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I'll call everybody to attention. Hey, we haven't been together for a few years. The last number were down here was January of 2020. So it's been three years. It's really great to see so many familiar faces in the room. We've got a great show for you today. I'm going to start off with the safe harbor statement. I encourage everybody to read that when you have some time. And here's who is here from management today, which have virtually the entire management team. So when we're done with the presentation, everybody will come on up, fill the stage, and then we can do Q&A. All right. We've got a pretty packed agenda. Some of it will be familiar to you, but these are all the things we think we want you to walk out of the room knowing more than when you walked in the room. All right. So, I want to start with a look back at 2022. So, as you all know, we had significant inflation this past year. We had $250 million of increases in COGS year-over-year '22 versus '21. And how we reacted to that, we increased prices both in '21 and in '22. And in some cases, we raised prices more than once. You saw that in laundry and also on litter. We have really great success this year with several of our brands. As you can see on the page here, ARM & HAMMER litter laundry detergent and BATISTE at all-time highs, racked shares. And then if you look at some of our more recent acquisitions, and that would be ZICAM THERABREATH and HERO acquired in 2020, '21 and '22, all had double-digit growth and all-time high market shares. And then finally, we know we've experienced a black swan event over the past few years. We know there'll be others in the future. So, we've done a lot of work in '21 and '22, spent a lot of money, a lot of effort getting ready for the next one. And then finally, we ended the year strong. So, what you see on the slide here that the categories that we're in grew consumption, 13 out of 17. And just as kind of a leave behind, these are the 17 categories that we compete in. So, you can take a look at this after class is which categories went up and which categories did not. All right. Now here's a slide that we show every year, and this is a very different slide than we've seen in the 16 years that I've been with Church & Dwight. So, the first 15 years with Church & Dwight -- every year, we've had significant TSR. And in many, many years, it's been double digit. And this year, we went backwards. And that's a disappointment to me, it's a disappointment to the management team, to the Board and our shareholders. And so, granted, we have that disappointment. But now we're just going to broom ourselves off, take our sows up. We got a great company. We've got great brands, and we're looking ahead with optimism to â23 and we plan on starting another 15-year streak starting in 2023. All right. So why do we have so much confidence in our future. First off, we'll go left to right U.S. So, Barry is going to come up in a little while and talk about our plans for the U.S. business and why we expect growth in the future. Mike Reid is going to come up and talk to us about international for a long time. International has been growing at 6% annually. That, by the way, is our model. And he's going to tell you why we believe that to continue in the future. Innovation as well, Barry is going to talk about innovation. We're a very innovative company. It's been a big contributor to our top line growth for many, many years. And Barry is going to take you through one innovation, in particular, which is hard ball new leader that we're launching this year, we think could transform the litter category. Surabhi going to come up. She's our Chief Digital Officer. He's going to talk about how Digitally savvy we've become on our plans for the future. And finally, the Evergreen model. everybody in the room, particularly long-term holders. We're very familiar with our evergreen model, 3% top line, 8% bottom line growth. That model is healthy long term. We have strong fundamentals in 2023, we think we'll return to that model in 2024. All right. So now who we are. So, we're a $5.4 billion company. You can see how we split. We're largely a U.S. business, 77% domestic, 70% International and our Specialty Products business, which is our legacy business is a business that the company was founded on, it's about 6% today. So, we have 14 power brands. Those 14 power brands make up 85% of our revenues and profits. One brand you won't see up there today is flawless. That's a business that we bought four years ago. It obviously didn't turn out the way we had expected as disclosed in the release. But as I said, these 14 power brands drive 85% of our revenues and profits. So, here's our formula. We have a balanced and diversified portfolio. I'll take you through some stats in a minute. We have low private label exposure. The weighted average exposure is 12%. And innovation, Barre, is going to take you through a little while, and we are an acquisitive company. We generate lots and lots of cash and the first destination for our cash is a TSR accretive acquisition. So, here's some of the diversity stats I want to share with you. So, we're 40% value, 60% premium. For as household and personal care split, it's about even 46% household, 48% personal care. And here's our weighted average private label exposure. And this is over a long period of time. It's generally around 12%. That really hasn't changed that much recently. There are the five categories that we're most exposed to. You can see on the chart there, see how the private level has moved up and down over time. But it's generally stable even in this environment. And as far as consistent innovation, this is the lineup a lot of the new products we're going to be launching in 2022. The upper left, you see hard ball. I think you're really going to be excited about that when you hear about it later today. All right. We have a long history of growth through acquisitions. If you look at -- go back 2004, $1.5 billion. We've added almost $4 billion to our top line, and a lot of that is through acquisitions. You can see they're all laid out through the bottom. Almost every year, we add a new brand. And in the year 2000, the only brand we had was ARM & HAMMER. So, with 13 of our 14 power brands have acquired -- been acquired since the beginning of the century. And most of those brands are number one and number two in their category. And we have very clear acquisition criteria. Got to be number one or number two in their categories. Notably, they need to be high-growth and high-margin brands that are fast- moving consumables. We've added fast-moving consumables because of our experience with FLAWLESS. Asset-light -- so we're a company that doesn't invest a whole lot in plants. We like to buy businesses that are already made by third parties, by co-packers. And we like to be able to leverage our considerable supply chain. And then finally, it needs to have a long-term competitive advantage. All right. So, the short story is, we have 14 brands today. We hope to have 20 tomorrow. We're talking about 2023, and we'll also talk about capital allocation and cash flow. So first off, this is how we begin and end most presentations. This is our organic evergreen model. So, we start off with 3% of sales growth. We have gross margin expansion of 25 basis points. We have marketing that's usually flat on a percent of sales but higher dollars. We leverage SG&A to get to 50 basis points, and then we expand EPS by about 8%. That is our long-term algorithm. So, in Q4, what happened. So, in Q4, we had a better-than-expected quarter. We were 300 basis points better on reported sales. Half of that was organic. Half of that was a little bit of FX and then the HERO acquisition did better than expected. So, thumbs up on reported sales growth thumbs up on organic sales growth. Gross margin was a contraction. That's what we expected. And we've stair-stepped better throughout the entire year in 2022, and we expect that to continue in 2023. Adjusted EPS was $0.62 at the high end of our range, and then cash from operations, I'll talk about on the full year, but we significantly beat our cash flow projections as well. For the full year, we came in around 3.5% reported sales growth versus 3%, about 1.5% versus 1% on organic, and then gross margin was way down. And you heard Matt say, $250 million of year-over- year inflation was the driver behind that. Adjusted EPS was $2.97, high end of the range. And then reported EPS was down 49% or $1.68 and that was really the flawless noncash impairment. And then cash from operations was $885 million versus our outlook of $800 million, and that's really strong cash earnings and improved working capital, primarily inventories were coming down back in line especially for our discretionary businesses, which was good to see. Okay. Moving to 2023. So, we try to simplify the outlook. We have the detailed outlook on the next page, but this is a chance just to take a step back and say, how are we doing. Our outlook is 0% to 4% the midpoint is 2% EPS growth. Before we get into the investments on marketing, SG&A and the impacts below the line, our core adjusted EPS growth is 10%, double digit. So, we're really pleased with how strong the business is performing. We've chosen to make investments in brands and people. And so, we're increasing our marketing spend up to 10.5% of sales, and that's about a $30 million investment or a 3% drag on EPS. Incentive comp normalization, and we didn't have a very good incentive comp year this year, back to par is about $30 million or so, and that's another 3% drag. And then interest and taxes is a 2% drag. Here is a detail of the financial outlook. So, 5% to 7% reported sales growth, 2% to 4% reported -- 2% to 4% organic sales growth that 300-basis point difference is largely the HERO acquisition. The detail for organic is for the divisions is 2% to 3% for the domestic division, 3% to 5% for international and SPD at 5% to 6%. Gross margin for the first time in a long time expands by 100 to 120 basis points. That is exciting for us, right? We've had a stair step down over the last few years. This is a road to recovery, and we'll get into the details in a minute. Marketing that's the investment I talked about. SG&A is higher, and we'll talk through that. Operating margin is flat. And then other expense, we're calling out as a drag of $110 million. We're $35 million higher on interest expense next year because of hero debt, and we have some variable debt that has rates going up. Effective tax rate is 23%, and then the EPS growth is 0% to 4% and cash is strong, up 5% or so to $925 million. Here's a track record of reported sales growth. I don't think we've shown this slide before. We usually just show organic, but we thought we'd show both. So, over the last 10 years, we've averaged 6% and of reported sales growth. And in 2023, we expect no different 5% to 7%. Organically, here's the 10-year track record. Our average is around 4%. Our organic model -- Evergreen model is 3%, and our range in 2023 is 2% to 4%. Now one of the most important things about organic sales growth is how you get it. And I'd say if you look back at the last eight to 10 years, most of our growth is volume growth. Historically, our Everbridge model was 3%, then we would have 3% volume growth and pretty much flat on pricing. 2022 is a little bit of an aberration, all the pricing that's happening all over the industry because of all the inflation that's happening all over the industry. But you can see in Q3 of 2022, we had really the low point for volume growth. And we have improvement in Q4. We have further improvement, although negative in Q1, further improvement, although negative in Q2, and then we inflect positively in the back half of 2023 is the expectation. Now moving to gross margin. So, 100 and 120 basis points. Why do we believe that we can expand? Inflation is moderating. We still have inflation, it's just moderating. Productivity programs are doing well. margin-accretive acquisition, that's CRO, and we're improving our case fill in a big way. So, you can see that 41.9% goes to around at the midpoint, 43% and if you look at the track record, 45% is kind of where we were. And so, we have room to run over the next few years. And here's the detailed gross margin. This is the bridge in 2022, we were down 170 basis points, and there is a massive headwind because of inflation. In 2023, we think yes, we still have inflation down 240 basis points, but price volume mix, plus productivity offset inflation for the first time in a long time, and then we have help from our acquisition. So that's how we're up 110 basis points year-over-year. On marketing, so a similar story. We have full year marketing support. We have better product supply. We're going to get to 2.5%. If you do the simple math, and look at our high-water mark back in 2020, it was around 12%. Now remember, we took price these last three years, and we don't raise marketing dollars just because we -- the price of the widget went up. So, 12.1%, effectively, if you strip out the price increases is around 10.7%. So, between 10.5% and 11% is equivalent to that 12%. So, by stair stepping up to 10.5%, we really feel good about the support we have for the brands. SG&A is higher, and it's higher for a few reasons. HERO has stand-alone SG&A. That business is off and running and doing a great job, $30 million of normalization for incentive comp and equity. And then number three, I also want to leave this group with our long-term evergreen leverage targets remain in place. We have a stair step up in one year, but the behavior doesn't change going forward. And we've had consistent strong adjusted EPS growth, low double or high single-digit growth for a long time is the track record. Last year, we took a step back down 1.5%, but we're taking a step forward this year in 2023, and we expect that to have further steps forward as we move along. There is a first half, second half story. First half EPS is expect them to be down. Why? Because we had continued choppiness of our discretionary brands. We've kind of telegraphed that last quarter. We said for the next six months or so, we have continued happiness for those discretionary businesses like water pickles and even vitamins as we're lapping Omicron impacts. International supply challenges return to normal promotional levels and higher marketing dollars, have higher marketing spend year-over-year in the first half than the second half. And then the second half is impacted by improved productivity, improved global supply. We have volume growth. That was that chart I showed you earlier. Moving on to cash flow. Our free cash flow conversion for many, many years has been industry leading, on average, around 120%. And this past year, we're around 97%. Why is that? Because of the CapEx investment we're making in capacity, laundry, litter vitamins. And then in 2023, we'll also expect free cash flow conversion to be in the 90s. How do we generate cash? Well, part of it is how we manage working capital. We've got from 52 days cash conversion cycle all the way down to 19 days. So overall, just extremely happy on how we've leveraged our balance sheet and improved our working capital. We took a stair step up in 2022 because we had elevated levels of inventory, primarily for our discretionary businesses. But as I -- as you heard in the Q4 release, we've improved those inventories. We still have more room to go, but we've improved those inventories. And then we have a really strong balance sheet. So, we ended the year at 2.1 times in 2022, and we're going to -- we expect to end the year at 1.7 times. So, we have plenty of firepower to do an incremental dealer deals. We have enough room to go up to $3.2 billion of a deal and stay and maintain our investment-grade rating. Okay. Just talking about capital allocation. Number one, we always talk about TSR, accretive M&A. We want to do the HERO deal. We want to do the THERABREATH deal again and again and again, those businesses are great. Those are the fast-moving consumer goods that we're focused on that Matt just mentioned. CapEx organic growth. We'll talk more about that in a minute, NPD, debt reduction and return of cash to shareholders. So, this is the capacity slide. laundry, litter, baking sorter vitamins, all have capacity projects in place, technology, sustainability, all those things help drive our organic growth. But overall, we're not a capital-intensive company. Look at a long track record for Church & Dwight. We're around 2% of sales. And in 2022, we took a step up to 3.3% as we started the investment cycle for laundry, litter and vitamins. In 2023, we'll be around 4%, 4.5%. And then in 2024, we expect to stay a step down and then in 2025, we return to historical levels. That's our expectation. And then finally, our dividend increase, right? We had a 0% to 4% EPS outlook, and this is the high end of the range. We've been paying a dividend for many, many years, 122 consecutive years. And then finally, I'd like to turn it over to Barry, who's going to talk through MPD and how the U.S. consumer business is doing. Thanks, Rick. Everybody, good afternoon. Nice to be back live with you here. I'm Barry Bruno. I lead our U.S. business, and I'm going to talk to you a little bit about our categories, our brands, a little bit about innovation and then a new marketing campaign. We call it give it the HAMMER. You might have noticed that when you walked in as we've wrapped the building in Orange today. So pretty good work there that I hope you like as much as we do. I may be biased as I lead the U.S. business, but I think our future is pretty bright. We're leaders in growing categories. I'll show you deeper what's going on in those categories in just a little bit, but we're number one or number two player in categories which are growing and healthy. We thrive in difficult environments. We've been through a lot over our 150-plus-year history and we thrive in those environments. We bring more consumers in. They stick with us as we emerge from them. And our acquisitions have a lot of room to run. I'm going to talk with you a little bit about ZICAM, a little bit about THERABREATH and about HERO. When I say that we're leaders in healthy growing categories, you can see what's going on here. Green means the category grew in that year, read, it contracted. You can see we've added a few new categories over the years as we bought brands in the cold shortening, mouthwash and acne patch categories, but healthy growth across each of those 6.4% weighted average last year. We also know how to hold and grow share, right? seven of 14 last year is not ideally where we want to be. We had supply challenges and a number of them that we -- that held us back from where we'd like to be. Ultimately, we plan to do far better as we go forward as we aspire to be better than seven out of 14. That's going to happen as our supply chain improves, right? You can see here where we were last year, Q1 below 80% and improving throughout the year. Some of those supply challenges has made share growth difficult. But as we get into the new year ahead, you can see we're at 93%, growing to 97% through the course of the year. That's good not only for us. it's good for our retailers as we bring growth back to these categories where, again, we're the number one or number two player. And you saw this before, we like difficult environments. We do pretty well in challenging environments. Our portfolio split 40% value, 60% premium, allows us to bring new consumers in, in tough economic times and keep them. And as Matt said about private label, relatively low exposure, only five of 17 categories have material private label. This is a look at consumption in Q4. So, in 13 of 17 categories in Q4, growth took place. You can see some categories that are new to us. If you look at the top cold shortening, if any of you navigated November, December without a cold, the cough, COVID, RSV, I commend you, many of your fellow compatriots here in the U.S. did not do as well, and you can see what drove category growth there. But what I like about this, categories that we've been in for a long time are growing, new categories are growing as well. So, let's take a look at some of those categories that matter to Church & Dwight. Fabric Care. Left-hand side, category growth, right? You can see category growth was 6%, 7%, moderating a little bit in Q3 when the consumer took a step back. And then you can see what church and with growth was on the right-hand side. So, while we lagged the point in Q1, we grew faster in Q2, 3 times faster than category in Q3 and Q4. And as you all know, when you're growing faster than category, you're gaining share and that led us to an all-time share high, 14.9% as we ended the year. And I want you to take away, that's part of a long-term trend, right? We were at 11.5% share in 2017. We're at 14.9% now consumers who try ARM & HAMMER, love the brand and stay with us over time. And we think that's only going to happen more in this environment, right? You can see where the consumer is trading down from premium into value, which is where ARM & HAMMER squarely sits and we're keeping those consumers, as you saw in our all-time share hide. Litter is another really important category. I'm going to talk to you about innovation in litter. But right now, let me show you where our existing business is double-digit growth each quarter last year, 14%, 12%, you can see what's going on there. And again, the story of share growth here in tough economic times, we're continuing to gain share. You can see where we've gained a point and change over the year. But really, what's going on our value orange box, cat litter is gaining material share again, if you look at Q3, Q4, when the consumer was most stressed and they were trying ARM & HAMMER litter they've moved to us and they're sticking with us. So, another story about tough economic times in Church & Dwight persevering. And it's not just economic times that are tough, cough, cold, flu, again, RSV. We really like the addition of ZICAM to our portfolio. You can see over years on the left-hand side how the category has been moving, took a step back in 2021. But in 2022, as consumers were socializing and going out again masks were going away. The category bounced back and ZICAM share of cold shortening has built strength upon strengthens at a 77 share. And actually, if you look at the far right here, we exited in December a 78 share of the category. And again, this is an interesting chart on the left, right? That is influenza reports to the CDC just in November and December of 2022 versus the last five years, that gives you a little bit of flavor for how severe the cough, cold season was and flu this year. So that's good, and those are some important categories. We haven't even really talked about acquisitions yet. So, I'm going to talk a little bit about mouthwash and acne care. As a reminder, we bought THERABREATH in December of 2021. We bought it HERO in October of 2022. So, HERO has only been with us for 90 days. But it's a story of strength to strength and growth. New distribution for THERABREATH plus our WATERPIK hygienist detailing it and have led to outstanding growth and HERO is on the same path. Let me tell you a little bit more about each of those. So THERABREATH sales on the left here. So, percentage growth year-over-year, you can see where that business was up 59%, 45%, 50%. Ultimately, though, that growth far faster than the category has led us to an 8 share of the overall mouthwash market. We're at almost a 20 share of the alcohol-free mouthwash market category, subcategory, right? We're the number two player there. We're growing as we're investing more in marketing and advertising and distribution. And speaking of distribution, when we last met with you guys, we talked about the huge runway that THERABREATH had. And you can see we're realizing some of that now up 60%, but we still trail all of our main competitors, Actin CREST and LISTERINE were way under skewed. And as a brand that retails for double the category average, we're at about a $10 price point versus a $5 average, retailers are happy to engage us with us in those conversations as we bring a lot of penny profit to the category. So, a great track record for THERABREATH breath already, and that's going to continue into the future. HERO, our newest edition. The Acne pass category almost didn't exist five years ago. You can see $20 million in retail sales in 2018. It has grown dramatically to $340 plus million fueled by HERO. And you can see the percentage growth for HERO on the right-hand side in each month driving that category growth. And what's remarkable about that, I think HERO was only in distribution in bricks and mortar and Target and Ultra last year, right, on Amazon as well, but only target in Ultra. That's why you can see the TDPs are difficult to calculate even in terms of how small they were. All of that growth is ahead of us as we look to get our fair share and drive more growth, and we're going to be launching in all of the major bricks-and-mortar retailers that you'd expect starting with CVS now and more to come over the course of the year. So, the summary for that section, right? They're great categories we compete in. They're growing. They're healthy. We're the number one or number two player in most of them. We thrive in difficult environments with the portfolio that's 40% value we bring consumers in and we keep them. And our most recent acquisitions have tons of room to run. And we haven't talked about innovation yet. So, I'm going to spend a little bit of time on that. It might surprise you, I'm going to focus on cat litter. Because I think we've got something really noteworthy that our R&D group has created for us. The category, just to give you a look back, we started with our orange box products going back to 1998. We added Black Box, which is our premium back in 2016. We've had a 12% CAGR over decades in the business. That value cat litter, $280 million in retail sales, that's Orange box that's one pillar for us. Second pillar, clump and seal, our premium price litter has been 80% incremental to us, and we think we're on the cusp of lasting our third pillar. We call it hard ball or lightweight litter perfected. Why do we care so much about lightweight later? Well, we've got a 25% share in the total clumping category. We've only got a 5% share in the lightweight category. And lightweight is about a 16% subcategory of the total category. So absolutely going after our fair share there, and we think hard ball is going to help us do it. What is hard ball. It's a new and different kind of litter. It's sorghum, which is a sustainable non-clay lightweight grain. We turn that into virtually indestructible clumps, which makes for easy no mess scoping. And I could tell you more about it, but I'm going to show you a video of some of our scientists having a little bit of fun that I think will bring it to life. Let's play the video, please. I like the roof drop as the demo, right? That's a compelling one. Hopefully, that gave you a flavor to what hardball is all about. Again, category benefits, it's surprisingly lightweight yet incredibly strong, it's virtually indestructible clumps, makes cleaning the litter box of breeze. If you've had to clean the litter box at home, you know it's probably one of the least favorite household chores and hard ball makes it far, far easier. And it's sustainable, right? renewable, lightweight, easy to transport as well. So that's only one of our innovations. You can see in the top left corner. We've got innovation across laundry and condoms and acne patches and water flossers and vitamins Nair prep and smooth, by the way, a great new innovation that's going to make facial hair removal, far, far easier. BATISTE, SPINBRUSH and we're going to bring THERABREATH to a whole new generation of mouthwash users as we launch our kids line. So, lots of innovation across it. Carlos Linares can't be with us here today. He runs R&D and Leslie Dreibelbis here. That team has done a great job giving us as marketers incredible innovation to launch. Trying to tell you just about one more thing. We call it Give it to HAMMER. It's our new master brand campaign for ARM & HAMMER. You see it all around the building. And I don't know if technically, we're in a recession or not as judged by economist, but I can tell you our consumer, sure feels that we're in a recession. If you look at the top right-hand corner, that consumer is paying $396 a month more for goods this year than they were a year ago. And that's forcing them to make difficult decisions. 53% are making different choices. 90%, as you might imagine, are anxious and stressed about that. And I grabbed a spot from a consumer that was posted to here before we ever started this campaign, but this is the inspiration. When you worked hard to get a good job, but it doesn't even feel like it mattered. Gas is $5, rent increased by hundreds. Frozen chicken is $25. It's impossible to buy a home and inflation is so high that the Dollar Tree is now the $1.25 tree, right? That's what our consumer is dealing with, and they feel powerless about it. And it's leading to a wide open window for brand reconsideration. Brands that were on autopilot are now being reconsidered. If you look at the bar chart at the bottom right there, 46% of consumers according to a McKinsey study are shop in different brands and 42% plan to add them to their portfolio going forward. And we say, ARM & HAMMER is made for this moment, where the hard-working brand is packed with power, price to be accessible to all and eager to help. And we're launching a new campaign, a new video to consumers next week. We're going to share it with you now. Let's play the video. So, we think right message, right brand, right time. We're going to be launching it to consumers on Monday. So, you guys have got a sneak peek here. National TV, digital all the influence and social media you'd expect on e-retail and through PR. We're excited about the campaign. We think it's going to bring a whole new generation of consumers back into ARM & HAMMER and they're going to stick with us after. So, thank you for your time. I'm going to turn it over to my partner in crime and the leader of all things digital, Surabhi Pokhriyal Thank you, Barry. Hi, everyone. So good to see you. flatter to be here, leading digital Church & Dwight. My name is Surabhi Pokhriyal. So, I would say digital acceleration is actually a stated and acted upon priority for us because this is a new section, I'll do a little bit state of the union of what the industry is seeing and then give color on what Church & Dwight is seeing. So, you will notice here, we say 70% of all purchases in the U.S. are going to be digitally influenced by 2027. Just for context, 60% of all sales in 2023 are already digitally influenced. What that means is not just the sales that we do on Amazon, walmart.com, target.com and so on, but sales that are happening in brick-and-mortar because of how the consumer feels inspired to make decision in store using the digital knowledge they have. So, when you're walking the target aisle and looking up a review on some other retailer, that's what we are calling digitally influenced sales. Similarly, the industry also tells us 81% of U.S. consumers are omnichannel shoppers. That is every channel shopper because the consumer doesn't discriminate online or brick-and-mortar. They just want the right price the right value and the right product. And we know from the industry that consumers that shop both online and in-store have a larger basket size. One example on online, how the digital shelf changes, this is a gif image of every hour how our results change and how fund you will have volatile online digital shelf is it literally changes by the minute depending on what you're searching and how the results show up. So, we aspire to win on those top five to 10 results, so our brands show up and the consumer needs us. This is one example. We really want to be there where the eyeballs are. So, in the last so many years, as we pivot to digital as our choice of channel to communicate with the consumer, be it social, search, programmatic. We want to make those authentic relatable relationships with the consumers and truly make it more edutainment. So, while we are educating them, we are also entertaining them and not really throwing a media creative out explicitly. At the same time, the proverbial marketing funnel has so on flattened because the consumer has the right to go from inspiration liking a product, considering to buy it and actually buying it within milliseconds. So, you will notice on the right, we are actually doing campaigns where consumers can go, be inspired about say, OXICLEAN in this case and go buy it at a retailer of choice all from within the creative media. And we see millions of clicks happening that way and flattening the marketing funnel. Let's talk some numbers. Back in 2016, about six years back, only 2% of our sales were digital, e-commerce sales. We closed 2022 upwards of 16%. Of course, COVID accelerated this behavior because the consumer chose to buy online when they had no other options. But what we are seeing is when the consumer learns a new behavior you cannot take convenience back from them. It becomes a very sticky behavior, and we see sustained post-COVID momentum, and that's how we see digital sales accelerating for us for all our brands. Saying that we have a digital first ambition actually means that we are pivoting from digital being a capability builder to digital being a business builder. So, we come with the commerce worst mindset. We spend a ton of media in overall marketing and a large part of that is digital media. We also are very cognizant that digital cannot be a function by itself, and we need to elevate all boats and which is why we're investing a ton of effort into training and educating "traditional folks" who may not have a digital responsibility and launching educational programs internally. This is a good example of how in-store and online. We want to make sure that we win with the consumer when she is on her way and doing footfalls in the store. At the same time, we want to make sure our content online is truly thumb stopping. So that we win with her in every single channel. So, in store, you want to be at eye level, easily reachable and have the right adjacency. But online, you want to have the right short-form videos, the product descriptions and so on. I'll give an example, like online, every keyword is actually an aisle in itself. So, you type a litter, that's your endless aisle. You try in dry shampoo, that's your endless aisle, and we want to win in both of those isles, both in-store and online. Personalization is also a big focus for us. We know that the consumer yearns for a one-to-one kind of connection, and we can no longer serve the same creative to every demographic. So, in this example, a fantastic dry shampoo brand, the #1 in the U.S. and with the largest market share, we saw a ton of consumer engagement and much high purchase intent when we started doing creative, which is the right media, the right messaging for the right hair type. We also are conscious that digital being such a fast-moving area, we cannot just accelerate what we already do in digital, but also be mindful of what might come at the helm in the future of. On the left, you will see a lot of examples from Dain that is TikTok in China, and you have probably seen many examples of how live streaming is a huge thing in China, and we sold, say, 60,000 bottles BATISTE of but he's in under five minutes. At the same time, in the Western world, live streaming is a newer concept because it's not meant as much for social commerce as it is meant for social discovery. So, we are partnering with a lot of retailers, Walmart, Amazon included, to see how might live streaming be a bigger concept, and we have experimented a decent amount in this. This keeps us at tip of the spare to make sure we do well, not just what we already do it well in digital, but find newer avenues to scale. Our current marketing spends of all the monies we spend in media, 70% is via digital channels. That is a big jump from -- if you see on the left-hand side, about until 2016, 2017, this number was 35%. So large part of the media used to be print, store and TV, where we just had a few asset types, each campaign. And now like Barry was showing, we have a variety of campaigns, everything from video, OTT, social, influencer retail media, of course, and audio that we are able to reach a variety of consumers with dozens of assets per campaign. So, we are able to personalize the messaging at the cohort level and get better reach, sufficiency and of course, media ROI for that. All this cannot be done without raising the intellectual capital of the most priced asset in our company, that is our people. We are very committed to raising digital IQ of everybody within the organization and we launched large-scale digital commerce certification programs for not just the people who do digital day in and day out, but the traditional or analog marketers so that nobody will be analog anymore. Everybody has to jump on the digital bandwagon. I'll quote [indiscernible] quickly here to say I scare to where the puck is going to be and not where it has been. That's exactly the sentiment will live and breathe in terms of digital acceleration in the company, be it consumer insights and analytics where we want to listen to the consumer using their ratings and reviews, consumer sentiment on social and design new product innovation or get back to them with the right solutions beat our acquisitions with digitally savvy brands like HERO and THERABREATH, who do a fantastic job at elevating all boats within the company. And having a one commercial team mindset where digital is truly a center of acceleration for Church & Dwight. So, with that, I will pass it on to my peer in international, that also see the ton of digital acceleration. So that is Mike Reed. Thanks, Surabhi. Great to be here. My name is Mike Great. I run the international and the SPD business for Church & Dwight. So, I just want to take the next few minutes to talk about how we're doing in international. And then close with some just updates on our SPD business. So, the international story. So, from the Evergreen model, we're planning to grow 6% organically each year. And just to give you a little bit of a makeup of the business, we're about $900 million in sales, it's basically two different parts. We have our subsidiary markets, which are six. This is a fully staffed, direct models that we have entities we sell directly to retail in Canada, U.K., France, Germany, Australia and Mexico. That's about 65% of our business. The other 35% runs through our Global Markets Group, which we call GMG. That's essentially -- we work with more than 400 partners and distributor partners around the world in over 100 countries. And then we've actually supported that with five regional offices China, Singapore, Panama, the U.K., and most recently, in Mumbai, India, which we opened in March of 2022. If you look back, we've got a very strong track record of growth against that 6% evergreen model going back to 2015. We did take a little bit of a step back in 2022. We've got really strong demand and orders in the system. We did have some supply challenges we referenced earlier in the presentation. And we did have some drag within our China market largely with some lockdowns and some waterflow contraction. But overall demand is really, really strong, and we've got a really strong track record. If I unpack that a little bit, clearly, China has been a drag. But if you actually look at the -- our six subsidiary markets as well as four out of GMG regions. We have really strong positive growth across the board. Demand is really strong. Our portfolio is performing extremely well. I think as supply chain recoveries and as China starts to recover, we'll be poised to take advantage of that and get back on our evergreen model. The reason we have confidence in that, I'd say it's threefold. One is just the strength of our brand portfolio. Our brands travel extremely well across the world. can frame it up in three different ways. Traditionally, and certainly a big part of what we do today is we leverage our U.S. power brand. So, ARM & HAMMER, OxiClean, BMS, TROJAN, et cetera. Those brands travel extremely well across the globe. ARM & HAMMER across all segments is our single largest brand and some of those performed extremely well for us. But those are also complemented with a strong international portfolio in the personal care and OTC space, brands like Sterimar, FemFresh, Gravel are unique brands to the International division, high margin and our high-growth categories, we performed quite strongly there. And of course, we've taken great benefit from our acquisitions that, in many cases, our U.S. based, we're adding their THERABREATH and HERO to the family in 2023. So really excited about those. So, across the portfolio, those are kind of the three ways we look at it, but together, gives us a lot to play with internationally. The second part is geographic expansion. So, while we've got a great international story, we're still very early in our journey. If you look at most of our peer set, most of the revenues are in the 60% range outside of the U.S. We're in that 17% to 18% range. So, we have a long runway to go, lots of geography, lots of brands to go into those geographies. So really excited about the runway ahead. And thirdly and equally important is we are making some key investments in the International division. So, we continue to invest in e-commerce and digital maturity and growth Similarly, in pricing and revenue management we're adding some supply chain within our Asia community as well as putting infrastructure in people around quality, regulatory, R&D in some of our key emerging markets lay in the APAC region. So overall, a very long runway of growth for international, very strong portfolio of brands. So, it's really a matter of continuing to extend our portfolio into new geographies. We'll continue to leverage our acquisitions. THERABREATH and HERO will become really important brands for the portfolio. Most of our growth will continue to come from our global markets group and within our emerging markets, and we're going to continue to invest in key capabilities and resources as we continue to grow. All right. Let's switch gears to Specialty Products. So, Specialty Products is aimed to grow 5% organically each year. Just to kind of break that down, it's about a $350 million business. It grew almost 4% this year. 2021, we grew at 12%. It's broken up two-third, one-third between Animal Nutrition, which is 69% and Specialty Chemicals at 31%. The animal productivity is largely prebiotics, probiotics, and food processing safety. It's all under the ARM & HAMMER master brand. So, we have a whole host of product lines in order to service the animal productivity space. And just if you go back to 2015, international was not a big part of the business. We have made a conservative effort to move into our global markets, not too similar to our consumer business. 2022, it's 12%, and we'll continue to grow our international footprint. But as we grow our international footprint, we're also going into new species as well. So, what used to be largely a dairy business is now cattle, swine and poultry as well. So, diversifying also the specie range. So, with that, this is probably the last time we'll show this slide. If you go back in history, we often had sort of our dairy business and our own productivity is largely linked to the fluctuations in milk prices. Since we've diversified in terms of our species to include dairy cattle and swine and also are moving internationally, we've been able to smooth out our revenue. So, we won't have the ups and down cyclical effect that we've had in past years. So, this will be the last time we showed this chart, but I think it's an important context to have much stable revenues moving forward on SPD. So overall, trusted brand from a Church & Dwight, but also ARM & HAMMER umbrella brand, both in the animal nutrition and the specialty chemicals. We're very aligned with kind of key trends around prebiotics, probiotics and available and affordable proteins. We've got a diversified around multiple species, and we're growing internationally. So, for all those reasons, we're pretty excited about where SPD is headed as well as international. So, with that, I will hand back over to Matt Farrell. Okay. All right. Thanks, Mike. I can try to bring it home here. You haven't seen this slide before, we talk about how we run the company. And this is a snapshot of our consumer business. We have seven SPUs. You see the first six on the left side or the U.S. businesses on international and the far right. So, this is how we break down all the brands that we manage and we manage dozens of brands, but you see most of the power brands are listed here. Maybe wondering why ARM & HAMMER appears for Fabric Care, Home Care and Personal Care. In Fabric Care, we have an ARM & HAMMER detergent. In Home Care, we have baking soda and litter. And over in Personal Care, we have a toothpaste and under armed ext. But we got -- these are all broken down into very manageable businesses. And over an international, as Mike just described, too. We have one-third of the business is the GMG, our export business and two-thirds is the subsidiaries Okay. So here are five operating principles, which I'm going to kind of walk through. The first thing is leverage brands. So we focus on brands that consumers love. It's not brands consumers like. It's brands consumers love. They're going to stick with you are going to walk out of the store, looking for your brand. The second thing is we've been a long-time friend of the environment. This company was founded in 1846, and the founders of the company were environmentalists and that's continuing to stay. Leverage people I'm going to talk about. We have a wonderful group of people in our company. We have 5,200 employees. We have over $5 billion in sales. We have over $1 million of sales per employee and leverage assets, many of you who are long-term holders now that we're focused on being asset-light. And finally, if you do the first four right, you get good returns, but if you're able to make smart acquisitions, integrate them and grow them, you're going to get great returns. And that's what we have gotten over the years. Okay. Leverage brands already mentioned that. We have 14 power brands that make up 85% of our leverage -- of our sales and profits. Friend of the environment, and we'll go in a little bit deeper on that. So you've probably seen this before. It's a good reminder that if you went back to the 19th century, we were putting trading cards in our boxes of baking soda. And those cards were pictures of birds. And they said, save the birds, save the planet. In 1907, we started to use recycled paperboard in our cartons. No one was doing that back then. We were the first to take phosphates out of laundry detergent back in the '70s. And we were the first and only sponsor of the first Earth Day. And 20 years later, in 1990, Church & Dwight was still the only corporate sponsor for Earth Day. More recently, we started plant trees in the Mississippi River Valley. Trying to offset the carbon dioxide that we put into the air. And if I go all over to the far right, we now we're committed to science-based targets. So when you plant trees, you remember from fifth grade science you take two out of the atmosphere, and science-based targets, what we're focusing on is spending money on CapEx to reduce the amount of CO2 we put into the atmosphere. All right. So here are some of our goals. So you say we aim to be 100% carbon neutral by 2025. That means we will have planted enough trees since 2016 to offset all the CO2 we put into the atmosphere. And it's pretty considerable. For a small company like ours, we put 350,000 tons of CO2 into the atmosphere annually. So this is really important to us. You see, we mention of science based targets below there. Water, we're trying to reduce water usage by 10% annually. And in solid waste recycling, we'd like to recycling 75% of the solid waste from all of our sites. Got a lot of recognition about that, the FTSE, EPA Green Power. Safer Choice partner, we've been a safer choice partner for the past seven years. And this is important to our management team. It's important to our employees. It's important to the families of our employees as well, but it's also important to our consumers. So you can see, it's really a top priority for so many consumers today, particularly younger consumers. All right. The fifth principle is to leverage people. So we say we have highly productive people and a place where people matter. When you invest in a company, you bet on people, and you bet ideas and their ability to execute those ideas. And I can tell you, we have a really strong management team. But it's not just the management team, it's also the 5,000 people that we have in our company. 3,000 of those people are in supply chain, 60% of the company. That is the backbone of Church & Dwight. And when you think about what's the culture in Church & Dwight. Any member of our management team could take you through this. It's a blue-collar company. That's not a dress code thing. This is how you will go to work every day. It's a roll up your sleeves environment. We've got a lot of high-aptitude people in the company. Many of them have worked in other large CPG companies. Wanted to go smaller where they could make a difference. So it's blue collar, high aptitude, underdog. So we compete against companies that are far, far larger than us and you know who they are. We never use that as an excuse. We beat these big companies every day. The fourth thing is getting the facts. So we -- it's a company we're maniacal about numbers and data. And one point of time, people made decisions based on the person who had the gray hairs in the room, the gray beards like me. So I know best, I've got 40 yearsâ experience, no more. That is not how business is done. Now it's done based on data, and we are oriented towards data, and we have data sciences in the company now, and we're becoming more and more focused on predictive analytics. Just to kind of round it out, digitally savvy is something that's very important to us. That's something we've focused on over the past five or six years. Diversity is the last one -- second lesson one. And finally, it's take risks. We want to be risk takers in the company. The way we illustrate that, we actually have a picture of Johnny Depp from Pirates of the Caribbean that we use when we're talking about this internally and say, "Hey, this is who we are." So I just want to give you a little bit of background on that. And here's some numbers. Here's all of our competitors and is our revenue per employee. And I think this is an underappreciated statistic when it comes to investing. We get mix. It makes a big difference when you've got fewer people, you get focused on fixing things, making things better, and its magic. All right. We have a simple compensation structure in the company. Many of you know from following us for many years, it's revenue, gross margin, cash and EPS. And what that does is it makes the company financially literate. So when we're talking about gross. We're talking about gross margin in every part of the company. When I go into a plant, we have 15 plants. We do town halls with all three shifts. We'll talk about gross margin. What is it? How do you get it? It's part of our compensation. And then as far as how do you get gross margin? It was good to great is the name of our productivity program. And it's a book that everybody has heard about, probably no one's read, but that's the name we use to describe our productivity program. Supply chain optimization, that's also how do we run our plants, what kind of capital we're putting in our plants which plans should we make a product that. New products, if you introduce new products that have higher gross margins, it's going to help you as well. And then finally, acquisition synergies. We like to buy businesses that have gross margins that are at or higher than our current gross margins. All right, leverage assets. Rick took you through this before. We pride ourselves on being asset-light. And historically, we've been around 2% of sales. It spiked back in 2009 when we built our gigantic plant in New York, Pennsylvania. It's spiking more recently because we're investing in so many different categories. But that's a good signal. You don't put in new capacity if you don't think you're going to grow. So we're going to be able to fill that up over the next couple of years. All right. And finally, leverage acquisitions. I mentioned that before. If you do that well, you can turn good returns into great returns. All right. And I just want to repeat the acquisition criteria in case you missed it previously. So we invest in brands that are number one or number two in their category. You're not going to see us invest in a brand that's number four or five and tell you the investor, we're going to drive that to number one. That's not going to happen. The brands are number one and number two for reasons. That's what we focus on. They need to be high growth, high margin and fast-moving consumables. Asset-light is our preference. We want to be able to leverage our substantial footprint around the world. And again, needs to have a long-term competitive advantage. So with respect to cash, we have 14 brands today, we are like 20 tomorrow. I just want to kind of end on the look ahead. So you saw in the release, we said, "Hey, we got strong fundamentals going into 2023."We got top line strength, both reported and organic. We got gross margin expansion. We've got a terrific new product pipeline, you only heard about one today, but there are many others as well. We're jacking the investment in advertiser. That's going to help us not only in '23, but in future years. Rick took you through the capacity expansion. And finally, we generate lots of cash. And so we're on the hunt for our next power brand. And with that, I'm going to bring up the rest of the management team, and we'll do some Q&A play stump the band for a little while. All right. Come on up gang. Great. Kevin Grundy, Jefferies. So thank you for the presentation. A question for the group with Matt certainly start with you. So last year, certainly, probably one of the more challenging to get that the most challenging yet that the company has dealt with the economic environment, excuse me, certainly challenged, but it was for your competition as well. So as you kind of do a postmortem on the year and you kind of think about supply chain, you think about your portfolio, you think about your relationships with retailers. What are sort of like the biggest learnings would you say operationally for the company? And then looking forward, what's the message for the investment community that there should still be a lot of confidence in the Evergreen target? Yes. Okay. It's quite a big question. I think every companies have flexibility and so it creates options. And I think going into the COVID, the pandemic and certainly the recession this past year, on our supply chain side, we didn't have the options. I think less than 15% of our raw materials had redundancy. And our target right now is to have 50% redundancy. So we've come a long way over the last couple of years. And that's why I said earlier that we're focused on -- be ready for the next black swan event. As far as the portfolio goes, 80% of our portfolio did exceedingly well. And we had 20% of the portfolio went backwards. And some of it is self-inflicted, and that is with respect to vitamins and our ability to supply. That has certainly hurt us both on sales as well as in the market share, but we're starting to turn underrun. And then from a device standpoint, certainly learned our lesson with respect to FLAWLESS. FLAWLESS struggled in '20 and '21 through COVID, '22 because of the pullback as it's a discretionary purchase. But WATERPIK is different. WATERPIK is also a device, but do you have a secular trend towards interest in gum health. And that's the business we bought in 2017. It grew high single digits in '17, '18, '19, '20, '21. And went backwards this year. Why we had the recession, $5 gas, et cetera. But that's going to turn around, and that's going to be growing, not only in the U.S. but also internationally for us, but I could go on. But there are many areas of the company that I would say we'd look back and say, "Yes, okay, we've been a little bit differently now but now we're -- we got our eyes open going forward. Thanks for taking my question. So just on pricing, I guess, looking forward to this year, is there any pricing -- new pricing incorporated in your guidance for this year? And if you look at last is, how do they play out versus expectations? Have they gone back to where you've historically been? Or are they still better than the history? Yes. We'll do it the elasticities first. And elasticities have been surprisingly good over the past year. So -- and I think you probably heard that from all of our CPG competitors. The first part of your question was⦠Yes. Well, I'll just start off, and he's going to have a little bit of chance to think of a better answer, but my answer would be the following: we already have pricing in place that's going to be in the marketplace in February and March, but it was sold in already. So we don't have anything ahead of us with respect to, hey, we got pricing planned in the second half or in the fourth quarter because it's going to be -- it's becoming exceedingly more difficult in order to push price through and get away. That was a great answer. The organic outlook for us is 3%. It's price in 2023 and volumes were flattish. We had that in the release, and that's really because we had carryover price from 2022. And then there's additional pricing that's already been sold in, like you said, it's effective in February. So that's really the preponderance of the 3% organic growth next year. Thanks. In the release this morning and then also in the presentation today, there was a notable absence of discussion around the VMS business. So thought it'd be great to just get an update on where things stand from an internal standpoint, supply raw material availability and also from a consumer demand standpoint, had early cough in flu, cold and flu. So where do we stand on kind of normalizing demand or what you think that will look like? Yes. That's a good question. I'll let Barry and Paul comment as well. But the vitamin business in January, it's a vitamin category in January was down 10% year-over-year. And the reason for that is because if you went back to last year, you had Omicron and Delta, and you had a huge spike. In fact, the first quarter last year, you may remember from the slides, we had only 70% fill rate because we just couldn't staff our plants. So that's an issue for the category right now. As far as our issues go, yes, we've had some self-inflicted wounds over the year. Our supply has started to come back as well. Now we have to win back the consumer. But I'll dish it over to Barry first and then Paul, if you want to add that. Yes, Lauren. I think we see the category as struggling as we're comping Omicron, and it's a discretionary category. When you're making a decision about $15, $20 vitamins. And as you saw in my campaign or regular grocery bills up $400 consumers are stepping back from the category. So good news, our supply rates are improving. Category is declining slightly. We're waiting to see what happens now as we get past the Omicron comp, how it looks. But we're going to be in a position to meet consumer demand as we get into the back half of Q1 here. And just a quick follow-up because the outlook range, I mean it's the beginning of the year, it's not just early in the year and giving ourselves a lot of room as you navigate through infinite sense. But I'm curious how much of the year's outlook is actually contingent on what happens with VMS because it's got attractive margins, a wide range of outcomes, right, in terms of where the category settles out. Just curious how important that is the full year outlook. Yes. What we said in the release is we had three categories that really hurt us last year through brands, where it's got WATERPIK flows and vitamins. And we said three of those together, we expected modest growth in the aggregate in 2020, but it's not going to be pulling the train -- businesses. In 2022, remember, those three businesses were about a 4% headwind to organic growth. In the quarter, they were as well, right? We had 0.4% organic, but we would have been at 4.5%, if not for those businesses. And we said for the full year, that's going to true as well, 4% headwind. Just the absence of that headwind, they're flattish to slightly positive next year. Thank you. My question is around the cadence of margins because, obviously, you're starting the year at a lower point. But you said that gross margin would be up in Q1. So could you talk a little bit about what's embedded in the outlook as you progress through the year? Because expect that SG&A is up pretty considerably in Q1. Is that advertising? Or is there other expenses that we should be mindful of? And what happens as year progresses? Thank you. Do you want me to handle that? To give you something. Gross margin is like we said, stairs up through the year. Part of that is the mix headwind in the front part of the year that we just experienced in the back half of this year because of the discretionary businesses like WATERPIK, Vitamins typically have good gross margins. Other part of it is as our fill rates recover, right? I think you saw a slide that Barry had up there showing 93% fill rates in the first half, 97% fill rates in the back half. So as you have fewer truckloads as you have fewer fines from retailers, all those things up gross margin as your supply improves. SG&A, we haven't really got into the quarterly SG&A. SG&A is higher in Q1, and part of that we put in the release was just timing of equity grants as well. Okay. Mark Astrachan at Stifel. Two related questions. So one, M&A, which is a stronger contributor, I think, than many expected in the fourth quarter. What drove that? And then how do we think about the contribution from M&A for '23 relative to what you had said about HERO? Yes. Well, we had a really strong quarter -- new acquisition HERO. It actually exceeded expectations. I think this consumer is driving that. And we also had the opportunity to spend more in marketing in the fourth quarter for Hero after we bought the business that came in, in October. But yes, as far as 2023, I would say, yes, it's a little stronger than we expected when we first bought it. So that's going to help us. And you can see our range -- the gap between reported, which is on average 6% and 3%, which is organic. Most of that is the payroll business. And just to give you a couple of numbers. We will end the year for HERO in 2022, around $180 million, we said when we bought it, it would be a 15% grower in 2023. You roll that forward and that means it's about 3%, and you're going to take the Q4 of 2022 out of the comp, but it's about a 3% tailwind for 2023. And on the EBIT line, I mean, I know what you said about interest expense. So what about from contribution there given the higher revenue, same sort of flow through? Well, we're investing more marketing and I'll let Barry talk to it a little bit, but we are -- as we expand distribution, we're going to spend more marketing for national campaigns, right? So it is a virtuous cycle for HERO. That we've never had a national campaign before because they weren't in national distribution, right? And like seem obvious. But we're getting excited about launching the first campaign to tell people all about acne patches because they still don't even realize what they are in many cases, household penetration versus total acne care lags by 10 times, 20 times, so that form we're going to educate about as the category leader, we benefit from that. So that's all new as we're building distribution at the same time. So I think it's a pretty exciting hero story. We've kept the whole Hero team with us, by the way. They're a great strong team, and they're leading that business today. So excited about here going forward. I'll start. Jon Feeney at Consumer Edge. You mentioned, Matt, a lot of CPG companies talking about elasticities are better, let's say, but yet everybody's get gross margin headwinds. And I wonder the data seems to say that consumers are quite receptive and you get retailers in November, December to how hard things are event one that was talking to food companies about why they need to lower prices. So could you give us a little more -- shed a bit more light, maybe unlike that pricing process where -- I mean, if -- why wouldn't you just price in some of these categories until you got the elasticity you were looking for and optimize the profit pool that way? Yes. Well, I'm sure you know the way it works is in order to raise price, you have to have a cost story. And without the cost story, you don't get the price. And the retailers have all the data about what's going on in the marketplace with respect to commodities, transportation, et cetera. So it's -- it is a negotiation about, hey, this is what we're seeing on the cost side. We need this price increase and then there's a debate. -- and Paul lives this every day. You can give Paul the mic and he can share it a little bit with you. But yes, that is it around the world with all the retailers is. You can only go as far as you can justify with cost. Yes. I'd simplify it as transparency, the retailers expect you to be transparent with them to that cost story that he said. I think we've been extremely successful in being transparent. That develops a trust. So when we do come in and share a transparent story and timing is important, too. Retailers have financial demands and controls and different things. And I think we've been very good at being showing them where the world is moving, where we expect -- so we have these conversations. They're not surprises. So trust transparency and timing, I would say, has been our secret sauce. And while it may seem a cliche and everyone should do it. I think that's what's allowed us to experience the elasticities we have and make the choices we have as well. Hi, thank you. Anna Lizzul with Bank of America. I was wondering if we could go back to the conversation around marketing investment. Just wondering if you can talk a little bit more about how you're planning to allocate this increased investment between your legacy brands and maybe some of the more recent acquisitions? And then just in terms of acquisitions, how are you thinking about maybe the personal care side versus discretionary just given the success of some of your more recent acquisitions like HERO versus some which maybe have been less successful in the past? Thanks. Yes. I'll let Barry comment on the marketing. With respect to acquisitions, we only hire one person in our entire acquisition, M&A department, which is very church and Dwight like. So we're not have a dozen people that are studying categories saying, wouldn't it be wonderful to be in this category. Yes, it might be, but you can only buy what's for sale. So anything that's for sale, particularly in the U.S., that's consumer products, we are aware of and you know what our acquisition criteria is as well. And we've -- even in the last six months, there's three acquisitions that we diligence that we passed on, had good economics, but they just didn't -- we didn't think they had good long-term potential for the company. But because we're able to make so many different products, we're in so many different categories, we can liquid in a bottle. We can put powder in a box. We put anything in a tube. We know how to make lots of things. So consequently, we can throw a pretty wide net as far as things that we might be able to take on as a company. But I'll dish it over to, Barry. Sure. Yes, we've got a lot of brands in our portfolio. We've got a classic brand classification approach we take, and it won't surprise you their seed and there's grow and they're sustaining milk, 80% of the incremental dollars that we're putting in is going against those seed and grow brands. It won't surprise you if I say a seed brand as a hero is a thorough breadth we're reporting kind of gasoline or maybe see is better to say putting water on them, maybe gasoline is a bad example. But that's where the spend is going. We make hard choices about it. We'd always like to spend more, but those -- in our brand classification, we know where we want to put those dollars and that's how we allocate it. So I won't get into those specific brands here, but that's how we approach it. When you've got 14 power brands, you're going to make hard choices, but we know where to put those dollars to work. We think HERO is certainly one of them. Some of your competitors have talked about retailers reducing their inventory levels. I wonder if you guys have seen any impact in your business and particularly what categories you see most of the impact. Yes. Okay. Well, Barry and Paul will deal with this every day. But I can tell you, in the fourth quarter, we had a major e-retailer significantly reduced their inventories and their days of supply. So that was a hit with respect to the fourth quarter. We did see a lot of that pullback happen midyear in 2022, but more recently, it was more retailers, but I'll let Paul and Barry comment on that. Take it away. Yes. By and large, we're back to a ship to consumption model. I'd say the retailers -- some may have their other challenges within their own network. They want to ship more product, but they may have constraints at their DCs or getting it out of their own DCs to their stores. But by and large, it's a ship to consumption. You guys or in stores across the country, you see what I see. We need more inventory on the shelves. It's just a matter of catching up. But I do not feel like what Matt described last year, is anywhere or the other side of that book shelf. And we want to get back -- they want to get back at just getting that product through their warehouse and through their network, but very small. Chris Carey, Wells Fargo. So from a ship to consumption standpoint, we've continued to see scanner trends, which are a lot stronger than your underlying results, right? So even in this quarter, there might have been a 10-point gap between what you did in personal care delivery versus what we can see in scanner. And so. Are we starting to get to the point where non-e tailer, so large e-retailer, that is going to remain noisy, but are you getting back to a shift to consumption in your core brick-and-mortar retailers because, again, we're seeing strong results in personal care consumption than what you're actually reporting, right? And it's making it a lot harder to actually call quarters and understand what the underlying trend here is, right? So if you're back to ship to consumption, that would seem to be a positive development. But I guess what I'm hearing is actually that inventory will remain volatile in the front half of the year. So I'm just trying to square the. Chris, you're -- the major difference between what you guys can see in Nielsen or IRI versus what's actually happening and on the personal care side is really what's happened in the discretionary business. Like the WATERPIK coverage that you don't see, I remember the universe is this small or your view through Nielsen or IRI on the WATERPIK business. Your view is largely a bit smaller for the FLAWLESS business as well. I think those two things are a big part of the disconnect. But take a step back, a lot of the portfolio is growing consumption really well. I think as you see Hero add to distribution and other retailers, you're going to see that, that gets picked up correctly. It just has to get scaled up to a greater degree. Anything you guys would add? Yes, I was going to answer if you had funded to be first. I would say the syndicated piece does matter, right? A lot of the personal care brands and what those retailers are, what you can see versus what we see. And it's not an excuse, that's just kind of where the business is and some of those just tracked the way that you guys are seeing it in the system. So I think Rick hit it. And just related, if I could, but the supply chain improvement is the inventory improvement and the shift of consumption. We've seen promotions come back up, specifically on your laundry business. Was that an impact on price mix in the quarter? And can you just describe that promotional activity, whether -- it certainly looks like it was more offensive as supply came back, you promoted behind laundry. But am I reading that situation wrong? And just again, any impact on the quarter, would be helpful. Yes. Let me give you some help with sold on deal for the categories that generally have lots of promotion. And then Rick or Barry or Paul can chime in. So if you look at the liquid laundry detergent, okay, Q2 versus Q4 you'd see that the sold under was 31% in Q2. It's 33% in Q4 for liquid laundry detergent. If you look at unit dose, it was 28% sold on deal in Q2, and it's 33% in Q4. So it's 500 basis points move. And then the other category that's a lot of promotion is litter. So litter was 11.5% sold on deal in Q2, and it's 14% in in Q4. So you've seen a move up. Now historically, liquid laundry detergent is kind of mid-30s sold on deal. Litter, however, is still low. It's typically high teens. So things have heated up a little bit in the last couple of quarters, but it hasn't gone to the point where it's a rocket ship or it's a big spike. It's sort of gradual. And as we look ahead to 2023. I would say our sold on deal were probably similar to what we did in Q4 evenly throughout the year. So if anybody wants to chime in, you can. I would also say year-over-year, yes, it's a drag because we're lapping a period where we didn't really have as much promotion. Fill levels were low. And so now as we get back to normal levels of promotion, is it a year-over- year drag, yes. Is it offset is off base from what our historical levels have been now. But supply allows us to get back to advertising and trade that are at normative levels, I would say, right? We're not wildly off where we've been historically, but that allowed us to in Q4 get back to normative levels. I'll take a second shot on M&A. And I think that some of it was in the earlier question was if perhaps you're thinking about discretionary differently in the context of future M&A. It does feel like when you think about something like ZICAM where you bought a cold remedy company at a time where nobody was getting cold. But it also sounds like a lot of discretionary assets that you might be looking at are also equivalently struggling forgetting about what's in your business right now. So can you maybe just talk about how you're thinking about M&A in terms of is discretionary still on the table? Or has this recent experience maybe changed your mind about discretionary as part of your... Yes. Well, let's go back to ZICAM for a minute. And we bought ZICAM has a brand, a very strong brand equity. And we renew we were buying it in the middle of COVID. We thought long term, this is a business that has opportunity to grow. And the opportunity with respect to ZICAM is similar to a brand like Emergency which is not episodic now and its sort of an everyday brand that many consumers use. That's the opportunity for ZICAM long term is converted -- also is having ZICAM in a gummy form. You got to keep in mind, we were in supplements with Vitafusion. So it made a lot of sense for us to add on to that as I can. So just to give a little bit of context. Now as far as discretionary versus nondiscretionary, yes, a recent experience does influence our attitude going forward. And certainly, if you're going to buy a discretionary brand, -- the question is going to be how resilient is going to be the downturns in the marketplace because, obviously, with -- certainly with respect to vitamins, FLAWLESS and WATERPIK. The economy did affect the performance of those brands over the past year. So it does influence that. It doesn't mean that we're -- it's hard and fast. We're going to extrude them. But I will tell you the devices you can put it next through going forward. Yes. So Steve Powers from Deutsche Bank. So I wanted to go back to pricing, a two-part question. The first one is just pricing in the quarter relative to what we're seeing in scan data. Pricing came in light. So I don't know how much of that is the promotion, how much of that is some of the mix that we don't see. But just you can bridge that gap would be helpful. And then as you go forward, as for as much pricing as you have taken and are taking, your pricing net of cost inflation is still has not cut up and it's not expected to catch up in your gross margin bridge. All your gross margin is productivity and fill rates and mix, which is great. a lot more emphasis on volume resumption in your messaging and value. So just philosophically, how you're thinking about that? And I guess, a little bit to John Feeney's question about just why not price a bit more, if you last this is your favorable to close that price versus cost inflation gap. Yes, I'll start, and I'll dish it to Rick. So as far as the fourth quarter goes, certainly, mix had an impact as we talked about earlier with respect to WATERPIK and vitamins and flows year-over-year -- promotions, which we went through also since that's kind of been heating up Q2, 3, 4. It's gradual, but it still had an impact in the fourth quarter. But I would say the two factors would be mix, number one and number two was heat up and sold on deal as far as the trend with respect to price mix. Yes. And as for 2023, if you look at the components in the gross margin bridge, they're all switched together. But I'll tell you, by the end of 2023, we do think that we've priced the dollars on inflation, okay? What you're seeing there is negative mix, again from the first half of the year on the flawless WATERPIK vitamin businesses. We talked last quarter as an example of -- in WATERPIK units were flattish to down slightly, but everyone was trading down to lower-priced units. That's where it shows up on the gross margin bridge is a headwind. But overall, we feel really good about our pricing and what we've done. And if you remember, rewind the clock a little bit. We were the first to go out with laundry pricing. We're not a leader in that category. We were the first to go out in litter pricing because we knew it wasn't if, but just when. And so we had the call story. We had the justification and we moved. And so we feel really good about our pricing. It's a core competency in the company now. I would say about seven years ago, we started a pricing department, and we have people that all they do every day just look at pricing and where we should be and what we should do. And so we have all these plans in place, and we've had a successful selling at retail because we have transparency, and we have the facts to back it up. And so we're not timid about raising prices, as you know Steve, as you just heard the what the history was with respect to when we've raised price. But we also have to be cognizant of what's going on in the category, the category dynamics and our price gaps with our competition. So I think -- I mean you and John are beaten on the same topic, but we've taken it as we think as far as we can at the moment with that because we do need cost justification to go few further. Just Andrea Teixeira from JPMorgan. Just to squeeze in to Steve's question on the pricing. And also the volume side, I guess you had a big impact on the fourth quarter and the full year, 4% for those of 20% of your businesses that were down. So I'm thinking as we think into the first half of this year, right, you're calling for a decline in volumes. Is that mostly on that or you're adding on a bit of elasticity in the first half of the year? It seems as if it's opposite like the existing -- the other 80% is going to grow volumes. Yes. I would say it's more of the same what we just experienced in Q4. All right? The 80% of the business is doing well. Volumes are up, and it's really the drag from those other businesses that we said were going to be choppy for the first six months of 2023. Peter Grom, UBS. So Rick, you showed the slide talking about gross margin performance over time? And then recognizing you're expecting to have a nice bounce back year here in '23. You're still kind of 200 basis points or so below kind of the 2019, 2020 gross margins. And I don't want to sit here and asking question for 2024 guidance in February of 2023. But you spoke to multiyear of opportunity on gross margin expansion. So I guess how big of a priority is that in terms of getting back to that level over time? And as you think about the cadence of the year and kind of look forward here, like how quickly can you get back to 45% gross margin. Yes. That's a great question. Number 1 priority in the company is always to grow our brands, right, have brands consumers love, grow share over time in good categories. The number two priority is probably gross margin. Gross margin expansion leads to EBITDA expansion leads to cash flow, right? We're known for cash flow generation. And I would say, two things really help give us confidence over the next few years. If you look back at our history, we normally have about $50 million of inflation. We haven't had $50 million inflation, it feels like for a decade. It's only been three to four years, but it feels like so long. $290 million of inflation in 2021, $250 million in 2022. We're calling $125 million in 2023. That is not normal, right? We're going to return to the days of normalized inflation. And meanwhile, our productivity program is alive and well, even stronger than it's ever been. So as that -- you saw in the bridge, I think that was closer to 100 plus basis points. We target closer to 2% on productivity. So if that equation normalizes, I think that's a great way we're going to have gross margin expansion. And then number two, as our businesses like THERABREATH and like HERO continue to grow and expand globally, that's going to be a great tailwind too. Yes. Just some math. I think the -- our gross margin just a few years back, pre-COVID, 45%. It's 41.9% in 2022 recalling 100, 120 basis points improvement. So pick the midpoint, so you go 41.9%, 43% in 2023. And then I used to dish it over to Rick Spann for a minute. By the way, Matt Duffy is here today. He's one of the on people that drives are good to great program, and we target 2% of sales for cost savings annual. It's $100 million. That's a big number. It's a huge effort to make that happen, but that's what it works referring to week we're able to sustain that going forward. And any kind of help from commodities and input costs, we'll be able to return to expand gross margin in the future. But Rick, anything to add about the target-rich environment. You've all seen Top Gun. Sure. Four years ago, we made a conscious effort to increase our focus on our -- good to -- great program, our productivity program. We brought Matt Duffy on who's in the room, as Matt said, to lead the program. And it was a push in the beginning. We couldn't get a lot of traction in the company. It's now part of our culture. We have marketing leaders asking us what else we can do to drive cost savings. We have the R&D community focusing on it. We've created a value engineering team whose sole focus is to break down our products and figure out more effective ways to go to market with those products from a cost standpoint. So it really is part of the culture now it's driving much bigger savings than it was four years ago. Yes. As far as call-outs, I neglected to point out that our entire M&A department is actually here on the stage. So if you want to talk to him after Class, please do. All right. Any other questions, no, I guess that concludes it today. I was so happy we were able to do this in person this year and look forward to seeing everybody next year. Thank you.
