 59th year of consecutive increases. Returned $3.3 billion to shareholders in the form of dividends and share repurchases and made solid progress on the integration of a very high-quality acquisition in the MTS Test and Simulation business. And most importantly, we delivered these results while continuing to make meaningful progress on our path to ITW's full potential through the execution of our long-term enterprise strategy. So, let's move to Slide 9 for an update on our full year 2023 guidance. And while we certainly see some positives in terms of supply chain easing and moderating input cost inflation, there's also no doubt that the economic outlook and demand picture is becoming increasingly uncertain. On our last Q3 earnings call, we pointed to pockets of slowing demand at approximately 20% of our business portfolio. And today, we would add semiconductor-related end markets to the mix bringing the total to about 25% of ITW's portfolio. In our view, it therefore made sense to take a more cautious approach to our top line guidance this year by basing it not just on current levels of demand, adjusted for seasonality as we typically do, but rather anticipating further slowing in end markets related to construction, commercial welding, auto aftermarket, appliances and semiconductor. As a result, our organic growth rate projection for 2023 of 3% to 5% is lower than our typical run rate approach. Operating margin is expected to improve by 100 basis points or more to a range of 24.5% to 25.5%. This includes approximately 100 basis points contribution from enterprise initiatives and positive price/cost margin impact based on all known and implemented price and cost actions. After tax return on invested capital should improve to 30% plus, and we expect strong free cash flow with conversion greater than net income. For 2023, we expect GAAP EPS in the range of $9.40 to $9.80, which also includes $0.15 to $0.20 of higher interest expense on our short-term debt and $0.25 of increased income tax expense as our tax rate will revert to our normal, approximately 24% versus 22% in 2022, excluding the tax impacts from our divestitures. In terms of cadence for the year, we're now back to our typical first half, second half EPS split of 49% and 51%. Our capital allocation plans for 2023 are consistent with our long-standing disciplined capital allocation framework. Our top priority remains internal investments to support our organic growth initiatives and sustain our highly profitable core businesses. The second priority is an attractive dividend that grows in line with earnings over time, which remains a critical component of ITW's total shareholder return model. Third, selective high-quality acquisitions, such as MTS, that enhance ITW's long-term profitable growth potential and have significant margin improvement potential from the implication of our proprietary 80/20 front-to-back methodology and can generate acceptable risk-adjusted returns on our shareholders' capital. And finally, surplus capital will be allocated to an active share repurchase program, and we expect to buy back approximately $1.5 billion of our own shares in 2023. Turning to our last slide, Slide 10, for our 2023 organic growth projections by segment. And you can see that we're expecting solid to mid -- solid mid- to high single-digit organic growth in four of our seven segments, offsetting some lower growth rates in Test & Measurement and Electronics, which is due to semiconductor demand, as well as in Construction and Specialty resulting in an overall organic growth rate at the enterprise level of 3% to 5%, which is on top of 12% organic growth in each of the last two years. Overall, we're heading into 2023 with strong momentum, and we're very well positioned to continue to outperform in whatever economic conditions emerge as we move through 2023. Hi, good morning. Congrats on a nice quarter. I guess, my first question, you talked about the 25% of your portfolio where you're starting to see weakness. Can you talk -- I know semis be incremental. Can you just give a little more color on what you're seeing in semi? And then on the 75% rest of your portfolio are trends in line with your expectations, a little more positive or negative versus last quarter? And then I guess, just my follow-up question to that price/cost in the quarter, I think it was 70 bps positive. I think that's a little better than what you expected. Was that driven more by price or raw going down? And then what are your assumptions on the ability to hold price in 2023? Thank you. Okay. That was a lot there, Jamie. I'll do my best, okay? So, I think the color on semi is really the -- we're coming off a three year very strong growth cycle with growth in the high teens or better than that over those three years. And we are starting to see a slowdown in the order intake really in Q4. So, it hasn't really showed up in our numbers in a meaningful way yet, but we do expect that to continue into 2023. We think it's more of a near-term slowdown. And like you said, that is the addition to the portfolio we've said before, 20% is slowing. Demand is slowing now. It's 25%, and semi is really the incremental 5% this quarter. But it's important to keep in mind that the balance, the other 75% of the portfolio, continues to perform at a really high level. And I'll just point to the 12% organic we put up in Q4 and for the full year. And then if you look at our guidance on Slide 10, by segment, you can see mid- to high single-digit growth in Automotive OEM, Food Equipment, Welding, mid-single digit in Polymers & Fluids and then a little bit lower in Test & Measurement. And then of course, Construction is the one that's a little bit projected to be down year-over-year and Specialty about flat. I'll also say, if you just look at from Q3 to Q4, we -- typically, our sales per day go up 2%, we actually went up 4%. So, we're more than offsetting some of the slowing that we're seeing in 25% of the portfolio. So good momentum, really well positioned going into next year. I think on the price/cost side, we were really encouraged. We talked about this on the last call and an expectation of being positive -- slightly positive on margins on price/cost in Q4. This was a little bit better, driven by both sides of the equation really price and cost, but it was certainly great to see that turn positive for the first time since I think I said the third quarter 2020. So, first time in eight quarters, so really encouraging heading into 2023. A little bit of a nit, but on the 3% to 5%, 23 top line for growth forecast. Is there any real price in that? Or you anniversary the big price increases that you had in Welding and now you're kind of more in the kind of neutral-ish to maybe slightly positive versus a bigger number? Well, I think we are certainly lapping some bigger price numbers. There's no doubt about that. And I think, as you know, we don't break out price and volume separately for all the reasons we've talked about in the past. But there's both price and volume in the numbers that we've laid out for 2023. And the 3% to 5% organic, I'll just say it's a risk-adjusted number. If you do a pure run rate, you end up at a higher number. We just thought given the -- everything we talked about, it was probably reasonable to take a more cautious approach given the environment. Yes. No, it totally makes sense. What about the inflation assumptions in general when you guys think about the '23 outlook as far as kind of breaking out materials versus labor? And is it fair to assume that labor inflation remains reasonably high, but material inflation is more moderated? Is that a fair assumption in your guide? Yes. I think that's reasonable. I think certainly materials and components in that order, we are seeing -- I wouldn't say price are coming -- costs are coming down in a significant way, and they're remaining at a fairly elevated level. And then I think on -- our labor costs, certainly we're experiencing the same labor cost inflation as others. But -- and so maybe a little bit higher than typical, but nothing really that significant. We're still expanding margins by 100 basis points or better here in 2023. So hopefully, that answers your question. Good morning. Congrats on the great results. So I have a couple of quick ones. The first one is how should we think about your EBIT margin progression throughout the year? Is the 25.5% to -- 24.5% to 25.5% range going to be fairly consistent in all the quarters? So Tami, like I said, we're kind of back to our typical cadence here. I think we said first half, 49% of our EPS for the full year; second half, 51%. We really -- if you go back unlike time, we've been remarkably consistent. Embedded in that is also the fact that Q1 is typically our lowest quarter in terms of revenue, and we're expecting somewhere in the mid-single-digit type growth. Margins will probably start out a little bit lower, but still 100 basis points of margin improvement on a year-over-year basis. And maybe just to give an additional data point, if you run the same data on Q1 contribution to EPS overall, it's somewhere around 23% of the full year, and that's a pretty -- the company has become remarkably predictable over the years. And so I think that's probably a pretty good estimate for how the first quarter might play out. Got it. That's fantastic color. Thank you. And I'm just going to ask the question and I hope I get lucky and get a number. But can you share what organic growth is trending quarter-to-date? Any segments trending negative right now? So we just saw the January numbers and everything looks fine. Everything is tracking and really nothing different from what we talked about in the script here. So we're off to the start that we thought we would have. Good morning, everyone. Michael, when we think about margin expectations for '23 across your segments, does the lag in price versus cost flipped the most in Auto OEMs, so you could see a nice jump in margin in that segment? Or should we generally think that your segment margin will trend with who has the highest growth forecast versus the weakest growth forecast in '23? I think, Andy, we expect -- all of our planning here at ITW has done bottoms up, as I think you know. And every one of our segments, including the higher-margin ones, such as Welding as well as Automotive, which is really dealing with some near-term pressures primarily related to price cost as well as just volume leverage. Every one of our 7 segments told us that they expect to improve margins year-over-year in 2023. But obviously, the ones that have the higher growth rates are going to have more volume leverage and therefore, probably a more significant improvement in operating margin. But everybody will get better. I would just say on Automotive, it's going to take some time to recover the price/cost margin impact, which has been significantly higher in Automotive than in other segments for all the reasons we've talked about in the past. It takes a little bit longer to recover price. So I think our current view is it will take us maybe two to three years to get back to automotive margins in the low to mid-20s. And so that's maybe how I would -- we would characterize it. Very helpful, Michael. And then can you give us an update on the longevity of enterprise initiatives? ITW continues to I think we might begin to get a little spoiled here that it could last indefinitely. So how are you thinking about enterprise strategy? Do you still see a long runway of initiatives across your segments? And where will the focus of enterprise strategy be across your segments in '23? Okay. Well, I think we're in the tenth year now. I think if you add up the combined savings, it's approaching $1.5 billion of structural cost out from 80/20 and from strategic sourcing. And when we rolled up the plans here in November and check back in, in January and had a chance to review all the projects and activities that go into delivering these 100 basis points, we were really encouraged by what we saw. And so I know that for a couple of years, we've been saying -- I've been saying this is not going to go on forever, and I... And I was wrong, which happens a lot. But I think, ultimately, look, I think if you model ITW long term, I'd go back to the TSR model we've given you, which is 4% plus organic growth, incremental margins in that 35% to 40% range. Then operating income grew $7 million. You add acquisitions and buybacks on top of that. And so EPS grows 9% to 10%, and you add an attractive dividend in that 2% to 3% range. 2% to 3% range on top of it, you get 11% to 13% over the long term, that's what you should expect us to deliver. And so I think I have to say, to give you a definite and on enterprise initiatives because, as Scott reminded me, I've been wrong for many years. But that's probably how I would think about it, Andy. I would just add in terms of perspective that I think one of the real strengths of our operating methodology and our business model is it's there's no one definition of perfection. There is always room to get better. We use the business model as the core tool that our 84 divisions used to identify and prioritize opportunities to get better. And I don't see that stopping for quite a while. Right. I think we've said this before. I mean, this proprietary ITW business model is more powerful than it's ever been as we sit here today. It's much different from 10 years ago, 3 years ago. And we are applying it. Our people, we've all gotten better at applying these methodologies, and we're applying it to a much more differentiated portfolio. And so as long as we continue down that path, I think it is -- I agree with Scott. I don't think it's going to end any time soon. So that's probably how we've set it up. You have Sabrina Abrams [ph] on for Andrew Obin. So first on the margin guide, the 70 bps to 170 bps of year-over-year expansion includes the 100 bps of enterprise initiatives. And then, I guess, the remainder is 20 bps of price/cost at the midpoint. I'm just trying to think, is this a conservative approach? Should you had 70 bps of benefit in 4Q? Is there potential upside here? Well, I think maybe what would be helpful, Sabrina, is just -- let me just give you some of the elements here that go into the margin improvement on a year-over-year basis. And I'm going to use round numbers here, okay? So if we just ended 2022 at operating margins of about 24%, you should expect volume leverage somewhere in the 50 to 100 basis points of positive contribution to margins year-over-year, the enterprise initiatives, which is sized at about 100. We're certainly going to make some good progress on price/cost as 70 basis points was encouraging in Q4. I think the -- if that's the run rate going into 2023, maybe a little bit better than that. Let's just say price/cost adds approximately 100 basis points based on what we know today. And then the offset to some of this is our typical kind of -- we talked about this a little bit, wages and inflation on wages. We are bringing in some new hires to support our organic growth efforts. We are investing in driving organic growth, including capacity. And so that's typically a headwind of less than 100 basis points. That's running a little bit higher, just given the underlying inflation that's in the system that's probably running at 150 to 200. And so you add all that up, you get 100 basis points plus of margin improvement on a year-over-year basis. And I think that's a pretty good number, Sabrina. Got it. That's helpful. And so China, I guess, was strong in Auto OEM in 4Q. Just trying to think what's incorporated in your guide for China reopening next year? Well, I think, as we look at kind of on a geographic basis, including China, most of our regions are kind of in that mid-single digits for the year. And China is maybe a little bit higher than that. A big driver, as you pointed out, in China is really the Automotive business, where we continue to make a lot of progress in terms of market share and penetration gains. So that's certainly our largest business and also the biggest driver of our growth in China next year. And so if the total company is 3% to 5% organic, China is certainly a little bit higher than that in our current projections as we sit here today. So... Thank you. Good morning, everyone. Solid results. Just back to enterprise, I've often kind of thought of it maybe incorrectly as reflecting a little bit of a trade-off between margin and growth. And maybe originally, it was more cost oriented, but the organic growth here recently would suggest you're not trading growth for margin. And I wonder if you could just kind of comment on that. Obviously, the growth has enjoyed a cyclical lift the last couple of years. So I don't want to overstate the point, but it does seem that the system has thrown up at organic growth than it had historically? And just any context on that, I think, would be interesting. Yes. First of all, Jeff, thank you for noticing. The -- what I would say in terms of just the arc of the last decade, we've been on this is that clearly, for the first five to seven years, we had a lot more work to do inside the businesses to get ourselves in position to grow. And what we're delivering now is much more about businesses that are from an operational standpoint, a lot closer to 80% or 90% of their potential. And so a lot of -- which allows a lot of our effort and attention and just to be reallocated to commercial opportunities to grow. And that's ultimately what is showing up now. We have a lot more sort of energy collectively being devoted to growth opportunities because we've gotten the internal -- the operational position of these businesses firing in sort of in a really strong position. And so it's -- you can't be great at everything all at once. It's part of, I think, what we would reflect that over the last decade and one of the real secrets to the outcomes we've delivered in my view is that we've been focused on the right things at the right time and have not tried to do too much at any stage. But we're clearly now at a stage where organic growth is the 80 of what we've got opportunities to do and what we've got to deliver on going forward. And I think that's reflected in the numbers that we're currently throwing off. And would -- Michael gave that piece of the bridge, wage and growth investment. Is that number other than kind of the inflationary pressures that you mentioned? Is that structurally moving higher? Or can that sort of be funded within the normal incremental margin construct and other levers that you're attempted for? That's exactly the way we do it. We are self-funding our growth investments through our incremental margin contribution. So at the 35 historical and targeted run rate, that is -- that includes -- that's after those incremental investments in growth. We're investing in capacity now in a really significant way in headcount in the areas that help us grow and supporting innovation. And we're still going to deliver of 100 bps of margin improvement next year. So that just illustrates the point of these businesses are so profitable that every incremental dollar of revenue that we generate organically drives a lot of incremental cash flow and certainly to support that we're going to invest some of that, but it doesn't impair our belief that we're in a good chunk of it to the bottom line. Good morning, guys. Most of my questions have been answered. A couple of quick follow-ups. Is there a portion of your portfolio where you would expect to give back price once the sort of lower energy and transportation and raw material costs kind of work their way through? We have a very small portion of our overall portfolio where the pricing is indexed to raw materials. If you add it all up, it's somewhere around 5% of our total revenue, so really an immaterial number, where it's an automatic giveback on price. I think on everything else, we historically command a premium given our -- the differentiated nature of our products and services and the quality of our delivery, and we expect to maintain that premium as we compete and focus on gaining market share. So that's how I'd answer your question, Steve. Great. I appreciate it. Pretty minimal then. And then just sort of maybe the obligatory question on capital deployment relative to your thinking on any sort of further divestiture opportunities or M&A pipeline, anything to kind of call out there? Yes. So I think you saw the two divestitures here in the fourth quarter. That's part of -- I think we called out a handful of business units about a year ago. So the first two are done. We've got a smaller 1 that's kind of in the works. And then we've got a more meaningful one that is performing at a really high level right now. And I think we're going to kind of assess the capital markets and conditions and whether it's the right time to launch sometime this summer and that would kind of round out what we talked about a year ago. So that's kind of where we're at. Well, yes, I mean, we get this question every time, we answer it the same way. I mean, I think organic growth is priority number one for all the reasons that Scott just talked about. I think -- we'd certainly be interested in high-quality acquisitions that accelerate the long-term growth potential of the company, where we can improve margins through the implementation of the business model and we can earn a reasonable rate of return on our shareholders' capital. And so MTS is a good example of an acquisition that checks all the boxes. That was a pretty big one that we did a year ago. And to the extent that other opportunities like that present themselves that check the boxes, we're definitely going to lean in, in a big way. So that's -- but... Yes, maybe just a little color on top of that, that's more sort of topical near term. What I would say generally is that we are not looking to acquire broken businesses, we're looking to acquire good businesses and help them be great businesses. And in environments where the sort of economic -- the macro is uncertain, those good businesses, it's really not a good time to sell. So if anything, I'd say the environment until the macro trajectory gets a little bit more clear, I would expect that the opportunities might be a little less than normal this year, at least through the first half, but we'll see. Excellent. Thank you. So the Food Equipment business, as you have highlighted, has definitely been a standout for you. And after attending the NAFEM Equipment Show yesterday, there's a noticeable difference in how the business seems to be presenting itself more cohesively than before. So will you comment on this aspect and also on some of the things that you're doing there with regard to consolidating sales reps and allocating more investments toward maybe the cooking side, specifically products like combi ovens and priors, which are certainly areas that have well-known large competitors? Well, I'll take a stab. I think we're not really doing anything different than we have over the last five years in the Food Equipment business. We've continued to invest in differentiated products, including the categories that you mentioned. And we've been putting up -- the team has been putting up some really great numbers as a result of executing on their strategy. And so if you add up the organic growth rate here, over 17% coming out of the pandemic 23% last year, this year, high single digit, double digit, and that's really as a result of us innovating and growing all product categories. Yes, definitely, I think this has been an area where kind of back to our win the Recovery positioning and the decision to carry enough inventory to service our customers with the same level of excellence in difficult supply chain on the different supply chain conditions has paid off in a big way. And so I think if you get the sense that the Food Equipment team is in a good mood. I think that's because they're gaining share and putting up some really strong numbers, including on the margin side, if you look at that almost 400 -- almost 500 basis points of improvement on a year-over-year basis. So that business, like we said, has got a ton of momentum going into 2023, and we're very bullish on the future here. Good morning. Thanks for taking my question. I wanted to start the Slide 4, where you show the 300 bps of outgrowth versus the proxy group over the last couple of years. Can you talk to attribution of that? And I think, obviously, a pricing environment where you've seen different trends across different companies, I'm not sure the degree to which maybe pricing is outpacing. But the degree to which it's volume is primarily share gain and just your confidence in the stickiness of those share gains as supply chain corrects? Yes. I guess I'll -- my response would be that there's no way that we can break this apart into various pieces. What I can say is that the proof is in the pudding. Ultimately, it's in the performance and our ability to consistently outperform. We're not claiming victory here. We're not -- we've got a lot of room to go across the company in terms of our ability to consistently deliver the kind of organic growth that we're capable of. But what we are saying is that we put a couple of years on the board, where we are growing our peers in the aggregate. Now what percent of that is our market exposures versus theirs or different approaches to pricing or supply capability? I'd say all of the above. In the end, it doesn't matter as long as we're able to consistently outgrow our peers and outgrow our markets and that's really the goal. And I guess related to that, as you're seeing maybe supply chain ease, and I don't know if competitors are in the market in a little bit more competitive way. But any challenges now that you didn't see maybe 6 or 12 months ago? Yes, I think, Joe, from the beginning, the Win the Recovery positioning was all about strategic share gains focused primarily on our existing customers. And we were not interested in opportunistic onetime orders. And so we're pretty confident with that direction. These share gains are going to stick. I think the pandemic and the supply chain kind of disruptions were a great opportunity for ITW to demonstrate how differentiated our supply chain capabilities are for those customers that didn't know. And so I think that's been really -- that's what's contributing also to the outgrowth relative to peers. I mean that's one more element of the equation as you talked about with Scott. And then I just wanted to clarify on the average daily sales plus 2% versus seasonal -- or plus 4% versus seasonal plus 2, the degree to which that's underlying demand accelerating versus maybe backlog burn. I think it's hard to parse given broadly inflated backlogs out there what underlying demand trends look like. But any comments on what you're seeing sort of underlying accelerate versus decel? Well, I think we're not a backlog-driven company. As you know, we don't carry a lot of backlog. And as you also say, it's hard to parse out what was backlog versus new orders. So I'm not sure I can give you a great answer. What I can tell you is that, typically, our sales per day go up by 2%. If you go back and look in time, and they went up by 4%. And so things are definitely not slowing. And we've got some great momentum going into Q1 and 2023. Good morning and thanks for squeezing me in. Maybe I just wanted to circle back to the organic sales growth guide and totally understand you don't take an elaborate macro gyration within that, and that's a very sensible approach. But you've got the 4% growth guide for the year as a whole organically at the midpoint. You just did low double digit the most recent quarter. So just want to understand how we think about that sort of step down. Is it a steady deceleration as we go through the year? Anything in particular we should bear in mind on one or two-year stacks? Any color at all really that you could give on and how we think about the plus four moving through 2023? It's all in the comparisons year-over-year, Julian. So like I said, we expect the year to play out from a revenue standpoint, in line with our typical cadence. And so Q1 starts out a little bit lower and then we kind of improve from there. But there's nothing baked in, in terms of a big acceleration in the back half or deceleration in the back half. We've kind of done our best here to model current levels of demand risk adjusted for the areas where we're seeing some slowing in demand and we come up with 3% to 5%. I think if you run the math, you'll see kind of the first half is the growth rates are maybe towards the higher end of that 3% to 5% and the second half is towards the lower end, and that's all driven by the comps on a year-over-year basis. That's very clear. Thank you. And then within Construction products, I don't think we built with that one yet. Apologies if you have to repeat anything. But that's sort of down for guide for the year. There's a bit of price in there, some maybe volumes are down high single digit or something. But maybe just help us understand what's embedded within that? I think simplistically, you have 1/3 is resi new build, 1/3 is resi replacement, 1/3 is commercial. Those three big pieces, how are you sort of thinking about those this year? I mean the big driver, Julian, is the housing market, new housing. And so the residential side is about 80% of our business here in North America, and that's where we're seeing some slowing, which we've talked about since the summer, I think. So there's nothing new here. And that's the big driver here. The commercial side is hanging in there. As I said, it was also our strongest business in the summer after the pandemic. Part of the advantage of the different end market exposures that we have. And we can -- we're always going to have some in the tailwind mode and some in the headwind mode, but the net mix of it all is pretty positive. So... Yes. It's going to be down a little this year, but it's also been a business that's really performed well for us when other parts of the macro have been challenged. So...