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EarningCall_801
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Good morning, my name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Wabash Fourth Quarter 2022 Earnings call. [Operator Instructions] Thank you. Good morning, everyone. Thanks for joining us on the call. With me today are Brent Yeagy, President and Chief Executive Officer; and Mike Pettit, Chief Financial Officer. Couple of items before we get started. First, please note that this call is being recorded, I'd also like to point out that our earnings release, the slide presentation supplementing today's call and any non-GAAP reconciliations are all available at ir.onewabash.com. Please refer to Slide 2 in our earnings deck for the company's Safe Harbor disclosure addressing forward-looking statements. Because we're wrapping up a record quarter on top of a record year, while starting another calendar year with very bright prospects, it feels like an ideal time to review our strategic choices and recall how we've arrived at this juncture where our company is performing very well in the midst of soft freight market conditions. Rewinding the last several years, we've added critical new legs to the stool that have enabled Wabash to grow in capability and performance. The addition of truck bodies to the Wabash portfolio has positioned the company to serve customers across product classes and also, maybe more importantly, broadened our perspective and allowed our team to get closer to trends and transportation, logistics and distribution like the disruption to logistics models caused by e-commerce and home delivery, rapid growth in cold chain or trends in power only brokerage. I am delighted that those who were part of that decisions still surround and support me in my current role as CEO. Our organizational journey has taken us from a siloed product-centric approach to a customer-centric model that prioritizes ease of doing business across our suite of products and services. This model has brought us closer to our customers, evidenced by the commercial progress we've made over the last 18 months. The deployment of the Wabash Management System philosophy has given us the process driven and problem solving culture that was required to meet the challenges of a dynamic environment we find ourselves in today. One of the key process improvements derived from the use of our management system tools has been our long-term agreement construct, a new vision of supply chain engagement and the rapid deployment of recurrent revenue generating initiatives. The modification of our pricing construct to a pass-through model allows us to better serve our customers with transparent pricing. Our improved pricing construct also forms the groundwork for our longer-term agreements which would have been unworkable under a fixed price construct. These longer-term agreements prioritize capacity for our customers to be able to forward conviction around their equipment needs to engage in collaborative multiyear demand planning. Beyond removing these strategic customers from the annual game of musical chairs for some customers are inevitably left without a seat at the table, these strategic relationships will be additive as we collaborate on product development and R&D efforts to jointly address unmet equipment needs. We are very pleased to have an innovative organization like JB Hunt as our inaugural partner. As we demonstrate the visionary leadership required to structurally improve relationships with major customers, we have successfully attracted the attention of key industry suppliers. As our 10-year supply agreements with both Hydro and Ryerson show, suppliers recognize the moves Wabash is making and are aligning with us to combine our respective strengths in order to support our customers. As our organization continues to leverage its - more streamlined collaborative structure to create value for customers, shareholders and our communities, a major strategic focus is our parts and service initiative. Quickly spinning up Wabash Parts, our parts distribution joint venture to developing innovative new offerings like trailers as a service for the power only brokerage space, we're excited for the potential to grow this more recurring revenue business that will act as a synergistic support mechanism for our transportation equipment. Our Board of Directors has been incredibly supportive of the organization evolution and the Board has continued to keep pace with us by adding new directors with capabilities that will further support Wabash in strategic direction. After the September edition of Trent Broberg, CEO of Acertus, an automotive logistics-as-a-service platform, our Board welcome Sudhanshu Priyadarshi as our newest Director. Mr. Priyadarshi is a global finance and operations leader with extensive experience in the tech, logistics, e-commerce, retail, consumer packaged goods and pharmaceutical industries in the U.S., Asia and Australia. He currently serves as Chief Financial Officer for Keurig Dr Pepper and previously served in roles at Vista Outdoor, Flexport, Walmart, Cipla and PepsiCo. We're excited to continue driving our strategy forward with the support and contributions of all of our Board of Directors. Moving onto our fourth quarter financial performance, our team delivered record EPS of $0.84, which exceeded our expectations for the quarter. Between the increased volumes and improved pricing, revenue increased 37% from the same quarter last year to an all-time record of $657 million. Profitability also continued to sequentially strengthen as we achieved 14.4% gross margin and 8.8% operating margin. I like to call out that our operating margins expanded by 680 basis points relative to the same quarter last year. For 2022 as a whole, I believe we've demonstrated improvement across any indicator of financial performance you can look at. We're very encouraged as our strategic choices shine through to enhance financial performance capped by record revenue of $2.5 billion and record EPS of $2.25. Moving onto market conditions and our backlog. We are mindful of freight rates that have been indicative of the ongoing correction in freight markets. For numerous reasons, we have not seen this reduction in rates impact underlying trailer demand. Between cyclical and structural influences, we agree with third-party forecasters that equipment demand is likely to remain strong. With under buys in prior years and supply chain remaining as a constraint into 2023, implied demand for this year is still very likely to outstrip supply just on those specific factors alone. Adding structural influences like the demand from formation of trailer pools to support drop and hook activity or power only brokerage, and we believe substantial scarcity remains in the marketplace, that's before we consider what would be another significant tailwind for trailers coming from the ramp of autonomous as that technology continues to advance. Turning to our backlog, total bookings ended the fourth quarter at approximately $3.4 billion, up sequentially by approximately $1.1 billion from the end of Q3 despite an outflow of record revenue. This implies net order inflow of $1.7 billion during Q4. And for full transparency although not announced until January, our long-term agreement with JB Hunt and a to be announced additional agreement are reflected in this backlog figure. Given the addition of multiyear orders, we are adding disclosure on the portion of our backlog we expect to ship within the next 12 months. Ending Q4, that subset of our backlog was $2.8 billion which implies somewhere in the range of $600 million worth of orders that reside beyond 2023. Given the excellent visibility provided by our backlog, we are initiating our 2023 financial outlook with a revenue range of $2.8 billion to $3 billion and an EPS range of $2.70 for $3. I'd like to reiterate that we are looking at 2023 as a year where we can achieve significant revenue, operating income and EPS generation even if the supply chain shows no improvement. As our backlog indicates, we do have the upside to our outlook if supply chain conditions improve. I'd like to conclude my comments by reiterating my excitement for the pace of strategic progress that we've been able to achieve. This is a testament to abate and level of engagement of our Wabash team who has trusted in our organizational and strategic moves and is executing incredibly well on our day-to-day business while driving structural improvements in the fundamentals of the business. With a record backlog and evidence throughout 2022 of great execution on margins, we are positioned to set a new bar for the financial performance during 2023. Starting off with a review of our fourth quarter financial results. On a consolidated basis, fourth quarter revenue was $657 million with new trailer and truck body shipments of 13,310 and 3,250, respectively. As Brent mentioned, this was yet another quarter of record revenue generation for the company. Gross margin was 14.4% of sales during the quarter while operating margin came in at 8.8%. This represents year-over-year improvement of 550 and 680 basis points, respectively. We feel that our margin structure really hit its stride during the second half of 2022 as supply chain surprises reduced and cost inherently ramping facilities stabilized. Operating EBITDA for the fourth quarter was $69.8 million or 10.6% of sales, which is a 580 basis point improvement versus the fourth quarter of the prior year. Finally for the quarter, net income was $41.5 million or $0.84 per diluted share. From a segment perspective, Transportation Solutions generated revenue of $611 million and operating income of $57 million or 11% of sales. Parts & Services generated revenue of $49.6 million and operating income of $7.9 million or 15.9% of sales. I'd like to call out the growth in our Parts & Services segment was about 20% year-over-year when adjusting for revenue from a business that was divested in mid-2021. Year-to-date, operating cash flow was $124 million, a strong net income was supplemented by more efficient inventory in the fourth quarter as we are able to lead our inventory levels as the supply chain continues to strengthen. Moving to capital expenditure, the timing on some payments from our dry van expansion disbursed from 2022 to 2023 and that CapEx underspend relative to our expectations for 2022 will be reflected in our 2023 CapEx spending. As I've mentioned, relative to our meaningful cash flow generation in 2020 followed by a significant ramp in working capital during 2021, I think it's important to take a longer-term view on what continues to be strong free cash flow generation through the cycle. That said, I believe that the measure of a healthy company is not simply maximizing annual free cash flow but purposely investing in the business when presented with the opportunity to generate significant returns that are in the best interest of long-term build. Wabash is also committed to delivering ROIC over the cycle that both significantly exceed our cost of capital but also exceeds our historical performance. We are now in a period where accretive organic investment opportunities exist, and as a result, we would expect to see CapEx as a percent of revenue in the range of 3% to 4% of revenue over the next couple of years. With regard to our balance sheet, our liquidity which comprises both cash and available borrowings was $401 million as of the end of the quarter. Turning to capital allocation. During the fourth quarter, we invested $50 million in capital projects, utilized $10 million to repurchase shares and paid our quarterly dividend of $4 million. For the year, we invested $57 million in CapEx, $31 million for share repurchases at an average price of $17.55 a share and returned $60 million to shareholders via our dividend. As stated earlier, our capital allocation focus continues to prioritize organic growth via capital spending, while also maintaining our dividend and opportunities for share repurchases alongside of M&A. Moving onto our financial guidance for 2023, we expect revenue of $2.8 billion to $3 billion with a midpoint of $2.9 billion. This outlook is supported by our significant backlog fill while remaining reasonable in our expectations for the production activity ongoing supply chain constraints will allow. We are on track in Q1 to complete equipment installation and begin system sale of dry van capacity addition. Like all significant capacity additions, this will come with a volume ramp that will see lower production rates in the first half of the year and then greater volume later in 2023 as we become more efficient and our expanded production benefits from the support of our recently announced supply agreements with Ryerson and also Hydro. From an operating income perspective, we expect to generate $218 million at the midpoint or 7.5%. This resulted in an EPS outlook of $2.70 to $3 per share with a midpoint of $2.85 per share. I like to reiterate that our guidance continues to assume that supply chain constraints continue to persist. As Brent mentioned, we believe our backlog enforce that there is clear upside opportunity to our 2023 financial outlook, should supply chain and conditions improve. We also look forward to another year of strong growth within our Parts & Services segment which generated accretive operating margins. We expect capital spending to be between $90 million and $100 million in 2023 as a result of planned expenditures from our dry van expansion, EcoNex capacity expansion as well as the previously mentioned dry van expansion payments that pushed from Q4 to Q1. We also expect to invest in CapEx that will be immediately revenue generating through our trailers service program. Our evaluation of the best way to finance the expansion of trailers as a service is ongoing and not included in our traditional CapEx guide, but we expect to take small bites at using our balance sheet in the short-term. With less than $10 million earmarked for the first half of 2023, we will continue to call this out separately for transparency. I would like to remind everyone that it is typical for Q1 to be our lowest quarter in terms of revenue and EPS generation. In 2023, this seasonality will be compounded by the cost to ramp our new dry van capacity. Our expectation is for the first quarter revenue to come in between $600 million and $640 million and for EPS to be between $0.40 and $0.50 per share. I like to sincerely thank our Wabash team for their remarkable efforts in generating record revenue and EPS in 2022. This year was a major pivot point as we accomplished our 2022 financial goals laid out at our 2019 Investor Day, and we also took a meaningful step achieving our 2025 target of $3 billion in revenue, 11% EBITDA margins and $3.50 a share of EPS. We're excited to take another significant step for those financial targets in 2023. More importantly, the Wabash team took a giant leap in our cultural transformation that will enable us to move even faster in 2023 and beyond. We entered 2023 as a transformed and rebranded company, representing the first to final mile portfolio that is unmatched in our industry and powered by a team that is inspired and driven by our purpose to change how the world reaches you. So Brent, maybe to start with the comment you made about the long-term agreements. Obviously, you've announced the agreement with JB Hunt, it sounds like there was another one that was reflected in the backlog and we might hear more about that customer at some point. But if you were to look at those two agreements collectively, is there a way to help us think about how much of a contribution that had to the backlog this quarter and maybe you could talk about additional momentum with some of the LTAs beyond these first two? Yes, thanks Justin. When we think about long-term agreements, we're looking in general in 2023 and somewhat growing in 2024 and have that be about 20% of our overall backlog. And with the capacity gains, and if you go through the full vision, possibly being as far as 30% of our backlog in 2024 that gives you a ballpark of what we're shooting for, and that still gives us enough room within our supply plan to meet other customers' requirements. In terms of thinking about it in our Q4 reported backlog, I would just frame it as a substantial add and is generally reflective of what you see in the '04 backlog and you can extrapolate that into '03. Okay, that's helpful. And to get to that 20% of the backlog, are these first two LTAs getting close to that or do you need additional LTAs in order to do that. I guess going back to the comment on additional momentum with other customers on this front? I'd love to get more color. We'd love to pick up and have an ongoing conversations at least two more that we would like to be coming to conclusion with in the first half of 2023. And then we're also looking at what we can do to expand the concept of long-term demand fulfillment to our dealer body especially around those dealers and their customers that are well positioned to take advantage of the market going forward. Very helpful. And maybe I'll shift my next one for Mike, when I look at the revenue guidance at the midpoint, it's up about $300 million relative to last year, any additional color you can give us on the key components of that growth and maybe what you're expecting for revenue growth for trailers versus truck bodies versus parts and service? Yes. So I would say, first and foremost, it's across the board. We're seeing growth in the traditional dry van business that I talked about. In some part from some of our long-term agreements, but we're also seeing growth in some of our less talked about value streams like tank trailers, we believe 2023 can be the best year in tank trailer history for Wabash, which is an important point, we're going to see significant growth in our truck body business on the revenue side in 2023 as well. And we would expect parts and services to grow in generally the same magnitude of what we saw from '21 to '22 which was 20% as I mentioned in my remarks, we'll see similar growth in '22 and '23, so it really is across the board and we're really excited about all the value streams that are growing, but we're going to see it in parts and services and we are extra excited about. We do believe that revenue provides a more recurring, repeatable profile and it is very synergistic to what we do on the Transportation Solutions front. I just want to reiterate that our management system is based on the fact that all of the existing value streams have to provide continued improvement, top line and margin growth as we go forward. We've done the pruning of the portfolio to-date to get us to where we have extreme focus. Results show that, and there is no area that we have more focus than parts and service right now. So that all aligns with what Mike said, but it is a very purposeful construct in the way we do business here now. Got it. And I guess the last one for me, there are clearly secular demand drivers that are driving strength in your business and backlog right now. I'm just curious if that's resulting in any change in the competitive landscape, are you hearing anything about competitors adding capacity, new entrants, et cetera or would you say that competitive landscape is essentially unchanged at this point? I'd say, based on what we see, we see it as unchanged, the same barriers existed six, nine, 12 months ago, it's still access to labor and a supply chain that is able to support overall capacity gains. Remember that the capacity that we're adding specifically on dry vans and, I don't know, tank operation, we are redeploying existing labor for the most part or in case of Mexico in a place where labor is available. And speaking to the two 10-year agreements plus others that we are - that are little bit more traditionally but yet still profound, our supply base is responding to our call for added capacity that we're really the only ones positioned to do this at scale right now. Yes, hi. Good morning and thanks for taking my question. I'll start off with a question on the truck body business. They were down quarter-over-quarter in the number of units shipped, but we keep hearing that chassis supply from the OEM's got a bit better during the last two weeks of December. So I was wondering if you could comment on how supply looks to start the year here at Wabash, and would you expect to see some good growth in the number of truck body that you get out the door to customers in the first half of 2023? Yes. Thanks, great question. We alluded to it on our last call when we talked about what did the supply of chassis look like and it's early signs of chassis flow improving. And that was, yes, they are improving but the actual flow in terms right chassis right time wasn't substantially improving. So what we saw across that truck body industry was chassis flowing in and sitting on a lot and unable to match the entire supply chain to get finished product flow. So what that means is less chassis on the yard for our customers and not a great ability to get those to flow through the business in terms of shipments. What we have seen through the fourth quarter as we come into the first quarter as we're starting to get back on track and we're seeing the actual improvement in the sequencing and the on-time delivery, where the right chassis are beginning to show up and that's why we're confident that we should see the targeted truck body growth that we expect in 2023. That's great Brent. And then moving onto Parts & Service, I really liked how Parts & Service, the mix helped you in the fourth quarter here, you've got - so it sounds like you've got some pretty good expansion plans for 2023 as well. So can you maybe comment on whether margins could expand in churn in that segment, if you see that's good constant growth there in the coming year? What we're really trying to target here Mike is profitable growth and get some scale. So we're not really guiding to improving margins, we think we can maintain those margins and add to the top line as you scale the business. We've got some specific initiatives, we're really excited to be able to scale that business and maintain and we grew margins in '22, but we think we can maintain that profile in '23 and then add significant revenue on top. We'll give some more guidance as we get through the year but that's really the mission for 2023, which will improve the overall corporation's margins because as you mentioned the Parts & Services margin is significantly higher at the base than the Transportation Solutions is. Great. If I could just maybe my last question zoom out a bit on your answer there, Mike. About your 2025 targets, you've talked about getting to $3.50 and getting $3 billion of top line, you actually hit that in 2023 a couple of years early, the margins obviously might not be there yet. Could you maybe outline for us a couple other moving parts that might get you either to a margin that works for the $3.50 EPS in 2025 or do you think maybe given what you know today and how things are playing out in some of your key initiatives whether there could be upside to a $3 billion top line number at that point? Yes, so as we outlined at the Investor Day when we launched those targets in May of 2022, we said several of the drivers would be front-loaded in the three-year plan and one would be our expansion of our dry van capacity which will be a driver of revenue. So, first and foremost, what could have us hit that number quicker would be the supply chain allowing us to ramp our overall facility so rather than a little bit quicker. We're not expecting that to happen in 2023 but certainly it could lead to us achieving those targets maybe before 2025. But as of right now, we're focused on the guide that we've given and also scaling the Parts & Services, as I mentioned, at a consistent margin profile which we believe we can maintain the growth to get to $300 million that we guided to back in May of 2022 in that 2025 time period. So had to summarize, what I think could happen, if we were to get to $3 billion quicker than the planned period, it would be our ability to get the supply for dry van components and get more volume out the door and that maybe could come quicker than 2025, but I don't foresee that right now happen in 2023. Yes, one thing I would add to that is when Mike talked about your earlier first question about getting the initial scale on the parts business, and really what that is, is the scale is part and parcel with adding additional capability inside our four walls in 2023. As we execute on both ends of that, I think that is one of the areas that we'll be able to, as Mike said, throughout 2023 give additional feedback on how that really propels us into 2024, that would be another opportunity for us to pull those targets forward, but it all comes down to growing that capability was why we're so focused on it. At this point, do you feel like the reefer capacity coming online in Minnesota in '24 and '25 would also be a positive driver towards your margin goals and your own goal? I would count it as narrow as in Minnesota. But I would say, overall, the opportunity for us to grow top line relative to taking advantage of what's going on in cold chain is absolutely another way, that is absolutely a '24-'25 more targeted timeframe for us to get that scale, but it is something that could be very positive. At a minimum is core part hitting '25 targets has the potential to pull that forward. Yes, I would say, I like to add to that, of our three key strategic initiatives, that's one that's going to be more back-end loaded in the planned period. So we will see some of that more in the '24-'25 time period, where you can see some of the real nice growth in the logistics disruption through dry vans and Parts & Services in that earlier periods of the plan. Thank you very much. First of all, congratulations, it's been a long time in coming and it's nice when everything you've been investing for starts to come together. So that's fantastic. Just a couple follow-up questions, in terms of getting to the $2.8 billion to $3 billion revenue number, I'm tinkering with the model here, but basically there is a $300 million increase in the revenue guidance at the midpoint. And if I assume we ramp slowly on the new trailer capacity and I assume ASP's up slightly, I get about halfway there, maybe a little two-thirds of the way there. So is the jump in outlook based on the idea that we could be producing close to 60,000 units for the year or is the jump outlook that our ASP continues to move even higher than expected because of the nature of these long-term contracts and the pricing that's in the backlog, I'm just trying to get to that $2.8 billion to $3 billion? I believe maybe a piece that you could be missing in there as I mentioned earlier, we do have some nice growth coming through our tank trailer business which probably wasn't called out in your model. And also we expect a significant increase in truck bodies as well, which would drive some of that growth. I wouldn't expect significant ASP growth year-over-year, as we've mentioned, we feel pretty good that we've got the price cost aligned with some of the inflation that we saw. So while we'll always look at opportunities that wouldn't be a huge driver, you maybe get second half revenue coming out of our dry van capacity expansion plus some tailwinds from truck bodies and trailers in Parts & Services. Okay. So your point is ASP could be up but that could be a mix issue based on just more tank trailers? All right. Well, as we choogle on through '23 and we head into '24 and you ramp up the new dry van capacity, what are your thoughts about the production capacity that you have. I know - and then secondly, we saw 52,000 units I think this year, you're bringing in 10,000 units of new capacity, obviously we won't use all that. But where do you think we can go in '23 and '24 on a unit capacity basis and can you hire enough of the right kinds of employees to get you there or is that going to be a bit of a governor on that growth? Yes, great question. When we talked to baseline number of adding approximately 10,000 units with the surge initiative, which is the conversion of South plant into which was primarily a refrigerated plant now producing dry vans, you take that, but then on top of the 52, and then we have additional productivity gains and very simple and straightforward capacity gains on the rest of our dry van manufacturing here in Lafayette. So, I think it's a mix as a factor easily 60 to 65 based on that and then you have the ability of pushing a little bit higher with the productivity gains we can get with existing operations. Based on that, labor would not be a significant barrier for us to be able to produce, we'll just call it, slightly above 65,000 units. Jeff, just to dial it in a little bit closer for 2023, like you mentioned, we'll probably ramp up to full line rate throughout the year. So for all of 2023 figuring that we're a little - running a little slower in the first half, a little faster in the second half, we're looking at about 7,500 units out of that facility this year and then like Brent said, longer term that goes to 10,000. Okay that helps with my math there. That's fantastic. Well, I got to tell you this is awesome to see. I wish I had a buy rating on the stock. I don't but this is fantastic to see everything you've worked so hard for coming around your way. So congratulations. I just wanted to quickly follow-up on the CapEx of, call it, close to $100 million. I'm just curious if you're able to provide some context to maybe dissect that between, say, the dry van capacity spillover, maybe EcoNex, maintenance CapEx and then some other growth projects you have in there? Yes, the three main drivers by far are the capacity addition that's going to be somewhere in the 40% to 50% of that number, that - as I mentioned there's some flow through from '22, we've got EcoNex would be the next biggest driver of our Little Falls plant expansion. And the next one would be some significant growth in our Parts & Services initiatives and with some technology spend in there that will help us ramp in '22, really that - those benefits will be in '24 and beyond. And then there's always that $25 million-ish of cost of doing business to maintain 14 manufacturing facilities, but those are the big drivers of the growth initiatives within CapEx. Got it. And then just on the parts and services. I appreciate the bridge on the strong year-over-year EPS contribution coming out of that, and I'm just wondering is there much baked in from trailer as a service at this point or should we think about that as being more of a longer-term story? Yes, I'd view that more as a longer-term story Felix, it's interesting because we view trailers as a services because it does a product offering within our Parts & Services and what we're trying to - how we're trying to develop our ability to maintain trailers in the field. And as I mentioned, a synergistic way that helps support our dealer network and our customers. But the actual big trailers as service growth you're going to see will probably be in '24 and beyond. We will talk about more in upcoming calls. I did mentioned, we do - we'll do a few million this year first half of the year in the trailers, we say this from a leasing perspective as we then come on the balance sheet, but the big driver from a revenue and EPS generation will be 2024 and beyond. Got it, okay. And then I don't know if this is maybe best for Brent, but I'm just curious if you can help us understand the, call it, direct versus dealer channel mix in the trailer business today and where you think that might go long-term just post the capacity expansion. I'm just trying to understand that all these changes from a multiyear agreement perspective might change the mix over time? Yes. So today within Wabash in respect, specifically talking dry van now, it is approximately a 50-50 split between direct and indirect. And that number or that set of numbers is a direct result of purposely increasing the indirect channel or dealers from roughly about 30% to 50% of our dry van allocation. And if you think about what we want to see, let's say, about 20% long-term agreements in the direct side and I'd love to see closer to 10% of that allocation or that capacity on the indirect side and that'd be a nice mix for us that we think would fit a real nice subgroup of customers that have a long-term vision, and we're going to be able to play this market really well. Okay, got it. And then just my last one, these long-term agreements, are they mostly with existing customers today. What I'm really trying to understand is to what degree, call it, the rise of power only brokers out there and just to build out of trailer pools, does that open up, just completely incrementally new customers to you, and would those type of customers be interest in long-term agreements. I'm just trying to think through mix implications long-term Brent? Yes. So today when we think about long-term agreements, they are primarily predisposed to those customers that had a more traditional first to final mile view, they buy across our portfolio and they are well positioned from a leadership and a business model standpoint to outgrow the overall industry based on the structural changes we have going on. That's how we look at it today. And when we think about trailers as a service, digital brokerage and power only, you are absolutely right that as a new subset of customers that will grow in scale that we're purposely cultivating today that we think become much more material '24 and beyond. And as a core part of our commercial constructs today, the way we're not going to be allocating capacity in the future and the systems that we're bringing to bear and capabilities of the organization.
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Hello, and welcome to WWEâs Fourth Quarter and Full Year 2022 Conference Call. All lines are on mute and after the prepared remarks there will be a question-and-answer session. [Operator Instructions] Thank you, and good afternoon, everyone. Welcome to WWEâs fourth quarter and full year 2022 earnings conference call. Joining us on todayâs call are Nick Khan, the WWEâs Chief Executive Officer; Paul Levesque, our Chief Content Officer; and Frank Riddick, our President and Chief Financial Officer. Following their prepared remarks, weâll open the call for questions. We issued our earnings release about an hour ago and have posted the release and other supporting materials to our website. Todayâs discussion will include forward-looking statements. These statements reflect our current views are based on various assumptions and are therefore subject to risks and uncertainties. Please refer to our SEC filings for a discussion of the risks and uncertainties, actual results may differ materially, and undue reliance should not be placed on these statements. Additionally, we will be discussing certain non-GAAP financial measures on todayâs call. Reconciliations of non-GAAP to GAAP information are provided in our earnings release and other supporting materials. Lastly, todayâs conference call is being recorded, and the replay will be available on our website. Thank you, Seth. Good afternoon, everyone, and thank you all for joining us. To start, 2022 was another record-setting year at WWE. In 2021, WWE surpassed $1 billion in revenue for the first time in company history. In 2022, we grew that number to $1.3 billion, up 18% from the prior year. We also generated record profitability with adjusted OIBDA of $385 million, over delivering on our initial projections. And weâre seeing our product reach more people on more screens, both domestically and internationally. We believe we are well positioned as we go forward. I, along with Paul and Frank, will touch on financial and operational highlights from the year and past quarter in more detail. Before we do that, I do want to take a moment to address a few other topics. As all of you know, there have been a few changes in WWEâs management structure during the past year. Vince McMahon, our Founder and long-time CEO, stepped away from the business for a period of time, but recently returned as Executive Chairman. Vince is driving our strategic alternatives process. WWE has engaged The Raine Group as its financial adviser with an end goal of maximizing value for our shareholders. Allow me to start with a brief update on this process, which is underway, but still in the early stages. As we have said before, there is more interest than ever in owning content and intellectual property. So with the expiration of our domestic media rights in 2024 and the upcoming negotiations for those rights, we have a unique opportunity to explore a wide range of value-maximizing alternatives, both with parties that recognize the value of content and IP like ours and with parties that value owning the content they host on their own platforms. Though still early in the strategic alternatives review, we intend to consider a broad range of options via thorough process. There can be no assurance that the review being undertaken will result in any transaction, and we do not intend to make future announcements regarding the review until such a time that is appropriate. One additional note on management, Stephanie McMahon, who has been both a great business partner and friend, stepped away last month. Stephanie has had a measurable impact on our company. We thank her for returning when she did and for her continued support of WWE and our fans. Iâm honored and privileged by the opportunity to sit in the seat that Iâm sitting in, working alongside our Chief Content Officer, Paul Levesque; and President and CFO, Frank Riddick, Our team has engineered record performance over the past year, and weâre confident we will execute on the companyâs key initiatives in the year ahead. Turning to the past quarter and fiscal 2022. It was another record revenue year marked by our first full year of touring for live events since the pandemic. We saw global gate revenues of $110 million on 231 events. This broke our record for the highest average revenue per event. Additionally, WWE set in-market gate records for Raw and Smackdown events in more than 20 cities, and we continue that run of success as we head into 2023. Last weekâs Royal Rumble set a new record in terms of paid tickets and gross revenue for the event bringing in a gate of over $7.7 million at the Alamodome in San Antonio. This surpassed our previous Royal Rumble gate record by almost $2 million. In early January, we announced that we broke our companyâs all-time gate record for any WrestleMania with this coming Aprilâs 2-night WrestleMania 39 at SoFi Stadium in Los Angeles. And thatâs before the announcement of a single match. We fully expect Aprilâs WrestleMania to be sold out across both nights and further drive what are already new gate revenue records for our company. Along with increased live event demand, we are seeing similar growth in TV viewership. The 2022, 2023 season of SmackDown on Fox is off to a strong start, averaging 2.3 million viewers, up 6% from a year ago. Raw is up 2% to 1.6 million average viewers. This comes as all of TV is down 18%. Our final SmackDown of 2022 produced an audience of 2.6 million, the highest in 24 months. As for Raw, its 30th anniversary show less than two weeks ago to our biggest ratings in nearly three years. SmackDown from this past Friday had an audience of 2.5 million. Paul will speak about this strong performance shortly. Additionally, watch times for Raw and SmackDown were at all-time highs in the fourth quarter. Raw and SmackDown are both seeing record average viewer engagement. One other specific ratings data point that we want to highlight. Raw is seeing big gains in young viewers. Raw is up 17% in the 18th of 34 demo year-over-year. This is as TV viewing for 18 to 34 is down 28% across all of television. What youâre seeing with Raw is one of the strongest growth stories in all of television for the young demo. Ratings growth increased watch time, drawing younger audiences. These numbers underscore how WWE is bucking the trends of national and traditional viewership. In streaming, our partnership with Peacock continues to yield viewership increases to all of our premium live events. Last weekâs Royal Rumble saw a 52% viewership increase over 2022, making this Royal Rumble both the highest grossing and most viewed Royal Rumble in company history. In Q4, during football season, all three of our premium live events saw double-digit increases. The following are year-over-year comparisons, 2022 Extreme Rules viewership was up 36%. 2022 Crown Jewel viewership was up 70%. 2022 Survivor Series viewership was up 46%. And when looking at aggregate premium live event viewership for 2022 versus 2021, it was up 43%. Two years into our partnership with Peacock, we could not be more pleased. Our premium live events are driving subs, keeping users coming back to the service month after month and serving as tentpole events. Internationally, our product also continues to perform and register viewership increases. When measuring premium live events on international viewership, weâre up 17% year-over-year. One of the standout premium live events from 2022 was Clash at the Castle in Cardiff, Wales this past September. The event set records for viewership, ticket sales and merchandise sales for WWE International event. It was WWEâs first major stadium show in the UK in 30 years and was the highest grossing UK event in company history. Notably, 75% of those who attended the event traveled from outside of Wales, creating maximum economic impact for Wales. Every hotel room in and around Cardiff was sold out. More than $12 million was spent in bars and restaurants alone. The success of the Cardiff event and the money it generated for the community has already led to positive conversations with potential host markets that see the economic and marketing value WWE can deliver. Following this success, were headed back to the UK this July 4 weekend for Money In The Bank at the O2 arena on Saturday, July 1, our first premium live event in London in over two decades. The Cardiff and London events dovetail with our upcoming rights renewal in the UK for Raw and SmackDown. Please also keep in mind that WWE Network remains a stand-alone agnostic service in the UK. Our success in the region puts us in a strong position as we begin those conversations. Staying with international, later this month, we hit the Montreal for Elimination Chamber, our first premium live event in Montreal in 14 years. We are already tracking towards more than 12,000 people in attendance, which will make it another sold-out event. These international events drive increased kit sales and build enthusiasm for our product in the market and further demonstrate that WWE is truly a global brand. For both the upcoming Montreal and London shows, we are offering premium experience packages through on location. This is the first time weâve offered premium experiences for international shows since partnering with Endeavor and On Location a year ago. We are seeing big sales in this category and expect to make On Location packages available at most international premium live events moving forward. State side, we continue to offer On Location packages at our premium live events and are seeing real growth there as well. In our Consumer Products business, the partnerships weâve struck over the past few years continue to deliver, and our localized merchandise approach once again yielded year-over-year growth. Extreme Rules in October of 2022, generated the most in-venue merchandise revenue in the eventâs history, resulting in a 62% increase over Extreme Rules 2021, which held the previous record. Survivor Series in November of 2022 also generated the most in-venue merchandise revenue in that eventâs history with a 73% increase over Survivor Series 2021, which held the previous record. Last weekâs Royal Rumble also generated the most in-venue merchandise revenue in the eventâs history with a 135% increase over Royal Rumble 2021 resulting in the highest domestic in-venue merchandise sales ever for a WWE event outside of the WrestleManias. We are also seeing growth for WWEShop.com since partnering with Fanatics last July. For the November and December holiday season, sales were up almost 25% year-over-year and our trading card business also continues to deliver healthy results. Our partner [indiscernible] executed seven product drops throughout the year, leading to record annual revenue for WWEâs trading card business. One area I also wanted to hit on as we head into the New Year is the sponsorship category, driving growth in this segment is key, and we expect to see increases for this fiscal year. Under new leadership in sales and sponsorship, weâve taken a different sales approach that focuses on expanding our core partnerships with a heightened focus on categories with strong consumer overlap. This new strategy is already yielding results. For 2023, average client spend is already up 98% from the same time last year. The team is finding new ways to organically integrate brands into our product. At Royal Rumble last week, we partnered with Pepsi to stage our first ever Mountain Dew Pitch Black Match and for the first time, our countdown clock was branded by Applebeeâs. These reached seven-figure deals, which helped us nearly triple our sales from last yearâs Royal Rumble. Look for more of these custom integrations in 2023, along with continued sales growth compared to the prior year. Before I turn the call over to Paul, I want to reiterate how pleased we are with the performance of the business and the performance of our amazing colleagues. Weâre off to a strong start in 2023, and we expect to deliver another year of record revenue and adjusted OIBDA. Thank you, Nick. As Nick hit on, weâre seeing record numbers for our shows, and that is a result of an amazing talent roster and a creative writing team that is as prolific as any in the world. Strong content is the bedrock of this company and drives our business. Weâre coming off a record Royal Rumble that featured the young up-and-coming powerhouse via Ripple, who won the Womenâs Royal Rumble, also featured the return of one of the most popular and entertaining figures in sports media Pat McAfee, fresh off reinvigorating college game day. We saw the hindering return of social media phenom turn WWE Superstar, Logan Paul, and of course, the return of the American Nightmare Cody Rhodes, who went on to win the Menâs Royal Rumble match and earn himself a championship match at WrestleMania. The event also featured our first-ever sponsored match highlighting Mountain Dewâs Pitch Black and concluded with an incredible WWE Championship match between Kevin Owens and Roman Reigns, where Superstar, Sami Zayn severed his ties with the blood line which ESPN said âwas one of the most dramatic moments weâve ever witnessed in the history of sports entertainmentâ. It was a historic night that set us up for a number of compelling storylines as we kick off the road to WrestleMania. Leading into the Royal Rumble was our Raw 30th anniversary show on USA that captured more than 2.3 million viewers and won the demo across all of television, including broadcast shows for the night. By way of comparison, the only other content on cable that traditionally beats out broadcast in the demo in the NFL games, and thatâs it. The night showcases the breadth of our talent roster, featuring global legends such as Hulk Hogan and Ric Flair, The Undertaker along with our current generation of talents like Roman Reigns and Bianca Belair. As we see record ratings for our flagship shows on linear and with our premium live events on Peacock, WWE continues to build our industry-leading social channels amassing audiences and establishing new revenue streams. In Q4, WWEâs YouTube channel surpassed 92 million subscribers and remains the most subscribed to sports channel on the platform, and we are one of only 10 channels on YouTube to ever surpass the 90 million subscriber mark. Across all social platforms, WWE social also racked up the most video views of any sports league in 2022, surpassing 16 billion views as we finish out the year. Royal Rumble Saturday alone, WWE generated over 200 million video views across all WWE accounts. On TikTok, we have established ourselves as the leading sports league as well. In Q4, we surpassed 20 million followers on our flagship TikTok account, making WWE the first sports league to reach that milestone. The success is leading to new revenue opportunities. We recently closed a content licensing deal that will see WWEâs output on the platform increase as well as lead to the launch of several superstar accounts. Additionally, weâll be launching three international TikTok accounts following the success of our WWE Español handle that is already at 1.8 million followers in its first year. As we continue to prioritize WWEâs global expansion, local language social accounts like these in key territories speak directly to our fans in the region and keep the product in front of them outside the traditional broadcast windows. In November, WWEâs weekly digital showed the bump, surpassed its 200th episode. The showâs quarter was highlighted with a live sponsored show for fans from TD Garden in Boston for Survivor Series. Look for us to launch more digital original programming in 2023 as it has proven to be an effective platform to pilot new shows and test creative, all while creating new programming for our sales team to sell against. Last but not least, in November at our Crown Jewel premium live event, social media star and a member of the WWE talent roster, Logan Paul, leaped from the top rope under Roman Reigns all while recording the move on a cell phone, that clip alone racked up over 40 million views in less than 24 hours across Logan and WWE social platforms, becoming WWEâs most viewed social highlight of 2022. He almost did himself this past Saturday at the Royal Rumble when the clip of he and Ricochet colliding from the top rope, which garnered 26.5 million views across all platforms. Of course, this success on social would not be possible without WWEâs roster of superstars. We continue to invest in a robust recruitment and development system to produce the next generation of talent. The foundation of this strategy is our next-in-line program that launched in December of 2021. As we hit the one-year mark of WWE NIL and with last weekâs announcement of the programâs third class are stable of nearly 50 athletes now represents 13 sports with 40-plus All-American Honors, 12 NCAA championships and an impressive 13.5 million combined followers across all social media platforms. Members of the first class have successfully transitioned a full-time training at the Performance Center with their TV debuts on the horizon soon. Additionally, building blocks designed to attract young talent and solidify relationships with stakeholders across sports have recently been launched. WWE Campus Rush successfully premiered in Q4 with visits to Power Five schools, including Ohio State, Clemson, Ole Missand with our spring schedule set to be revealed in the coming weeks. Initiatives with the industry leader in sports performance training at shows and with the nationâs leading sports-focused prep school IMG Academy will only bolster our domestic talent development efforts. Keep in mind that WWE superstars like Bianca Belair, Roman Reigns, Big E, John Cena and of course, Dwayne "The Rock" Johnson where all major college athletes that transitioned to WWE. We want to make that possible transition as easy as we can for all college athletes. Internationally, weâve unveiled a new annual campaign alongside our Sub-Saharan broadcast partners at MultiChoice and SuperSport. The search for Africaâs next WWE Superstar, the first integration of the continent-wide talent search will culminate with a multi-day tryout in Lagos, Nigeria later this year. The competition to land a WWE contract is a compelling story in and of itself. We will have exciting news to share soon on our plans to bring the stories of our aspiring superstars to our fans. On original programming, production is underway on our new Hulu documentary series featuring superstars, Montez Ford and Bianca Belair. The series will be rolling out on Hulu later this year. Last week also saw the debut of our first WWE Studios, a local language original Contra las cuerdas, I think I said that right. The scripted half-hour comedy about an aspiring young Lucia Dora premiered globally on Netflix with incredible success. In just two days of release, it was the third most in-demand show in Mexico. Thatâs not just on Netflix, but of all new series premiering on any Mexican platform athlete. In addition, it quickly rose to number two on Netflix Top 10 Shows watched in Mexico and has remained on that coveted list ever since itâs premier. Outside of Mexico, the show is in the top 10 in six other countries according to data from parent analytics. Before I conclude, I want to reiterate just how excited I am and how much fun I am having in my role as Chief Content Officer. Now I also want to add that having Vince around has been great. And I will tell you this, it has allowed me â and it will allow me to speak for our entire creative team weâre standing on the shoulders of giants. So having him back and involved, even at just the Board level comes with his incredible insight and he is a tremendous asset to this company. This is the best time of the year. You kick off the road to WrestleMania. Itâs an amazing moment for WWE, and I look forward to continuing to build the business alongside this leadership team for the long-term. Thank you, Paul. Iâm going to review our financial performance for the quarter and the year and then discuss our outlook and key initiatives for 2023. As Nick highlighted, 2022 was a record year for WWE, both in terms of revenue and adjusted OIBDA. Despite all of the external challenges to the economy, WWE has delivered record results in each of the past three years. We think this is a testament to the strength of our IP and brand as well as the stability and attractiveness of our financial model. Our content remains highly engaging and therefore, desirable to third-party programmers interested in attracting and retaining viewers. In 2022, we generated revenue of nearly $1.3 billion and an adjusted OIBDA of $385 million, which was at the very high end of our revised guidance range and exceeded the range we originally provided at the beginning of the year. Revenue grew 18% and adjusted OIBDA grew 19% as compared to the prior year. This performance reflected the return to a full year of ticketed live events and strong results in each of our three reporting segments: media, live events and consumer products. Turning to Slide 3 of our presentation. In the fourth quarter, we generated revenue of $325 million and adjusted OIBDA of $90 million, which was at the high end of our guidance. On Page 4 of our presentation, we detail our business performance in the quarter, which shows revenue, operating income and adjusted OIBDA contribution by segment as compared to the prior year quarter. Looking at our Media segment on Page 5. Adjusted OIBDA increased 3% or 9% revenue growth. Network revenue increased due to the timing of our premium live events which resulted in an additional event in the fourth quarter of 2022 compared to the prior year period. Other revenue included the staging of a large-scale international event in both the current and prior year periods. The increase in other revenue was primarily due to the delivery of third-party original programming to A&E in connection with our ongoing partnership. For content line fees increased due to the contractual escalation of domestic rights fees from the distribution of our flagship shows, Raw and SmackDown. Growth in this line item was partially offset by the timing of the calendar as we aired on less episode of SmackDown in the current year quarter. International core content rights fees increased primarily as a result of the MENA deal that we entered into early in the year. Advertising and sponsorship revenue declined due to continued pressure on third-party digital platforms as well as lower sponsorship deals in the quarter. The growth in revenue was partially offset by higher operating expenses. The increase in expenses was primarily related to an increase in third-party original programming and higher content-related costs. Television production costs for our weekly entering content draw on SmackDown were relatively flat year-over-year on a per episode basis. Now letâs turn to our Live Events business as shown on Page 6 of our presentation. Revenue from our live events was $24 million and adjusted OIBDA was $1 million. During the fourth quarter, we continued to experience strong demand for our live events. We held 61 total events, 54 in North America and seven international events. Average attendance in North America was approximately 5,500, up nicely year-over-year at 6%. Moving to our Consumer Products segment on Page 7. Adjusted OIBDA was $9 million on revenue of $22 million. Results in this segment reflected a number of moving pieces. Licensing revenue declined year-over-year as growth in revenue from collectibles was more than offset by a decrease in video game revenue and the revision to our estimates for certain and licensing agreements with minimum guarantees that we highlighted in the third quarter call. The decrease in video gaming revenue was primarily related to the timing of the release of our franchise game, WWE 2K22. As a reminder, we didnât release version of the game in 2021 and instead moved the release to March of 2022. As a result, and notwithstanding the success of WWE 2K22 for the full year, the booking of the minimum guarantee in Q4 2021 exceeded Q4 2022 video game results. The latest installment of the game, WWE 2K23 is set for release next month, and weâre very excited about the early feedback for this version with initial preorders and social media interaction well above last yearâs launch. E-commerce revenue declined in connection with the transition of our digital platform to Fanatics, which occurred in the third quarter of this year, reflecting the terms of our deal with Fanatics, we record the revenue on a net as opposed to gross basis. Still early days, but we remain quite pleased and excited about the Fanatics relationship and the economics of WWE, which will continue to gain momentum. Along these lines, adjusted OIBDA for our e-commerce business was up year-over-year in the quarter. The new merchandise revenue increased due to an increase in total events and per cap spending, which was up 8% year-over-year. For the full year, CPG revenue is up 33% and adjusted OIBDA is up 59%. Strategic alternatives review process. As announced on January 6, 2023, Vince McMahon, our Executive Chairman and majority shareholder and cooperation with WWEâS management team and Board of Directors announced the intent to undertake a review of strategic alternatives with the goal being to maximize value for all WWE shareholders. In connection with the strategic alternatives review process, the company has retained outside financial, legal and strategic communication advisors to support WWEâs management team and Board. There could be no assurances given the â regarding the outcome or timing of this alternatives review process. We donât intend to make further announcements until such time it is appropriate. As weâve previously disclosed, a special committee consisting of the independent members of the Board of Directors was formed to conduct an investigation into allege misconduct by Mr. McMahon and another executive who is no longer with the company. In November 2022, the company disclosed that the special committee investigation was completed and the special committee was disbanded. Our fourth quarter results include a $2.3 million expense associated with the cost the company has incurred related to the investigation. Going forward, we expect to incur additional costs related to the investigation. As we previously discussed, Mr. McMahon has agreed to pay the reasonable cost of the investigation not covered by insurance. Our results in the quarter also included 7.4 million of expenses reflecting payments that Mr. McMahon has agreed to make related to additional claims that have recently been settled. These payments were or will be paid by Mr. McMahon personally. Now letâs turn to WWEâs capital structure as shown on Slide 8 of the presentation. In 2022, we generated 126 million in free cash flow as compared to 144 million in the prior year period. The decrease was due to higher capital expenditures related to the companyâs new headquarter facility. During the year, we incurred 200 million of capital expenditures, approximately 170 million of which related to our new headquarters. Excluding the new headquarters CapEx, free cash flow would have been 296 million or a conversion rate of 77% of adjusted OIBDA. During the year, we returned 76 million of capital to shareholders including 40 million in share repurchases and 36 million in dividend payments. We did not repurchase any shares in the fourth quarter due to regulatory and legal requirements. To-date, weâve repurchased 5.3 million shares at an average price of $54.09 per share, totaling 289 million and have 211 million available under our $500 million repurchase authorization. Going forward, we do not expect to repurchase shares during dependency of the ongoing review of strategic alternatives. As of December 31, 2022, WWE held approximately 479 million in cash and short-term investments. Debt total 235 million including 214 million associated with the carrying value of our convertible notes. We have no amounts outstanding under our $200 million revolving line of credit. Our current and projected liquidity remains strong and we continue to evaluate our capital structure and financing strategy for opportunities to lower our cost of capital and increase shareholder value. Turning to our outlook for 2023 is shown on Slide 9. Weâre targeting an adjusted OIBDA range of 395 million to 410 million, which would be another all-time record for the company and represents growth of 3% to 7% from 2022âs adjusted OIBDA of 385 million. Weâre targeting record revenue in 2023 and relatively flat operating expenses. In terms of revenue, weâre projecting growth in media rights fees for the companyâs flagship weekly programming and premium live events. Weâre making positive strides in our advertising and sponsorship business and are targeting healthy growth in this area. These increases are expected to be partially offset by the timing of our third-party original programming deliveries, and the full year accounting impact of the transition of our digital retail platform to Fanatics. We remain very excited about the partnership with Fanatics and project that relationship will be accretive to adjusted OIBDA in 2023 and beyond. On the expense side, we expect to continue to invest in the creative side of our business. Given the importance of the U.S. media renewals for Raw and SmackDown, we believe this investment best positions in business for the long term. We expect to partially offset the increasing creative costs with savings in other areas of the business such as IT and related network costs. Weâve made good progress in managing overhead and other cost increases in 2022 and expect to continue to find incremental efficiencies in 2023. Some of the revenue drivers I mentioned will also yield lower expenses in 2023 in particularly the â in particular, the reporting of the Fanatics e-commerce partnership and lower third-party original program. As in any year, there are several key initiatives that will impact our ability to achieve our targets for 2023. These include the renewal of our domestic licensing agreement for NXT, which is expected to expire in September, the renewal of content licensing agreements in various international markets, most notably MENA [ph] in March, our ability to enter into new third-party original programming agreements, our ability to grow sponsorship and advertising revenue in line with our projections and the performance of the latest installment of our flagship video game franchise, WWE 2K23, which will be competing and comping with the very successful 2022 release. Weâre also continuing to keep a close eye on macroeconomic conditions including the potential impact on consumer behavior and any related impact on our financial performance. Moving to Slide 10 for 2023, we expect capital â total capital expenditures of 150 million to 170 million, including spending of approximately 105 million to 120 million related to our new headquarters facility with the remainder primarily related to the maintenance and enhancement of our existing production and enterprise technology infrastructure. Page 11 of our presentation provides an update on total capital expenditures for the new HQ facility. Despite the challenges related to supply chain disruption and labor shortages, we continue to make good progress on this project. We expect to complete the build out of the facility this year and are planning to move our employees in operations and waves with the first wave scheduled for late March. To-date, we spent 188 million in CapEx on the new project, new HQ project and have received offsets in the form of tenant improvement allowances of 34 million for a net spend of 154 million. As you can see, weâve updated our projections and narrowed the ranges for both the gross and net spend. We now expect the net spend to be within a range of 180 million to 190 million as compared to our original estimate of 160 million to 180 million. Our estimate for the total gross spend increased modestly due to some changes in scope and the inclusion of approximately 10 million of capitalized interest in our projections. As a reminder, the estimated total for the new headquarters project includes approximately 70 million of accelerated expenditures for IT equipment and broadcast production technology that likely wouldâve been spent in the absence of this project. As we look to the first quarter of 2023, weâre targeting adjusted OIBDA in the range of 65 million to 75 million. The estimate reflects a shift in timing of the staging of a large scale international event, which occurred in the first quarter of 2022 into the second quarter of 2023. As a result, we expect a year-over-year decline in revenue in the quarter despite growth in revenue from our media rights agreements. In conclusion, WWE continued to generate strong financial results in 2022 that reflected robust demand for our events and consumption of our programming across platforms. We believe our long-term outlook is supported by the rising value of live sports content and increasing demand for media companies that deliver reach and fan engagement both domestically and around the globe. Looking ahead, we believe that WWE remains well positioned to take advantage of significant growth opportunities across all of our lines of business. We look forward to updating you on the progress of these initiatives in the coming quarters. Hi, thanks for taking the questions. Just first digging in on the strategic alternatives. I think the potential buyer universe is probably going to be impacted by Vinceâs desire to remain after a sale or not. Nick, can you tell investors with certainty that Vince will be willing to end his involvement with WWE following a transaction if that gives shareholders the most value? Yes, without question. Heâs declared it to the Board. Heâs declared it to us in management. Itâs all about shareholder value. Obviously, he is a shareholder. So itâs not about what role heâll have, itâs about maximizing that value opportunity. Okay. And I think recently you said that you were looking for, I think it was the right partner in the sale of the company. Can you elaborate what youâre looking for in such a partner beyond just the dollars and cents? So a partner that has more than simply deep pockets. So a partner that understands the media business, thatâs in the media business that understands how to further monetize the media business, that certainly understands our product, our intellectual property, what weâre doing with it, what can be done with it, media rights both domestically and internationally. We see the international growth opportunity is huge. So these are folks in terms of choosing the right partner, these are all things that weâre going to be looking at in terms of who can accelerate our business and again, whatâs the best value for our shareholders. Good afternoon. And thanks for the question. Nick, I wonder if you could talk a little bit about the UK sports rights environment. Last â correct me if Iâm wrong, last deal that you had in the UK that went to BT Sports, I believe was flat to down. Can you give us a sense how that environment has changed now? Yes. We think, number one, there are many more buyers as you know, and as everyone knows, Eric, as the U.S. based companies have expanded internationally. You have folks who are reaching into the UK looking for programming who werenât looking for similar programming three, four, five years ago, whenever the last deal was done. So, in what may have been a bakeoff between two primary entities then is now a situation where you have five, six plus entities who are desirous of content like ours. Obviously, we always look favorably upon our incumbent. BT has been a tremendous partner and weâll be getting into those conversations shortly. Thanks. And as one follow-up there for Frank. One of the things you mentioned in your presentation is that production costs have been rising in creating the content. Is this just, what youâre seeing inflationary? Is there something going on thatâs been incremental that youâre allocating to the business? Or maybe you could give a little perspective on whatâs causing these costs to rise? No, itâs not inflation driven. Itâs really investment in improving the quality, expanding the talent pool and creating a more vibrant show. So weâre going to â as we noted last year and this year, we believe those are good investments to make and weâll pay off in the upcoming renewals. Hey, good evening. I have one for Nick on sponsorship. Seems like demand for Royal Rumble and WrestleMania has been strong. Can you elaborate on what youâre doing different to drive that success? How sustainable it is? And would you ever consider monetizing assets like the ring, the skirt, the ramp that have not historically been monetized for sponsorship? Seems like you have a lot of underutilized inventory. Thanks, Curry. In reverse order, if thatâs okay? Yes. To your question about monetizing the ring assets, itâs something weâre taking a deep dive into now and that we want to do. In terms of whatâs sort of driven it, I think it all started with Stephanie McMahon and sort of changing the culture of our sales group to along with the leadership of the new Head of Sales and Sponsorship, changing the leadership and mentality from maybe to a yes. So when Pepsi and Mountain Dew pitched us on the idea of sponsoring a match, I think what was done was, yes, absolutely we do it. And then a conversation with Paul, obviously, our Head of Creative about, hey, we could probably do this right, which Paul and the Creative team made every accommodation to get it done. So we think thatâs whatâs driving it, in addition to going into higher levels at each of these potential companies. Thanks, Seth. Two questions. So maybe first, Nick, the strategic alternatives process is conjunction with the rights renewals process, is the idea that by running those in parallel, potential buyers can get a better sense of what the renewal potential is. Maybe you can just help us understand why Vince and the board have decided that those processes work better simultaneously than they would in a serialized fashion with the renewals coming later. And then maybe for Paul or for Nick, it looks like Raw ratings, they were down in the fourth quarter. Theyâre down quite a bit since 2019, and then SmackDown ratings have done the opposite, theyâre up nicely both in the quarter and since 2019. Can you talk about the differences in those two programs? And why you think youâre seeing this divergence in performance on ratings? And maybe an update on NXT ratings as well just because you mentioned that those rights are coming up. Thank you. Absolutely. Steve, this is Nick speaking, the strategic and media rights process. The right of first kick in, in short order for both of our incumbent partners. So if WWE did new deals for Raw and SmackDown, so letâs say, the current deals, as you know, are five-year deals for the U.S. media rights. If we did five-year new deals, it would take a number of buyers off the table or a number of potential buyers off the table. So we wanted to go into it with an approach that any of these potential buyers who I referenced in my notes, people who are looking to own the content that they put on their platforms that they get an opportunity to potentially make an offer, while, of course, weâll respect all of our contractual language with both of the incumbent partners. Does that make sense on that one? Great. On the Raw ratings, keep in mind, you mentioned fourth quarter with the proliferation of gambling with what we see as an increased enhanced Disney, Monday night football schedule with also simulcast of that game. I think seven or eight of them on ABC in addition to the primary ESPN broadcast in addition to the Manningcast, which we think has been wildly successful. Weâre up against different competition once NFL season starts on Mondays. We think that has something to do with it. If you look at the rating surge in Raw, Paul and the creative team has put in as many efforts to make sure that the quality of the Raw product is on par with the quality of the SmackDown product. Itâs not to suggest that it wasnât before, but when youâre going up against an 18-week regular season of the NFL and the Monday night football playoff game, which, as you recall, was the Dallas Cowboys at Tom Brady. Itâs something that weâve put an enhanced focus on to make sure that the roster is sufficient there while not depleting SmackDown. So even when Frank said, hey, with the costs associated with production included some talent costs, we went and signed more talent. And we think all of that is paying off and will pay off. On NXT⦠Normally, I would have let that go, but I wanted to make sure you got your questions at it. NXT, weâre seeing ratings growth there as well. USA is thrilled with it. NBCU is thrilled with it. Keep in mind, as much of its own brand as NXT is, itâs still our farm team. Itâs our feeder system to get folks called up to the main roster. So the expectation there is not the expectation that we and others have for Raw and SmackDown, but certainly the expectation, but the outside world is the same as our world inside, which is growth, which is, I think, what youâre seeing. Thanks. Good afternoon. You guys gave some good color on some of your international strategies, particularly some of the trends in the UK. I was wondering, I donât know if Paul or Nick or both could talk a little bit about the India market, which is another market that, at least back in the last cycle, there was a lot of enthusiasm around and maybe didnât translate to as much upside as hoped, but thatâs in the market with a massive WWE audience. So I would love to hear what youâre doing there and the trends in the business. And then maybe just following up a bit on Stevenâs question around the rights renewal and strategic review time line. Nick, I think you were on Bill Simmons, well, I know you were on Bill Simmons podcast. I know he asked you about â trying to conclude this process before getting into the exclusive windows with your incumbents. Should we think about this as NBC and FOX sort of having any kind of rights if this â if your business were to be acquired by somebody else, itâs just an interesting dynamic having these two different processes at the same time Iâm trying to think about the time line you have coming up real quick here. Hopefully, that made some sense. Number one, any transaction, any suitor, any potential successor in terms of ownership would 100% respect the rights that NBCU and FOX negotiated with us and we would make sure that those rights are respected. So there is no work around on that. Weâre not interested in the work around on that. Weâre interested in having good productive conversations with each of those partners, which weâre excited about, which again should start right after WrestleMania, which is conveniently located in Los Angeles at SoFi Stadium, where certainly FOX Sports, as you know, is based and a lot of the NBCU group is. So weâre excited about that, and those will always be respected. In terms of India, allow me to tell you from our perspective, whatâs going on there and what will go on there. Weâre waiting for the Zee, Sony India merger to be approved by the regulatory authorities there. The hope is in April. Keep in mind, which you already know, COVID stunted our growth opportunity in India in a number of places. But in India specifically, where I would say it was almost impossible to travel in and out of, we couldnât do local events there. So as soon as we have a sense of when the regulatory approval goes â happens on Zee and Sony India, look for a big live event in India. The best way to grow viewership and I think weâre seeing it proven out with our UK shows with the upcoming Montreal show and in other markets is to have live events there. Itâs a much easier sale for our partners with their ad partners. Itâs a much easier sale for us with potential partners when theyâve been to the show and they see the power of it, itâs just a smoother path. So as soon as that transaction is approved, look for us to be there in short order and to start continuing to build that Empire in India. Hi, thank you. This question is a bit of a softball, but I think itâs an important one. Can you just talk about the way that media landscape is changing in favor of you and the upcoming rights renegotiations? We hear an array of views from clients and frequently that do you have any real interest in the rights will be from the incumbent NBC and Fox. So again, if you just talk about your take on how the media landscape has evolved since 2018 and what that means for the rent negotiations, I think it would be helpful. Absolutely. Look, in the last negotiation, there were other bidders. So forget other suiters, other bidders, third-party bidders conglomerates that all of you know who made significant offers on each of the two programs. We think the marketplace has expanded since then. So keep in mind, weâre always going to respect and adhere to the right of first conversations, but Iâm not sure that any third-party whoâs not in business with us would be saying to you or anyone similarly situated, we must have that product because it shifts the leverage across the table. Once weâre out there in the marketplace, unless thereâs a deal done early with the incumbents, once weâre out there in the marketplace, weâll know it past is prologue. We saw it a few years ago. We expect to see the same thing today, especially with more buyers. So weâre quite bullish on it. Operator, please. I just have two quick questions. And maybe this is a little strange, but if I just look at your â the cash flow that this business has generated over, I donât know, the last 15 years when I look at your capital structure, which has always been very lean. It seems like whether you sell the company to someone that has more cash flow or you end up not selling the company and we go through this rights renewal. Youâre just going to have a lot more firepower at your disposal. And Iâd just love you to spend a second and talk about what that incremental cash flow could be used for to drive faster sort of top line growth? Thatâs the first question. My second question is, and this is maybe a little bit too detailed, but I was just looking at the trending schedule from the third quarter versus the fourth, and it looks like there was a small re-class within media from the core rights to digital. I was just wondering if you could elaborate on that, that would be helpful. Yes, there was a re-class went back several quarters we discovered there was a error and interpreting one of our contracts and allocating the funds between the linear TV part of the deal and the network or streaming part of the deal. It was just a calculation error we went back and corrected that, and we stated the periods. It had about a $10 million impact in period. So no change in bottom line revenue to media. With respect to I think to your point, we look at our cash flow characteristics of the business, itâs quite strong. And based on our assumptions about the rights renewal will continue to grow. And once we get past, the investment in the headquarter will generate a significant amount of free cash. And if nothing comes out of the strategic alternatives process that is pursued, we have a number of growth initiatives primarily related to building an experiential new PC growth in the international area, and weâll be starting some of that in the fourth quarter and launching a new NXT Europe touring program. Looking at doing more monetization of our IP, both our talent IP as well as some of our other IP. Nick refers to it as marvelization of WWE. Those are the key areas of investment, and we see lots of opportunity. And to the extent that we donât have investments in growth that we think generate the right rate of return, we will return funds to shareholders. Do you want to add anything to that, Nick? Hi, thank you. Nick, maybe to ask the prior NXT question a different way. Is it important to position that content for potential buyers of Raw and SmackDown just given the synergy of running multiple nights of wrestling with one partner? Or is this kind of a totally separate process? And then one for Frank, record content, the quarter-over-quarter increase was a bit less than weâre used to seeing in the fourth quarter when you cycle into another year on your domestic deals. Iâm not sure if that was related to the number of shows or some content moving to cable in the quarter. I just wanted to see if you add more color there. Yes. Just â Iâll take the first one â the last one first is yes, we had â itâs really just timing of shows in the quarter on a year-over-year basis. You should expect to see the normal escalation quarter-over-quarter until we enter into a new contract for those rights. And in terms of NXT, look, weâre really happy with our NBCU partnership. So allow me to articulate a couple of reasons why. If we do a premium live event on a Saturday, and NBC has Sunday Night Football, obviously, on Sundays for 18 weeks or whatever their full regular season packages. We get a lot of promotion out of those two enterprises to Raw on Monday, which promotes a lot to NXT on Tuesday, which all of those promote to SmackDown on Friday on Fox. So we like the way that, that cadence has worked. That being said, this past â the past winter Olympics, so February of last year, we were preempted on USA on Raw. I know youâre asking about NXT. We were preempted in short order on Raw and moved to Syfy. Raw carried 90% of its audience in both the demo and the overall audience from USA to Syfy, again, with very short notice. So weâre pleased with what we can do on any platform, any network with our programming with again, it having worked quite well at NBCU. Thanks for taking the question. Nick, I was really impressed with the fact that the young demos are doing so well on Raw. How important is traditional TV for your overall fan engagement when you look at TV versus streaming versus digital these days or. Look, itâs still important, but itâs certainly not as important. We donât think to anyone as it once was. So the TV Everywhere notion is something that we like even if you look at the Peacock numbers, a lot of those are on mobile devices. So we like people being able to watch what they want to watch, when they want to watch it. So if you look at the way that we certainly designed it for this right cycle. You have one program on broadcast SmackDown, you have one on basic cable Raw and you have our premium live events on streaming with Peacock. We think all three have worked. So as it goes into the new cycle, again, Fox is traditional broadcast in terms of free-to-air. We love it. Itâs worked. In terms of USA, it continues to work. Theyâre obviously a long-time partner of ours. And in terms of where the young audience is, we want to make sure we donât miss that. So a renewed energy focusing on that young audience we think is part of the reason why you see that spike on Raw in the 18 to 34 demo, and we want to keep all of that up.
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Good afternoon, ladies and gentlemen, and welcome to the Preliminary Results 2022 Conference Call of Raiffeisen Bank International. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Johann Strobl, Chief Executive Officer. Please go ahead, sir. Thank you very much for the kind introduction. Ladies and gentlemen, welcome to our call. It is about the preliminary 2022 results. Thank you for taking the time out from your busy schedule today. Results as you have seen are very good. These include of course an unusually high contribution from Russia. With many distortions caused by the war. I believe however, that down the line trends and the performance of the rest of the bank is also very good. The overall consolidated profit is around 3.6 billion and ROE of nearly 27%. The underlying profit if you adjust for Russia, Belarus and the one-time gain on the sale of Bulgaria is around â¬982 million and an ROE of 8.7%. Please keep in mind that this includes â¬448 million of provisions for litigation in Poland and 253 million of risk costs. This gives you an idea of the very good earning capacity of our core businesses. As we will discuss in a minute, our CET1 ratio improved to 16% consolidated and 14% if you assume a full ride off of our Russian business. If we move to the next slide, then you see that our loan book has grown nicely in Central and South Eastern Europe while we had reduced significantly in local currency terms in Russia and Belarus. Core revenues have improved nicely as well, in particular for the business excluding Russia and Belarus. Our adjusted cost to income ratio of 50% is also very satisfactory. Let me move to the next slide. Let's first discuss the dividend. On the one hand, they're very good results across the group in 2022 and the strength of our balance sheet mean that we are able to pay a dividend. The proposed $0.80 per share are roughly 26% of our normalized earnings. On the other hand, considering the uncertainty ahead, we need to be prudent and we'll wait for more visibility. We've made a lot of progress on the CET1 ratio and as we stabilize around the current levels, we will be in a better position to distribute. Until the decision to distribute is made, we will deduct the $0.80 per share from our capital ratio as this amount is earmarked for our shareholders. As mentioned, our ability to propose a dividend is also a reflection of our very strong balance sheet. Net of the proposed $0.80 per share, we have strengthened our CET1 ratio to 16% and more importantly, improved our CET1 ratio, excluding Russia to 14%. At the same time, we have grown the loan book in our key markets, digested the RWA inflation from rating downgrades and other inorganic effects, and provisioned conservatively. We've also improved our MREL buffer over the course of the year. I would like to take a minute to highlight the remarkable job our colleagues in Ukraine have done and the excellent performance of our bank there. First, by ensuring business continuity in the early days of the war and again when the country's energy infrastructure came under attack. There was extensive preparation done before the invasion, including for black out infrastructure such as generators, diesel power banks. Within weeks, all data and critics systems were successfully moved to the cloud. Most importantly, we experience no downtime of any consequence. Raiffeisen Bank Ukraine is a major contributor to the banking infrastructure in Ukraine and one of the best performers under these extreme circumstances. The feedback, from both customers and authorities alike, has been anonymous. Second, Raiffeisen Bank Ukraine has strengthened its capital position while also taking a very conservative approach to risk costs. The revenue potential of the bank is also intact with a stable customer base and market shares. In fact, amongst the privately owned banks in Ukraine, we have seen the smallest loan book reduction and we have the highest share of customer assets relative to the balance sheet. In critical industries, we have maintained our lending exposures or even written some new business. Operating income benefited from the high interest rate environment as well as excellent feed business and trading results. This has allowed us to absorb their significant risk costs without showing a loss for the year. More importantly, Raiffeisen Bank Ukraine demonstrated very strict cost discipline, which largely offset the unexpected OPEX pressure caused by the war such as cloud migration and relocation costs, financial assistance and donations. All in all, I'm very proud of the job done by our management and colleagues at Raiffeisen Bank Ukraine. Let's move to the next slide. As mentioned already on the second slide, we have seen very good growth in core revenues this year and you can see this on Slide 7. We have had seen both NII and fee income growth for eight consecutive quarters. In the most recent quarter, we have again seen excellent growth in the core group, excluding Russia and Belarus. We continue to see benefit of higher rates through resilient liability margins both in Euros and domestic currencies. In the Czech Republic, you will have noticed the 38 million dropped quarter-on-quarter. Now to a large extent this is coming from a line shift in revenue recognition on a fixed derivatives. If you focus on the underlying business strengths, we see a small drop in the quarter around 8 million which is coming from the deposit mix. We have seen some of the current account volumes move to saving accounts and term deposits, which of course have a better yield. Fees and commission income is largely driven by Russia this quarter and elsewhere growth was slower. Looking at the core part of the group FX business saw lower volumes and of course the loan and guarantee line usually tracks the lending volumes, which were also muted in the quarter. Let's move to the next slide. And what you see here is what I have mentioned earlier. In the business areas, excluding Russia and Belarus, you saw a nice loan growth by 6% year-on-year. And I think also their deposit growth is very good within the group. I'll leave you with this slide and move to the next one, which is the waterfall of the CET1 ratio development for Q4 and what you see is a significant improvement by more than 130 basis points to 16%. Coming from various areas, reduction in the loan book, some other credit risk reduced, and market and operational risks so overall it's important to have retain earnings to be considered negative. We have seen, of course the FX rate, which happened rather at the year end. And of course I should mention here as it is stated, the earmark dividend is excluded from the 16% and you should be also aware that these are numbers from the traditional application of IFRS 9, where the benefit is about 44 basis points. If we now look at the outlook on capital for 2023, so you see our assumptions on organic impacts from retained earnings. And the RWA increase on the other hand mainly from loan growth, some FX elements and then some other regulatory elements, what you have also as part of this development, but it should be above 15%. Moving to Slide 11, which is one element to inform you about our double steering approach, dual steering approach and what you see here is the impact of a deconsolidation scenario in Russia, of course with risk expectedly on the 31st of December, 2022. We would have landed at 14% and if we look forward we will see the group in a way that for sure we should be above 13.5% if this would happen. Now the core numbers are they're 4.2 billion of CET1 which would be deconsolidated without compensation in this calculation and then RWA deconsolidation of 15.8 billion. Be aware that the subordinated instruments which are held by the group are not deducted in these numbers. So if we wouldn't get any compensation for this as well, this number 14% would be lower by 30 basis points. On the next Slide 12, you see an overview for your convenience for the core numbers on group level and the various MDA triggers, MDA buffer, and available distributable items. I think the numbers speak for themselves. You see the increases in some of the buffers on the right hand side of this slide. Moving to the next you see -- a good improvement. So this 13, what you see is a good improvement over the year on our MREL and funding and you might have also seen that in addition to what we report to year end, we had another. MREL issuance at around 1 billion at the beginning, just recently in January. If we then move to the next, you see a few information on liquidity and MREL resolution groups. You know, we have this multiple entry point concept. The LCR very well improved, MSFR very good. So I think we have in all these aspects, very good numbers and for your information, you see also the upcoming funding needs to meet also in the other resolution groups, the respective requirements. Moving to the next slide, this is the second part of the Russia update. What you have seen is, a huge decrease in RWAs of 6.3 billion. Half of it was the FX development and the other elements are reductions in the credit RWAs, but also in the liquidity. And the RWA is required for liquidity and, yeah. I think what one might also mention here, to give the total, the total view we have net, net cross border risk to Russia of slightly more than 200 million. In this we also reported, our trade finance guarantees to Raiffeisen Bank Russia, which are about 80 million. Of course, we see very good results, the Russian entity is more than well capitalized with CET1 ratio on local standards by more than 27%, which is an enormous buffer. And also, if you look at the liquidity ratios, the numbers are very strong. Coming to the next slide, which is 16, an updated macro outlook from our own sources, Raiffeisen Research. The basic assumption is that the beginning of the year sees, of course is low down, maybe a seller recession, but then also some recovery in the course of the year. So that overall in Central Europe, we expect that the year brings a small growth of about 1%, slightly more as the structure is different, the industry structure is different in Southeastern Europe, on average around 2%. And, Austria 0.5 after the strong 5% growth in 2022. We see a stabilization in Ukraine after the huge drop because of the war by a third in 2022. And we see a further decline in Russia by around 4%. Next slide gives our view on interest rate developments and also some flavor on where we expect inflation will be. It seems if you look here, that in some markets we already have seen the peak of this rate cycle, and in the second half of the year we already expect rate decreases, like in the Czech Republic and in Hungary, stable development in Romania, Serbia, and Europe of course, we see some further increases. Coming to my last slide, before I hand over to Hannes, I think here it's, I would abstain from the reading exercise. This slide is full of numbers, the best what we can share with you what we expect within this year is probably might also answer most of your questions already, what you usually had, but with this to Hannes. Hannes, please. Johann, thank you very much. Good afternoon ladies and gentlemen. I hope you have had a good start to the year and thank you for joining us for our first update of 2023. Before we discuss the coming year, however, I would like to spend a minute on where we stand after challenging year. Johann has mentioned a positive development of our balance sheet and there is but little for me to add. We finished the year with a non-performing exposure ratio of 1.6% stable on the year, and again, a very good Stage 3 coverage ratio of 59%. In most of our countries, we saw few interventions [ph] which allowed us to build up our overlays and BOS model adjustments. Please bear in mind, we have â¬729 million of overlays available to us for any risk cost beyond what is already budgeted for the next year. There have been a number of RWA headwinds this year, and I believe we have managed them well. We have been proactive all year in reviewing our exposure in our internal ratings. Initially with the war in Eastern Europe, followed by inflation spikes and energy crisis, this has been definitely a very busy year for risk manager. I shared with you some of these portfolio analysis performed during the year, and I'm otherwise satisfied that our portfolio is fully reviewed and up to date. Not to forget the bank's liquidity situation, which is excellent, both on the group level in each of our individual countries. While there was some initial volatility march, this did not last, and we have seen consistent liquidity inflow since then. And of course you're aware of, since I'm not getting tired in repeating, our rating has been confirmed by Moodâs and S&P already in March. Focusing on Eastern Europe, I would also like to highlight the very good performance of our -- of the Ukrainian colleagues. The cost of risk unfortunately reached our initial guidance here, and yet despite this, the capital situation of our bank in Ukraine sound. In local currency terms, we have maintained our loan book roughly flat with [indiscernible] attributable to the increase in provisions, rewrote new business during the year supporting the agriculture sector and related industries. In Russia, we have reduced the loan book by 30% in local occurrence terms. We will continue to selectively replace corporate exposure with retail exposure. Russia is an example of our active RWA management, and you will recall of course, the rating downgrades and the liquidity inflows, which led to substantial RWA inflation in the first and second quarter. On the provisioning side we also came to the upper end of our initial guidance. Here, however, this is largely driven by Stage 1 and Stage 2 bookings. Again, the revenues have more than made up for the risk costs and the capital situation of the Russian bank is well above the regulatory requirements. Now, as we look ahead to 2023, we see some reliefs in otherwise challenging environment for corporate customers. Many of the post pandemic tailwinds are now over. The very positive momentum that we saw in 2021 and the first half of year 2022 is behind us. We were talking about deteriorating consumer confidence, and this usually of course comes after certain lagging with economic consequences, which is now any way the accepted new reality. But we have a complete new rate environment. What is also important for me to see is that on the other hand, the doomsday energy scenario have not materialized. Let me move on to the next page please. What we understood from all your feedbacks that you would appreciate a little bit more color and splitting up our risk cost guidance to the different segments. While on group corporates and market CE and SCE, I think the headline would go stagnation or possible or slight recession in a combination with higher rates and persistent inflation. As I said, we have now already a stock of overlays of â¬729 million and so 2023 might more be focused on Stage 3 bookings. We believe that we could see up to â¬440 million in the segment mentioned. You may consider this on the upper end, and I would dare to agree at the same time please bear in mind the sudden defaults what I'm also usually flagging, and this you would most properly find in this segment. The other two segments I picked out are more difficult when it comes to risk cost guidance. For Russia, Belarus, of course, it becomes now evident that the same sanctions are making their impact. Ongoing recession, especially if commodity prices drop global growth deceleration. So here we would believe that risk cost could sum up to some around between 250 to 270, and Ukraine it goes without saying that this is more than challenging to come up here with any well founded and sound numbers. So we again came up with this â¬200 million, â¬220 million, but please bear mind if you look at the risk costs from Ukraine that also here we have an overlay for extraordinary situations of round about â¬50 million. Having said this, let me move on to the next page when talking about IFRS 9 provisions. As said in my summary, total â¬949 million and big part of it was anyway not in the Stage 3. So mainly in Stage 1 and Stage 2, you can see here all the details, the moves between Stage 1 and 2, adding a little bit on the microsite on the other hand side have any capacity to release the one hour overlay and the quarter four has been mainly driven by Stage 3 bookings. Having said all this, I'm sure you also have recognized our strong drop on RWAs. If you look at this drop of â¬10.8 billion, I think you have three main buckets. The one is the credit risk RWAs, and here you have two effects, the one that short term exposure has been reduced. And on the other hand side also locally liquidity placements in Russia have been reduced. And on the other hand side, we have conducted in the quarter four some new securitizations and guarantees. The second big part, if you try to explain the â¬10.8 billion drop in RWAs comes of course from FX, which is summing up to â¬4.4 billion. OP risk, and I will talk about this in the page. We have switched back to the standardized approach and market risk RWAs also have been reduced because we have reduced our USD hatching. Let me move on to one of our big blocks, what we also have allocated in our 2022 numbers, and this is about Poland. As you can see on the right hand side, we have now increased our stock of provisions for litigation to â¬803 million, and we have added another â¬262 million for new provisions for litigation in quarter four. What is important for me is, as I said beforehand, we handed back our advanced measurement approach on the op risk and therefore are being capable to report reduced volatility when it comes to op risk RWAs. I anyway, was talking about the MPN, the coverage ratio on my introduction and so I would stop here my presentation and we are eager to take your questions. Thank you. Oh, hi. Thank you for the presentation. I have a few questions, firstly on NII, and particularly your guidance, your 2023 guidance excluding Russia and Belarus. I think it implies a pretty significant drop from the Q4 level, from the Q4 annualized level around 15%, 20%. Would you be able to comment on the outlook here why you are so cautious or downbeat on NII going into 2023? And a related question to that, if you could elaborate on the check NII dynamics, please because it looks like the trend you have been flagging here, increasing share of savings, account term deposits, probably sounds like -- more like a trend rather than a one-off. So what are your thoughts about check NII into 2023? And my final question is going to be on Russia and the impact of the sanctions, not so much against Russia but I'm asking this on the back of the sanction, the recent sanction, which directly impacted Raiffeisen. So it would be useful to hear your thoughts about Raiffeisenâs ability to keep the Russian business in light of the likelihood of potential further sanctions? Thank you. Thank you Gabor for your questions. I think in a nutshell, as I tried to explain, we in some countries, we already assume that the peak of the rate cycle is now, and in the second half of the year, we see a declining rate. So this will have some impact on the NII. The second is that we tried to explain that in some countries, so their trust meant -- so the relocation of funds on current accounts to time deposit -- term deposits and savings accounts is still ongoing. So this together explains why we are not so enthusiastic anymore of a further increase in NII. To your question on the check development and on this relocation to the trading result, yeah, in the FX derivative business I understand there is no one practice in the market. It can be allocated to the NII, so the interest component can be allocated to NII or to the trading risk, trading line. We have chosen the second one. So there was a relocation to that and as I said, in the speech so the net impact is around 8 million, which comes from this shift to other deposit from current account to the deposits. And so the basic assumption to support you is that at least for now, an NII income of around 50 million per month in the Czech Republic. So, I hope this covers that. And to your final, to your third question, the Russian sanctions on that, I -- let's look at it from two perspectives. So the one is the financial impact. I think here it's very, very simple. We have a leasing business in Russia, which is outstanding at year-end, 360 million. Around a bigger part of that is vehicle leasing. But nevertheless, we assume that our customers are not using these vehicles in the territory of Ukraine. And therefore I think the direct risk of repossessing or confiscation of these assets, I will assume is very small. And in the mid to long term -- additional consequences. These sanctions mean cause of course for the first time, an RBI entity is sanctioned and one has to observe and analyze what it could mean. Currently, I can only say we watch out, we will monitor, we will analyze. As of now, I could not add anything or give you any indication what this would mean. I don't expect that this would cause sanctions by the Western government into this whatsoever. Thanks very much for the presentation. Maybe if I may follow up on Gabor's question on the sanctions risk, not necessarily on this one sanction that we saw, today, yesterday, the day before. It feels like it's becoming sort of a -- there's a momentum that we are seeing several risks and headlines coming, related to your operations in Russia and some of the liabilities that you have there and that you have to follow the rules in Russia, etcetera. Can I ask, is this becoming sort of a liability now and given the options are quite limited, seemingly, is the urgency of finding a solution increasing in your eyes, as we enter 2023, so I know it may be a difficult question to answer, but I would appreciate any color that you can give us here? And maybe my second question is on the dividends. When I look at the capital ratios now you're at 14% excluding Russia, 16% including it and you've recently increased your management target, seems like you're above all these requirements. So what kind of developments would you expect to see from here to make that decision or at least you know propose it to AGM [ph] at some point later or is it simply just to wait and see how the Russia situation pans out later? And maybe finally on the Polish provisions, you've reached quite a good coverage level now with the top up that you have done in the fourth quarter and how should we think about provisioning from here in Poland in 2023? Thank you. Thank you for the questions. Indeed, I can only give a color based on what we observe and expect. So, indeed what we see is some changes. I think the Ukrainians and also the authorities said at the beginning of the war, been very vocal that the Western banks should leave Russia. And what we saw recently is that it seems that some of this they pick up again for whatever reason. I think it's political warrants. As I said before, it's not the financial impact as of now and I think, yeah, the concerns earlier had always been what if we just talk about the Ukrainian part of this overall development. And then of course the question is, will there be at some point in time also an impact on the Ukrainian entities or IFRS in Ukraine. Yeah, we have to see -- I think it's well understood and we try to share with you that the bank is also we know that there is a huge sector of state owned banks in Ukraine. I still believe that foreign banks are important for the development of the country. And of course we hope that this is considered and I shared with you the positive contributions that the bank delivered to the country. And I hope this is considered when talking about the whatever sanctions they might have in mind. But of course it's a change in the sense that that now an entity was sanctioned and not only threatened to be sanctioned. I think in the other part, I think there are spillovers, so there is -- or so here up and down so, but there we carefully monitored the let's say the social media exchanges of use on our activities in Russia. And of course it -- some events make it -- bring it to a producer's attention. We have had this when the moratoriums for conscripted soldiers had been discussed in the public. I mean the very small amount in the portfolio. So also in absolute terms it's very little. But of course we understand that within Ukraine this is also a big emotional topic. From the Western parts, I think here the governments have a clear view that they want to define in which scope and in which frequency they add sanctions. So I think this is a clear political instrument and here we have I think a very good compliance framework and to be adhered to and the sun has set. Also we are proactively trying to understand what consequences could be and you see from the numbers that we to a large extent avoided that. So we have this of course this emotional political part and what Western governance need and want. So I can only assure you that we are working on the assessment of the options what we have. And leaving Russia is one of the options by I'm sure you have carefully monitored the recent publications of what we call the protocol which states the requirements for a sale of a bank and also the -- but what for potential buyers might be of interest or is also potential dividends. And I mean the good thing is it's very clear now. The not so good thing is that of course the range is still wide, so the minimum discount what you have is 50% but it can be substantially higher as well. So it's -- and still you need this is just a frame for a decision but you also need an improvement. But I can assure you we are working with quite a lot of manpower and also external advice on that, but we permanently have to adjust. When it comes to the dividend and you also made the link to Russia. Yeah, I think it's important to see the developments and as Hannes and I shared with you, we want to keep this high level of CET1 ratio and the good other ratios. I think there might be the -- there might be an option of leaving Russia, which would require for a short period of time more capital. So what I mean is between the period of IFRSD consolidation, when we would occur a loss. And the final regulatory deconsolidation of the RWA. So there might be a period where the impact might be even bigger than deconsolidation with zero rates so that at that point in the zero amount, so at that point one might be below this 14%. And so this would slightly help as well. And to the dividends, then this simply means that there is a high probability or that you shouldn't expect that we have the annual shareholder meeting end of March. You should not expect that we would propose it. For that was depending also on some developments, but rather that we would have an extraordinary shareholder meeting in the course of the year. Nevertheless, we wanted to state with that we werenât at the right point in time to distribute the dividend to the shareholders. Yes, I can take the question on the Swiss Franc. You raised payment the 2023 guidance. We would think about that most properly we would need maybe another up to â¬200 million for the year to come. And I may anyway assume that you are closely following all the different league steps, [indiscernible] rolling to be expected in the end. But this is what we have currently considered in our numbers that â¬200 million are being added to the litigation provisions. Thanks for the question. Yes, good afternoon and thank you for your presentation. I have a couple of questions please. First one is still on NII and I'm just wondering if you could confirm that you are indeed using a 4% ECB rate forecast for your group NII outlook for 2023 and I think that's what you show on your macro forecast slide? That's the first one. Second question is a Hungarian NII. I think in Q4 you recorded a very strong 22% growth. I saw that there has been healthy growth also on the loan side or the asset side about 7%. I'm just wondering, what's been driving this step change in NII, is there any one off here? And the last question is on your cost of risk forecast. I think Hannes you mentioned 50 basis point cost of risk outlook for GC&M, Central Europe and Southeastern Europe and do I understand correctly that that guidance is driven mainly by Stage 3 and does not assume any further overlays to be added on Stage 1 and Stage 2? Thank you. Well, let me start with the cost of risk question. Yes, you understood me right. I think we really have now heavily increased our overlay bookings just to reference it. This is more than a full year of expected loss, the â¬700 million. I think this concept served us well in 2020 and also in 2022. Well, of course, if some special situations are coming up we still might be tempted to have another million Euro here to allocate to the overlay booking. So the 440 if they would materialize and I'm really cautious here on this 440, we would believe it's either out of migration but mainly out of the Stage 3. And do not forget the loan book what I'm talking here about is a quite substantial bond. So we're talking about the loan portfolio of round about â¬90 billion. And out of this â¬90 billion we are saying, well, we could see up to â¬440 million. And those like you might know me well that I'm usually also including one or two certain defaults when I do the risk cost guidance anyway. So this is yes, you're right it's Stage 3 and please bear in mind on this 440 which I have shared that one or two certain defaults are also included. Johann. Yeah, thank you, Hannes. As far as to your NII, so if I start with the Hungarian one which is very precise as you were asking for Q4. I think the special phenomenon in Hungary is what you see is that the central bank rates are high. But the allocation from the current account to other deposits is slow, so it's not that huge what you might expect. And as the margin is always much better on this current accounts, this was supported very much. And of course if you keep then this liquidity in the central bank at the deposit rate there then this supports your margin very well. I think what maybe if you can compare to other banks what might also strike you is when talking about the NII that there is a cap on some loan rates which probably in other banks is because of the structure what they offered compared to what we offered. So fixed versus variable rates. Loans, indexed loans this is also different and so in a nutshell this was also supportive as the let's say the negative part of this government measures was relatively less painful for us than for other banks because of the structure of the loan book. When talking about your question do the Euro, do the CP rate, where we yes, we at this point in time we assume that it will move in the course of this year to 4%. And this still comes in steps if you look where we are. So it takes some time to feed through. You shouldn't expect too much positive impact on the what we have in the head office. This is to a large extent here so that it is within RBI. It's mainly a large corporate customers where you always are around the market rate. So the margin is razor sharp and you gain very little from it, but we have in some network banks a share of euro deposits and here we could get something. So maybe I guess could be that it might have a positive impact of 40 million to 60 million in the course of 2023. Oh, hi, thanks for the call and your answers so far. Just a couple of questions if I may. Firstly, Hannes talked about potentially sort of 200 million plus more provisions on Poland. Now they're taken in other in command. Are they in your forecast for provisions or are they outside of that because you did seem to say that they were taken into account. So could you clarify what you mean by no further legal provisions for Poland in relation to what you said about provisioning? That was the first one. Then secondly on Russia, I think there was a pretty -- 30% odd depreciation in Q4 and yet you're -- when we see that and what happened to the loan book and what happened to obviously risk weighted assets as well and yet the reduction in NII was relatively limited and your fee income again was record. Could you just give us a little bit more detail as to what was going on, what was the levers if you like in the Russian business in Q4 and presumably that is not something that's sustainable. I mean I understand that we've had a number of quarters of very strong numbers that you're forecasting, a recession in Russia and apparently there's not that much hedging. So could you put a little bit of color on what's actually been going on there? So that was another question. On Ukraine in terms of provisioning you're talking about sort of again a few 100 million more provisions they put into the pot for 2023 and yet you took almost no provisions in Q4 against quite a high operating income. And I wonder what's -- again what's going on there, why if you need to take so many more provisions for Ukraine next year, didn't you use Q4 as an opportunity to bump them up a little bit? That would also be interesting. Then does the dividend that you're proposing needs to be agreed with the regulator, has it been agreed in principle or does that happen after you properly propose it, would be also interesting? And finally, do you think that the margins, the net interest margin of the group excluding Russia and Belarus will actually be up in 2023? Thank you. Yeah, I'm not the IFRS guy but the provisions for Poland is in the other, not in the risk provision of Hannes, but in the other. So when talking about the Ruble depreciation and you compare it to the NII of 2022. So if I remember correctly we had this steep drop in the FX rate only in December. So the -- in the income you have the reporting on the -- I'm looking to my colleagues on the average of the month and the compensation for this you have then in the OCI. So the impact on the OCI was huge and partly of course this is the income. So looking forward of course we start from a different level and therefore NII and also fee income cannot compare to what we had so far. When talking about not so much the FX impact, but the development on its own, the fee income so you see some seasonality, some also driven by the various developments around the war and the impact on Russian population. And here this is one driver of fee income as well. But of course it will have an impact also by the -- from the FX and one should not be as -- you should not consider the very good development of Russia that this will continue from any perspective. So neither from the volume, from the amounts what we have, nor from the very positive FX impact. So this is a different year what we have ahead of us. I mean still the underlying business as of today looks good still but at a different rate level. Well, Alan you gave us a lot of question and also about Ukraine, what is our way of thinking when looking at the Q4 just in Q4 we had in total â¬73 million of Stage 3, but if you look at the full year how we have dealt with the war situation in the country. We took the impairment losses early on. As usual, this is our approach, but this is just to reconfirm that we took the impairment to -- losses early on. And as I said when talking about the risk cost guidance in Ukraine and when talking about these â¬200 million which I've flagged, I clearly say well this is the most challenging part on the assessment. Bear in mind that we have â¬50 million of Stage 2 overlay provisions also allocated for a potential blackout scenario. So you see the things what we're discussing here, blackout, non-blackout, I don't know, but the â¬50 million for the blackout would already be here. And looking at the total portfolio of still â¬1.6 billion, as I said, we were supporting also the planting season in the Agri business. We still have â¬1.6 billion of performing loan portfolio available and therefore we thought it's prudent and conservative to have another guidance of â¬200 million on risk costs. And believe me every Euro we have to spend less in risk costs is a good Euro for me as well. Johann. Thank you, Hannes. To your question of the dividend, of course when we talk about the dividend, we go there, but as you see it, we left it open when it will happen and therefore it then when we come to a decision it would need again a discussion also or an information of the regulator. Okay, thatâs great. Just one or two small follow-up. On the overlays in Russia presumably are staying in Russia, so they're not available to do anything else with? That was one. And also on the -- I notice in Russia that you appear to be sort of growing the business. There seem to be about 5% more staff there in Q4 against Q3. I mean, I guess it's being run independently, but I just wondered why you'd be doing that in the current environment? Thank you. Well, I will take the first question when it comes to the Russian overlays, yes, these overlays are being created, booked and built in Russia and they will and shall stay in Russia if they are needed. But at the same time, I think we have been extremely transparent also showing how much of overlays Alan have been booked on the remaining RBI Group. And please bear in mind that besides the overlays, we also have heavily increased our Stage 2 bookings when it comes to the macroeconomic adjustment. This was a main driver in the fourth quarter and of course these macroeconomic bookings are available for the entire RBI Group. But yes, you're right, the overlays of the above 300 has been booked and created in Russia and therefore will be available for Russia in the case of need. Johann. To your question of FTE increase, this is not an increase business growth, it's related to IT. So what you see is that in addition to the sanctions, there are many IT companies are finishing their services to Russian banks. And our bank has to redevelop or develop new systems quite quickly and so this is why we add the additional IT people to well to be fast enough and to be resilient and independent from Western suppliers. Appreciate the comments. One question on the insurance please. Just regarding your plans for a benchmark Tier 2, is that purely based on the anticipated RWA inflation that you see in 2023, just given that you did a benchmark deal in the fourth quarter near Tier 2 curves, so I was just wondering? Thank you. Yeah. So we had a pre funding for -- in October, which for one which is running out now. So, I think this should serve us well. I hope I got your question right. But this would answer to the question I understood. Thank you. The pre funding in the fourth quarter, so in October, but then you indicate another deal for this year if I understood correctly from the presentation? Good afternoon. Two questions and two clarified -- one clarification. The first question is on the 7% return on tangible equity target for our guidance for 2023. I understood that that includes 200 million of extra provisions for Swiss farm mortgages in Poland. If it is or not, can you confirm? And also at the denominator⦠Okay, at the denominator, what have you used in terms of equity, the current equity of the bank or you have taken out Russia and Belarus given the scenario is without Russia and Belarus? Then can you give us some color on volume growth, the 3% to 5% in 2023, which countries would do better or which geographies would do better? And the clarification is just on the Czech Republic NII, the 30 million, does that refer to the whole of 2022 or just the quarter, I shall -- is that the new base or the new base is higher because you have taken down 22 million which was for prior quarters? Thank you. Yeah, sorry I interrupted you. The 7% ROE target, the 200 million as Hannes explained are included in that. So, the denominator is without Russia and Belarus, it's of course it's always the average of the capital what you have. And then the volume... Yes. Yeah, an in Czech I understand that this is a great confusion, this reallocation. So that's why we say our base assumption is we start from January with monthly NII in the Czech Republic by 50 million per month. So I hope this clarifies. And the loan development, probably some further shrinking in Eastern Europe. Of course not at the speed what we had so far because now we are coming more to the longer maturities and then we have in the bigger segment Central Europe, maybe 3% loan growth, something like this 3% to 4%. And in the Southeast Europe slightly more. So, higher single digit. Hi, good afternoon everybody. Couple of -- two to three questions if I may. The first one is on Slide 10 where you mentioned 80 basis points of regulatory and inorganic effect on capital. I suppose this is in 2023. Would you mind elaborating a little bit what this refers to? The other question I have is with regard to the overlays, your guidance is -- before the use of overlay in 2023 is there -- how should we think about the use of overlays, is it possible to use it in 2023 or is sometime given the outlook is something that is eventually postponed for sure to 2024, just to have an idea when you talk to your own -- with your own personnel what kind of discussions you have on this topic? The other question I have is on fee income, looking at what you have reported in Q4, it is a bit difficult to reconcile fee income at around 2.5 billion next year. Do you expect all the business related to FX to basically evaporate and if that is the case why should it be given that that stream of revenues has been there now for three quarters in a row kind of situation, not exactly changes unfortunately? And the other question I have is on the general on the leverage and the risk weighted assets reduction. Is that something that we can consider as somehow completed or how should we think about you -- you seem to be here and that especially Russia? Yes, to your question with the to Slide number -- page number 10 with the other impacts. So, a couple of elements which we have to mention. So, one is an impact from the transitional benefits. Well, we had so far. So, this is phasing out. Others are that there is a phase out of the temporary positive treatment of sovereigns. So, they had a risk weight of zero, this has increased to 20%. So, this was public debt issues in currency of other member states and here we took out the maximum what one can assume. Then there is this EBA repair program where if you have more need for detail question which then has an impact on Romania and Slovakia. Hannes might have additional questions. And yes, some in the financial institutions rating model, there are also some adjustments. So, couple of topics which come from that. Well, Ricardo talking about the overlays and the use of overlays, I know that you anywhere of how add ons can be released, but just for the big audience. On the one hand side, we could of course, immediately release them if the underlying risk which is currently not being captured in the different models would no longer exist and therefore, we anyway would be obliged to release. The other one is if the risk factor which we have flagged is being captured within the model and/or if the client has migrated into a Stage 3. Maybe one more thoughts to be added what we also tried to, the way how we have created some of the small adjustments and overlays that they are self-consuming. And I will give you an example, I was always talking about our cross border exposure. And in the due course, whenever we are able to further reduce we will also release a certain amount of cost model adjustment because we have allocated a certain by booking to this poster, to this cross border exposure. And whenever we are capable to reduce we are also able to reduce part of this post model adjustment. Ricardo, thanks for the question. And to the fee income question Ricardo. I mean, if you look on total group level, we explained several times that this specific currency management by the Central Bank of course, will not repeat. So, this was a strong contributor to the FX income. But even if you take aside this component, then you do remember that there was also in the Western part of the world for a period of time substantial FX business related to Ruble. I think we also had a share in these activities and this will not come back again. And then the usual words I expect on total fee income, some assumptions like in the Eastern part, we will see further devaluation in the currency. And if you compare it to 2022, then this also has in Euro amounts a negative impact. And, of course, what I should also not forget is that Croatia now is in the Euro area and of course, the FX business which is still needed for tourism and other activities is substantially smaller. So, this on its own might cost us 20 million or so. Thank you. And did I miss something Ricardo. Maybe on the -- under the leverage and how should we think about the balance, the size of the balance sheet especially in the Russian interactions? I'm not sure if I got your question right. Do you see the balance sheet size in Russia, how this this might change? I mean, here this is mainly a question of the deposit inflow and the currency development, I would say. So here it's -- this is not driven by the loan book but it comes from these other elements and here it is difficult to say, some large corporates, they can place their deposits here and there. And then maybe also when it's about foreign currency deposits, then it's it might be also in pricing issue. So these are price sensitives deposits as well, which are the driver for the balance sheet. Thank you. Hi, thank you for the time. Hugo Cruz from KBW here and I have a few questions. In no particular order. First of all, you're accruing dividends or you will accrue dividends for 2023. What will be the accrual mechanism that you're assuming their payout, is it just ex Russia and Belarus or the whole team? Second, a question on the Polish, I thought before these results, you didn't have to increase coverage anymore, because you had so much capital allocated against the Polish and Swiss Franc issue. So what made you change your mind about it to decide to increase provisions again and you gave the guidance of 200 million, does that mean -- thatâs on the provisions but should we expect any change to the RWA's or allocated against Poland, will that change in 2023? And then final question. We have the EBA stress test coming up. I don't know if you have any comments about the assumptions that the EBA is using or what kind of impact you expect that for --? Thatâs it, thank you. Yeah, indeed, there is also a dividend accrued for 2023 and it's around maybe a little bit more than what we what we have this year, for this year so for 2022 and yeah, that's the maximum I can say as of today. And I think from this figure it easily can be assumed that one does not expect an input, if I may say so, our contribution from Russia or Belarus at this point in time. Well, thank you for your questions Hugo on the Polish slot. The minor change of the approach are from the armor to the standardized approach. I think this is pretty straightforward and we have shared with you how dynamic and how strong the dynamic of the op risk RWA has been, because of each and every league. In provisional bookings, we had to add more and more op risk related RWAs. And the armor was not capable to serve this and to cover this topic appropriately. The second one the way I understood your question on their increase of provisions, but at the same time having a lower capital RWA coverage. Please bear in mind a couple of thoughts on this one, whenever we add more of the legal provisions, this of course, is also increasing our coverage when it comes to the deleted lane of our counterpart. And the locally deployed risk weight of this 150% when it comes to Swiss Franc financing, of course, keeps on existing. But the op risk RWAs what we have seen out of the armor have been many -- most of the time are mainly being motivated by this very, very strong dynamic we have seen out of these legal provisions. And because now we have moved back to the standardized approach, the allocation of op risk RWAs towards the specific segment goes across along the cross income allocation. So this is the main reason why you now would see a lower RWA coverage when talking about Poland. The second or the third question, you raised is EBA stress test and our comments on the assumptions what we do have on this one? Yes, we had next to all the many discussions we had in the last couple of days. We deeply looked at the scenarios provided. Well, I think within our guidance and way of thinking and talking to you, an idea to claim that on the avec [ph] scenarios and on the energy prices, we would say that they are milder converted what we have considered when talking about our integrated stress test and when sharing our way of thinking with you. But at the same time when looking at the GDP unemployment rate this looks a little bit more pronounced than what we had in top of our mind. And as you're well aware that last time what is the motivation or the narrative has been argued is well, let's assume the virus would be back and then we would see two years of slump in GDP and only the third year would maybe then see a certain recovery. But having said this, this is important. Hugo, at the same time, we have the â¬729 million of risk overlays is interesting. And not yet having conducted yet the calculation, but I would at least assume that the impact is comparable or higher than with our last test with our last EBA stress test is exercised. This would be out of my first talk with my colleagues when looking at the macro economic assumptions. For me, it was interesting to see how certain countries have been considered when it comes to valuation drops in terms of real estate. So this is interesting how the countryâs brief is looking like. So this would be my first assessment and not to spoil conference call, I would stop here. Thank you Hugo for your question. Good, great. Thank you for taking up my question. I know I mean, it's getting quite late. So quickly looking at the changes of the equity and regulatory capital quarter to quarter, has there been anything else except for the FX impact behind? And second, there has been already a couple of questions on the fee line development going forward, like lesser demand for hedging, etc. But looking at Russia, specifically, are you aware perhaps of any coming legislation that could affect profitability of the sector in general there, I'm referring here to the for example, budgetary situation, funding for war in Ukraine, which might require some spatial sort of war economy with negative impacts spilling over, for example, on to the banking sector to your knowledge, has any such potential plans or drafts been already taken or thought about on the ground there? Thank you. Let's start with the second one, with a short answer, which is no, I'm not aware of any developments till now. I'm not the real insight in Russia. But given the history, what they have, I would not expect that they go for such things. And the first question was the FX impact on the -- in Q4 I think here we have -- I think the answer should be on Page 9, I guess it's 78 basis points, which was negative. So the last of these elements in the waterfall of Page 9, 78 basis points. Thank you. Yes, thanks for taking my questions as well. I would like to touch back on the NII. With regards to the deposit beta could you maybe share with us what you're currently seeing in the individual countries and also what your forecast is, your expectation for a deposit beta, we know, it's all often kind of 20% to 30%, with many European banks? And secondly, again, touching on the question and the first question actually from Gabor with regards to the 15% to 20% decline of NII if we kind of extrapolate the Q4 result. Could you maybe give an indication that makes you explain well with the Czech Republic and so on, but how much of that potential 600 million to 800 million decline could be transferred actually to the trading line, is it 100 million to 200 million you see basically on the other line? And I think that's it. Thank you. Beta is a difficult one. I spent spend some time with my people and at the end of the day, they told me please tell me what is the beta and I was somehow struggling. So, we rather that the intention is to give you and we tried here and there to give you some sensitivity on the driven by the key rate developments. And yeah, as I said before, there may be Czech flats of -- flat development, maybe slightly negative with the minus 8 million. What you have seen in Q4 is some indicator of what might go on when you have the structural shift in the liabilities. In the NII, if the Czech is irritating you that's why we try to say simply take the 50 million as a starting point, the 38 million, this was only a Czech issue and the third million built up in the first three quarters. And we changed it in the fourth quarter. So it's not the quarterly jump or whatsoever. So it's reallocation of that. And I would need to figure out a little bit more on your annualized Q4 that there are some factors in so maybe the team could come back after the call and give you a break up on what we have. If this is okay for you Tobias. Hi, there. Thanks for taking my question. Sorry, if I've missed this already, but I haven't heard any plans for -- issuance [Question Inaudible]? Yeah, indeed Ellie. We might come -- no, I'm sorry, I was still caught you. I was a little bit distracted by your question. If it wasn't already answered, the question before was the Tier 2 where I said we will come in later of the year. But you were talking about the 81. So sorry for creating this confusion. I think what you shall say here is you know that the rate has been adjusted in the -- the coupon has been adjusted. So, what we can say is, we cannot comment on upcoming COVID decisions at this point in time, but you should be aware that we are committed to replacing the non-COVID bond with a new bond subject to the economics and spreads of the refinancing and here, this was my reset. Yeah. We have seen some coupon adjustments which you only have here. Thank you for your question. Thank you all for your questions. [Operator Instructions]. As there are no further questions at this time, we will now conclude today's conference call. Thank you for your participation.
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Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2023 First Quarter Conference Call. During todayâs presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. Good afternoon. Thank you, Rob and welcome to PTC's first quarter 2023 conference call. On the call today are Jim Heppelmann, Chief Executive Officer; Kristian Talvitie, Chief Financial Officer; and Mike DiTullio, President of our Digital Thread Group. Today's conference call is being broadcast live through an audio webcast and a replay of the call will be available later today at www.ptc.com. During this call, PTC will be making forward-looking statements including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in PTC's Annual Report on Form 10-K, Form 10-Q and other filings with the US Securities and Exchange Commission as well as in today's press release. The forward-looking statements including guidance provided during this call are valid only as of today's date, February 1 2023 and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website. Thanks, Matt. Good afternoon, everyone and thank you for joining us. Turning to slide 4. I'm pleased to report that despite seeing some incremental macro softness, PTC delivered a solid first quarter to kick off fiscal 2023. On the top-line metric of ARR we came in at $1.603 billion, which was above the high end of our range and up more than 15% year-over-year. The strength was broad-based across all product groups and geographies. Sorry about that, a little interference. The strength was broad-based across all product groups and geographies. Organic ARR growth was 14% with Codebeamer then contributing that extra point of inorganic growth. The strong Q1 ARR results put the company in a position to narrow our original 10% to 14% full year ARR guidance to 11% to 14% as we feel that the 10% outcome has become increasingly implausible with a solid Q1 behind us. Switching to our bottom-line metric of free cash flow we delivered $172 million ahead of our guidance and up 28% year-over-year. We raised our free cash flow guidance for the full year by $15 million. Currency had little impact to free cash flow in Q1, but it is expected to be incrementally helpful as the year progresses. On the subject of currency, I'll remind you that Kristian will cover the ongoing effects of foreign exchange fluctuations later in the call. So to simplify things I'll focus my discussion on constant currency results when discussing top-line metrics. Turning to slide 5. Shortly after our first quarter close we completed the acquisition of ServiceMax. ServiceMax is not included in the Q1 results we reported though we did incur some acquisition-related costs that we're a headwind to our nevertheless strong free cash flow results in Q1. With the deal now closed ServiceMax will be included in our guidance going forward. To recap the highlights of this business as now part of PTC, ServiceMax is used to manage the service processes for high-value long life cycle products. Think of products like an MRI machine in a hospital, a machine tool in a factory or pumping equipment at a refinery. This has always been a sweet spot for PTC and we have many customers matching this profile. Referring to the infinity diagram on slide 5, many of you know that PTC's logo represents the interplay of physical and digital and that logo provides a good way to explain the fit with ServiceMax. The digital part of our logo refers to when products are under development. At this point, they exist in a purely digital form which is authored in Creo and managed in Windchill. Being purely digital at this stage products are easy to change and highly configurable. Each time our customers get an order their factories take a configuration of the digital product data that matches the order and use it as the recipe to produce the physical product, which is then delivered to the end customer. That's where the physical part of our logo fits in. Physical products are very different. If you want to change them for example, you need to dispatch a truck to the customer site carrying a technician and spare parts. Spare parts are managed in our Servigistics software. The technician will need access to similar types of digital product information, as what the factory used when creating the product. This service information is created using Arbortext and Vuforia. High-value products are operated by the customer for years or even decades. These products require regular service to keep them up and running, and this service is typically provided by the manufacturer, who views the recurring service contracts and spare part sales as a highly desirable source of revenue and profit. ServiceMax helps the manufacturer manage their entire installed base of physical product instances and orchestrates all the necessary service activities. By monitoring the installed base of products, ThingWorx adds a lot of value to ServiceMax because it allows service to be more proactive and preventative in nature. And sometimes the service can even be done remotely thereby canceling the need for a truck roll. As you can see ServiceMax has great synergy with Creo and Windchill, because on one hand the service process consumes the digital product data created in engineering in the form of parts catalogs and service instructions. And on the other hand, the service process is the primary source of feedback that drives ongoing product improvements through engineering change orders or ECOs. Windchill serves as the system of record for the digital definition of all possible product configurations and ServiceMax serves as the system of record for the actual physical instances of products that exist, each of which may have a slightly different configuration. As the infinity diagram implies, there is a digital thread of product information flowing between these key systems in both directions throughout the product life cycle. Aligning ServiceMax with PTC's various offerings will lubricate this flow of data creating tremendous business value. No competitor has a solution comparable to this. Equally important, as the service system of record, ServiceMax knits together our existing SLM products, allowing PTC to now offer the industry's first truly comprehensive offering for service management optimization. You can think of our new SLM offering as a hub-and-spoke model with ServiceMax as the hub and PTC's various other service solutions as spokes. For example, ThingWorx IoT connects to and monitors the vital signs of installed products to enable preventative remote service. Arbortext dynamically publishes technical service information to match each product configuration in the installed base. Vuforia AR enables this technical service information to be augmented onto each installed product to make service technicians more productive. And Servigistics allows customer service level agreements to be met, while carrying the smallest possible inventory of spare parts. With the acquisition now closed work is underway to enable deeper integration between ServiceMax and these various PTC offering. I'm pleased to announce that Neil Barua the CEO of ServiceMax is joining PTC and will preside over this expanded SLM business that now exceeds $300 million of combined ARR. Neil and team will unveil a broad new SLM vision at our LiveWorx conference in May. And based on the number of inquiries we're getting, I expect it to be one of the highlights of the conference. The strategic fit with ServiceMax is excellent and we're excited about the synergies we can generate by cross-selling from engineering to service and vice versa and also cross-selling between our various SLM offerings within the service domain. The financial fit is excellent too as the transaction is expected to be accretive to PTC's growth rate as well as the PTC's cash flow and this drove part of today's guidance raises. ServiceMax also increases PTC's total addressable market. The ServiceMax business has been growing in the mid-teens which is a few points faster than the market, but we see potential for the business to accelerate to high-teens growth over time as synergistic cross-sell opportunities are realized. Turning to Slide 6. Given the elevated focus on profitability that investors all share in today's market, I want to reiterate the margin expansion program that PTC management has been driving. The organizational realignment we did at the end of fiscal 2021 and the resource rebalancing work we did during fiscal 2022 have created an organizational model for PTC that's both highly efficient and fully sustainable. When we made these changes, we were not addressing a problem per se, but simply pursuing margin expansion opportunities that we had identified. The actions we took proved prescient, as we're now well-positioned for a macro downturn. While many notable tech companies are announcing layoffs to come to terms of bloated cost structures, thanks to our proactive actions, we're entering this period of uncertainty with a very lean cost structure and we do not anticipate any need for layoffs or restructuring. In Q1, non-GAAP operating margin expanded to 36% compared to 35% a year ago. That sounds like progress, but due to ASC 606 noise, it doesn't fully capture the full magnitude of improvements we've made. We prefer to assess our margin progress by focusing on a more meaningful metric we now call operating efficiency. Operating efficiency is the same metric that we previously called cash contribution margin, but we're changing the name of the metric to be more precise that it is an operating metric, not a non-GAAP financial measure. This is a change in name only. The metric is still calculated the same way and still measures how much of our billings we're able to convert to cash flow each year. At the midpoint of our ARR guidance range, based on actions already taken, we continue to expect this operating efficiency to expand by another approximately 450 basis points in fiscal 2023, following the 300 basis point improvement we delivered last year. The significant operating efficiency improvement when layered on top of double-digit ARR growth is what drove the strong Q1 free cash flow result and is what will drive the 38% free cash flow growth we're guiding to for fiscal 2023. Kristian will elaborate further. Turning to slide seven. As you're aware, our FY 2023 ARR guidance range, has from the start, contemplated the possibility of a potential macro downturn. In Q1, we saw further signs of a downturn in the form of incrementally softer bookings. At the same time, we were comforted by strong renewals, which actually improved slightly year-over-year, reinforcing just how sticky our software is. The net impact of these softer bookings and stronger renewals was a slowdown of about 0.5 percentage point from last quarter's 16% ARR growth rate, taking the Q1 ARR growth rate down to about 15.5%. This was obviously less than we had allowed at the high end of our Q1 ARR guidance range, so ARR results landed $3 million above the range. The softness was relatively consistent across various dimensions of the business, suggesting it was macro related, rather than any type of competitive issue. The summary is that, after posting 15.5% growth in Q1, we remain well positioned to perform against our financial targets and indeed, have raised our guidance accordingly. Turning to slide eight. With Q1 behind us, as compared to our original guidance, we're now on track to deliver ARR growth results within a narrower 11% to 14% range in fiscal 2023, with the low end having been raised, because the 10% outcome is less plausible now, given that solid Q1. Keep in mind, the addition of ServiceMax to our portfolio happens here in Q2 and the inclusion of ServiceMax will recalibrate the ARR growth range upward. In a few minutes Kristian will outline a new guidance range, that's essentially 11% to 14% plus 1,100 basis points more from ServiceMax added on top. Across this range of ARR outcomes, we've also raised the original cash flow guidance we provided a quarter ago by $15 million to $575 million, which now represents 38% growth for the full year. The raise is powered in roughly equal parts: by a strong free cash flow result in Q1, the expected $5 million benefit from the ServiceMax acquisition and improving foreign exchange rates. Should exchange rates hold, or further improve, FX could prove incrementally helpful as the year progresses. Kristian will elaborate on the various factors involved here too. Turning to slide nine. Let's look at ARR growth across all geographies. ARR growth in the Americas was 16%. In Europe, ARR growth was 15%, despite the Russia exit in Q2 of last year which still affects the growth rate, given the trailing nature of our ARR metric. ARR growth in APAC was 12%. Across all geographies, the largest ARR growth in terms of magnitude was driven by continued strong demand for Creo CAD and Windchill PLM products. In the Americas, we saw the strongest ARR percentage growth in IoT, Arena, Windchill and Onshape. In Europe and APAC the growth rate was highest for Arena, which has been expanding outside the US. Arbortext and Servigistics both delivered strong growth rates in Europe and APAC. And finally in Europe, Onshape and augmented reality also delivered strong percentage growth. Next let's look at the ARR performance of our product groups on Slide 10. In CAD, which is those products that enable authoring of product data, we delivered 10% ARR growth in Q1 in a market that has been growing approximately 8%. Within this the growth was primarily driven by Creo, supplemented by strong percentage growth in Onshape and Arbortext. In PLM, which includes those products that enable data management and process orchestration for product development, our ARR growth rate in Q1 was 20%, or 18% organic with strong growth across all geographic regions. In PLM, we continue to significantly outperform the market, which has been growing approximately 12%. Half of our Q1 growth was driven by Windchill, but ALM including Codebeamer and Arena, IoT and retail PLM also contributed to great Q1 PLM results by delivering strong percentage growth. I'd like to discuss Windchill+ in the context of a new logo customer on Slide 11. Given the importance of our SaaS transformation program as a growth driver, I'm pleased to see good progress ramping up the new multi-tenant Windchill+ solution. While it's still early across a combination of new logo deals as well as lift-and-shift SaaS conversions, we now have about a dozen Windchill+ customers in production or headed there shortly with dozens more opportunities in the pipeline. As we said at our Investor Day, we expect an S-curve type of ramp over multiple years for our Plus offerings. And thus far we're tracking well to that expectation. To share a customer story, we landed a new logo deal with a well-known motor sports company. That's a great example of an organization that's reaping the benefits of the streamlined PLM implementation experience that Windchill+ offers. This customer has committed to enter a new racing circuit, but faces a tight time line to get prepared. Their team needed a PLM system to be in place quickly, because they're designing a more efficient power unit that needs to be completed and tested in short order. And then as usual there'll be a steady diet of changes and improvements thereafter. With their Windchill+ implementation the motor sports company achieved a production ramp-up time of several months, including integration with their hybrid SaaS ERP system. They got there so quickly by leveraging the out-of-the-box capability of Windchill+ delivered by PTC to the customer as a secure preconfigured service. This customer has no dedicated IT team, so leveraging SaaS applications is important to enable them to keep their internal efforts focused on racing, while improving collaboration across team members in the field and around the globe. As a reminder, Windchill+ is the tip of the iceberg of a bigger Plus strategy, and you'll see us follow with Creo+ and similar premium SaaS offerings in FY 2023 and beyond. We are aiming to launch Creo+ and the bigger Plus strategy at LiveWorx in May. I'd like to share another customer anecdote to help you better understand the immense power of our technology. Turning to Slide 12, I want to tell you about an important project from our customers at the U.S. Department of Energy. I trust you saw the mid-December news that for the first time scientists at Lawrence Livermore National Laboratory have produced a nuclear fusion reaction that generated more energy than it consumed. This major scientific breakthrough happened at Lawrence Livermore's National Ignition Facility and may pave the way to a future filled with clean energy. The National Ignition Facility, or NIF is essentially a massive machine of enormous size and complexity. The NIF is a precision-engineered system of systems that generates and then directs 192 powerful laser beams onto a pencil eraser-sized area that heats to millions of degrees to ignite the nuclear fusion reaction. The sports stadium-sized NIF machine is all modeled in Creo and Windchill, everything they say except the walls and the bathrooms. With 3.5 million components, we believe the NIF is the largest Creo and Windchill assembly ever made and very likely, the largest assembly ever modeled in 3D CAD, which is a real testament to the power of our technology. During our regular collaborations with DOE teams over many years now, PTC product teams have been challenged to further develop our products to enable such highly advanced projects in what has proven to be a mutually beneficial relationship. While substantially more work lies ahead in the effort to harness the potential of fusion energy as demonstrated by the NIF, we're very proud of the role that our technology has played in enabling this early breakthrough. And the announcement was exciting for many PTC employees who have been involved including me. PTC may very well-prove to play a key enabling role in the ultimate ESG breakthrough. Summarizing then on slide 13. While in Q1, we saw incremental signs of a macro slowdown there's a lot going our way right now. First, PTC has established itself as the clear category leader in PLM, which has become a must-have technology backbone for digital transformation at industrial companies. We just posted another quarter of 18% organic PLM growth well-ahead of market peers. We are conquering the PLM market. The addition of ServiceMax further extends what was already a unique portfolio of interconnected digital thread capabilities across the full product life cycle and ServiceMax is expected to be a tailwind to ARR and free cash flow right from the start. Both Codebeamer and ServiceMax will provide a big boost to our PLM conquest efforts. Second, while the company growth is at a double-digit level already, we're in the early days but executing well against a major on-premise to SaaS transformation that should provide a multiyear growth tailwind. Third, we have a reputation for driving margin expansion that goes back more than a decade and the proactive changes we've already made are driving high levels of free cash flow growth again this year. Fourth, we're demonstrating that our business model is very resilient. Top line growth and bottom line profitability are at levels that are amongst the best in our industry peer group. Not many peer companies are projecting the double-digit organic top line and 38% bottom line growth that PTC is guiding to this year. And finally, we're led by a team that has deep expertise and proven ability to drive growth and margin expansion. We're happy to welcome Neil Barua to the PTC executive ranks because Neil and the entire ServiceMax team share the same depth and passion for the business that's so important here in the PTC culture. With so many positive trends going our way, I continue to believe PTC has a tremendous opportunity to create shareholder value even in the face of a macro downturn we've all been expecting. Thanks, Jim, and good afternoon, everyone. Before I review our results I'd like to note that I'll be discussing non-GAAP results and guidance and ARR references will be in both constant currency and as reported. Turning to slide 15. In Q1 2023 our constant currency ARR was $1.6 billion, up 15% year-over-year and exceeded guidance. On an organic constant currency basis excluding Codebeamer, our ARR was $1.59 billion, up 14% year-over-year. As Jim explained our top line strength in Q1 was broad-based. We're executing well against our strategy and we're continuing to improve upon the strong market position that we have. Our SaaS businesses saw continued solid ARR growth in Q1 as well. On an as-reported basis we delivered 11% ARR growth, 10% organic due to the impact of FX headwinds. Currency fluctuations were positive in Q1 of 2023 and our as reported ARR was $60 million higher than our constant currency ARR. However, on a year-over-year basis currency fluctuations were still a meaningful headwind. Moving on to cash flow. Our results were strong with Q1 coming in ahead of our guidance across all metrics. While it was great to see favorable FX movements during Q1, there was no impact to free cash flow from FX. Our free cash flow performance in Q1 was driven by strong execution based on a foundation of solid collections and cost discipline. Our cash from operations also came in ahead of guidance by $11 million, due to a combination of free cash flow outperformance and the timing of capital expenditures which were $9 million in Q1, compared to our guidance of $5 million. When assessing and forecasting our cash flow, it's important to remember a few things. The majority of our collections occur in the first half of our fiscal year. Q4 is our lowest cash flow generation quarter. And on an annual basis, free cash flow is primarily a function of ARR, rather than revenue. Q1 revenue of $466 million increased 2% year-over-year and was up 9% year-over-year on a constant currency basis. In Q1 recurring revenue grew by $12 million, perpetual license revenue grew by $5 million and professional services revenue declined by $9 million year-over-year. The decline in professional services revenue is consistent with our strategy to transition some of our professional services talent and revenue to DxP our partner for Windchill+ lift-and-shift projects. As we've discussed previously, revenue is impacted by ASC 606, so we do not believe that revenue is the best indicator of our underlying business performance, but we'd rather guide you to ARR as the best metric to understand our top line performance and cash generation. Before I move on to the balance sheet, I'd like to provide some color on our non-GAAP operating margin, as I did last quarter. Compared to, Q1 2022 our non-GAAP operating margin expanded by approximately 100 basis points to 36% in Q1 of 2023. We continue to caution that because revenue is impacted by ASC 606 other derivative metrics such as gross margin, operating margin, operating profit and EPS are all impacted as well. Still, it's worth mentioning, that we're benefiting from the work that we've done to optimize our cost structure in fiscal 2022. On a year-over-year basis in Q1, we continue to grow our top line at a faster rate than our spending and delivered significantly higher ARR and free cash flow. Moving to slide 16, we ended the first quarter with cash and cash equivalents of $388 million. Our gross debt was $1.36 billion with an aggregate interest rate of 4.3%. Looking forward, in Q2, in conjunction with the ServiceMax acquisition, we took out a $500 million term loan and increased the size of our revolving credit facility from $1 billion to $1.25 billion. The net of new borrowings and debt pay down in Q2, should leave us with $1 billion in high-yield notes, the $500 million term loan and approximately $450 million drawn on the revolver at the end of the quarter. As a reminder, we also have a second payment for the ServiceMax transaction, due in October 2023 of $650 million. We intend to fund this with cash on hand and our revolving credit facility. This deferred payment is included in debt on our balance sheet and is factored into our debt-to-EBITDA ratio. We expect our debt-to-EBITDA ratio to be approximately 3.4 times, at the end of Q2. We should be around three times levered by Q4 and below three times throughout fiscal 2024 and into fiscal 2025, as we continue to pay down debt. To help you with your models, in fiscal 2023 as it relates to cash flow, we expect total cash interest payments of approximately $85 million. And as it relates to the P&L, we expect interest expense of approximately $125 million. Given the interest rate environment, we expect to prioritize paying down our debt in fiscal 2023 and 2024. We'll pause, our share repurchase program. And in fiscal 2023, we expect our diluted share count to increase by a little under, one million shares. We expect to have substantially reduced our debt by the end of fiscal 2024 and we'll then revisit the prioritization of debt paydown and share repurchases. Despite this interruption, our long-term goal assuming our debt-to-EBITDA ratio is below three times, remains to return approximately 50% of our free cash flow to shareholders via share repurchases, while also taking into consideration the interest rate environment and strategic opportunities. Next slide 17 shows our ARR by product group. In the constant currency section on the top half of the slide, we used FX rates as of September 30, 2022 to calculate ARR for all periods. You can see on the slide, how currency dynamics have resulted in differences between our constant currency ARR and as-reported ARR over the past five quarters. Exchange rates continued to move materially in Q1 2023 causing a difference between constant currency ARR results and our as-reported ARR results. Based on the exchange rates, at the end of Q1 2023, our as-reported ARR in Q2 of 2023 would be higher by approximately $62 million compared to the midpoint of our constant currency guidance and fiscal 2023 as-reported ARR would be higher by approximately $67 million compared to our constant currency guidance midpoint. We report both actual and constant currency results and FX fluctuations can obviously have a material impact on actuals. But remember that, we provide ARR guidance on a constant currency basis. If exchange rates fluctuate significantly between the end of Q1 and in the end of Q2 2023 the impact to our as-reported ARR would also change. We believe constant currency is the best way to evaluate the top line performance of our business, because it removes currency fluctuations from the analysis, positive or negative. Given the sharp moves that, we've seen recently, I thought it would be useful to provide an updated ARR sensitivity rule of thumb on slide 18. In addition to the US dollar, we transact in euro, yen and more than 10 other additional currencies. Using currency rates at the end of Q1, the impact of a $0.10 change in the euro-to-USD rate would be $39 million positive or negative, and the impact of a Â¥10 change in the USD-to-yen rate would be $9 million again positive or negative. And of course, the estimated dollar impact to ARR is dependent on the size of the ARR base. With that, I'll take you through our guidance on slide 19. For our ARR guidance amounts, we're using FX rates as of September 30, 2022. The previous guidance shown on this slide is from our November 2022 Investor Day presentation, and includes ServiceMax. For fiscal 2023, we expect constant currency ARR growth of 22% to 25%, which corresponds to a fiscal 2023 constant currency ARR guidance range of $1.91 billion to $1.96 billion. This narrowed range is based on two primary factors. First, we took up the bottom end of the 10% to 14% guidance range we provided on our Q4 earnings call, which excluded ServiceMax. While we saw some incremental macro-driven booking softness in our first quarter, this was partially offset by better-than-planned churn and our guidance contemplated the potential for a much bigger impact than what we saw, and we actually finished $3 million above the high end of our Q1 2023 ARR guidance range. So based on our strong Q1 results and forecast for the year, while still being mindful of the macro environment, we feel comfortable taking up the lower end of the range, which still allows for continued softening due to the macro environment. Secondly, the other update to guidance is adding approximately $170 million for ServiceMax compared to our Investor Day assumption, which was for approximately $175 million. There's a few reasons we're doing this, which include. First, ServiceMax' fiscal quarters ended one month later than ours. As we all know, the final month of a quarter in a software company is really when the magic happens. So, while I think that ultimately their results will align with PTC's quarter-end hockey stick, I also think it's prudent to assume it may take a few quarters to align selling and customer buying behavior. Second, as you know Salesforce.com is a go-to-market partner with ServiceMax for its Asset 360 product. Salesforce just announced a fairly sizable reduction in force. And while we do not know if or how this may impact ServiceMax business in the coming months, we feel it's a valid concern which we want to account for in our guidance. And third, frankly, the uncertainty of the macro environment applies to ServiceMax as well. So, it's primarily for these three reasons that we're derisking the ServiceMax guidance for fiscal 2023 and adding $170 million to our now updated 11% to 14% guidance range. With a strong Q1 behind us and given our pipeline and forecast and how we've set our guidance ranges, we believe we're well-positioned to achieve our fiscal 2023 ARR guidance. Note that we expect modestly more deferred ARR to become ARR in fiscal 2023 than in fiscal 2022. And our churn in Q1 was lower than planned. In dollar terms, churn was actually lower in Q1 2023 than it was in Q1 2022 and that's against a bigger base of ARR. For Q2, we're guiding constant currency ARR to be in the range of $1.79 billion to $1.81 billion. At the midpoint, this equates to 25% constant currency growth. I'll discuss our Q2 guidance in more detail on the next slide. On cash flows for fiscal 2023, we raised our guidance. We now expect cash from operations of approximately $595 million, up 37%; and free cash flow of approximately $575 million up approximately 38%. Compared to the guidance we provided a quarter ago, our updated $575 million target for free cash flow factors in our strong execution and results in Q1, $5 million from the ServiceMax acquisition which we already communicated at our Investor Day, as well as an increase from FX tailwinds for the remainder of the year. Assuming we hit our Q2 free cash flow target, we'll be at approximately 65% of our full year target similar in the past two years. Our CapEx assumption for fiscal 2023 is $20 million. Therefore relative to our free cash flow guidance of $575 million, we're guiding to cash from operations of $595 million. For Q2, we're guiding to free cash flow of approximately $200 million. We expect approximately $5 million of CapEx in Q2 and therefore, our cash from operations guidance is approximately $205 million. As you model the quarters of fiscal 2023, keep in mind, we expect the quarterly distribution of full year cash flow results to follow a similar pattern as in fiscal 2022 and fiscal 2021 with over 60% of cash flow in the first half of the year and Q4 being our lowest cash flow generation quarter. Moving on to revenue guidance, we raised -- which we raised from our November 2nd guidance, primarily because of ServiceMax and currency. For fiscal 2023, we expect revenue of $2.07 billion to $2.15 billion which corresponds to a growth rate of 7% to 11%. ASC 606 makes revenue fairly difficult to predict in the short-term for on-premise subscription companies, hence the wide range. More importantly, revenue does not influence ARR or cash generation as we typically bill customers annually upfront regardless of term lengths. Turning to slide 20. Here is an illustrative constant currency ARR model for Q2 2023. You can see our results over the past nine quarters and in the far-right column, we've modeled the midpoint of our Q2 constant currency ARR guidance range. Because our ARR tends to see some seasonality, the most relevant compare is Q2 of 2022. The illustrative model indicates, that to hit the midpoint of our Q2 2023 guidance range of $1.8 billion, we need ServiceMax ARR of approximately $160 million, which is what we said at Investor Day and believe is a reasonable target. On top of the ServiceMax contribution, we need to add $37 million of organic ARR on a sequential basis. This is $19 million less than the $56 million we added in Q2 of fiscal 2022. In percentage terms, we need 2% organic sequential ARR growth to hit our guidance midpoint for Q2, which is at the lower end of what we've delivered over the past nine quarters. All things considered, we believe we've set our Q2 2023 constant currency ARR guidance range prudently. Turning to Slide 22. I'll conclude my prepared remarks today by highlighting, that we're prepared for a storm and expect to be resilient in the face of one. From a top line perspective, we serve industrial product companies. And R&D, at those companies tends to be quite resilient, so we have a supportive top line backdrop. We also have a subscription business model and our products are very sticky with our customers. Just as importantly from a cost perspective, we've already battened down the hatches. In addition, to the cost optimization work we did last year, we've already slowed planned hires and backfills as we head into Q2. Nevertheless, as we've said in the past, we don't have a Pollyanna-type view when it comes to the macro situation. We have a strong track record of disciplined operational management. And if the macro situation gets meaningfully worse, you can expect us to moderate our spending further, to better align spending with market realities and mitigate the impact on our fiscal 2023 cash flow results. For example, variable compensation would automatically adjust. And depending on the magnitude of the downturn, we would also be incrementally more cautious on hiring and marketing spend travel, et cetera. On the other hand, if the macro situation improves and/or if the dollar weakness continues, this would be favorable for our cash generation. And in that scenario, we would have the optionality to invest more aggressively in our business. There's no question that the macro environment is hard to predict. Nevertheless, we've contemplated one strong quarter of fiscal 2023 -- completed one strong quarter of fiscal 2023 and are positioned to continue producing attractive financial results, based on our strong product and market position coupled with solid execution and prudent financial management. [Operator Instructions] And your first question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open. Great, guys. Thanks for taking my question. Congrats on the strong results guys. Jim, you guys are pushing the envelope for SaaS beyond many peers that we talk to which is obviously, great. I guess a two-point question, do you think that's resulted in sort of a larger pipeline coverage ratio than maybe a year ago? And with your Plus strategy, do you think the opportunity for PLM and CAD replacements could accelerate as well? Yes. Well, let's say, certainly the Plus strategy and SaaS here at PTC is helpful to the pipeline, because first of all when deals come in at SaaS, they come in twice the size as they would have been had they've been on-premise, so right away you have a factor there. But I'd also say, the interest level is quite high. I mean, I think if you come to LiveWorx, you're going to see lots of customers are going to come, just to learn about SaaS because they're interested. We're at that phase where everybody is interested. Some people will bite sooner than others, but everybody wants to hear about it, start thinking about it and understand how it plays into their future. Then on the competitive replacement opportunity, I do think that some of our competitors are laggards with SaaS or they're doing SaaS in a pretty hokey way. For example, we have a French competitor, who is trying to become a hyperscaler. And when you place an order with them they turn around by hardware to host it on. And between you and me I don't really think that's the right strategy. And I think a lot of companies are going to say, "I don't actually want to buy into a strategy like that because the day it all collapses I'm a little bit out in the cold." So I do think that people are going to say, "We need to go to SaaS. If my vendor doesn't have a good story, I should shop around." And at PTC, we have mature proven products like Creo and Windchill, that will be available in an honest-to-god true SaaS form not unlike for example Microsoft Office 365. And then on the other hand, if you want to go full bore, clean slate, right from the start pure SaaS, well we have Onshape and Arena, which are the SaaS-est products in our entire industry. So I do think we're going to get some amount of people moving to SaaS and switching vendors at the same time. And as you said, we're way out there ahead of people with a pretty serious well-thought-out strategy. I guess firstly just how is ThingWorx growth during the quarter? Has it been impacted at all by the reallocation of resources there? ThingWorx growth was pretty steady. No doubt that reallocation of resources isn't actually helpful to just standalone ThingWorx growth, but I think it's actually been quite helpful to PTC growth and very, very helpful to PTC cash flow, because instead of hiring new resources that would consume cash flow, we moved resources around and let that fall to the bottom line. So I think probably not helpful to ThingWorx, although ThingWorx is clipping along at a decent growth rate but very helpful to PTC altogether kind of neutral to growth altogether very helpful to cash flow. Okay. Great. And if I could just also ask channel continues to lag direct AR growth on a constant currency basis, can you talk about why growth is a little bit slower in the channel I guess with your partners? And what might be done to sort of bring that more into line with your direct business? Well, I think they simply are more impacted by the macro situation. When the economy was strong our channel was growing faster than direct. And I think small companies have less room if you will less capacity to weather a downturn, so they're more conservative. So I think in a downturn situation, small and medium businesses, which is what our channel cover they're the first ones to start getting conservative on spending. And I mean we've seen that. I think for example, a lot of the start-up companies aren't hiring. And if they're not hiring they don't need expansions and so forth. So I would attribute that the channel is relatively more macro sensitive than the direct sales force. Now on the rebound it goes the other way of course. Hey, hey, good evening, Jim. Good evening, Kristian. So a question just on the bookings commentary. So I think last quarter your base case was for flattish year-over-year bookings for the full year to kind of get to that 12% ARR growth obviously, pre-ServiceMax. When you say you saw bookings weaken, did bookings go negative during the quarter? And where is kind of your underlying assumption for the full year on bookings? Yes, Tyler, so we thought a lot about how to describe this. And what we really owe you is transparency to how bookings and macro affect ARR because ARR is the key metric. And we're in this funny situation, where what happened in the quarter didn't align to any of our scenarios because bookings was a little softer and churn frankly was shockingly good. So what we decided is if we really want to tell you what exactly happened to bookings we're going to tell you exactly what happened to churn and we probably ought to tell you what happened to deferred and then maybe we ought to get into year-over-year comps because as you know bookings is where the volatility is. So we decided, we'll disclose it, we'll quantify it, as 0.5 percentage point of slowdown. So 0.5 percentage point you can do the math it's about $8 million on $1.603 billion. So we had $8 million less in bookings than what it took to maintain a 16% growth rate, but $3 million more in bookings than what it took to hit the high end of the guidance range we gave you. So, I think if you look at it that way, in the year now we've lost $8 million and that will show up four quarters. And it won't compound but the $8 million will show up in the next four quarters. I think as we look forward the pipeline looks pretty decent. The forecast looks good. The real question will be, post rates, does the business come in or not. And that's sort of an unknown. But to us, Q1 while it was a little bit softer than the previous two quarters, actually it was not a bad quarter. That's super clear. Thank you. And just a follow-up, so going back to one of the questions on the competition, maybe broader than just what you're seeing as it relates to SaaS. Can you just talk about maybe the strength you're seeing in PLM more broadly? And obviously the growth rates you're posting on an organic basis are kind of above market. Who do you see you're taking share from and anything from a product perspective you'd highlight? Yes. I mean nothing changed materially in the quarter. But to kind of remind you, just in general what's happening. SAP has given up share, Oracle has given up share. In our view, Dassault has given up quite a bit of share, because we passed them in the last year and we're opening up quite a gap now. And we think Siemens has given up some share. Siemens has been posting actually negative numbers in terms of PLM growth of late, and it will be interesting to see at the next earnings report. I encourage you all to dig in and try to parse it apart, because I think Siemens is losing a lot of momentum. They have some structural changes happening, so it's a little hard to kind of tease it all out and they don't provide much disclosure. But I think youâre going to see -- Siemens would be our toughest competitor and you're going to see us post growth rates approaching 20% and it wouldn't surprise me if theirs has a negative number on the front of it when they report this quarter. Hey, guys. Thanks for taking my questions. Sorry, I'm kind of new to covering you guys and so the math maybe is a little bit tricky. But like you said last quarter that I think it was a low-single-digit constant currency bookings growth year-over-year. I'm kind of having trouble putting what you just said kind of altogether. What does that actually mean on a year-over-year constant currency bookings growth rate for this quarter? Yes. Steve, I mean we don't disclose. We don't report bookings. We don't guide bookings. We provide color. And because, again, the scenario was a little strange compared to the guidance scenarios, softer on bookings, stronger on free cash flow to avoid having to disclose a lot more detail, we netted it out and netted it out as better than guidance but a slowdown of about $8 million for the year 0.5 percentage point. Yes. Okay, got it. That's helpful. And then just lastly on free cash flow, pretty strong even seasonally even how you talk about it with a decent amount coming here in the first half of the year assuming you hit the $200 million. Receivables were a big positive at least on a GAAP basis. Anything else moving around in working capital that kind of overdrove at all or is this kind of bang in line with what you guys were expecting? In general, I think it was largely in line with what we were expecting Steve. I mean again solid collections performance. Yes, itâs little bit Steve, like with the ARR situation where our guidance contains a little bit of a buffer and we didn't need it. Hey, Jim. Hey, Kristian. Thanks for taking my question here. Jim, maybe just -- I'd love to dig one level deeper just into sort of that dichotomy, right, the softer bookings but then also the lower churn. Maybe just on the softer bookings piece, are those deals that are pushing? Are those deals that are still in the pipeline, or are they ones that you think just get pushed indefinitely? And then on the lower churn piece, that is great to hear, particularly with the hiring environment how much is maybe some of the price adjustments that we did last year maybe factoring into that as well? Yes. Well, let me address the churn piece first and I'll circle back to the push or cancellation on bookings. On churn, you remember that we gave you scenarios that had churn getting worse, when we were clear, we have no evidence that that is happening or will happen, it just seems prudent to allow for the possibility. So, we're allowing for a possibility that would require a reversal in trend, but we did not get the reversal in trend. We got actually more of the same improving trend. And I think we were clear that certainly pricing helps, but it doesn't really account for the strength we're seeing. I mean the strength we're seeing is fundamentally just good renewals. And to put it in perspective, Creo and Windchill, represent roughly 70% of our ARR just those two products. And if you took the churn rate for Creo and Windchill in the quarter and you annualized it for the entire year, it would be less than 3% churn on those two massive product bases. So I mean, we're talking about fundamentally strong adoption of our technology, mission-critical technology. You can't switch from it. You can't stop using it. You can't stop paying for it, I mean unless you're winding your business down. So, I think it's just good fundamental sticky software that people are continuing to use. And I think there's not really a lot of layoffs happening in our marketplace right now our customers. A lot of layoffs happening in tech, but I don't think so many engineers in the world of product development for physical products are getting laid off. And then coming back to the push and cancel, I mean, I think it's mostly push. What happens is typically you've got a purchase order and it needs some level of approval. Maybe last quarter, it needed a higher level of approval, another signature maybe somebody sat on that signature because they're saying, couldn't we do this next quarter? Couldn't we start this project a little later? So I think it's pushing. There's no competitive dynamics. And generally it's not being canceled, because companies do need this technology. They're just delaying a little bit. The second factor would be expansion, sometimes are driven by hiring. If a company is hiring a lot of engineers, well, now they need to go back and buy more CAD and PLM seats for those engineers. There probably is a slowdown in hiring, which is slowing down expansions, but nothing structural happening. It's just sort of the natural delays the cholesterol if you will that gets in the way of doing deals when people are getting nervous about the economy. Thank you. Good evening. Jim for you first, over the last couple of years at least to the active bases for both Creo and Windchill have seemingly grown at least a mid-single-digit rate, at least by our calculation, which corresponds to the share gain for each we've been able to document. How are you thinking about the active base growth from here for both those products? And perhaps more broadly, since we've gone through so many evolutions of both those markets over the last many years, what from here do you think are the critical functionalities within CAD and PLM to continue or sustain the growth in those businesses, maybe GD or something else that you care to mention? And then secondly, maybe for Kristian you've done well in terms of product releases, adhering to the road map, but you do have the smallest R&D budget in your peer group. So, how are you thinking about orchestrating or managing R&D productivity from here to keep executing on that road map in the context of containing your expenses? Yes. Okay. You've got a couple of different questions for me there. Let me say, the wildcard Jay is what happens with the economy. There's nothing again structurally happening that would cause our share gain or our seat growth to differ from the trend as it has been other than just a macro slowdown. And in the past, like in 2020, when there was a macro slowdown then we had an acceleration on the back end of it. We had a tough quarter, I think it was Q3 right Kristian, yes, Q3 of 2020 and a monster quarter in Q4 and it was like a snapback to where we work. So, even if there's a slowdown, we might get that effect, but that's the wildcard. Otherwise nothing in the industry is happening that would in my view change the trend. In terms of some of the critical functionality, yes, generative design is important. The ANSYS simulation is important. But the thing I think is really carrying the day is this concept that our guys call model-based enterprise. And what that really means is, companies are trying to make 2D drawings go away. In the world of engineering, there has been forever a really messed up process, where engineers create 3D models to really conceptualize the parts and how they fit together and to simulate them with technologies like ANSYS and everything is done in 3D. And then the very last step is, they convert that all to 2D drawings. They dumb it down and leave a lot of information behind and the drawings get sent out to the supply chain and to the factory and everything else. And then, for example, at suppliers they get these drawings and they turn around and remodel them in 3D. And the factory gets the data and they might have to remodel, so they can generate tool paths off it and whatnot. So the industry has said for a long time, we shouldn't need drawings, but we need to figure out how to get different processes that aren't so dependent on them, because all the procurement processes, the supplier collaboration processes are based on drawings and red lines and so forth. So what's happening now is many, many companies are saying, okay, this is it. That drawing process has to go now. What we have to do is model it in 3D. It has to be 3D -- annotated 3D models go out to suppliers, annotated 3D models go down in the manufacturing process, annotated 3D models end up in the service process, there's not going to be any more drawings. Now that requires a lot more adoption of CAD, because suddenly now a lot more people need a CAD suite rather than an Acrobat viewer, PDF suite, if you will. We're not just talking about viewing a PDF file; we're now talking about interacting directly with the 3D data. So I think that's a driver for the whole industry, but I certainly can tell you here at PTC, it's a driver. Many more suites of CAD software are sold when a company decides to move away from drawings. And on their side, they can shut a whole department down. And it's a department that not only leaks value, it actually actively destroys it by dumbing data down that then has to be smartened back up by somebody else downstream. So I think that's a big factor this model-based enterprise stuff. That's the whole capability around annotated 3D models and whatnot and viewing technologies and markup and collaboration. But certainly, generative design and simulation, 3D printing, additive manufacturing, those are all quite interesting as well. Now, finally, on your last question about the smallest R&D budget. I'm an R&D guy, so I'm not going to lose and we have not been losing the product battle. We've actually been winning the product battle. And I think what it is, is just, R&D is not about body count, it's about strategy, it's about project selection, it's about execution. Some of our larger competitors spend a lot of time and energy developing nonsensical products; products that don't work; don't make any sense. Autodesk was famous for that for many years. But some of our French and German competitors, French in particular, they've developed a lot of 3D experience, blah, blah, blah, that these are products that actually mean anything to anybody, but there's engineers working on them. So, I think, at PTC, we're just much more serious, much more focused. We prioritize what we do. We execute it well. We don't get in too many rework loops. We're just very efficient. And I think that's the winning recipe. Throwing bodies at R&D is not a winning strategy. Executing a good strategy efficiently is what it takes to win and we're doing fine in the product front. You know this. Our products are very strong and, if anything, getting stronger despite the fact that we spend less in R&D. And then, finally, one last comment. It's not like we don't spend much on R&D. Creo has 500 engineers working on it. Windchill has 500 engineers working on it. If you have 1000 engineers on it you just have more people tripping all over each other. So I think also I don't want you to think we don't spend much. We're not quite as extravagant as other people, but we're executing very, very well within what is a substantial spend envelope. Awesome. Thanks so much for taking the question. Maybe just two quick ones. Just first, Jim, just on the incremental softness you noted on the macro, it doesn't sound like things gotten any softer in the month of January. And of course, January is a smaller month to begin with, but just any commentary there on how demand trends have started so far in the month of January. And maybe just as a follow-up on ServiceMax, obviously it seems really compelling, just curious now that the acquisition closed, how early customer feedback is from both customers and prospects? Thanks so much. Yeah. So on the first question, how's Q2 looking, at the start of the quarter here, we're more or less still at the start of the quarter because if you look at our quarter, a majority of our business is done in the third month of the quarter. So it's very difficult in the first month to really understand how things are trending. I mean we're starting the quarter with a decent pipeline. We're starting the quarter with a decent forecast. The real question will be in the last week or two of the quarter, are we able to close these deals or do they slide. If they slide, bookings will be soft again. If they close, actually we'll have a pretty stellar bookings quarter based on how things are forecasted at the moment or maybe we'll end up somewhere in between. What was the second question? Sorry, I didn't write it down. ServiceMax, yes. So ServiceMax, I mean you see I'm very excited about it. You can probably sense that through the call here. That's because customers are very excited about it. I mean, we had a thesis of what this was going to mean. We've gotten into it. We found how many customers had independently purchased software from both of us, but also how many customers ServiceMax has that looked like PTC customers and how many customers PTC have that look like they should be ServiceMax customers. And a lot of common customers immediately contacted me, immediately contacted Neil and said "Hey can we get together? Can you fly out and see us? Can we come visit you? We want to hear this story." To be honest, we're pushing back a little bit on them saying "Could you just give us a little bit of time to figure out the details?" So we're really targeting that for LiveWorx. I mean obviously, we'll talk to a lot of customers before LiveWorx, but that will be kind of the grand unveiling of that sort of infinity concept that I had on that slide. And I think it will be very exciting. I think there'll be many, many excited customers. Hey, Jim, hey, Kristian. Thanks for fitting me in. Maybe just a quick one. We've been hearing different customers and organizations trying to use PLM more within their organizations. When we think about the expansion, is it expanding to different departments and teams, or is it product development, just becoming a more critical role within an organization? I guess, how would you kind of quantify this secular dynamic? Yeah. I think maybe a couple of thoughts. One thing I said Jason is that PLM is moving from a nice-to-have to a must-have, and for example, this concept I was talking about earlier model-based enterprise where you're going to interact with 3D models. And 3D models are too big to e-mail around. By the way, when you're interacting with a 3D design, it's not one file, it can be dozens, hundreds or thousands of files and you need a system to find them all and fit them together and present it to you so that you can understand what's going on. So, I think what's happening this is all forms of digital transformation is that companies are saying, we're going to get rid of paper drawings and PDF files. We're going to go to 3D. Therefore everybody in the company who interacts with product data is going to need a PLM seat and they're going to need some type of a 3D seat. It might be a Viewer, it might be CAD, whatever. But it's driving proliferation of PLM out from the engineering department, where it's always been into purchasing into manufacturing now into the service technicians. We pretty quickly envision service technicians out in the field on their phone interacting with 3D models when they're standing in front of a piece of equipment if not augmenting it right onto the piece of equipment. So, I think that's what's happening is it's becoming a true enterprise system versus a departmental system, while at the same time it's becoming a must-have rather than a nice-to-have. I think it's those trends that are really driving this proliferation of PLM, which frankly is good for the whole industry, but I think PTC is taking share in the industry at the same time. Great. Okay. So, let me just wrap up here. Thank you all for spending time with us. In the next quarter, we have quite a busy investor schedule. So, I just want to share with you some of the things happening in case you want to participate. So, Kristian and I together are going tomorrow and Friday, weâre going to -- tomorrow at dinner and Friday in the morning we're going to participate in an RBC roadshow in New York. Then on February 27th, we're hosting a headquarters visit that JPMorgan is conducting here in Boston. On March 8th, we're both going to the Morgan Stanley TMT Conference in San Francisco. Meanwhile on my own behalf, I'm going to the Wolfe Conference in New York on February 28th. Kristian additionally is going to the Baird Conference in Utah on March 2nd; to the JPMorgan Global High Yield Conference in Miami on March 6th. And Kristian's going on a Barclays Virtual Bus Tour or probably hosting a Barclays Virtual Bus Tour on March 15th. And then one of our executives Kevin Wrenn, who's our Chief Product Officer is doing the Loop Virtual Conference on March 13th. So, lots of IR touch points here in the coming quarter. Hope to see many of you in the course of one or more of those events. And if not hope to catch you again in about 90 days on our Q2 earnings call. So, thanks again and have a good evening everybody.