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EarningCall_795
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Good day and thank you for standing by. Welcome to the BankFinancial Corporation Q4 and 2022 Year End Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakerâs presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised todayâs conference call is being recorded. I would like to turn the call over now to Mr. Gasior, CEO. Please go ahead. Good morning. And welcome to the BankFinancial fourth quarter 2022 investor conference call. Sorry for the delay. At this time, we would like to have our forward-looking statement read. The remarks made at this conference may include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 and are including the statement for purposes of invoking these Safe Harbor provisions. Forward-looking statements include -- involve significant risks and uncertainties and are based as -- on assumptions that may or may not occur. They are often identifiable by use of the words believe, expect, intend, anticipate, estimate, project, plan or similar expressions. Our ability to predict results or the actual effects of our plans and strategies is inherently uncertain and actual results may differ from those predicted. For further details on the risks and uncertainties that could impact our financial condition and results of operation, please consult the forward-looking statements declarations and risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements. We do not undertake any obligation to update any forward-looking statements in the future. Thank you. Our earnings release was completed last week, Friday. The 10-K will be filed on schedule and we are now ready for questions. Hey. So I guess my first question is about loan growth for next year. You had a really strong end of the year. Multifamily was quite strong. Equipment finance kind of as expected. What are your kind of expectations for next year? You have talked about 10% last quarter. Any extra color there would be great? Well, thank you for the question. We actually had a good fourth quarter even though the fundings were delayed kind of in the last part of the quarter as the gap between the year-end numbers and the average outstanding for the fourth quarter shown. But we had a good growth for the entire year, year-over-year. So we were pleased with that. As far as 2023 is concerned, we are operating in somewhat of an unusual environment in an inverted yield curve. Federal Reserve policy, obviously, is going to dictate a lot and we have noticed that the middle part of the curve, the three-year to five-year part of the curve has actually been dropping in the last several weeks, which makes the planning even a little more interesting. But, generally speaking, for the -- for 2023, our focus is going to be between 5% to 10% loan growth. We would like to see the higher end of the range at the 10% level. But the strength of that will come, again, primarily through equipment finance and then C&I in our commercial finance areas. Thatâs the -- those are the areas that we are going to spend the most time and focus on and given relative returns from various asset classes, the equipment finance side and the commercial finance side make the most sense, so most of the marketing attention, expansion attention will be in the equipped finance side and the commercial finance side. So, if multifamily and commercial real estate were $5 million to $10 million growth, equipment finance was somewhere between $30 million to $50 million for the year and then C&I was 30% on the low side to $75 million on the high side that gets you a range of up to 10% at the end of the year. In terms of commercial finance, the strongest part of the portfolio will be the healthcare portfolio. We had a very good pipeline of new opportunities going into 2023, some of which have already started to fund and we saw greater utilization in the healthcare portfolio, particularly in fourth quarter, continuing on now into the first quarter and it has two dimensions. Our customers are using their excess liquidity. So you are seeing the commercial demand deposits decline, which is something that we felt would happen a year ago and it started and itâs continuing. But that also means that their line utilization will improve. So thatâs where we see the bulk of the growth in C&I based on what we have right now. But we also see opportunities in commercial finance, government, finance, lessor finance and even in the Chicago Community Finance area and that will make up the bulk. But healthcare will probably be about half of the growth from what we see right now. The other categories will be the other half based on their own individual category opportunities. Is that half of the growth for the year in healthcare or is that half the growth in commercial finance alone? So roughly about $30 million to $35 million to $40 million -- $30 million to $40 million would be healthcare and the rest of it would be in the other commercial finance categories. So about 3% to 4%... Okay. Got it. And your -- the thought process on multifamily, CRE being less of a focus, just kind of rate driven. Are you already seeing slower demand there? You did have a great end of the quarter in multifamily? Yeah. A couple of things. One is we are pricing cash -- we are reallocating cash flows. So right now from a profitability perspective and an asset liability perspective, continuing to maintain a bit shorter duration and also picking up some improvement in yield seems important to continue the improvement in profitability. So we are really looking at doing is allocating cash flows for the year. And again, the equipment finance side and the commercial finance side give us the most flexibility from an asset liability perspective. Just, for example, in 2023, we will have over $600 million in assets re-pricing, the bulk of the greater portion of it in the second half. So what we are really doing is reallocating assets and cash flows. For example, the multifamily portfolio is expected to have significantly reduced prepayment rates, in part because of market conditions and in part because of where rates are right now. So we will see less cash flow coming off that portfolio to reinvest. Equipment finance, we will probably have close to $200 million coming off of the portfolio. We expect we will be able to reinvest that back into equipment finance, take some of the excess cash flows we might have from securities or multifamily, put it into equipment finance. And then in commercial finance, as we mentioned last quarter, we will have about $60 million coming off of the securities portfolio this year, at an average of 2.66%. Our goal is to put that into commercial finance at an average of about 9.6%. So pretty strong contribution of growth there and thatâs why itâs our priority. So with that kind of re-pricing and improved asset yield performance, what are your kind of thoughts on the NIM going forward. At the same time, you are having a little bit increase in deposit costs, but just kind of what are your thoughts on the NIM outlook? Well, we would expect net interest margin to stay relatively stable in the first half. I want to caution all these observations with the uncertainties of deposit re-pricing. So far we are able to maintain a good funding base with the pricing we have so far. But we have to watch what market reactions are as more customers seek higher yields. We will also see communications from the Federal Reserve on their expectations for rates during the year. And then those have -- that does drive some of our deposit customer perceptions on what they should be seeking for rates. So our big wildfires this year is going to be deposit interest expense. So in the first half, we expect net interest margin to stay relatively stable. In the second half when we have more cash flows re-pricing, we have an opportunity to expand the net interest margin, especially as we get better deployment in higher yields in equipment finance and especially in commercial finance. The securities re-price in the second half of the year, if we time the deployment of those cash flows into commercial finance at that time, then you see a strong opportunity for net interest margin expansion in the second half. I appreciate that. Switching over to expenses. It did a little better this quarter than I would have thought and then you had the branch savings planned for, I believe, next year. Whatâs kind of a good expense run rate in 2023? We are comfortable with the expense. If you look at where we are at now, we would say, expenses generally will run between just under $40 million, say, $39.5 million to just over, so framed right around $40 million. To the extent we see savings from the branch operations. We want to plow that back into marketing, especially for the commercial finance and some commercial deposit assets and liabilities. The branches are now closed. The two branches had issue. We had a contract on the sale of one of the branches. It fell through just a couple of weeks ago. There is still some interest in it. So we have reopened up the process and we are actually starting to negotiate an acquisition of the second branch, the larger facility and we are told that, that buyer has a 90-day to 120-day process that they are working through. So itâs conceivable that we could have both buildings sold and closed by the end of second quarter. The estimated cost saves from both those branches are roughly $800,000. So we would see an improvement in expenses of about $400,000 for the second half. We do think thereâs going to be some disposition costs on that based on where the contract is settling in. I donât think it will be material to the financial statements, but it could cost us a couple of cents a share at whatever period we report this, most likely here in the first quarter since thatâs when we have closed the facilities. So we could see a little bit of impact on first quarter, and then once the facilities are actually sold and closed is the bulk of the benefit after that. One of the facilities, for example, has an annual tax bill of approaching $300,000. So the sooner itâs gone, the better we are. But thatâs the key to achieving the cost saves as to disposition of the facilities. Is that increased marketing spend kind of depending on where the economy is, any -- is that an area where it could shift if the second half of the year is a little bit weaker? Like how are you thinking about the back half of the year and possible places you can shift if the environment changes? Well, I would say that, the commercial finance side is something that we need to allocate marketing expenses to and that needs to be a relatively consistent presence. So I would say, once we commit to a plan in that, we are going to see it through and see how effective the marketing is. The product capabilities we have in commercial finance and government finance, even a lessor finance are very strong within the market, in some ways, unique. So we need to make sure the word gets out and so that is a fundamental level of expense that we are not likely to change very much. On the deposit side, to your point, if we are well funded for our objectives and especially if our commercial marketing deposit marketing is effective. That does two things. One, it might bring down the overall marginal cost of funds a bit. And two, we can meter the expenditures a little bit based on how the marketing is effective. So right now, I would say, the marketing is a fluid number. We know we are going to spend more on it. But itâs hard to predict it and so we measure the effectiveness of what we are going to try to do and some of what we are going to try to do is relatively new to us. Focusing on commercial deposit marketing has been something thatâs done within the loan -- the credit areas. Now we are going to make that a central focus within the organization, branch level, treasury services, are both going to contribute to those business plans and see if we can improve our total percentage of commercial to total deposits as best we can. So itâs hard to predict those numbers. But once we get into it, we will have a better sense of what works and doesnât work. Got it. Got it. I guess my last question before I step back into the queue. Just updated thoughts on your buyback, I know that you are a little bit concerned about the tax this year, but you did get some shares bought here in the fourth quarter, just kind of thoughts on that going forward? We put -- the Board approved an increase to the share repurchase plan last week, and I would say that, given that the lower level of volume we have seen in the fourth quarter, we were able to do some volume. But I would say that it will probably slow down a little bit. I would probably use 50,000 a quarter as a baseline. It could be higher. I doubt it would be much lower. And so at that point, you would end up the year roughly around 12,500 million shares, plus or minus. So I would use a little bit lower baseline than we have historically. Hopefully, we trade-up a little bit in share price and itâs a little bit less accretive. But still, I think, 50,000 a quarter is a good baseline. If itâs better than its better, but I think thatâs a reasonable place to start a minimum estimate. Thank you. One moment, while we prepare for the next question. [Operator Instructions] Next question is coming from Brian Martin of Janney. Your line is open. Please go ahead. Hey, Morgan. Can you maybe just talk a little bit about or, I guess, the thought on just how you fund the loan growth this year, just kind of the size of the balance sheet. I know that the cash balance is obviously down pretty substantially, but you also talked about $600 million. It sounds like itâs re-pricing over the next 12 months. So just kind of in connection with maybe if you look at the 10% loan growth, you are talking about $120 million at the higher end. So just -- kind of just trying to understand how you are thinking about funding it and just the balance sheet along with some of the deposit contraction you saw this quarter, so? Yeah. I think the simplest thing is, if you look at it, we will take $60 million out of the securities portfolio to fund the loan growth and we will need $60 million of new funding, plus or minus. And the new funding, probably, in the shorter run would be done through retail CDs and money markets, but especially retail CDs. The customers that we are working with seem to want to go in that direction right now and that seems to be working for us. And then as the year goes on, as I said earlier, we are going to try and focus some attention on commercial deposit marketing, whether itâs new commercial deposit, DDAs from new customers, commercial MMDAs and then some commercial CDs. We donât have that much of it, but commercial would be the next component. So letâs assume, for example, that we are able to take that $60 million of new funding requirement and do half in commercial and half in retail. That would be a good result for us, because it will come in at a lower cost of funds than the retail side would. And it would also mean we are growing our core banking franchise and our core commercial finance or commercial deposit franchise in a meaningful way. Got you. Okay. And as far as the contraction -- a little bit of contraction in deposits and just kind of how you see that playing out with kind of managing the loan-to-deposit ratio. What do you see -- do you see more contraction potentially on the -- given where rates are in some of the deposit mix or is that -- do you feel like itâs stabilizing here and... Well, of course, thatâs the big question. I would expect to see some more contraction just based on the fact that the economy has seen some inflationary components that have drained liquidity, especially on the retail side and you see customers looking for higher yields. We have been able to play pretty good defense, but thereâs not 100% retention there. So we do expect to see some further declines the commercial deposits. As I said earlier, customers are going to use their liquidity before they start borrowing against their lives, and obviously, there are certain minimum liquidity requirements they have to maintain. But again, their choice is simple. If they have cash available, they are going to use it first and then they will draw next and as that cash diminishes just through operating expenses, you will see greater impact on line utilization. But first, the cash is going to run off. Itâs also the case in 2022, we have one large depositor that did a capital markets transaction at the end of 2021, dropped $25 million of DDA on us and then consumed about $20 million of it during the course of the year that, we do not expect to repeat. So I would say a slowdown in commercial deposits is more likely given that large depositor delta. But still the retail side, I would say, some run-off is still possible, especially since we will see just a little bit greater inflation coming through the economy, real estate taxes that our customers have to pay. The timing of that is different than it used to be here in the Chicago market. So we are bracing for a little bit of additional runoff during the course of 2023 and thatâs why we are planning ahead with some replacement in retail CDs and we are going to try to focus as much as we can on commercial deposit growth and build a stable growing franchise there. Got you. No. Thatâs helpful. So not -- maybe not much change net-net to the loan-to-deposit ratio. I think itâs around 90% today or in that area, is that how you are... Yeah. I think thatâs about right. And if we feel that we need to bring that ratio down a little bit, then we obviously have the cash flows to do that. But I think if we can maintain it in that 90%, 92% range, get the mix that we want on both the loan side and the deposit side, it speaks to a stable environment for the first half of the year and an expanding environment in the second half of the year. Got you. And just you said earlier, maybe just your comments about, the bulk of the growth sounds like itâs both kind of the equipment finance and the commercial finance. Just the yields you are seeing in those buckets today. Can you just remind us, I think, you said, it was not or one was over 9.5% maybe as a commercial, but on the equipment finance side, just kind of what you expect to be -- just trying to understand the pickup you are thinking about getting here? Well, again, it gets a little variable and somewhat volatile. But right off the bat in equipment finance, if you think about a moderate duration of around three years to five years, say, four years at an average, then the swap rates there can go anywhere between 3, 3.5 to 4. So, say, $375 million is a reasonable number. Then we are looking at around $250 million to $300 million depending on the asset class, whether itâs corporate other, middle market or small ticket, so high 6s seem reasonable there. We -- 6 is kind of a floor for us right now, given where we think funding costs could go and profitability targets. But the swap rate plus $250 million is a reasonable proxy. It might go a little higher depending on the mix, but we are trying not to lock ourselves into relatively low yielding assets at this moment given the uncertainty of where things might go. There you are looking at anywhere between Prime plus half on the low side, which gets you, if thereâs a modest bump here in the Fed funds rate and the Prime rate here in the first quarter, thatâs 8.25% on the low side. And then you can see Prime plus 2 on the high side. So if you again weighted average that, depending on the mix in the portfolio, you can get yourself in the mid-9s, which is kind of where we are trying to target it. Got you. Okay. And -- okay. And then just on the, I guess, just jumping -- you said, the pipelines today in general are, I guess, it sounds like you kind of outlined where you are targeting your growth, but just the pipeline in general support, I guess, kind of the outlook that you are kind of talking about here today that seems fair? Yeah. I think it explains the pipelines in healthcare are the strongest. Thereâs quite a bit of activity out there now, plus we have the opportunity for greater line utilization, right? So letâs assume we are trying to grow that portfolio by $40 million, $20 million of it is quite foreseeable based on greater line utilization. But we think we probably will do better than that with growth and commitments. The next area to focus on is commercial finance and government finance. Those pipelines are relatively thin right now. Thatâs where the marketing has got to come from. Lessor financed, thereâs some opportunities there. That one is the hardest to predict growth, because it tends to have line utilization during the quarter, but period end, they usually discount the transactions from the lines and you donât see much quarter-over-quarter growth in that portfolio. And then community finance, so the business finance side, we have got some new product development thatâs just rolling out right now. Thatâs intended for our small business customers who are also seeing some liquidity consumption. They will probably need some credit support during the course of the year. No more PPP, no more ERTC, no more EIDL. So we will see some modest growth there. But healthcare, we feel the strongest about, the others are really going to be a function of marketing and growth. So thatâs why we have kind of underweighted those until we can prove up the efficacy of the marketing. Got you. Okay. And just maybe one on the payments or the payoffs this quarter, I guess, you have kind of talked about maybe the payoffs coming down a bit at least in one area, there was one you mentioned. But just in general, kind of should we expect or I guess, are you expecting the payoffs in 2023 to be a bit lower than what they were in 2022 or just trying to gauge kind of the trend, I mean, the trend in the last two quarters has been definitely lower. So just trying to understand if thatâs kind of a trend you expect to continue? It sounds like it is. Well, certainly, in the real estate portfolio, we would expect lower prepays compared to 2022 and thatâs in two dimensions. One, the rate environment right now doesnât really lead -- lend itself to a significant amount of refinances from our portfolio. Two, the multifamily markets in a bit of transition with higher debt service requirements on new purchases, maybe somewhat higher cap rates, maybe somewhat lower NOIs. We are seeing real estate taxes in almost all markets take a bite out of NOIs compared to the last couple of years. So those building valuations and the relative trading values might alter a bit during 2023. So I would say the fourth quarter payoff rates were probably a reasonable proxy for whatâs going to happen in 2023, absent a material change in the rate environment. We do see some purchase opportunities in the market, some of them driven by 1031 exchanges. So thatâs a good credit environment for us. Some people are just taking profits and deferring the taxes and getting themselves into the best asset they can. So that will drive some prepayment activity. But we would expect real estate prepayments to be considerably more muted than they were in 2022 and itâs also the case that we donât -- the customers that paid off portfolios, for example, in third quarter, the one customer that sold their entire portfolio and paid us off completely in several other lenders. Thereâs not those concentrations in the portfolio at this time where we see a massive pay down like that. So one, fewer concentrations, and two, slower market activity equals lower prepayment rates in 2023. Equipment finance is relatively stable, principally amortization. But from time-to-time, we do see some early terminations. In our case, thatâs probably favorable. It gives us more cash to redeploy at a higher yield in almost all cases in that environment. And then commercial finance isnât so much a question of prepayments as it is to the volatility in line usage. Itâs not unusual for us to see a draw of $5 million, $7 million, $8 million, $10 million in a week, get a pay down two weeks later of the same amount or a little more. So for that matter, itâs line utilization week-by-week, month-by-month, hard to predict in the extreme. But with greater commitments out there and overall lower liquidity along those fire walls [ph], we still expect to see somewhat higher utilization. Okay. And is utilization back to kind of a normal level or is it still well below where it was running kind of pre-pandemic? Itâs not quite where it was before. Itâs probably retraced about 50%. And so thatâs why we think thereâs some runway ahead of us in a more normalized liquidity environment. And also, even though in the healthcare space, many of our customers are enjoying somewhat higher reimbursement rates at the state level. Their expenses are going up, too, especially in states that have organized labor as part of their workforce. So the margins will remain relatively stable. But in an intra-period basis, their expenses are going up, which means their draws are going up and we will then, therefore, see somewhat higher utilization on those credits, almost no matter what. If it retraced -- thatâs what we are saying, if it retraced all the way back to, shall we say, the 2019 level, we would pick up at least $140 million of utilization. Right now, we are expecting $20 million in our official business plan. Got you. Okay. That color is helpful. And maybe just last one or two for me. Morgan, the margin, and I think, we talked about in the past, the margin may be peaking in the upper 3 to 3.70, 3.80 type of level. Has anything changed in your outlook there? I know maybe itâs a back half event. Just trying to understand when the margin peaks and if thereâs any real difference in your outlook on that level today versus a quarter ago? No. I actually think that, as I said earlier, we have an opportunity to expand the margin in the second half of the year. It will depend on the mix and it will particularly depend on us being successful in commercial finance growth. But if we are successful, I wouldnât necessarily call a peak to net interest margin. Obviously, too, the part of that is deposit interest expense. If things remain relatively stable, we are able to maintain the funding base at the levels we are talking about. Then, again, I see some opportunity for margin expansion. And if we are able to bring in commercial deposits and reduce the overall marginal cost of funds, thereâs yet another opportunity to expand margin. So I would say that, the higher end of the range for the year would be in the upper 3s. It seems a reasonable place for us to be. But if we are successful in what we are trying to do in the second half on the commercial finance side and the commercial deposit side, that isnât necessarily the peak. But, again, we have to see what happens with the core funding costs during the first half of the year, what the Fedâs communications are as far as rates are concerned. If all of a sudden, there is a pivot in the latter part of the year, then it might take some pressure off of funding costs. But at the same time, we will be able to maintain or even expand margins, because we are going to be repositioning cash flows. Got you. Okay. And last two, Morgan, just was -- just the -- with the growth you are outlining or at least kind of anticipating by bucket, can you just talk about the reserve level and just how you are thinking about it in the context of CECL? And then just -- I know you have talked in the past about kind of the levels of profitability you are targeting. Just thinking about, I think, in the past, itâs kind of in the low 30s or mid-30s kind of a 1% ROA. So just kind of the reserve, with regard to CECL and the profitability outlook would be great? Thank you. Okay. Well, first, on reserves. Yeah, CECL is upon us. We are in the final stages of model analysis and validation, but we do expect that, consistent with the impact of CECL, the overall reserve ratio is going to go up. And obviously, as we put in somewhat higher risk credits in the commercial finance area, middle market, equipment finance, small ticket equipped finance, those are higher reserve ratio credits. So we would expect there to be some additional growth in reserves, both because of the day one impact of CECL and as we pivot the portfolio further to equipment and commercial finance, you will see some higher provisioning. Probably better able to give you more specifics on our next call. But just right off the bat, the middle market, small ticket portfolios will have a reserve ratio greater than 1%. The commercial finance portfolios will have a reserve greater -- ratio -- reserve ratio greater than 1%. So on a weighted average basis, both of those credits are going to require higher reserves, and therefore, bring up the average reserve ratio. On profitability, given the timing of cash flows this year, we expect the mid-to-high 20s for the first half, but we do see ourselves hopefully being able to push into the low-to-mid 30s in the second half. The bank at that point would be somewhere between 95 basis points, 90 basis points to 95 basis points on the low end and 105 basis points,110 basis points, maybe even pushing 115 basis points right at the end of the year on the high end. So again, right within that 1% range, which is what we have been trying to achieve, looks like we are getting pretty close. The key is to just keep it stable in the first half and then work to expand in the second half. Good morning, Morgan. Good quarter there. I was just wondering if -- since our dividend coverage ratio has improved drastically since earnings have gone up, would you consider an increase in the dividend or a special dividend that will really help us all timers? Thank you. Well, let me say that, both as a significant shareholder and as an all timer I generally personally in favor of a higher dividend. But right now when you look at our comparative dividend yields, they are very competitive in the market and we also want to see what happens with interest rates overall. If they are actually going to be coming down during the course of the year, the dividend yield looks even better. So I would rule nothing out right now. The company is well capitalized at both, at the bank level and at the holding company level. And to your point, we appreciate the recognition of the better dividend coverage. So I would expect at least for the first quarter or two, while we get a handle on Federal Reserve policy and we make sure that we are able to put a floor under net interest margin and earnings, the dividend policy remain about the same. But I would also say that, we are going to take another look at that in April and another look at that in July. It would roll nothing out right now. Dividends have been a key component of shareholder return these last several years. Itâs an important component of it and if that is a path to better total shareholder return, I would not necessarily rule anything out right now. Thank you, Morgan. That was helpful. Just one more quick comment, I guess one of your competitors did a major deal in the Chicago area neighborhood. Do you have a comment on the merger or acquisition field in the Chicago area? Thank you. I -- that would be a great conversation to have over a longer period of time. But to address our particular plans, I would say this. First, right now, I think, executing our business plan on an organic basis has proven to have good results. As you look at the improvements in originations even starting in 2021, continuing on to 2022. We have an opportunity to further improve of results here in 2023 and towards that we want to stay as focused as we can. Having said that, growth can be a good thing, if it contributes a funding base thatâs helpful to us, if it contributes higher operating leverage and if it improves the capital base to the point where we may meet the Russell 2000 threshold for inclusion later this year. So I would not really want to comment on the broader aspects of Chicago. People have their own perspectives. But I do think that, we may see an opportunity to do something later in the year if it would help us, but itâs certainly not our focus. It would almost be something that somebody offered us and we thought it made sense, not something that we are going to go out and seek out to do. It does appear that the market will respect higher earnings and more stable earnings. We think that the pivot to more commercial base helps earnings strength, and therefore, the multiple earnings going forward. So, again, thatâs our focus. Thank you. [Operator Instructions] There are no more questions in the queue. I would like to turn the call back over to management for closing remarks. Thank you. Well, we appreciate all the very good questions and continued interest. We look forward to 2023 building on the 2022 results and we will do our very best to improve our -- stabilize and improve our results for shareholders. Enjoy the rest of the winner if you can and we will talk to you in the spring.