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Good morning, and welcome to Landstar System Incorporated Year-End 2022 Earnings Release Conference Call. All lines will be in a listen-only mode until the formal question-and-answer session. Today's call is being recorded. If you have any objections, you may disconnect at this time. Joining us today from Landstar are Jim Gattoni, President and CEO; Jim Todd, Vice President and CFO; Rob Brasher, Vice President and Chief Commercial Officer; and Joe Beacom, Vice President and Chief Safety and Operations Officer. Before we begin, let me read the following statement. The following the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies and expectations. Such information is by nature subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2021 fiscal year described in the section Risk Factors and other SEC filings from time-to-time. These risks uncertainties could cause actual results or events to differ materially from historical results, or those anticipated. Investors should not place undue reliance on such forward-looking information unless our undertakes no obligation to publicly update or revise any forward-looking information. Note throughout these remarks that the 2022 fourth quarter included 14 weeks of operations and the 2021 fourth quarter included 13 weeks of operations. Once again, Landstar delivered record financial results in fiscal year 2022. Our record performance in 2022 followed another record year for Landstar in 2021. Among many new annual financial records, we established in 2022, Landstar achieved record annual revenue of $7.4 billion, $900 million higher than the previous annual record set in 2021. Diluted earnings per share in fiscal year 2022 was an annual record of $11.76, an increase of $1.78 or 18% above our prior fiscal year record of $9.98 in 2021. During fiscal 2022, Landstar generated a record free cash flow of $597 million. Additionally, during fiscal year 2022, Landstar paid dividends of $116 million and purchased $286 million for the company's stock. In December, the Board declared an additional dividend totaling $72 million to be paid in January 2023. Within our record financial performance in 2022. The 2022 first quarter proved to be a peak following six consecutive quarters of strengthening in the macroeconomic freight environment. As we move further into the year, supply chain congestion began to ease and the macroeconomic freight environment, although, still relatively strong by historical standards began to weaken, not unlike typical cyclical patterns, historically, experienced in the best domestic freight environment. Beginning in the 2022 second quarter, Landstar experienced a deceleration in quarter over prior year quarter growth rates for both truck revenue per load and the number of truckloads that ultimately led to truck revenue per load and the number of loads hauled via truck in the 2022 fourth quarter to both be below the 2021 fourth quarter. Heading into the 2022 fourth quarter, it was clear these cyclical conditions were continuing. As such, during our October 22, 2022 third quarter earnings conference call, we provided 2022 fourth quarter revenue guidance of $1.775 billion to $1.825 billion, below the 2021 fourth quarter revenue by 6% to 9%. The guidance anticipated truck volume to decrease from the 2021 fourth quarter in a range of 2% to 4%, even given the extra week in the 2022 fourth quarter and revenue per truckload to be 5% to 7% below the 2021 fourth quarter. 2022 fourth quarter loads hauled by truck were 6% below the 2021 fourth quarter, and revenue per truckload was 7% below the 2021 fourth quarter. Note that, the number of truckloads hauled by Landstar reached an all-time record level in the 2021 fourth quarter and remain relatively strong by historical standards throughout 2022. Although, revenue came in below the low end of the earnings guidance, earnings per share came in at the low end of the guidance. This can be attributed to a higher variable contribution margin than projected, along with lower SG&A and other operating costs in the 2022 fourth quarter, as compared to the estimated amount reflected in the guidance. As compared to the 2021 fourth quarter revenue hauled via truck was $211 million, or 12% below the 2020 fourth quarter, approximately 16% and when excluding the estimated truck revenue of $60 million contributed by the extra week in 2022 fourth quarter. And revenue haul via other modes was almost $60 million below the 2021 fourth quarter. While we experienced a 12% decrease in truck revenue from the 2020 and fourth quarter, to be fair, one needs to put the impact of the pandemic-driven demand and supply chain congestion and perspective. Since the end of the summer of 2020, strong consumer demand along with supply chain congestion drove truck rates and volume to historic highs. Landstar's two-year growth in truck volume from the pre-pandemic fourth quarter of 2019 to the record 2021 fourth quarter was 37%. Truck revenue per load grew 39% during that same time period. We expect that that growth was going to subside, as supply chain disruptions eased and economic cyclicality returned to the freight industry. And when that happened, year-over-year comparisons will become very challenging. Leaving aside the tough quarter over prior year quarter comparisons we experienced in the 2022 fourth quarter, truck revenue in the 2022 fourth was still 68% higher than that of the pre-pandemic 2019 fourth quarter. Revenue hauled via van equipment in 2022 fourth quarter was $154 million lower than the 2021 fourth quarter, but $373 million above the 2019 fourth quarter. Revenue hauled via on-site and flatbed equipment in the 24th quarter was only $13 million below the 2021 fourth quarter, about a $121 million over the 2019 fourth quarter. And revenue generated via other truck transportation services mostly power-only services was $48 million lower than the 2021 fourth quarter, yet a $116 million above the 2019 fourth quarter. Clearly the van market was more favorably impacted by the pandemic-driven consumer demand than the unsided flatbed market throughout the past two years. Van loadings in the 2022 fourth quarter were 5% lower than the 2021 fourth quarter. Unsided flatbed loadings were 2% below the 2021 fourth quarter and other truck transportation loadings were 16% below the 2021 fourth quarter. After the decrease in van and other truck transportation loadings, the number of loads hauled via our substitute line haul service offering, primarily on Van equipment and some power-only moves was 35% below the 2021 fourth quarter, even with the extra week in 2022. Additionally, load count for consumer durables, building products and food stuffs were down 8%, 6% and 31% respectively from the 2021 fourth quarter. One of the few volume growth areas was in automotive parts and materials, which grew 13% over the 2021 fourth quarter. New agents as of the end of 2022, which we define as agents who contracted with the company on or after the beginning of 2021 contributed $144 million of revenue in fiscal 2022. This followed new agent revenue of $181 million in 2021. Our agent base is strong and these new agent additions will continue to drive new customers and truck volume into the network. During 2022, there were 625 agents who generated over $1 million of Landstar revenue. This is the highest annual number of million-dollar agents and last our history. Turnover for $1 million agents is typically very low. During 2022, $1 million agent turnover was only 2%, in line with historical million-dollar agent turnover rates. We ended 2022 with 11,281 trucks provided by BCOs. The number of trucks provided by BCOs decreased 583 trucks or 5% from the beginning of 2022. Overall, BCO truck turnover was 29% in 2022 compared to 21% in fiscal year 2021. A decrease in the number of trucks provided by BCOs is typical during a cycle of decreasing revenue per mile. In December 2022 compared to December 2021, revenue per mile on van equipment hauled by BCOs decreased 16%. In December 2022 compared to December 2021, revenue per mile and on-site equipment hold by BCOs decreased only 2%. In each case, revenue per mile excludes the impact of fuel surcharge built to shippers, as 100% of few servers built to customers are excluded from Landstar's revenue and paid a 100% to the hauling BCO. In fiscal year 2022, total fuel surcharges billed to customers paid 100% of BCOs were $445 million, compared to $260 million in fiscal year 2021. I'll now pass it to Jim Todd to comment on additional P&L metrics and a few other fourth quarter financial statement items. Jim? Thanks, Jim. Jim G has covered certain information on our 2022 fourth quarter, so I will cover various other fourth quarter financial information included in the press release. In the 2022, 14-week fourth quarter, gross profit was $180 million compared to gross profit of $209.8 million in the 2021, 13-week fourth quarter. Gross profit margin was 10.7% of revenue in the 2022 fourth quarter, as compared to gross profit margin of 10.8% in the corresponding period of 2021. In the 2022 fourth quarter, variable contribution was $234 million, compared to $263.3 million in the 2021 fourth quarter. Variable contribution margin was 14% of revenue in the 2022 fourth quarter, compared to 13.5% in the same period last year. The increase in variable contribution margin compared to the 2021 fourth quarter was primarily attributable to an increased variable contribution margin on revenue generated by truck brokerage carriers. As the rate paid to truck brokerage carriers in the 2022 fourth quarter was 294 basis points lower than the rate paid in the 2021 fourth quarter. Other operating costs were $10.3 million in the 2022 fourth quarter, compared to $9.4 million in 2021. This increase was primarily due to increased trailing equipment maintenance costs, partially offset by increased gains on sale of operating property. Insurance and claims costs were $29.6 million in the 2022 fourth quarter, compared to $30.3 million in 2021. Total insurance and claims costs were 5% of BCO revenue in the 2022 period and 4.2% of BCO revenue in the 2021 period. The decrease in insurance and claims costs as compared to 2021 was primarily attributable to decreased net unfavorable development of prior year claim estimates, partially offset by an increased severity of accidents during the 2022 period. During the 2022 and 2021 fourth quarters, insurance and claim cost included $3.8 million and $5.2 million, respectively of net unfavorable adjustments to prior year claim estimates. Selling, general and administrative costs were $56.1 million in the 2022 fourth quarter, compared to $62.6 million in 2021. The decrease in selling, general and administrative costs was primarily attributable to a decreased provision for incentive and equity compensation under our variable compensation programs and decreased employee benefit costs, partially offset by increased wages and an increased provision for customer bad debt. In the 2022 fourth quarter the provision for compensation under variable programs was $5.3 million, compared to $16.8 million in the 2021 fourth quarter. Depreciation and amortization was $14.8 million in the 2022 fourth quarter compared to $13.1 million in 2021. This increase was almost entirely due to increased depreciation on software applications resulting from continued investment in new and upgraded tools for use by agents and capacity. The effective income tax rate of 24.7% in the 2022 fourth quarter was 140 basis points higher than the effective income tax rate of 23.3% in the 2021 fourth quarter as the effective income tax rate in the 2021 fourth quarter was favorably impacted by the resolution of certain state tax matters. In addition, the effective income tax rates in the 2022 and 2021 fourth quarter were each unfavorably impacted by the impairment of deferred tax assets related to employee equity compensation arrangements as a result of performance conditions being attained as of year-end. The increase in the effective income tax rate in the 2022 fourth quarter as compared to the 2021 fourth quarter drove approximately $0.05 of the $0.39 quarter over prior year quarter earnings decline. Looking at our balance sheet, we ended the quarter with cash and short-term investments of $394 million. Cash flow from operations for 2022 was $623 million and cash capital expenditures were $26 million. The operating cash flow generation of $623 million during fiscal year 2022 was more than double the previous annual record operating cash flow of $308 million in fiscal year 2019. Thanks Jim. As it relates to our 2023 first quarter guidance, recent trends in truck revenue per load and load volume indicate the continuation of a softer freight environment consistent with cyclical trends we believe we have seen return to the marketplace over the last three quarters. As to truckload count, we generally experienced a 2% to 3% sequential decrease in volume from the fourth quarter to the first quarter. Excluding the extra week from the 2022 fourth quarter, a truckload volume assumption has volume decreasing at a slightly more rapid rate than the historical typical range as demand softening has continued into the beginning of the 2023 first quarter. Revenue per truckload trends from the fourth quarter to the first quarter have been inconsistent over the past several years. Over the past several weeks, revenue per truckload has drifted down, which is often the case in January. We finished 2022 with revenue per load approximately 10% below where we were as of the beginning of 2022. And our expectation is we could experience an additional 5% to 7% decrease in revenue per load during the 2023 first quarter. Note that revenue per truckload reached its all-time high at Landstar in February 2022 and experienced levels without historical precedent throughout much of the 2022 first quarter. As a result, the revenue per truckload comparisons for the 2023 first quarter compared to the record revenue per truckload established from the 2022 first quarter makes for an extremely difficult year-over-year comparison. Overall, we expect revenue in the 2023 first quarter to be in the range of $1.400 billion to $1.445 billion and diluted per share to be in a range of $2.05 to $2.15. This earnings estimate anticipates variable contribution margin ranging 142% to 14.5%. Although, we do not plan on providing full year earnings guidance due to the unpredictable nature of the spot market, Jim will cover our estimates of cost and expenses for fiscal year 2022, as they are more predictable and fixed in nature. Jim? Thanks Jim. With respect to my expectations for Landstar's full year other operating costs, assuming a normalized provision for contractor bad debt, I estimate 2023 other operating costs would increase by $1 million to $3 million, as increased trailing equipment maintenance costs and increased transaction costs associated with the software rollout are partially offset by increased gains on sales of used trailing equipment. With respect to anticipated insurance and claims costs I continue to believe 4.5% of BCO revenue is the appropriate measure to utilize but we will continue to reevaluate each quarter. My base case assumption on selling, general and administrative costs is a $3 million to $6 million increase year-over-year, assuming a normalized provision for customer bad debt. Included in that base case assumption, is approximately $12 million of tailwinds from potential decreases in the company's variable compensation programs. In a hypothetical 20% revenue decline scenario those tailwinds could grow closer to $18 million to $20 million which will result in a slight decrease in selling general and administrative costs year-over-year. I expect depreciation and amortization costs to increase $4 million to $6 million year-over-year depending on the timing and ultimate acquisition cost of new trailing equipment. I also expect that the information technology headwinds we have experienced on this line in recent periods will begin to recede in 2023, as a greater portion of our IT spend is expected to shift from initial development work to maintenance and enhancements of existing in-service digital tools and products. Back to you, Jim. In closing, and as previously mentioned, the macro freight environment gathered strength from late-summer 2020 through 2021 and drove Landstar's truck revenue to historic highs. 2021 fourth quarter truck revenue was 91% above the pre-pandemic 2019 fourth quarter. The prior upmarket cycle reaches peak in the 2021 fourth quarter and 2022 first quarter and was followed by decelerating year-over-year growth rates in truck revenue per load and volume beginning in the 2022 second quarter. Regardless of challenging year-over-year comparisons a less robust freight environment and the inflationary pressures of labor, equipment and insurance costs the resiliency of the Landstar variable cost business model continues to generate significant free cash flow and financial returns. For example, if we were to experience a 20% revenue decrease from the $7.4 billion of revenue reported in fiscal year 2022 we believe Landstar could still generate an operating margin, representing operating income over a variable contribution of 50% or more. We also expect free cash flow to exceed $350 million under that scenario. 2021 and 2022 were historic years at Landstar, during which the company achieved new levels of record financial performance that resulted in Landstar's historically strong business and balance sheet becoming even stronger than before. 2023 has its work cut out for it, due to the tough comps to the prior year and a less robust freight environment to start the year. Nevertheless, we have been through many business cycles before and we still expect nothing less than 2023 being a terrific year by historical standards with anticipated annual revenue well above pre-pandemic levels. Thank you very much sir. [Operator Instructions] And we have the first question coming from the line of Todd Fowler of KeyBanc Capital Market. Your line is now open. Hey. Hi. Great. Good morning everybody. Jim, I guess to start on the revenue per load commentary for the first quarter, it sounds like that the down 5% to 7% is in line with what you see from a typical seasonal standpoint. But you've got a little bit of easier comparisons coming off of the fourth quarter. And I think that on a year-over-year basis it kind of implies like a mid-teen decrease. Can you just comment on do you feel that that's reflecting where the market is or a little bit of a lag in kind of, how your pricing flows through on the revenue per load side and then, just some expectations maybe as we move through 2023 for revenue per load during the year? Yeah. I would say that, generally, we do lag a little bit in the market climb by three, four weeks or so, based on the reaction time of the shippers and agents kind of coordinating pricing. But I wouldn't say it's substantial. I would say that the market trends that we're seeing today are probably a little more true at the market than we typically see in our business. We did trend down into December, but I'm not sure with the dynamics we're seeing in the marketplace right now that we wouldn't continue to trend down the way we have in January. We did go through the fact that December was a little lower than we anticipated and would that drive a less drop into January, but we're not experiencing that. So, I think we're still pretty comfortable. We're going to see that normal drop from being 10% in the fourth quarter below the first quarter with plus another 5% to 7% drop. We'll be that mid-teen drop off in the first quarter. We're not seeing -- I would say we're seeing a little bit of I don't want to call it stable, but it's a little more stable I guess than it has been over the last three or four weeks. But again still pretty unpredictable because things have been flipping back and forth pretty quick over the last several months. As it relates to the year, we would -- if you go back to the last two years, I would always say that I believe in cycles regardless of the pandemic, I still think we're going to -- the spot versus contract cycle is going to happen. And capacity tightens and you need business and spot markets climb and then it loosens and people go to contract and spot market drops. I was saying that for the last two years that we're going to cycle down. And if you believe in cycles our peak was in February, right? We went from August of 2020 to February of 2022. It was about 18 months from what I would say was like trough-to-peak. And if you think another 18 months of peak-to-trough that puts you back somewhere in the summer. And being a believer in cycles, I would project that things will start to improve and we'll get a little bit more rate seasonality as it climbs into the third and fourth quarter. So, that would be my guess is where we're headed. It's kind of what we've talked about here and what we expect to happen in the back half actually is that we see the spot market to drive rates up a little bit. Again I'm not talking like tremendous, I'm talking seasonally normal increases in rates from Q1 maybe not the Q2, but into Q3 and Q4. Yes. No, all of that makes sense. And I would say that it's been surprising that it does turn out that it feels like a cycle even sometimes when it doesn't. So, just a quick follow-up -- and I know you went through the detail on the end markets, but are you seeing any difference now? It feels like going through a lot of last year was more on kind of the consumer durable side slowing. It looks like some of your industrial end markets are still holding in relatively well. But just kind of any general comments between end markets where you're seeing some strength and softness? Thanks. Hey Todd, this is Rob. Specifically, on the output equipment plan, we're seeing a lot of positive trending on heavy-haul projects. We're seeing a lot of heavy equipment really pick up for us from the manufacturers direct. Now, that could be the fact that again due to supply chain constraints that they're now filling orders that they couldn't over the past year and a half. But to that point exactly to the cycling up and cycling down, more so in the metals and some of that more specialized open equipment freight, we're seeing that come down, which is a typical cycle because it's winter time, right? There's not a lot when the ground freezes up north, there's not a lot of those projects that are going on. But we do anticipate as the season warms up and the year moves on that will continue on an upward basis. Automotive continues to be where it's been both from a van and a flatbed perspective for us. When you look at the automotive suppliers and you talk about the business that we're doing, I don't know if they're going to be caught up any time this year. That's really hard to predict, but it doesn't look like they are. So, that will continue in that trend. Thank you. We have the next question coming from the line of Scott Group of Wolfe Research. Your line is now open. Hey thanks. Morning guys. So, yes, I just wanted to get more of your perspective Jim on just the cycle. It sounds like you're hopeful that rates bottoming Q1, Q2. So, if you look we have this from trough-to-peak a 60% plus increase in rates and we're getting close to the trough a 20% or so drop from peak-to-trough. Does that sort of -- you got a long history or does that sort of drive with what you've seen in prior cycles that we can hold on to most of these pricing increases? I would say that the time line of the peak-to-cycle kind of 18 to 24 months kind of make sense. But we've never had a trough-to-peak of 60% growth. So, I think one of the discussion is then what's your peak-to-trough. And seeing a little bit of where the rate is sitting today is the trough down 20% or 25%. I don't -- you're not going to go down 60%, clearly. I don't believe, we're going to go back to 2019 levels. You just can't, because -- so much more cost in the system move with inflation and insurance costs, I don't see how the industry can bring rates back to that level. I'm kind of comfortable with what we're seeing in the first three or four weeks of January, has got us heading slowly down and not driving down into a 60% drop off. So, I'm pretty comfortable that with kind of the commentary is. I'm not sure, we continue to drop into the second quarter. I would say, that maybe we get a little improvement in the second quarter. And then from there we get better improvement for spot markets more seasonal. The high lows over the last two years have been crazy, right? Before that, it moved 10% or 15% from peak to trough. And not just pandemic drove it to new highs. And like I said, I just don't think it pulls back that far, as far as it grew because of the cost structures. Right. Do you have a view on where we are contract for spot? And then, maybe just to your point about, how much costs are up, right? We saw some big drop in the BCO count and the approved broker carriers just -- what you're seeing in terms of capacity? Any update on how that's trending in Q1? Yes. This is Rob. From a pricing perspective, there are still real pressures on rates right now. And those pressures are because of the huge drop in spot market rates. I don't know, where we are. To Jim's point, I think, they're starting to stabilize a bit. Assets have been pushing back for a long time because of their increased operating costs and the increases they put into their system we are starting to see those carriers and those contract rates, a little bit relaxed and start to succumb to some of the pricing pressures. I don't know -- so I think it's weakening. I don't know that we're at the bottom. But from our perspective, I do think there's some stabilization from a rate standpoint spot to a contract. Yes. Scott, this is Joe. I'll take the BCO and capacity question. So it -- we've seen we're going to we're predicting that the first quarter will look a little bit a lot like the fourth quarter as far as a net decline. And really what's driving that really doesn't change. It's -- if you think about our model, on the ad side we're really -- if guys can't get used trucks then it kind of makes it hard for them to come out of other systems and come here. The interest in Landstar is still strong, but a lot of that interest is predicated on identifying and finding a truck. So as you see, more broadly as newer trucks get put into different systems and those come into the market, then that feeds to the used truck market. And as that availability and that price begins to be rational, I think you'll see the ad thing kind of fix itself. And on the retention side, it's really about the parts and labor to keep the existing equipment running. As you probably know on the BCO side, they're running used equipment. And you've seen the inability. We've seen the inability to get trucks prepared and repaired timely and really affect our utilization throughout all of 2022 and that continues into 2023. So as that used truck market improves, as the ability to get parts and get tax into shops and get equipment back on the road, we think that helps a great deal because it's really been pretty disruptive for the last few quarters. And then, you can -- stabilization of demand, I think also is a big factor on the BCO side. Once that price levels off, as we've just discussed, I think you'll see a greater interest in coming back into the fleet, which I think a lot of these guys are currently sidelined. And you really don't see a dramatic difference in my view from where the BCOs are challenged with carriers about over 60% of our brokerage business, is on carriers of less than 10 trucks and they're seeing, a lot of those same supply-related, cost-related inflation and access to equipment-related challenges that everybody else is. And so I think they're -- a lot of them are just trying to fight through it. It's really I think a very tough condition, for a lot of truckers in the marketplace today. And as some of these things that are out of their control come back in their control, I think we'll bounce back. But I think, that's going to be a couple of quarters. Okay, great. Thank you for the time. Really appreciate it guys. Good morning. So, I guess maybe kind of a macro question divided into two parts. I guess one for Joe, one for Rob. But I guess, as you sort of think about -- on the industrial side, I think there's a lot of concern about the potential for destocking of industrial inventories. Similar to what we've been seeing over the last nine months or so on the retail consumer side. I'd just be curious if your customers are telling you anything about the potential need to do that? And then I guess just following up on Scott's question about capacity, given the pressure on small fleets, are you seeing any signs that capacity is exiting the market or maybe that capacity exit is accelerating in any way? I know that's a long question but would just be curious about both those things. Yes, I'll start, Jack. I think yes just based on the FMCSA data and some of the stuff we're reading, the net revocations of carrier authorities has really â it's been like 6000 to 8000 a week for the last several weeks of 2022. And we've seen our approved carrier count decline as well into the first quarter. So I think you're going to continue to see that. I think until some of the conditions I was just referring to with Scott kind of find a floor and start to see some level of consistency or predictability, whether it's predominantly getting trucks fixed getting drivers the labor side of things and keeping their trucks healthy and again just feeling comfortable with where the environment is. I think you're going to continue to see the larger market contract a little bit from a capacity standpoint and particularly in the small carrier realm, which is a lot of that one to 10 truck fleets. And Jack, this is Rob. To address the destocking comment. That is not something that we're experiencing or have in those conversations, again due to a lot of the constraints that have taken place over the last two years. We're really starting to see a lot of the projects come back in the aerospace and the energy, automotive, government things of that nature. So where they couldn't get supplies before or they couldn't actually fulfill their projects or orders we're starting to see those now come to fruition and continue going forward. Okay. No that's really helpful. And I guess Rob another question for you and Jim Gattoni, Jim Todd, sorry. No questions for you from me on the call today. But I guess Rob, I'd love to get your thoughts on Landstar Blue in 2023 sort of what's the plan for that part of the business this year? And sort of I guess â as you think about that kind of as a springboard into 2024, what do you hope to accomplish to prepare that? I think we're looking at that as a potential growth engine but would just be curious if you could maybe talk about what the plan is for Landstar Blue in 2023? Yes absolutely. Landstar Blue is the volume growth mechanism. That's what we're there for. And we see this as a time of opportunity, because as I'm sure you're hearing from others, companies are putting their freight out for it. Companies are looking for partnerships. They're looking for solutions. Now a lot of the reasons why they're doing it is in their mind is to drive rates down or get the rates back to where they were but it gives us an opportunity into lanes into places that we haven't been into different sections of their business to continue to grow that. So we look at it as an opportunity. The more customers that we're in front of talking about their supply chains, their needs in trying to provide solutions, I look at that as a benefit to that company. From an organizational standpoint I know Jack I had to jump in because I know you weren't going to ask me a question. So I'm jumping in anyway. We are working like crazy, trying to get Rob all the automation into his systems for â to automate dispatch capacity stuff like that. So there's I don't want to say we are pulling â I don't say we're holding back on growth there but we're doing it properly and we don't want to disturb anybody supply chains until we get automated. Hey, good morning, everyone. Appreciate the time here. Jim, Jim Gattoni, I guess maybe just a follow-up on that automation comment. You all talked about a lot of the new technology investments that you're making and how that's going to start to ramp down this year. Can you maybe just give us an update on what those are and as far as the automation how far you are along in that process and what the rollout looks like? We're dealing in two different worlds. Once we started off Blue, Blue is right more contract dedicated lane type business and it requires a little bit of automated dispatch at all not that the agents can use that. And we're kind of experimenting a Blue to build out tools for the agents. On the core side, which is the agent is, it took a good six or seven years to build out a TMS. And the TMS is really the order to delivery system that the agents use to put the orders in the dispatch a truck to monitor the â not the monitor but to just provide the transaction to a certain workflow. On top of that â so that's one â that's our biggest spend is building out that new TMS. So that's the biggest part of the spend we've had over the last five or six years. But we've attached a pricing tool too. We've attached a credit tool to it. Trailer -- we're rolling out a new trailer maintenance app to help the drivers identify -- to more easy get trailers maintain more easily get trails maintained. Trailer request tools Clarity which is our visibility tool which is where you can -- how we track freight. Those are all connected in, right? So they're always separate components of technology that lead into the successful move of freight from point A to point B with the proper communications. All those are actually up and running over the last year or two when they're starting -- they've moved off of the sitting in our balance sheet as an asset and they're starting to roll out. Now, since they're rolled out we depreciate them. So, all that stuff is very far along. The TMS is probably -- it's starting to roll out. The rollout is getting a lot quicker. I would say, it's probably made 15% of our truckloads are in it, but we're shooting for getting that ramped up this year. So most of the agents be on it. And when you speak to some of our agents in the first 90 days change is hard. So I don't talk to a guy that has been it for 90 days, talk to the guy that has been in for 120 and you'll get very favorable feedback on the efficiencies that are built into the way they do their business. Okay. That's great. Really appreciate all that color. And then maybe Rob, just one follow-up. You mentioned some of the glimmers of positivity on the flatbed side. We've heard some discussion on a few of the industrials conference calls about mega projects this year, whether that's related to chips or Inflation Reduction Act. Just wanted to know, if you're able to attribute any of that positivity on the unsided side to that project business there? To the project business. Again, a lot of what I've seen is heavy equipment aerospace government. So, while any time that we want to talk about infrastructure, anytime we want to talk about that, I can't directly say that we have an impact in that directly. But I can say that the people that feed those projects we have an impact with them. I don't know, if I answered your question exactly the way you wanted. But I see it more from the manufacturing side than I do it from the actual project yourself side. Right, you're seeing it from the supply chain, lower down the supply chain, the raw materials and the equipment going into those projects as opposed to the -- we're not getting hired by the person running the project. We're getting hired by the supplier supplying the stuff in. Jim, thinking about your hypothetical 20% revenue decline downside scenario, one thing you've really been good at over the years is outgrowing the market and a volume perspective and protecting not all of that, but a lot of that in downturns. Can you talk a little bit about if a scenario were to present itself where revenues were fall 20% or close to that? Like where would you have to really break the model? Is it volumes would have to do something that they really haven't done, or is it just a rate reversion that's more commensurate with the rate inflation? Can you just walk us through where you would be most surprised if we did print a 20% revenue decline for 2023? Thanks. Surprised, if we had a 20% revenue decline. Well, our revenue decline in the first quarter is above that. So, I mean, what we build into the year. First off, let me say that, we look at what the street has us at for revenue. And if you look at what the street has and what we're putting out as the first quarter, clearly, we have to improve off of the first quarter and we have to see that seasonal norm. And when I think about what that means is we're going to see pricing strength coming into the back half and then the volumes trending off the first quarter, pretty normal seasonally. I -- the unpredictable piece of our model typically as you know is the spot pricing and how that moves month-to-month and quarter-to-quarter. Never really surprising maybe sometimes to the degree I see it move, but we do expect and kind of project that out a little bit in the short term and the long term. I wouldn't be surprised if it moved up or down 10% from now until the end of the year. It's just very difficult. The volume size is the one that surprises us more than anything, because we do see consistency as you said year-over-year and month-to-month, there's a lot of consistency. So, if we were more than the 20% down and it was a volume-driven thing, I think we'd be looking at ourselves trying to figure out what happened and what -- do a deeper dive. Typically, when we see that drop though, you look at industry rates and we're not dropping more than the industry is. So, if we saw volumes down more than what the industry was down, I'd be surprised and concerned. Thanks for walking through that. And just one more clarification. You talked a lot about rates earlier. If I look at peak-to-peak for revenue per truck, it looks like it's up 25% from 2018 on a full year basis. Your net revenue per load is up exactly the same. Should we just look at -- thinking about conceptually about the model, is there anything that would force the net revenue per load tranche is obviously pretty important indicator for the bottom line of your business? Is there anything unique that would drive that to really diverge from rate, or is that really going to be a function of the rate on the way down as well? Thank you. Well, there's a mix in there right? It's BCO or broker. One of the things we've been -- one of the reasons if you're looking at that -- if you're looking at combined on a truckload and you're not looking separate BCO versus broker, the one thing we've been struggling with over the last probably three quarters is BCO utilization they're not driving as much and that would actually drive -- that mix would actually drive that variable contribution per load down, because that's a higher variable contribution per load, because clearly we have -- as it relates to the BCOs where they're under our -- we cover their losses on insurance so there's other costs below the line. So there's mix there based on who's hauling a load in the percent of BCO versus broker as it relates to revenue. The other thing clearly is the spread -- the typical market spread between a tight market and a soft market as it relates to third-party trucks all in our freight. Right now we're clearly in the expansion mode as it relates to variable contribution per load and we expect that probably continues at least in the first half as capacity stays loose. So those are the things that drive it. But the thing about our model it doesn't necessarily move as much as you'd see in the pure broker play, because as you know like 40% of our business is on a fixed margin. So if revenue per load goes down on the BCO, our VC per load goes down by the same amount, right? So that also would drive that margin down. Our expectation for 2023 is that we're going to be sitting on a VC margin that's probably 60 basis points, 50 to 70 bps above where we were in 2022 just based on the market dynamics right now of having more available capacity. Jim I really appreciate the additional color on just kind of your thoughts on the cycle and I think very clear and you can see it in the trends just peak activity in February of 2022. And to your point that based on normal cycle timing that puts us in a bit of a recovery or a normal period in the second half of this year. I'm just curious if you just look at what has transpired with the kind of deceleration since February. How much of that do you think is just kind of an unwind normal cycle from what was a very abnormal two years with COVID? And how you think about what happened if the US macroeconomic environment deteriorates at some point here more so than we're at right now and how that kind of fits into somewhat of an improvement here in the back half? Just would love to give your general thoughts on how the freight cycle and economic cycles can kind of intersect together? Thank you. Yes. I've been reading a lot about economic -- I'm not an economist and that's a hard word to say by the way. When you read about the economists you've got some that dire there's going to be a huge recession and others are talking about soft landing. So I'm not going to go with what anything the economists say, because they're all over the map right now. But look clearly if the economy was going to soften from this point forward more than we anticipated, we're going to struggle with hitting even what the street has out there today as a revenue number, because what -- if you take our first quarter $1.4 billion to $1.45 billion that generally in the normal year is about 22% of annual revenue. And if you believe that then the back half contributes to the next 78% which should get us to that $6.2 [ph] billion, $6.4 [ph] billion in revenue. Now that's in a normal environment where your seasonality where the economy kind of grows a little bit out of the first quarter. But if it doesn't do that I think there's more pressure on us to hit those numbers. I don't think there's any question. So trying to predict what's going to happen is hard. But if that did happen I would say that it's -- those numbers would be a little tougher on the top line. I don't think there's any question. Right. No, that's really helpful. And then as you kind of go back and I know thinking over what has happened the last really let's call it February. Do you feel like the commentary that you were carrying from your end markets your customers particularly on the consumer side will make it seem like it was a bit more of an economic slowdown in there end like they were already in the resection, or was this just again kind of come down from a weird COVID environment? I'd just love to hear what your customers were saying and how they were feeling about the environment? Well, I think a lot of customers got it wrong and overstock, right? I think they anticipate the fact that that was going to eventually slow down and we were going to see normal business cycles. So I think a bunch of our customers got caught and stuck with inventory and then they see that coming out of the end of 2021, right? And they're still dealing with inventory issues moving stuff around. And I think that's when things started to drop off. They started pulling back on spending trying to worried about inventory levels. And that's kind of what brought us down. I would say that the customers might have been -- not all of them but some of the customers buy a little late to the game on slowing down their inventory production. And once that happens, I think we've been reading about inventory since early summer. But I think it might have been a little sooner than that they were having problems and they just started to admit it. Good morning. It's Daniel on for Scott. Thanks for taking our questions here. Curious on the other truck transportation line item. What you've been seeing recently across those categories and how we should think about that in the first quarter and maybe beyond please? Thank you. Well, in that other truck transportation is power only and a lot of that was that substitute line haul business. We were dropping trucks in there and pulling someone onto other trail -- someone else's trailer. That started softening up halfway through last year. And I would anticipate that's going to -- it's like the drop-off there is because it was so high before, it really took off. It's one of the fastest growers coming through the pandemic. And I expect that actually to slow down. It might be the one that slows down more than the van or flatbed. Just based on the business that we're doing within that category being the substitute line haul, which really was consumer-driven. Thank you. And on SG&A, I mean helpful color earlier, but how should we think about the cadence this year? Anything unusual? Yes. The unusual would be kind of the mean reversion on the compensation under variable programs. But to Jim's point earlier, there's still a little bit of sticky wage inflation benefits inflation. And with softness in the general economy, that could pressure the customer bad debt line a little bit. But that was all scrubbed and part of the guide earlier. I think one of the areas too is the one you didn't mention other operating costs, which is really a smaller piece but we're experiencing like 20% to 25% inflation on the trailer maintenance per trailer. So there's some inflationary not just in the SG&A line, some of the biggest inflationary factors we have going on right now is trying to maintain our trailing equipment between the labor and availability of parts. Hey. Thank you, operator. Hey. Good morning, guys. I want to circle back a little bit to Jack's question but come at it a little bit different of a way. If we just assume normal seasonality from here in 1Q and into 2Q how oversupplied is the market right now? Are we 2% 3%? Is it more than that? So in other words, how much capacity do you think needs to continue to come out of the marketplace from here to get us back to sort of equilibrium? In all, obviously, clearly it's oversupplied, because when you look at the PT rates we were paying the trucks in the fourth quarter, it was probably the lowest it's been. And I think we look back 10 years. So there's clearly put the percentage on that it's hard to say how over -- how much more capacity. I'm also a believer in a little bit of momentum too, because people start getting scared when everybody starts putting up that rates are falling through the floor and the trucks get a little scared, so they start cutting rates on their own just so they can get freight. So there's some momentum there too. So I think there's a little bit of much capacity not enough demand that -- and then the -- hey, I need to get a load, because I'm scared rates are going to keep dropping mentality. As to how many trucks that is so -- that's such a hard measurement for us to figure out almost anybody around. We're still seeing the trucks charging us. We're still getting pretty good rates off of the trucks right now. And typically it takes three to six months for that to tighten up. So I would say that, that's all I can give you is a period of time where I think it tightens up as opposed to how many trucks are in the market, how many excess trucks. I'm not a big believer, if you add 50,000 trucks into the market that it's going to move the needle that much. I think, it's more of a demand-driven environment than a truck driven environment. You've seen sales climb, right? But I think that's -- like sales -- I thought I saw sales being at a record level in December, were pretty high compared to where it's been over the last three or four years. But remember, people are sitting on older trucks and they're just starting to swap them out. I mean, I don't even know if we know how many of those -- how many of the sales are being replacements versus additions. And then, there's all the access to drivers. It's always talking about not getting drivers into the system. So it all plays into this, how many more trucks are on the road and how many we need to come out. And it's kind of more about, your feeling trends and trying to identify what's going on. I mean, you can look into the truck counts that are coming out of the government and stuff like that and how many CDL licenses are out there, but are they all driving? It's just a very difficult question. But I would say that, it was very loose in the fourth quarter, looser than it's been in such a long time based on the rates we're paying to the trucks. And I would anticipate that's going to continue for a little while through the first quarter and then, maybe swing up, tighten up a little bit in the -- once we get through the second quarter. That sounds good. Are we seeing any impact from weather? Because we've been hearing stories about truckers getting stranded down south of all these big storms sweeping through. Yes. But with us, what happens is, we'll see a day like now that's going on in Texas, youâre like, our dispatch loadings probably were pretty low yesterday, because we won't throw trucks on the road if it's like that. But then the loads get -- the same loads that they were waiting on, they just pick them up today. So you'll see, its very short term for us. It doesn't affect the quarter so much. What does affect the quarter, if you're running contract business and someone shuts a plant and all of a sudden those 15 loads that day, they didn't get produced. So there's -- you did lose freight. But in our world, we don't necessarily lose the freight. It's really just moved to a different day. And if that's not true, maybe, I'll have -- if I'm wrong there, I'll use some weather excuse in the agenda of the first quarter. Hey, guys. Thanks for the follow-up. So Iâd go back and look in 2019 where revenue was down 10% and SG&A was down 15%. Explain to me, again, just why you think revenue could be down 20%, but SG&A up? I'm just not following. Well, I mean, like the last time we had a big drop in revenue, SG&A was down a lot. So why would this year be so different? Yes. So, Scott, I would tell you that pre-pandemic the inflationary pressures were really isolated on the insurance line and the tech line, whereas post-pandemic, we've got wage -- two years in a row of huge wage inflation. The benefits inflation on that line is a little heavier. And then, I think, 2019, the comp under variable program snapped to like $4 million. It was very low. And we've got some recent equity tranches that are based on lower base years, like, 2020 for example. So we're not going to get as much of a -- we'll get softening, but we won't get as much of a softening on those lines 2018 versus 2019 and 2022 into 2023. The other piece is not just SG&A. It's -- I believe that the insurance line was $70-something million and we're running $125 million right now. So there's $50 million of pressure right there from 2019 into 2023. That's a big piece. I -- this year, we're going to continue to buy back. It's our favorite thing to do here other than work. But our thing is, we didn't buy back in the fourth quarter, because we watched the stock run up. I think we ended the third quarter at about -- I think the stock was trading like in 145. And we don't compete with buyers by the time -- by the time the window open and -- by the time we got to the end of the quarter it went up to 160 - 170. So that's really why we didn't get in. We're just waiting for it to settle. Look, if it stays in the range that it's at today and we see some stability in pricing and volumes over the next couple of months we'd be in. I mean, it's the same thing. We'd be opportunistic stabilize -- see the stabilized price and see the market stabilize a little bit. I think we're a little too early into the first quarter to determine whether we're going to see the stabilization in rates that we see currently and whether we're not confident in the volume trends we got to get through February. February is such a tough comp. It was our best month last year. And so we're watching all those signs, but we haven't changed our thought process on buybacks. We favor them. Okay. And then just last thing, I may have missed some sort of comments you made about profitability on contractual over spot right now. I haven't heard you talk about it that way before. If you could just expand on that because I think I missed it. We don't -- like most of -- blue is so small. Blue is doing most of the contract work, but it's pretty small. So we don't really have much data on the comparisons there. But with us it's the profitability. We don't really have a lot of contract dedicated freight out of the agent base at the core. I mean, they run some of it, but it's still -- even in our world contract rates are almost like spot rates right? If the shippers -- if we're running something that looks like a contract run like lanes and rates start dropping the shipper comes back to us and drops our rates. So we have contract rates. They just don't hold. So our whole world almost works in the spot world other than the little piece over at blue. I think the question was we're trying to figure out where our spot rates today as compared to contract rates. And I don't think we had a very good answer because I don't think we know where they stand today. We get the data just like you get it from people who publish it. At this time, I show no further questions. I would like to turn the call back over to you sir for closing remarks. Thank you. Before I sign off on 2022, I want to thank all of Landstar's agents BCOs and employees for putting up another record year. The people in Landstar's unique network of agents, capacity price employees or what truly sets Landstar apart in our industry and enables the success we all achieved together. Thank you and I look forward to speaking with you again on our 2023 first quarter earnings conference call currently scheduled for April 27. Have a good day.
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EarningCall_806
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Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Software AG's Q4 and Full Year 2022 Results Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] Good morning, ladies and gentlemen. Welcome to Software AG's analyst call and webcast on its preliminary Q4 and full year 2022 results. Yesterday, Software AG published preliminary results for the reported quarter and the full year 2022 as well as the presentation used in this call. We will start with the presentation from our CEO, Sanjay Brahmawar; followed by our new CFO, Daniela Bünger, before opening the line for taking your questions. Before we start, here are some housekeeping remarks. The conference call is also being broadcasted via web. You may access the webcast via our Investor Relations website. The webcast will be display the presentation slides related to this call and the same slides are available for download on our website. The webcast, including the full call with questions, answers and the names of the questioners, will be recorded and made available for replay later today. Finally, let me remind you of our disclaimer statement, which is shown at the beginning of the slide presentation and is valid for the entire call. Today, I have three headline messages to deliver. First, despite ongoing macro challenges, we delivered a strong fourth quarter and full year, in line with or, in case of A&N, ahead of our stated guidance ranges. Our successes, the results of four years of root-and-branch transformation form the basis on which we'll start to evolve our strategy going forward. Second, this evolution starts with five strategic priorities for 2023. With demand for SaaS accelerating and our cloud integration portfolio going from strength-to-strength, these areas will be major themes. We also sharpen our sales execution and deepen our commitment to cost management in the face of macro uncertainty. Doing so will help us become more efficient, productive and profitable as we scale. These priorities have been developed with the full support of our new supervisory board and with the input of our refreshed management team. They underpinned our operating plan and our guidance for the year, and they give you a strong sense of how our long-term thinking on strategy is crystallizing, as we head into our Capital Markets Day on June 6th. Third, building on the success of Q4, we are taking actions at the start of 2023 that will create a leaner and more productive organization. We've initiated a cost program that will deliver â¬30 million to â¬35 million of margin impact this year with further annualized benefits to come thereafter. The increasing resiliency of our business, clear priorities for 2023 and a leaner operating platform, all give me confidence of achieving our guidance we've announced today. Before looking to the future, Daniela and I will first provide a quick rundown of the highlights from 2022. During Q4, we delivered strong new business growth in cloud integration which, along with robust renewals performance, drove our organic digital business bookings growth to 15%. This reacceleration took our full year organic digital business bookings growth to 12% and into our guidance range. Within this, SaaS bookings grew 30%, three times faster than our subscription bookings. In Q4, we also saw organic digital business product revenue grow for a seventh consecutive quarter at 7%, leading to a full year growth of 7%. This trend shows our transformation continuing to drive profit and loss success. Organic digital business ARR, our key indicator of future revenue and cash flow, also continued to grow consistently at 11%. In A&N, strong execution of large subscription deals pushed bookings growth to 144% in the quarter and 23% in the year. This level of performance was partly driven by the early closing of a large deal brought forward by the Israel's Finance Ministry. It was an important strategic win for us, combining A&N rehosting in the cloud with API technology from our digital business portfolio. In shifting this deal into 2022, the consequence is that we've strengthened the comparator against which we are now judging our 2023 performance. This reality is reflected in our A&N ARR guidance for the year. From a product revenue perspective, our organic digital business and A&N performance helped us reach organic growth of 24% in Q4 and 7% in the full year. And on revenue quality, I'll note that 93% of our full year organic product revenue was recurring. Finally, on organic margin, we delivered 23.1% in the fourth quarter and 21.2% for the full year. I'd like to thank the team for everything they've done to bring us to this point. I'm proud of our achievement so far, and I'm excited about what's to come. Behind the numbers, our performance reflects the trends we've developed in key growth areas. On the product side, our big goal through Helix was to take a material leap forward with our cloud product portfolio. Now we have strong cloud offerings, in particular in webMethods, ARIS and Cumulocity. In Q4, our API management and industrial IoT products were all recognized as Magic Quadrant leaders by Gartner. Our product Net Promoter Score also reached an all-time high of plus 61, up from plus 52 last year. This recognition demonstrates a level of customer acceptance, which has supported ARR growth in the double-digits from our cloud integration, ARIS Cloud and Cumulocity products in 2022. As I mentioned, we've seen particular strength in integration and API management. Here customers continue to seek innovative solutions to drive value from data stored across disparate cloud and on-premise systems and applications that aren't designed to work together. Our key products to address this opportunity are webMethods.io, our cloud integration and modern API platform; and our recent acquisition, StreamSets, both of them won great new deals in Q4. In webMethods, we won a fantastic SaaS renewal in DACH region with Airbus. And with the support of Microsoft, we won a large expansion deal for our cloud integration and B2B stack with a modern leading logistics firm in North America. StreamSets also continues to grow strongly. During Q4, we saw new synergy deals coming through, including a great win with Dubai Airports. This landmark deal included integration technology from a broader digital business building on the synergy success we had in Q3 with G42 and further demonstrating the strength of our acquisition rationale. Wins like this showcase our success in progressing another key Helix ambition, landing new customers. In 2022, we won 333 new logos. This represents our second consecutive record year. Our market impact is also being supported by the quality and improvement of the health of our pipeline, which is helping us become more consistent over time. Despite the macro uncertainty, our digital business pipeline coverage for the next half year is ahead of our position at this point in 2022. This reflects the ongoing work by Joshua and his team to address the execution issues we saw last year. While it won't make us immune, it does give us a good basis on which to manage any increase in macro impact in the year ahead. Finally, last year, we also continued to create value through migrations and renewals in our digital business. Our digital business migration multiplier was 1.5x last year, and we delivered organic renewal bookings up 57% year-on-year. I'll now hand over to Daniela to run through the key financials before coming back to look at our plan for the year ahead. As you've heard, results from last year show the quality of the growth that were built through Helix. In my first few weeks here, I've started to see that from the inside. I'm now fully focused on working with the team on the final details of our strategy evolution, where we'll continue to improve the quality of our revenue with subscription and SaaS-led growth. This next phase of the transformation will also see greater emphasis on cost efficiencies, as we prioritize our investments behind the best growth opportunities and ensure our wider business is a leaner, more future-proof organization. This will enable a consistent capital allocation approach that delivers sustainable growth in top and bottom line. I look forward to speaking with many of you in the coming weeks and going into more depth at the CMD later in the year. I'll now run through the key numbers from the fourth quarter and the full year 2022. In our digital business, our organic bookings grew at 15% in the quarter and 12% in the full year. SaaS bookings were up by 26% in the quarter and 30% in the full year, reaching a portion of total digital bookings of 24%. This development has demonstrated the increasing customer demand for SaaS, which will drive a good portion of our 2023 activity. Total digital business bookings, including StreamSets, grew 37% in the quarter and 29% year-on-year. On ARR, our digital business also continued to grow double-digits. On an organic basic ARR, we were up 11% at the end of Q4 and including StreamSets, we grew by 20%. In A&N, as Sanjay already mentioned, we saw a very strong subscription-led performance in Q4, which benefited from the early closing of a large deal. This drove bookings to growth of 144%. For the full year, this meant bookings growth of 23%, substantially ahead of our guidance range. Our ARR in A&N was up 7% in 2022, and saw a sequential acceleration in Q4. Looking ahead, our strong 2022 performance impact on our 2023 expectations, and we have approached our 2023 A&N - ARR guidance accordingly. In combination, our organic digital business and A&N results gave us organic total bookings growth of - 35% in the fourth quarter and 15% in the full year. Our full year bookings to, revenue conversion rate was 44% in the digital business and 72% for A&N. All of these rates are broadly in line with the planning assumptions issued at our last Capital Market Day despite the headwinds coming from the higher share of SaaS in our overall bookings mix as well as the higher share of A&N migration to subscriptions. These conversion rates gave us organic product revenue growth of 24% in the quarter and 7% in the full year, within our guidance range. Including StreamSets, our total product revenue grew 28% in the fourth quarter and 10% year-on-year. The StreamSets' contribution represents â¬9.6 million in Q4 and â¬22.1 million for the period of eight and a half months since the acquisition was closed. As a reminder, this â¬22.1 million represents the contribution from StreamSets' IFRS revenue. To arrive at the non-IFRS group product revenue expectations we provided at the time of acquisition, we need to translate these revenues back into non-IFRS. This is to remove the non-operating net negative impact of factors, including accounting policy changes and the purchase price allocation related to the acquisition. Adjusting for these factors, StreamSets' non-IFRS revenue contribution was roughly â¬27 million in the full year. When added to the group's organic product revenue, our total group non-IFRS product revenue growth would have been 11% net of currency. This is slightly below the assumptions we shared with you in April, primarily due to a higher than expected SaaS mix as StreamSets' latest cloud products resonated strongly in the market. Moving now to Professional Services, on an organic basis, Professional Services revenue was down 3% in Q4 and 1% in the full year. With the contribution of StreamSets, Professional Services revenue increased by 2%, both in Q4 and for the full year. From a margin perspective, Professional Services achieved a margin of 3.1% in the quarter and 14.7% in the full year, excluding StreamSets, and 1.2% in the quarter and 13.4% in the full year when including StreamSets. Together, our organic product and Professional Services revenue led to organic total revenue of â¬292 million in the quarter and â¬930.8 million in the full year. This represents growth of 19% and 6%, respectively. On a group basis, including StreamSets, total revenue was â¬303.8 million in the quarter and group basis 958.2 million in the full year. This represents growth of 24% and 8%, respectively. Now coming to costs and margins, total costs increased 10% for the full year on a stated basis, excluding the impact of StreamSets. Adjusting for foreign exchange, total cost increased just under 6% for the full year, at the upper end of the range we set out at our Capital Markets Day last February. At that time, we also indicated that we would invest between â¬35 million and â¬40 million last year, divided across the areas of product innovation, sales and go-to-market and people and culture. At the end of December, we had invested â¬32 million across these three buckets. Overall, our total cost development brings us to a full year organic non-IFRS EBITDA margin of 23.1% in the fourth quarter and 21.2% for the full year, comfortably within our guidance range. Nevertheless, the ongoing inflationary environment will lead to higher salaries and operating expenses in 2023. Also, the increasing portion of SaaS will come with higher costs, which we'll explain in more detail later. The impact of StreamSets in 2022 amounted to a negative margin impact of â¬19.1 million, again affected by lower-than-expected revenue as a result of the strong SaaS performance. This brings me to cash flow. As in the previous quarters, we have continued to see negative technical impact on cash flow as a result of our business model transformation and subscription shift. Despite our strong Q4 performance, in Q4, our free cash flow was at minus â¬10.2 million, as payments usually land in the following quarter. Looking at the full year, free cash flow has turned slightly negative to minus â¬1.1 million versus â¬91.4 million in the last year. This result was partly driven by a small number of material one-off cash flow outflows, like higher tax payments and M&A charges, which mainly occurred in Q2. A look at our ARR development gives us a clear indication of future cash flow development as our subscription, SaaS and new business contracts start to stack up over time. In parallel, we continue to be laser-focused on driving financial discipline throughout our organization, as it relates to cash and cash management. We are driving the right sales behaviors for example, our payment term negotiations as being as efficient as possible with costs overall. Having spent some time getting to know the business, I'm encouraged by the progress I've seen in these financial areas of the company, albeit with more to be done and with greater emphasis on return on investments. At the same time, I will ensure that we continue our pursuit of non-financial goals, like maintaining a strong employee engagement score. Measures like this contribute to sustainable financial success in the long run. And that's it for me for now. Now it's time to turn to the future. With the final year of Helix upon us, we are well placed to continue benefiting from our business model shift and our strong finish to 2022. Importantly, we are mindful of the macro environment, and we have budgeted accordingly. On this, sales cycles may be lengthening, but underlying demand remains robust. And given the mission-critical nature of our products, we have not seen customers walking away from deals. With this context in mind, we have also been working hard to bring together our plan for the next phase of our growth. We are finalizing the last details, but the guiding principles we've identified inform both our 2023 plan and the mid-term view that we will share with you at our Capital Markets Day. The process we've been through to arrive at this plan has been honest and self-critical. We have gained a clear view of where we are strong in our product, in our subscription shift, in the start of what we've made on SaaS and in the way these developments have helped us become more competitive on new logos. We've also gained a clear idea of where we have still room for improvement. For example, our sales execution has been volatile, and we still have too much portfolio and process complexity in our business. When we instill greater focus around one of our key end markets and simplify our business operations even further, we can drive productivity and efficiency and present an even more powerful product proposition to our customers. Our evolved plan takes all of this into consideration. Before we dive into how this work provides the foundation for our 2023 operating priorities, it's worth noting that in some cases, our decisions, particularly on SaaS and in A&N, have short-term impacts on our revenue or cost this year. As Daniela will explain, these impacts are reflected in our guidance. They reduce over time and enable sustainable value creation for our customers and our business in the medium and long-term. Our five priorities are as follows: first, with demand growing rapidly, we'll accelerate the journey to making Software AG cloud first. For next year, our key growth initiative is to prioritize specific cloud sales motions of products like webMethods.io, StreamSets, Cumulocity and ARIS Cloud portfolio. We support this activity with programs to increase our cloud efficiency as we add scale, including improvements in cloud ops automation and contracting, pricing and quoting. While our 2022 performance has strengthened our commitment to pressing forward with SaaS, our success impacts margin in the short-term. Again, Daniela will pick this up when we discuss our guidance shortly. Second, we will double-down on innovation and integration. Our updated market analysis tells us that the cloud application and data integration market is growing at 21% annually to â¬11 billion by 2026. This represents the largest opportunity across our product set. Prioritizing investment here will further differentiate our product and increase our competitive success. So far this year, we have announced new API management tools for webMethods and launched a new webMethods API marketplace. Both of these innovations make life easier for developers, increasing efficiency and reducing cost. And more innovation like this in 2023 will see us take our product to the next level. Third, we will take bold action on our sales force, increasing sales specialization to drive efficacy and efficiency. We started this process in January by moving to a specialized go-to-market model in North America. This change saw us reduce our overall sales headcount by 33, while at the same time, increasing our number of expert quota-carrying resources by 14 and thus, customer-facing capacity in this key market. We'll also integrate the specialized StreamSets sales force this year. By shifting to a specialized model, we'll increase our sales competitiveness, matching up head-to-head with key competitors who already go-to-market by buyer, product and competitive set. Lastly, we continue to work we started last year with partners, like Persistent, to invest in outside implementation practices for our leading growth products. While this will have a temporary impact on our support and services margin, it will allow us to further focus and specialize our own Professional Services organization on higher margin advisory services over mid-term. Fourth, we continue to leverage the value of A&N by helping customers to the cloud via subscription. This activity builds on our 2050 plus modernization program, which has already been successful in extending the life cycle of A&N for key customers. Over the last two years, customer churn in A&N's top 170 customers has been extremely low. This is a customer group that accounts for over 80% of A&N's ARR. In 2023, we'll continue to put our weight behind technologies like ZIPP [ph] and cloud containerization, which extend A&N's life cycle. We'll also accelerate cross-sell into our digital business focusing on growth use cases like API enablement, via our webMethods.io and the integration of mainframe and cloud data via StreamSets. And fifth, we've introduced a program to optimize our operating platform and increase operating leverage as we grow. We have three types of activity here. First, we'll drive operating efficiency through a lift and shift of resources from Tier 3 geographies into more productive Tier 1 and 2 countries. We'll also increase G&A, process efficiency and double-down on cloud ops automation to increase productivity. Second, we have a number of people actions underway. We've already executed on our sales specialization work in North America, and we are making further changes that will result in a workforce reduction of approximately 200 employees or 4% of the total FTE. We've begun talking to some of the people impacted today. Lastly, we remain conscious of our spending in light of the current macro environment and continue to exercise prudence as we execute against our operating plan. Together, we expect this activity to yield a positive margin benefit of between â¬30 million and â¬35 million in 2023, with further annualized benefits to come thereafter. Please note, this doesn't mean we will stop investing in key strategic areas, like our cloud offerings. Turning now to our guidance, I want to highlight one key change from last year. From today, we are shifting our headline metrics from product bookings to ARR for both our digital business and A&N. At the start of Helix, we introduced a, bookings metric to give you a direct picture of our sales success, while our revenue metrics were impacted by our business model shift to subscription. Due to the success of that program, almost 90% of our total bookings in 2022 came from subscription and SaaS. Therefore, nearly all of our bookings now contribute directly to A&N ARR. In addition, our progress on subscription means that the vast majority of our cash is now collected on annual cycles. This means that ARR is a good reflection of the future cash flows we expect to see in our business when combined with cash flows we still receive from a small amount of perpetual licenses we sell and our Professional Services revenue. Additionally, ARR isn't influenced by IFRS accounting. And unlike IFRS revenue, it won't fluctuate because of changes in deployment mix as we push harder on SaaS. We'll provide more detail on the drivers of ARR, particularly on the product side at our Capital Markets Day later in the year. Our other guidance metrics, product revenue and non-IFRS EBITDA margin remain unchanged, and we will continue to provide bookings numbers in our financial presentation for your reference. I'm now going to walk through our guidance at a high level before handing back to Daniela for a bit more color. For 2023, we expect constant currency digital business ARR growth of between 10% and 15%, a constant currency A&N ARR development of between minus 2% and plus 2%, constant currency group product revenue growth of between 6% and 10% and a stated non-IFRS EBITDA margin of between 16% and 18%. Please note that our guidance now incorporates StreamSets. We're delighted with our acquisition, which is growing ARR in the double - strong double-digits year-on-year and is resonating powerfully with customers in the market. However, we should be mindful that it carries a negative impact on margin until late in its third year of ownership. On ARR, our guidance for digital business demonstrates our ongoing confidence in its growth. On A&N, against a tough compare, our ARR guidance still demonstrates we remain confident in stable performance. On product revenue, we are similarly confident in growth led by our digital business despite the technical impact of our ongoing subscription shift in A&N. Our strategic decisions around SaaS and A&N shift to subscription, coupled with the impact we anticipate from the macro environment in 2023, mean that we expect to fall short of the organic â¬1 billion total revenue ambition we set out in 2019. These dynamics are also the primary reason for the development of our margin against that same original ambition. These decisions are consistent with the aims of Helix and its intention of setting our business up for long-term value creation. As such, they are right for the business going forward. From my perspective, this guide is all about setting Software AG up to deliver a set of ambitious, but achievable goals due to current macro uncertainty that you can all plan and track our business around with confidence. A strong focus on top line and the transformation results are the main drivers to ensure we deliver our 2023 results as well as our long-term ambitions. This will be combined with a strong focus on sustainable as well as profitable growth. To elaborate how we will achieve this, let me get back to our margin guidance and its context. The bridge you can see on your screen summarizes the drivers of our margin development from 2022 through 2023. First, coming from 2022, we expected a positive margin contribution from revenue growth implied by our 2023 product revenue guidance. Second, you see the benefit of the efficiency and productivity program Sanjay mentioned. This will yield a positive impact to margin of approximately â¬30 million to â¬35 million in 2023. Next, we anticipate temporary margin headwinds related to our 2023 strategic priorities, including our focus on SaaS and the continued transformation of our Professional Services business. Moving along, you will see we have a margin impact from higher salaries in 2022 and some notable operating expenses due to the wider inflationary environment. In order to mitigate this impact in 2023, we are evaluating the company's overall compensation plan for the year. We also benefited in 2022 from FX gains that will not be repeatable in 2023. And lastly, there is the margin impact from StreamSets present in our books for the full 12 months of this year. This impact represents a slight year-on-year improvement when compared to an annualized due of last year, as we continue to move StreamSets towards margin accretion in this third year of ownership. Importantly, if we weren't moving forward with key strategic initiatives we've mentioned, our 2023 margin guidance would have been ahead of current market expectations for this year. However, we are running our business to create value in the long-term and we're very confident that these are the right steps. Now a comment on our 2023 cost program, as part of our actions this year, we expect one-off costs of around â¬15 million to â¬20 million. This means we will also expect total one-off adjustments to our IFRS EBITDA of â¬15 million to â¬20 million for the full year. As we look forward, we expect the impact of each negative margin driver to reduce substantially as we head into 2024. When combined with the annualized positive impact of our cost actions and our additional efficiency measures, we expect increased operating leverage on our incremental revenue growth from the subscription and SaaS backlog we see landing in 2024 and all similar revenues thereafter. We will share more on this positive future margin development and its drivers at our Capital Markets Day in a few months. So to bring the call to a close, I'd like to reiterate the messages I opened at the top of the call. First, our strong Q4 and solid 2022 performance was a result of the hard work through the first year of Helix. Second, we are now ready to start evolving our strategy for the next phase. Together with our new Supervisory Board and our refreshed management team in place, we made an honest assessment of our progress and developed our strategic priorities for the coming year. These priorities will drive our business forward in terms of growth, efficiency and product. And lastly, building on the success of Q4 and with the increased resiliency of our business, we're confident in our 2023 guidance. We'll share more details on our view beyond 2023 at our Capital Markets Day. But for now, taking into account our Q4 performance and our macro environment, we believe our ARR growth to be sustainable. We also expect to see continued margin improvement in the mid-term. Thank you, Sanjay and Daniela. Ladies and gentlemen, you may now ask your questions and only one question at a time. Operator, please repeat the instructions on how to proceed. Good morning, thank you for taking my question. Okay, I will keep it to one. Just a question on the margin bridge on Page 20 and the strategic initiatives and maybe for Sanjay, why do you think it's now the right time really to accelerate all these initiatives and also, in particular, the transition to the cloud? You have just gone to a pretty disruptive transformation and after which you've committed to deliver margin leverage. So why does it make sense to change your plan already so early and again? Hi Sven, thank you for the question. So let me mention first that we now see a high increased traction on our cloud products, the innovation that we've launched in the market, both around the integration as well as ARIS and Cumulocity. And so, this is very much driven with the way the customer is engaging with us and based on the customer demand. And then the second thing is that - we see that acceleration coming through quite heavily through Q3 and Q4. And so, it makes a lot of sense for us to now really go with the customer demand, the way the customer wants to buy from us, and to be able to allow our sales force and incentivize the sales force accordingly in the market. And hence, the shift makes sense now because of the traction on the products. Perhaps Josh, you can share a bit from what you're experiencing in the market also. No, Sanjay, as you said, we continue to see strong demand for our products, and we continue to see strong pipeline build and customer commitment as well as the partnerships that we've established with our global system integrators. Thank you. Hi, thanks for taking my question, My question was majorly on the DBP performance. Like - we saw that the SaaS uptake was higher because of which the growth in revenue did not really stack up the bookings. And given the ARR growth that we have of around 10% to 15%, how should we think about that as in both like the ARR dynamics versus the revenue dynamics going into FY '23? Deepshikha, could you repeat the first part because it wasn't very clear? We couldn't hear the first. However, got the ARR 10% to 15%, but would you mind repeating the first part, please? So in the fourth quarter, what we saw was while the bookings were pretty solid, like the growth in DBP in bookings in the fourth quarter was pretty good, the revenue was not exactly. I got it sorry, thank you. I couldn't hear that first part. So let me just first explain that because what we saw is an acceleration in SaaS Deepshikha. So what happens with SaaS is it's ratable. So therefore, you don't get the revenue straight away. You only get it from the time that the bookings, converts into an order, and so we will see the full impact of that revenue next year. And that's the reason why you see the difference between, obviously, the bookings coming through, but the revenue not getting impacted. And then, of course, on the ARR, you said the 10% to 15% growth, we see the impact coming through from the SaaS that we have signed this year. We will get the full impact of that SaaS next year, including the growth that we expect through both new business as well as the renewals. Our renewals portion is also growing significantly as we step into the 2023. So my question basically was that the differential between the ARR growth and the revenue growth will decrease substantially, like will - versus what we saw in the fourth quarter, right? Yes, good morning. And just looking at Slide 10 in the pack and the ARR trend, I mean could you address two things. Firstly, I mean, sequentially, ARR is flat and this was a big quarter for renewals, which would normally generate sort of up-sell, cross-sell, so can you comment on that? And also looking at the SaaS element within it, I mean it's up â¬3 million quarter-on-quarter, â¬8 million in the six months? It doesn't look - these numbers don't suggest to me a dramatic change in consumption patterns. So maybe you can say how much of ARR exiting '23 you expect to be on SaaS? And then just a small clarification, if I can, Daniela on EPS, there was a big hit from something or rather. Can you explain what happened to full year EPS? Thank you. Okay. Daniela, do you want to go with the EPS? Michael, it's Sanjay, the first part on the ARR is basically related to the SaaS and the SaaS percentage grew significantly from - literally from 25% to 35% in 2023. So therefore, that is the reason why you will see a significant change in the ARR. Yes, and if we come to the second part, your EPS question, so coming from net income to the EPS, we have a deferred tax impact that drives our tax rate, which led to an unusually high tax payments in 2023 - 2022, sorry. No, no, no. I mean, it was a tax rate of 71%. And no, we don't want to repeat that, and we won't sorry. Yes, but Sanjay, I'm struggling with your 25% to 35% because â¬72 million out of â¬516 million is the SaaS number for Q4 organically ARR, that's like 15%. I meant booking, sorry, Michael, I meant booking. In the bookings, we have a significant growth in the amount of bookings related to SaaS as we step into 2023. So what do you think SaaS will be an ARR by the end of this year? I think - before you were talking about 15% maybe in cloud by the end of '23? Good morning, and thank you for taking my question. If we just take a step back and I guess, look at the margin guidance, in particular, the previous mid-term guidance was for that to get towards 25% to 30% range. Obviously today, it's 16% to 18% for 2023. And within that, there is the benefit from the cost cutting or the efficiency plan? Can you maybe just walk us through, at a high level, what the main changes are? I know, obviously, some of it's going the shift more to - or the acceleration more to SaaS, but it would just be helpful if you could kind of walk us through what really has changed? Absolutely, Alastair thanks for the question. So you can broadly think of the gap to the midpoint of the guidance as half revenue related and half cost investment related. And we view these as temporary headwinds, particularly on the cost investment side. So the reasons behind these are essentially twofold. One, the strategic decisions we've taken, firstly, on SaaS to really go for more SaaS. Number two, also for A&N subscriptions, as I said, there's more traction and more demand from the customers around A&N subscriptions. And then the third thing is investing in StreamSets. Now if we have taken - if we had not taken those decisions, these strategic decisions, our margin would have been up year-on-year and ahead of expectations. Now the second part is on the macro side, we have considered some top line impact from the macro in 2023 as well as the cost inflation from 2022 that's impacting 2023. Now those are mostly offset by the cost actions we've announced today. And as I mentioned and Daniela also in her script, that these are actions that are actually not one-off in terms of cost improvement, they are run rate-impacting actions. So you will see this benefit come through into 2024 also and hence see the impact of the margin expansion. Daniela? And maybe one important thing to add, the impact of the Helix program that Sanjay was just referring to of about â¬30 million to â¬35 million this year, this for us is a run rate improvement. So you can expect to see that in the years to come which is already a significant impact to our margin - in terms of percentage. And on top of that, I mean, what we've baked into our numbers for this year is steady macroeconomic impact around inflation. While we don't have a crystal ball, I guess we all agree that we expect inflation to go down to levels that we've seen in the past decade or more than we've seen in Europe and U.S.. Yes hello, thank you. Looking at the final revenue mix in 2022, we saw that it was much more favorable than initially factored into your guidance, given the strong A&N outperformance. Still you have been rather organically at the midpoint of your guidance, while one would have normally assumed a clear beat given the more favorable revenue mix? So I tried to get a better understanding. Also I understand that inflation started to kick in mainly in H2. But what - was basically the burden for the outperformance for the operating profit in 2022? Thank you. Hi Knut, it's Sanjay. So as you can see that we had a reacceleration, first and foremost, of the digital business and you saw that come through in Q4. We had always said that Q4 was going to be a big quarter for us, and we had a strong pipeline, and we had strengthened with our new CRO onboard, the execution aspects also. So that's one. We really accelerated the digital business side. And the second thing is we had a deal on A&N also that came in early [Technical Difficulty]. Ladies and gentlemen, sorry for the interruption, we have a problem with the speaker line. Please stay connected one moment. Sorry for the interruption, we are now back on line. The speakers are connected, and we can continue with the question from Knut Woller. Okay, so Knut, apologies for this interruption, but I don't know how far you heard my answer. Perhaps you can let me know whether you've got the information you were looking for or did you miss something? Thanks Sanjay, just that's it you saw the reacceleration of digital business in the second half and then the line broke so? So I'll just reemphasize, Knut. We put a lot of effort onto the digital business and the execution side and with Joshua and team. So we saw that coming through in Q4, strong pipeline ending towards the year, but also stepping into 2023. We see this momentum now, number one. And number two was that we had a deal in - Israel Finance Ministry deal in A&N, where the customer wanted to do the deal earlier. And so as you know, these are finite set of customers, and we go from the customer demand and customer need perspective. Of course, we have to keep in mind if that deal comes forward, we don't have that customer to renew in 2023, so it's just a matter of timing. But those are the reasons that were kind of driving the higher than expected. And Daniela? And Knut, just add on the margin side, so what happened to the margin with the revenue we saw, especially in the fourth quarter, I mean with the deals closing and closing early, we had higher-than-planned commission payments that we had to accrue for in the quarter. It's also the shift of the cost profile probably more extreme than we had originally anticipated. But again, that's, of course, not something that we see every quarter that was coming with additional accelerated revenue. Good morning, thank you for taking my questions. Mine is on the free cash flow development. As you are transitioning also parts of and to subscriptions, how shall we look at free cash flow development going forward? When should we expect free cash flow to come? Thank you. Yes, I mean as you saw on the slide, 2022 practically zero free cash flow. Our projection for 2023 is, give or take, in the same area due to all the impacts that we've discussed. One special impact that you couldn't see on the slide, but that's worth mentioning is factoring in all prior years, including 2022 we have few factoring as a measure to improve the cash position. We have not planned for that in 2023. If you would, in a like-for-like comparison, add factoring back mentally, you could add another â¬20 million to â¬30 million to our free cash flow. So that would give you an improvement already in 2023. Coming out of the shift to subscription, we do expect a steeper improvement of the free cash flow in 2024. However, we need to be mindful that cash is the - KPI is always lagging behind, but we are very confident that with the cost measures in 2023, the change in the cash profile and the revenue profile, we will see a strong pickup in our cash profile going forward. Yes hi, good morning. Just a quick one, and can you comment on the expected price increases in the SaaS and maintenance base if any, and the expected contribution to top line or ARR growth this year? Thank you, Martin. This is something Josh has been working so much on, so I'm going to ask him to give you a feedback on price increases. Yes, I think Martin, thank you, Sanjay, for the question. I think where applicable and where we have the opportunity to, we are certainly looking at every lever we have around price increases for our portfolio mix. And obviously, inflation is baked into our contracts, so that's something that is - that we see a strong success on, Martin. Yes, thank you. Just two follow-up questions so first, on the inflationary impact on the cost and when you look at Slide 20, it seems like the impact from inflation cost is so much larger than what you expect the incremental revenues. So just the question is essentially, in the past, you spoke about the ability to increase prices to compensate for inflation. So why don't we see this now coming through? And then second question is just on the maintenance conversion. This accelerated in Q4 and I wonder if that was always the plan? And if not, why you decided to accelerate the conversion in Q4? And maybe also, it would be great if you could comment what level of maintenance conversion you expect for 2023? Yes hi, Sven, let me take the second one first, and I'm going to pass it on to Daniela for the inflation-related question that you have. So listen, I think we are moving very much in line with what we expected and the changes around the split. You know that we are in the three buckets of renewals, new business as well as migrations. And to give you a flavor, in terms of the change in migrations for a full year of 2021 versus 2022, actually, migrations in 2021 were 45%. And this year - sorry, in 2022, the migrations were 33%. So the number of migrations - portion of migrations is going down. Even in Q4, if you compare it to the previous year, migrations in Q4 were 39% against - last year's Q4 of 47%. So as a percentage, migrations are going down. Obviously, renewals are going up and new business continues to stay steady in the range of about 30% to 35%. So actually, I feel really good about the health of the business and the way it is shifting. And we are not having a situation where the sales teams are just trying to push through the migrations to make the numbers. So I think it's an even-based change. Over to Daniela. All right thank you, Sanjay. So Sven to your first part of the question, do we expect any further inflation impact in 2023, referring to Slide 20 that we've shown? Referring to the full year 2023 expectations, we do believe that globally inflation rate saw its peak last year. And while the development of wages depends on inflation rates as well as talent availability, we did take some actions in 2022 to mitigate inflation, especially in hot spots. And we do expect that this is the measure that we had to take. We don't expect any additional measures to be taken in this area in 2023, barring a few needed exceptions, of course. Yes, so why is, then the inflationary impact, the negative impact on Page 20, much rather than the incremental revenue growth? Shouldn't it be - if your inflation is coming down and you have pricing power, and this will more than be compensated by incremental revenue? Yes, so in 2022, we only saw half a year of the impact. And now in 2023, we see the full year of the measures we took around people in 2022. So now that's why we're seeing a higher impact in 2023 on the costs coming from this area. So it's half year versus full year impact. Yes. In 2023, we are expecting approximately 30% in terms of convergence. So just for the trend to just establish that, right? So we've gone 45% down to 33%, down to 30%. So you see that portion is going down and new business stays and the renewals goes up. Thank you. And with that last question, we would like to conclude the conference call. Ladies and gentlemen, we appreciate your participation and constructive questions. If there are further questions you would like to ask, please contact the IR team until next time. Goodbye. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.
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EarningCall_807
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Greetings and welcome to the Meritage Homes Fourth Quarter 2022 Analyst Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Emily Tadano, Vice President of Investor Relations and ESG. Thank you. Please go ahead. Thank you, operator. Good morning and welcome to our analyst call to discuss our fourth quarter and full year 2022 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management which are subject to change at any time and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2021 annual report on Form 10-K and subsequent quarterly reports on Form 10-Q which contain a more detailed discussion of those risks. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website within approximately 2 hours after we conclude the call and will remain active until February 16. I'll now turn it over to Mr. Hilton. Steve? Thank you, Emily. Good morning and welcome to everyone participating in our call this morning. I'll start with a brief discussion about what we are seeing in the market and provide an overview of our recent company milestones. Philippe will cover our strategy and quarterly performance. Hilla will provide a financial overview of the fourth quarter and forward-looking guidance. Q4 marked a strong finish to a year of exceptional execution and dedication from the Meritage team. We delivered 29% more homes this quarter and generated $2 billion in home closing revenue in the fourth quarter which was 32% higher than the fourth quarter of '21. Our home closing gross margin of 25.2% and quarterly SG&A leverage of 8.4% led to our quarterly diluted EPS of $7.09. Although favorable demographics and the low supply of housing inventory should drive long-term demand, we believe they were overshadowed in the back half of the year by ongoing economic uncertainty and buyer psychology, increasing mortgage interest rates and inflation. With homebuyers on a [indiscernible] about when to get back into the market, our fourth quarter sales orders declined 46% year-over-year driven by a cancellation rate of 39%. Today's higher mortgage interest rates continue to pressure housing prices as monthly payments still remain above 2020 and 2021 levels despite price cuts and rate locks. We believe that until rates stabilize, home sales activity will remain choppy. We see some potential buyers who could qualify but are waiting for further price declines as they anticipate additional builder incentives are coming. Other current buyers with rate locks in place or below current market mortgage rates were cancelling due to the buyer hesitancy as they may have been nervous of the general economy or their own financial positions. However, given our available inventory, we are seeing some buyers -- the market and respond favorably to our quick movement selection as well as our incentives and company-wide sales initiatives. Now, on to Slide 4. As the team that embodies our start with heart core value, Meritage employees donated countless hours to deliver 3 mortgage-free homes to deserving military veterans and their families on Veterans Day in Houston, Nashville and Tucson. This is one of the most impactful annual initiatives that the entire organization looks forward to and we were excited and humbled to continue that tradition in 2022. We also expanded our long-term history of contributing to local non-profit organizations to further our diversity, equity and inclusion mission as well as voluntary time and donated financial support to organizations, combating food and security across the country and providing shelter to those in need. This quarter, Meritage was recognized by the Phoenix business shareholder, both as one of the best places to work and one of the healthiest employers. And as a result of our overall commitment to ESG, Meritage was named one of the 2023 America's Most Responsible Companies by News League Magazine. Overall, we are proud of what our team members accomplished this quarter on top of the quarter of solid operational execution. Thank you, Steve. During the quarter and looking into 2023, we are analyzing the business through the lens of market events and actions that are within our control. We could not influence the macroeconomic factors impacting Q4 sales that Steve described. However, we can control how we react to them and how agile our business can be are focused around our core strategies that we have honed for many years now. To reiterate our strategies and the actions we have taken, we remain committed to prestarting 100% of our entry-level homes. This readily available home inventory puts us in a favorable position since buyers in the current market want homes are ready to close within 45 to 60 days. Eliminating uncertainty and reducing stress are a premium in today's murky economic environment. Further, line building allows us to complete homes on a shorter cycle time than a build-to-order model despite supply chain issues. Prestarting homes with a limited SKU library means we can also offer more affordable products as we pass on our savings to our customers. As an added benefit, when we have cancelled inventory, the lack of customization of our homes, stemming from our streamlined and -- specifications, results in limited discounting for the future resell of that home. Since we mainly build entry-level products, we expect a higher average absorption pace and prioritize pace over price. Like all homebuilders, we benefited from the runup in home prices for the first 2 years at COVID. And despite higher costs, we experienced industry-leading gross margin levels. More importantly, we increased our market share. Consistent with our strategy, we continue to target 3 to 4 net sales per month. As we had a net order absorption pace of 2.2 per month in Q4, we have taken additional actions to get back on our target, including lowering prices and utilizing a full range of incentives such as mortgage rate locks, rate buydowns until we find the market clearing point to move our inventory and get back to our target sales pace. The timing of these actions align with the production time line of our spec inventory which is now completed or near completed and ready for quick moving sale ahead spring selling season. Further, during Q4, our operations team worked hard to close a large portion of our backlog despite supply chain issues impacting cycle times. We also aggressively validated every home that remain in our backlog as of year-end. Most confirmed their commitment to their homes. Some use incremental pricing or rate adjustments that we were able to offer. In other cases, though, we had to cancel the sales, it was clear the buyer is not going to purchase home with a reasonable incentive structure. By proactively showing our backlog, we likely identified some cancellations earlier in the cycle than normal but this gave us more confidence in our backlog at the end of 2022 and added available inventory for sales into January. While we certainly don't have a crystal ball regarding what cancellations rates will do in 2023, we are comfortable that the buyers who purchased homes in earlier March 2022 under a different market and economic environment represent a smaller portion of today's backlog compared to a greater portion coming from buyers that have a more fulsome understanding of the current market conditions, their monthly payment expectations and the relative advantage of their rates and pricing incentives. In addition to our sales initiatives, our purchasing team is actively rebidding our vertical costs to capture cost savings as incremental capacity is growing within our supply chain. Hilla will touch on more details but suffice to say, we are pursuing cost savings across all cost categories in all of our markets this year. These intentional actions enable us to adjust pricing and can structure community by community so that we can take advantage of our supply of available inventory as we kick off 2023. We believe we have the right level of completed and near-completed hotel which combined with a different mix of pricing actions, financing solutions and incentives allows us to offer a total package that is aligned with each local market environment. Now, turning to Slide 5 to share our operational statistics. The 29% year-over-year increase in our Q4 closings to 4,540 homes was attributed to our team successfully managing the persistent labor and supply chain challenges. Entry-level loans made up 85% of closings, up from 81% in the prior year. Our fourth quarter 2022 sales orders of 1,808 homes were comprised of 89% entry-level homes, up from 82% in the fourth quarter last year. The 46% decline in sales orders year-over-year was primarily due to elevated cancellations and weaker overall demand despite a 10% year-over-year increase in average communities. Our cancellation rate in Q4 of 39% increased from 12% in Q4 2021 and 30% in Q3 2022. Quarterly gross sales orders declined a more modest 22% year-over-year. Our fourth 2022 average absorption pace was 2.2 per month which was down from 4.5 per month in the fourth quarter of 2021 but gross sales pace was 3.6 per month at our 3 to 4 monthly target, affirming the underlying consumer demand is indeed present. In finding the right pace to price relationship, we expect our average absorption pace will get fast towards a target of 3 to 4 net sales per month during 2023. Moving to the regional level trends on Slide 6. The highest regional absorption pace of 2.6 per month in the fourth quarter occurred in our Central region which is comprised of our Texas markets. Orders were down 46% year-over-year in Texas overall. With all 4 Texas markets holding a growth sales pace greater than 3.0 per month, we believe we are starting to find stability in Houston, Austin and San Antonio, while in Dallas, we are experiencing a steadier environment and are gaining market share. The fourth quarter regional absorption pace for the East region was 2.5 per month. We still have work to do here but all of our Eastern markets actually had a gross sales pace in line with our 3 to 4 per month per target. And we are confident that we are well positioned in this part of the country. The East had the lowest region of decline in orders up 41% year-over-year and the lowest cancellation rate in the fourth quarter. In Florida, ASPs on orders were up 11% due to product mix shift even after our price adjustments, while orders were down to 25% reduction in average communities. Consumer pullback was most evident in the West region, where the absorption pace was 1.6 per month for the fourth quarter. California was the only place to have an increase in orders year-over-year which is primarily the result of more convenience. California also had a gross sales pace over 3 per month, given the quality of our locations and our entry-level positioning in the market. Colorado and Arizona continue to experience be hesitate to transact as they adjust to the higher lovely payments in these markets that experienced a higher runoff in ASPs over the past 2 years. Further, cycle times in these 2 markets are still so are the longest and least predictable. Although the new incremental capacity showing up in the supply chain now is providing a run rate for improvement here. We wanted to provide some color into January sales. As we know, that's top of mind for everybody on today's call. Compared to the average absorption pace of 2.2 per month in Q4, we saw a notable improvement in January, achieving a net absorption pace greater than 4.0 per month per community as well as a more normalized cancellation rate in the mid-teens. We sold over 1,200 houses in January, up approximately 4% over last January. We have some initial confidence that we found the right combination of pricing incentives to sell at our targeted 3 to 4 net sales per month. Now, turning to Slide 7. To align starts with lower demand we further moderated construction this quarter, starting approximately 2,100 homes in the fourth quarter compared to approximately 2,700 in Q3 2022 and more than 3,700 in the fourth quarter of 2021. We ended the period with nearly 4,900 spec homes in inventory or an average of 18 per community as compared to approximately 3,200 specs or an average of 12.3% in the fourth quarter of 2021. Market demand dictates our target amount of available inventory in each of our communities. Our goal is to keep 4 to 6 months' supply of specs on the ground by managing our starts to match our sales pace and production capabilities, although excess cancellations increased our specs slightly above our target rate in the quarter. To align with the additional supply of inventory on hand, we will flex and slow down our starts until we reach our optimal equal liver. But as noted, we have already worked through about 25% of these stacks in January. Similar to last year, 79% of our home holding this quarter came from previously started inventory. At December 31, 2022, we added over 750 complete homes to sell. Our 15% completed homes is higher than the last couple of quarters and, coupled with our homes that can close by the end of Q1, represent about 1/3 of our spec inventory. We ended the fourth quarter with a backlog of 3,300 units as we closed out a significant portion of our backlog and improved our conversion rate from 60% last year to 75% this year. Q4 cycle times continue to be similar to the earliest 3 quarters of 2022 which were still approximately 6 to 8 weeks longer than our pre-COVID [indiscernible]. However, we are targeting aggressive reductions in construction time for 2023 and are already starting to see some improvements from our front-end trades. We are hopeful that with the industry backlog clearing over the next few quarters and the capacity of back-end trades like appliances, flooring, countertops in cabinets loosening, our cycle plan and backlog conversion rates will improve in the back half of this year. Thank you, Philippe. Like last quarter, we'll start by providing a bit of color on our BFR business before reviewing the financials in detail. Sales through our built-for-rent partners in the fourth quarter only represented a low single-digit percentage of our net orders volume as the rental operators, much like the rest of the sector, are pausing to analyze their financial hurdles and adjust underwriting targets. We're encouraged to see some incremental interest in January and continue to believe in the viability of this channel due to the historical countercyclical strength of rental market and higher interest rate environment. Now let's turn to Slide 8 and cover our Q4 financial results in more detail. Home closing revenue grew 32% year-over-year to $2.0 billion in the fourth quarter of 2022 combining 29% greater home closing volume and 3% higher ASPs when compared to prior year as we overcame supply chain challenges to close a substantial portion of our backlog. Our fourth quarter 2022 home closing gross margin was 25.2%. The 380 bps deterioration grew 29.8% a year ago was the result of greater incentives and higher direct costs as well as several nonrecurring items, including $10.9 million and warranty adjustment related to 2 specific cases and $4.2 million in write-offs for option deposits and due diligence costs for terminated land yields which were partially offset by $5.4 million in retroactive vendor rebates. In the fourth quarter of 2021, we had $2.5 million in write-offs for terminated land deals and no warranty or rebate adjustments. Excluding these nonrecurring items, adjusted fourth quarter 2022 home closing margin was 25.7% compared to 29.2% in Q4 of 2021. We expect that price concessions elevated discounts and a continuation of financing incentives for rate locks and buydown will negatively impact gross margins in 2023. We However, with our sales ASP down 10% to $389,000 this quarter when compared to last year, we've already taken material pricing action, demonstrating our commitment to elevating our sales pace. And although we're not projecting broad-based cost savings to offset the challenging market conditions today, we are starting to make some headway to reduce direct costs and improve cycle time. There are full company initiatives to drive substantial cost reductions with success stories of $15,000 per home in savings just since already emerging in some divisions, particularly in our slower markets where trades have excess capacity. However, we likely won't benefit from the full impact of these savings until the tail end of 2023 and into 2024 as they will be captured in our home starts until mid to late this year. We still believe that long term, our normalized gross margin will benefit from better operating leverage from our increased volume and our streamlined operations and will end up at or above 200 bps from our historical average of 20%, although the next several quarters are likely to be bumpy. SG&A as a percentage of home closing revenue was 8.4% for the current quarter which was a slight improvement over 8.5% in the prior year. Our higher revenue allowed us to better leverage our SG&A. This was partially offset by higher commissions and advertising costs that reflects our response to the current sales environment. We believe marketing costs and broker commissions will remain above historical averages in the near future which, combined with lower expected closing volume in 2023, will drive lower SG&A leverage. The fourth quarter 2022 effective income tax rate was 23.3% compared to 23.8% in the prior year. Tax credits were earned on qualifying energy-efficient homes under both the 2022 Inflation Reduction Act for the current quarter and the 2019 Taxpayer Certainty and Disaster Tax Relief Act for the prior year. Overall, higher claim closing volume, combined with the lower outstanding share count in the current quarter, led to a 13% year-over-year increase in fourth quarter 2022 diluted EPS to $7.09. To highlight a few full year 2020 results on a year-over-year basis, order units declined 15%. Closings were up 10%. We had an 80 bps expansion of our home closing gross margin to 28.6% in fiscal 2022 and SG&A as a percentage of home closing revenue improved 90 bps to 8.3%. We generated a 35% increase in net earnings and diluted EPS was a record $26.74 for the year, a 39% increase from 2021. Turning to Page 9. Given slower market conditions, we are also focused on exercising balance sheet discipline. We reduced spend on land, development and phone inventory, ending the year with over $860 million in cash and generating $562 million of free cash flow just this quarter. At December 31, 2022, nothing was drawn on our credit facility and our net debt to cap was just 6.8% which is well below our maximum internal threshold of high 20s. With no shares repurchased during the quarter, we ended 2022 with $244 million available under our authorized share repurchase program. Ahead of the spring selling season, we felt it was prudent to grow our cash position to maintain maximum flexibility in an uncertain environment. In the coming months, we will look to strike a balance between cash preservation for operations and returning dollars to shareholders and we expect to provide additional updates on our next quarterly call. Shifting gears, I want to remind everyone about how impairments are calculated. When we estimate that the cash to be generated from the sale of homes in a community is not expected to cover the cost we will incur in that community and impairment is present. We review all of our assets every quarter and determined that there were no impaired communities in Q4 despite the reduced ASPs and higher direct costs. Looking at our expected home prices in 2023, we do not expect broad-based impairments across our assets. On to Slide 10. Even with the increased liquidity this year, we grew our community count 5% in 2022 to 271 communities at year end. In Q4, we opened 21 new communities compared to 11 in Q3 this year. The ongoing supply chain issues [indiscernible] transformers continue to extend the time line for our new community openings. Additionally, we have strategically slowed and at times halted some of our openings to take advantage of the opportunity to rebid and lower our vertical costs so that these communities can open in a more competitive position when they come online. We expect to continue to open new stores throughout the year and return to our 300-community targets over the next several quarters. This quarter, we continue to rightsize our land portfolio, walking away from underperforming land deals or recently sourced deals where we could not secure closing extensions. Even with slightly more than 10,000 terminated loss this year, we still ended 2022 with 4.5-year supply of lots within our target of 4 to 5 years. So we're comfortable that we have all the land we need right now. In Q4, we did not add any new lots under control while we terminated roughly 3,700 lots with a corresponding write-off of $4.2 million. These terminated loss relate to approximately $280 million of future land and development spend that we will not be incurring. For full year 2022, after considering $15.8 million of walkaway charges from terminated land yields, we only have $92.5 million of incremental exposure related to deposits, due diligence for future lots under control which includes next phases of our existing communities. All in, this makes up less than 2% of our total assets. During the fourth quarter, we spent only $351 million on land acquisition and development, bringing our full year total spend to $1.5 billion. With reduced land acquisitions, about 2/3 of the spend was on land development costs. We expect our 2023 land acquisition and development spend to be at or below the $1.5 billion extended in 2022 despite the anticipated community count growth. At December 31, 2022, we had approximately 63,000 total lots under control compared to approximately 75,000 total lots at December 31, 2021. About 73% of our total lot inventory at December 31, 2022 was owned and 27% was auctioned as the terminations of auctioned lots understandably drove the mix of controlled but not one lot lower. In the prior year, we had a 65% owned inventory and a 35% auctioned lot position. With just under 50% of our current portfolio sourced from land secured in 2022 or earlier, we are comfortable with the basis of the land control as well as the balance of owned and auctioned lots. Finally, turning to Slide 11. Looking to Q1, we expect closings to be between 22 and 2,600 units with corresponding revenue of $940 million to $1.1 billion. We expect margins to trend down to 21% to 22% and our tax rate to be around 22% to 23%. With limited visibility and market conditions, we're holding off on providing full year guidance at this time. Thank you, Hilla. To summarize on Slide 12. January is off to a great start but too early to quantify the strength in spring selling season. We are prepared to find the right combination of product pricing incentives for all of our communities to achieve a pace of 3 to 4 net sales per month. Our commitment to prestarting 100% of -- homes, streamline operations and prioritizing takeover price positions us to capture market share, gain leverage and maximize profitability as market conditions evolve. In conclusion, I would like to thank all Meritage employees for their hard work and the job well done in 2022. Their dedication drove our success. First, just making sure I heard this correctly. Did you all say previously that January net orders were about 1,200 and up 4% year-over-year? Yes. We have sold about -- approximately 1,200 houses in January, a little bit over 1,200 which over last January was up about 4%. And then our absorption pace per store was right around 4.5 per -- sales per community. Okay. Perfect. And I realize not reading too much into January trends. But we have lower lumber costs beginning to flow through the P&L. You all mentioned perhaps some other stick and brick costs maybe hitting later in the year. We also have some higher land costs in maybe an uncertain pricing or incentive environment that maybe you all found the floor. But I'm hoping -- can you help us think through 1Q gross margins if you all think that might be kind of the floor for the year? Or should we still expect it to be pretty choppy? I'll let Hilla dive into a more detailed description of what's going on in Q1. But I mean, it's just really too murky right now to know what pricing is going to do. Obviously, we've been aggressive. We're an affordable spec builder. So we're going to price ourselves in the bottom 2 piles of our competitor set community by community which is what we've done which is why our prices. Our ASPs are down now into the 300s from $4.80 at the peak. So, we feel like we've made some really significant adjustments to be affordable and to find the pace that we need to and feel like we're well positioned for the long term. But it's hard to tell what our competitors are going to do. Some builders still have quite a bit of backlog that they're going to close out and I don't think they've adjusted pricing yet. So we'll have to wait and see how that plays out and we certainly don't know what interest rates are going to do. We're happy to see them stabilize where they are and feel optimistic about that but those 2 factors are really driving our inability to predict pricing at this point. Yes. So thank you, Philippe. Our Q1 is primarily what we saw in activity over the last 4, 5 months as the ASPs that you're seeing in our sales. As we mentioned, we had fairly decent gross sales. It's really the scrubbing of the backlog and the cancellations that brought the net sales down in Q4. So we think we found a market for 3 to 4 net sales per month. January definitely proved it. So right now, we're not comfortable giving guidance beyond Q1 but what we're seeing in Q1 reflects the current sales environment does not reflect anything yet in the direct cost initiative. However, as we said, we don't think that those margins are really going to materialize until the latter part of the year. And that's assuming that there's no other increases that are coming our way. So kind of looking at where we are, we're comfortable at our current pricing structure. We're down almost 20% from the peak and we're able to sell at an acceptable pace. So we don't feel like we need to move it any further at this time, although we're constantly adjusting with market conditions. Perfect. And you all clearly have streamlined business model generally with fewer vendor SKUs and floor plans than competitors. I'm hoping -- we'll leave lumber alone. It's clearly down a lot year-over-year. It's jumped up here pretty quickly so far in January. But I'm hoping you can help us maybe quantify the magnitude of potential cost tailwinds that you're experiencing as of today's starts outside of lumber. Any chance you can help us think through those? Well, we're going through an entire rebidding effort right now. As Hilla mentioned, we're aggressively rebidding all of our communities for spring starts. We also have been holding off on opening some new communities to really rebid those to get our vertical costs as far as we can. So it's way too early to let you know exactly what that's going to look like. But as we said in our script, we're having success on the front end and less success on the back end as it relates to the build. So we've seen in some of the hardest hit markets that we've recovered over $15,000 per house which, on a $200,000 construction budget, you can do the math. In other markets like Florida, we haven't seen -- you've seen that because the market is still pretty stable, starts are still going out pretty fast and we haven't seen that opportunity. But that's all we're prepared to say right now because we literally are going through this effort right now. But the early feedback from our vendors is that there's opportunity here and we're going to capture everything we can and we'll report back to you next quarter on how we did. Yes, exciting times. I appreciate all the color. And particularly, the commentary on January really dovetails with what I've been hearing. A lot of excitement out there but everyone seems extremely cautious about predicting the sustainability of the rebound. So with regard to that, obviously, the sales that were extremely good. You were over your 3 to 4 order per month pace in January. And so the market clearly has done a kind of an about face. And I'm wondering if you're beginning to ratchet down incentives at the community level or taking other actions which would effectively mean that you're raising your net price. Yes. So at the end of the day, we're going to try to get 4 net sales per store. And that's how we built our business and we're going to try to get a 21% to 22% margin at that pace. And we -- everything from that point of view. So we went out there, we had some additional inventory. And I'm optimistic that having that inventory really is why our sales rebounded in January. We're not sure the market, frankly, is any better other than the fact that it's the spring and not the winter and interest rates have somewhat stabilized. From our perspective, it's about having move-in ready inventory which we have. That's what consumers want. And that's why we feel like we saw the January result. In a number of communities where we made adjustments, we did see very strong elasticity in demand when we lowered prices and we were able to achieve even above our 4 net sales. So in those communities, we're pulling back on incentives where we think that's sustainable. And we'll back off on rate buydowns. We don't have to use rate buydowns nearly as much as we did now that we're selling all specs. People can move in relatively quickly and we can drive those costs down. So it's community by community. But it's one month and we're going to go take market here right now. We're going to be aggressive. If we can do more than 4 months at today's margins, we'll probably take more than 4 months at today's margin. It's spring selling season and we want to go get this market share while other builders don't have the spec homes to go get it. So, we'll pull back a little bit where it makes sense. But for the most part, we're comfortable where our absorptions are, our entire margins are. And we're going to go try to sell more houses. Yes, that makes a lot of sense. Your commentary, though, about community count and your rollout of those communities would seem to be a bit at odds, though, with running hotter than 4 a month. So correct me if I'm wrong. If this demand actually proves to be deeper and broader than anyone is really willing to bet on yet, do you have the ability to do an about face on your community count openings or community openings so that you can maintain a positive year-over-year community count over the course of the year? We can always accelerate opening our community. The demand is really strong. I think we don't feel that that's prudent today. So it would have to be really strong for us to make the decision to do that. Right now, we're seeing some meaningful opportunity to lower our vertical costs on those new openings and I think that's probably more critical for the long-term success of the community than opening it up early and getting community count comps because we have these big investments we made. And we don't want to compromise the integrity of those communities by opening them up at high vertical costs that don't underwrite. So that's number one. Number two is it's still not getting any easier to open these communities, get the municipality, municipal approval, get transformers to the job site and, frankly, get finished inventory so that when we open up a community, we have ready to -- move in ready inventory in every single one of community. So that's driving the decision is the operational discipline there. And I don't think we're going to compromise that just to hit -- to accelerate community count this year. It's more about opening up those communities with strong momentum, opening them up clean, well executed, opening up with Sandy inventory ready to move in and opening up with the best vertical cost structure we can. Just to clarify, Stephen, the 300 community count target that we say we're going to hit in a couple of quarters, that already peaks in the rebidding process. So as we said, it's going to take us a couple of quarters to get through the full rebid. We said we're not going to have those home starts until the latter part of this year which is exactly aligned with our community count opening target that we just provided. Opening a community without inventory doesn't really work. As we said, the volume that we're seeing is because we have available specs. And putting a whole bunch of specs in the ground at an inflated cost and you know it's coming down in just a couple of quarters doesn't seem to be the right decision. So we're willing to be patient to make sure we drive that accelerated pace while not sacrificing what sales price, we can set the targets at and just have those sales in the back half of the year instead of more anaemic at a lower margin pace in the front end of the year. And just one last comment, the cancellations in Q4 were all part of the issue was people opening up communities without production. And then you're hoping to hold on your buyer for 9 months and that just doesn't make any sense when we don't know what interest rates are going to do. So we want to open up with move-in ready inventory. Customers are willing to engage with something that moves in 30, 60, 90 days. They can lock their rate. And I think it minimizes your cancellation exposure. So we've got our cancellations down to where we want it now. And we're going to run our business to make sure we keep those cancellation rates low, assuming that interest rates will continue to remain volatile. Yes. So that's interesting, Philippe, because I think that you mentioned that you'd like to see rates stabilize. And what you just said is that we've seen a lot of volatility in the mortgage rate which we certainly have. And so I'm curious -- you sort of suggested that buyers need to see some rate stability. But I'm curious if that's really true. For instance, if we were to see the mortgage rate drop into the which it certainly seems as possible here in the relatively short term, do you not think that, that might represent an additional boost to a home buyer sentiment as that starts to make the headlines? I mean, clearly, you're asking me a trick question. If rates are lower, there's more demand. It's absolutely one-to-one relationship. So yes, if rates go to 5, we're going to see stronger demand. But we're going to stay with our operational discipline of selling move-in ready specs. It's about our supply chain. It's not our cost structure and it's about not knowing what the future holds. We could see a great -- a strong spring selling season. But rates could go up in the back half of the year. The Fed made their speech yesterday. They certainly didn't say they were going to lower them. So we don't know yet and we're going to focus on operating the way we think is in the best interest of our company. Thanks, as always, for all the great info. First on the pricing side, Hilla, you brought up average order price down 20% over the last couple of quarters which is obviously way more than the market is down and certainly way more than your peers are. And it sounds like maybe some of that is you guys being more aggressive. But I would imagine there's a decent amount of mix in there as well. So, I'm just curious if you're able to kind of parse that out for us because I do recall a couple of quarters ago when you were kind of giving the impairment sensitivity. I think you said like home prices would need to drop 20% for there to be any meaningful impairment risk. And now you're saying there's obviously not a ton of risk out there which makes a lot of sense given the current market. I'm just curious if you could kind of drill into that a little bit. I'll let you unpack the impairment question but I would just tell you, it's not a lot of mix. It's mostly just price. We absolutely -- our ASP was close to [indiscernible] middle of last year and we're now close to 390 and it's mostly store-to-store. Primarily, the biggest adjustments have been in the West and certain parts of Texas, although a little bit to the east. And our position is that we're an affordable builder. We have to get to a payment that makes sense for our customers. And we believe that payment exists when we're under 400 ASP. So we underwrote most of our land that's come into our income statement 2 years ago, assuming our ASP was going to be in the 3s to low 4s and that's where we position our product. And so we're about competitively positioning ourselves at the bottom of the graph or slightly above the bottom of the graph and being the affordable new homebuilder in our competitive set; so all that is mostly price. It's -- yes, we've opened up a few new communities and they're maybe at lower ASPs. But it's pretty much all priced. And then Hilla can speak to the impairments. When we're looking at it, Alan, we mentioned, just on a mix perspective, 89% of our sales in the quarter were entry-level. It's not that different from 82% last year's fourth quarter. So the mix is in somewhere in the 80s category. So that's not probably a material shift that with this material, a price reduction that we're still north of 20% margin. That gives us the confidence to say that, as we sit here today, we don't see broad-based impairment with north of 20 margins not just in the current quarter but in the quarter that we gave guidance for. So, how does that math work? How can you drop 20% from 31.6% and still be above 20%? There are some other pieces that go into the mix, certainly some increased efficiencies and simplification of the product. But then also the high volume is helping us leverage some costs, particularly as we saw in the fourth quarter. So there's a lot of other pieces that roll into those calculations. But overall, you're seeing the impact of lower prices already in our numbers which is why we feel comfortable, especially looking at our January numbers that without any large material shifts in the market that we have a good ASP to hit our 3 to 4 net sales. And where we've made the most meaningful adjustments in Phoenix, Denver, we've also saw the most meaningful direct cost savings which have softened what our margins have done. When we quoted earlier in our script that we got 15,000 per house, that's in Colorado and Phoenix. That's where we got those numbers where the market has adjusted the most and also where prices ran up the most over the last 3 years. That's all really helpful. And I think it's really impressive that you've been able to reduce prices as much as you have and bring the affordability equation at a more reasonable level for your consumers and still generate the margins you are. I think it obviously speaks to the execution of the operation there. So well positioned to kind of take -- continue taking share from that regard. The second question, we heard from another builder last night that kind of gave similar commentary on January activity but they did kind of add in a comment that they might have seen a bit of a leveling off of the improvement over the last week or 2 kind of implying that things really accelerated kind of back half of December into early January. Not to get too fine here on weekly activity here but is that a statement you would agree with? Or do you feel like the market is continuing to gain momentum at this point? I mean we just gave out monthly. Now you want weekly sales trends. I can just tell you, we would not agree with that statement. I appreciate you taking my questions. I just wanted to circle back and make sure I'm understanding some of the puts and takes on the gross margin side and obviously appreciating you're only giving first quarter guidance at this point. But if I heard right, you said that you're thinking about your long-term gross margins being in a 21% to 22% range, I believe you said which is where you are in the first quarter. How should we think about the puts and takes beyond first quarter just directionally at least? Because obviously, we're talking a lot about reduced construction costs, either materials or labor or both which, everything else equal, could be a tailwind, as you had said, might impact late 2023, early 2024. I'm wondering if there's anything that would kind of perhaps even offset that, if you're thinking about trying to hit a 21%, 22%, it could even still be above that, given some of the lower construction costs. Or is there any lag in the impact of the incentive and pricing environment that you've seen over the last few months that might create a little bit of a -- even a further dip in the second quarter relative to where you are in the first quarter? So thanks for the question, Mike. The 2020 -- the 21%, 22% that we guided to for the first quarter that's -- but there are any homes that are under production. So we know what those costs are, right? They're closing in the quarter. We either came in to them with backlog or there's specs that can close in the quarter. So we have a good visibility into Q1. Now not to be too cute here but when we spoke about our long-term trend, obviously, we're not talking about 2023 as a whole. We're talking about long-term trends. We said at or above from the normal margin of 20%. So I think that what we're trying to communicate there is that the long-term margins are 22% or north of that. So to be honest, we kind of just really got our whole operational structure in place right when COVID hit, right? 2019 is the first year that we really kind of had all engines coming in a new strategy. And then we had COVID and it was impossible to look at what an environment would be in a normalized pace. So at the beginning, we thought it would be 21. Since then, we raised it to 22. And on today's call, we said normalized would be at or north of 22 as we continue to harvest the efficiencies that we're seeing in the business. So when we look at Q1, I don't -- I can't predict sitting here today if it's the trough. I know the builder took that position, so that's going to be the low point for the year. By not providing guidance for the whole year, we're not confident that we understand all the dynamics yet for the rest of 2023. We do feel confident in the long term operational structure that we have, the long term will be 22% or higher. As that clarifies over the coming quarters, we'll give additional insight there. That's great. That's helpful. I appreciate that, Hilla. And just to make sure also one element of my question around the current pricing environment. Would you say that in terms of where you are in the last couple of months, in terms of incentives on orders that, that is more or less fully reflected in your first quarter gross margin guidance? Or because I would assume that incentive levels in December were higher than October, let's say but maybe I'm wrong on that? So just trying to get a sense of where the first -- what the first quarter gross margins reflect and if current incentive levels are higher than that or in line with that. So I'll just clarify. I know you said incentives but just to clarify, we don't look at incentives because we expect builder primarily with 89% of our volume coming from entry level. So we use base price incentives and financial discounts interchangeably because we're solving for a payment for the buyer. So all in, what you're seeing in our Q1 guidance includes the January sales. This is our current volume and what we expected. Those specs that we mentioned that we have 1/3 of them entering the year, ready to close in the quarter, we sold some of those. We sold 1,200 of those in Q1 already. So what we're seeing in the margin guidance of 21 to 22 reflects the current environment. I know you mentioned about potentially being more open to returning capital to shareholders. But just thinking about your liquidity position, the stock's valuation, there's no debt coming due to 2025, I mean, is there an opportunity here to get aggressive on share buybacks? Sure. There's an opportunity to get aggressive on share buybacks to consider other methods of getting cash to shareholders to look at the debt paydown. We're looking at everything and trying to make sure that what we do optimizes the return to the shareholders while keeping us in the strongest balance sheet position possible. So there's definitely some action that we'll be taking in 2023 but the magnitude and which action it is, we're still betting through our Board. So stay tuned for next quarter's call for some more visibility into that. Okay, that's good to hear. And then the 89% of orders for entry level, how high can this go? And how high would you like it to go? And is there -- just remind us, is there any margin differential on the entry level versus other parts of your portfolio? Yes and there's really no differential. We have 3 consumer segments that we focus on entry-level buyer, what we call the move-down value-conscious buyer and then we move up the value-conscious higher. And it's kind of blurry. The lines get blurry. Some of them are the same people, same type of families, aspirational entry-level buyers are kind of moved up value-conscious. So I think you go -- it can get all the way up to 90%, 95% based on your definition of our customers and our communities. But our target is 70%, 75% entry level and 25% to 30% value conscious move down and move up buyers. And so I think it can move around depending on what interest rates are doing and what the market is doing but that's kind of the sweet spot. Philippe, you mentioned that cycle times in Arizona and Colorado were the longest in the company. I'm just curious why is that. It's a good question. I think it's a couple of different things. I think and they're both different actually, not the same reason. But in Arizona, there was just so much demand during COVID. And I just don't think the trade capacity could keep up with the amount of starts that were being pushed out both in multifamily and single-family. So tremendous ramp-up in 2020, '21, just put a lot of constraints on them and they just weren't able to keep up and we saw some pretty meaningful expansion in cycle times across a lot of categories not just front end versus back end but across the board. So just big market, lots of demand. Colorado has always had a labor issue. It's always been difficult to attract skilled labor there. It's -- a lot of folks don't get into that business there. It's always been somewhat constrained. And then when you add a surge in demand that we saw again out of COVID, you just saw our cycle times get really, really long. So 2 different reasons; I think Phoenix recovers relatively quickly as demand has slowed significantly here. And so we're already seeing that. I think we'll be able to get our cycle times down here relatively quickly as demand slows. Denver is always going to be a challenge. We always have the longest cycle times there. We build basements. We do a lot of high density there because affordability. So we'll continue to have challenges there but hopefully, we'll do better as the market slowed there as well. And then second, in the past, you've talked a lot about the importance of keeping your pricing near to below FHA conforming loan limits. Obviously, you've had a big jackup in those limits. Has that helped at all in January? Are you hearing that from consumers or seeing that in terms of apps? No. It's really not even a factor for us anymore because FHA and conforming loan limits have gotten so high. So now it's just all about where we're positioned against our competitive set. We want to be, as I said earlier, on the bottom to the middle of the bottom of the graph, depending on who we're competing with and really be the affordable offering in the market. So it's just driven by our pricing and our research department that looks at every community every week and tells us where we need to price our inventory to find the ideal pace. But it's no longer really connected to that unless it is, right? It clearly matters. We want to be below that but we probably want to be well below that these days given how high we are. Just visibility, Carl, FHA for the year for us was 15% of our total mortgage pool certainly, some people are using FHA but it's so high that a lot of people are just getting conventional loans. They don't need the assistance that comes from FHA, the dollars kind of got a little bit disconnected. It was a 2-year lag to where they needed to be and they came up right when ASP started to come down. Yes. I wanted to ask regarding your land position, how you guys are thinking about what's transpired, I guess, in the last few weeks and your approach to land going forward, if there's going to be opportunities to replace the stuff you guys cancelled at better deals? Or are you just going to hold off? Or how are you guys thinking about the current land environment? We're definitely going to be cautious and patient here. We're going to get through certainly the spring and sort of re-evaluate what the market looks like, what the long-term prospects look like. We're seeing some opportunity out there. I saw a survey recently that land prices have started to decline modestly, I think, around 5%. I don't think that's enough. We've got to get our land development costs down as well, if things are hard to underwrite. Today's interest rate environment is the new reality; so we have plenty of land. As you've articulated, we have the ability to maintain our 300 community count trajectory for the next couple of years without really buying anything. So it will be about when it's time to grow from there. We're in some new markets. We clearly want to be active there but we want to be patient as well. So, I think you're just going to see us be really, really patient. We're definitely going to get through the next couple of quarters to read the tea leaves, kind of evaluate what 2024 and 2025 are going to feel like before we start ramping it up. That being said, we have $850 million sitting in the bank. And if opportunities present themselves, we'll certainly go get. Yes. Alex, just to clarify, you're hearing from all of our peer builders. A lot of folks are dropping options that don't make sense. We're walking away from land deals. Those land deals still exist. They're just going to be repackaged and sold to the builders at a cheaper price. So at some point, there is going to be a jumping point that we're going to enter the market opportunistically more than having land committee every week and buying land aggressively but there will be opportunities to buy land at more attract prices. Got it. And if you reflect back to the last 2 years, I mean, we had supply chain issues, then we had rising interest rates. What do you think are the, I guess, lessons for you guys? Or how are you thinking about maybe if either of those 2 things -- let's say, the market reaccelerates and we start to see supply chain issues again, what do you think you'd be doing differently this time to capitalize on these opportunities? Or how would you approach things differently this time around, given your experience in the last 2 years? Well, we're always learning. I think that we've demonstrated over the last 5 years that we're probably one of the -- we're an extremely agile and proactive organization. We've been ahead of a lot of the trends. We came out of COVID more aggressively than anybody, grabbed market share. We pivoted our strategy. I think we're playing in the -- with the right side in the right part of the market. We have specs. So we're going to continue to be agile. We do this job 24/7. We're paying attention to everything. We have a very aligned, engaged team out there. We talk all the time. We listen to one another and we're going to continue to collaborate as a team and move quicker and faster than we have before so that we can take advantage of whatever opportunities represented in this market but also properly manage the risks that are still evident as well. So it's about being agile. It's about being willing to change and innovate constantly and we have a real strong capability here and we'll continue to invest in that. And that's what we've learned, right? Don't continue to think that everything that was is going to be and just be willing to evolve and adapt. Thanks. Thank you, operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of the day and a great weekend. Thank you. Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.