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Greetings and welcome to the MaxLinear fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference call is being recorded. Thank you, Diego and good afternoon everyone and thank you for joining us on today's conference call to discuss MaxLinear's fourth quarter 2022 financial results. Today's call is being hosted by Dr. Kishore Seendripu, CEO; and Steve Litchfield, Chief Financial Officer and Chief Corporate Strategy Officer. After our prepared comments, we will take questions. Our comments today including forward-looking statements within the meaning of applicable securities laws including statements relating to our guidance for the first quarter of 2023 including revenue, GAAP and non-GAAP gross margin, GAAP and non-GAAP operating expenses, GAAP and non-GAAP effective tax rate, GAAP and non-GAAP interest and other expenses and GAAP and non-GAAP diluted share count. In addition, we will be making forward-looking statements relating to trends, opportunities, and uncertainties in various product and geographic markets including without limitation statements concerning opportunities arising from our broadband, wireless, infrastructure, connectivity, and industrial markets, timing for the launch of our products and opportunities for improved revenue and market share across our target markets. Additionally, we will make forward-looking statements relating to the completion of the pending Silicon Motion transaction and its anticipated timing. These forward-looking statements involve substantial risks and uncertainties including risks arising from our purposed merger with Silicon Motion including the anticipated timing of the People's Republic of China State administration for market regulation or SAMR review. Risk related to increased indebtedness, competition, the impacts of global economic downturn and high inflation, our ability to obtain government authorization to export certain of our products or technology, and a failure to manage our relationships with or negative impacts from third parties. More information on these and other risks is outlined in the risk factor section of our recent SEC filings, including our Form 10 for the year ended December 31st, 2022, which we filed today. Any forward-looking statements are made as of today, and MaxLinear has no obligation to update or revise any forward-looking statements. The fourth quarter 2022 earnings release is available in the Investor Relations section of our website at maxlinear.com. In addition, we report certain historical financial metrics, including gross margins, operating margin, operating expenses and interest and other expense on both a GAAP and non-GAAP basis. We encourage investors to review the detailed reconciliation of our GAAP and non-GAAP presentations in the press release available on our website. We do not provide a reconciliation of non-GAAP guidance for future periods because of the inherent uncertainty associated with our ability to project certain future charges, including stock-based compensation and its associated tax effects. Non-GAAP financial measures discussed today are not meant to be considered in isolation or as a substitute for the comparable GAAP financial measures. We are providing this information because management believes it to be useful to investors as it reflects how management measures our business. Lastly, this call is also being webcast and a replay will be available on our website for two weeks. Thank you, Leslie and good afternoon everyone. Our Q4 revenue was $290.6 million, up 2% sequentially and 17% year-on-year, capping a major milestone in fiscal year 2022 with record revenues breaking the $1 billion mark and operating cash flow of $389 million. Our Q4 non-GAAP gross margin was 59.6% and non-GAAP operating margin was 32.5% with cash flows from operating activities of $69.4 million. As we look forward, we are energized by the near and long-term drivers of our growth trajectory, spanning fiber broadband access gateways, Wi-Fi connectivity, wireless and optical data center and enterprise infrastructure. Entering 2023, we are confident in our ability to outperform our end markets via share gains and expanding silicon content in customer platforms. Our connectivity business achieved record results with both quarter four quarterly revenue and fiscal 2022 revenue growing nearly 100% year-on-year. Our connectivity growth continues to be fueled by the strong market adoption of our Wi-Fi 6 and 6E access point solutions, increased attach rates in existing customer platforms and a healthy pipeline of new customer design wins. Beyond service provider gateway opportunities are ramping design wins in several third-party standalone routers will further expand and diversify our Wi-Fi revenues. They comprise a new and continuing high volume growth opportunity in 2023. As we look beyond Wi-Fi 6 and 6E, our Wi-Fi 7 standard compliant WAV700 product family is currently sampling and is the industry's first single chip tri-band dual channel Wi-Fi access point solution in the world. It'll drive increased performance and differentiation, higher detach rates, ASP improvements, and a favorable cost structure versus previous generations and competition. We expect to see WAV700 enabled customer products starting late this year. Turning to broadband. Coming off several strong quarters of growth, in Q4, our revenue declined as expected, even as demand moderates to more normalized levels through an adverse period of digesting excess channel inventory, we believe the market is early in a multi-year upgrade cycle of infrastructure modernization by both operators and carriers to enhance customer experience and enable a variety of new revenue generating services. Market growth in PON is a particular area of strength globally with additional government incentives or fiber upgrades just beginning to rollout later this year. In this context, we are excited about the solid market traction we have with our industry leading integrated PON and 10 gigabyte fiber processor gateway solution. In 2022, our fiber access revenue increased more than four times from 2021, and we are entering 2023 with strong design win momentum. Importantly in the fiber PON market, we have relatively small market share today and expected continue share gains in the coming years with our unique product and technology differentiation. We currently have multiple customers in North America ramping our products, including a large Tier 1 operator. We are winning designs globally beyond North America, along with significant silicon content expansion from our Wi-Fi, Ethernet, power management, and more. Moving to infrastructure. Our wireless infrastructure business grew by over 20% this past year, despite acute shortages of substrates and backend capacity, which resulted in minimal shipments in second half 2022 versus demand. However, as we enter Q1, we are excited to see sustained strong demand for our wireless back haul and access products, along with improvements to our supply chain headwinds. Throughout 2023, we see great market traction and are excited about wireless infrastructure growth as we continue to benefit from the expanding rollout of multi-band millimeter wave and microwave back haul 5G platform solutions across several large geographies. These multi-band platforms not only double our content, but also grow our total addressable units. In high speed optical data inter interconnect, we have a leading strategic position with our second generation and industries only finite CMOS, 400 gigabit and 800 gigabit PAM4 for production ready silicon. We're making good progress in ongoing qualifications and feel confident that our data center revenues will grow meaningfully over the next two years. We are working closely with hyperscale data center enterprise and OEM module customers to support the increasing performance requirements of the industry's transition to 400 gigabit, 800 gigabit and beyond. A strong Q4 performance on our 2022 revenues of $1 billion plus and operating cash flows of $389 million are capstone achievements, which are very -- which we are very proud of. In 2022, we also significantly advanced our technology platform and expanded our product portfolio offerings. We have conviction in a strong long-term growth, even as we navigate the ongoing macro weakness with extreme discipline. Thanks to our developing technology leadership, accelerating design win momentum, and expanding target markets consisting of Wi-Fi, fiber access, wireless and optical infrastructure. Over the last two years, we have delivered transformative growth and strong financials, balancing discipline expense management, and investments in product innovation. Entering 2023 as a result of our core offering, we are once again uniquely poised to grow MaxLinear its significant profitability levels and increased scale. We are also looking forward to our pending acquisition of Silicon Motion and are excited for the future growth opportunities offer comprehensive combined product portfolio. With that, let me now turn the call over to Steve Litchfield, our Chief Financial Officer and Chief Corporate Strategy Officer. Thanks Kishore. Total revenue for the fourth quarter was $290.6 million, up 2% versus Q3 and up 17% year-over-year. Broadband revenue was $99 million down 17% versus Q3 and down 23% year-on-year, and was in line with our expectations entering the quarter. Our connectivity end market had strong growth sequentially in Q4 as a result of solid demand in growing market opportunity. Connectivity revenue in the quarter was $105 million up 27% sequentially and up 99% year-on-year. Our infrastructure end market had revenue of $32 million down 11% versus the prior quarter and flat year-on-year. Infrastructure performance was in line with our expectations as a result of ongoing supply constraints in substrates throughout 2022. Lastly, our industrial and multi-market revenue was $55 million in Q4, a 16% sequential increase and an increase of 62% year-on-year. GAAP and non-GAAP gross margins for the fourth quarter were approximately 56.2% and 59.6% of revenue. The delta between GAAP and non-GAAP gross margins in the fourth quarter were primarily driven by $9.3 million of acquisition related intangible asset amortization. The decline from the previous quarter was primarily driven by a mix shift of end market revenues in the quarter. Fourth quarter GAAP operating expenses were $122.2 million, including stock-based compensation and performance-based equity accruals of $35.3 million combined. Acquisition and integration cost of $1.1 million and amortization of purchase intangible assets of $1.3 million. Non-GAAP operating expenses were $78.5 million down $1.9 million versus Q3. Non-GAAP operating margins for Q2 2022 was 32.5%. GAAP interest and other expense during the quarter was $0.5 million and non-GAAP interest and other expense was $0.4 million. In Q4 cash flow generated from operating activities was $69.4 million. While cash flow generated for the year increased more than 2x compared with 2021. During Q4, we made a $50 million prepayment against our long-term debt position, which is at approximately $120 million today and continued to make debt prepayment of priority. We exited Q4 of 2022 with $207 million in cash, cash equivalents, restricted cash and short-term investments. Our day sales outstanding for the fourth quarter was approximately 54 days down slightly from 57 days in Q3. Our gross inventory turns were 2.6 times essentially flat with the previous quarter. This concludes the discussion of our Q4 financial results. Before we go to guidance, I want to give you an update on the status of our pending acquisition of Silicon Motion. We continue to progress with the SAMR approval process and remain optimistic for a mid 2023 close. We have fully committed financing for the transaction and have actively working to optimize the debt structure to lower our expected cost to capital. We are excited about the opportunities for our combined business and looking forward to bringing our two technology focused cultures together soon. With that, let's turn to our guidance for Q1, 2023. We currently expect revenue in the first quarter of 2023 to be between $240 million and $260 million. Looking at Q1 by end market, we expect broadband revenue to be down quarter-over-quarter. Connectivity is expected to be down versus Q4, primarily driven by the timing of Wi-Fi shipments between Q4 and Q1. In infrastructure, we are expecting revenue to increase compared with Q4 as substrate supply constraints continue to ease. Lastly, we expect our industrial multi markets revenue to be down quarter-over-quarter. We expect first quarter GAAP gross profit margin to be approximately 55% to 58% and non-GAAP gross profit margin to be in the range of 59% and 62% of revenue. Gross margins being driven by a combination of near-term product, customer and end market mix. We expect Q1, 2023 GAAP operating expenses to be in the range of $114 million to $120 million. We expect Q1, 2023 non-GAAP operating expenses to be in the range of $80 million to $86 million. We expect our Q1 GAAP tax rate to be approximately 25% and non-GAAP tax rate to be roughly 10%. We expect our Q1 GAAP and non-GAAP interest and other expense to be roughly $4 million, and we expect our Q1 GAAP and non-GAAP diluted share count of $81 million to $83 million. In closing, we are navigating a dynamic environment in Q1, but solid execution and innovative product offerings are enabling us to maximize strategic business opportunities with continued success. As we enter 2023, we're energized by our traction and Wi-Fi, fiber broadband access gateways, and wireless infrastructure where our growth drivers are less dependent on macro conditions. As always, we will continue to focus on operational efficiencies, physical discipline, and shareholder value as we optimize for today and plan for an exciting future. Hi. Thanks for taking my question and congratulations on executing and what's probably been a very tough environment. I think in the past you've commented on strong backlog that's maybe exceeded a year. Is there an update you can give us on backlog trends and how you've been seeing movement within backlog on terms of cancellations, push outs, increases, et cetera? Sure, Alex. Yeah. So just briefly on backlog. So, somewhat consistent with what we've been saying over the last couple of quarters. We have had strong backlog. Lead times had been long. They are definitely getting shorter now and -- but that being said, we still have a significant amount of amount of backlog. Consistent with the last two quarters on this call I mean, I've highlighted that customers have been kind of moving around shipment dates and asking for either push outs or cancellations. So, we continue to navigate that today as we have been over the last three to six months. Okay. That's helpful. And then on the Wi-Fi constraints, any more color you can give us there in terms of how to think about the year? There as well I think in the past you've talked about over $200 million in revenue. Do you still see that as possible? And do those -- does the impact in Q1 come back fully in Q2? Yeah. So, on the Wi-Fi side, I mean we had an incredible year. I think in 2022 we made lots of progress. We were able to increase a lot of our shipments. You saw a big pickup in our results in Q4. A lot of that was driven as we got more supply online and customers have definitely taken that. So, very excited. You talk about that $200 million that, that we've highlighted as a goal for next year or for 2023. That remains the goal and we're pushing hard towards it. That being said, I mean, we are in a pretty difficult environment where there's a lot of inventory in the channel, but we are continuing to gain good traction. We're continuing to see ASP increases, and so we're working very hard to get there. Hey, guys. Thanks for taking my question. I wanted to basically ask about the general tone in the market environment and maybe more specifically about the 14% sequential revenue decline you're expecting for Q1. I appreciate you commenting that broadband and connectivity will both be down sequentially, but between the two, what would you say is creating the most amount of headwind? Or is it sort of equally balanced, sort of channel reset? Yeah. Gary, I mean, I'll jump in here. I mean kind of consistent with my previous comments about, just the order rates and visibility. I mean, it's definitely cloudy out there and so, we're trying to navigate it best we can. I think we kind of came into this much later than others. We continue to see really good demand. And I think overall, from a long-term perspective, this kind of multiyear broadband cycle continues to be very exciting with the attraction that we're seeing on our fiber product offering as well as Wi-Fi is really encouraging. I think there's clearly some inventory in the channel that the industry is going to have to work through. And we're doing our best to kind of navigate that with our own business as well. I mean -- long term, I mean, I feel very good about the progress that we're making in each of our end markets with all of our product offerings. So, you want to look at broadband in two categories, right? There is the cable side and the fiber side. Fiber side is a continuing growth storey with share gains and content expansion. Cable has been a content expansion story and the real next big growth Philip comes when DOCSIS 4.0 launches. So, I think the secular growth vectors in place, we have the right product offerings. And it's very hard to predict what is the channel inventory levels right now. On a longer term basis, as we have stated in the script portion of our call here that we're really excited where MaxLinear is positioned today. Got it. Appreciate the color. And as my follow-up, I want to ask about the China SAMR approval process. What is the communication like with China SAMR? Are they asking for supportive materials for consideration? And have they communicated with you that gives you any -- if they communicated with you anything that gives you comfort in the mid-2023 close? Yeah. Gary, with regard to SAMR, I mean, we're not going to comment on the dialogue that we have with SAMR. But we do remain optimistic as we've consistently said about closing this mid this year. Hi, guys. Congratulations on a nice close 2022. Obviously, the environment entering 2023 is, as you said, low visibility. But I guess, Steve and Kishore, you've talked about inventory in the channel. I think, in broadband, it sounds like there's some in Wi-Fi. I assume there's probably some in industrial and multi-market. And so I guess, my question is typically inventory corrections last longer than a quarter. Do you expect that to be the case this time around? And can you give us any sense do you think the second half of the year you start to come back to consumption levels or could the inventory burn potentially last into the second half of 2023? Hey, Quinn, it's -- this is -- it's a very difficult question you're asking. We are talking to our OEMs and the OEMs are talking to the operators, and everybody is trying to get hold of what the total inventory in the channel is. So, while I do not expect the correction to complete in the first half of 2023, we're projecting far out into the second half of that is very difficult. Having said that too we are really depending on growth coming in our fiber side, the content expansion and wins that ship in outside of the operator gateways in our Wi-Fi products as well. So, Wi-Fi, while it is attached substantially to the operator platforms as we speak today, there are growth opportunities in the non-operator markets, retail router gateways that are more in the operator class. So, I would say that I cannot answer your question. It's very cloudy, but I'm optimistic as everybody else that things will revert back in time by the time we close out 2023, right? But for us, the growth cycles really depend on the -- on Wi-Fi infrastructure going strongly, fiber going strongly. And then beginning of a ramp on our optical high speed data center interconnect products. So, those are the things that really we are looking forward to because they set the stage for very strong growth in many years to come. I guess, as a follow-up, Kishore. Do you think based on the timing of either third-party routers and Wi-Fi deployments or share gains in fiber that the infrastructure ramps. I mean, can you tell today whether you think second half of the year is better than first half of the year? Or is it just too tough to call at this point? So, I'll just jump in real briefly. Look, I think the kind of where we're seeing the inventory is today, I mean, we're just beginning this. I mean, it definitely feels like we see some more pain or some additional decline next quarter. And then hopefully, we start to see that inventory flush out and we see some things improve. As you know, they don't improve quickly. So, I don't think we're expecting a dramatic snapback by any stretch of the imagination, but hopefully, in the second half, we'll see that inventory clear out and start to see improvements in Q3 and Q4. See we're maintaining a conservative stance, right, about how we plan our annual operating plan and our investments in a very disciplined balanced manner. And that's one thing we've always done very well throughout our existence as a public company, and we will continue to do that. Hi, guys. Thanks for asking the question. I think everybody's kind of beat the dead horse about visibility going forward. So, let me just try to ask something slightly different. Ex inventory, Kishore or Steve, are you seeing any change in the design win frequency in your core areas, whether obviously the new stuff in fiber, Wi-Fi and optical, you're really excited about? You mentioned that a bunch of times. But any sort of market share shift change in design activity given the uncertainty in the market? Thank you, Ross. We'll go beyond the beating the dead horse, so to speak. Hey, you have to celebrate the first mixed signal $1 billion plus company in this century, right? So, it's really, really -- and it's almost at the brink of our 20th anniversary as a founding company. So, I'm super excited, right? And coming back to the question of -- you're asking basically, are there any design win cycles here that are presenting themselves, what is the momentum in the market? You asked a very, very good question. Actually, there's quite a bit of a froth from all these operators, et cetera, where there's RFPs out there for next-generation platform design-ins. So, what we do over the next 12-month window, we'll set the stage for the next seven years because it's a generational technology transformation that's happening. And Wi-Fi 7 is going to stay for a long time. From then, the innovation cycles will slowdown. And so, it's very, very important for us to write now focus on design win momentum and technology win momentum to win these major platforms on the PON side. On the cable side, we feel quite comfortable that we'll maintain our share and win the next-generation design. So, even those are in the mix, but you know how that world works out, right? So you asked a very good question. And we see in the optical, there's again some momentum going on in the next-generation high speed interconnect this thing. So, we -- I know we talked about this, but I wouldn't talk about this if I was not feeling good about it. Let me tell you that after two years of talking about it. So that feels good. On the wireless infrastructure side, lots of conversations on the transport side of next-generation designs, but less conversations on what I call access transceivers, it's almost like, okay, we're going to wait for another few years for the next generation of access transceivers sort of technologies. So, I would say if you want to really identify where the froth and momentum is in fiber, in terms of design win, what we call at play and their wireless infrastructure in the transport side, which is all these multi-band backhauls and transports, millimeter wave and microwave and then on the optical side, there is some -- quite a bit of conversations and design win battles about next-generation technologies. Thanks for all that color. I guess, as my follow-up, Steve, going over to the OpEx side. You guys have done a great job of controlling that coming in below your guidance and down sequentially in the fourth quarter. The step-up in the first quarter, anything to point out there. And generally, given the uncertain environment on the revenue side of things, what's your strategy on OpEx as we think relative to kind of the -- what I guess, $83 million you guys guided to in the first quarter? How should we think about that trending throughout 2023? Yeah. Ross, it's a super important question. So, look, as we look at Q1, you have your standard payroll tax increases that you bump up in Q1. We've also got a variety of kind of legal costs that are somewhat one-time in nature, but they do tick up in Q1. Look, kind of given the revenue declines, we're looking very hard, and you'll see us reduce our OpEx kind of throughout the entire year. So, I would expect it to come down slightly in Q2 and then down the rest of the year, really acknowledging the market environment that we're in right now. Yes. Thank you. If I could just zoom into your broadband business a little bit more. So, based on your guidance, I mean, it looks like that business is going to be down about 30%, 40% from its peak. And that's even with the fiber side, obviously, growing pretty nicely. So, I do appreciate you don't know exactly where the channel inventory is. But down 30%, 40%, do you start to get a sense for when that business will start to flatten out? It's a great question. We're wrestling with that. We've seen, as I mentioned before, good backlog numbers. And at the same time, there's just -- it's a very murky environment right now. And I think with some of the supply chain dynamics, a lot of our customers and their customers naturally have ordered up ahead of that. And so, we're really wrestling with kind of where everything shakes out. It kind of feels tough in the first half of the year. Hopefully, we start to see some modest improvements in the second half. But I wouldn't say that we're counting on any major shifts, but it does feel like we're kind of getting down to the right levels. But I think 2023, you're going to see -- numbers are going to come down quite a bit with some decent recovery in 2024. Sounds good. That's fair. And I noticed you made a small acquisition in the quarter. I know it's pretty small, but was that just a group of engineers or care to comment on that? Yeah. So -- yeah, so the small group of engineers looking to kind of reduce our overall consulting cost, and so that will end up being a modest cost reduction for the company going forward. Very good. Just one last question because, Kishore, you talked about the broadband business probably not seeing that next leg up until DOCSIS 4. So, what's your best guess on timing there as when DOCSIS 4.0 will be a more material driver for MaxLinear as a company? So, Tore, we are speaking of the cable side here. I think there are two links to the growth, right? When cable launches a recovery, which would be through ASP expansion and some unit growth, right? And the first one would be really 3.1 with Wi-Fi 7. Wi-Fi 7 being a big catalyst for the refresh in the DOCSIS. And then the other one is the next-generation DOCSIS 4.0 with the Wi-Fi 7. So I think that is a sequence of it. So, I would expect that to happen sometime beginning in the second half of 2024 in terms of these new offerings. Hey, good afternoon and congrats on navigating this tough environment. First, maybe I just wanted to ask, do you think that any of the WiFi, just kind of given the strength that you saw in connectivity sequentially, is there any of that you think was maybe pulled forward from the first quarter that is contributing to that 14% sequential decline? Hey, David. I guess, the way I would describe it, I mean we were really planning to catch up throughout the year. We're talking about trying to capture more of this third-party router business. We were able to capture some of that. I think as we look into next year between some of the gateway fall off, which is attachment revenue for us. And then also some of the additional third-party router revenues that I think we were anticipating in the first half, really, both of them come down a fair amount, and so moderate a bit, but we are excited about that particular business from a diversified revenue stream. It's another customer base that we've got design wins and are very excited about. So I think it's something that will continue to fuel growth for us on a go-forward basis. But in the short-term, you're going to see connectivity and Wi-Fi specifically come down a little bit in the first half. Okay. Great. Thanks. And then maybe just on the gross margin side, it was a little bit lower, I think, this quarter than we expected because of mix tends to -- or it looks like it's going to bounce back. How much of this -- and maybe all of it is really driven more by the favorable mix. And then maybe if you can talk to any of the pricing pressures you're seeing either on the sales side or on the input cost side? Yeah. I mean, so with regard to gross margins, so yeah, just mix related. We talked a lot about how some of the newer business, some of it in the connectivity area was lower margins. And then if you recall, the infrastructure business with the substrate shortages really kind of hurt us in Q4. So that will start to recover and thus, the raised guidance in Q1. So that's encouraging. With regard to the ASP pressure, as you know, I mean, most of our business doesn't have -- isn't really subjected to a lot of ASP pressure. I think around the edges, there are certain places like third-party routers that could potentially see that, but we're prepared for it. And that's one of the things that we're excited about some of the newer products, the lower cost structure on a go-forward basis. So we remain committed to getting gross margins up to those mid 60 levels. And the ASP pressures in our business really there's a lot of inventory in the channel, like in the broadband side. Pricing does not change how much you can ship because it's built up in the channel. So, the FX are more limited. However, what has happened was that there was a lot of demand scrambled last year. And we ordered product that at much higher costs because the foundries and the packaging companies raised prices quite a bit, even though there was like what I call volatile demand being spoken about, but we paid the extra monies to secure more product. And now, of course, that sort of catches up with you when the demand now declines, right? So, paying more, listening to our customers to get the product sort of also has hurt us a bit. Hey, guys. Thanks for the question. Great to see infrastructure guided up. I was wondering if you guys could illuminate a little more on the substrate availability. And is there still a shortage going on there? When do you think we could be at equilibrium? And would you expect more supply to come online into June as well? Could we potentially see an up quarter there? Hey, Chris. On the substrate, I don't think anybody would even now say that there is any capacity issues anymore or less in the system for supply. I think a lot of them are lines down. The tragedy of the whole process has been that the way -- the qualification process now is at a place where we are in the recovery process and that recovery process has a certain time cost into completely feeling our capacity needs for wireless infrastructure. And by the time we hit second quarter middle, lot will end up. We should have no product issues, right? Now the capacity is available, but there is a gestation cycle to ramping up product because we've got other alternatives that we're calling, and we don't want to stop that in between. So, I don't see capacity issues moving forward in wireless infrastructure once we are past a quarter or so. That is very helpful. Thank you. And then lastly, Kishore or Steve, if you guys want to take a shot at this, we don't need specific numbers, but maybe looking out over the full year for 2023. If you could kind of force rank your outlook, just given the drivers that you guys know regarding your four segments, if you could kind of force rank growth for us, I think that would be very helpful? I'll take a stab at it. Look, we're not going to guide the entire year for the whole company or by end market. But look, I mean, definitely, as I look at 2023, as Kishore just comment on some of the wireless areas, I mean, look, infrastructure is going to do well this year. I think the connectivity and -- the connectivity and broadband area, there is inventory in the first half of the year that we got to work through, and that will be a headwind. And then the industrial multi-market, I think, will be somewhat subject to this as well. But so that's kind of how some of the inventory dynamics play out. But I mean, I really do -- I know probably gone on about this quite a bit. But the growth that we're seeing I think we remain very focused on winning more of the fiber business as well as getting more market share with some of our Wi-Fi offerings as well. So, those are things that really lead us out of this exiting 2023 and into 2024. And there's an outside factor, too. I don't know how many of you have thought about it is that, I mean, China is now no COVID or whatever you call the policy, but there is free movement now. Everybody is traveling. Second half does China really snap back and then does it create a positive vector. And that's the one I am sort of keeping an eye out fall. Yeah. Hey, guys. Thank you for taking the question. Yeah. Just a couple if I could. On -- with regards to sort of customer verticals, is there anything interesting to glean there from a demand perspective? I don't know about specific customers. I mean, we definitely have some key wins like our Tier 1 operator that's ramping some of our fiber products. I mean that's very exciting, so early days. We had talked about that happening kind of in the first half of the year. So that's something that's probably exciting. We've got all your our typical customers on the wireless infrastructure side that we'll definitely see some nice growth in the first half of the year as well. And then maybe pointing to Kishore's comments a little bit earlier, we're engaged very closely with a lot of the operators. And as a lot of those decisions are being made for future platform deployments, for fiber or soon to be all the Wi-Fi 7 platforms as well. Okay. Got it. That's useful. And then, Steve, just I guess on the gross margin. I guess, what are the kind of pushes and pulls as we go through the year here that can move the margin around? Do you expect -- I mean -- and do you expect potential for much movement? And if they were to move, what would be the thing? Look, I think we had -- everything working against us in Q4. I think that definitely improves. I mean, we showed that in the guidance. So, I think I do see improvements. I don't see big swings as we kind of get through the year. I mean, the mix shift itself doesn't change that much in the first half, getting infrastructure up and going and seeing some of our backhaul products, transceivers, modems, et cetera, start to ramp will definitely benefit the gross margin line. But I don't know that we're not there with a breakout yet much higher, just kind of given some of the industry dynamics, but then also getting the cost structure in line from our standpoint, right? So, we've talked a lot about Wi-Fi 7 highlighted that that's kind of that first single monolithic chip that we can get out. Cost structure is much lower. And so as that business starts to ramp in the second half of next year, it can be a more meaningful contributor. Hi, Kishore. Hi, Steve. So, I'm looking ahead to the Wi-Fi WAV700 for the Wi-Fi 7. What do you think your design win share would be in that as those start to come in versus the current Wi-Fi 6, 6E, will it be similar? Or is there a potential for further gains there? So, Suji, look, our attach rates on our own platform is Wi-Fi 6, 6E is really not even not close to 50%. So, it's less than that. So, the potential growth is much higher as Wi-Fi has become sort of the mandatory attachment to all the broadband access sort of gateways or even smaller, lower tier units. So, I believe that the attach rates will increase quite a bit. And the Wi-Fi 7 design assignments, allocation have not yet happened yet. I think they happen towards the end of the year. And so, there is no such what I call slack fest in the non-consumer markets, and we are not in the consumer markets, per se. We do in the client side of the market. So, I think, in our case, it happens at the end of the year when the sort of the -- but the bids, the RFPs I talked to you about where all these operators are looking at next-generation platforms, Wi-Fi 7 is an essential part of it. So, we're all right now, putting in bids that include pricings and things like that. So, just to follow on that, Suji. I mean, we talked about those attach rates. I mean, definitely, in some of the markets like cable, we have a higher attach rate, but we've definitely got much more room to go and Wi-Fi 7 really gives us the ability to go up and get that. I'd also just remind you, WiFi 7 ASP increases will be significant over Wi-Fi 6. Thanks Steve. Very helpful color. Maybe the next question is for you, Steve. Just going back to the debt related to the planned Silicon acquisition. You talked about some potential to restructure or revisit that debt in the rates there. Can you just elaborate on what that opportunity is for you guys? And whether the deal is somewhat contingent on that? Or it sounds like the deal is financed, you said. So, I just want to get clarity there. Thanks. Yeah. So, sure. Yeah. The deal is financed. I mean, I said in our prepared remarks about us continuing to work on increasing -- or improving the cost of capital there. So looking to kind of move into the pro rata market, where we can pick up some additional share. We've had some interest. It comes at slightly lower rates. And so that's one of the things that we're doing to lower the overall debt cost. Clearly, interest rates have gone up. And while we're very confident on the synergies between the two organizations, the cost savings that can be achieved, but ultimately, the long-term growth that we can achieve is very encouraging and exciting. At the same time, in the short-term, we got to make sure that we're very disciplined around spending, especially in some of these slower periods that we're going through right now. Hi, guys. Thanks for taking my question as well. Kishore, maybe I'll ask you to peel the layer back here a little bit on optical PAM4. Especially looking at 800 gig, can you kind of characterize the breadth of your engagements across hyperscalers? I assume that's really the more important point of influence here. How you're doing? Are you expecting kind of first or second share position there? And then what kind of time frame do you expect these wins to be awarded and eventually to ramp? Okay. So, I think that the various hyperscalers ramp into the 800 gig PAM4 or 400 gig PAM4 or 2 by 400 gig PAM4 or even 2 times into 1.6 terabit PAM4, it depends. Everybody has a different plan. Having said that, so -- and everybody is different in the time line with some of our leaders, some are followers. So here on the 400-gig side, we -- that is well in the process. We're working with two hyperscalers and their OEMs to get design-ins and called. And on the 800 gig, it is the new one, we'll be the first -- the leader in that in terms of as and when the launch plays out. Of course, we don't have incumbency, but we have the best product, and we have got good traction with OEMs that supply to and a couple of two hyperscale data centers, right? They are the leader. So you just follow them. And sometimes, one of them really expects to have a custom product for themselves, which is -- we have a lot of sync on that one. But still, from where we are, it will be a substantial opportunity for our growth. And we expect initial ramp shipments to start sometime in the second half of this year, probably latter than earlier. But however, we would have the visibility much earlier. We are shipping pilot qualification quantities right now and that has to go and flush through the entire chain. So it really sets up a very nice 2024. And I would I will look at the â what happens 2023 as milestones to -- and pointers to what happens in 2024 and beyond. Kishore thanks for all that. Itâs great. Second question on the fiber business here as you're expecting your nice growth here this year. Maybe you can kind of give a little bit more color to the geographical split here. I know you've got a Tier 1 operator here this is in North America. But wondering if we're going to see any material contribution outside the U.S., whether in Europe or Latin America or other places can you characterize that, that would be great. That's all for me. Thanks. Great. On the fiber side, actually, we've done very well. But I also have to admit that the growth and victory have commented on the lower tier products, what I call non-gateway products. But my gosh, it's grown so nicely, so fast. And it's really heavily a North America concentration actually substantially. And the big victory is this Tier 1 operator in North America that the ramp has started. There are boxes in the field there and in tens of thousands. And you may not see as much of a spike right away in the quarterly revenues because they already took inventory and product earlier on. Now this particular one is probably the world's premier fiber optic gateway product, and it is an exemplar for the remaining operators who are selling in bids and where we establish credibility through the shipment to this particular operator. So, I think that's what it plays out. I think the next one will be Europe for us. And when we talk of fiber, we always talk of the non-China market. India and all would come in line over time potentially, but they will tend to be lower tier products like the ones we are shipping today in North America in pretty good quantities. Thank you. And there are no further questions at this time. I'll hand it over to Dr. Kishore Seendripu for closing remarks. Thank you. Thank you very much. I just want to let everybody know that we'll be participating at the flowing conferences this year in short order. The Susquehanna Twelfth Annual Technology Conference in New York; the 35th Annual ROTH Conference in Dana Point, California; the Loop Capital Markets 2022 Investor Conference on March 14; and the William Blair Seventh Annual Tech Innovators Conference in March 15. In my conclusion, I want to say that we've got a very nice momentum and a large technology portfolio that's developed over the last two years. We are at scale where we can compete and customers find a strategic. At the same time, it's a big celebratory milestone for us as a mixed signal associate company, having -- being the first one company started up for 2,000 that has actually hit $1 billion in revenue point. And so, I think it's a great movement for us. Internally, we are very proud, and we are sharing for future success. Thank you very much and see you soon. Bye.
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Thank you for standing by and welcome to Amdocs First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd to introduce your host for today's program Mr. Matthew Smith, Head of Investor Relations. Please go ahead sir. Thank you, John. Before we begin, I need to call your attention to our disclaimer statement on slide two of the presentation. It notes that some of our comments today may be forward-looking statements and are subject to risks and uncertainties including as described in Amdocs' SEC filings and that we will discuss certain financial information that is not prepared in accordance with GAAP. For more information regarding our use of non-GAAP financial measures including reconciliations of these measures, we refer you to today's earnings release, which will also be furnished with the SEC on Form 6-K. Participating on the call with me today are Shuky Sheffer, President and Chief Executive Officer of Amdocs Management Limited; and Tamar Rapaport-Dagim, Chief Financial and Operating Officer. To support today's earnings call, we are providing a presentation, which can be found on the Investor Relations section of our website. And as always, a copy of today's prepared remarks will be also posted immediately following the conclusion of this call. On today's agenda, Shuky will recap our business and financial achievements for the first quarter fiscal 2023 and we'll update you on the continued progress we have made executing against our strategic growth framework. Shuky will finish by commenting on our financial outlook for the full year fiscal 2023, after which Tamar will provide additional details on our first quarter financial performance and forward guidance. Thanks Matt and good afternoon to everyone joining us on the call today. Starting on slide six, I am pleased to report strong first quarter results, sincere thanks for which go to our incredible people around the world who everyday work to support our customersâ multi-year journey toward digital modernization, 5G monetization, cloud migration, and network automation. Q1 revenue was a record $1.19 billion, up 9.5% year-over-year in constant currency and above the midpoint of our guidance. 12-month backlog of $4.09 billion was also a record high, up approximately 7% from a year ago on continued sales momentum, and we delivered non-GAAP diluted earnings per share of $1.45, which was above the guidance range, primarily due to better profitability on a higher revenue base and a lower-than-expected non-GAAP effective tax rate. Overall, our financial year is off to a strong start, positioning Amdocs to deliver consistent and profitable growth in fiscal 2023 within a global macroeconomic backdrop that remains challenging and uncertain. To provide context to our financial performance, let me review our quarterly operating achievements, as shown on slide eight. To begin, we saw continued sales momentum and further cultivated strong value-driven partnerships with new and existing customers during Q1. Notably, we deepened our long-standing relationships with customers like AT&T, T-Mobile, Verizon, Comcast, Dish, and Claro Brazil in the Americas; Vodafone and Three Group in Europe, Globe in the Philippines; and Tier 1 operator in Malaysia. Additionally, we further diversified Amdocsâ customer base by winning several new logos, including Colt Technology Services in the UK and Telefónica Móviles El Salvador in Latin America where Amdocsâ online charging system will replace the existing vendor. Amdocs Vubiquity has also continued to execute well on its strategy of servicing leading studios and direct-to-consumer platforms, winning several new projects and extensions over the past year including Disney, Warner Brothers, Discovery, MGM, and Paramount. Turning to execution, Q1 was another great quarter, which included major project milestone deliveries at AT&T, T-Mobile, Verizon, Bell Canada, XL, and many others. At Claro Brazil, we expanded our policy platforms to allow for new use cases such as Voice over LTE and 5G standalone, in addition to which I am happy to share that nearly all the Brazilian postpaid customers Claro acquired from Oi have already been successfully migrated to our monetization platform. I believe Amdocsâ high rate of successful project execution is a direct outcome of our highly skilled workforce, unique global delivery model, methodologies, tools and automation, and our regional site strategy which is constantly refined as we optimize our global talent pool. I'd also like to highlight the competency of our managed services business, which this quarter delivered flawless execution for customers over the peak retail volume periods of Black Friday and the holiday season. In addition to sales and execution, we maintained a high level of R&D investment during Q1 and further extended our technology and product leadership. The most advanced version of the Amdocs Customer Experience Suite and service offering will be presented at the fast-approaching Mobile World Congress in Barcelona, where we are planning a significant presence and meetings with many customers and partners. We will also be showcasing innovative solutions and exciting use cases, including those resulting from our collaborations with service providers, enterprises, and partners at our Dallas 5G Experience Lab. To complement our growth pillars, Amdocs remains committed to disciplined M&A as and when opportunities arise. Amdocs is constantly evaluating a broad pipeline of exciting M&A opportunities, and while the previously announced acquisition of Mycom OSI did not move forward as planned, we continue to look for suitable deals that can accelerate our growth strategies. Before moving on, I want to proudly recognize our recent achievements in the ESG domain, as shown on slide 9. As previously announced, Amdocs was included in the S&P Dow Jones Sustainability Index for North America for the fourth consecutive year. Additionally, we are today pleased to announce that Amdocs has been included as a member of the 2023 Bloomberg Gender-Equality Index, which we believe is a testament to Amdocsâ progress towards achieving the various diversity goals to which we are committed. Our commitment to sustainability and corporate responsibility has also earned several other recognitions this quarter. Amdocs India was recognized as one of the Most Preferred Workplaces in IT and Information Technology Enabled Services for 2022-2023. We improved our environmental disclosure rating at CDP from B to A-, and our new state-of-the-art campus in Israel has been LEED Gold certified for its sustainable design and operations Prestigious ESG recognitions such as these reflect Amdocsâ desire to make a positive impact on the environment and the communities in which we operate, and I'd like to thank our global base of talented and committed employees for their essential part in making achievements like these possible. Now, let me provide a progress update in respect to our multi-pillar growth strategy, the aim of which is to bring market-leading innovation to help service providers to accelerate migration to the cloud, create seamless digital experiences by transforming IT operations, launch and monetize new 5G services, and deliver dynamic connected experiences with real-time, automated networks. Starting on slide 10, we see a growing number of service providers embarking on multi-year cloud migration journeys that Amdocs is supporting with our end-to-end suite of cloud platforms and services. I am happy to report that T-Mobile selected Amdocsâ cloud-hosted Intelligent Networking Suite, a next generation platform to enable provisioning of advanced 5G services, and Vodafone Ireland recently chose Amdocs to modernize and migrate its Amdocs data and application workloads from on-premises to the cloud to enable greater flexibility and capacity, an improved customer experience and rapid adoption of the latest 5G innovations. Additionally, a leading Tier 1 operator in Southeast Asia has selected Amdocs to smartly migrate its existing Amdocsâ BSS suite to a modern cloud transformation at two large regional affiliates, thereby enabling improved security and operability, while defining the long-term journey towards a full cloud native environment. Moving to Digital Transformation on slide 11, more service providers are recognizing the power of data to drive personalized customer experiences. Amdocs is working with Comcast on several new projects, including upgrading the new Amdocs Data Hub for Mobile and B2B on the cloud. Under a multi-year managed services engagement, Three UK selected Amdocs to migrate to a modern, cloud-based data architecture to serve its customers timely recommendations based on data-driven decision-making. Finally, Amdocs is providing AI-driven data insights to Globe Telecom, a leading operator in the Philippines with nearly 88 million mobile subscribers. Implemented on the public cloud, and delivered under a multi-year managed services agreement, the service will empower Globe to drive business growth, time-to-market agility, and operational efficiencies. Turning to slide 12 and 5G monetization, fixed wireless access is rapidly emerging as one of 5Gâs first meaningful success stories and Amdocs is already playing an important part. For instance, a leading Tier 1 operator in North America recently selected Amdocsâ Home Operating System, which utilizes AI technology to simplify internet and device management, automate customer support, and introduce enhanced security features for fixed wireless broadband customers. More broadly, Amdocs is helping service providers to modernize and build agility in the 5G era by enabling the rapid launch and monetization of new 5G products. Amdocs was recently commissioned by CTM, a leading telecom operator in Macau, to modify its online charging and billing infrastructure to support 5G standards We recently extended our managed services relationship with Vodafone Romania, which selected