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Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Fourth Quarter 2022 Conference Call. At this time all participants are in a listen-only mode. Following the companyâs prepared remarks we will open the line for live question and answer session. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 1, 2023. Thank you, Donna, and good afternoon, everyone. On the call with me today is Scott Anderson, our Interim Chief Executive Officer; Arun Rajan, our Chief Operating Officer; and Mike Zechmeister, our Chief Financial Officer. Scott and Mike will provide a summary of our 2022 fourth quarter results and our outlook for 2023. Arun will provide an update on our path to a scalable operating model to improve the customer and carrier experience. And then we will open the call up for questions. Our earnings presentation slides are supplemental to our earnings release and can be found on the Investors section of our website at investor.chrobinson.com. Our prepared comments are not intended to follow the slides. If we do refer to specific information on the slides, we will let you know which slide we're referencing. I'd also like to remind you that our remarks today may contain forward-looking statements. Slide two in today's presentation lists factors that could cause our actual results to differ from management's expectations. Thank you, Chuck. Good afternoon, everyone, and thank you for joining us today. I'd like to start today's call by expressing my appreciation and the Board's gratitude for the contributions that Bob Biesterfeld made to C.H. Robinson over his 24 years with the company, including his three years as CEO. Under Bob's guidance, C.H. Robinson navigated the challenges presented by the pandemic and the ongoing supply chain disruptions. And he played an important role in positioning Robinson for long-term success. We wish Bob all the best. In order to accelerate C.H. Robinson's strategic initiatives and take the company into its next chapter, the Board felt that a change in leadership was needed. Jodee Kozlak, the newly appointed Chair of the Board, is leading the Search Committee to find a new CEO. With Jodee's background and expertise, I can't think of anyone more qualified to lead the Board and the search process. To give you a little of my background, I've spent over 10 years as a Director here at Robinson and the last three years as Chairman of the Board. I've spent the first 25 years of my career at Patterson Companies, most recently as CEO from 2010 to 2017 and also Chairman from 2013 to 2017. I look forward to working closely with Jodee and the Board as well as the whole Robinson team in the coming weeks and months. I'm excited to bring my experience and my knowledge of Robinson to the role of Interim CEO. I'm leveraging the relationships I have with the senior leadership team to ensure that we continue delivering superior global services and capabilities to our customers and carriers while continuing to execute with great focus on our sustainable growth strategy. During my first few weeks as Interim CEO, I've been meeting with our customers and employees who are highly engaged and motivated to win. And I'm confident in our ability to navigate this transition and deliver for our customers. Throughout the transition, we're increasing our focus on delivering a scalable operating model to lower our costs, improve the customer and carrier experience, and foster long-term profitable growth through cycles. The current point in the cycle is one of shippers managing through elevated inventories amidst slowing economic growth, causing unseasonably soft demand for transportation services. At the same time, prices for ground transportation and global freight forwarding are declining due to the changing balance of supply and demand. While the correction in the freight forwarding market was certainly expected, the speed and magnitude of the correction in only two quarters was unexpected, with ocean rates on some trade lanes already back to pre-pandemic levels. As a result, our operating costs were misaligned. As was announced on our third quarter earnings call, we have taken actions to structurally reduce our overall cost structure. The actions are expected to generate net annualized cost savings of $150 million by Q4 2023 as compared to the annualized Q3 2022 run rate. If growth opportunities or economic conditions play out differently than we expect, we'll adjust our plans accordingly. I believe we're uniquely positioned in the marketplace to deliver for our shippers, carriers and shareholders through a combination of our digital solutions, our global suite of services and our network of global logistics experts. Thanks, Scott, and good afternoon, everyone. Our Q4 financial results reflect the price declines and slowing demand in the freight forwarding and surface transportation markets that Scott referenced earlier. Our fourth quarter total company adjusted gross profit or AGP was down $88 million or 10.3% compared to Q4 of 2021 driven by a 39% decline in Global Forwarding and partially offset by a 5.7% growth in NAST. The market softness was also prominent on a sequential basis, with total company AGP down 13%, including a 24% decline in Global Forwarding and an 11% decline in NAST. On a monthly basis, compared to Q4 of 2021, our total company AGP per business day was down 10% in October, down 7% in November and down 14% in December. In our NAST truckload business, our volume declined on a year-over-year basis for the first time in seven quarters with shipments down 4%. Within the fourth quarter, monthly volume declined sequentially from October through December as freight demand weakened. Our AGP per truckload shipment increased 6.5% versus Q4 last year due to an increase in our contractual truckload AGP per shipment. On a sequential basis, however, our truckload AGP per shipment came down 6.5% but remained above our 10-year average. During Q4, we had an approximate mix of 65% contractual volume and 35% transactional volume compared to a 55-45 mix in the same period a year ago. Routing guide depth of tender in our Managed Services business, which is a proxy for our overall market, declined from 1.3 in the third quarter to 1.2 in the fourth quarter, which is the lowest level we've seen since the pandemic impacted second quarter of 2020. The sequential declines in our truckload linehaul cost price per mile that we experienced in Q1 through Q3 continued in Q4 as excess carrier capacity, combined with slowing demand, led to the softening market conditions. This resulted in an approximate 24% year-over-year decline in our average truckload linehaul cost paid to carriers, excluding fuel surcharges. Our average linehaul rate billed to our customers, excluding fuel surcharges, decreased year-over-year by approximately 21%. With the cost down 24% and price down 21%, we saw a 3% increase in our NAST truckload AGP per mile on a year-over-year basis. In our Global Forwarding business, higher customer inventory levels, combined with softening demand, contributed to significantly reduced import prices for ocean and airfreight. In Q4, Global Forwarding generated AGP of $188.7 million, representing a year-over-year decrease of 39% versus the record high fourth quarter in 2021, which was up 72%. With these results, our ocean forwarding AGP declined $89 million or 43% year-over-year compared to an 86.5% growth in Q4 of 2021. The Q4 results were driven by a 36.5% decrease in AGP per shipment and a 9.5% decrease in shipments. AGP in our airfreight business declined by $33 million or 51.5% year-over-year compared to a 92% growth in Q4 of 2021. This was driven by a 40% decline in AGP per metric ton and a 19.5% decrease in metric tons shipped. Despite the soft market, the forwarding team continues to add new customers and diversify our industry verticals and trade lanes. In Q4, approximately 50% of our AGP from new business was generated from trade lanes other than the trans-Pacific lane. Now turning to expenses. Q4 personnel expenses were $427.3 million, up 1.7% compared to Q4 last year, including $21.5 million of severance and related charges driven by the restructuring that we initiated in November. The restructuring-related costs were partially offset by a decrease in equity compensation as we reversed some previously accrued expense due to financial results that came in lower than previously expected. On a sequential basis, Q4 personnel expenses declined $10.2 million. Excluding the restructuring charges in Q4, personnel expenses declined $31.7 million sequentially due to lower incentive compensation and lower salaries and benefits associated with reduced headcount. Our Q4 average headcount declined 2% versus our Q3 average. The workforce reduction initiated in November affected approximately 650 employees. While nearly 150 of those employees had left the company prior to December 31, over 600 had exited as of early January. As we continue to make progress on delivering a scalable operating model, we expect our headcount to decline throughout 2023 as productivity improves. For 2023, we expect our personnel expenses to be $1.55 billion to $1.65 billion, down approximately 7% at the midpoint compared to our 2022 total of $1.72 billion, primarily due to reduced headcount. Excluding the restructuring charges in Q4 of 2022, the midpoint of our 2023 guidance for personnel expenses is down approximately 6% year-over-year. Moving on to SG&A. Q4 expenses of $176.8 million were up $27.9 million compared to Q4 of 2021 driven primarily by $15.2 million of restructuring charges and a year-over-year increase in legal settlements, partially offset by a decrease in credit losses. The restructuring charges in SG&A primarily included an impairment to internally developed software related to the reprioritization of our technology investments that Arun will speak to shortly. Our approach to investments and investment prioritization is more data-driven and more focused on delivering a scalable operating model than in the past, which is improving the value of the benefits we are delivering and allowing us to pivot more quickly if investments are not delivering as expected. For 2023, we expect our total SG&A expenses to be $575 million to $625 million compared to $603.4 million in 2022. The slight decrease at the midpoint includes an expected decrease in legal settlements in the absence of two onetime items that occurred in 2022. Those include the $15.2 million Q4 restructuring charge and the $25.3 million Q2 gain from the sale and leaseback of our Kansas City regional center. 2023 SG&A expenses are expected to include approximately $90 million to $100 million of depreciation and amortization expense compared to $93 million in 2022. Q4 interest and other expense totaled $42.5 million, up $24.1 million versus Q4 of last year. Q4 of 2022 included $24.8 million of interest expense, up $10.7 million versus the prior year, primarily due to higher short-term average interest rates. Q4 results also include a $16.9 million loss on foreign currency revaluation, up $10.4 million compared to Q4 of last year driven by the relative weakness of the U.S. dollar. As a reminder, the FX impacts are predominantly non-cash gains and losses on intercompany balances, which is why they are not hedged. Q4 tax rate came in at 20.9%, bringing our full year tax rate to 19.4%. We expect our 2023 full year effective tax rate to be 19% to 21%, assuming no meaningful changes to federal, state or international tax policy. Q4 net income was $96.2 million, and diluted earnings per share was $0.80. Adjusted or non-GAAP earnings per share, excluding the $36.7 million of restructuring charges, was $1.03, down 41% compared to Q4 of '21, which was up 61% versus the prior year. Turning to cash flow. Q4 cash flow generated by operations was a record $773.4 million compared to $75.9 million in Q4 of 2021. As we have talked about in prior earnings calls, we were expecting an improvement in working capital when the cost and price of purchase transportation came down. The $698 million year-over-year improvement was driven by a $650 million sequential decrease in net operating working capital in Q4 due to the declining cost and price of ocean, air and truckload in our model. Conversely, Q4 of last year included a $200 million sequential increase in net operating working capital as costs and prices were rising. If you look back at the period when cost and price of purchased transportation was rising from the end of 2019 to Q2 of 2022, our net operating working capital increased by approximately $1.5 billion. Between Q3 and Q4, as the cost and price of purchased transportation has come down, we have realized over $1 billion of benefit to working capital and operating cash flow. That benefit has come on a lag basis based on our DSO and DPO. Driven by the increased free cash flow generation in Q4, we returned $507 million of cash to shareholders through $438 million of share repurchases and $69 million of cash dividends. The Q4 cash returned to shareholders significantly exceeded net income and was up by 128% versus Q4 last year driven by the record cash flow. Consistent with our capital allocation strategy, to the extent that we have excess cash after managing through our commitments, investments and holding to an investment-grade credit rating, we are committed to returning that cash to shareholders through share repurchases. Capital expenditures were $27.8 million in Q4, bringing our full year capital spending to $128.5 million, up $58 million compared to 2021. The increase was primarily due to an increase in internally developed software. We expect our 2023 capital expenditures to be in the range of $90 million to $100 million. Now on to the balance sheet highlights. We ended Q4 with approximately $1.34 billion of liquidity comprised of $1.12 billion of committed funding under our credit facilities and a cash balance of $218 million. Our debt balance at the end of Q4 was $1.97 billion, up $55 million versus Q4 last year, primarily driven by our expanded capacity to borrow given the strong EBITDA performance. Our net debt-to-EBITDA leverage at the end of Q4 was 1.29 times, down from 1.42 times at the end of Q4 last year. As I mentioned, our capital allocation strategy is based on maintaining our investment-grade credit rating, which allows us to optimize our cost of capital. As we anticipate reduced earnings in 2023 given the strong results in the first half of 2022, we are planning for a lower level of debt to deliver our leverage targets. To the extent that we reduce our debt levels, this may reduce the amount of cash used for share repurchases. In December, our Board authorized and declared a 10.9% increase in our regular quarterly dividend taking it to $0.61 beginning with the dividend that was paid in January. We have now distributed uninterrupted dividends without decline for more than 25 years. Over the long term, we remain committed to growing our quarterly cash dividend in alignment with long-term EBITDA growth and using our share repurchase program as important levers to enhancing shareholder value. With that, I'll turn the call over to Arun to walk through our strategy to deliver a scalable operating model and strengthen our customer and carrier experience. Thanks, Mike, and good afternoon, everyone. During the fourth quarter, we continued to focus our efforts on working backwards from customers and carriers needs to build a scalable operating model. A scalable operating model improves customer and carrier experience and improves service levels while simultaneously reducing our cost to serve. These efforts include operationalizing our information advantage at scale by giving customers insights around price and coverage and providing features to carriers that improve their utilization and cash flow. Increased digitization is a key element of the scalable operating model. There are a number of data points that demonstrate our progress in 2022, including 183% increase in loads booked digitally by carriers and increased digitization across the board as evidenced by 2.3 billion digital transactions with customers and carriers, which represented a 30% increase year-over-year. In 2023, we will continue to deliver meaningful improvements to our customer, carrier and employee experience by accelerating the digital execution of all touch points in the life cycle of the road, including order management, appointments, in-transit tracking, cash advances and financial and documentation processes. We made progress on this front in Q4 as well with the automation of appointment-related tasks, increasing 34% year-over-year and in-transit tracking automation increasing by 450 basis points versus Q3. We are focused on opportunities to automate or make self-serve those processes that are core to our operating model, which we expect will enable us to decouple volume and headcount growth and drive increased productivity while simultaneously improving the customer experience and service levels. Throughout 2023, we'll provide updates on the progress we're making on shipments per person per day, which is a key metric to measure our productivity improvements. During the recent restructuring efforts, we continued our ongoing evaluation and prioritization of our tech and software projects. Through the assessment of those projects, we determined that some were no longer relevant to the acceleration of our scalable operating model, and we incurred the restructuring charges that Mike described earlier. The remaining projects are better aligned to improve the customer and carrier experience and reduce our cost to serve. And therefore, we're allocating more of our investments to those projects. We've also taken steps to align compensation and incentives to support our strategic priority of creating a scalable operating model, which is foundational to being the low-cost operator, which ultimately gives us the pricing flexibility to unlock and accelerate long-term market share growth while delivering our long-term operating margin targets. Thanks, Arun. As inflationary pressures continue to weigh on global economic growth and freight markets present cyclical challenges, we need to continue evolving our organization to bring great focus to our highest long-term strategic priorities, including keeping the needs of our customers and carriers at the center of what we do while lowering our overall cost structure by driving scale. I believe in the strategy that the team is executing on to deliver a scalable operating model. We expect this initiative will continue to drive improvements in our customer and carrier experience and amplify the expertise of our people, all of which will drive share gains and growth. And as Arun said, we expect these efforts will also improve our productivity, which will reduce our operating costs and lead to improved returns for our shareholders. I'd like to close by saying thank you to our employees for persevering during the period of extended market disruption and the market correction that is followed and for continuing to provide industry-leading service to our customers and carriers. This concludes our prepared remarks. And with that, I'll turn it back to Donna for the Q&A portion of the call. Good afternoon. And thank you for taking my question. So Scott, if I could address this to you. The change in leadership at the CEO level would indicate that the Board believes that a change in strategic direction is necessary. But if I listen to the message on the conference call today, it's very similar to the message three months ago from the company. So I guess my fundamental question here is, what is actually changing at C.H. Robinson today? And as you think about the qualities that you're looking for in the permanent CEO, what are those? And where does the Board want to take this company over the long term? Thank you. Yes. Thanks, Jack. Appreciate the question. A few things. First of all, the Board was unanimous in our decision. And it really was around an opportunity for this to be an inflection point of performance at the company, and new leadership being a component of that in terms of making that happen. As I said in my prepared remarks as well, we were also unanimous in our appreciation of Bob's contribution to the company over his career. I think this is a tremendous opportunity here at Robinson and couldn't be more excited after the five weeks I've spent with our people and in the field. Our core strategy of building out our operating model going forward, I think, is solid. Obviously, new eyes in terms of a new CEO will give some perspective to that as well. But strategically, we are absolutely in a spot with global supply chains becoming more complex to be a go-to partner in the future. So this is not a shift in strategy for the company. This is really a shift in sort of accelerating performance and moving at a faster pace. Yes. As I mentioned, Jodee Kozlak, our Board Chair now is the Head of the Search Committee. Just for background, Jodee was the former Chief HR Officer at Target. So she's familiar in processes like this. We're using a leading executive search firm that's helping the Board. We're going to take our time. We're going to be thorough and inclusive. And we're going to be broad in terms of the type of qualities we're looking at for the next CEO. Like I said before, this is a tremendous opportunity for somebody. We're looking for an experienced operator with sharp strategic thinking and someone who really can take Robinson to the next level. I think the next 10 years for Robinson are going to be the most exciting for the company going forward. So the opportunity here is fantastic for the next leader. Thanks, operator. And good afternoon everyone. Maybe just a follow-up on the strategic question and maybe in a little bit more of a pointed way. But when you think about your customer base, how many of them use you for end-to-end service? How many are both NAST and Global Forwarding customers? And then when you think about Bob's kind of statement before that Global Forwarding was an intrinsic part of Robinson, do you feel the same way about that division going forward? Thank you. Yes. First, why don't I turn it over to Mike for some specifics on that, and then I'll get my perspective. Yes. As we look at the combination of NAST and Global Forwarding, we've seen some great opportunities from a cross-selling standpoint between the two. And as we pointed out, if you look at the last 12 months, we've had over half of our revenue in AGP comes from customers who use both, Surface Transportation and Global Forwarding, services. We've looked deeper into this. We could probably do a better job at taking advantage of the relationships on both sides, but we have had some pretty compelling results. And I'll share with you one of the studies that we did where we looked at the last five years and we looked at customers who use both NAST and Global Forwarding versus customers who use one or the other. And the five-year compound annual growth rate for customers who use both was 400 basis points better than those who use one or the other. So we've been able to leverage customer relationships, bring business from NAST customers to Global Forwarding customers and vice versa. We believe as we think about customers and what they need and what they want that we can bring a full complement of services that they really need where they can get stuff from center Asia, center China to center U.S. with us and do it in a way that is value-added to their supply chain. So we believe in the ability to leverage both of those businesses, and that's our plans going forward. Yes. And I'll add on to that. I was on the board in 2012 when we did the Phoenix acquisition, which really was sort of the baseline of our modern Global Forwarding business. And we have built a substantial business in Global Forwarding and I think have just begun to see those cross-selling benefits. I'm a believer that, as I said before, global supply chains are getting more complex, and partners that can solve problems and I've seen that already in customer meetings I've sat in over the last five weeks can create tremendous value for multiple players, including Robinson. That being said, as a Board, we always stress test the portfolio and challenge ourselves as to the best ways to drive value for customers and shareholders. So I would say -- particularly, I would say, after the last two years, we have a great franchise in our Robinson Global Forwarding business, and we have a tremendous opportunity in a world where supply chains are just so much important post pandemic. And just a quick follow-up there. You all talked a lot about this new, I guess, global platform and some of the tech changes that you're making. Arun, I didn't hear a whole lot about the Global Forwarding side of that. Maybe just some quick comments about what's in store on the technology side for Forwarding. And ultimately, do you feel that Navisphere is the right platform there? Yes. In terms of scalable operating model, we think of that cross divisionally across NAST and Global Forwarding. The opportunity, as it relates to creating a scalable operating model, exists in Global Forwarding just as much as NAST. In terms of an increased focus in that context, Global Forwarding is already down the path, but we believe there are acceleration opportunities that the product and tech organizations will be focused on starting in the back half of this year. As it relates to Navisphere, I think of Navisphere as a system of record. There is a lot of -- much of the work that we're doing that's probably around Navisphere in terms of how we harvest the data out of it, run our algorithms and present it back to customers and carriers in whatever form they choose to consume it. And I would add on to that, that in the Global Forwarding business, the opportunity for tech enhancements is probably greater. The business is probably further behind truckload in the U.S., for sure, and LTL. And so there's more complexity in Global Forwarding when you get languages, currencies, culture, customs that makes it a more challenging environment from a tech enhancement standpoint. But that being said, the tech enhancements on the Global Forwarding side have been great. They've done some really nice backhouse automation. They've got some customer-facing features that have improved services. And they're excited about the tech for 2023. In fact, they've shown the tech to some customers. Nav 2.0 is something that customers are excited about. And it's been a while, I mean, since our team internally has been excited about the upcoming year with respect to tech and Global Forwarding. Certainly is. Yes, this is Scott. I'll just add on just some perspective from the Global Forwarding team. And when you have basically a stress test that they've had and the amount of volume they moved and the way they did it over the last two years, they're very open about areas where technology can help them improve. And to echo what Mike just said, we were with Mike earlier this week who heads up Global Forwarding, and I think he is excited about what's coming but also excited to drive the change management internally that we'll get the investment back on the tech investment for the return. Thank you very much. I had a question for Arun. Arun, where -- when you think of digitalization and digital transactions on the platform, how do you define what's digital versus what's not digital? And thinking about both the Forwarding and the NAST businesses separately, where are you in terms of percent of transactions that are -- you consider digital today? And where do you want to be by the time we're finished with this change? Yes. I mean the way we think about digital versus non-digital, if there's a manual touch, it's generally not digital. So you take in-transit tracking as an example. And I think the way a digital-first company might approach that might be different than a broker has approached it for the past couple of decades. And historically, there have been several -- lots of touches as it relates to in-transit tracking. And the way I think about it is the less we touch the load as it relates to in-transit tracking, the better it is in terms of both productivity of our internal people, obviously. And equally for our customers, it's a better experience because you have less variability in service outcomes, and it's a more standardized outcome for them. So that's kind of how we think about it across multiple processes in the life cycle of the load. So think about track and trace, think about document management, payments, appointments and so on. So it's a matter of driving down the manual touches for each of those processes systematically over time, which drives greater productivity and better customer experience and carriers. That's kind of how we think about it. Scott, go ahead. Yes. I would just add sort of how I talk about it to the employees as sort of an incumbent leader in the space that is using technology to sort of modernize the business is through sort of some business examples, I come from a distribution background. So you look at a company like Grainger and how they've leveraged technology to really drive tasks but then unleash the expertise their employees have for their customers. That's very similar to, I think, the opportunity we have here is really make our employees or logistics experts much more productive and then make technology tools that are sticky to the customer and that they really appreciate in terms of just making us easier to do business with. And I think Arun's product team is absolutely on that track. And maybe just to add some color to what Scott said. Reducing touches, for sure, along the lines of what I described, were equally amplifying the abilities of our people. An example might be someone in sales. How do we do targeted sales versus sort of the approach that you might have taken in the past? The ability to take behavioral data and give them insights to be more targeted in their efforts. And then the second part of that question, please, Arun, where are you today in terms of -- however you choose to think of it. I was thinking percentage of transactions that are digital. Where do you want to take that in two or three years? And where do you want to take that long term? I think the lens to look at it is -- these are all inputs, and the output that we're looking for is effectively better productivity of our people as we measured by shipments per person per day and a better customer outcome or carrier outcome. In the case of customers, it's better on time in full performance and greater customer satisfaction. So those are the output metrics we look at. And so as a goal for 2023, we have a productivity improvement expectation from these investments of 15% that we track quarterly. I think it's better for us to look at it that way. And the input metrics might vary because we might see a greater opportunity for productivity in in-transit tracking versus appointments. And so we'd rather not go there on these calls and just focus on productivity and customer outcomes as the expectations from these investments. Thanks. Good afternoon. Scott, maybe a question here about Global Forwarding. So it sounds like this is something you think is key to the portfolio going forward. So I think it would be helpful to maybe give a bit of a perspective of where you think we are in sort of the normalization cycle. Obviously, the pandemic boosted rates to extraordinarily elevated levels, and as you noted in the release, were kind of back down to pre-pandemic levels in some of these end markets. So prior to 2020, this business was generating net revenues north of $500 million. It peaked out, obviously, a multiple of that. What is the right number for Global Forwarding as we start to go forward? I guess maybe in other words, how much share has been sort of captured there? What's the cross-selling opportunity? Just if you could give us some perspective of how to think about it in the context of normalization, I think that would be great. Yes. Great, Chris. I'll make a few comments and then turn it over to Mike to dive into a little more granular detail. I would say my statement is Global Forwarding at Robinson today is a much stronger business than it was pre-pandemic. And I think part of what we owe to you is exactly that question is what is the run rate of this business on a more normalized rate. I'm super encouraged by Mike Short and his team and what we're doing in the marketplace, knowing that we're up against a backdrop of a tougher marketplace this year. But maybe Mike can give some specifics in terms of some numbers to help you with that question. Yes. Chris, happy to do that for you. So after running operating income margins of over 50% in Global Forwarding in Q1 and Q2, obviously, we knew that wasn't a sustainable level, and the market would come back to us at some point. The normalization, if you call it that, has surprised us a bit in terms of the speed and magnitude of the correction. And so I think in that process, we found ourselves with cost structure that didn't match the business. And so we are in the process of kind of rightsizing that cost structure. During the pandemic in some of those periods, we were intentionally investing in our business. There was the ability to get the attention of customers to a greater extent. We were improving customer service. We're investing in technology. And the intent all along was to come out of the pandemic in a better place. And we feel like we've done that. But as Q4 demonstrates, when you look at the operating income margin, we've still got a ways to go in rightsizing our cost structure, and Mike and the team have been getting after that. Headcount is down and will be down further as we enter into the New Year. We do think that a 30% operating income margin for the long term is still the right number. And I mentioned the technology and how the technology can help improve the operating margin on a go-forward basis, but I'll mention a few other things that I think are key to success in that Global Forwarding business, too, and things that the team is encouraged for in terms of continuing to gain market share as we go. But another one I'd mention is operational uniformity. That's really standardizing a lot of the work and activities that are done there. They have a good start on that, but there are still quite a bit more there that generates efficiency. And the good news is that as they come out of the pandemic here, the customer excellence scores are pretty solid. Team wants to make them better, but they're in pretty good shape from that perspective. Continuing to build scale. So the pipeline for new customers has been solid. They're looking at new verticals. They're looking at new trade lanes. And building that scale will be important to help us leverage the investments that we're putting in on that business to ensure that they've got a good return. I talked about their intentions and actions around managing expenses and headcount. That did get out of line a little bit here in the back half as rates in ocean and air really came back quite dramatically. And then the last thing I'd mention would be talent acquisition. So there's a lot of talent out in the marketplace. The team has done a pretty good job of bringing in folks that can help us extend into new verticals and extend into new trade lanes and geographies. And so continuation of that also gives us confidence that they can continue to grow market share going forward. And that will be the key to success and the key to getting that margin to 30% long term. Okay. So the idea is relative to that pre pandemic era. Margins maybe could be double what they were, so there's the ability to absorb some downside shock here or normalization over the course of this year and next year on the net revenue line. I guess that's the way to kind of triangulate to the way you think about profitability of the business. I was wondering if you could talk a little bit to where you think we are from a spot market perspective for truckload pricing. And sort of based on where you think maybe that bottoming occurs, how are we in terms of contract timing on your non-renegotiated contracts to this point? Thanks. Yes. Jordan, let me take that. So first of all, the demand has really pulled back here. That's pretty clear. And as a result, the spot market has really dried up. There's not a ton of opportunity there. In the prepared comments, we talked about we're sitting at a contract business that the commitments from the customers to be able to deliver the volumes that were inside of those contract agreements are being pressured because of the overall demand. So the business right now, we were 65-35 contract spot. The spot opportunities are not there to a great extent. And so we would expect that, that eventually flattens out here as we go through the year. I'm not sure if you follow the projections that we have in the marketplace around pricing, but we're anticipating a 16% year-over-year decline in truckload spot cost per mile in 2023, most of that coming early in 2023. And then the contract pricing generally follows where the spot market is on a lag basis. And so inside the contract business, maybe I'll take you back to the beginning of 2022. And so as we were entering into new contract business and bidding on contracts that were available, we were looking at the potential in the back half of '22 with COVID shutdowns, the holiday season, Chinese New Year coming that prices would hold up more than they did. As things played out, there really wasn't a key season. The demand was soft. The prices came down. And so as we were bidding on contracts in Q1 and Q2, we weren't as successful on a win percentage as we probably would have liked to have been. And certainly, we would have been better had we known the drop-off that was coming. So then you kind of get us to real time here, Q4 and into Q1. We're out there in the market on these contracts. We're bidding competitively, and we're feeling pretty good about the win rates. But the demand and the volume there from the customer just isn't strong. So even with our higher win rate from a bid standpoint, the volumes that are materializing are still challenged. We talked about kind of in Q4, the decline in truckload volume that we had seen, and obviously delivered a minus 4% in the quarter. It is not our intention to have negative numbers on our truckload volume. We certainly expect to grow, but it was a soft market. And the good news, I think, for us is as we come into the New Year, we've seen a better performance on the truckload volume side into January here. When you talk about the contracts themselves and what's coming, one of the things that I think over the past few years during the pandemic that we observed was that what was largely a 12-month bid contract had transitioned to contracts that were of lesser duration. And what I can tell you in Q4 is that, that continued in that about half -- roughly half of the contracts that we bid on were 12 months, and the other half were something less than that. So even as the market has come down, that mix has remained in the contracts that are less than 12-month duration. Thank you. Good afternoon. Scott, in the answer to an earlier question, you'd mentioned kind of no change in strategic direction, and however, maybe greater sense of urgency and timing. You talked about the annualized savings by the end of '23. But as you've been in this new role, have you found either new opportunities or ways to kind of front-end load some of the cost alignment that you have planned for the year? So therefore, you're kind of timing that more with the macro headwinds or some of the volume headwinds you see and are still cutting in the back half of the year when conceivably things may be getting better? Yes. No, thanks, Jon. There's no doubt, it was a tough back half of the year. And that being said, I do see a palpable excitement about the future here. But in the short term, I think one of the things I'm trying to do with the management team, and I talked about empowering them, was also simplifying the message, aligning focus on customers and leveraging Arun and his team to show customer benefit. And we talked about the amplification of our people's expertise in the field. But we're very focused on expense. We're focused on headcount. We're focused on really tightly managing this business through the first half of the year. But also, as I've said to the senior leadership team, making no assumptions that the wind will be at our back throughout 2023. I think there's additional opportunity for us to get sort of more precise in how we go to market and find efficiencies throughout the company. I'm really proud of the team. It's never easy to do what happened back in November, but the spirit of the folks in the field and the ability to want to get better, faster, stronger is absolutely here at Robinson. And I can add a little color to just on the cost savings front. So we did make some progress against that expense reduction target here in Q4, particularly on the personnel side. And just as a reminder, back to the commitment. So we were taking the run rate of Q3 and annualizing it, and the commitment was that we would get to a net cost reduction of at least $158 million by Q4 of 2023. And if you look at what we delivered in Q4, you take out the restructuring expense and annualize where we're at, you get to a number that's about $2.27 billion. So the run rate that we were -- if you take the Q3 and the annualized run rate of that, that was about $2.4 billion. So that implies that we've already -- are already at about $130 million savings versus that original commitment. Now you can't read into that too much because in Q4, as I had spoke to earlier, we did have a benefit to our equity compensation that reduced the overall expense in Q4, and we wouldn't expect that to continue into 2023. But the net of that is we have made some decent progress. We are, I think, much better focused going forward on headcount. And that will be a key since that's such a big part of our cost structure as we roll through 2023. Good afternoon. And thanks for taking the question. Maybe just two quick follow-ups then just on the expense reduction. It's obviously announced a little while ago and implemented in the fourth quarter, but it still seems like things maybe got worse a little bit faster than you initially thought in Forwarding. So if you can just clarify if there are additional opportunities on the horizon or you're sort of sticking with the $150 million for the time being and implementing that. And then just, Mike, I think you mentioned on January a little bit in terms of things stabilized. So I wondered if you could put some numbers behind that in terms of the truckload market, AGP per day volume or anything like that would be helpful as you start the first third of this first quarter? Thank you. Yes, I'll kick off on Global Forwarding and toss it over to Mike. The Global Forwarding team has a history of managing expenses really well through cycles. Obviously, the last 18 to 24 months was very unique. So I'm confident that they're on point. And where they can find expense reduction that makes sense, they're absolutely going to do it. And then maybe Mike can give some color to that. Yes. So try to make sure I get to each part of your question. So first of all, on the cost savings part, we continue with the commitment to the $150 million net cost reduction by Q4 on a run rate basis annualized. And I'll just point out maybe the obvious there that the inflationary environment that we're in is as high as it's been in 40 years. So the net cost reduction is offsetting our inflation and delivering the savings there, too. But we will stick with that. I will also add that if you did the math on the midpoint of the expense guidance that we just provided, you get to $2.2 billion for the year. And again, the run rate that we're going off of is $2.4 billion. So we're guiding to a midpoint of $2.2 billion, which is $200 million worth of savings. So let me address that for a second. We are committed to the net cost reduction. That is what we would consider to be more permanent cost reduction, more structural in nature. We will likely deliver more savings than just that. But the second part of the savings is more what I would say transitory related to the softness in the market. And as we've talked about, we've got a history of adjusting our cost structure with the market. And because we are seeing some softness there, there is some additional savings that comes along with that. I think another part of your question was about AGP trends. We do give you -- we did give you AGP per business day on an enterprise basis in Q4 where we were down 10% in October, down 7% in November and down 14% in December. That softness has continued into January. But as I mentioned, the truckload volume that we delivered in Q4, we have seen improvements on that going into the New Year. Thanks for all that, Mike. So I guess the difference between the $150 million and the $200 million you guided to you, that would be basically the transitory of the market-based impact. Is that what you call out there? We are showing time for one final question. The final question for today is coming from Stephanie Moore of Jefferies. Please go ahead. Good afternoon. And thank you. I want to touch on with this change in strategic direction, I want to know how this change is being reflected in your capital allocation plans. You called out wanting to deliver on certain leverage targets, but maybe you could just speak to how or it could make sense to maybe adjust your capital allocation plan as you look to kind of change the strategic direction of the company. Thanks. Yes. Thanks, Stephanie. I'll have Mike start, and then I'll wrap up and maybe talk about our capital allocation committee a little bit as well. Yes. So from a capital allocation standpoint, I think one of the major differences here is of late has been the amount of free cash flow that we've had really resulting from the working capital dollars coming back to us. And we had been pointing to the idea that when the price and cost of purchased transportation in ocean, air and truckload would come back down off of the record all-time highs that, that $1.5 billion of absorbed working capital that we experienced from the end of 2019 to earlier in '22 would start coming back. And of course, in Q3 and Q4, we saw over $1 billion of that tied up working capital come back to us, and therefore, began to deploy that in alignment with our capital allocation strategy. And so of course, we covered our commitments, our investments, our dividend. And our policy after that is to, as we are managing our leverage to maintain our investment-grade credit rating, any money that's left over after that goes to share repurchase. So you saw our share repurchase pick up quite a bit in Q3 and Q4. And then what we experienced after that was observing those prices coming down across ocean, air and truckload, which informs our forward-looking view on EBITDA and, therefore, informs our forward-looking view on the level of debt we need that we need to maintain the leverage ratio is appropriate to maintaining investment-grade credit rating. And so that's a long way of describing a pullback on share repurchase to make sure that we maintain that targeted leverage. But in terms of the overall capital allocation strategy, while there were some differences in activities as a result of the record free cash flow haven't changed our philosophy at all on how we are planning to deploy our capital going forward. Yes. And Stephanie, I would just add from a Board perspective, we're making our Capital Allocation Committee a permanent committee, and we're also going to be soon adding additional members to that. And I think this is really going to serve as a great partner to the management team in terms of looking at areas that we can drive value across the organization for both customers and shareholders. Thank you, everyone. That concludes today's earnings call. Thanks for joining us today, and we look forward to talking to you again. Have a great evening. Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time. And enjoy the rest of your day.
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EarningCall_809
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Present here today, we have our Group CEO, Frank Vang-Jensen; and Group CFO, Ian Smith, and my name is Matti Ahokas from Investor Relations. As usual, we'll start with a presentation by Frank and after that, you will get a chance to ask questions. To ask a question please register for the webcast. Today we have published our fourth quarter and full year '22 results. If we look back on our results announcement last year and reflect on how we entered '22, the world then was quite different to the one we are facing today. At the beginning of last year, we were dealing with the last big wave of COVID restrictions in the western part of the world. At Nordea, we were introducing our updated strategy and our new financial target for '25. Little did we know, '22 will turn out to be very different than expected. We witnessed Russia's invasion of Ukraine causing significant human suffering and societal and financial uncertainty across Europe. We returned to a more normal interest rate environment after a decade of extremely expansive monetary policy which has been one of the biggest financial experiments in many decades. In the financial markets, we saw the worst combined returns across bond and equity markets since the late '60s as inflation and interest rates shifted material higher. Despite the changed environment, our direction and purpose as a bank have remained unchanged. We have stood by our customers, supported our Nordic societies and delivered on our strategy. This has led to another strong year for Nordea. Last year, we once again showed that we have a resilient business model and our business plan stands the test of time. So one of the highlights in '22 were, our business volumes grew and we gained market shares across the Nordics. Our mortgage lending grew by 3% and corporate lending by 19%. We continued to improve customer experiences in all channels. Our '22 operating profit was â¬5.4 billion which is 9% higher than '21. also a strong year. Our return on equity was 13.5% up from 11.2% in the previous year. Our credit quality remained strong with low levels of net loan losses and our capital strength continues to be among the best in Europe. So, a strong set of results driven by our employees' relentless focus towards our customers and our decisive actions to continuously improve business momentum. Looking at the fourth quarter results, we were able to continue to grow business volume despite higher economic uncertainty. Corporate lending was up 9% year-on-year and mortgage volumes were up 3%. Net interest income was up 31% driven by growth in lending and deposit volumes as well as deposit margins. Net commission income decreased by 12% due to continued lower capital markets activity and lower assets under management due to market turbulence. Asset under management recovered and were up 5% quarter-on-quarter. We have very strong net fair value result, net fair value was up 69% supported by strong customer activity. Our return on equity was 15.9% and the cost-to-income ratio improved to 45% from 48% a year ago. Reflecting our strong financial performance and the strength of our business, the Board has proposed a dividend of â¬0.80 per share. This will benefit our shareholders consisting of more than 565,000 private individuals, pension funds and other investors and would also support society during difficult times. For our '23 outlook, we aim to continue to improve our profitability and expect the return on equity to remain above 13%. I'll come back to the outlook at the end of the presentation. Let's now look at the fourth quarter results in more detail. In the fourth quarter, we focused on providing proactive advice and driving high business activity. This led to solid business momentum where we maintained volume growth and gained market shares across the Nordics. Net interest income grew by 31% year-on-year. The rising cost of living and greater economic uncertainty has cooled down the Nordic mortgage markets leading to lower transaction volumes and lending margins. Despite this, we were able to keep a good activity level with mortgage lending up 3% year-on-year. Lending demand among our corporate customers remained high. Total corporate lending volumes grew by 9%, SME lending grew by 5% while large corporate lending grew by 12%. We are well-positioned to adjust to the changing environment and capture the growth opportunity available. Our deposit volumes also continued to increase up 7% year-on-year. We offer a comprehensive and competitive deposit product arranged to our customers. Our deposit margins have benefited from the return to a more normal interest rate environment after a decade of extremely expansive monetary policy at negative rates. Of course, the banking industry is experiencing some tailwind due to the normalization of interest rates following a highly unusual and prolonged period of negative rates. At the same time, we are facing headwinds due to the uncertain environment. For the financial sector also the ultra-low rate environment has naturally posed some challenges. One, the deposit engine has not generated income in several years. But as a broader question, the negative rates have caused an unhealthy situation for both individuals and for society at large. While some have said the zero rate environment won't last forever, we believe that has not been a proper realistic understanding of the cost of money during the past years. All in all, the return to more normal rates is a healthy and needed adjustment to create a foundation for sustainable growth. We expect that our net interest income will continue to benefit from the higher policy rates in '23 even if we expect the rate hikes to slow down toward the end of the year. We saw a mixed picture for net commission and fee income in the fourth quarter. While payment and card fee income was clearly up, lending-related NCI and savings and brokerage and advisory fees were down. Net fee and commission income was therefore down 12% year-on-year, payment and card income increased by 12% year-on-year due to higher customer activity. Savings fees were down 1% quarter-on-quarter and down 13% year-on-year following the lower asset under management. The strength of our franchise was visible. Even in a muted environment, we continue to have positive net flows from internal channels. Brokerage and advisory fees were up from the seasonal quiet third quarter but challenging market conditions are still impacting customer activity. We expect this area to recover when the market confidence increases. A very high customer activity led to a very strong net fair value result in the quarter. The contribution of the customer areas was substantial and we achieved a 16% improvement compared with the same period a year ago. This was driven by high demand for FX and interest rate hedging products. Treasury income increased by â¬73 million, market making operations were also up driven by FX rates and equity trading. The net fair value result increased by 69%. Cost increased by 12% year-on-year including one-off items such as costs related to the acquisition of Topdanmark Life. Underlying costs were up 3%. Higher inflation is leading to increased cost pressure in our businesses similar to what our customers are experiencing. In addition, we've made significant investments in selected areas, for example, in digital and also technology and risk management. In the fourth quarter, we invested â¬50 million to increase our financial crime prevention capabilities and to make our IT infrastructure even more resilient. In '22, our income growth allowed us to make these selected investments to improve the resilience of our business even further while still improving our profitability. For '23, our plan is to remain focused on maintaining strict cost control and growing revenues faster than costs while continuing to invest to strengthen the bank even further. Our credit quality remains strong and we are well-positioned to handle the continued economic uncertainty that will impact our customers. Net loan losses and similar net results amounted to â¬59 million or 7 basis points in the quarter and one basis point in the full year '22. Despite the economic slowdown, individual provisions and net loan losses remained low and amounted to â¬40 million. We didn't see any particular industry concentration in the losses. Following an assessment of the potential impact of higher cost and reduced consumer spending on our customers, the management adjustment buffer was increased by â¬20 million to â¬585 million. Our buffer continues to ensure a strong reserve to cover potential and expected loan losses. Our capital position continues to be among the strongest in Europe. Our CET1 ratio was 16.4% that is 5.3 percentage points above the current requirement and continued capital generation enables us to support our customers and remain a leading bank in shareholder distributions. Reflecting our strong financial performance in '22, our Board has proposed a dividend of â¬0.80 per share. Together with our share buybacks during '22, the distribution to our shareholders will be approximately â¬1.5 per share or 15% of the current market capitalization. Dividends are important for our shareholders for more than 565,000 private individuals, pension funds and also investors. Our dividend payments support economic activity, drive growth in the Nordic societies and channel funding into innovation and education and also societal support. This is especially important in more challenging times. Let's now move to our business area results. Our business areas delivered strong performances in '22 and continued on the same path in the fourth quarter. In Personal Banking, we maintained high levels of activity and continued to provide proactive advice and support to our customers during the financial market turbulence. Our approach helped us to gain market shares in mortgages across the Nordics even in a muted environment. The overall cooling down of the mortgage market has slowed down the growth rates compared with the previous quarters. In the fourth quarter, mortgage volumes increased by 2%, deposit volumes increased by 4% with improving margins. In turbulent times, customer investment activity and demand for new loan promises have decreased. Customer focus has shifted towards broader personal finances which include deposit products. Our comprehensive offering and holistic expert advice help our customers manage the rising interest rates and high inflation. We also continue to build strong digital relationships with our customers and support them proactively. For instance, we saw a 50% increase in their interactions with personalized digital messages on our mobile app and Netbank. We also continue to see an increase in the number of mobile users up 6% year-on-year. The market environment impact the savings and investment income which was partly offset by higher payment and card fees. Even in a challenging savings market, the ESG share of gross inflows to funds reached an all-time high at 32%. The credit risk picture remained stable across the Nordics despite high inflation and rising interest rates. Total income was up 18% driven by strong NII growth, return on capital at risk improved to 23% compared with 17% a year ago, and the cost-to-income ratio improved to 47% from 51%. Business banking ended the year as it started delivering solid growth, volumes increased by 5% led by strong performance in Sweden and in Norway. Total income was up 21%. Net interest income increased by 34% year-on-year driven by higher volumes and improved deposit margins. Equity and debt capital markets activity remained subdued. The credit quality continued to be stable. Loan losses were mainly driven by a small number of customers. We maintained close dialog with our customers to support them as they face the current macroeconomic challenges. We engaged in more than 50,000 meetings and continued to support them with the financing needs during the quarter. During the quarter, we also launched a new Nordea Business Net Bank in Norway, the Net Bank is now available in all markets, and the business mobile app in Denmark, Finland and Sweden. This is an important milestone on our journey to become the leading digital bank for SMEs. We also saw a positive development in customer satisfaction in both the Net bank and mobile app. Our focus on driving the transition to a more sustainable future continues. Our green loan portfolio more than doubled year-on-year. In October, we entered into a partnership with Normative, the carbon accounting software provider. With our new business carbon calculator, our customers can understand the missions and identify climate transition opportunities. Return on capital risk in Business Banking increased to 21% compared with 15% a year ago and the cost-to-income ratio improved to 40% from 46%. Large corporates and institutions continue to focus on high customer activity. Our productivity and expertise led to high net interest income and net fair value growth. Lending volumes increased by 12% and higher deposit margins contributed to 38% net interest income growth. Capital markets remain challenging but we saw somewhat improved sentiment during the quarter. Credit quality remains strong. Net fair value analysis was up 94% driven by high demand in our FX and rates products. Our market-leading service offerings and expertise help to capture the increased demand. And the yearly Prospera customer satisfaction survey ranked as the Best Corporate Bank in Denmark. In addition, our corporate banking scores continued to improve in the Nordics reaching an all-time high. SEI's contribution was critical to our delivery of â¬58 billion worth of sustainable financing transactions in '22 contributing to our '25 target of more than â¬200 billion. Despite increased lending, economic capital was stable year-on-year, supported by solid capital discipline. Return on capital at risk increased to 21% compared with 13% a year ago. And the cost-to-income ratio improved to 36% from 44%. In Asset and Wealth Management, we continued solid income delivery despite challenging market conditions. We maintained good business momentum and delivered growth in our private banking business. With especially strong results in Finland and in Sweden, we continue to attract new customers and increase lending and deposit volumes during the quarter. Net flows were positive in Private Banking. Equity and bond market sentiment continued to be challenging and total income decreased by 1%. Assets Under Management decreased by 13% year-on-year in line with the overall market. During the fourth quarter, we saw signs of improvement with Asset Under Management up 5% quarter-on-quarter. We also finalized the Topdanmark Life acquisition during the quarter and we are now ready to offer attractive and competitive pension products and services in Denmark. The cost-to-income ratio was 45% and increased due to the Topdanmark Life costs. Return on capital at risk improved to 38% compared with 31% a year ago. To sum up, '22 was a strong year for Nordea despite the uncertain environment. I would like to thank our very skilled and dedicated employees for supporting our customers and making it possible to achieve these results. Now as we enter '23, macroeconomic uncertainty remains high. We expect the challenging environment to continue during the coming quarters. We have a very resilient business model and the Nordic societies are well positioned to weather the challenging conditions. We are committed to delivering on our key priorities and our '25 financial targets. We aim to continue to improve our profitability and expect the return on equity to remain above 13% in '23. This is already in line with our financial target for '25 and we plan to provide a target update by the year-end '23 when the environment is hopefully more predictable. In order to improve our performance further, we will continue to deliver on our three key priorities creating the best omnichannel customer experience, driving focused and profitable growth and increasing operational and capital efficiency. We are also delivering on our two key levers across the entire bank. Being a digital leader among our peers and integrating sustainability into the core of our business. Our key focus is and always will be, to serve our customers to the best of our ability. We recognize that without the trust and loyalty of our customers, we would not be where we are today. I'd like to use the opportunity to thank all our customers, shareholders, and other stakeholders for your feedback and very good cooperation during the year. Our role in society is the same as it has been for 200 years. We are here to enable dreams and aspirations for a greater good. That is also our way forward to be the preferred partner for our customers in both good and challenging times. Thank you. Thank you, everyone. First question, yes, that's what everyone has been focusing on in the banks here [indiscernible] in the presentation pack where you show the sensitivity for 2023 was 1 to 1.5, but then you have the arrows to the right showing what would impact the NII in the year and I remember I think Ian in Q3, you said that the rates should more or less cancel each other out. So it should really be rates that's going to drive the NII. Could you give us an update on how do you think those areas are going to weigh on the total NII, please? Good morning, Andreas. I don't think we've got a different view now. There's always a number of factors that come in and out of this. I suspect that the most important sensitivity to the development of NII is deposit betas, which have been the banks have not passed on a great deal of rate increases so far. I think it's reasonable to expect that to change in 2023. But I think we still feel pretty good about the estimates we provided. Yes. Good. And then on asset quality, you now you have 585 in your buffers and I'm looking at consensus 565 in the provisions for 2023. I mean how do you think, should we, I mean, either consensus believe that you're going to write it back and provisions roughly underlying going to be double or we don't believe that you're going to write back any of it? Could you tell us a little bit, how long are you going to actually keep adding to it and when are we actually going to start to release it from the 585? Thanks. Yes, that's a good question, Andreas. I can't speak for how analysts are thinking about the development of provisions. From our own perspective, we've done a pretty thorough job of assessing where the risks lie, looking at sectors that might be impacted more than others in the current environment, and that's led to our assessment of 585 as being the requirement. I think then the key thing is to think about when should those losses manifest and when we might see them coming through. I think at the moment given the strength in the portfolio and the leading indicators, that's something that feels like it's a little bit later in '23 and perhaps into '24. And we would expect to use those additional provisions to offset losses that we see arising. The provisions are held for a very specific purpose. So I think it's always hard to estimate with precision where we might see losses coming through. But it feels like it's later in '23 and those additional provisions are there to absorb those losses. No, just if they come and Andreas, we see this as a prudent action. So it's best to be prudent than the opposite. Yes. And Frank, on the prudent comment, on the above 13% already for 2023, I mean you are at 16% now in Q4, and you still have sensitivity to rising rates. So should we basically ignore above 13% because it's probably going to be quite significant above 13 and how should we really view that number? Yes. The start point, of course, the floor would be above 13 and as you say, it's too early to comment on any details yet. Our internal environment has changed a lot since a year ago. There are positive and negatives. However, we aim to be the best bank in the Nordics and that should also be seen in our operational performance and as well as our financial target. So let's see how the year will end and let's come back to the update discussion in the second half of the year. And I think, Andreas, Q4 was a very strong performance for Nordea but it's still an environment in which we're seeing lower than even normal levels of loan losses and other things. So I think we do need to work through as Frank says a couple more quarters to see how things are tracking. Thank you. Just continuing on NII there. If I look at your NII on page 8 in the fact book, the deposit margin impact is seen under â¬336 million quarter-on-quarter. So I was just wondering if you could give us a feeling for the regional split there. Which countries have contributed the most and what you see going forward? From the business area accounting, it clearly looks like Finland was the strongest performer followed by Sweden. But if you could give us that split, it would be helpful. Hi, Magnus. Yes, you're right, Finland has performed extremely well in Q4. And you would expect that to be the case because we've moved into positive territory with ECB hiking. I think all three of our countries on the retail side are continuously improving our performance. And as you know, we're working very hard, particularly in our retail business in Norway where there's always a bit of a challenge with the notice periods and other things and we had indicated that 2023, we would expect to have worked through that hiking cycle and I see a strengthening of performance particularly impaired in Norway. So I think that's the picture. Okay. For example, if I just follow up in Finland, you had â¬26.5 billion in deposits and how much of those did you pay zero interest rate in Q4? We've got a really strong market share of deposits in Finland and that's what helps with our deposit income performance. We've said before that we're about sort of 50-50 across all of our countries, Finland is probably a bit higher than that in terms of transaction accounts. Yes. Okay, and if floor effect remaining at all in Q4 and the negative effect remaining as you had a quite significant one in Q3. Yes, we did see some impact from floors estimate is probably around â¬20 million. But I think we've now worked through that particular impact. Okay, thank you. And then secondly just on costs. You made some proactive investments in Q4 here on additional IT risk management of â¬50 million. And I also noted that I mean headcount is up around 600 of which 300 is Topdanmark. So it continues samples in underlying terms, is this something we should expect also into '23 given your strong income growth, and if so, could you quantify those investments, please? So we're investing more in people and processes to further strengthen our risk management across the board. A couple of key areas are financial crime prevention and IT resilience and that has involved hiring more people as you spotted. We do expect to continue to invest but comfortably within cost expectations for 2023. And we think it's the right thing to do to try to get ahead of the regulatory curve as best we can, particularly in some of those areas of high scrutiny such as financial crime prevention. So, yes, we've made those additional investments. We'll continue to invest there and also in areas where it's important to the development of our strategy within our cost envelope, I guess for 2023. It's just part of a range of different things for us, it isn't something that needs to be called out especially. Hi, thanks. I've got two questions, please. Firstly, for 2023, you're reiterating the 3% to 4% cost growth, which I think Matti spoke about on the previous call. And secondly, just on deposit because why do you think they are much lower in Denmark versus Sweden or Norway. Do you think it's a matter of catch-up because rates are further behind or do you think there are some sort of structural differences? Thanks. Good morning, Namita. So our expectation for '23 cost is probably around 5% cost growth. Combination of inflationary pressures which are still quite intense and our commitment to invest in our business. So, probably a bit higher than the 3% to 4% that we've been talking about up until now. Still expecting strong positive jaws and a strong ROE performance but I think around 5% feels about right. And then in terms of deposit betas in Denmark, I mean, I think the market is just a little bit slower. When rates started to move, we are among the leaders in offering really market-leading savings products. Transaction accounts have been pretty stable and I think the market is just moving a little bit slower. Yes, hello. Thank you for the presentation. A couple of questions. First of all, on your NII sensitivity. Compared to your previous guidance, you revised slightly down by â¬50 million. I see that this change is coming from a lower impact expected in Sweden and in Denmark. Just wanted to check with you, why you lowered the sensitivity in these two countries and why you're still confident that you can deliver the same sensitivity for the future hikes in Finland. That's the first question. Yes, good morning, Maria. So I think the key thing to understand here is that our NII expectations remain strong for 2023 and the benefits that we highlighted at the end of Q3 in terms of seeing the rate rises in the Eurozone and Denmark starting to come through are going to be a very positive development for our business. Our sense on trimming back slightly the sort of level of sensitivity for 50 basis points rise, it's exactly that we might expect to see, for example, Sweden, which is quite far ahead in hiking cycle start to increase the passthrough rate on rate rises on deposits. And then in Denmark again, I think we might see some competitive elements lead to higher passthrough rates. So it's really a small adjustment to the thinking but the overall picture here is an expectation of a strong development of NII in 2023. Thank you. I appreciate your comments and then the second question is on capital development. If you could confirm that you still expect IRB model approval in the first half of this year? If there is any impact that you can share with us and kind of general thinking on buyback outlook because I believe the current one is going to be completed before the end of this quarter. Yes. So I think we all need to be patient on the IRB model approvals, I think it's taking longer than expected, but we continue to work with the ECB on that. And in terms of buybacks, the Nordea capital efficiency and capital return story continues and we are still in the middle of that. We're nearing the end of our third buy-back program that as I've said before should keep us going through Q1. We're thinking about what we do for the next buyback and it will continue that sort of capital efficiency and getting down to our 15% target range is still very much front of mind for us. So no change there. Just to clarify, aside from IFRS 17 impact of roughly 20 basis points you don't expect any headwinds coming this year. Yes, just to confirm on capital headwinds aside from IFRS 17 impact which you provided of 23 basis points, there is nothing else to flag. Certainly nothing at the moment. There are plenty of future developments out there. We're aware of, for example, things like countercyclical buffer increases and other things but these are all factored into our guidance. Thank you very much for taking the questions. So I just had a quick question on the CET1 target and getting down to 15%. Can I ask if you will look to get down to 15% as rapidly as possible? And the reason I'm asking that if I just wanted to thrive likely buyback to be announced within 2023 or are there any potential uses or optionality that Nordea would like to keep. That means that the Board may not want to pay down to 15% immediately in the very near term. And the second question I had was just on the lending growth outlook. Now clearly Nordea has had a very nice market share story which I would expect it continues. But if you think about system-level lending growth in your different geographies, could you help us think about your views on lending growth in households and corporate in the bulky markets? Thank you. Yes, morning, Omar. I'll take the first question and then Frank will talk about the outlook on lending. So first of all, I want to be clear. We don't have a CET1 target as such. The target that we have is ROE and we've highlighted both for 2023 and 2025 of our expectations there. What we've always said is that where we think we should be depending on a whole bunch of regulatory developments and other things is around about 15% and that remains our position and we will we've always sought to balance pace in getting there with all of the different things that we would have to do within our business. And again, that doesn't change. So our view is that the long-term level is 15%. If we're seeing opportunities or other things that might cause us to vary the pace of getting there, we'll consider them. So at the moment, we are pleased with our progress on capital efficiency. We're also extremely pleased with our capital strength which is our CET1 ratio is up 60 basis points quarter-on-quarter as you can see but we're not driven by any sort of particular thoughts on pace. We will come back as previously flagged in Q1 to talk about where we go next on buybacks. We still have an excess capital position that will seek to manage down. So I think what we said back in Q3, very clearly was we dealt with the obvious excess, and we now have a comfortable sort of excess to our target that we would think about whether we deploy for growth, whether we deploy for other opportunities, or we worked through with buybacks and buybacks is still a big part of what we believe in. When it comes to so lending growth, let's start with the overall level within the different baskets. When it comes to mortgages, which as you know is like the majority of our household lending, it's super hard to say exact number, but the activity has clearly come down significantly across the Board. Highest increases did we see in Sweden and least increase in the market in Denmark and then also in between. My best guess and it will be a guess only would be 1%, 2% market growth in the mortgage year, in the mortgage market for this year. And then, I can't see any reasons for why we should not keep on taking our share and perhaps a little bit extra and there's not really any super big differences between the countries. This is just what usually happens, so uncertainty leads to be customers to being cautious. When customers are cautious they start to look at the prices. The seller want to sell to an old price, the buyer wants to have a discount to the new price and then it takes time before it meet. When it will meet, activity levels start slowly to come up again. We are not there yet but it is developing. So this year we'll be sort of like in a between year, I should say, and let's see then how it will play our. My best guess is 1% to 2%. On the corporate side, it's a bit tricky, because the large corporates are in good shape. Most of them are hungry. They want to invest, they want to look into sustainability investments, and they want to look, so for example, supply chain investments. So there is actually a very, very high activity and parallel, we are having a dysfunctional bond and partly also equity market, and then of course that creates an opportunity for us to help where we can and we are doing so. So large corporates' lending I would assess to being pretty positive during this year as well, but let's see how it plays out finally. Then you have the SME and that's twofold. It looks like the mid-cycle but still are active. They are looking at a bit like the large corporates and I would expect to see a continued lending growth within that area and then we have the small businesses and remember many of these are impacted by the lower consumer confidence and the less spending and will be impacted, I think, through the entire year. So there, I expect to see very, very low growth and when you combine that, it's hard to say a number but clearly more positive than the household market. Yes, good morning. Thank you. A slightly detailed question on the AUM coming from Topdanmark, if you could comment on that. Is that margin accretive or is it a lower margin than the back book of the average AUM? And then secondly, I mean do you dare to put out the cost-to-income ratio for a target for 2023 as well as you will have a positive jaw and you ended 2022 at a very low level or below the 2025 target? Thank you. Good morning, Maths. The â¬11 billion or so that came in from Topdanmark is neither high nor low, it isn't. I would think of it as being just consistent with our average margin now. In terms of cost-to-income ratio, we are firm believers in delivering the best ROE among European banks. And so our focus is on all of the levers that contribute to ROE. We gave cost-income ratio guidance last year because of the developments such as additional regulatory fees coming from Swedish bank tax and other things. We think now our cost picture is well understood, consensus indicates that. And so we've chosen deliberately to go to our primary focus which is on ROE of greater than 13% next year. And also just to add to it, we expect positive jaws for '23 as well. So I think you have most of the components and without having a clear guidance. Thanks. Thanks for taking my questions. If I get back once again on slide 17 where you provided the outlook for '23, when you talk about â¬1.1 billion to â¬1.5 billion NII carryover spec in '23, should I read this number in connection with the chart where you show the policy rate path expectations, so to go down at some point in the Euro area and then in Sweden and in Sweden too and related to that, when you say actual passthrough will vary between account types and countries, does it mean that you expect, let's say, the 1.1 to 1.5 is built with the assumptions that the positive EBITDA will go up or what we have seen so far? The other quick question I have is on the cost. Ian before mentioned kind of 5% maybe. I would imagine this 5% should exclude or should be on let's say on underlying basis excluding some of the one-offs that you had in '22 and in Q4, probably. And then I have a curiosity rather than a question. Do you see any pressure from ESG investors to improve their remuneration of your deposits which will help households weathering and facing ultra inflations in the various Nordic countries. Just a curiosity, which I honestly do not to know. Okay. Hi, Ricardo. I'll take the first couple of questions and Frank will come back on the picture on deposit rates. So yes, you should read the NII estimates of policy rates alongside the graph of policy rate expectations and you'll see that we've upgraded the estimates of net interest income impact given the expected development of policy rate since Q3. And subject of course to the things that we've talked about that can impact it, we think it's a pretty good estimate. What's included there is our assumptions around policy rates and as we've indicated in certain jurisdictions, we might expect those pass-through rates to increase beyond what we've seen in 2022. But I think we've been pretty helpful there. So hopefully that works and on costs, we're very straightforward here in Nordea, we're not acute at all. So when I say that we can expect cost growth next year of around 5%, it's on our totaled 2022 number rather than any additions and deductions. And there are still a number of things that remain to be settled within that. We're still negotiating pay settlements with collective pay agreements with unions and others. So a slightly moving picture driven by inflation and all of those complexities. But you also should look to our track record in managing costs. And so when we say around 5%, that's based on our total cost out turn for 2022. In regards to the ESG question you posted, our purpose is to enable dreams and aspirations for the greater good. We have been over 200 years. And our customers and the society in which we operate should see us as very predictable in Nordea, very strong, very stable, and being there to support all our customers also in tough times. And that is actually what we are doing and that's why it's so important to have capital planning that is long term, to have a prudent approach advising our customers to be resilient and predictable. And I can't say enough how important it is for societies to have strong banks and we are super strong in the Nordics. When it comes to pricing then it is a matter of competition. And the competition is high. It's high on mortgages, it's high on lending to corporates and the margins are coming down. And deposit margins are coming up. And what we have seen in regards to deposits, that is we came from negative margins, then we were building a neutral margin, and then we have increased the interest rates on deposits while we at the same time have built a margin. So we have established the third engine, which has always been crucial to running a bank, lending, deposit, and fee engine. The third one now is being established. So that's the way we assess it and I think that's the way it should be assessed and is assessed by basically all banks. There is no pressure or there is no anything else from investors or authorities as we believe and I believe that they believe that the way it should be done and why that is to have healthy and strong banks to support the societies and our customers. Good morning. Thank you. Thank you for taking my questions. I would just like to follow up on these three engine comment in terms of profitability mix or split between lending and deposits. And then obviously historically been heavily skewed towards the lending and fee side. Do you see the risk that some of the lending economics transition more into the deposit and here in a way that mortgage margin as an example could be lower from here as trying to access the balance between the three engines or do you see some of the weakness we currently see in certain markets in terms of mortgage pricing to be more transitional in terms of nature. And secondly, I was just wondering in terms of the deposits 50-50 mentioned earlier, have you seen any discernible change so far in terms of the rate path in terms of customer shifting funds from transaction into savings and where would you kind of expect the steady state balance to be between those two going forward if rates stabilized at a higher level. Thank you. So if I deal with, I'll deal with this question on sort of the balance in deposits and I guess your question on mortgage margins as well. So on deposits and deposit mix, we are seeing over the past few quarters, and particularly the last couple of quarters, a move into savings deposit products, and that is I think a combination of, it's certainly driven by customers looking at some very attractive rates now and so that is natural. We definitely see a substitution, I guess, in customer conversations between say market-based investment products and deposits because of current conditions. That's natural. The shift from off-balance from transactions to savings accounts, it's happening in a small way, and you can expect that to continue but probably not to a significant structural change because customers have always been pretty good at managing the level of balances on transaction accounts versus where they might put their money to earn some return. So we're seeing a small shift between transactions and savings but not marked. It will continue, I think, but again not something we're concerned about. And the more interesting conversation is customers looking at deposits and savings products as an attractive alternative to perhaps putting something into funds or something like that. And I think we're in really good shape there. We've got market-leading deposit products, saving products in all of our countries and I think we will win market share as a result. And on the lending margin, we've seen, you can see through the numbers that the contribution from deposits, the gross contribution was offset by a reduction in lending margin and that's natural, I think different dynamics there, some of it is a bit competition related particularly in a muted mortgage market and also to a certain extent where we're catching up with passing on cost of funds increases through lending rates and other things. So certainly our base cases perhaps continued lower contribution from lending margin which is more than substituted by what we see on the deposit side and our base case for 2023 is some continued net interest margin expansion. Thank you. Could I have one more follow-up please just on the structural hedge? Just looking at the strong NII progression quarter-on-quarter, it seems like the is comparatively small. I was just wondering if you could give us any steer in terms of how big it is and in which country currency it might be. Thank you. So the size of our structural hedge has been pretty stable throughout the last few years and so no changes there. We are seeing, it's one of the, I guess a headwinds in the net interest income picture but we are seeing such strong performance on deposits that it isn't a particular feature. Good morning, everyone. So just a couple of questions, please. The first one, can I tempt you into guessing when peak net interest income will appear in your P&L? The reason I ask is just going back to your famous slide 17 if I annualize our Q4 net interest income, you'd be running around â¬900 million higher in 2023 versus 2022 already, so that's sort of â¬1.1 billion to â¬1.5 billion guidance for the increase in 2023. It seems like at this pace of momentum, you have sort of hit that peak quite soon, which maybe surprised me a little bit based on where rates were in Q4 and where you're expecting them to be in the middle of the year. So any question on -- any comments on timing would be helpful. And the second question please, just on deposit balances. I can see across Personal Banking lots of Business Banking and large corporates, you've had some deposit contraction in local currency in most markets. Is that seasonal patterns and typical or do you think there's anything more structural going on there? And maybe if you can just develop any thoughts on deposit strategy from here and I think you just made a comment about taking market share from here. I think it will be accustomed in recent years to focusing on lending market share, I just wondered whether you felt as optimistic about being able to take deposit share without sacrificing on price using some of this Nordea secret source you found as successfully as you've done on the lending side. Any comments there would be helpful. Thank you. Good morning, Nick. Matti, do you want to take the question about peak and then I'll come back on some of the deposits? Sure. Hi, Nick. You should compare the full-year '22, so i.e. the â¬5.6 billion not Q4 annualized. So that's the short answer for the first question. In terms of deposit balances probably a couple of influences there. Yes, I mean I think in our business banking, business areas there is no discernible trend. I think it is seasonal flows and indeed on average balances, we're continuing to see some growth there. In LC&I, it can be a bit lumpier and at the end of Q3, we saw a significant jump in LC&I deposits driven by companies in the energy sector and the reduction that we've seen in Q4 is also those energy companies kind of regularizing their sort of cash flow and cash flow position. So it's just some special lumpiness rather than anything else. In terms of deposits and market share ambitions and other things, one of the areas where we focused on seeking to I guess recapture market share has been in Norway and we've done that with some special product offerings and I think we've been managing our way through that without having to give away too much on pricing, I think that's building up that deposit capability, that muscle. It's been an important thing to do for us. In other markets where we're much more strongly established in terms of transaction accounts and other things and I would say more in balance, we feel pretty good about our ability to capture market share in deposits because of our relevance in terms of product offering in terms of our focus on customers and others. So Yes, I guess it will be something that we talk about a bit more than we have in previous years because of the focus on deposits now, but we feel like we should be able to do well there. And just to add. So the start point of us is that we are in a relationship bank and that means that when we work with the customers we are covering every part of their business. So you are not experienced us to start to compete on price going broad and be [monolinear]. But you are seeing in Nordea that is even more disciplined and structured also covering the deposit part of the customer's business in a more like firm way than we have done before and the reason for that is that for customers, it has not been a product of attention in some of our markets. Now, of course, it is due to its carrier interest rates and it's a very, very good product for some customers to reduce risk for example to park money or to be an alternative waiting to re-enter sort of mutual funds and whatnot and therefore we have put it into basically all conversations with customers and just doing our work and bringing the deposit market share up to our natural market share would lead to a market increase, market share increase on the front book. That's really helpful. Thank you. Can I just pick up on the net interest income question, this one more time? I take the point in that Slide 17 has a full-year, on a full-year effect, I think my point is if we just start with the Q4 base that you're running with into next year and if that was the run rates already that will be enough to give you â¬900 million of this â¬1.1 billion of annual increase. So if I take the low end of your guidance for 2023, would involve something like â¬50 million more rate benefit to come in Q1 and then the fund is over. So, I'm just a bit puzzled really why the low end of the range sort of still exists in a way or whether you really think net interest income starts to cap out that quickly in the coming few quarters of 2023? So look, Nick, I think it's a broad range. And I think it's reasonable given uncertainties around competition, all those other things that we give that breadth on the range, I think you can expect us to perform strongly in NII in 2023. Good morning, thanks for taking the question. Just one question actually it's on slide 19 and regarding the decline in your Stage 2 loan balances. We've seen some of your competitors starting to prudently lower some of the credit ratings across their corporate portfolios. So I was just interested in that context, see if your Stage 2 balances are still declining, and I'm just wondering if you could give us any color in terms of the composition of that number and whether this particular corporate sector where you're starting to see negative ratings' migration and particular corporate sector that you're putting on to increased monitoring at this point. Thanks. Hi Piers. So yes, we have a watch list in the same way exactly as you'd expect us to do but that isn't growing at this stage but it's somewhere where we stay vigilant. The positive development in Stage 2 and Stage 3 is, I mean, it's not particularly sector concentrated with perhaps one exception. We continue to work with some restructuring cases in oil, gas, and offshore and we've delivered significant improvements in that particular sector over the last few quarters but otherwise it's across the Board. We're not seeing yet negative rating migration even as we update our assessment of customers. It's something that we're sensitive to going through 2023. But I think this is just an indication of portfolio strength at this stage. All right. I think that's the end of the session. So thank you everyone for the call. And as always, just call us if you have further questions, thank you so much and see you soon.