Amdocs to modernize its revenue management systems with a modular platform, enabling it to launch and monetize new products and services at speed. Additionally, Globe Telecom recently selected Amdocsâ next generation charging platform to enable the monetization of new standalone 5G services to consumers and businesses, while reducing operating costs. And KT Corporation in South Korea signed a three-year extension for ongoing support services and fast-track development for Amdocsâs Turbo charging and Catalog platforms, which extends Amdocs and KT Corporation until 2025. Turning to network automation on Slide 13. Global service providers are considering investment in cloud-native, fully digitalized processes to better manage massive scale and complexity across services ordering, activation and provisioning for consumer and enterprise customers. Amdocs recently completed an operational support system modernization project for a leading Australian operator, providing it with fully cloud-native services design and orchestration capabilities running on public cloud infrastructure to enable increased performance, business agility and cost savings. Along similar lines, in the UK, Colt Technology Services has signed a Letter of Agreement for Amdocs to deliver the Amdocs Resource Manager. The solution will be cornerstone in Coltâs continuous modernization journey, focused on delivering on digital infrastructure services, which empower its customers and employees around the world. We are also bringing value in respect to network deployment and optimization. Amdocs is providing system integration services for vRAN in Verizon to drive mass scale of automation and deployment efficiency as 5G rolls out nationwide. Additionally, Telefonica Germany has chosen Amdocs' cloud-native network optimization suite, enabling the operator to maximize network performance and accessibility and to benefit from great flexibility, scalability and automation. Running out my strategic review, let me quickly comment on an interesting project that we recently implemented for Bank Hapoalim. As one of Israelâs largest financial services institutions, Bank Hapoalim is using Amdocs' leading Catalog Management software to rapidly create and deploy customer-centric offers, products, and services, such as digital lending, through vastly improved time-to-market agility. Now, moving to our fiscal year 2023 outlook, as presented on Slides 14 and 15. To begin, let me remind you that Amdocs and our global customers are not immune to economic cycles, and we are continuing to closely monitor the current period of global macro uncertainty. Amdocs is well-situated at the heart of the multi-year 5G network automation, digital and cloud-driven investment cycle with our market-leading software and services, and a strong reputation for successfully delivering mission-critical systems transformation. From our vantage point as a trusted partner, and key technology enabler, we continue to see an attractive pipeline of opportunity and healthy level of customer engagement as we collaborate in respect to their next-generation software application and services requirements. In the current environment, Amdocs is also very well placed to help service providers improve customer experience, accelerate cost reduction and increase efficiency, as demonstrated by the many customer activities highlighted today. We are confident in our unique business model, which is more resilient due to the highly recurring revenue streams and strong business visibility resulting from our support of mission-critical systems under multi-year engagements. Wrapping everything together on Slide 15. We are reiterating our guidance for full year revenue growth of between 6% to 10% on a constant currency basis in fiscal 2023, with all three operating regions contributing positively over the full year. On the bottom line, we are raising the midpoint of our outlook for non-GAAP diluted earnings per share growth by 100 basis points to a new range of roughly 9% to 13% in fiscal 2023. The outlet reflects our strong Q1 financial performance and our commitment to further improve profitability by accelerating automation, driving efficiency and tightly managing costs. Additionally, we are on track to achieve our free cash flow guidance of approximately $700 million in fiscal 2023, the majority of which we plan to return to shareholders. Thank you, Shuky, and hello, everyone. Thank you for joining us. Turning to our financial highlights on Slide 17. I'm happy to report solid first quarter financial results kicking off a strong start to fiscal year 2023. Record Q1 revenue of approximately $1.186 billion, at the higher end of our guidance range was up 9.5% year-over-year in constant currency. On a reported basis, revenue increased 7.3% and was above the midpoint of guidance even if we exclude the favorable foreign currency movement of roughly $9 million compared to our guidance assumptions. On a regional basis, North America delivered another record quarter, and Europe accelerated as we continue to execute on behalf of our customers. Rest of the World declined during the first quarter, reflecting normal fluctuations in customer activity, but is on track for full year growth as new projects awards are ramping up. Altogether we expect all three operating regions to grow on a constant currency basis for the full year fiscal 2023 as we anticipated at the beginning of the year. Moving down the income statement. Our non-GAAP operating margin was 17.7% in Q1 and up 20 basis points from a year ago and up 10 basis points sequentially as we began to leverage the benefits of efficiency improvements, automation and other sophisticated tools while maintaining a high level of R&D investment. On the bottom line, non-GAAP diluted EPS of $1.45 was above our guidance range, primarily due to improved profitability on a higher revenue base and from a lower-than-anticipated non-GAAP effective tax rate of 13.7%, resulting from internal structural changes in certain jurisdictions in which we operate. guidance range of $1 to $1.08. This was primarily due to a lower GAAP effective tax rate than anticipated in the quarterly guidance partially offset by restructuring charges of $25 million related to the alignment of our workforce around our global site strategy as well as the optimization of our hybrid work model. Moving to Slide 18. 12 months backlog was a record high of $4.09 billion, 6% from a year ago and consistent with our reported growth at the midpoint of our revenue guidance range. On a sequential basis, our 12 months backlog was up by $120 million, reflecting continued sales momentum. Our 12 months backlog has traditionally served as a good leading indicator of our business, having consistently averaged around 80% of forward-looking 12 months revenue over the years. Turning to Slide 19. First quarter managed services revenue of $700 million was up 6.1% from a year ago and accounted for about 59% of total revenue. In addition to the expanded managed services deals Shuky already mentioned of Three UK, Vodafone Romania and Globe Telecom this quarter, I'm happy to report that DISH and Amdocs signed a new managed services agreement which will offer an improved billing experience for DISH commercial TV customers. To remind you, our managed services engagements underpin the resiliency of our business with recurring revenue streams, near 100% renewal rates and expanded activities under multi-year engagements and may sometimes include modernization projects, which deepen our relationship even further. Now turning to the balance sheet and cash flow highlights on slide 20. DSO of 87 days increased by 13 days sequentially in Q1, while the net difference of deferred revenue and unbilled receivables declined by $39 million sequentially. We generated free cash flow of $50 million in Q1. This was comprised of cash flow from operations of approximately $83 million, less $34 million in net capital expenditures. Free cash flow and DSO were impacted by the timing of roughly $100 million in cash collections, which were due for the payments around the quarter and holiday period, but which were subsequentially received in January. We are reiterating our full year free cash flow outlook of roughly $700 million, with free cash flow in the first half of fiscal 2023, tracking in line with our expectations, taking into consideration the normal seasonal timing of annual bonus payments in the second quarter. Overall, we ended Q1 with a strong balance sheet and a healthy cash balance of approximately $0.7 billion, including aggregate borrowings of roughly $650 million. Moreover, we have ample liquidity to support our ongoing business needs, while retaining the capacity to fund strategic growth. Turning to capital allocation on slide 21. We repurchased $100 million of our shares in the first quarter -- $100 million of our shares in the first quarter and paid cash dividends of $48 million. As I just mentioned, we remain on track to generate free cash flow of approximately $700 million for the full fiscal year, which equates to a healthy free cash flow yield of about 6.3% relative to Amdocs current market capitalization. Our outlook assumes a conversion rate of roughly 100% relative to non-GAAP net income. Regarding our capital allocation in fiscal year 2023, we expect to return the majority of our free cash flow to shareholders by way of our quarterly share repurchases and dividend payment program. Now turning to our outlook on slide 22. As Shuky indicated earlier, we are closely monitoring the prevailing level of macroeconomic business and operational certainty, which remains elevated in the current business environment. Thus, the second quarter and full year fiscal 2023 financial guidance reflects what we consider to be the most likely outcomes based on the information we have today, but we cannot predict all possible scenarios. We are on track to deliver revenue growth in line with the midpoint of our long-term guidance range of 6% to 10% year-over-year on a constant currency basis in fiscal 2023. Visibility to this outlook is supported by our solid Q1 performance, a record 12 months backlog and the strong pipeline we see in it. Our annual outlook includes second fiscal quarter revenue within a range of $1.2 billion to $1.24 billion. On a reported basis, we expect full year revenue growth within an improved range of 5% to 9% year-over-year as compared with 4% to 8% year-over-year previously. The new outlook anticipates an unfavorable foreign currency impact of approximately 1% and year-over-year compared with an unfavorable impact of 2% year-over-year previously. Moving down the income statement, we anticipate quarterly non-GAAP operating margins to fluctuate around the midpoint of our annual target range of 17.5% to 18.1%. Below the operating line, we anticipate that foreign currency fluctuations and cost of hedge will continue to impact our non-GAAP net interest and other expense lines, in the range of a few million dollars on a quarterly basis. We expect that our non-GAAP effective tax rate will remain within an unchanged annual target range of 13% to 17%, for the full fiscal year 2023. Bringing everything together, we are raising our outlook for non-GAAP diluted earnings per share growth to a new range of 9% to 13% for the full year fiscal 2023, and the midpoint of which represents an improvement of about 100 basis points compared with our prior guidance. Overall, we are well on track to deliver double-digit total shareholders' return for the third year running in fiscal 2023, including our outlook for non-GAAP earnings per share growth, plus a dividend yield of about 2%. Thanks, Tamar. As you can probably tell from our remarks today, we are very pleased with the strong start we have made to fiscal 2023, putting us in a great position to deliver another year of steady and profitable growth. Yeah. So I want to start with the bookings and sales commentary. I think like a top quarter in your history in terms of incremental dollars added to backlog. And your comments do sound positive, but you also had the Amdocs is not immune type of commentary there. So let me ask what you're seeing in terms of your investor -- in terms of your client conversations with regards to projects, new sales? How is it evolving in terms of speed of decision-making, size of contracts, those types of things? Hi Ashwin, so as we mentioned, yes, we are not immune. I mean, we like ourselves that we are a very strong company, but we are not immune to everything that's going on around us. But I think that overall, we see a lot of demand to our services. The area of growth for Amdocs, today are highly strategic for our customers. Everyone wants to be successful in -- when they deploy 5G use cases, fixed wireless, network automation. Everyone wants to move to the cloud. So while there is some uncertainty, I can tell that we see that we continue the project with our customers. These are highly important for them and we see a very rich pipeline ahead of us. I understand. And then, during the quarter, you did have layoffs. There's obviously the charge there, what are the forward-looking financial benefits from there? And are they now incorporated? I mean, I know you still are seeing midpoint of â of the margin range. But why should it not be more towards the upper part? So I think in general, when we look on the opportunity for margin expansion, as I'm sure you recall, we raised the operating margin range for fiscal 2023 and the beginning of the year, where now we are guiding for a midpoint of an elevated range. So we definitely see the impact of many investments we have done and continue to do in automation and tools and the methodologies of how we deliver things. And this is, I think, is at the heart of our kind of unique opportunity in terms of how to bring value to customers as well as doing things in a more efficient way. Another very important element that has to do also with managing labor in a smart way has to do with how we think about our global delivery and our global execution when we are leveraging geographical locations around the world and what we see as our strategic sites around the world, thinking about things like locations, in terms of access to skills, cost structure, proximity to customers, et cetera, et cetera. There are many considerations that play. And we are looking on that as something that is a major, I think, differentiator as well in speed to deliver and managing demand that may change from time to time, et cetera. And of course, it's about how we are investing in our people and how we are investing in talent to make sure that they are with high retention rates in the company that they are moving and developing the skills in a way that can actually benefit them in their managing their career as well as the company. So Ashwin, we are very focused on all of these levers. And yes, we have done some adjustments in workforce that we have mentioned. But I think in the grand scheme of things, it's not something that is moving the needle either away from the company margin profile. But at the same time, it's a healthy shift that we felt that it's the right thing to do to adjust to how we are looking on our site strategy and the whole structure of how we deliver to our customers. Thank you. One moment for our next question. And our next question comes from the line of Timothy Horan from Oppenheimer. Your question, please. Thanks, guys. Kind of a qualitative question. As you have more and more cloud-based services at a cloud platform, do you think you're helping your customers more? Can you help them drive more revenue? Can you help them hyper automate a little bit more? And did the customers kind of recognize this at this point? Yes. As you I mean how much more of an improvement it is for your customers as you move to the cloud. Thank you, Tim for the question. There are many, many value moving to the cloud environment. I mean there is some basic value like you get elasticity, we just mentioned in the prepared remarks that with a very good peak retail season and always Black Friday and holiday, and we have like an amazing service to our customer. So today, in the on-premise environment, you need to buy the hardware to support Black Friday, which is much bigger than the normal. So you get some elasticity, but I think the main -- when you move to the cloud, in many cases, it's part of modernization And then you get a much secure environment, much agile environment, better operational tools. So you can do things faster and cheaper and be much more competitive, and as I said, it's also helped with the elasticity. So if you look at it, there are many, many benefits to our customer to move to the cloud. And I think this very unique agility, changing market offer and do things much faster, much more secure environment, giving all the security trust that everyone seeing today. So all in all, I think it's a very holistic value proposition, which comprise of many, many, many areas. And just to add to that, artificial intelligence now is becoming pretty important and ChatGPT seems to be a pretty big breakthrough. Are you increasing your investments there? And is there a way for you to use ChatGPT maybe with -- for your customers for customer engagement and time to your systems? So I think definitely, we are evaluating this. But generally speaking, we talk about how we use artificial intelligence. Obviously, in Amdocs system, we have a lot of data about our customers. And as I mentioned today, we developed a cloud environment that are helping our customers to serve their customers or their consumer better in a way that's understanding, what is the consumer demand and what will be the right offer. So this is something which is, I think, growing and we deploy more and more this type of solution to our customers to better serve their consumer or businesses based on what they know about them. Regarding ChatGPT, as we speak, we are looking to it. We think it can have some -- obviously, some place in call center application, another thing that we are looking right now. And I believe this probably in a quarter or two that will be much more mature in our evaluation of how we can integrate it to our platform. Just to add on the AI as a topic, I think it's also important to think about it in the context of how we are automating, how we do things for our customers. So when we think about things like zero-touch operations and self-filling processes, a lot of AI-driven decision rules going into that and... We feel this is enhancing our operation to be much more technology-led and innovative in how we can deliver value to our customers. Thank you. One moment for our next question. And our next question comes from the line of Tal Liani from Bank of America. Your question please. Hi. It is Matalan Brookston [ph] for Tal, Bank of America today. Just two questions from me. First, I was going to be looking at your guide. I just wanted to understand the breakout of organic growth, given that -- the deal that was announced last year and was factored to have around 60 bps of revenue growth in the guide as of 4Q, given that that's not happening anymore, I wanted to know just if there's any commentary on organic growth without the deal. So, given the fact that we are reiterating the guidance even though this deal is not coming through, you understand that whatever was supposed to come from this deal, the 60 basis points of growth are going to be coming from organic additional and incremental revenue, and therefore, we can hold the line on our expectations of growth for the year. So pretty much, you can say that the year is growing based on organic revenue growth. There is some, I would say, full year impact of small deals we've done last year, but that's marginal, but we definitely are pleased to see an improvement in our organic performance despite the fact milestone is not happening. Just to be clear, we are not counting on any future M&A that has not been announced to make the numbers. This is based on the current known business and the assets that we have. Okay. Perfect. That was going to be one follow-up. So then I'll pivot to the other follow-up. Just wanted to see if there's any concern in spending deceleration with service providers? And have you noticed any incremental change as the first quarter progressed? Look, looking on the deal signings and the strong momentum of sales we've done in Q1. You can clearly see the outcome of that in the strength of the backlog and the fact we're reporting a record number and a very strong sequential increase of $120 million to the backlog versus prior quarter. We are seeing a solid pipeline. Yes, naturally, people are focusing sometimes about how to create an immediate impact, a shorter-term impact. We're bringing them a lot of tools and capabilities that enable them both to accelerate revenue generation, as well as deal with efficiencies and cost structure. For example, our model of managed services or what we call the transformational and managed services together is like the sweet spot of both. We can help our customers with our product suite, modernize their systems, move to the cloud, be ready for the 5G and digital world. And at the same time, provide them under a multiyear agreement, a committed cost structure, predefined KPIs and we take the full accountability for that. So, we are coming either with this model or some of it depends on their appetite and how we want to go about it. Thank you. One moment for our next question. And our next question comes from the line of Will Power from Baird. Your question, please. Great. Thanks. It looked like nice results. I guess, first question is just on a couple of the geographies. I mean, North America, of course, strong, but I'm curious on the European strength, if there's any other color there on what drove that year-over-year growth. I'm really just trying to understand the durability of this higher revenue level. But I guess on the flip side, Rest of World was weaker year-over-year. I know you expect that to still grow. So, I'm just trying to understand the confidence level and the drivers of growing that rest of world business year-over-year? Yes. Sure. So yes, we are very pleased with the performance of North America continues to be strong. And to remind you, in Europe, specifically, I've been talking for some quarters now about the fact that Europe is growing on a constant currency basis, but unfortunately, the reported number, didn't look as much because the currency was a big headwind. Finally, now when we have a quarter where the currency was not a headwind, you can clearly see the reported number of Europe growing. So it's not only just a constant currency growth, it's also on a reported level growth. And the fact is, we have been seeing a very strong momentum of wins and new activities in Europe for some quarters now, fueling our business. So it usually takes a bit of time between signing in deals, starting to recognize revenue, and we continue to see very nice signings. So it's not just that we are using in a way the past deals that have already gone into the backlog. We are continuing to see new deals. You've seen the pipeline and the new logos that we talked about, for example, called in Europe, as well as expansion of relationship and organization with Vodafone and with Three UK, and there are many other examples that we could not name specifically. So, we are happy about the momentum we are seeing, and we feel it will continue. And regarding the rest of the world, our business in rest of the world depends also on project activity and -- sometimes there is a specific quarter like we just had in Q1 where certain activities naturally and as they mature and the project go live and then does a matter of the timing of the beginning of the new project awards. So that's when we have, on the one hand, Q1 with some softness, but the confidence we see a fast recovery and for the full year that we will see growth in the region. Okay. And then, Tamar, if I could slip in one more. I know you all focus, I think, more on operating margins, but the gross margin has kind of continued to tick up I wonder if you have any comments on kind of the key drivers of the gross margin expansion and what the outlook is for that going forward? So as we usually say, we are focused on the operating margin more so than the elements underneath such as the gross margin versus the R&D, and we are investing in R&D, and we have accelerated investment in R&D. And some of this investment goes into automation that helps us do our execution better and more efficiently. But it's not necessarily that you should take the gross margin per se on a standalone basis and draw significant conclusions from that. On the other hand, for example, you can see that the SG&A was a bit higher this quarter. Again, there are some specific items that go into that, not necessarily consistent expected in the next quarter. So that's why we are very focused on bottom line on the operating margin, and we feel that we will be able to execute on the operating margin around the midpoint of our new elevated range give or take a few tens of basis points maybe one direction, the other direction. We think that this will be the continued consistency of activity of the company. [Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Matthew Smith for any further remarks. Yeah. Thanks, John, and thanks, everyone, for joining today's call and for your ongoing interest in Amdocs. We do look forward to hearing from you soon. And please reach out to us here in the IR group if you do have any additional questions. And with that, have a great evening. Thanks. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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Good morning. My name is Michelle, and I will be your conference operator today. I would like to welcome everyone to Virtus Investment Partners Quarterly Conference Call. The slide presentation for this call is available in the Investor Relations section of the Virtus website at www.virtus.com. This call is being recorded and will be available for replay on Virtus website. At this time all participants are in listen-only mode. After the speakers' remarks, there will be a question-and-answer period, and instructions will follow at that time. I will now turn the conference over to your host, Sean Rourke. Thanks, Michelle. And good morning, everyone. On behalf of Virtus Investment Partners, I'd like to welcome you to the discussion of our operating and financial results for the fourth quarter of 2022. Our speakers today, are George Aylward, President and CEO and Mike Angerthal, Chief Financial Officer. Following their prepared remarks, we will have a Q&A period. Before we begin, please note the disclosures on Page 2 of the slide presentation. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And as such are subject to known and unknown risks, and uncertainties including but not limited to those factors set forth in today's news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. In addition to results presented on a GAAP basis, we have certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement, which are available on our website. Thank you, Sean. Good morning, everyone. I will start with an overview of the results we reported earlier today before turning it over to Mike to provide more detail. The fourth quarter remain challenging, consistent with the trends throughout the year. In addition to a volatile market and heightened uncertainty, open end fund flows industry wide were particularly negative, most notably in December, as investor sentiment driven activity resulted in and among the most elevated fund net outflows than what was already historically difficult year. Well, we had net outflows in the quarter due to higher redemptions. We did have a meaningful increase in sales across products and asset classes, positive institutional net flows, a higher average fee rate which has been resilient despite industry trends, continued solid investment performance, and significant balance sheet flexibility and a net cash position at December 31. We have built our organization to navigate challenging environments like these and our position for market stabilization recovery with increasingly well diversified products and capabilities that can attract assets across market cycles and changing investor preferences. We continue to be focused on the execution of our strategy and building out capabilities to position us for future growth as the environment improves. Turning now to review the results. Total assets under management increased 3% to $149 billion, primarily due to market appreciation partially offset by net outflows. Sales increased 27% to $7.3 billion with increases across all product types and most asset classes. Institutional sales doubled to $3 billion, benefiting from a large inflow into an existing mandate, contributions from non-U.S. clients and the issuance of the new CLO. Retail sales also increased with open end funds up 5% due to higher sales of equity, fixed income and alternative strategies, and retail separate accounts rose 4% due to investment grade fixed income. Net outflows were $3.4 billion, essentially unchanged from the prior quarter and again, primarily due to elevated redemptions. Net outflows were primarily in mutual funds, consistent with industry trends, but also included in net outflows in the intermediary distributed retail separate accounts, while institutional and private client generated positive net flows. By product, institutional net flows were positive $0.8 billion, reflecting the meaningful increase to a domestic large cap growth equity mandate, and $300 million from the issuance of the CLO. Institutional net flows have been positive in eight of the last nine quarters and considering the challenging environment we are pleased with this consistent level of activity. But net outflows of $3.8 billion were elevated, in line with market trends and were particularly negative in the month of December. Retail separate account net flows were again negative due to higher redemptions, reflecting retail investor sentiment. In terms of what we saw in January, mutual fund net flows was still negative improved meaningfully from the fourth quarter and represented the best month of flows since September of 2021, including improvements in both sales and redemption rates. In particular, we saw positive net flows in our international global products, as well as certain of our small cap and fixed income products. The institutional pipeline remains strong with known wins, exceeding known redemptions over the next two quarters. Our fourth quarter financial results again reflected the impact of market declines over the course of the year. Operating income as adjusted was $56 million, down from $65 million sequentially, and the related margin of 31.8%, declined from 35% due to lower revenues and relatively stable operating expenses. Earnings per share as adjusted decreased 10% to $5.17, reflecting the the impact of decline in average assets under management. Turning now to capital. Given our solid cash flow generation and balance sheet, we continue to return capital to shareholders, while maintaining appropriate levels of working capital and leverage. During the quarter, we've repurchase 10 million of our common shares, totaling 90 million for the full year, and we've reduced shares outstanding by 4.3% in 2022. We ended the quarter in net cash position of $77 million and continue to have significant flexibility in managing our capital needs, with total cash on hand at year end of $338 million, a $175 million undrawn revolver, and $128 million in investments, providing ongoing flexibility to invest in the business and continue to return capital to shareholders. Before I turn the call over to Mike, I would like to provide a brief update on our agreement to add AlphaSimplex, a leading provider of liquid alternative investment solutions as an affiliated manager. As we've discussed previously, AlphaSimplex will enhance and diversify our investment offerings, provide additional product and distribution growth opportunities and expand our presence in the alternatives category. The transaction which we expect to close near the end of the first quarter will be funded with existing balance sheet resources that include our undrawn credit facility. We expect it to be immediately accretive to earnings consistent with the 10% level we previously provided. Given the timing of the close, the first quarter outlook Mike will provide for various metrics will not include the impact of the transaction. We will update you on the modeling for AlphaSimplex and its impact on our outlook on the next call. Thank you, George. Good morning, everyone. Starting with our results on Slide 7, Assets Under Management. At December 31, assets under management were $149.4 billion, up 3% from $145 billion at September 30. The sequential change reflected $8.8 billion of market appreciation and $3.4 billion of net outflows. Average assets under management in the quarter were $148.6 billion, down 5% due to market performance and net outflows. Our assets under management remained well diversified by product type and asset class. Institutional represented 34% of total AUM at December 31, with U.S. retail funds, and retail separate accounts at 32% and 24%, respectively. By asset class, equity was 55%, fixed Income and multi asset strategies were combined 38% and alternatives were 7% of AUM. We continue to generate strong relative investment performance across strategies. At December 31, approximately 57% of rated fund assets had four or five stars, and 90% were in three, four or five star funds. We had nine funds with AUM of $1 billion or more that were rated four or five stars, representing a diverse set of strategies from five different managers. On a five year basis, 75% of our rated fund AUM was outperforming to median performance of their peer groups. In addition to strong fund performance, as of December 31, 87% of retail separate account assets and 61% of institutional assets were outperforming their benchmarks over five years. Also 57% of institutional assets were exceeding the median performance of the peer groups on the same five year basis. Turning to Slide 8, Asset Flows. Total sales increased by 27% to $7.3 billion, reflecting growth in each product, particularly institutional. By product, institutional sales were $3 billion, up from $1.5 billion in the third quarter, due to a significant additional funding into a domestic large cap growth equity mandate, in addition to the $300 million CLO issuance. Fund sales of $3 billion increased 5% with particularly strong growth and alternatives, domestic small cap and global equity. Retail separate account sales of $1.2 billion increased 4% largely driven by investment grade fixed income. Total Net outflows were $3.4 billion, primarily due to open end funds. Reviewing by product, institutional generated positive net flows of $0.8 billion, with meaningful contributions from non-U.S. clients. Strengthened non-U.S. came from multiple affiliates, and included both new mandates and fundings to existing accounts. For open end funds, net outflows were $3.8 million, up from $2.8 billion in the third quarter due to elevated redemptions and consistent with negative retail trends. In retail separate accounts, net outflows of $0.4 billion, compared with $0.2 billion in the third quarter, with investment grade generating positive net flows. In our private client business net flows remained positive as they have for 16 consecutive quarters. Turning to Slide 9, investment management fees as adjusted of $156.1 million, declined $7.9 million or 5%, reflecting the 5% sequential decline in average assets under management. The average fee rate of 41.7 basis points compared with 41.5 basis points in the prior quarter. The fee rate increased modestly on a sequential basis for each product category. And on an overall basis, the fee rate has remained in the 41 to 42 basis points range over the course of 2022. Performance fees in the quarter were $0.5 million, up from $0.3 million in the prior quarter, favorably impacting the fee rate by 0.1 basis points in both periods. Slide 10 shows the five quarter trend and employment expenses. Total employment expenses as adjusted of $88.3 million, decreased sequentially from $88.7 million. Lower profit and sales based compensation was partially offset by market valuation adjustments and investment related compensation utilized in deferred plans. These valuation adjustments are hedged and fully offset by a corresponding amount included in other income. As a percentage of revenues, employment expenses were 50.1%, up from 47.8% in the third quarter, primarily due to lower revenue. For the first quarter, the fourth quarter ratio would be a reasonable level to expect. Though I would note, it will be subject to variability based on market performance profits and sales. For modeling purposes, the first quarter will also include seasonal employment expenses which are incremental to this outlook. Turning to Slide 11, other operating expenses as adjusted were $30.8 million and compared with $31.1 million in the prior quarter, which included approximately $1 million of costs associated with the AlphaSimplex transaction. Excluding these transaction costs, from the prior period, other operating expenses as adjusted increased by $0.7 million or 2.3%, largely due to higher sales and marketing activity, which continues to normalize as well as efficiency and distribution initiatives. For the first quarter of 2023, we anticipate other operating expenses as adjusted will be at a similar level as the past three quarters. We continue to closely manage all discretionary expenditures and initiatives. While our expenses have been impacted by inflationary pressure, increasing costs of contracts with key vendors, service providers and suppliers, as well as by the ongoing resumption of sales activity toward more normalized levels, our focus on discretionary spending has generally offset those increases, allowing us to maintain other operating expenses at a relatively stable level over the past several quarters. In addition, our expense management efforts have supported our ability to continue to invest in select strategic initiatives that we expect will benefit future operating leverage and expand our growth capabilities. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $56.1 million, declined $8.8 million or 14% sequentially due to lower revenues. The operating margin as adjusted of 31.8% compared with 35% in the third quarter. Net income as adjusted of $5.17 per diluted share declined 10% from the prior quarter. Regarding GAAP results, net income per share of $4.77, increased from $4.25 per share in the third quarter, and included $1.53 benefit from the fair value adjustments to affiliate non-controlling interests and $0.78 of net realized and unrealized gains on investments partially offset by $1.03 of CLO issuance expense, $0.50 of negative fair value adjustments to contingent consideration and $0.41 of discrete tax adjustments. Slide 13 shows the trend of our capital liquidity and select balance sheet items. Working Capital was $181 million at December 31, down from $195 million at September 30, as an investment and our new CLO and return of capital to shareholders exceeded cash earnings. Contingent consideration which includes estimated revenue participation at earn out payments was $128 million at December 31, down sequentially from $134 million. This amount will vary over time, based on changes in the underlying related revenue streams. During the fourth quarter, we repurchased 53,320 shares of common stock for $10 million. And over the past year, we have reduced shares outstanding by 4.3%. At December 31 gross debt to EBITDA was 0.8 times and net cash of $77 million increased from $47 million at September 31. First quarter 2023 cash obligations include payment of annual incentives, seasonal employment expenses, a revenue participation payment, and as mentioned, we expect to close an AlphaSimplex near the end of the quarter. Thank you. [Operator Instructions] And our first question comes from the line of Sumeet Mody with Piper Sandler. Your line is open. Please go ahead. Thanks. Good morning, guys. So nice to hear retail flow starting off well for the year, sorry if I missed this. Can you guys talk about what you're seeing on the institutional and SMA channels as well in January so far? Sure. So for mutual funds, so we commented on the month of January and after really challenging 2022, in particular December was very nice when we close out January that on -- in terms of the level of even sales rate or redemption rate, as well as in terms of overall dollars, as I noted was the best month is September of 2021. So that was really good to see. We particularly seeing some categories like international and global actually as a category in the fund set kind of be positive as well as the select areas of strength within some of the small caps but not all of them and as well as some of the fixed income. And though I have more optimism for fixed income later on in the year, hopefully. Institutional, pipeline remains strong. That's been a lot of area of focus for us where we put our attention and our resources and several of our initiatives are related to maximizing that. So we're really happy to see the consistency of what's in a lumpy business. Though it's still generating strong levels over the nine quarters, we've noted eight have been positive, pipeline is good. The non-U.S. concentration continues to get a little bit better. So that was something we were underweight several years ago, but they've now become significant contributors. And that's across affiliates and across strategies. So that's great to see. On the retail separate account side, given the nature of that business, particularly the intermediary retail channel, where some of the strategies are, are really sort of either done model only, or through other provisions. We don't have as much real time access to some of that information. But generally, because as that business is concentrated in our equity strategy, particularly growth and smaller cap, mid cap kind of strategies, it's going to go with a broader market. So I think what you saw in the fourth quarter for that, it was really just reflective of the sentiment on those equity strategies. And while we have a smaller piece that's in fixed income, that's where you kind of saw a little bit of an uptick in the January comment. Great, thanks, really helpful. And then on the AlphaSimplex transaction, what was the AUM two and the year for that? And can you maybe talk about some of the demand you're seeing on the institutional side, specifically for them, and how that's been going to start the year as well? Yeah, so for AlphaSimplex, until we close, we're not going to make comments on their business or their business results. Obviously, they're part of another company. So we're not going to comment on that. But we're continuing to do a lot of work related to the preparation of the integration. Very excited about having them as an addition to the family of boutiques. The great team over there. We spent a lot of time internally here, thinking about ways to leverage their capabilities and their expertise. Again, they're in the alternative space. So in the periods in the beginning of the year, last year, where traditional strategies were underperforming, they were outperforming. So again, there'll be -- meant to be, will have a [Indiscernible] of gold to some of our more correlated strategies. But we're really excited about the opportunity for us to sort of apply what they can do across a whole host of things. And they're still, in our view best-in-class in terms of what they do. Got it, great. And then last one for me on the ETF side of the business. Just -- I know the AUM has been pretty stable over the last few years. Can you just maybe update us on the growth strategy, more long-term? Are you focusing on growing that kind of organically or kind of more M&A opportunities over the next year or two, as they present themselves? Yeah, I mean, we always focus on making sure that we have an organic growth strategy for products and in the ETF space, including with some of our product introductions, you've seen more in terms of the active fixed income ETFs. So that continues to be an area where we've had some existing strategies, where we actually launched one in the quarter, right, the Stone Harbor ETF. So that's continues to be an area of product introduction. And one of the things we actually were working on throughout the latter part of last year, we really kind of had sort of optimizing ways to more fully incorporate them into our overall retail distribution, they've been part of it. But the data on ETFs is a little more challenging than the data on open end funds. So we actually feel that we're, in addition to building out our products, I think we've made a few further refinements in terms of leveraging our existing retail resources to be even more effective and bringing those to market. And again, I do think that's an area where investors will increasingly be looking at ETFs. And again for us, it may be more in some of the active strategies as opposed to the passive strategies, which we will continue to do. Thank you, and one moment for our next question. And our next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is open, please go ahead. Hey, good morning. Thanks for taking the question. Maybe just on the fixed income, just curious to hear your perspectives of views on the prospects for potentially a strong year of flows into fixed income, just given the higher interest rate backdrop. Which strategies that Virtus, do you think would be well positioned to capture that? Maybe you could talk to, which strategies have pretty good performance right now in your view on the fixed income side that could stand to benefit? Yeah, I mean -- my general view is that -- and particularly going into this year, this could be a good opportunity for credit strategies or fixed income strategies. I'm not going to make any predictions, because every time I turn on the TV, I see slightly conflicting thoughts around where the markets going to go. I do think there is that opportunity for those strategies. I do think there's some broad opportunities, because again, not all investors are going to be approaching in the same way. So I do think there will be opportunities on our shorter duration products, particularly one of our flagship products, the Multisector Short Term Bond Fund, and low duration is a related kind of product. I think those are opportunities there. I also think that, emerging market debt which has been an area where people have obviously not been gathering money, that's a very cyclical area. And depending on your global views, there could be good opportunities there as well. So I really do think across the continuum of fixed income products. I think as people are sort of reevaluating what is the right diversified set of a portfolio? And what should it look like going forward? Is 60-40 makes sense? If it's not 60-40, what should it be? I do think there's going to be increasingly be opportunities, particularly for those things in the fixed income space, that have very targeted approaches, like the loan types of products, like the EMD, or something that just really works the relative valuation of the sectors, which again is the whole suite of our new suite [ph] of products. Great. And just on the international distribution, also if you could update us on the build out there, how that's progressing, and how much that contributed in terms of AUM and flows? And maybe talk about some of the initiatives from the sales and distribution teams' standpoint? Yeah. We continue to be very happy about that. And Mike give a little color around the relative contribution. But as I noted, we continue to be increasing that business, which for us, non-U.S. clients have gone from roughly zero to 5%, 10% to 15%-ish, as we stand here now, did give some attribution for the quarter that we had that contribution. So a lot of things that are going on there. The non-U.S. has been a great opportunity for many of our managers, because previously, they hadn't been big participants in it, right. So there's a lot of open opportunity for various managers. So over the last year and a half, two years, we have commented several times on large mandates outside the U.S., mandates for multiple affiliates, large mandates from multiple affiliates in the same quarter. And so that's been an area that we have been focused on. And one of the attributes of the Stone Harbor transaction was that brought along some additional high caliber, non-U.S. institutional distribution resources that have done a tremendous job of getting themselves ready and prepared and have been very active in marketing, our managers to markets where we might otherwise not have had the ability to market readily. So some of the initiatives we've had behind that are really sort of support that maximize that. There's a different, obviously regulatory environment in some of those areas. So we've been focused on streamlining some of the ways that we can sort of maximize the footprint that we can have there. And then the resources that are supporting them, but we've been happy with that. Yeah, I think you highlighted it. But just to put a finer point on it, we've had, where in the past, we've had maybe one affiliate or two affiliates contributing selectively. Internationally, we had four or five affiliates deliver both new mandates and additional fundings through existing mandates. And George alluded to the pipeline, that trend continues in the pipeline, where we're seeing it across affiliates, and across geography. So it really is gratifying to see that investment bring us to a level of consistency, especially in this market environment. Right, and maybe just last one for me. Maybe coming back to your point earlier, George that you're looking to build out capabilities to position the firm for growth. So I guess as you look at the firm today, how well positioned is it relative to the opportunity set? And where you'd like to see that? Where might there be opportunities to further extend into either from a footprint or a product set opportunity? How are you thinking about that either organic, as well as inorganic? And maybe you can update us on some of those conversations, how those are progressing today versus a year ago? Sure, so on the organic side. So we always think about the product offering set. Again, we feel very well represented in terms of traditional active, right. And then our area of focus on the inorganic side has led to -- have really been in the non-correlated or less correlated alternative types of strategies. So we still think that there's opportunities there. The other areas where we see an opportunity and where we have a focus is taking advantage of, the individual strengths we have amongst our affiliates with more multi assets, as well as more model-based and more collective types of products. Again, we have them provide the building blocks of a well-diversified portfolio. But while we do provide some comprehensive solutions, I think there's great opportunities in some of the recent resources that we've added will allow us to sort of accelerate some of the work we want to do in that area. So we do think that that is good opportunity. I already alluded to AlphaSimplex. I do believe that there is a much broader application of their capabilities that we can utilize across our product set. Because again, most of our managers are active fundamental managers. And they bring to that some quantitative capabilities. And we also separately brought in a team, the very systematic team that also provides us capability. So I see great opportunity there. On the market side, the non-U.S. again, is a high priority for us, because it's a fertile playground for us. We haven't had a lot of resources there over 10 or 15 years. So we think that that is a good priority for us. And that would also include the usage the global funds. So we've been in the process of building out those products. And some of those resources will actually dovetail into both institutional as well as our use of products. But we've actually been in -- most of our product introductions, recently had been focused on ETFs and use it actually not on the open inside. So I think all of that is part of the comment that I made in terms of the increasingly diversified set of offerings that we have as the market environment becomes a little more or less uncomfortable. So we feel good about that. In terms of the inorganic, again, while our growth strategy is not predicated upon doing M&A. We continue to make sure that we're in active dialogue, those dialogues continue. So we've been as active as we've always been. We're very selective in terms of what we do. Does it make sense strategically either from an addition of a capability, broadening of a market or some other kinds of scale enhancing or otherwise strategic value enhancing transaction? So continue to be active on those. Again, our focus is always on the organic, but as you have seen, we are quite busy on the inorganic side as well. Great. Well, I just want to thank everyone today for joining us. And certainly, we encourage you to give us a call if there's any other further questions. Enjoy the rest of your day. Thank you very much.