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Good morning. My name is Anita, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation Fiscal Year 2023 Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers have completed their prepared remarks, there will be a question-and-answer period [Operator Instructions] Thank you. And now to begin the conference call here is Dale Ganobsik, Vice President of Corporate Finance and Investor Relations for Lancaster Colony Corporation. Good morning, everyone, and thank you for joining us today for Lancaster Colony's Fiscal Year 2023 Second Quarter Conference Call. Our discussion this morning may include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. Also note that, the audio replay of this call will be archived and available on our company's website lancastercolony.com later this afternoon. For today's call, Dave Ciesinski, our President and CEO will begin with the business update and highlights for the quarter. Tom Pigott our CFO will then provide an overview of the financial results. Dave will then share some comments regarding our current strategy and outlook. At the conclusion of our prepared remarks, we'll be happy to respond to any of your questions. Once again, we appreciate your participation this morning. Thanks, Dale, and good morning, everyone. It's a pleasure to be here with you today as we review our second quarter results for fiscal year 2023. In our fiscal second quarter, which ended December 31, we were pleased to report both record sales and higher profits. Consolidated net sales increased 11.4% to $477 million, while consolidated gross profit improved 5.7% to $102.1 million, and operating income grew 13.3% to $51.3 million. The Retail segment's second quarter net sales reached $259 million, up 5.6%, including the favorable impact of the pricing actions we have taken to offset inflationary costs. Beyond pricing, sales gains were driven by New York Bakery frozen garlic bread, and the continued success of our licensing program. The growth of licensed sauces was led by Buffalo Wild Wings and incremental sales from the recently launched Arbyâs Horsey and Arby's Sauces. Retail segment sales volumes measured in pounds were up 3.8% in the period, due to price elasticity as anticipated, along with the impact of our decision to exit some less profitable product line in fiscal 2022. IRI data for the second quarter showed very strong performance for our marquee retail brands. Sister Schubert's leading share of the frozen dinner roll category increased 140 basis points to 55.4%. Marzetti share of the refrigerated salad dressing category added 110 basis points to 23.7%. And New York Bakery's leading share of the frozen garlic bread category grew 90 points to 43.1%. In summary, the Q2 top line results for our Retail segment reflect our pricing actions, strong share growth from our core retail brands, and contributions from our licensing program, which were partially offset by price elasticity and product line rationalizations. In our Foodservice segment, net sales grew over 19% driven our pricing actions along with volume gains for select customers and our mix of national accounts. Foodservice volume was down 4.6% in the quarter, primarily driven by our decision to exit some less profitable product lines in fiscal 2022. During Q2, we continue to experience high level of inflation for raw materials, packaging and freight. That said, we've made great progress through our pricing actions to where our PNOC or pricing net of commodities was favorable versus the prior year. This is a continuation of the trend that began in Q1 in which we are recovering some of the negative PNOC we experienced last year. In the quarters ahead, we intend to focus on productivity gains in our supply chain and revenue growth management to improve our financial performance. Before I turn it over to Tom, I would like to extend my sincere thanks to the entire Lancaster Colony team, for all their ongoing commitment and contributions to our improved operational and financial performance. I'll now turn the call over to Tom, our Chief Financial Officer, for his commentary on our second quarter results. Tom? Thanks, Dave. Overall, the results for the quarter reflected continued top and bottom-line growth driven by pricing actions that offset inflationary costs, as well as improved fundamentals. First quarter consolidated net sales increased by 11.4% to $477.4 million. This growth was driven by successfully implemented pricing actions, in both segments. Decomposing the 11.4% revenue growth,15.4 percentage points were driven by pricing, the impact of the volume decline Dave mentioned, was four percentage points. Consolidated gross profit increased by $5.5 million or 5.7% to $102.1 million. Gross profit margin declined by 110 basis points, reflecting the dilutive impact of higher pricing and commodity costs on the percentage calculation. The increase in gross profit dollars reflects favorable pricing net of commodities or PNOC in both segments. If you will recall, in Q2 of fiscal 2022, we had negative PNOC, as we lagged the rapid run-up in costs. We continue to recover those losses. While our commodity inflation was about approximately 24% this quarter, our pricing actions offset this increase and the majority of the prior year shortfall resulting in the improved performance. Consistent with the first quarter, our results also reflected improved fundamentals in three areas. First, both of our segments have eliminated lower profit businesses and SKUs. Second, through improved planning, scheduling and tactical execution, factory headcount was down for the quarter versus the prior year quarter. Third, inventory days on hand are down versus the prior year quarter and our mix of inventory is better aligned with demand trends. These items along with a more stable and predictable operating environment, helped to improve gross profit and significantly improve our cash flow performance. Selling, general and administrative expenses declined 1.5% or $800,000. This decrease was primarily due to lower expenditures on Project Ascent. Expenditures for Project Ascent, our ERP initiative totaled $7.5 million in the current year quarter versus $8.6 million in the prior year quarter. We also benefited from lower professional fees and timing-related changes in consumer spending. Consolidated operating income increased $6 million or 13.3% to $51.3 million, primarily due to the gross profit growth and the reduction in SG&A costs. In the prior year quarter, we had a change in contingent consideration and a restructuring charge. The net impact of these items was immaterial. Our tax rate for the quarter was 22.8% versus 24.3% in the prior year quarter. We estimate our tax rate for the remainder of fiscal year 2023 to be 23%. Second quarter diluted earnings per share increased, $0.20 to $1.45. The increase was primarily driven by the growth in operating income. With regard to capital expenditures, payments for property additions in the second quarter totaled $31.9 million. For fiscal year 2023, we are forecasting total capital expenditures of approximately $100 million. This forecast includes approximately $50 million for the completion of the Horse Cave, expansion project. In addition, to investing in our business, we also returned funds to shareholders. Our quarterly cash dividend of $0.85 per share on December 30 represented, a 6% increase from the prior year amount. Our enduring streak of annual dividend increases now stands at 60 years. Our financial position remains strong, as we're debt free with $95.5 million of cash on balance sheet. So, to wrap up my commentary, our second quarter results reflect revenue growth driven by pricing that served to offset significant commodity inflation. In addition, the company continued to execute well on the fundamentals in a more stable operating environment. Thanks Tom. As we look ahead, Lancaster Colony will continue to leverage the combined strength of our team, our operating strategy and our balance sheet in support of the three simple pillars of our growth plan to one, accelerate core business growth; number two, to simplify our supply chain to reduce our cost and grow our margins; and three, to expand our core with focused M&A and strategic licensing. In our fiscal third quarter, we expect Retail sales to benefit from our expanding licensing program while in the Foodservice segment we anticipate continued volume growth from some of our QSR customers. Cost inflation will remain a headwind for our financial results, but we expect our pricing actions and cost savings initiatives to offset the increased cost. During our fiscal third quarter, we will also continue to ramp up the production in the newly expanded section of our dressing and sauce facility in Horse Cave, Kentucky. In the back half of our fiscal year, SG&A costs will reflect increased investments in our business including higher levels for spend on consumer promotions. We will also continue to monitor economic conditions for any potential impact on our Foodservice business. Finally, I'd like to provide you with an update on the implementation phase of our ERP initiative, Project Ascent. As we shared previously this past July we successfully completed Wave 1 of the implementation. And in October, we completed Wave 2. We are now in the early days of the third wave of implementation, which will add our dressing and sauce production facility in Horse Cave, Kentucky to the new system. As many of you are aware this facility is the largest plant in our manufacturing network. All is proceeding as planned and we look forward to completing this important phase of Project Ascent. Note that during the implementation phase, we will have this facility down for four days as part of the cutover process. Our third quarter financial results will reflect the incremental costs associated with this temporary shutdown. I would like to extend my sincere thanks to my teammates for their ongoing efforts on this very important strategic initiative. This concludes our prepared remarks for today and we'd be happy to answer any questions that you might have. Operator? Hi. Thank you. On volume there was like -- it improved. I mean, volumes were still down, but they improved a lot nicely for retail. And I saw that your direct-to-consumer or your consumer marketing was down, but how about the promotion that is accounted for as a net reduction of sales particularly trade spending or other items. Did the -- could you give us a little more detail on the evolution of the improvement in volume sequentially this quarter versus last quarter? And what -- did that include promoting? And did that impact the gross margin? Yeah. It's a great question Andrew and I'll take it head on. So our trade spending performance during the period was essentially flat versus the prior period. And on volume if you adjust for the fact that we had discontinuations in the prior period that we're continuing to work our way through, our volume -- discontinuations was down 1.9%. And I think when you pull it apart and you look at it across Retail and Foodservice, I'll hit them sequentially, our Retail business remains strong. The business continues to perform very much in line with our elasticities. We posted record shares in New York Texas Toast and we posted record shares in Sister Schubert's as well. Our Marzetti brand and refrigerated dressing continue to do well. And the licensed sauces we've told you before are a bit unique in that it's -- they don't have necessarily the direct competitors on the shelf. So vis-à -vis the magnitude of the price increases we feel very good about the volume that we have that's in there and the performance. Now swinging around to Foodservice. Here again I would say that we're seeing -- we're optimistic about what we're seeing. So traffic across the whole industry was essentially flat in the period. And that was marginally better than it was in the preceding quarter. And if you look at our mix of customers, it reflects that. We had several customers Chick-fil-A first among them that were growing traffic. Taco Bell was also strong. Olive Garden was strong. But there were some others in the space that were a little softer. But what continues to give us a measure of optimism when we look at volume is that our elasticities in Retail are performing in line with our expectation. And really, we have our new items that are back-half loaded, as we've shared with you guys throughout the period, this fiscal year-to-date. And in Foodservice, I would tell you the same thing. We remain cautiously optimistic about the consumer, and we have LTO activity that's planned in the back half. So net-net, we think our volume is holding up in line to slightly better than our expectations at the beginning of the year. Thank you. That was a pretty full explanation. So on the gross margin specifically, are there any things in there to call out with regard to getting Horse Cave up and running? Is there some -- obviously when Horse Cave is running whenever that is sometime in the future that will have an impact that I'd like to know about too. But particularly in the quarter, was there any disruption there? And... So yeah, this is Tom. On the quarter and the margins, one of the things we did see obviously, year-over-year we've got quite a bit of commodity inflation. And when you put in $50 million of higher inflationary costs and $50 million of pricing, you get a natural dilution of over 200 basis points on our P&L. So year-over-year, that's a key driver. Now sequentially, we did see much higher egg costs and a couple of other commodities that resulted in some of the dilution you're seeing sequentially. But overall, despite those higher costs, we were able to from on a dollar basis offset it and still grow our gross profit in this more challenging environment. And Andrew, if I can maybe go in on Horse Cave, the start-up has gone very much in line with our expectations if not better. So the factory has gone live. It's up and running in the new section. We're servicing customers out of that exactly as we had planned. In my prepared comments, I mentioned that we were going to be taking it down in this period for several days and that's because of the SAP cutover. But I wanted to make sure that you and others understand that. We went out and we said we intended to bring that facility up with that new expansion and that team down there has done a fantastic job. It's brought it up. And maybe a little bit later in the comments, I'll talk about new items that we have on the horizon and it's been a blessing because we've seen a resurgence in demand on Buffalo Wild Wings and that new capacity has enabled us to keep up with that surge in demand. Yeah. Thanks. Good morning, gentlemen. If I could just start with the Retail segment top line. It strikes me that the track sales in Nielsen were -- grew at about 2x your reported net sales. Curious where the delta comes from? I'm not sure if that's still a little bit of byproduct of folks working off inventory from the pull-forward in demand or if there's that SKU rat, which I understood to be more on Foodservice side, but maybe if you could just aggregate the impact of SKU rat on Retail, if there was any? Yes. So you're exactly right. If you look at the scanner consumption, it was in fact stronger than what we shipped in the period. Honestly, we can't necessarily speak to whether it was a deload or something else. But generally, we have been shipping to consumption. And it's just -- I would say, it's just a bit of a timing thing that's going on there. As we look in on the magnitude of the discontinuations on Retail alone that accounted for several points of growth as well in terms of shipments that are in the mix. Yeah. Brian on the Retail impact, it was a little over 100 basis points. And then I think if you really peel it back, where we saw the biggest disparity in terms of shipments, our revenue versus consumption is obviously Chick-fil-A's doing extremely well the licensed product. And I think in the prior year period we were still building some inventory. So that may be what you're seeing. What about anything in the non-track channels that would be a factor one way or the other to explain the delta whether you might be lapping -- whether you lapped a program or anything like that? Just curious. Okay. Okay. And then to go back to the gross margin component again. So, I guess what I'm trying to reconcile is I understand the gross profit dollar growth. I understand PNOC going from negative to positive and some improved mix. But it didn't convey to gross margin improvement either sequentially or year-on-year. And it doesn't sound like start-up costs for Horse Cave were material. But again if there's something there to call out just so we understand. I just kind of want to -- maybe we'll just start there to level set and then think about what the path forward is just based on what you're dealing with both upstream and downstream. Yes. So, when you look at the percentage margins when you lay in all the commodity inflation and keep in mind our inflation is a lot higher than our peers really due to our exposure to soybean oil. And this quarter, in particular eggs, were up quite dramatically. And so when you factor that in and you say okay, I'm going to add $50 million of inflationary cost to the P&L and you price for it, you've got that natural dilution that occurs. Sequentially, as I mentioned, it really was the eggs and soybean oil was up sequentially and then we also had some tomato costs that were up sequentially. So, that's why you're seeing all that dilution despite the positive PNOC. As you go forward, we feel like we're going to definitely grow our gross margin percentages versus the prior year certainly in Q3 and we're looking at Q4 now to try to make sure that we are successful there as well. But keep in mind it's -- this -- until we see some sort of stabilization of costs, we do have this dilutionary impact. And certainly if we get to a point where some of these commodities moderate and come down it will certainly be gross -- the percentage dilution. Certainly, we're focused on growing the penny profit and happy with the quarter's performance. Okay. That's great. If we could just kind of double-click on the commodities component. So, first looking I guess a little bit backwards. I think you said input cost inflation was something like 24% this quarter. Is that -- was -- forgive me that I don't have this at my fingertips, is that an acceleration versus the magnitude of inflation you faced in 1Q? Yes. And it was -- like I said it was -- the unforeseen run-up in egg costs sequentially was a key driver. Yes. And then if we roll that forward, I guess maybe a two-part question here. One where are you kind of from a hedging standpoint? Eggs are what they are right now. Obviously, there's some discussion that maybe the flocks are improved by -- second half of calendar 2023. Maybe we could get some cost relief. But I don't know if you're in a position to capture that based on what your forward buying looks like. And then kind of a similar dynamic because we're hearing encouraging news on the oils and those prices coming down. So, I don't know Dave or Tom if you have commentary there. Just trying to get a sense of we think inflation as you're looking at it right now moderates from here. So, maybe I'll jump in and then have Tom come in and add more color. On hedging on eggs, to remind you, eggs are an area where it's difficult to hedge. With our whole eggs we buy on grain-based agreements. So, as grains move up and down so do the cost of our eggs. I would say there we've been able to somewhat take a more modest impact, but inflation nonetheless. But we also buy yolks for some of our formulas and you cannot hedge against those yolks. What we've been able to do is get forward protection which is 90-day pricing protection, which brings me to the second part that I want to bring in on things like eggs and even oil as we see it continue to move, we're continuing to hedge where we can and then price where we can to make sure that we're passing those along. So, on these items where we saw the exposure in this period, we have pricing actions that have gone into flight, particularly for areas that -- or products that are heavy consumers of eggs whether they're in Foodservice or whether they're in Retail. I appreciate the color. Last one for me and forgive me today for being very model-specific and not asking some of the fund strategy questions, I typically like to hear Dave opine on. Hopefully, someone else in the queue will get to some of that. But is there -- as you look at your -- as you look at where you are today, expectation that further pricing is needed do you think you've got it all in there at this point? Do you expect to have to take more? And if so, maybe where -- is that Foodservice driven or Retail? Yeah. So Brian, as Dave mentioned, there are a number of actions in flight. All of those have been successfully sold in. So we feel -- we continue to feel good about our ability to price to cover this so -- in both segments. So there's not a concern for us in terms of retailer pushback at this stage. We're able to get the pricing in. As Dave mentioned, with the more recent run-up there are additional actions that are in flight to help us. Maybe I'll add to that point. If you remember last year at this time, we were talking about the fact that our pricing was lagging the inflation. In Q1, we were PNOC positive, where actually our pricing exceeded the costs that were coming in helping us recoup. In this period we were PNOC positive again. And we expect that trend to continue forward. So I think even where we're seeing this shift it's on the margins. We should have been more PNOC positive were not for the run-up in that short-term in things like eggs. But I think what we want to convey Brian in terms of the model is as we're seeing it come through. And we can't hedge it or even if we can we're pricing for it. And we're pushing forward. So we feel like that muscle is fully developed. And we're utilizing it. Quick question following up on Brian's last question, if you look at -- and Dave you just talked about where you can't hedge, you'll go out and try to price for continued either sticky or even accelerating inflationary pressures and spots. How does that vary by channel right now? How do you think about pricing in the Retail channel, willingness to take it relative to the elasticity that you're seeing? And kind of that early shot across the bow from, Whole Foods trying to push back on suppliers already, do you feel like pricing will be easier to get in the Foodservice segment going forward if needed versus the Retail segment? Brian -- Todd rather our conversations on pricing continue to be very constructive, both in Retail and in Foodservice. I'm looking at a sheet that shows me about a dozen discrete pricing actions that are going into effect in this -- at the very end of our second quarter and early on in our fiscal third quarter which is now. And these are all conversations that were had in Retail that have sold through. And on Foodservice those conversations remain the same. I do want to go back and clarify a little bit on things where I saw Whole Foods' announcement on commodities. And I don't know what data they're looking at but it doesn't necessarily line up with the data that we're looking at. What I would tell you is, things may have eased off of their high and discrete categories and maybe that's particularly true in some of the commodities that they're buying. But 1.5 years ago we were looking at 20% inflation on raw material and packaging. We're looking at 20% inflation through the remainder of this year. And even, as we look forward we're continuing to see inflation albeit, at a lower rate. And that's just on raw material and packaging. So any areas that you may see some modest pullback, is being overcome by areas where we're continuing to see inflation. And that particularly I would point to things like beans. The price on the board may have pulled back some but basis which we really need that when you factor in what the total delivered cost is still remaining very, very high. So net-net we're not seeing relief on inflation. We wish we were because we would be net beneficiaries. And we don't have any intention at this point to roll back our prices, because the economics of our market basket don't support that. And Tom, I think last time we talked about pricing I was going to kind of waterfall over the course of this fiscal year. I think we were looking to be running high-single digit in Foodservice and maybe mid-single digit at Retail. How does that change with these actions that you're anticipating taking for the back half of the year? Yes. So excellent question. So we're now more high-single digit in Retail and very high single-digit in Foodservice. So we are looking at more pricing than we had initially anticipated based on these more recent commodity moves. Okay. Great. And then I'll slide in a more strategic question just Horse Cave. Now that we're up and running and producing product out of that facility, Dave can you walk us through maybe a Horse Cave ramp timeline? How does â long does it take to ramp fully? Then where do we go as far as that full ramp? We unlock maybe the Chick-fil-A expansion opportunities with larger pack sizes additional flavors. How do we unlock maybe some other licensed programs with the capacity that's come online? And then finally where in that process does co-pack volume maybe come out and go back into an owned facility? Yes. So good questions across the board. Love talking about these because it gives us a chance to talk about the strength of the top line of the business. So maybe first just focusing in on the factory itself. So I mentioned earlier that the start-up has gone very much in line with our plans. We're literally producing hundreds of thousands of cases out of the facility now. And it's enabled us to keep up with a really sort of a fun spike in demand that we've seen on BWW. I know most of you probably aren't TikTokers. I don't claim to be one but as a case in point we had two aspiring TikTokers that created recipes for a meal that included the Buffalo Wild Wings garlic parm sauce. And both of those videos combined have over 25 million views and that product has been absolutely on fire resulting in a big surge in demand, well in excess of what we had in the forecast and the fact that Horse Cave has been up and running has enabled us to meet that surge in demand and go. So really Todd for all intents and purposes it's running and it's out there to meet our demand and we need it, because as we look forward, if you remember, it's March when we go into the full rollout in Retail of our new items. That's the large size of the Chick-fil-A sauce, that's the barbecue and the Sweet & Spicy Sriracha on Chick-fil-A. It also includes the caesar item that we have for Olive Garden and not to mention just a whole lot more energy behind Buffalo Wild Wings. So I would tell you, I'm just thrilled with the progress that the team has made there. And our view now is just how high is high and how fast is fast, as we look to run that item. So it's a good story. And on Retail as well, it's out there. It's producing product. And we just look forward to sweating it harder. Now your last question was how does this factor in on co-pack? To the degree to which we have co-pack agreements we're honoring those but we expect those to wean down through the remainder of this year and early into next year and then to bring that virtually all of that volume back in-house. Just a follow-up on that and then I'll pass it along. Tom, if we're bringing that co-packs volume back in as we think about â I know we talk margin dollars more than we talk margin rate. But just kind of what type of benefit from a margin rate is in-house production versus co-pack production? Yes. So we talked about it being a dilutive impact of 100 to 200 basis points throughout. So over time we'll get that dilution back. So it's certainly will be a catalyst as we go forward. Yes. So just a quick one for me here at the end of the call. So it seems like you're seeing greater elasticity at Retail versus Foodservice when adjusted for SKU rationalizations. And so obviously, the Retail and Foodservice businesses are quite different. But I guess just why we think Foodservice volumes have remained so strong, right? I mean it seems to run contrary to popular belief. You'd assume consumers would dial back meals out before cutting back on the grocery basket. Yeah, it's a great point. We're just not seeing it so far Connor. If past is prologue, we would see exactly that sort of thing. But so far the consumer is remaining resilient. And when you look at the traffic really, which -- we have pricing discussions with our customers. They either reflect those on their menu or they don't. And then ultimately what it comes down to is what's happening on traffic. Consumer traffic in these concepts and you follow the data like we do has remained quite resilient. I mentioned on the call that traffic overall was flat for the industry versus the prior period. And if you look at it, it was sequentially stronger than the period before. And now if you dial it in you look at our portfolio, we have Chick-fil-A. And Chick-fil-A continues to drive traffic growth and that helps us as well. So when you look at the mix of business our business versus others, I think part of what you're looking at is influenced by the strength of the Chick-fil-A franchise in our business that's showing that. Yeah. On the inventory being down particularly the finished goods inventory, down 7% or so at least from the end of the last fiscal year that includes the inflation in producing it. So, I mean what is the inventory down on a case basis? It sound -- could I just add 20% to that and say that the cases are down 25% using round number, or am I not thinking of it the right way? You're close, not quite that much, but it's down sizably in terms of units of inventory. And last year we had a lot of unstable demand. So we built up -- we got long on some items. And this year through -- as I mentioned in my script there's some better tactical planning and execution we've been able to drive that inventory down and really help our cash flow performance. So thank you for that question. Sure. And it's -- I know that's part of your plan. And -- but just to revisit I think Brian asked you about this and I just wonder kind of re-ask. Is there any -- have you heard anything even anecdotally if you can't wrap it up and say that's for certain whether the retail trade may be destocked a little bit for the December quarter because -- or the Foodservice, it sounds like the Foodservice -- you're part of Foodservice, QSR did good enough. But did you see anything in retail or anybody destocking whether to shore up their balance sheet or get their cash flow to look better or maybe they had a little less demand in December and they just took down -- deferred orders, or anything anecdotally because like we're trying to figure out what's going on with -- like Brian brought up consumption versusâ¦? Yeah. No there -- we've stayed obviously really close to our sales teams on retail and in Foodservice and there haven't been any conversations like that. So there's nothing that we can point to specifically. Having done this a while like Tom and the rest of us here, you see this periodically you'd much rather see what we're seeing now where your consumption of the shelf is faster than your shipments than the other way around. But just generally if we're looking at the business and we look at the fundamentals, it's tracking very much in line with our expectations. What I would also tell you is even on things like one question could be, are there execution issues inside where we're having problems getting the product out? Our on-time and in-full was higher in this period than it was last year same period. So we're continuing to see sequential improvements on all operating metrics, not just improved inventory but our service levels have improved even our safety in our plants have improved. We've really just spent the last year trying to buckle down to tighten up execution and end-to-end coordination. Hey, just a couple of quick follow-ups if I may. What's the timing on the Horse Cave cutover? When that four-day shutdown will be? I'm just wondering where that is? Okay. Perfect. So we're in the middle of the quarter. So we don't really need to think knock wood, obviously, but we don't need to think about any impact to how we model the quarter for the shutdown, given it's a mid-quarter shutdown assuming all goes well? Yes. We're looking at it as a modest headwind. If everything goes well certainly, we lose -- there's a couple of headwind factors to it. We do lose those production days and you've got the factory absorption impact. And then, certainly, there's a cost to training and a start-up cost. So there should be a bit of a modest headwind in Q3 from it. It's difficult to quantify, what it will be until we actually are through it, but we'll certainly keep you posted. And part of it is just the absorption hit, because we have the factory down for four days and this is a factory that would be running 24/7. So if you just look at the rough math, 90 days in a period, four days in the period are going to be down, which is just going to drive a little bit -- on top of what Tom described a little bit of modest absorption. Okay. Great. And then my other follow-up was on the G&A side. I think you talked about some timing changes in consumer spend. I mean, if I back out the onetime Project Ascent costs, it looks like SG&A is running just north of 9%. What's the right level set to put that at based on the commentary around maybe some accelerating consumer spend, as we look to the back half of the year? Yes. Yes. So, I'm glad you brought that up, because we do expect to be spending more in consumer in the back half, as we continue to drive volume growth for -- continue to drive volume in the business. The Ascent -- we also mentioned, the Ascent cost coming back to the basis business previously, and that's $5 million or $6 million incremental in the year, slightly back-half loaded. And then we have some additional other costs that -- and compensation expense, that we're anticipating in the back half. When you look at it as a percent increase on the full year, when you take out the Ascent costs rolling in, we're looking at more of a 3% to 4% increase and then the Ascent costs adding to that. So, I think when you do the math on that, we will have a lot of catch up on -- a fair amount of catch-up in SG&A. But overall, the full year profile will be in line with kind of our expectations initially. Thank you, Anita and thank you everybody for joining our call today. We look forward to seeing you guys out on NDRS [ph] in the forthcoming period. And if we don't see you sooner, we'll talk to you in May. Have a great rest of the day.
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Good day, and thank you for standing by. Welcome to the Brookfield Infrastructure Partners Q4 Results Conference Call 2022 Results Conference Call and Webcast. [Operator Instructions]. It is now my pleasure to introduce Chief Financial Officer, David Krant. Thank you, Andrew, and Good morning, everyone. Welcome to Brookfield Infrastructure Partners' Fourth Quarter 2022 Earnings Conference Call. As introduced, my name is David Krant, and I'm the Chief Financial Officer of Brookfield Infrastructure Partners. I'm also joined today by our Chief Executive Officer, Sam Pollock. I'll begin with the discussion of our fourth quarter financial and operating results as well as touch on our balance sheet strength and robust liquidity position. I'll then turn the call over to Sam, who will reiterate the merits of owning infrastructure investments throughout market cycles and provide an outlook for the year ahead. Following our commentary, we will be joined by Ben Vaughan, our Chief Operating Officer, for a question-and-answer period. At this time, I would like to remind you that in our remarks today, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information on known risk factors, I would encourage you to review our annual report on Form 20-F, which is available on our website. With that, I'll now move on to a discussion of our record results. 2022 was another successful year for Brookfield Infrastructure. The essential nature of our assets showcased their attractiveness by continuing to generate predictable and growing cash flows. Funds from operations, or FFO, for the year was $2.71 per unit, representing a 12% increase over the prior year. We ended 2022 with our highest quarterly FFO to date of $0.72 per unit, which exceeded the prior year by 11% and resulted in a payout ratio for the fourth quarter of 64%. We're entering the new year in a solid position to expand the company organically and through acquisitions, driven by the significant momentum in a number of our operating businesses. This momentum is further supported by our long-term debt maturity profile and significant liquidity. Taking into account the strong results for the year and a favorable outlook for the business, the Board of Directors have proposed a quarterly distribution increase of 6% to $1.53 per unit on an annualized basis. This marks the 14th consecutive year of distribution increases. I'll now go through the key drivers behind our strong financial and operating results for the year. FFO totaled $2.1 billion, reflecting a 20% increase compared to 2021. Results benefited from organic growth for the year of 10%, capturing elevated inflation in the countries where we operate and volume growth across the majority of our critical infrastructure networks. During the year, we commissioned over $1 billion of new capital projects that are now contributing to earnings as well as deployed a further $1 billion into new acquisitions that favorably impacted results. Starting with the Utility segment, we generated FFO of $739 million, an increase of 5% over the prior year. This growth reflects an average inflation indexation of 8% that positively impacted almost our entire asset base and the contribution associated with $485 million of capital commissioned into our rate base. Results also improved from the contribution of 2 Australian utility acquisitions completed in the first half of the year. Partially offsetting these results were the impact of higher borrowing costs at our Brazilian utilities as well as the sale of our North American district energy platform completed during 2021. Our U.K. regulated distribution operation recorded another strong quarter of sales activity, ending the year with a total of 339,000 connection sales and a record order book of 1.5 million connections. This was the company's best year of sales and was 5% higher than our record set last year. Performance was solid across all utility offerings with notable outperformance in the sale of water connections, which increased by over 40% relative to the prior year. In Australia, our regulated utility business recently secured an agreement to build greenfield electrical infrastructure to support a blue-chip customers construction of 3 new hyperscale data centers. The project will help connect new utility-scale renewable power generation and highlights the attractiveness of building greenfield utility infrastructure to support Australia's transition to net 0. We're continuing to grow our global residential infrastructure platform that has a presence in 5 countries and offers a range of heating, cooling and energy storage solutions. Most notably, in Australia, our smart metering business signed a contract with one of the largest energy retailers to deploy up to 1 million smart meters over the next 10 years. This opportunity will require total capital expenditures of over AUD 600 million and is additive to the contracted growth profile we acquired with the business. Across the residential platform, we continue to see exciting opportunities to launch new product offerings and help provide homeowners with decarbonization solutions, a trend that will be further accelerated with the integration of the recently completed acquisition of HomeServe. Moving to our Transport segment. FFO was $794 million, an increase of 13% compared to the prior year. Results primarily benefited from inflationary tariff increases across all our businesses. Higher volumes supported by strong economic activity surrounding our networks and the commissioning of approximately $400 million in capital expansion projects during the year. Our rail networks realized an average annual rate increase of 6% and benefited from strong demand for bulk goods and commodities that underpin the global economy. Our global toll road portfolio, annual traffic levels and tariffs increased 4% and 10%, respectively, compared to the prior year. And finally, at our diversified terminals operations, rates have been strong, and volumes for the year were up 8% compared to the prior year. This was driven primarily by robust demand for U.S. LNG export through our terminal as well as the commissioning of the fixed liquefaction train earlier in the year. Within our Midstream segment, FFO for the year was $743 million compared to $492 million in the prior year. This step change is primarily a result of the acquisition of Inter Pipeline that we completed in the second half of last year. Results were further aided by elevated commodity prices, which led to increased utilization and higher market-sensitive revenues across our base businesses. Our North American Gas Storage business had its best fourth quarter on record as we captured the benefit of higher natural gas prices along the U.S. West Coast, stemming from curtailed gas supply and volatile winter weather conditions. The reliable energy supply provided by our gas storage infrastructure is playing a critical role in the shift toward intermittent energy sources that need to be matched to elevated demand usage during periods of extreme temperatures. At Inter Pipeline, the conventional system saw a 6% increase in volumes compared to the fourth quarter of last year and reached record levels since 2018. We continue to progress the ramp-up of the Heartland Petrochemical Complex as the PDH unit achieved initial production of polymer-grade propylene, leveraging our experience of large start-up activities, production of propylene will increase in a staged manner over the coming months. We expect to reliably achieve high levels of integrated polypropylene production by mid-2023, with full run rate contribution to financial results by the second half of this year. Finally, our Data segment generated FFO of $239 million, which was consistent with the prior year. Our underlying data businesses performed well as they continue to benefit from increasing customer utilization and network densification requirements. This year's growth was driven by additional points of presence and inflationary tariff escalators across our portfolio. These positive effects were partially offset by the impact of foreign exchange on our euro and Indian rupee-denominated cash flows. In November, our U.K. wireless infrastructure operator completed the purchase of a portfolio of approximately 1,100 towers from a strategic investor who sold as part of competition approval requirements. The transaction required approximately $70 million of equity, of which BIP funded $20 million. The acquisition is expected to increase EBITDA by over 30% and will double the existing tower portfolio in the U.K. to solidify our position as the largest pure-play tower company in the region. This excellent operational finish to the year, combined with the strength of our financial position gives us optimism as we enter 2023. Our corporate balance sheet remains well capitalized as reflected in our investment-grade credit profile. During the quarter, we further derisked our maturity profile by raising $700 million in the Canadian debt capital markets. The issuance had an average term of 7 years and proceeds were used to refinance existing debt. With respect to our asset level nonrecourse borrowings, we proactively refinanced several near-term debt maturities. This includes refinancing that Inter Pipeline and our U.K. port operation. We also completed the initial debt funding associated with the U.S. Semiconductor joint venture. As a result, less than 2% of our borrowing base is maturing over the next 12 months. This, combined with the largely fixed rate balance sheet that has an average term to maturity of 7 years provides us with tremendous financial flexibility. Finally, we ended the year with corporate liquidity of $3.4 billion. During the fourth quarter, we completed the sale of 2 previously announced transactions as part of our capital recycling program. With the closing of the telecom tower portfolio in New Zealand and the first tranche of our recently constructed electricity transmission lines in Brazil, we raised nearly $400 million net to BIP. Our liquidity position will be further enhanced by the proceeds from the sale of our Indian toll road portfolio and our 50% owned freehold landlord for in Victoria, Australia. After the previous sales did not receive regulatory approval, we signed a binding agreement to sell the port to a reconstituated consortium for AUD 1.2 billion. which was a 30x EBITDA multiple. Closing of these transactions is anticipated to occur in the first half of 2023, with net proceeds to BIP of approximately $260 million. Finally, we are progressing several advanced-stage sale processes, which -- and we recently launched the next round of asset sales that we expect will garner significant interest considering the current economic environment. Together, these processes should generate over $2 billion of net proceeds for the partnership this year. I'd like to thank you all for your time this morning, and I'll now turn the call over to Sam. Thank you, David, and Good morning, everyone. I'm going to begin my comments today with a few words on why infrastructure assets are an attractive choice for investors during this economic environment. And I'll follow that with a summary of our strategic initiatives and conclude with an outlook for our business. This past year, the global macroeconomic environment was characterized by elevated levels of inflation and corresponding interest rate increases that created market uncertainty and volatility. Although inflation appears to be cresting in most countries, it is possible that certain structural dynamics prove hard to abate such as the effect of deglobalization, energy security and a tight skilled labor supply. This may result in continued near-term market volatility and downward pressure on corporate earnings with cyclical exposure. Investments in infrastructure assets, such as utilities, pipelines, ports and telecom towers are essential for the function of the economy and society. While not agnostic to the macro environment, they typically perform well through all parts of the market cycle and notably outperformed during economic troughs. This ability to generate steady long-term returns is driven by several key characteristics. Now first, their highly contracted or regulated revenue is generally long duration, and therefore, provide sustainable cash flow predictability. Second is their embedded inflation indexation, which expands our lease maintains margins during periods of elevated inflation. And third is their ability to grow during all economic cycles due to their essential nature and role in promoting economic growth. Combined, these attributes make the asset class and appealing investment choice in all market conditions. Now there are many views on what lies ahead for the economy. The optimist or glass half full market participant could argue that inflation has peaked and will come back within the target raise by the end of the year, implying that fiscal policy today has been effective where you could be in the skeptic or glass half empty investor cap, which might be the view that a tight labor market and continued wage pressures will make inflation tougher to abate in 2023 and that central banks will continue to raise interest rates higher than currently projected. Now we lean towards a more optimistic view of the year ahead, but we expect market fatality to persist until the direction of interest rates is more settled. More importantly, Brookfield Infrastructure has a highly contracted inflation protected and well financed infrastructure company should perform well in either scenario. In terms of our strategic initiatives, we had a successful year for capital deployment that build upon 2021's record deployment. Over this 2-year period, we invested over $5 billion into new assets. During 2022, we secured $2.9 billion of investments that are now closed and will begin contributing to results right away. We also entered into a partnership to construct a state-of-the-art semiconductor foundry in the U.S. This innovative transaction has added approximately $4 billion to our capital backlog and pioneered a new investment structure to deploy our large-scale and flexible capital. With the recent closings of HomeServe and DFMG, which are part of that $2.9 billion and the ramp-up of the Heartland facility over the next several quarters and elevated inflation levels, visibility into our cash flow growth has rarely been stronger. This growth should be sustainable over the longer term, given our large capital backlog of organic projects and our proven ability to grow on the business through accretive new investments. Favorable sector trends, which have been the catalyst for our recent acquisition activity, continue to support our investment pipeline. In addition to evaluating several corporate carve-outs, a large component of our deal pipeline is comprised of public to private opportunities. As we stated in the past, the infrastructure super cycle is creating long-term investment opportunities that will require trillions of dollars. This is generating large-scale opportunities for well-capitalized players that can invest in growing operating platforms or be a partner of choice for government or corporate entities that have less access to the capital markets. That concludes my remarks for today, and I'll now pass it back to the operator to open the line for questions. I wanted to start with a question on the M&A pipeline. In terms of the corporate carve-outs and take private opportunities currently in that pipeline, maybe you could give us a bit of color on those life sector and by geography and comment on whether the year-to-date market rally has made any of the take private less attractive? And if you were able to establish toll hold positions at lower prices? Cherilyn, I'll take that question. So as you can appreciate, I'll probably be somewhat vague in my answer to that -- to those questions. But what I can say is that -- there are situations where we've taken modest toll hold. So I can confirm that. That is part of our strategy to mitigate costs and to give ourselves a competitive advantage. But as far as the balance between the 2, I'd say it's equally balanced. There are a number of companies, strategics, who don't have the same access to the capital markets or have seen their share prices drop. And as a result, in order to raise capital to continue to grow their businesses, they are looking to private investors to either buy a whole businesses or to invest in a partnership basis on certain elements of their business. So that is definitely a source of opportunities for us. And similarly, despite the market rally, which you mentioned that took place in January, the market rally wasn't even across all companies or sectors. And so there still remains a number of situations, which we think remains priced at an interesting level. And there's still a discrepancy between where those valuations lie and where we think they would sit from a private market perspective. So we continue to progress those situations. As far as sectors and geographies, they're fairly well balanced between North America and Europe, I'd say. That's where the largest percentage line. And sector-wise, I think we have opportunities across all the sectors that we pursue. So it isn't really concentrated per se in one sector. That's very helpful. And then David, this one is probably for you. On the record CapEx backlog, which is always nice to see. Maybe you can help us better understand the duration of the backlog? And how much of it relates to the Intel partnership where it appears that you've already deployed about 1/3 of the expected outlay? Hey Cherilyn, I'm happy to answer that for you. So in terms of our backlog, you highlighted, obviously, Intel was the big contribution or addition to it in the fourth quarter. And that's a $14 billion capital project. So our share of that CapEx would be about $3.7 billion, $3.6 billion, $3.7 billion that we've added to our backlog in Q4, Cherilyn. So that's on a net to BIP basis. the spend to date figure that we referenced in our materials of $1.1 billion, that's at a 100%. That's -- so our share of that is roughly 250. So we're not near the same completion percentage that you may have inferred. We're probably closer to somewhere in the 5% to 10% completion on construction. So it's still pretty early days on that construction project. It's likely to span several years. So our backlog still remains over that next 3-year period that we plan on completing and commissioning. I'd say that's the biggest large-scale project we have in the backlog. The rest are smaller type rollout additions like we had at the U.K. at EnerCare some of the installations. So much smaller, shorter duration projects that we replenish quarterly with new sales as well. So that's kind of a bit of color around the composition as well. I see. Okay. So you've invested $250 million to date at BIP share. And over the next 3 years, it's $500 million, which is where I was sort of getting the 1/3 figure, but that's kind of the near- to medium-term outlook for it. Yes. And just for the one the $500 million is the equity component. Of the $3.5 billion. So there will be additional capital, obviously. Just wondering, as you think about funding, and so you've got the self-funded kind of strategy around the organic plan. But in terms of highlighting the $2 billion of potential asset sales for this year, how does that size up versus what you're seeing on the acquisition front? And I guess the other avenue of financing, when you look at the deals in front of you, is there a reasonable opportunity to use a share exchange as a viable financing product... Robert, it's Samuel. I'll take that one. So we get this question a lot about how we size the amount of capital that we look to recycle during the year. And I would say a lot of it has to do with just the natural maturity of our investments, we typically look to buy businesses, grow and derisk them over a 7- to 10-year time frame. And then at that point in time, look to monetize them and start the process all over again. We're at a stage in our evolution now that we've been growing the business for 15 years, where we have a steady stream of businesses. And on average, we have businesses that would generate every year for us, probably forever now, $2 billion to $3 billion annually of proceeds from sale. And so it's a rough guesstimate, $2 billion is probably at the bottom end of that number. It could be higher. And so we just bring to market the ones we think are the most derisked would generate the proper value and obviously take into account what the market is looking for the most. So we do do a bit of a high grading for whatever we think is appropriate. So there's a lot of thought that goes into that. But we feel really good about the assets we bring that we'll get good value. As far as your question about other levers that we have available, that is something that we take a lot of pride in. I think what makes us unique is the fact that we are able to invest alongside lots of institutional investors, which gives us a lot more firepower. We do have the ability to use shares in transactions like we did with IPL, and we've proven that those are well received and people, particularly in the Canadian market who know us well, in fact, seek them out. And then we have other levers that we can pull on just being part of the Brookfield complex. So long story short, depending on the amount of transactions in front of us and depending on if there's a really large transaction that we want to execute. We will look at all these different components and draw on them as needed to get a transaction done. So there's no one right answer, but we have the whole collection of alternatives in front of us and using shares definitely is something that if we think the shareholders want to stay invested, we have the currency to do that with them. Got it. Appreciate that color. If I can just finish just on some color from you on the rationale for where you decided to increase the distribution, 6% there. Organic growth in '22, as you know, it was 10% and then FFO was even higher. And then you had the Investor Day with the forecast for 12% to 15% asset growth and unit growth into 2023. So just what was some of the reasons for selecting that 6% kind of below the growth rate of those 2 other numbers... Obviously, we had a good discussion at the Board, and we're blessed to be dealing from a position of strength, a lot of liquidity and a great outlook for FFO and a great year behind us. Other factors we take into account are the amount of capital that we're reinvesting back into the business to grow it. And as we looked at our business and the amount of capital backlog and potential for tuck-in acquisitions. We felt that it was better to retain some of our capital for that capital allocation purpose and maybe not go as high as we probably could have with the slightly higher distribution. So it's really just balancing a number of capital allocation decisions -- there's no right answer, but we felt that 6 was still a very attractive number for people in this market and would be well received. Just wondering if you could expand on the recent agreement. You secured at [indiscernible] electrical infrastructure in Australia, I thought that was quite interesting. You mentioned the greenfield project will help support some hyperscale clients. So could you provide a bit more color on that and maybe perhaps the allocation of those data centers? Yes. I guess in terms of the contract in Australia, I guess this is -- was a win to deploy smart meters in Australia. And... I think... No, I think My apologies. Okay. I thought we were talking about the rollout of Smart Meter centers. Yes, so the AZNet contract, the one that we referenced in the materials this quarter was basically one of the large hyperscalers wanted to build a meaningful sized asset in our footprint, and they came to us to build the transmission access for that. And when we do that with these on a bilateral basis with these clients, it's actually -- it's a really attractive structure where it's very low risk on our part. So we basically -- the counterparty basically assumed the cost risk on the project and we build it through a stage gate process. And we're entitled through the contract bilaterally to a full return on and return of our capital. So it sort of mimics the rate regulated rate base construct even though it's a bilateral agreement. So a very attractive project. And the counterparty was willing to engage with us on that basis because of the need to get this done in a timely fashion. So hopefully, one of many projects in the future like this that we'll engage in not only to build out to support big load like this hyperscaler in the region, but also as we've discussed with the asset, renewables in the region as well it would be similar. Okay. That's useful thanks. And apologies if I wasn't clear with my question, but just moving, I guess, to Europe. Just wondering if you're seeing or contemplating opportunities to expand your tower portfolio to other European countries or is your plate full right now with the transactions you just completed in Germany and a little -- the smaller one you did in the U.K. I'll tackle that one. So there's 2 ways of us expanding our portfolio. One is to go into new countries. And the other is to do tuck-ins within an existing country. Recently, we did an add-on to our existing U.K. tower business, which was almost double the size of it. We have our business in France, which given its scale, probably we're limited to doing more organic growth than inorganic growth. And then Germany, obviously, we've got a large-scale business and again, probably limited to organic growth versus inorganic growth. There is -- we do have a business in our Super Core Fund, which is not in it in the Scandinavian countries. So we have a presence there. And I'd say we don't have too much white space left because a lot of the other countries, there has been M&A activity and a lot of them are held in more consolidated businesses, LagVantage and Cellnex and others. And so it's unlikely they would sell. So I think the opportunity to expand is limited. It's not to say that's not possible at some point in the future. But I think most of the growth going forward is likely organic. I want to circle back on the asset divestitures. Can you maybe just add a little bit of color of what the environment is right now, where we are in these processes? Are we in price discovery? And have we seen kind of any change in the expected valuations of these divestments, just... Robert, I would say -- I'll make a couple of comments. First, we have transactions at all phases of a transaction light, so some that are more advanced than some that are early stage. So -- and we are active participants on both the buy side and sell side. So I'd say our views on valuation stay of the market are probably pretty good. The I think the -- I think my comments generally would be on valuations for the most part, they've been steady and haven't changed meaningfully over the last year or so even with rising rates. There are some businesses that to the extent that people use higher leverage to buy them, they're probably the most impacted because obviously, that cost of debt has gone up. But many of our infrastructure assets are not financed at high levels. And so the impact of leverage is more modest. Probably the biggest thing that's changed in the market over the last year has just been the number of participants is probably a little less than what would have been. And that's really not so much from an infrastructure manager or a strategic perspective because I think those groups have a lot of dry powder and are still pretty active. But we have seen some pension funds and Starwall funds, pull back a bit with some of the drop in equity prices and that impacting they're waiting in their portfolio. So the denominator effect that people refer to is probably was prevalent maybe in the latter half of last year. Now -- having said all that, I think as the new year has started up, we've definitely seen a change in tone. And so I think while maybe not to the levels we would have seen at the beginning of last year, there's definitely more activity in the market. And what is different, I think, with infrastructure than some of the other asset classes is because the credit markets are much more important for private equity interest and real estate. There definitely was a decline in activities in those sectors, but we did not see that to the same extent in infrastructure. Infrastructure is still highly sought after and particularly in periods of volatility, it's an area that people want to invest in. So long story short, valuations are still good. Everyone has different views of value. So I think our views of what we think assets are worth are very reasonable. And so they have not changed much. There might be other people had elevated views of value, but for us, it hasn't changed much. And the market is still very strong and supportive for infrastructure as a whole Great. Appreciate that fulsome answer. Maybe going back to your 2022 Investor Day and the outlook for 12% to 15% FFO per unit growth, just taking a look at the environment and taking a look at the headwinds and tailwinds, what are you seeing in terms of kind of pushing it one way or another? It does seem like the commodity-exposed business is maybe a little bit -- continue to be quite strong there. Hey Rob, it's David here. I can start and feel free to jump in. Look, when we -- at our Investor Day, obviously, we had similar insights to where we are today in the market. I'd say the market hasn't changed all that much. To your point, the commodity environment remains strong, and that's a tailwind for not only our midstream businesses, but a lot of our transportation networks that haul or transport bulk commodities. So I'd say the transport and the midstream sectors continue to perform well to start the year, and that will fuel again part of that outlook. The other element is obviously the fact that we committed to and have now already deployed the $2 billion of new investments in HomeServe and DFMG that will fully contribute to our results. So those would be, I'd say, the prevailing tailwinds that were certainly informing us and giving that guidance. And I'd say we still feel the same outlook as appropriate. I'm wondering if you could give some indication of how the markets received the semiconductor joint venture and what other industries might seem most suited to similar structure... Rob, it's Sam here again. So -- let me start just by the reaction. I think in -- in my -- I hate to say many years at Brookfield because it's a long time. I probably haven't seen as much interest in a single transaction as I've seen in that transaction. Clearly, it was seen as innovative. The scale was large, and the fact that it was related to a very topical and critical industry also brought a lot of interest towards it. So whether it's governments, other sectors and obviously, all our competitors investment banks, everyone's been studying to see how they can apply to other semiconductor facilities or companies or other sectors. So suffice to say, it's definitely being studied, and I think I would be shocked if in some different way, shape or form, it wasn't replicated again multiple times for other sectors. And obviously, we would look to do that ourselves. As far as I think where it's most applicable, it's applicable for -- you need to have a couple of ingredients. You need to have large dollars. You need to have a long-life asset that you are supporting and you need a strong counterparty or some sort of strong commercial framework to support the low cost of capital that makes the transaction interesting for both ourselves and for the use of the capital. So that could be battery manufacturers, I think other semiconductor facilities. And I think already a lot of energy businesses use the structure, and we're referencing a lot of the Middle East transactions, whether it's ADNOC or Saudi Aramco, we all use similar type of arrangements to finance their businesses. So I think we'll see a lot more of it, and it's something, obviously, given that we feel we are at the forefront of arranging capital from alternative private sources and packaging it together for investors. We think we should be hopefully doing a lot more.. Okay. That's very helpful. And then just one more here, sort of getting into the weeds on Heartland, but maybe you can elaborate on the process, the start-up process there, how it's tracking versus expectations? And if there's been any need for major rework or component replacements. Yes, Rob, it's Ben here. I'll take that one. Yes. So maybe just to go back through the commissioning goals we've had for Heartland over time. So the first phase was to commission the central utilities hub, and that was done quite a while ago to make sure we had the power and steam to run the plant. The second phase was to achieve full production of the polypropylene side of the plant, so making the PP pellets and getting that up to full production. And so that has happened and that's behind us. The third phase was really getting the front end of the plant running. So the PGP end of the plant where we convert the propane to PGP. And that is now up, running and heading towards full production. So that's now largely behind us. As we went through Phases 2 and 3 of that start-up, we also started up the full sales and marketing function. So we established relationship with customers, and we got all of our products approved by them. So we now have over 100 customer relationships, and we have inventory in the system to ensure that we can service those clients. So that's also behind us. So now we're in the final phase, which is to just get the methodical ramp-up of the full integrated facility up to full capacity. And I think as Sam mentioned in his opening remarks, we expect that to happen in the coming quarters here. So -- and then in terms of, I'll call it, surprises, Heartland is a large complex. And for its size, I would say there was nothing material, no material surprise. The normal course, I would describe it as optimizing and a few odd minor teething pains as we started to plant up, but nothing major in the context of a start-up with this. Various points over the last couple of years, you were highlighting opportunities with ocean carriers, either partnering or carving out some assets. Are you still optimistic about opportunities in that sector? It just seems like there could be maybe a bit more motivation from these companies just given the rapid pullback of freight rates. Devin, that's an interesting question. during COVID, there was an unusual dynamic where charter rates went to all-time highs. And the shipping companies made amount of capital that would have historically taken them 10 or 20 years to make. So they really changed the nature of their businesses. And they were aggressive buyers of assets, and frankly, probably didn't need our help on too many things. That dynamic has changed, things have gone back to normal. I still think that many of them are well capitalized. And so I can't say that the level of activity that we have with them today is extremely robust. It's probably just a normal conversational level. I think there's still things we can do with them. But when we look at -- and I know I've said this many times in the past, our main strategy is to follow capital flows and to go towards groups that need money. And today, I wouldn't put them necessarily in that category. There's other groups that have huge amounts of capital needs and need our capital more than they do. But that changes quickly, and we continue to nurture those relationships. Okay. That makes sense. And maybe just a modeling question here for David. But hedged currency rates in 2023? Is it much different than what we saw in 2022? Hey Devin. No looking into 2023, I think the guidance we gave at Investor is 1% to 2% below current levels. So nothing significant. And I get primarily, if you look at the currencies we have the [indiscernible] on the GBP. So no, I wouldn't -- we don't see that as significant. Just wanted to set off on the guidance for 2023. I think in the past, you've talked about a bit of a lag getting inflation adjustments in your tariffs and in your existing businesses to flow through results. Can you maybe give us a bit more detail about what is built into the guidance for this year in terms of the inflationary impacts? Hey Naji , I can start with that one. This is David. Look, I think as we mentioned, inflation still continues to run above targeted levels in pretty much all the regions we operate. So it will still continue to be a tailwind for our business into 2023. I don't think we're in a position to predict where that number will land for the year, obviously. But that being said, I think to your point, our businesses, most notably our -- some of our U.K. and Australian regulated utilities they do lag into the local inflation levels. So RPI would be the one in the U.K., and that's usually on a 12-month lag. So we're getting inflation in the 4% range in 2022. That should continue to elevate as it looks back over the trailing 12-month period because I think inflation in the region today is above 10%. So those will be some of the businesses where you'll continue to see that tailwind, whereas others more predominantly in our transport and in our data businesses are usually as at a point in time throughout the year and don't have much of a lag to them. So I'd say that's pretty much the outlook for inflation that we have as of today. Okay. That's helpful. I wanted to maybe get your thoughts on capital recycling. I think in the past, you've targeted a 2% to 4% investment spread from asset sales to new acquisitions. There have also been periods where you've been able to take advantage of market dislocations and beat that spread or realize a higher spread. Do you see the potential to do that again today? Do you think we're in that market environment again today? Hey Naji it's Sam here look, that's a very difficult question to answer we're always trying to hunt out and focus on the highest return opportunities that meet our risk tolerance. And it's hard to predict what might come along. I'd say that in today's environment, we feel that we have a good opportunity to invest for better value than another point in the cycle just because there are fewer market participants and particularly with some of the institutional investors on the sideline for the time being, which may not last long, but for the short while, it just means that people with large pools of capital like ourselves are rare, and we -- there's a few transactions at that higher level that we can maybe negotiate on a bilateral basis. So yes, we're trying. I can't make any promises, though. No problem. Maybe just a quick final question for Ben. You've been able to achieve a lot of positive things we see a lot of developments with the residential infrastructure business. I'm just wondering if you can give us a bit of color on sort of the key initiatives and the integration plan for HomeServe for this year. Yes, sure. So on the demand side, the carbonization businesses of the residential infrastructure businesses, we're now focusing them regionally. So we basically have a great platform in Europe. We have one focused in the United States and 1 now in Canada. And we have established and focused management teams dedicated to each of those regions. There are a number of businesses, some that gather effectively leads and some that service those leads. So the key strategic priorities when you really look through it is just to find the opportunities to make sure that all the leads that we're gathering to the greatest extent are being serviced by us -- and to the extent they're not making sure we have very effective dealer networks in place where we can service our clients. And the real goal over time is to build a rate base of attractive long-term contracts. So we're trying to convert sales to long-term rental and build a rate base. So there -- like I said, there are several companies, all of them that do different things, and we're just going to sort of integrate that flow over the coming years to make sure we're building a rate base over time. So I hope that's helpful. I guess the first question is for David. And you mentioned a little bit of what Brookfield has done from a debt market perspective. How do you think about the upcoming maturities and just the functionality of the debt markets? And I ask the question in part because when we look at the term structure and we've seen some higher quality credits place longer-term debt at pretty attractive spreads in the market. But how do you think about the upcoming maturities in this year and then next year? Yes, happy to give you some color, Andrew. I think first and foremost, I think we feel like we're in an excellent position for the maturities that we have in the next 24 months. I think the team here has been focused for the last probably 12 months on taking care of a lot of those, and we've talked about some of those in our materials for the last year in terms of pushing out maturities to give us that financial flexibility while rates remain elevated. I think -- the benefit, as Sam alluded to, for the infrastructure sector is that debt capital markets have remained open throughout the year. And that is specifically related to investment-grade markets where we finance the vast majority of our businesses, over 90% of them. So at the asset level, we've had robust access to capital at the corporate level, we've demonstrated that as well. So I think we feel very well positioned. I think if you look at our maturity profile into 2023, as we said, less than 2% are actual maturities. The others are normal amortization that we will have covered with operating cash flows. So I think 2023 is largely taken care of. There's a few in 2024 that we're progressing now. And to your point, spreads and activity in the capital markets is pretty positive, and we'll look to take care of those in the first half of this year as we -- in due course. So I think we feel good at these levels, and they're still very accretive to our underwriting of these businesses in terms of the returns we target. So I think we're well positioned. I appreciate the color. And then maybe the flip side of it. There's others that maybe got too far over their [indiscernible] . Are you seeing any kind of interesting dislocations that are either market-specific or industry-specific that are thematically interesting to you... Andrew. So -- so short answer is, obviously, that's on our screens where we spend a lot of time focusing is companies that either have balance sheets that was maybe not the right amount of liquidity or just a lot of near-term maturities and even more so companies that have that as well as big capital commitments. So yes, that's a big part of our screen. As far as the level of distress, I don't think we're seeing anything like what we would have seen back in the financial crisis. There's nowhere near that level of anxiety as the infrastructure sector is still pretty well open to most people. But for some public companies, it's created opportunities. And I think for other companies -- probably where it creates situations for us is its required some companies to either slow down or shut off their growth initiatives in order to manage their financial position. And obviously, they feel that's destructive to their business, the value of their businesses, and so they want to find ways to get those going again, and that creates the ability for us to come up with unique partnerships or buying certain assets that help them get their businesses running again. So that's kind of the theme of how we approach it. But yes, we have our filters open and looking for people where we can help solve their financial situations. Thank you, operator, and thank you to everyone who listened to the call and joined us this morning. I hope your new year is off to a great start. Ours has been, and we appreciate your support and look forward to talking to you again next quarter. Thank you.