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EarningCall_799
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Good day, and thank you for standing by. Welcome to the Wizz Air F â23 Q3 Results Conference Call. At this time all participants are in listen-only mode. After the speakersâ presentation, there will be the question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you. Good morning, everyone. Thank you for coming to this presentation. So this is Wizz Air Holdings plc Q3 fiscal â23 result presentation. So let me just give you the highlights as we consider this period. So the reporting -- in the reporting period, revenue was up 43% versus pre-pandemic level. So that is Q3 fiscal â20. If you take the financial year-to-date, the first nine months, we are up 35% versus pre-pandemic level. So clearly, Wizz Air is the fastest-growing airline in Europe. At the same time, unit revenue grew by 4%. I think we said that before that this is the first time, we are seeing a very substantial volume growth, capacity growth delivered to the market at the same time being able to grow unit revenue too. And within that revenue growth as unit revenue represented 7% growth relative to pre-pandemic levels. We delivered breakeven EBITDA, slightly profitable quarter on net profit, although with some fluctuation of financial inputs, especially foreign exchange. Fuel unit costs came down by 5% versus the first half of the financial year. So we are seeing some improvements of the macro environment. Let's not forget that we are unhedged in this period. So we are really subject to the market, both on fuel and foreign exchange. Completion rates improved significantly. You recall that we got severely affected by operational disruptions during the summer. And post-summer, we were able to stabilize operations and improved our completion rates. So we are nearly back to historical standards, still a small gap, but I think we are heading the right way. Liquidity, close to EUR1.4 billion. This is the same liquidity level. As a year ago, without taking any incremental financing. So essentially, the business over the past year was cash flow breakeven, despite the P&L loss what we are reporting. We got strong ratings out of the rating agencies from Fitch and Moody's. And we continue to focus on our environmental footprint and our sustainability performance, which is becoming increasingly recognized by the outside world as well. And the latest manifestation of that is the CAPA Global Environmental Sustainability Airline the award, what we received recently. If you look at kind of the key metrics of the business as it stands. With regard to our passenger account, we carried 12.5 million passengers in the period. This is 60% more than a year ago and 24% more than the pre-pandemic quarter before the breakout of COVID-19. In terms of aircraft count, the fleet has been growing on a constant basis. We added 27 aircraft over the past year. And our fleet is now 57 aircraft larger than what it was pre-pandemic. We extended our footprint. But at the same time, we also consolidated our operations, as you can see. We were striking out smaller ineffective operating basis to make sure that we are gaining scale benefits and operational efficiency, as well as financial performance from those moves. So it is a more focused, more concentrated network what we are having right now. At the same time, we entered some new markets, new countries, added three more countries to our franchise versus a year ago and nine versus pre-pandemic levels. We have been talking about sustainability, but also, we have been getting some other awards in this period. I mean, we are not really trophy collectors, but of course, it feels good when the industry recognizes our performance. This is important because, as we said, the current financial year is a transition year. We are ramping up operations, and we are ramping up our investments we have made during the COVID times. As a result, you can see our market share has grown substantially in Central and Eastern Europe from 18% pre-pandemic times to 27% now. I mean, that's a substantial growth. So essentially, our impact is 50% bigger in Central and Eastern Europe, than prior to the breakout of COVID-19. And we have continued to invest across our markets in Central and Eastern Europe, we consider an Eastern Europe as home run for Wizz Air. So it remains an investment market. Although on a going-forward basis, you will see that our growth rate is moderated in Central and Eastern Europe, because really the growth will come through some of the new market investments that we have made during the COVID period. So strong results across the board following through our commitment to Central and Eastern Europe. And with those highlights that we just turn it over to Ian to talk about the financial performance, and I will take it back for some of the other insights of the business. Thank you. Thank you, Jozsef. Good morning, and thank you. As outlined in the highlights, revenue more than doubled in Q3 versus last year at this time, with the Q3 revenue figure of almost EUR1 billion, 43% higher than the same period pre-COVID in F â20. EBITDA was roughly breakeven and our operating result improved, though still affected by higher operating costs, which we will break down in detail later, as well as explain how these we be brought back in line with pre-pandemic levels. Ultimately, we turned to EUR33.5 million profit for the quarter, admittedly helped by a course correction from a strengthening euro. Cash remained level with last year's balance despite the growth and the higher volume of business. Revenue is 43% higher than fiscal year â20 for the same quarter. Notably, unit revenue growth when compared to this quarter in fiscal year â20 came in at EUR3.73, which is almost 4% higher than F â20 and 50% higher than the same quarter last year, and it is lining up with the half two guidance we gave you in November. Ancillary revenue is growing fast at 7.5% versus fiscal year â20 as we optimize and segment our customers better and tailor suitable products to their requirements. Longer routes such as those to the Middle East and that region, in general, present the opportunity to price up and across the network as our load factor increases, so will our ticket-related unit revenue. The cash balance at the end of December was EUR1.37 billion, in line with our forecast, and it reflects the seasonality of the reporting period. In addition, we purchased EUR125 million of EU and U.K. emissions trading credits as part of our offset obligations. Unflown revenue for future flight purchases and the refund of PDP payments from Airbus contributed to almost EUR100 million of positive cash flow during the period. We ended the quarter with roughly the same amount of cash as we did in the same quarter last year, despite the 43% growth in available seat kilometers, which demonstrates the business' ability to generate cash, while withstanding the summer challenges. We have not required the PDP financing facility that we mentioned in last quarter's results presentation, although that credit line has now progressed from a term sheet stage to definitive documentation, and we anticipate a closing in early February to provide additional liquidity, should there be an unexpected deterioration in macro factors. With respect to our fleet financing obligations, we have secured financing commitments for all aircraft scheduled for delivery in calendar year 2023. In addition, we have been engaging with the market and preparing for deliveries for next year for 2024. And we remain confident that the combination of the Wizz Air credit quality and the superior Airbus A321neo aircraft in the 239-seat configuration will make our order book the most attractive asset for the leasing community to finance, which will ultimately put us at a cost advantage compared to other airlines. Our ex-fuel CASK figure continues to drop and ended at 2.49-euro cents, which is now only 10% higher than pre-pandemic levels and is approaching guidance, which targets the second half of this year's increase to no more than single-digits, compared to fiscal year 2020. Cost reduction is our top priority now that the post-COVID ramp-up pressure is starting to normalize and the enhancements we spoke about previously start to mature. We remain confident that the results of these efforts combined with higher aircraft utilization, will deliver reduced unit costs that return to historical levels. In fact, if you look at the last row on this slide, it shows how our utilization increased, compared to this quarter last year. but how it is still below our fiscal year â20 levels and dramatically below our target minimum of 12.5 hours a day, which Jozsef will talk about later. Fuel costs continue to put pressure on earnings this quarter, but as of today, we -- I can confirm that we are -- that we continue to follow our hedging policy, and we have 45% of our fuel requirements for next year hedged and 20% of our fuel-related currency hedged as well for next year. In terms of how we're going to tackle ex-fuel CASK, it's two-fold. Firstly, there are a number of structural cost reductions that we will benefit from. These include having the youngest fleet with an average age of 4.6 years, which means lower operating costs and higher fuel efficiency. Then you have an up gauged fleet with 239-seats for the new deliveries, which, especially with utilization returning puts us far ahead of any other operator whose seat count is simply unmatched. Secondly, we factor in the work we've been putting in this winter to optimize the business, such as rationalizing basis, optimizing the route network, eliminating certain flying patterns, reducing flight disruptions and improving customer service. And with that, I'll hand the floor back to Jozsef to further talk about our cost advantage and targets for the balance of this year and next. Thank you. Thank you, Ian. Well, maybe the best way to put this is that we are putting fleet utilization in the forefront of the business, and utilization is the religion of the airline. And everything as is sort of subordinated to that. And we would like to highlight a few major directions here with regard to flight disruptions, operational resilience, customer service enhancement, the fleet efficiency, network development and sustainability. But please kind of keep in mind the utilization target of the business to be reinstated back to pre-pandemic levels. So if you look at the business, you are seeing that disruptions are moderating, but at the same time, they are still a factor. And we are clearly resetting the operating model to make sure that we get more resilience out of the system. We are expecting to grow ASKs by around 30% in the first half of fiscal â24 versus previous year. While load factors have been building up, they have not reached pre-pandemic levels, but we are expecting load factors to be reinstated to pre-pandemic levels, 90% to 93%. Utilization, again, while improving, but we are not fully transitioned. But we are expecting in the first half of fiscal â24 to be back into a pre-historic levels with 5.5 hours of utilization. And same for completion rate I mean significant improvement during the quarter, but more improvement to follow with 99.5% target. I mean you can see that in Q3 fiscal â22 that was achieved. So we want to make sure that it's not only the off-peak period, but during the peak summer period, that performance level is sustained. We are heavily investing into operational resilience. We gave notice on this direction before. We are investing in the infrastructure into people and into aircraft. So with regard to our infrastructure, quite a significant number of systemic and automation initiatives are taking place, but also, we are changing design elements of the model to make sure that we get more output through the system. I mean, we have gone through some significant disruptions and the consequences of those disruptions were to manage all the claims, customer claims. We are adding capacity to that figure should that happen again that we are ready to do that and effectively process that claim volume. Also, we are adding more crews to the system, on standby to make sure that if the operating environment is disruptive that actually we have better ways to recover. We hired 3,000 people during the last two years in 2021, 2022. I mean, this is against the 4,000 people we had at the bottom of the COVID period. So we nearly doubled the size of the organization over the last two years. Obviously, we are putting these people through training, and we have very significant throughput increase in our training center. And we have a number of other programs to make sure that people are properly trained and advanced in their carriers like the Wizz Air Academy or the Cadet program that we have in place. We continue to embark on the A321neo aircraft. This is the best craft of our times in terms of economic efficiency and in terms of environmental impact as well. And as you know, that we have the high-density 239-seat of aircraft coming online, and we continuously take deliveries of those aircraft and to advance the renewal of the fleet. If you look at the customer side of the equation, we are very focused on the customers. We have basically the entire document validation put through online brand awareness is increasing in key markets and in investment markets across the board. We are becoming increasingly digitalized in our interactions with the customers. So moving away from call support towards digital support, as you can see, a significant shift with that regard. Obviously, this is a lot more efficient and effective with the customer. As said, the fleet remains to be a cornerstone issue to the business. We continue to receive new aircraft deliveries. I mean, we all know that the industry is disturbed at the moment in terms of the manufacturer's ability to produce and deliver on time to operators. So we are not immune from that. But if you really think about this, we are programmatically delivered the aircraft. So even if that is delayed, that we suffering doesn't really mean that we would be lacking aircraft over time, but it would just be delivered later. But at one point, we would be getting pretty much the same number of aircraft as originally scheduled, because we have a delivery stream program for five, six years in front of us. So we have a large aircraft order book out there. I think we are in a privileged position to have access to the best aircraft of the world, while other airlines don't have that order book. And certainly should you want to order as of today, you would not be able to take it from the manufacturers. So we're seeing that the aircraft itself and the order stream in front of us are a great source of structural competitive advantage for the business going forward. If you look at the way we are delivering growth in fiscal â24, this is a very safe way of growing the business. So essentially, most of the growth, roughly 80% of the growth will come through as increasing frequencies on existing routes, 16% on joining existing airports. So essentially 95% of the growth come through the existing network, existing routes, existing airports. And if you look at the geographical split of deploying growth, half of the growth comes through new markets, namely Abu Dhabi and Italy, and the other half would come through the existing network. So again, it is not like that we are blowing growth in our existing market and diluting our revenues as a result. But really, growth is put through largely the newly invested markets. Maybe just a few words on Abu Dhabi. We find Abu Dhabi a very exciting venture be it great results coming through now. I mean, it was a slow start because we launched the airline during the pandemic under quite restrictive COVID measures. But as the market opened up, we are seeing the fruit harvested from that investment. We have significantly scaled operation. We are having actually nine aircraft based in Abu Dhabi, eight flying, one being spared. Obviously, it's a young fleet of aircraft. Brand awareness is growing. Customer reaction is very significant, providing further ground for growth in the future. We are looking at dubbing down on Abu Dhabi in the coming years. So we are going to double the fleet size would be in the next 15 months or so. Already we are the second largest are in Abu Dhabi, and we continue to grow our business there. We are seeing market demand pretty much across the board to Europe, to the CIS countries, to the Middle East, to the Gulf region itself, but also to the subcontinent. But obviously, some of them are easier to be accessed, some of them are more difficult from a regulatory standpoint, but we are working on each of these countries to make sure that we are able to access those markets. But Abu Dhabi has been a very strong story with strong results coming through encouraging us to invest further in that market. I've already commented on sustainability. Sustainability remains in the focus of the business in the company. You can see the current performance of the business and the target for 2030. I've publicly stated, we are value ahead of the game, value ahead of the industry in terms of current performance and future commitment in terms of CO2 unit target for the business. And we are working on a number of initiatives to create staff capacity for the business going forward. Obviously, this is a work in progress. We are kind of inching in every period. So the latest one is an MOU signed with OFO in Austria, but we are looking at a number of other initiatives to get access to soft. So maybe a bit of a summary on existing performance and what you should be expecting from the business going into the next financial year. We are maintaining our ex-fuel cost guidance for the second half of the current financial year. That's single-digit versus single-digit increase versus the same period pre-pandemic. We also maintain our guidance on revenue, unit revenue, mid-single-digit for the half year versus pre-pandemic period capacity growth remains on track with 35% projected for the second half of the financial year. We are halfway through that financial year, and we are tracking in line with that protection. Of course, we are expecting net loss for the financial year as indicated before, as this is a year of transition, but we are expecting to return to significant profitability in fiscal â24. With that, for fiscal â24, we are focused on two major operational KPIs getting aircraft utilization back to 12.5 hours. Obviously, this is not only an operational issue, but it is also a commercial resource allocation issue, and we are adjusting our models as such that we can deliver on 12.5 hours. This is what this business used to deliver player to panic with completion rate to achieve 99.5%, which again, is the restoration of historical performance. Very importantly, we are very focused on getting ex-fuel CASK performance back to pre-pandemic level. You may recall we used to be presenting a chart showing like a very consistent ex-fuel performance year after year for five, six years since listing the business. Obviously, we broke down on that during the COVID times due to circumstantial issues. But we are intending to reinstate that level of unit cost performance. And I would just highlight again the strategic advantages, competitive advantages we have versus the market. We have the most renewed fleet program benefiting from new technology. We are up gauging flying the highest density aircraft. Obviously, that benefits unit cost production. And we believe that those cost savings together with productivity gains offset the headwinds. But of course, we are seeing on inflation, on macros and all those sort of areas. So we believe that we are in a lot better position versus any other airlines when it comes to unit cost prospects of the business, given the advantages falling out of the fleet. We are expecting the first half of the next financial year to grow by 30% relative to the current financial year. So with that, let me just quickly summarize the presentation. So as said, we are much focused on unit cost reduction to get back to pre-pandemic performance levels through increasing utilization, gaining advantages from the aircraft. We are on fuel hedge parity with our competitors. So that issue is eliminated going into the next financial year. Revenue growth is focused on ancillaries and load factor performance. I mean, you may wonder why we dropped down load factor. We dropped down load factor for two reasons: One is that we made a lot of new market investments. And obviously, all those new markets investments go through a maturity curve. And those markets are now maturing. They will be in the segment third year of maturity, and that is the time that you expect those markets to deliver full load factor potential and also because the COVID booking terms were very different from the normalized booking terms. And now we are transitioning from COVID to normalized. And it takes some time. So because of those two factors, you saw the drop of load factor. But now we are going back to historical performance levels. Network continues to expand, and it will become more robust going forward. But the way we are growing capacity is very safe, 95% of the capacity growth is put through by increasing frequencies and showing excess results in the system. And most of the growth goes through new market activities without inflating existing market yields. And we are having strong liquidity, and we believe that the improving financial performance, we use significant liquidity gains for the business. But again, I would emphasize that, irrespective of the P&L loss we are reporting actually, last year was a cash flow breakeven year, and we are expecting to top our decides position substantially going into next financial year. Hi, good morning. It's James Hollins from BNP Paribas. Three for me, please. Just on the ex-fuel CASK, up 10% in Q3 wondering if we should be thinking about single-digit being high single-digit or maybe close to 10% for the half as a whole? And maybe if you could just run us through near-term where you're seeing particular cost inflation or indeed some tailwinds in the business? Secondly, you talked about financing your leases this year. I was just wondering, a, some general thoughts on the market, as well as your loss of investment grade make much difference to leasing cost. Obviously, IAG claim that doesn't perhaps you give me your view? And then just third one, I might be being stupid here, but does your utilization back to pre-COVID levels? Is that not made slightly more difficult by your route network changes? I guess, a specifically high Abu Dhabi, I think you're starting up Turkey as well? All right. So maybe I take the utilization model. But the utilization model is at the moment, down to operational ramp-up mainly, but also commercial ramp-up. So we don't see any natural barriers to range that the utilization model. Now obviously, we are testing the resilience of that operating model in light of expected turbulence in the operating environment and some stress coming out of especially ATC operations going into summer. So ATC is going to be a complicated issue, due to the whole system being on the soft on the one side and dealing with hugely increasing levels of complexities, especially arising from the partial air space closer over Ukraine and Russia redirecting traffic as a result and also increased military activities in the air, which has priority over-city flying. And this is really a question how we put the operating model on the ground as such that it is resilient on the one side, but it is delivering the utilization targets on the other side. And this is what we have worked out during the year. I think we told you that we are transitioning the model. Abu Dhabi actually is adding to the utilization target, because its longer sectors flying more. So the Abu Dhabi utilization is more like 14-plus hours as opposed to 12.5 for the European operations. So in terms of ex-fuel CASK, the question, I think, was whether we expect it to land in sort of high-single-digits or somewhere in the lower or middle single-digit range. There's certainly a ramp-up period that we have to get through from the lower seasons, where we are now back into the summer season. So I would expect it to be more in the higher single-digit range at this point. and then reducing rapidly into next year. Because if we're going to go back to pre-pandemic levels of F â24, we're going to have to get to that pretty quickly to land there for the full-year. In terms of where we're seeing cost inflation across the line. So I would say that our airport costs are higher just because of the lower utilization currently in terms of 10.5 hours versus where we want to be at 12.5 hours. Handling is up across the board, due to wage growth and general inflation pressures. A different airport mix also contributes to that. Navigation charges are up 10% as a factor of Euro Control communications. Maintenance is actually coming down, because of the new aircraft that we operate and the more reliable that they can be. Crew costs are up. As Jozsef mentioned, we are obviously having to add a lot of people into the system and then train them up. And there's also wage inflation across the board. We would expect slight disruption costs to come down, although they have been up in this quarter as a result of compensation claims and other adjustments having to work their way through the system. Overhead, we're planning on bringing in line or below ex-fuel historical or current CASK ex-fuel CASK levels. And depreciation is actually going up as we take more -- if we take newer planes that are -- that have a higher cost. In terms of your third question, in terms of whether the loss of investment grade has a negative impact on our financing costs. So I would agree with the statement you said, which is that the feedback from the aircraft financing market is the investment grade. And remember, we are a split rating right now. So we still maintain one investment-grade rating. But I would agree that it has little to no impact on our financing costs. What does matter is the quality of the airline and the quality of the asset. And so aircraft financing costs across the board are going to increase, whether you lease or finance them just, because of the base rate increases that have happened, where we will be competitive is because of our remaining investment grade rating and because of the asset. And so on a relative basis, our costs will be lower. And for this period and for going into next year, cost is the name of the game, eliminating any cost advantages or disadvantages that we might have and getting the utilization up to 12.5, which from 10.5 where we are currently is a 25% increase in utilization, and that 25% increase will dramatically bring down those unit costs across the board. Stephen Furlong from Davy. Two quick ones. Could you just remind me, actually, what changes you made internally in the crewing model from last summer disruptions? I think you made some changes so that at least I know ATC can be an issue next summer, but that there will be nothing internal that will be an issue. And I was just wondering, Jozsef, do you have any comments on what happened with the EU in December in terms of the phase out of the ETS allowances, I think, out to 2026, '27? And how fair or unfair that is? It's certainly focused, obviously, into Europe rather than ex-Europe. Thank you. Thank you. Maybe to benefit from the presence of our Chief Operating Officer, here. So Mike, maybe you want to elaborate on the crew modeling issue. So this is Mike Delehant, being in charge of the airline's overall operations. Thank you, and good morning, everybody. Yes. Certainly, the tightness of the crew model in years past where we had a stable underlying environment, we were able to push the duty times towards where the regulatory high-end would be. So as we learned through the summer that having no ability within the flight duties in terms of hours available of the crew members was what was being triggered once the environment got highly disruptive. So essentially, we've designed out the majority of all of the high-risk duties, which included such things as you may have heard of W patterns other complex flying that would push to that end. So as we look towards our ability to be able to respond to longer ATC and ground times, we've been working towards getting multiple hours of buffer into flight duties on a daily basis, while still being able on a monthly basis to maintain productivity by spreading across the days in a better way. So that ability to absorb doesn't necessarily increase costs at all, but it does provide the crews with the ability to still have duty time available when disruption occurs. So that was the fundamental change that we've made as the model moves towards summer. And the utilization of the aircraft move-up, the productivity of the crews should be still able to move up, yet each individual day, they should have more ability to absorb, along with a stronger standby model in terms of available people at the right times in day. Thank you, Mike. With regard to ETS, I mean, this is a long-debated issue in the industry, whether this is fair or unfair, I mean I would say that phasing of the current system benefits Wizz Air because we are yet not benefiting from free allowances. So essentially, we have to buy pretty much everything because of the growth, while most of our competitors are protected based on their history. And we think it's an non-fair system because essentially, that is freezing the status we are supposed to allowing more efficient operators to merge the issue of who gets exempted and who's not from any schemes coming into play in Europe. I think this is, yes, a debate we totally disagree with any exemptions on long haul or cargo or anything like that because this is just a cross subsidization for the life of tours, et cetera. And that really makes a system unfair. And we are fighting against that approach. We understand that there is a significant lobbying of the legacy airlines for getting some single for the favor versus our standpoint here. But I don't think this is yet a settled view in Europe. Hi, good morning. It's Harry Gowers from JPMorgan. I've got two questions. Could I firstly ask about pricing and load factors in Abu Dhabi, are these higher-yielding routes on average and also as it grows, also matures? How that affects the group CASK mix? And then just following on from James' question on ex-fuel CASK, up 10% in Q3. If we assume improved a fair bit relative to â19? What's the real kicker on the improvement relative to Q3? Thanks. All right. So maybe to also benefit from the presence of our President, who runs the commercial line of the of the airline. So Robert, would you please comment on the Abu Dhabi pricing load factor equation? Yes. Good morning, everybody. I think we're continuing to see strength in Abu Dhabi, and it's building up and maturing nicely. So it will be up to as you've seen the announcement, we have the eight aircraft there operating now, and we have a much more diversified network we're operating through this winter with a nice bounce of short, medium and long sectors in there. I think load factors are -- it's still early in the maturity curve, but low taxes are building very nicely with what we would expect. So actually in some of the markets outpacing expectations and yields on some of these sectors. It's a market that has not seen ultra-low-cost competition to date. And so while we're coming in with price points the market hasn't seen, they are still healthy yields for markets that are basically one-year-old. Thanks, Robert. And Harry, on the ex-fuel CASK kicker question. So I would expect thus to see airport flat with pre-pandemic levels handling down as we build more ASKs through higher utilization. We have a stable mix and benefit from some contract adjustments and negotiations. And so that's a structural change that we've made to the system. Navigation costs will come down as we increase ASK. We donât expect Euro Control to be passing any further costs through to us. As I mentioned earlier, maintenance cost to be flat â or sorry, to be down like weâre seeing currently. Crew costs down as we no longer need to ramp up as aggressively. Sales and distribution to come down as we grow pack, thatâs quite predominantly credit card costs and fees associated with that. And then flight disruptions to be down as we maintain our 99.5% regularity target overhead under control and depreciation to be flat with where we are currently. So higher than pre-pandemic levels as a result of the larger and newer fleet. So overall, ex-fuel CASK to remain in line with guidance with bringing it down to pre-pandemic levels in F â24. Thanks. Alex Irving from Bernstein. Three for me, please. First, let me come back to utilization. So your target looks like slightly ahead of pre-pandemic at 12.5 hours per day. You mentioned earlier on that Euro Control has been warning on potential disruptions, but you seem quite confident that you'll still be able to maintain that 12.5 hours. Can you please go into the reasons about why that is? Second, on network structure. So those in your average stage length is up materially this quarter, north of 1,700 kilometers. Does that have any impact on the unit costs we've been talking about around crew overnights or other expenses you may have not incurred before? And you able to maintain your cash targets? And then finally, on use of liquidity. So liquidity seems pretty far ahead of your EUR 1 billion target with interest rates coming up, is it become more attractive to own your fleet rather than use sale and leasebacks or JOLCOs or you need that to term out the EMTN that matures about a year from now? How are you kind of thinking about the use of that cash balance, please? Maybe I would start with utilization. So in light of expected ATC disruptions, how are we going to deliver 12.5 hours. But we're going to be planning for more than 1.5 hours to create the lowest for ATC disruptions. We just know from historical performance that we made a strategic choice of flying brand-new aircraft. That also means that we have to fly that aircraft as opposed to keeping the aircraft on ground to maximize the economics sorting out of the fleet. So this is absolutely critical and cornerstone to the model. So you can get fleet economics out of used aircraft in a low utilization model, but this is not the model of what we elected to do. So we have to fly the aircraft. And given the allowance and the change to the operating model, we're seeing that we will be a lot more resilient coming into summer than where we were last summer, because simply. We just didn't have that level of resilience built-in, because ATC may not be necessarily forcing you to cancel every time, but you have to be able to process longer delays than how we designed ourselves before an using that's the change in our model. With regard to the network structure, yes, indeed, we are clearly discovering that people pay for stage length. As a result, the model of what we bring to the market is equally comparing for medium-haul activities, medium-haul flying. I mean Abu Dhabi is probably the best example for that. But it's not only Abu Dhabi. I mean we are having significant stage lengths operations within the European network like flying to the Canarys and those sort of areas. And let's not forget that in 18 months from now, we are expecting to receive the first XLRAC 21 XLR, and we have 70 of that aircraft on order. And we are looking for best ways to operate that capacity. And to some extent, we are testing those with the existing fleet. It won't distress the cost structure of the airline. And obviously, one issue we will have to contemplate, especially when the XLR comes into play is crew overnight. But we are looking at it to figure out the best way to minimize the incremental cost of it. So through daily rotations as opposed to keeping crews out for multiple days. So this is something that we are working on at the moment. And we might be testing it on a few routes. But we are not adding complexities and we are not adding incremental cost to the system as a result. Then on liquidity, I mean there's no secret that it is getting harder to identify sources of capital for, I think, weaker or smaller sized airlines. But in terms of your question as to whether we're going to buy or continue leasing, as long as there's leasing companies out there prepared to offer us the kinds of rates that we're seeing, whether it's a standard operating lease or JOLCO or some other sort of structure like that, it is far more efficient for us to unlock the value in our order book that way and give us the flexibility down the road to continue to recycle aircraft and exercise orders and options on our order book to bring our average fleet age down and benefit from the newer technology and the enhancements that are happening as the fleet evolves. I mentioned earlier the PDP financing. We haven't needed to draw that down, although it is in final documentation stage. That is a feature that we're putting in as an insurance policy, reflecting on the fact that spreads have increased across the board and is a bird in the hand sort of opportunity right now. We remain confident on our January 1, 2024 bond repayment and have no issues there in terms of whether the business is going to have the liquidity to do so through a combination of that PDP facility and cash on hand from operations and what's generated over the course of the year. So overall, as I said earlier, I believe that everyone is going to be impacted, whether you own or rent from fleet, I think our impact is going to be lower than others. Good morning, everyone. It's Jarrod Castle from UBS. Three as well. We've obviously got relatively encouraging commentary about Easter and summer from EasyJet, Jet 2. Do you want to give any comments on how booking patterns are progressing for Easter and summer? And then you've given us the 30% growth in the first half of '24. Is it possible to give us an indication of the quarters how that would evolve? And then just lastly, you've obviously put a lot of growth in Italy, recent announcements around Ita and Lufthansa, just if that impacts how you're thinking about the Italian opportunity? Maybe I will start with the Italy question. In the meantime, I will just ask Robert to answer the summer question and the growth breakdown across quarters. So with regard to Italy, if you look at the Italian market capacity, it is still down versus pre-pandemic levels after our investment. So that has been a significant constellation in the marketplace, not only from all Italia Ita, but also from other smaller underperforming airlines pulling capacity out of the market. I think on the one hand, that created the demand opportunity for Visa to come to market. But let's not forget that structurally, we took advantage of the COVID times to use our leverage with constituency in Italy to strike long-term arrangement, cost arrangements benefiting the business for a longer period of time, five years, et cetera. And those opportunities wouldn't have been available to us prior to COVID or after COVID. So we kind of pushed ourselves through that window. So we feel comfortable with regard to our settings in Italy, both on the cost side and the revenue side of the business, and we continue to grow our activities. You might have noticed that we have done some consolidation in Italy in terms of seizing smaller base operations and redirected growth to large airports like Rome and Milan, where we have very strong reaction to our products and services. So maybe Robert, if you take the summer and the growth question. Yes. On the question around the color around Easter and into summer, I think we're seeing bookings in line with our expectations at this point. You've seen and you -- I mean, there were comments earlier around where the ticket yield is at right now. We see trends continuing, but I think the real focus we've got is on, as we've said, closing the load factor gap versus where we were at pre-pandemic levels. So when we say we see bookings in line with forecast that assumes for closing that gap and filling up at both factors. So I think we're very comfortable with where summer is booking and Easter is booking at this point. Yes. So the quarterly breakdown of the 30% growth, it's going to be heavier. We can come back to you with the exact numbers on it. It's heavier in the first quarter. Obviously, I believe it's closer to 40% given we had the reductions last year of Ukraine and Russia impacting that quarter, and then it's a little closer to 25% in the second quarter. Good morning. It's Neil Glynn from Air Control Tower. So I'll also follow the trend of three questions. The first one on the -- back to the financing chest note, I guess, obviously, interest rates rising, but not everywhere. I'm just interested, can you give us a sense of the shape of instruments you're using in FY â24? For example, are JOLCOs helping you take advantage of low interest rates in Japan to keep that financing cost per new delivery down? The second question with respect to U.S. dollar hedging. You've got 20% in place. Is that considered optimal? I'm aware that you're obviously financing in euros, some of the new aircraft delivery. Just interested in your thoughts as to what that natural hedge actually is and how that compares to the 20%? And then a final question, obviously, a different market, but your, I guess, sister company, Volaris has announced a loyalty strategy this week, which isn't, I guess, considered the norm for ULCC. Might that be something that Wizz Air would think about in the future? Or does your target markets prohibit that or make it less sensible, certainly in the foreseeable future? Let me take the last one and then Ian, you take the first two. So I remember in my previous life when I worked for Procter & Gamble, and we were looking at the U.S. retail market, and you observed two very clearly different strategies in U.S. retailing price going high and low with the head loyalty program attached to it. and everyday low pricing launched by Walmart at that time. I think we had a Walmart kind of execution in the industry. So we think there is nothing more to do for loyalty than bringing everyday low pricing to the consumer. And that's why we are so focused on cost, because that creates our ability to price low in the market if we are the lowest cost producer in the industry. So we don't have any intention to history copy what Sister Airlines are doing. I mean, they are in a different market context, competing against different competitors. We remain focused on cost on ULCC being the lowest cost producer and the lowest fare provider to the market. In terms of interest rates and the mix between traditional financing or sort of more structured financing. So as I mentioned earlier, all of our aircraft deliveries for the calendar year are committed, not time but committed in terms of binding term sheets. The majority of our financing still comes out of the Far East, and JOLCOs play an important role to that effect. We don't have the breakdown in terms of that, but I can say that we are still pursuing innovative structures. For example, in December, we closed a JOLCO that had a debt element to it tied to sustainability. So the more sustainable we can be in the lower interest rate we benefit from. So features like that continue to drive down our overall cost and make us competitive in relative terms to the rest of the market. In terms of hedging in terms of the 20% currency hedge, that is the currency related to fuel portion. Our policy dictates that we first execute the policy with regards to the fuel commodity. Once we hit policy levels, we then move to currency, and we've put 20% in place as of January on the fuel -- on the currency-related portion to fuel. And we continue to follow a policy with periodic reviews of the policy. I think where you're getting to in terms of whether that's enough or not puts us back into the dangerous territory speculating, which is not what systemic hedging is meant to do at this point, and it's something that we currently have no intention of doing rather than -- but then following the policy and reviewing the policy proactively from time to time. Natural hedges are a benefit that we have currently. And because many of our vendors, including, for example, maintenance providers and parties like that are European-based. We do have the ability to balance either some of these contracts by all being in euro payments or some portion of it being a mix depending on the objectives and the pricing that we are able to get. Fixing currencies in different -- fixing contracts in different currencies does come with a cost, and we constantly evaluate the cost and the benefit of that versus the overall unit cost that we're looking to achieve. And so we're confident that we have a hedging policy, both on the commodity and the currency that's robust and in line with the market. I would just make a further comment on our hedging attitudes, if you want to put it that way. Do we like hedging? No, we don't. Do we make money on hedging? No, we don't. Is this a strategic long-term driver of the business? No, it isn't. The reason we do it is that we are in a very volatile environment with lots of risks to be that with. And this is one risk less you just strike this out in line with competitive practices and you can focus on bigger fish to fly. That's why we are doing it. Good morning. This is Sathish from Citigroup. I got two questions here. Firstly, on the fleet utilization, if you could actually give some color on what was the exit rate in December? And where are you seeing it in for January in terms of fleet utilization, like number of hours? Is it more than 10.5 hours as we go into March quarter? And you actually mentioned that the utilization is greater in Abu Dhabi around 14 hours whereas Europe, it's around five hours. How much of it is actually related to the bottleneck that we have due to the conflict on the air space? And within Europe, what has actually been the major drag on the utilization? And the second one is around the return-to-profitability into FY â24. What are the moving blocks here? Is it mainly getting the CASK ex-fuel back to pre-pandemic levels? Is that the major driver in terms of getting back to the profitability level? Thank you. Maybe on the second one first. As far as I'm concerned, absolutely ex-fuel CASK is determining profitability of the business. This is what you can control. I mean, I have no idea how fuel is going to go in the future. Yes, we are hedging. So we are lowering of the fuel cost component in the business, but I'm not in control, but I can control ex-fuel costs to an extent I can. And the real question is how our ex-fuel cost performance compared to other airlines we are competing with. And should we be returning to pre-pandemic level ex-fuel unit cost levels. We would again become the lowest-cost producer in the industry in Europe. And thus, in that's the position we need to take to be able to create shareholder value to drive growth in the business and drive profitability of the business. So it is absolutely a cornerstone. I mean that's the single most important asking metrics, what we are having. And this is heavily utilization driven. This is why we are talking so much about utilization because it is driven fundamentally by utilization. And it is important because empirical evidence suggests, and I'm pretty sure that you have maybe even broader knowledge on this than what I have, that if you look at this industry over the last, I don't know, 10, 15, 20 years, you see rising input costs flowing through the system over time and declining input cost are also taken out of the system over time and fuel being the most volatile input cost to the industry. So if fuel price goes up structurally, over time, kind of, through a time lag of 12-months, you're going to see that affecting the industry through capacity discipline. So capacity is removed, restart the yield is moving up to cover the cost of increased input costs. And same happens through a time lag when input cost decline. So I think the industry has almost like a self-defense mechanism to protect its financial performance against input cost volatility over time. I mean this is not an adjustment happening overnight. But really where we can make the difference as a competitive vector in the market is to get our business delivered at the lowest unit cost and being on that basis, especially as we are in commodities and in commodities, lower cost means -- utilization you want to take? So in utilization in Europe, yes, I mean, I would say that ATC is going to be the trickiest constituent going into summer. Last summer, we had lots of issues with airports, handling and those sort of economic factors. But I think they have largely fixed that is true. So I'm not expecting them to fall apart. I mean that is one factor. The European is talking about that all industries might be expecting more social orders than before because inflation will creep through and will affect consumers. And economic recession might be taking at all on employees, creating some sort of a social unrest. I think this is something to be seen whether that's a real fear or not. But ATC, I think is very tangible. So ATC is going to be dragging. And that's why it is important that we have the model, the operating model as such that we are able to process at least a large part of the ATC drag in our performance as opposed to being forced to cancel in the end. So for the people on the microphone, I didn't hear the answer. So we published the quarterly figures, which is 10 hours and 31 minutes. In December, it was slightly higher on the back of that. Good morning. Jaime Rowbotham from Deutsche Bank. Two from me. I think one for Jozsef, one for Ian. Jozsef, some investors very high-level struggle, I think, with the idea that when it comes to A321 utilization that you can make as much money as much profit flying on rotation to the Middle East versus, say, three rotations in your core existing markets. Perhaps you could offer some further thoughts on that. I appreciate we've touched on some of the aspects already. And then secondly, Ian, on the EU ETS advanced purchases. Obviously, it will be entirely up to you when you choose to use the offsets. But could you give us a rough idea for fiscal â24 of how much exposure you've still got in terms of offsets that you might need to buy versus what you've got locked in? Thanks. I think I would actually challenge the statement of Middle East rotations cannot produce the same level of profitability as more frequent rotations in Europe. That's simply just not true. I mean if you look at the Middle Eastern environment, we, first of all, I think people generally pay for stage length. And two, it is a less competitive environment, if I may put it that way, giving us more room to maneuver on the yield side. So I don't think that profitability is at structural jeopardy just because we are operating in the Middle East and/or even I don't think that we are leaving opportunity costs from the table by not operating in Europe as a result. Now having said all of that, we should certainly not be operating one rotation a day, and this is not the plan. And we would be still operating multiple rotations during the day. But of course, we would have motivations coming out of the European network, just given the geographic of Euro relative to Abu Dhabi, for example. But we are not seeing a structural deterioration of profitability as a result of this model. Ian? Hi, everyone. [indiscernible] from Bloomberg Intelligent. Just going back to what you said about load factor I'm getting back to pre-pandemic levels. Can we assume that's just 2024 guidance? And what are the sort of underlying drivers. I appreciate there's general demand recovery in there, but is there sort of company-specific factors. I think you mentioned about fuel being a headwind meaning you have to prioritize yield this year. And then maybe if we could just have some comment on the Saudi operations. What appreciate its early days, was the customer profile looking like? What's the performance like so far? Any update on if you could possibly do outbound? All right. So on the first one, I can make a quick answer, sorry. We don't guide on load factor. It's an operational target that we have, but we don't guide on it. But I think if you just if you just look at kind of the underpinning factors affecting load factor. So we decided to invest into Abu Dhabi, into Albania, into London, Gatwick through the acquisition of a slot portfolio into Italy. And that what happened during the COVID times. And obviously, all those investments are yet maturing. So you can't expect structural load factor performance to fall out of those investments on day one. So it takes some time. It's not a long time, but two to three years. And if you look at the portion of that investment within the total network, we are talking about roughly 25% of the total network that would fall into that category. On top of that, we have to remove significant capacity that was intended to operate to Ukraine and Russia. That's roughly, what was it, 11% of the total capacity, we had to remove and reallocate. Now this is premature capacity, obviously, because we had to find a new home for the aircraft for that capacity. So we have like 1/3 of our capacity basically maturing. This is the underlying cause of the drop of load factor. But as that maturity takes place, obviously, we will benefit from the load factor ramp-up on that. And next year, we are kind of getting into the period when you should be expecting significant maturity happening and see the different office load factors. So that's really what's driving up the load factor performance. And that's not forget the growth what we are intending to deliver will be deployed the safest way possible just putting on existing routes and existing gas which as opposed to adventuring new markets, new airports, new territories. So we are derisking that growth substantially as through the way we are deploying that growth. And Saudi, I think Saudi is very exciting. Probably equally exciting to Abu Dhabi, if not more. We are gaining a lot of traction in terms of market awareness for Wizz despite the fact that we actually just started operating that market. I mean we don't have a long operating history, 1.5, two months. And so far, so good. So we like the reaction. As a result, we decided to launch more routes. Now we have 24 routes on sail to Saudi. Half of that network is operated. The other half is yet to be operated. And we are seeing quite a mix of travelers. I mean, Robert, what's your early profile detection on the customers? Yes. It's actually a really good mix of travelers on board. It's both Saudi originating and inbound into Saudi as well with everything you can imagine from tourist volumes, families going back and forth, religious tourism going back and forth. So I mean there's quite a diverse mix with -- as we said, I think both the load factor and yield expectations are outperforming what we anticipated going in. So it started off strong. I don't think we have any comments to make on outbound. I think the position or the same. It's a market we're focused on building up the route we have and we'll continue to explore new opportunities. Now we're going to take some questions over from the participants on audio line. And the first question comes from the line of Mark Simpson from Goodbody. Your line is open. Please ask your question. Yes. Good morning. Just one left actually after the lengthy call here to date. Obviously, cost of visibility is often recognized as something attractive. And I'm just wondering in terms of long-term contracts, both with airports and section staff, where do you stand currently? And where do you think you could take that in future years? So if you remove the far to behind you, I think you asking your question was to what extent we can expand our long-term context with airports and people? Okay. I mean I think COVID represented a significant opportunity for this to unlock the benefits of our growth in a distressed period for the constituents and we try to really look it down for the long period of time to sustain that benefit structurally I think what we are bringing to the part out is certainly growth. I mean, let's not forget that we are the fastest-growing airline in Europe. So we can deliver more growth than anyone else in the industry. And secondly, which I think is gaining traction is the environmental sensitivities of the industry. We are deploying the best aircraft from an environmental standpoint and also from an economic standpoints to airports, which I think makes -- that makes this value appearing from an airport perspective. And we are trying to negotiate that kind of an element into the long-term contracts with Airport. So we think we have leverage as we speak, growth and carbon footprint of the airplane. But obviously, the COVID times were unique with that regard. But we also see that, especially when you step outside Europe, let's say, kind of the peripheral markets are very eager to get this into their territories, especially observing the successful expansion in Abu Dhabi and now in Saudi. And I think that also that kind of a desire also gives us significant opportunities for locking in long-term cost advantages through -- access to our infrastructure. With regard to people, I mean when it comes to our own employees, I mean, we manage our employees according to market. So if the market changes, we go with the market, we don't have specific policies. We don't have long-term contracts with people. We go with the market. We think it is a fair way of approaching our people with that regard. And that's what we are doing. This is what we have been doing, and this is what we will continue to do that. So we are not trying to lock in long-term employment contracts. We just go by the market. And if I might add a few anecdotal points to that. So I've been looking at a number of the contracts, and I know because I've also sat on the other side of where there is a supplier or a potential supplier. In many cases, the company took the opportunity during COVID to enter into new long-term arrangements. That was before the inflationary pressures as aggressively as they have now. And those contracts have provisions in their A4 inflation escalation tied to caps in terms of what happens in terms of indexes, and they have extension rights on terms similar to the original terms. And so what we're seeing is that we are protected through contractual arrangements from the vendors and suppliers. Now I'm not talking about specifically airports, but across the supplier base in terms of what they are able to pass through to us in terms of cost increases, and that puts us at a very competitive advantage going forward for maintaining our cost advantage and our unit costs. And Mark, maybe just to add to it, if you look at it from a people perspective, so from an employee perspective, we are gaining a lot of productivity benefits from the gauging of the aircraft moving from 180-seat to 239 seats, because 239 seats would require the same two pilots and are on more cabin crew. So we are gaining significant productivity, which offset the inflationary pressure on labor cost. That's great, Ian. And I say apologies about the party, but we're just celebrating the recovery in the industry. So great news. Thank you. Now we're going to take our next question. And the next question comes from the line of Alex Paterson from Peel Hunt. Your line is open. Please ask your question. Yes. Good morning, everybody. Actually, can I ask just a couple of questions. Just to -- and sorry to labor the profile of the ex-fuel cost ex-fuel CASK decline. You're saying that you're coming in the second half of this year at sort of high single-digit, but you're expecting to be flat next year. Do you -- I mean, that would be a very dramatic change in a very short period of time. Do you think that when you say flat, you might be a little bit above or actually are we looking at exiting â24 below pre-pandemic levels of ex-fuel CASK? And then the second question is just obviously, with your network, you're trying to derisk the opening of new routes. You have had quite a bit of change of routes, trialing some and then launching them and then closing them. Can you just say sort of what the costs are of starting and closing a route? And what sort of impact that's had on your utilization and also on your CASK? Maybe I would start and Ian, please is to add. I mean, if you look at CASK, there are a number of drivers to it. I mean, first of all, utilization, we are, at the moment, down to 1.5 hours. We are intending to be 12.5 hours. I mean this is a very significant uplift of utilization. I mean that profound the effect actual cost performance. Second issue is that we were heavily down to all kind of change costs and disruption costs in the current financial year. If you recall, the board effect, changing the network, removing aircraft, reallocating crews. All those issues obviously incurred a lot, of course, not only immature revenue, but also substantial incremental cost in the system coming with the peak summer disruptions, which we are trying to create resilience against. So that's another driver that we are expecting a lot better performance and a lot less operational distress coming out of the operation of the coming summer despite the ATC comments, what we have made. So basically, you're going to be also gaining on compensation costs as we are targeting the 99.5% completion rate, which we were unable to achieve last year. So I think we should be in a lot better place. And when you are, kind of, adding all these factors on top of that, recognizing that we're going to be flying a younger fleet of aircraft to further up gauged fleet of aircraft with the productivity benefits and the maintenance benefits of the younger fleet. So when you kind of add up all those elements of the puzzle, that's how you get to the kind of the high single-digit improvement on ex-fuel CASK. I think to answer your question on the cost of opening and closing bases or airports and things like that, I think it's important to look at that in the context of what are the real drivers of our cost lines in our business, which -- and looking at this period's numbers, clearly, our fuel airport handling and on route charges and depreciation and amortization, that right -- those three right there make up the bulk of the cost base. And so it's important to maintain perspective that yes, there is a cost of opening and closing base. But the benefit of optimizing that and finding the right route structure, so that you can generate the right yields and the right load factors far outweigh the cost of that when it comes to what really matters in terms of relative sale and getting the network right so that we can deliver the utilization and the on-time performance and the actual productivity is going too far outweigh the individual costs of those modifications. But it is -- I mean, closing a base, opening a base, I mean, these activities are not cost critical. I mean, most of our pilots are flexible. So you basically relocate them, so you don't really incur substantial cost. And with regard to cabin crew, we are also offering the cabin crew jobs across the network, maybe the take-up rate is not the same as the pilots, but many -- actually, many of our cabin crews float around with the movements of aircraft. So we don't really incur structural costs. So we don't have any infrastructure cost. We would be committing or have to or leaving behind when we close. So this is all down to personnel costs. And I think that is actually very flexible. So it is fairly marginal, I would say. Thank you. There are no further questions for today. I would now like to hand the conference over to our speaker, Jozsef Varadi for closing remarks. Well, ladies and gentlemen, thank you for your interest. Thank you for coming over. Thank you for listening and your participation with your question. I mean, just a very quick summary from me. I mean, clearly, this business has been transitioning from these COVID periods to getting back to normalized circumstances. We have been encountering significant challenges throughout the current year. But we are very confident that now the ship is moving in the right direction. So we have turned the corner, and you should be expecting a lot more normalized performance coming out of the airline comparable to pre-COVID times. And we will certainly benefit from our fleet program on the one side, and that's going to be topped with the operational KPIs, cost performance coming into play, which are important drivers of the business going forward. Thank you again.
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