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EarningCall_812
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Thank you, Justin. I'd like to welcome everyone to Stifel Financial's fourth quarter and full-year financial results conference call. I'm joined on the call today by our Chairman and CEO, Ron Kruszewski; our Co-Presidents, Victor Nesi and Jim Zemlyak; and our CFO, Jim Marischen. Earlier this morning, we issued an earnings release and posted a slide deck and financial supplement to our website, which can be found on the Investor Relations page at www.stifel.com. I would note that some of the numbers that we state throughout our presentation are presented on a non-GAAP basis. I would refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release. I would also remind listeners to refer to our earnings release, financial supplement and our slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of Stifel Financial and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial Corp. Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our fourth quarter and full-year results conference call. 2022 represented Stifel's 132nd year in business, and represented our second best annual results as our balanced business model enabled us to deliver return-on-tangible common equity of 22%. Simply stated, Stifel performed as we expected with our more stable Global Wealth Management business, offsetting declines in our institutional segment. As is well reported, 2022 represented a difficult operating environment characterized by persistent inflation and rapid central bank tightening, which put pressure on equity valuations illustrated by a 19% decline in the S&P 500. The pressure on asset valuations was broad-based and in the case of high-growth technology companies, dramatic. The complex and volatile environment, including the highest inflation in 40 years and significant geopolitical turmoil had a chilling effect on capital raising and related strategic activity, impacting our institutional business worldwide. Despite this volatility, Stifel revenues totaled $4.4 billion with earnings per share of $5.74. Additionally, we increased our book value by 6% and our tangible book value by 9%. Global Wealth recorded record revenue and record profitability and our institutional business despite a difficult year when compared to 2021 was approximately the same as 2020, which represented record revenue at that time. Again, these results are a testament to the diversity of our business model and our long-term strategy of continually reinvesting for growth. On the basis of our 2022 results and our belief in consistently increasing our dividend, I'm happy to announce that our Board of Directors has approved a 20% increase to our common dividend, which will now total annually $1.44 per share or $0.36 per quarter. Moving to Slide 2. We review the significant growth in our business since 2015. Even with the difficult operating environment in 2022, our growth has been stellar. Net revenue was up 86%, net interest income up nearly 600%, advisory revenue up 300% and earnings per share increased more than 350%. Further, comparing our 2022 results to 2020, our growth story is equally clear. We have increased net revenue by 17%. Net interest income nearly doubled, advisory revenue was up 67% and earnings per share grew 26%. You've heard me say a thousand times, but I remind you again, Stifel is a growth company and we will continue to reinvest in our business as it has been instrumental in our long history of consistent profitable growth. Our focus on long-term growth is a key factor in reaching our strategic objectives. Over the past 25 years, Stifel has grown from a small Regional Wealth Management firm to a premier Global Wealth Management and investment bank. As I look to the future, we will continue to grow both our business segments by redeploying our substantial excess capital with the goal of generating the best risk-adjusted returns. For our Wealth Management franchise, this means continuing to recruit high-quality financial advisers that choose to make Stifel their firm of choice due to our adviser-friendly culture, expands the product suite, excellent technology and industry-leading yet simple and fair compensation systems. Since 2018, we've added more than 500 financial advisers with trailing 12-month production levels that total more than $350 million. As you've heard me say before, we believe that we can reach $1 trillion in total client assets through a combination of strong recruiting, net new asset growth and market appreciation. This growth will not only help us grow our private client asset base, but increase our deposit base at our bank and further expand our bank balance sheet, which has been a significant contributor to our top and bottom line growth. Speaking of the bank, we are pleased with both our net interest income and expanding net interest margin. As Jim will expand on later in this presentation, we believe our net interest will increase nearly 40% next year with our net interest margin expanding to between 4.05% and 4.25%. We have accomplished this because of our focus on building an asset-sensitive balance sheet over the past several years of near-zero short-term rates. This asset strategy has allowed people to offer competitive saving type accounts and pass more of the rate increases to our clients. A particular note is our bank's Smart Rate program, this high-yield savings account has enabled Stifel to increase its client deposits over the past few quarters while many in our industry have been dealing with the impact of cash sorting by clients looking for higher yields on their cash. Also, we will continue to pursue deposits from our corporate clients as our expansion in the fund banking and other corporate banking services has further expanded our deposit base. Our institutional group has grown from essentially zero, a little less than 20 years ago into a global business that generated average total revenue in the past three years of $1.75 billion. This was accomplished through both organic growth as well as a number of strategic acquisitions. Our growth has been focused on increasing our relevancy to our clients. As we look forward, this will continue to be a driving principle. In terms of our overall business outlook, we believe that we will achieve our objective of $1 trillion in assets under management, which coupled with loan growth, would more than double the revenue generated from Wealth Management. As such, even considering the substantial growth we expect from our institutional business, we expect Wealth Management to comprise a greater percentage of our revenue in the years ahead. In addition, given our strategic objectives for our business, we anticipate that our excess capital levels will continue to grow meaningfully. That said, we will continue our long-standing policy of focusing on generating the best risk-adjusted returns, which I'll discuss in greater detail on the next slide. As you can see from the chart on Slide 4, at year-end, we have approximately $400 million of excess capital. And based on consensus analyst estimates, we could generate an additional $800 million in 2023. Look, it is strategic that we have the capital to be able to take advantage of opportunities in the market, particularly in down cycles. However, as you can see from the chart on the lower left, we have a history of deploying our excess capital to both grow our business and return it to shareholders. Our approach in either case has been and will be based again on risk-adjusted returns. Over the past two years, we have focused on growing our balance sheet. And as such, we've deployed more than $1.8 billion in capital, supporting balance sheet growth of nearly $11 billion. Of course, this asset growth has been funded by deposits, which have grown since 2017 by $16 billion, attributable to strong recruiting as well as an increase in retail and commercial deposit gathered capabilities. While balance sheet growth has been the recent focus of our capital deployment strategy, we've also paid out $275 million in common and preferred dividends, we purchased nearly $280 million of common stock and allocated $136 million to acquisitions. As we enter 2023, we have stated our intention that not to slow our bank growth, which effectively increases capital available for other uses. Further, we believe in consistently growing our dividend. And as we did again today, our dividends we did today and reinvesting in our franchise for future growth. That said, we also feel that given our current share price, our stock is attractively valued compared to others in our peer group, and we currently have 8.7 million shares remaining on our current repurchase authorization. During the quarter, we repurchased about 1.3 million shares for about $75 million. I suspect many in the analyst community had expectations for a higher level of share repurchases. I would note two factors impacting the level of buyback; first, we were only in the market two months; and second, we are working on an acquisition during late December. Thus one should not read too much into this, and we will continue to utilize share repurchases as a tool for capital utilization. Speaking of valuation. On Slide 5, we illustrate how Stifel compares to two high-quality peers; Raymond James and Morgan Stanley. I respect these firms that would note that our business models, which combined Wealth Management, Institutional and a bank are quite similar. Much like these firms, we run our company to be recognized as a consistent high-quality performer. Look, when we compare our valuation metrics to these companies, we see that we trade at a 25% to 33% discount based on PEs or price-to-tangible book. However, since 2017, our growth in EPS and tangible book value is considerably higher than these two quality companies as is our trailing 12-month return on tangible common equity. Simply, our team's goal is to continue to perform consistently and as a natural result, close the valuation gap. Finally, on the next slide, I'll discuss our outlook for 2023 in terms of current Street analyst estimates. The current consensus estimate for net revenue for 2023 is $4.8 billion, which is up about $425 million from 2022. The primary driver of the increase is the expectation that our net interest income will grow to $1.25 billion, about a $360 million increase. Of note, our fourth quarter NII totaled about $300 million, which, of course, annualizes at $1.2 billion for 2023 and does not take into account any increase in net interest margin or interest earning assets. Taking out NII. The Street is essentially predicting that our operating net revenue will be flat to up slightly. Said another way, The Street consensus implies the overall market conditions for 2023 will be similar to 2022. Of course, markets can turn very quickly and improving market conditions will positively impact revenues while a recession is also possible. Considering both possibilities, we are guiding to total net revenue of $4.6 billion to $5 billion in 2023. This includes our expectation that net interest income will be in the range of $1.2 billion to $1.3 billion. Operating revenue has a little less clarity as the environment for our institutional business remains challenging. While we expect the capital raising activity will improve and M&A announcements will pick up, the overall market environment will play an important role in 2023's revenue, thus, again, the wider range of net revenue guidance. I would note that given the expected increased contribution from NII in 2023 and our revenue guidance, we expect that our compensation ratio will decline to 56% to 58% and that operating non-comp will be in the range of 18% to 19% of net revenue. Thanks, Ron, and good morning, everyone. Stifel generated quarterly net revenue that surpassed $1.12 billion, our second strongest fourth quarter in our history, and our focus on managing expenses resulted in pretax margins of 23% and non-GAAP EPS of $1.58. This drove an annualized return-on-tangible common equity of 23%. Looking at the details of our fourth quarter results on Slide 8. We showed solid sequential improvement as revenue increased 7% and earnings per share improved 23%. I'd highlight that the fourth quarter marked the ninth consecutive quarter with a pretax margin of greater than 20%. This is of note, as prior to the beginning of this streak, we only had five quarters with pretax margins above 20% since 1993. Moving on to our segment results. Global Wealth Management revenue increased 10% to a record $744 million, and our pretax margins were 43%. This is an increase of 810 basis points from a year-ago. For the year, we posted record revenue, driven by net interest income and asset management revenue that both reached all-time highs in 2022. During the quarter, we added a total of 36 advisers and 152 for the full-year despite an environment that was less than ideal. As market conditions normalize, we anticipate a strong pickup in the number of advisers coming to Stifel as our pipelines remain robust. The markets have also influenced our transactional and asset management revenues. Regardless, we ended the quarter with fee-based assets of $145 billion, the total client assets of $390 billion. Speaking of growth, our net new assets increased 5% in the fourth quarter and 4% over the trailing 12 months. On the next slide, we illustrate some of the longer-term drivers in our Wealth Management business. Our new recruits typically bring substantial client assets to our platform and generate a large percentage of the revenue in advisory fees. This, combined with our increasing NII contribution has increased our percentage of recurring revenue, which adds greater stability and predictability of results. Our recurring revenue reached 76% for the full-year 2022, which surpassed our previous full-year high by 1,000 basis points. Moving on to the Institutional Group. In the quarter, revenue was $354 million, and for the full-year, institutional revenue totaled more than $1.5 billion. In the fourth quarter, firm-wide investment banking revenue totaled $224 million. As you can see by the chart on the bottom right of the slide, we've significantly grown the number of investment banking managing directors. At the end of 2022, Managing Directors totaled 229, which is up more than 2.5x the number we had in 2012. While market conditions have weighed on this business, our increased scale enabled us to generate $971 million of investment banking revenue in 2022, which was our second strongest year ever. As market conditions normalize, we believe our increased scale will continue to drive revenue in this segment. Advisory revenue in the quarter was $167 million. We were once again negatively impacted by the delay in deal closings, particularly in our financials vertical. That said, one of our larger deals was recently approved by the FDIC, and we anticipate that it will close in March, which should result in higher than seasonal norms for our advisory revenue in the first quarter. We continue to see positive signs in our business as client engagement remains high, and our investment banking pipelines remain solid, as we've seen in the second half of 2022, closings have slowed. On the next slide, we look at the remainder of our institutional equities and fixed income business. Fixed income generated net revenue of $105 million in the quarter and $504 million for the year. Our equities business was down approximately 50% for both the quarter and full-year. Again, due primarily â due to the industry-wide drought in capital raising. Our full-year fixed income transactional revenue increased 3%. It was the second highest in our history. Our business benefited from the higher activity levels earlier in the year, particularly in our rates business as a result of the addition of Vining Sparks. Fixed income capital raising for the year was $134 million. Our business was negatively impacted by lower industry-wide issuance activity in both the municipal and credit markets. However, I would highlight that our market share for the number of negotiated transactions increased to 15.3% in 2022, which was 710 basis points ahead of the next highest firm. For the quarter, revenue came in at $28 million, which is up 3% sequentially and compares favorably with the 25% industry-wide decline in public finance issuance. Equity transactional revenue totaled $52 million, up 13% sequentially. This increase compares favorably to industry-wide volumes that were down 3%. Overall, we see increased engagement in electronic trading as we continue to gain market share as our clients embrace our electronic offerings and value our best-in-class research. In terms of equity underwriting, the market continues to face headwinds from increased volatility. We anticipate that as markets stabilize, activity levels will begin to return to historical norms. Moving on to Slide 13. Our net interest income has been a standout in 2022 as we benefited from the growth in our balance sheet and the impact of higher interest rates. For the year, NII totaled nearly $900 million, which came in slightly above our full-year guidance. For the quarter, NII was up 24% sequentially to $302 million and also came above the high end of our guidance. I would note that NII in the quarter was positively impacted by a benefit in the mortgage portfolio as a result of higher interest rates, increasing the duration of that portfolio, which results in deferred costs being amortized over a longer time frame. This accounted for approximately $5 million of the increase in NII during the quarter. We project net interest income in the first quarter in a range of $295 million to $305 million and bank NIM of 380 basis points to 390 basis points. For the full-year, NII guidance mentioned earlier for 2023, I would note that this is based on loan growth of up to $2 billion, a bank NIM of 405 basis points to 425 basis points and a full-cycle deposit beta of 40% to 50%. I would add that we ended the year with $8.7 billion in the Smart Rate program. The range of our NIM guidance reflects our assumptions for various levels of additional cash sorting throughout the year. Moving on to the next slide. A quicker we review the bank's loan and investment portfolios. We ended the quarter with total loans of just under $21 billion, which was down approximately $200 million from the prior quarter. Our commercial portfolio decreased by $300 million, primarily due to the decline in broadly syndicated C&I loans. On the consumer side, our mortgage portfolio increased by more than $300 million, while our securities-based loan portfolio fell by $60 million. Moving to the investment portfolio. We continue to see improved marks on the available-for-sale and held-to-maturity portfolios, which improved $4 million and $75 million, respectively, during the quarter. Turning to credit metrics. Our credit loss provision totaled $6 million. For consolidated allowance-to-total loans ratio was 74 basis points, which is up slightly due to the provision expense and the decrease in the loan portfolio. Overall, our credit metrics remain very strong. Our non-performing assets as a percentage of total assets were 4 basis points, while our non-performing loans were 5 basis points. On the next slide, we go through expenses. Our comp-to-revenue ratio in the fourth quarter was 56.5%, a 150 basis point sequential decline as we continue to benefit from the NII contribution. For the year, we came in at 58%, which was in line with the high end of our updated guidance. Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $219 million, which is up $10 million from the prior quarter due to seasonal increases in travel and entertainment expenses. For the full-year, our non-comp operating expenses as a percentage of revenue were 19%. The core effective tax rate during the quarter came in at 24.5%. Finally, our average fully diluted share count came at above our guidance as the benefit of our share repurchases were more than offset by the increase in our share price. Absent any assumption for additional share repurchases and assuming a stable stock price, we would expect the first quarter fully diluted share count to be 115.9 million shares. Thanks, Jim. As you can tell from our guidance, there is still a significant amount of uncertainty in the operating environment in 2023. U.S. economy faces the prospect of a recession. The impact of the war in Ukraine continues to be a drag on the global economy and China's reopening could further impact the global supply chain, just to name a few. However, as Stifel has shown time and time again, our business is built to perform throughout economic cycles. To summarize, in 2022, we generated our second highest net revenue in EPS in an environment where our institutional revenues were down 30%. Our focus on reinvesting in our business resulted in record Global Wealth Management revenue and a 79% increase in net interest income. The growth in our investment banking managing directors enabled us to offset the 64% decline and capital raising with strong advisory results. We generated pretax margins of return-on-tangible common equity of nearly 22%, while growing our tangible book value per share by 9%. As I look into the current year, I am optimistic in our Global Wealth segment, we anticipate further NII growth despite the slower growth rate of our balance sheet. Our strong recruiting outputs will lead to further net new asset growth in our Private Client business. Our Institutional business is more cyclical, but remains well positioned to benefit from any pickup in capital raising activity and we will continue to focus on increasing our relevance to our clients. Lastly, we continue to generate significant excess capital and given our expectations for significantly less balance sheet growth in 2023, we anticipate additional available capital for share repurchases, dividend increases as we just did and potential acquisitions. And considering all of the above, I look forward to closing Stifel's valuation gap. Maybe just to start on the guidance, appreciate heading into 2023, there's a lot of uncertainty. But I'm assuming kind of a big input here is just trying to understand what happens in investment banking. That's going to be a pretty big toggle. And so I'd love to just maybe think about some of the underlying assumptions that you guys have in that revenue guidance around equity market movements kind of on the plus and minus side. And then just overall kind of how you're thinking about the guardrails for investment banking for 2023. Devin, I think I tried to address it in the call, let me just state it again. Our guidance started with consensus guidance on The Street, which is about $4.8 billion. And as I said, other than an increase in NII, which we can forecast pretty well as we've shown, and we're confident in that number, and The Street is effectively having flat operating revenues. So 2022 on the institutional side was a difficult year as well advertised across the Street. So that $4.8 billion, which is the middle of our revenue guidance assumes for us basically the same kind of environment. I would say that if you look at investment banking, I would say that capital raising would be up, advisory would be down, maybe offsetting each other, but operating revenue is flat in an environment that will be similar to 2022 as the Fed figures out what it's going to do in the economy, either has a soft landing or a recession. So the middle is sort of like report stayed the same as 2022. Now if the market gets better, which you can turn on a dime and we've seen, and I expect at some point it will, then you get to the higher end of our guidance, which would be driven by improved asset management fees and improved investment banking. The lower end of our range would say that the market environment worsens from 2022, and therefore, it may be a recession. And therefore, you get to the lower end of our guidance, which would be even more difficult institutional markets and asset management fees that would be down because equity markets would correct even more. So that's the give and take on that. Jim, do you have anything to add? No, the only thing I would emphasize there is the comment on some of the advisory fees that slipped out of the fourth quarter and into the first and just emphasize the fact that, that's going to result in some seasonality differences in advisory in the first quarter, particularly the large financial deal. There's been a couple of other deals that slipped out of the fourth quarter into the first and just would emphasize that as well. Yes. We got a little bit of a head start on advisory, but okay. So hopefully, that gives some color again. We're using The Street consensus and then commenting from there, Devin. Yes. Appreciate that. Good context. Maybe just a big-picture question, Ron. Like the Slide 5, where you frame out kind of the growth of the company and the valuation. Just at a high level, you talked a lot about kind of Wealth Management and that becoming bigger and getting to $1 trillion in assets. Just as you look out over the next handful of years, you grew earnings to 142% over the last five years. Is that type of growth as a firm is obviously the larger scale today? You think you can do that over the next five? And just what are some of the â if you were to kind of highlight a couple of the biggest drivers or opportunities for Stifel right now, what are you most excited about? Well, certainly, on the Wealth Management side, we see a very strong recruiting pipeline. We're always looking for accretive acquisitions. I'm not saying that we see that now. I'm just saying that we will do this. But on the Wealth Management side, both our view of the recruiting landscape and the investments that we've made to be an attractive destination makes me optimistic about that business. And look, Devin, I get this question a lot, and it's hard to sit here today and just say, "Oh, we can do that." But go back over any five-year period and look at our growth over any five-year period over the last 20 years, and you'll see very similar characteristics. So I'd say past is prologue, we're a firm that makes investments, accretive investments, and we grow our returns. And I see as the firm has become more relevant to clients and have a â has more product suites, we are better positioned today to grow our Wealth Management, but also our Institutional business. I don't just want to lose sight of how difficult 2022 was across The Street in the Institutional business. And we've built quite a franchise there, and that's going to rebound. So you take the combination of those two, and I'm optimistic about our growth. And I think we, as a management team, have shown the ability to bring revenue growth to the bottom line. I would â just maybe to add to that just a bit. We have more financial flexibility today than we've had historically, just given the excess capital we had, the stability in the revenues and the earnings we're generating and that excess capital we're generating. So the ability to support the growth and invest in the growth, whether it's in people, acquisitions, et cetera, buybacks, you name it, we have a lot more financial flexibility today than we've had historically. Yes. And we also â we just announced Torreya as a deal. That deal we expect to be accretive in â and our recruiting has been strong in the first half or the first part of the year. So again, I'd sort of say past is prologue and let's just go from there. Okay. Great. I'm sure we'll get some questions on the excess capital, but I'll let someone else ask. So I'll hop back in the queue. Thank you. Hey, good morning, Ron and Jim. Michael Anagnostakis on for Steven. Just starting off maybe on the topic of comp leverage. The midpoint of your guidance suggests absolute comp dollars will grow roughly $200 million in 2023, while NII is growing $350 million with fees roughly flat. Given much of that revenue growth is coming from NII, why wouldn't we see better comp leverage in 2023? And just any help understanding the drivers there would be helpful? Thank you. Well, just based on numbers alone, your observation is correct that everything being equal, we could have an improvement in our comp-to-revenue ratio based on that. Look, I think we're conservative. We always have been as it relates to this and our range is reflective of many possible outcomes that can occur. We always start the year conservative in our compensation assumptions. We'll adjust as the year goes on. But I won't dispute the math that you're doing here, okay, which would imply that we would have further leverage in our comp ratio, all else being equal. That said, we gave you our guidance. Yes. And I'd also point out that over the last two years, we've been able to knock almost 200 basis points off the comp ratio. And so I think the conservative nature of the guidance, we're intending to basically show that we're continuing to get comp leverage there. But there is a wide range of scenarios in that forecast, which makes it difficult to exactly pin down. Yes. And the other thing that we do, we pay our â when we recruit that â those recruiting costs run through our comp ratio. We don't exclude those as some form of non-operating â those numbers. So as we anticipate and we do grow our recruiting, which obviously drives our future growth, those initial cost, which can be â well, they're certainly higher than what the comp ratio would suggest for that individual that we hire. Those are absorbed in our comp-to-revenue guidance. Great. Yes. That's helpful color, for sure. For my follow-up, I just wanted to dig into capital management on the excess capital topic a little bit more. You gave some detail on the drivers behind the $75 million during the quarter. How should we think about the magnitude and cadence of buyback given that $800 million of capacity you had cited after dividend and bank growth? Thank you. Well, if I actually answer that question, it will be the first time in the history that I've actually given a future view on buybacks, which, for us, are dependent on market conditions and other opportunities. And so I don't â I do not and will not provide some number. We don't look at it that way. That said, you're right about the $400 million of excess plus $800 million potential, that's the $1.2 billion. When you â what I will say is that we have because of the market and some of the uncertainty, we want to see where the Fed lands, a whole bunch of reasons that we've decided to slow our balance sheet growth in this environment. That's taken a lot of capital over the last couple of years. So we just increased our dividend. And you naturally will have left the ability to make acquisitions or make another acquisition, which is called buying our own stock. And today, when I look at it, and I showed on Page 5, that's a compelling use of capital to make an investment ourselves. So you take that as you will, but we're increasing. At this point, we believe that our available capital will be less as it has been years into balance sheet growth and more into capital-return options. Yet, we're always considering accretive acquisitions. Maybe just one more comment on the share count. As you think about repurchases last quarter, the vast majority of those repurchases happened in the back half of the quarter. And obviously, that's based on an average count for the quarter. And so when you see our guidance for next quarter absent any additional share repurchases, the guidance going down to 115.9 million shares. You see the benefit of last quarter showing up more in that number. And we will continue to bring that down over time with the additional repurchases that Ron discussed. And look, I think it's a great question and something that people can look at because we are generating substantial capital and are well capitalized going into this. Hey, guys. Good morning. Hey, Ron. Good morning guys. So just kind of following up on your last comments around utilization ex capital. It sounds like the discussion around M&A may be is picking up a little bit more, if I'm kind of reading your body language correctly, any particular area that you think you will participate more in whether it's institutional or wealth when it comes to deploying excess capital, if you're not going aggressive on the buyback? Well, I don't â I certainly didn't want to imply that we wouldn't be aggressive on the buyback, Alex. What I've said is that we â that the amount â all things being equal, we've got a lot more available to point toward a buyback. So I'm not trying to say that â I just don't like to say we're going to buy x number of shares at any price come hell or high water. We just â we don't approach it that way. But one of the best acquisitions out there is our own stock, all right? I always want to put the caveat out there that we're â we've been an opportunistic firm. We've done over 30 acquisitions. And when we see a deal transaction that will increase our relevance and build our franchise, we'll do that as well. So I don't â I didn't want to imply â and I'm glad you asked the question that we have some acquisitions around, obviously, I couldn't talk about it anyway. But let me just say that way, we have a lot of capital. As I look forward, I would say that we're going to and we're always looking at Wealth Management and Asset Management and what I would say more capital-light businesses to leverage our extensive platform. So I would favor that over other transactions. I think our goal in the Institutional growth is to consolidate based on market conditions and improved profitability back to 2020 levels. But look, we just did a nice acquisition in the Advisory side and Institutional and if something like that would appear, that was a very nice fit, we would highly consider it. So again, maybe a roundabout way of saying it, but do not assume that I was saying we're not going to do buybacks because we have the acquisition. Got it. All right. That is helpful. Second question for you guys, just wanted to dig into the funding mix a little more. I think I caught it right from Jim, the Smart Rate program was at $8.7 billion as of the end of the quarter. I think it's up about $4 billion sequentially. So maybe talk a little bit about within your NIR assumptions, how are you thinking about further kind of client utilization and how significant do you think those balances will be in your sort of 2023 outlook? And just a clarification, when you talk about 40% to 50% deposit beta, that's not accounting for the mix, right? This is just the rate increase on various programs you have. No, I think it is accounting for the mix, okay? We're â today or through the end of the year, I would say that our total deposit beta is around 40%, maybe 41%, and that's total and that includes the remixing into Smart Rate. And so â and our effective interest cost, Jim, which is... For Smart Rate, it is at 4% today. Total interest cost was about 100 and was 142 basis points in the fourth quarter. Yes. So that's all mixed in. And I'll say that one of the things that I am pleased with because we anticipated at some point, rates were going to rise. We didn't necessarily anticipate how rapid they would be in 2022. But we built the balance sheet, we've actually sort of gave up some NIM to build an asset-sensitive balance sheet. So what we've been able to do is watch our NIMs expand while we've been what I think is fairly dealing with cash sorting and deposit betas. And so we feel we're in a good position as we continue to provide a product, to keep deposits on the platform, attract new deposits, which is important, while also forecasting NIM expansion next year. So I think that this is sort of where a plan came together, and we thought about it. And now we're trying to maintain a deposit franchise. What I see across The Street in many instances, is NIM is being driven by lower net interest cost because deposit betas are lower and our deposit beta is what we originally anticipated. At the beginning of the cycle, if you remember, we said it would be 25% to 50% through the cycle north 41% including $8.7 billion in a nice high yielding savings account. Yes. And just maybe to add that a bit, we didn't â we gave some pretty granular expectations of the assumptions, a full year NIM of 405 to 425 basis points in that beta between 40% and 50%. Now we didn't give specific mix composition between Smart Rate and the Sweep Program. What I would say is the higher deposit beta assumes a pretty aggressive amount of remixing and the lower deposit beta more along the lines of what we've seen over the last few months. And I think that should kind of be able to get you some of the detail on how we came to that calculation. The question sort of high level. You've touched on it a couple of different ways from a couple of different directions here on that Slide 5. Ron, when you think about the recent history, the institutional deals, you've been active there, and they've been accretive. And so they certainly help drive returns and they help drive earnings growth. But I think they also could end up keeping investors focused on the institutional business at Stifel, which might impact perception despite the case that you lay out on the slide. So how do you plan to strike a balance in thinking about where you're going to be allocating growth capital to each of these businesses? Well, again, we â I picked these two peers, the high-quality peers and one has a little bit more Wealth Management and Institutional but still has significant Institutional. The other has more Institutional than even Wealth Management today, and so they're very similar in terms of their mix. We will focus and continue to focus on building Wealth Management. That's what investors want to hear, and we certainly have the platform to scale that business, and we will do that. We will not do that at all cost. One of the things that we focused on is our return-on-tangible common equity, which you can see here. So despite even our â the focus that we've had on Institutional, we have great returns here and great returns across â what was just a difficult market cycle. So I think that â I think maybe the perception that â perception, if it was true, we would have had an awful 2022, okay? It would have been as awful. We had a really â across The Street, the Institutional was very difficult. Our business was down over 30%, yet we had our second best year ever and very good results because our model balances the stability of Wealth Management with the cyclical aspects of the Institutional business. We'll focus on Wealth, we always have. We will also do accretive transactions in the Institutional space because we believe that's a business, especially where we're positioned as a middle-market firm and so many firms are exiting. They're either not big enough to get there or they're large enough, they're focusing up. There's a huge market for us, and we're going to take advantage of that. I'd also reiterate one of Ron's comments from the prepared remarks. We expect Wealth Management to comprise a greater percentage of our revenues in the years ahead. I think that's indicative of the investments and the growth we expect to see occur in that segment. Yes. Appreciate sharing your thoughts on that. That's helpful. Another thing to consider for you guys might be disclosing the net new asset figure in writing to that might help the other two that you flagged there to do that as well. So that might help. A couple just follow-up items, maybe probably for Jim. You just spoke to premium AM at $5 million tailwind. Where does that stand versus the prior cycle trough at this point? And as far as thinking about the NII guide, was there any specific rate assumptions that underpin that or deposit balance and balance expectation? Yes. So the comment I made related to the $5 million impact on net interest income was specific to the mortgage portfolio. And basically, as rates rise, the duration extends and you have to recast your expected period of time in which those deferred origination costs are amortized. And so that kind of true-up or catch-up entry was kind of a onetime event, $5 million in the fourth quarter. Unless you see a dramatic change in rates from here forward, you wouldn't expect that to change materially. In terms of forward rates, I think essentially, what we're saying in our forecast is consistent with the Fed fund future curve. Almost everything we have on balance sheet is tied to the short end of the curve, and we're just following Fed fund's future expectations. Okay. Great. Yes. The $5 million that â I mean, that was just a premium amortization adjustment on the mortgage book, right? I just wanted to make sure. So there's origination costs, right? They get expensed over the life. So not a premium amortization, but so costs that we incurred to originate those loans that are now being cast over a longer period of time. It's somewhat analogous to that premium amortization topic, but it's just origination costs. Yes. It's Michael on again. I just â I want to ask one quick follow-up on the balance sheet. Given some of the volatility on the long end and the forward curve implying Fed cuts in the back half, how is the thinking evolving around managing duration here? Is there any greater desire to remix the balance sheet to lock in some higher yields? Or is the strategy to remain predominantly geared to the short end? Thanks again. Look, I think the strategy is to remain what we've been doing, okay? I get a lot of questions. I think it's a great question about locking in rates. That always gets me nervous just to tell you that, that's embedded in that is an interest rate bet. And we â the way we look at it is we're kind of naturally hedged anyway though. If the rates do get cut, at some point, they will. I'm not sure, the market might be anticipating that sooner than what we think. I think the Fed will be a little bit longer in maintaining rates. It's my personal view. But when it comes to saying that we're going to remix the balance sheet to try to predict the future yield curve, no, we're not thinking that way. If rates do get cut, that will compress NIM naturally, not as much as you would think. The deposit betas are near 100 on the way down. And so we would see that. But the other thing that happens is that in that kind of environment, cash goes up. Our cash balances go up and our short-term cash available goes up. So what we think is, even though we might get some NIM compression, we'll increase NII. So that's how we think about it. A bet of locking in rates, I've listened to that over decades, and sometimes it works and sometimes it doesn't. Maybe one other thing to add there, too, is if we did see some stability in rates and even a declining rate environment, that could also be a catalyst for our Institutional group. Obviously, the rapid rise in rates over the last year has not been helpful for origination activity, and I think that activity in general. Well, that was very productive, very good question. I appreciate that thoughtful. We want to thank everyone for listening. We feel we had a very successful 2022. We look forward to continuing to build this franchise in 2023 and the years beyond and look forward to reporting to our shareholders after our first quarter. So have a great day, and thank you.
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EarningCall_813
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Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer. First, some housekeeping matters. Our discussion today will include forward-looking statements. It's important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. Thanks, Keith. Thanks, everybody, for joining the call. We apologize about the technical difficulties. I'm going to read my comments again to make sure that everybody has the same information. I guess, I should feel blessed that I'm pleased to report the results. So it's my pleasure to read them a second time. I apologize for those who are out to hear them again. Good morning, everybody, and thank you for joining today's call. We closed 2022 on a strong note with excellent Q4 financial results, reflecting solid performance across segments, favorable development and a rapidly growing contribution from investments. However, I'd like to begin today with a follow-up to my remarks last quarter. I discussed a series of changes we were seeking to ensure an increased margin of safety for investors in the face of mounting catastrophe losses, which exceeded $130 billion in 2022, as well as the continued effects of climate change, inflation and the increasing occurrence of secondary perils. Importantly, I can now report that we accomplished all of the ambitious goals we set for ourselves in one of the most pivotal January 1 renewals in our history. Most notably, this includes a step change in property reinsurance pricing. These changes have resulted in a fundamental and necessary reset in the relationship between insurers and reinsurers -- promising more appropriate risk-adjusted returns to investors, while ensuring customers sustainable access to reliable, high-quality capacity. The structural shift that the market has undergone constitutes a stabler long-term equilibrium that will protect the interest of both investors and customers. The renewal in our casualty business was successful. We saw rate increases in many specialty classes and made good progress on reducing ceding commissions in traditional casualty lines, which on average reduced by about 1 percentage point. I will discuss the casualty segment in greater detail in part two of my comments. Turning to our â22 results. At the end of each year, I'd like to review our performance by responding to two questions. The first is we do financially and is, have we executed our strategy effectively. Starting with the first question. We had an excellent fourth quarter from both a GAAP and operating perspective with an operating ROE of 30%. For the year, we reported a little more than $300 million of operating income which represents a 6% return on common equity. To be clear, I do not think a 6% return on equity is acceptable -- quite the opposite, I've said multiple times that our business needs superior long-term returns to justify the volatility that we take. That said, this 6% return is materially better than our results in 2021 and when we roughly broke even despite a similar level of industry catastrophe losses. This improving performance reflects the many accelerating tailwinds our business is benefiting from, including the higher reinsurance rates, increased investment income and growing capital partners business. We are also seeing the benefit of higher operating [Technical Difficulty] the investments we made in growing the scale of our business. Bob will address these tailwinds more fulsomely in his comments. This quarter, we also demonstrated the benefit of our increased diversification. As we achieved excellent results despite material net negative impact from large catastrophic events, given the reset in underwriting at January 1, we would expect a significantly smaller loss, if similar events occur this year. In 2023, we believe that this upward trajectory on financial performance will continue as we will be paid more for the risk that we take, earn substantially more on the investments that we make and continue to grow our fee-generating capital partner business, which leads to my second question. Have we executed our strategy effectively. If there's one word to define our strategy in 2022, it was consistent. We remain committed to being a global P&C reinsurance [Technical Difficulty] at scale and a leading underwriter of property catastrophe risk. We have chosen to occupy this position, because it is a critical link in the insurance value chain where we have a competitive advantage. Surveying the insurance landscape. We have chosen this position, because it is the most effective means for us to deliver superior profitability to shareholders over the long-term. Over the past decade, we have emphasized building sustainable platforms that would support long-term profitable [Technical Difficulty]. We have added scale to our business by growing our top line, bottom line and capital and have diversified our business by adding new products, platforms, customers and capabilities. These actions have diversified our earnings increased our leverage and secured us a leading competitive position. It has also provided us the confidence to maintain our strategy and continue being a leading writer of property cat insurance. That said, in 2022, we challenged our underwriters to optimize our property portfolio. And throughout the year, we target improved profitability. This culminated in the most recent January 1 renewal when our strategic consistency and focus on improving the bottom line enabled us to deploy significant and sustainable capacity to our customers. As a result, we entered 2023 with each of our three drivers of profit, poised to outperform. I couldn't be more excited about the current environment and our positioning in it and the potential to create material value for our shareholders. That concludes my initial comments. I'll provide more detailed update on the renewal in our segments at the end of the call. But first, I'll turn it over to Bob to discuss the financial performance for the quarter. Thanks, Kevin, and good morning again, everyone. We finished â22 with a very strong quarter, reporting operating income of $322 million, annualized operating return on average common equity of 30%. For the year, we generated operating income of $316 million and an operating return on average common equity of just over 6%. Our performance this year demonstrates that our three drivers of profit, underwriting, fees and investments are increasingly benefiting our financial results and making them more resilient to volatility. I will discuss our fourth quarter results in more detail in a moment, but here are a few points from 2022 that I'd like to highlight. First, casualty and specialty performance remained strong and the segment has been consistently profitable every quarter for the last two years. In 2022, the segment delivered a consistent mid-90s combined ratio and grew net written premiums by 42%. We have been successfully growing the Casualty and Specialty segment into a profitable market. Kevin will talk more about the renewal. But as we look forward to 2023, we feel great about the positioning of this business and continue expect a mid-90s combined ratio in 2023. Second, our Property segment broke even in 2022 despite a very active year, including a major Florida Hurricane, is a 7-percentage point improvement from 2021, which had a similar magnitude of industry losses. The improved performance is a result of the increased rate and tightening terms and conditions we achieved in our property book throughout 2022. But importantly, the additional underwriting [Technical Difficulty] we took in January 1 should continue to benefit the property books results. Third, our Capital Partners business continues to lead the industry in the third-party capital management. In 2022, we raised a total of $1.4 billion in third-party capital with an additional $400 million effective January 1, 2023. In 2022, management fees contributed consistent $25 million to $30 million per quarter, and we expect this to run around $35 million per quarter in 2023, reflecting an increase in capital managed primarily in DaVinci. We also expect to see performance fees start to recover midyear absent any significant catastrophe events. And finally, retained net investment income grew considerably in the second half of the year to $144 million in the fourth quarter. Over the past few quarters, we have rotated the book into more current yields. Subject to market changes, we expect retained net investment income to continue to increase at a milder pace. Importantly, as part of our strategic positioning as a global P&C insurer, we have scaled these diversifying income streams very efficiently. Over the last five years, common equity is up 15% and while casualty gross premiums written have quadrupled, management fees have doubled and net investment income was up 2.5 times. As we look towards 2023, we feel we are in an excellent position with all three drivers of profit poised for continued improvement and outperformance. In addition, we organically grew shareholder equity this quarter by $440 million and have over $600 million of unrealized losses on our fixed maturity investments that will accrete to par over time. All of this puts us in an excellent capital position. We are in a very attractive market and are excited about the many capital deployment opportunities in 2023 and beyond that should result in strong financial performance. Moving now to our fourth quarter results and our first driver of profit underwriting. Beginning with Casualty and Specialty portfolio. The segment results were strong again this quarter, and we reported a combined ratio of 94% for the quarter and 95% for the year. Gross and net premiums written were up 31%, continuing to reflect the growth in underlying rate improvements from prior year renewal periods during the year. Net premiums earned for the Casualty and Specialty segment were [Technical Difficulty] million, up 31%. In the first quarter of 2023, we're expecting net earned premiums to be about $975 million. Turning now to our Property segment, where we had a solid quarter. This segment reported a combined ratio of 63%. The current accident year loss ratio of 54% contained 19 percentage points from large cat events, which had a net negative impact on our financial results of $84 million, about one-half of which [Technical Difficulty] Winter storm Elliott and Hurricane Nicole and the remainder coming from aggregates. These events impacted both property cat and for property cat, the current accident year loss ratio was 42% and included 34 percentage points from large cat events. For other property, the current accident year loss ratio was 63% and included 8 percentage points from large cat events and an additional 5 percentage points from the [Indiscernible] gas explosion. In the quarter, there was also 19 percentage points of favorable development for the property segment, primarily driven by releases on 2017 through 2021 large cat events in the property catastrophe class of business. Net premiums earned for other property were $393 million for the quarter. Going forward, we expect premiums in our other property business to decrease as we shift our focus to property catastrophe business where we sell the most attractive opportunities. Moving now to fee income and our capital partners business, where overall fees were $30 million. Management fees were $26 million, continuing to provide a steady source of income in the quarter. Starting in the first quarter of 2023, we expect management fees to increase to around $35 million per quarter, reflecting increased capital managed on our joint venture balance sheet. Performance fees continue to be depressed due to the cumulative impact of [Technical Difficulty] '21 and '22, we expect these fees to start recovering by the second quarter of â23. Overall, we shared $236 million of our net income with partners in our joint ventures as reflected in our redeemable noncontrolling interest. $207 million of this amount was operating income and the remainder being mark-to-market gains. Finally, on Capital Partners, as of January 1, we reduced our ownership stake in DaVinci from 31% to [Technical Difficulty] in order to make room for several long-term oriented investors. Moving now to investments, where net investment income continues to have a growing impact on our financial statements. In the fourth quarter, retained net investment income was $144 million, the higher net investment income was driven by higher coupon yields as we rotate our investment portfolio, higher yields on our floating rate exposure, as well as an increase in invested assets. Over the course of 2022, retained annualized net investment income return has increased from 1.5% to 4.1%, and our new money yield, which is reflected as retained yield to maturity has increased from 1.8% of 5.6%. As a result, in the first quarter of 2023, we expect quarterly net investment income to be about $150 million. Overall, duration has declined on a managed basis to 2.5 years, largely driven by capital increases for our joint ventures. On a retained basis, duration remains relatively flat at 3.3 years. In the fourth quarter, rebounding equity markets, tighter credit spreads and bond accretion led to retained mark-to-market losses of -- retained mark-to-market gains of $129 million. For the year, we reported total retained mark-to-market losses of $1.5 billion, principally in our fixed maturity portfolio. As I discussed last quarter, these are high-quality assets and we expect to earn these losses back over time in two ways. First, the securities that we hold, they will read the par over time. And second, through increased net investment income, where we proactively sold the securities and reinvested at higher coupons. Retained unrealized losses in our fixed maturity portfolio are about $13.93 per share. Finally, turning briefly to expenses. Our operating expense ratio was up by about 1.4 percentage points in the quarter. And for the year, the operating expense ratio was relatively flat. The increase in absolute operating expenses reflects investments in people and the increased costs as we return to a more normal operating environment. Going forward, we expect to hold the operating expense ratio relatively flat. In conclusion, we finished the year with a very strong fourth quarter. This demonstrated the growing strength of each of our three drivers of profit, even with significant catastrophe activity in the year, we generated a 6% operating return on equity. As we look forward to 2023, we expect continued stable underwriting income from our Casualty and Specialty business. Our Property segment to benefit from increased rate and tightening terms and conditions, stable and increasing management income with upside from performance fees and significant retained net investment income. Thanks, Bob. As usual, I will divide my comments between our Property and Casualty segments. And while I touched on the success of our January 1 renewal in my opening remarks, I will primarily focus on adding more detail given our belief this renewal marks an important inflection point for our business. Starting with Property. The Property renewal was very late with many deals not found until late December or even early January. Going into the renewal, we expected significant supply and demand imbalance for property cat reinsurance that would drive material rate increases in the range of 50% to 100%. As the renewal progressed, cedents understood that the market would remain disciplined on rate. They responded by increasing retentions, restricting coverage and restructuring programs in order to control budgets. These changes benefited us in particular, as our underwriting expertise and flexible capital allowed us to execute in a structurally shifted market to increase profit, reduce risk and better diversify our portfolio. Cedants reactions also meant that limits, particularly in the U.S., were relatively flat, albeit more remote. The increased demand we anticipated was retained by [Technical Difficulty] as at the time they were unwilling to pay additional rate, this marginal demand would require. Over time, we expect this risk to return to the reinsurance market as macroeconomic forces, such as inflation and climate change continue to drive overall risk in the system. We will always have the most efficient capital to assume property cat risk, so it should ultimately sit with us. I am very pleased with the property [Technical Difficulty] that we wrote at January1. As expected, we renewed business at significantly increased rates and tightened terms and conditions. Additionally, we increased allocation to property cat as it became increasingly profitable relative to other properties. Regarding top line growth. We are seeing good opportunities and expect to reset on rates to persist through 2023. The January renewals is more focused on retro and international business, while the most dislocated part of the property market, U.S. risk, mostly renewals in midyear. Consequently, we expect many opportunities to deploy additional capacity in property over the next six months. As Bob explained, in addition to the growth we've already achieved, we have ample capital to deploy into a profitable market. As we expected, the retro market was highly dislocated [Technical Difficulty] into the January 1 renewal with rates up materially, terms and conditions very tight and an ongoing shift to occurrence from aggregate structures. This allowed us to build a strong inwards book of business. Against this backdrop, we had several successes on our seeded placements as well. First, we purchased more, retro protection than originally anticipated, a testament to our strong relationships and consistent track record. Second, we were able to grow with our longstanding partners on our structured reinsurance products. Finally, in early January, we issued our Mona Lisa cat bond albeit for a reduced limit. Given current market conditions, we believe we successfully executed our gross-to-net strategy and that it materially improved the efficiency of our portfolio. Moving now to our Casualty and Specialty business. Similar to property, January 1 [Technical Difficulty] important renewal for our casualty book. At the renewal, casualty and specialty reinsurance terms and conditions moved in a positive direction across many classes of business. Dislocated markets provided opportunity for us to quote and lead profitable business. We continue to see opportunities across casualty and specialty classes. Rate increases are starting to slow in general liability lines and reducing in D&O. This follows several [Technical Difficulty] significant rate increases in these lines. In most cases, ceding commissions reduced and we maintained attractive margins. In cases where expected margins did not meet our hurdles, we scaled back our exposure. The market was very dislocated in some specialty classes. And we were able to quote significant lead lines unprofitable business. Lines, such as marine and energy, terror, cyber and aviation were particularly attractive. We demonstrated leadership and achieved increased rates and retentions as well as tightened terms and conditions in these diversifying classes of business. Our mortgage and credit and political risk business remains profitable, critically due to the structure of our portfolio and our focus on risk selection, it is also resilient to any downturn in economic conditions that may occur this year. Overall, we are confident this casualty renewal will drive sustained profitable growth. We continue to grow this book, and we have written what is likely to be our largest and most attractive portfolio to date. More importantly, as our casualty business matures, it is becoming increasingly consistent at delivering mid-90s combined ratio performance. Shifting now to the Capital Partners business. We have always taken a differentiated approach to our capital partners business. First and foremost, this is because we are recognized leaders in underwriting property and casualty risk and always approach this business as underwriters would. This means, we start with sourcing desirable risk and only then seek to match it with the most efficient capital. Second, we have a long and successful track record of managing third-party capital and are always strongly aligned with our investors. Our partners know that we always stand alongside them sharing any loss that they [Technical Difficulty]. This provides them with the confidence to reinvest with us after large events. Finally, we offer the broadest suite of investment vehicles with both owned and managed balance sheets for every risk that we take. This includes Fontana, the only rated third-party balance sheet dedicated to casualty and specialty risk. In addition to being innovative, our vehicles are highly flexible from a capital perspective and have features allowing us [Technical Difficulty] capital when it is needed and return it when it is on. This allows us to navigate difficult markets as we did in 2022 and also to facilitate the liquidity needs our institutional investors demand. This differentiated approach is highly appreciated by our partners. It also explains our success in raising capital in 2022 as both new and existing investors chose to trust us with their capital. Now we continue to scale our capital partners business even under the most difficult circumstances demonstrates that it is a permanent part of our franchise. We have every intention of continuing to grow it in the future in order to bring reliable, sustainable capital to our customers. We fully expect our capital partners business to increasingly generate low volatility fee income for the benefit of our shareholders. In closing, this quarter brought a strong end [Technical Difficulty] year, which was marked by elevated cat losses coupled with Fed-driven mark-to-market investment losses. Consequently, the January 1 renewal was one of the strongest in our history, and investment returns should be materially higher in 2023. The ongoing growth in our capital partners business should serve as the third financial tailwind. As a result, we expect to deliver material shareholder value over the course of 2023. As usual, we will now turn the call over to questions. Apologize for those that had difficulty coming on the call at the beginning. Both Bob and myself will stay available after the close of the hour to make sure we answer all your questions. Thank you. Hi, thanks. Good morning. My first question, assuming 2023 is a normal cat year -- based on the book of business that you guys were able to put together at January 1 and [Technical Difficulty] include some expectation for the rest of the year? What ROE do you think your book of business could generate this year? Thanks, Elyse. This was one of the most profound renewals, I think RenRe has ever had. We went in with very aggressive targets for ourselves, including growing the property cat portfolio, reducing risk at the low-end of the risk distribution, holding PMLs relatively flat, increasing our footprint, particularly with the addition of third-party capital. So all of those things will inure to the benefit of shareholders should there be a normal cat year. One way that might be helpful to think about it is, if we just take a couple of losses last year and think of how they could affect us. If we looked at Hurricane Ian occurring in the third quarter of this year, I would expect our loss would be significantly lower for a couple of reasons. One, primary companies will need to retain more risk at the low end of their risk distribution. Secondly, we will have more rates, so more reinstatement premium coming in, should there be a loss. So I think from that perspective, we would have a smaller loss. If we were to look at Winter storm Elliott between the increased retentions, tighter terms and conditions and higher rates, I would expect that loss to be almost fully retained within the primary market and not be transferred to the reinsurance market, which is different than what happened last year. So it's difficult to put an exact number on it. But between substantial rate increase, the growth we've achieved, the additional profitability in specialty, higher investment returns, I would expect returns to be substantially high or should we have a repeat of â22 year and â23. And then my second question. So you just said your PMLs are flat, I believe, right? So your exposure is probably consistent. We've heard right about retentions going higher for primary companies, right? But there's a lot of rate increases in the system. As you put it all together, how do you see the premium growth coming together just within the property cat business in â23? Yes. So about half of our U.S. exposed property cat limit is yet to be renewed. So just to kind of put it in context, and I anticipate that what we achieved at one-one will persist through the rest of 2023. So in thinking about the portfolio, it was our objective to hold the tail of the distribution relatively flat and increase the probability of high returns by reducing the level of [Technical Difficulty] end of the distribution. So I feel optimistic from a property cat perspective. The other thing I would say is we allocated increasing capacity to our property cat portfolio within our overall property book by adding capacity from the other property portfolio to the property cat book. So we will achieve substantial growth in the property cat portfolio. A little bit of that growth will come from us creating capacity by reducing a bit on other property. Yes, thank you. Can we talk a little bit about the casualty and specialty seating commissions. How quickly will they roll through the book? And what -- how many hundreds of basis points might we see just on the acquisition cost ratio alone. So on average, as I mentioned, it's about 1 percentage point for the casualty portfolio. Let me talk a little bit about casualty specialty first, though. We had substantial growth in several specialty lines, which are within that segment. And that growth is based on the fact that it became dislocated because of the Ukraine War -- elevated losses and there's also a degree of property cat risk, particularly in the marine and energy portfolio. We tend to [Technical Difficulty] increased ceding commissions through directly. So just as we earn the premium. So over the next 12 to 18 months, different than what we do from a pricing equation. So it will earn through more quickly. I don't have the number to drop to a GAAP number though. And say 100 basis points, I mean, look, everybody is just a spectator. It does seem like commentary is greater than 100 basis points for the industry and more broadly, maybe not where you play. Do you think 100 basis points is typical? Or is that specific to run rate? I think it's pretty typical. And I could be optimistic and point to deals where we had much bigger changes, but there are deals that have been performing better and ceding commissions were a little stickier. So I use 1% as a good macro benchmark for how the portfolio is, and it is consistent with the way I would discuss the industry. And where are we in terms of the commentary in that portfolio of understanding your own loss and your own risks and whatnot and using your own data to: a, set new loss picks and b, evaluate the loss picks you said in the past. So if you go back to 2006, that was an important part of the discussion for rate changes, understanding how the models have changed, [Indiscernible] it also drove the expected loss through the property market. I'll speak about our view of risk is relatively consistent this year to last year. I would say it's the normal tweaks in our model. We did not run through substantial risk changes from inflation and from climate change or other natural phenomenon. We had that reasonably well reflected. So we went through our normal process. So the rate change that we achieved this year is much more similar to the risk-adjusted rate change than we would have experienced in 2006. Well, I guess, maybe I'm sort of talking about the loss picks in the cash and specialty book where you said you're holding back sort of being more aggressive and being conservative because you just don't have the data yet to be super confident about using your own ability to pick the losses? And you're -- are we at the point in time where now you are -- have the full data set and the loss picks we're going to see are based on your experience? The vast majority of it is based on our experience at this point. We are always looking at industry metrics to test our development of our own portfolio. We -- your point about being cautious with reserves. I think we've mentioned on previous calls, we generally take bad news before good news. So we wait for substantial, I'll call that one-third of the curve to develop before we think about it, recognizing good news. I'd say that's not a typical for the industry, but that's based on our own curves and our own assessment of when it's appropriate to think about making adjustments. Hey, thanks, good morning. I guess just a relative question, thinking back to 2006. In the years following that, I think Ren net ROEs, 30% to 45%. I realize there were no cat years, but even if those were normal cat years, it would have been a 20%-plus ROE business. I guess just in comparison, Kevin, like if you think about like the health in the property cat business today relative to where it was in 2006. I mean, maybe linking us back to what happened at the renewal concessions that you thought might have fallen a little short of your expectations. I guess, like what are the primary differences that would make it a different ROE business today versus post Katrina? So I think of this one-one as being less similar to â06 and more similar to what happened in 2001, 2002, guess. The -- because it's broader geographically, there are far more attractive lines and far more hardening lines in the market. And so I don't had to answer your question with regard to comparing it to â06. But when I think about what we've built in our ability to [Technical Difficulty], it's stronger now than it was â02. The fundamentals of the market are a little different, but the ability for us to harvest profit from the casualty portfolio, I think is increasing. We've got a much bigger Capital Partners business, which continues to contribute, investment returns look stronger. And then the property portfolio at the reset level is at extremely attractive levels. Got it. And again, just on the renewal, it did seem to kind of come together at the end. Any idea of just, I guess, whether it's terms and conditions or rate, some aspects of that renewal that you wish would have potentially been a little bit more favorable than they were for the industry or for Ren? Late renewals work to our advantage and renewals often, because it's a renewal where there's been a dislocation that hasn't been fully absorbed by the market, which means creating options and providing alternatives is a skill that can reap outsized rewards. We placed -- we achieved a significant number of private placements by helping companies think about how to structure their programs. The one area where we've think it's a delay, not a miss, is the capacity that we think -- we thought would come to the market at one-one. We saw more capacity come to the market in Europe and some other places. The U.S. capacity, I think buyers ultimately made a wallet decision as to how much they wanted to spend. And I don't think their appetite for how much they want to buy has diminished. And I believe that what we're experiencing is a bit of a delay in that limit coming to the market, which will add to the sustainability of the price hardness that we're seeing. So when I look at it, I'd say that that's an area that I'd say was a bit of a surprise to us on one-one. But again, I'm not concerned about it, because I do think the capacity needs to come to the market. And I think if it does come to the market, we've got the capital and the structuring capability to be able to service them. Got it. And then just lastly, with capital going more toward the property cat business away from other property. Other property obviously has quite a bit more premium. Any indication of I guess what top line could look like next year from another property perspective? Yes. It's quite a deliberate change. And let me just -- we're getting very good rate increase in the other property portfolio, but it comes in more slowly than the losses occurring nature of the property cat portfolio. So leveraging into that, I think we're making a smart trade as to how to put [Technical Difficulty] market. So I don't particularly worry about one being up or the other. Our footprint in that market is exceptionally strong. And when the opportunity there begins to emerge as accretive again, we will leverage back into it. So -- but right now, property cat is preferred, and we're going to continue to emphasize the growth there. In the long and short of it, we're going to grow property cap quite a bit, and we're going to shrink a bit in other property, which I think is a good trade. Thanks, I guess to begin with, it sounds like the casualty and specialty combined ratio expectation is flat on a year-over-year basis. In other words, picking in the mid-90s, Am I thinking about that correctly? Yes. In my prepared comments -- thanks for the question [Technical Difficulty] prepared comments, we did say that we expect that with the growth, we should still continue to maintain mid-90s as the range. This year, mid-90s was 95.3, and you saw us kind of move up and down in that range with events like earlier in the year, Ukraine losses. And I'll point out this year, we had the loss on one-one. So it should move up and down, but we feel very comfortable about mid-90s. Okay. No, that's fair enough. I guess I was expecting a little bit more improvement, but I understand what you're saying about the range. If you look back at the extended one-one renewal season, how do you I guess, compare the actual capacity deployed to your expectations going in. We did extremely well. I would say -- again, the area where -- I think that's the most relevant question is for the U.S. property cat limit. And as I mentioned, we have about 50% of that yet to be renewed. So I would say that, yes, there was less demand that came to the market. That did not change anything with our strategy as to how much to deploy, it just meant we needed to be a little bit more nimble on how to get the limited with the customers' hands, and we did that. So from my perspective, I feel really good about where we traded into the market, albeit the dynamics are a little bit different than we expected going back to December 1. Okay. That's helpful. And I guess last question, if I can, just to continue with that. You talked about expecting that demand to come back. Is that the higher or lower layers of coverage that you expect to come back? Yes, it's a good question. It will be higher layers. I think at this point, companies are going to continue to -- let me company -- larger companies will continue to make the trade that they'd rather build balance sheet protections rather than have low-end income statement protections. And I think that's -- the income statement is going to need to be bolstered by them getting more primary rate. The one exception to that is in Florida. I think there's sometimes some -- there's the way people think about the Florida market is to weather limits above or below the FHCF. I think there will be still a need for some purchasing of limits below the FHCF, which I [Technical Difficulty] be very low. But more broadly, the new limit purchased will be at the top end of programs. First question, maybe going back to Elyse's question on kind of how the ROE look in a normal cat year and realizing you can't really prognosticate the precise ROE what exactly would look like in â23, but maybe you can also help us with delineating how much of the improvement you see coming from NII versus the underwriting? Would, it be more weighted to underwriting, more weighted NII? I've tried to point that. It's a good question. I'll help me try and break that. We're seeing much more improvement, let's start with net investment income. You started to see that over the course of the year, ending with $144 million and giving you guidance that we'll probably look at $150 million in the first quarter here, give or take, subject to market moves. And we're starting to see relative performance just on the management fees on -- coming through from our capital partners going up by basically 40% from $25 million a quarter to $35 million, which is reflective of the capital that we've raised. The Casualty -- Specialty business will improve based on the net earned premium that we bring through. So those are things that we look at as very stable. And we look at that as something we continue to talk about in the content drivers of profit property should do better. As Kevin has pointed out, property should do better, but you can't control mother nature. You can only structure the book to be able to adapt to it as well as you can. So that's the picture that we're trying to portray out there that there is a core stable, solid earnings stream that does support a level of return that we feel is above our cost of capital just to be in with. Got it. That's helpful. And then in the underwriting book, maybe you can help clarify a little bit or sort some of the noise. And I don't want to put words in your mouth, but it sounds to me like you're saying that maybe more of the underwriting margin improvement would come from property cat, but maybe more of the growth -- top line growth would be in the casualty and specialty in â23? Is that a fair summary? I didn't mean to leave that impression. We are growing property cat substantially. We will -- so other property as a whole will grow. Property cat will grow substantially, we're going to reduce a bit on other properties. Again, talk a little bit about that as being kind of the trade and how to set up the portfolio. We will grow the casualty specialty portfolio. A good piece of that growth within the casualty portfolio will come from some dislocated specialty lines. The final thing I would say is just having an underwriting background, I'm focused on net-written premium just because we have a lot of changes at the third-party capital level and the managed premium level that are important. So being more specific there, it's Upsilon. We reduced the footprint of Upsilon into the market, because the product that Upsilon sold was better sold into RenRe and DaVinci, and that will change the gross written premium, but the net economics coming to us are better reflected in net written premium because of that shift. And does this shift or the -- I guess, the parallel growth in casualty, specialty and property cat at the same time, how does that impact excess capital? So from a capital position, we are extraordinarily well situated going into the opportunity set that we're seeing. Within casualty, within specialty and outside the U.S., capital is never an issue. We -- the peak exposure within the portfolio going into this renewal was Southeast Hurricane. It will remain Southeast Hurricane, and we still have significant opportunity to grow the portfolio and deploy more capital should we choose to. Great. Thank you. Hey, just a couple of ones here for you, Kevin. I think, I just want to clarify what you just said there. So you should see some pretty substantial growth in cat premium retained net written premium growth. Okay. I just want to clarify that. So it's on your balance sheet, great. And then the second question, I'm just curious, on Florida, as we look at the six-one renewals -- does any of the legislative changes make your appetite there any better? Or is it purely just what's going to happen with rate and pricing in that market? I'm pleased that they're taking steps to improve the health of the Florida market. At the margin, it's beneficial. It -- thinking strategically as to how we're going to position the book will not change our appetite in Florida, specifically because of that rate, attachment and other opportunity will be the drivers in how we structure the portfolio. Got you. Great. And then I guess just last quick question. I think you kind of referred to it earlier. It sounds like Europe turned out being better-than-expected with rate increases. Have you increased your allocation of business to Europe? Yes. Capital is still driven by U.S. and capital still driven by Southeast, but we saw more opportunities in Europe than we expected, and we're able to kind of leverage into it. The Zurich office performed well, seeing the opportunity early in executing. Hey, great. Follow-up on the Florida question from Brian. So I'm just curious now that you've had some time -- more time to go through the legislation. It sounded like, Kevin, in your answer that maybe these legislative changes aren't might not be that meaningful. Or do we just need more time to see them play out? And I guess also reflecting on the past question about this current cycle versus the 2000s, the counterparties have -- are much different than back then. Maybe I'm wrong, you can correct me. But is there -- do you expect your counterparties over time to maybe improve from a capital or a kind of social inflationary aspect over the coming years, maybe given some of the legislative changes. Yes, thanks for the question. I think the profile of the Southeast risk that we take is materially different than the early 2000. The early 2000s, we had a much bigger footprint with the -- with local Florida companies participating in that market. A big -- a much bigger piece of our Southeast wind exposure in particular, comes from large nationwide companies tend to have much higher retention. They have their own claims staff. They have a lot of infrastructure that they can bring to bear or should there be a loss and having some of the changes that were made legislatively, it can make a bit of a difference in the uncertainty post loss. But again, I'm just trying to be transparent that the drivers of our capacity deployment for the Southeast and in particular, Florida will be driven much more around attachment point, price and macro terms of the deal rather than the legislative environment and the changes that were made. Okay. And my follow-up would just be kind of on new capital. We're clear on hearing your expectations for midyear to continue to be favorable. But curious, we're seeing some headlines about new capital coming to the marketplace. Do you -- are you seeing or hearing about additional capital providers coming in to kind of swoop in and feel some of the supply-demand dislocation? I mean, obviously, you hear all the rumors. And I know people looking for capital. we've been successful bringing capital. It's because of the uniqueness of the offering and the expertise of the underwriting. I think that will continue. So should new capital come in. I think the natural place for them to want to have a conversation is here. I think it's getting a little -- the class of â23, which we've seen in other big dislocated years seems as if that's a little bit more unlikely than third-party capital coming in. Regardless, I look at third-party capital at this point is if it's going to be something that disrupts the market, it's unlikely to disrupt us, because of the flexibility of our platform and our ability to execute into the market. So not that concerned about it at this point, but something we're watching closely. So thanks, everybody. I appreciate you staying on for a few extra minutes. I appreciate the questions as well. For those that have trouble getting on to the call, I apologize for the difficulties. But happy to take any follow-ups. As far as the renewal, I've been doing this for a long time, I've seen a lot of different types of markets, and this was one of the most impressive renewal performances I've ever seen from the Renaissance team to be able to execute into this market, and I couldn't be prouder of the portfolio that they build. This concludes the RenaissanceRe fourth quarter and full-year 2022 earnings call and webcast. Please disconnect your line at this time, and have a wonderful day.
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EarningCall_814
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Good morning, everyone. My name is Chris Pockett, I'm Head of Communications for the Renishaw Group. I'd like to welcome you to this live Question and Answer Session event for Renishawâs Interim Financial Results for the Six months ended December 2022. Hopefully by now you've all had an opportunity to view the video presentation that was released as part of this morning's RNS statement. And will lead Chief Executive and Allen Roberts, Group Finance Director are here now to answer any questions that you may have in relation to that presentation and the interim results statement. He will try to answer as many questions as possible, before we close at 11:15. I will try to group similar questions together, so we may not answer all individual questions. If you haven't already done so you can submit questions via the question icon that you can see on the control panel on the right of your screen. Just to note that based on past feedback, it may help to refresh your browser, should you lose sound or the connection. And now we're going to start with the first question. And this is a question relating to the competitive environment. Has the competitive environment become tougher or easier in the last two to three years and why? Is competition likely to become tougher going forward? And what can Renishaw do to manage these risks? And I think that one's going to go to Will. Thanks, Chris. So from many years, we've faced really good competitors. I don't think this has changed significantly over the last few years. Probably the theme to draw out here that we've mentioned before is the emergence of new competition in China. I think we're pleased with how we're doing here, differentiating ourselves on performance from the innovation we invest in global support, and also the quality and reliability of the product that we supply that's often integrated into quite high value equipment. Going forward, we always assume the competition is going to do a really good job. And our strategy is going to remain unchanged here that came to that, that we're going to continue to invest in the R&D, to make sure that we are supplying a differentiated product and make sure we're there to support our customers around the world with the high quality products, and also investing in our manufacturing to make sure that we can maintain that and respond to their needs. Okay, thanks Will. You touched on R&D then, and we have a question relating to that. So that is from many years, your R&D has averaged around 10% of sales, will that be sufficient going forward? Yes, as you say links in well with the previous question there. So we certainly believe so, that the positive for us probably in this half is, we talked in the past about the last few years, we've had a lot of challenges with supply chains and actually more of our engineering spend has actually been on making sure we keep products going out the door. You can see for the numbers now, we've actually got more of the engineering effort back onto innovating for the future. We believe with this, it's more about the productivity of making sure we're getting the key disruptive products coming through from our investment. And we think that will really place us well going forward. So we don't see a long term significant change in the amount of percentage that we are going to be investing in R&D. Okay, thanks, Will. And got a question here, which I think is going -- go to Allen. You've been building a network and capsule inventory for an extended period of time, citing safety stock, including around 49 million in FY â22 and a further 49 million plus in H1 2023. Trade working capital seems to have reached a new all-time high relative to sales. When or where do you expect working capital to peak normalize in light of destocking trends at your customers? Thank you, Chris. Yes, it's a good question. Increase in our net working capital has been primarily driven by our inventory increases, as you rightly say. Over the last couple of years, the supply chain has been very difficult for us and for many organizations. And we have been building safety stock and quite extended safety stock levels, to be perfectly honest with you. And -- so what we are seeing now is, there's more stability is becoming more normalized. So we do expect, not particularly this year, but into next year, a more normalized inventory level to turn over. And which is the particularly driver between on for our networking capital increases. So we must bear in mind also that we do have a very short order book, typically two to three months for most products. And so planning is also quite difficult. So we got to get appropriate inventory and to map what our planned -- production plans are. Yes, I think that building on what Allen said, actually, this is a real area of competitive advantage. For us, if you look, we have a very automated manufacturing that's capable of ramping up quickly, we need the inventory to allow us to do that. Now, as we've seen at the moment, for example, that our electronics, business of selling encoders is weaker. We know when that ramps up, it ramps up very, very quickly. And our ability to respond to that is key in making sure that we're keeping our customers supplied and gaining market share often when we can supply and others can't. So it's vital for us it's a really tricky balance, but it is a core part of our strategy going forward. But in the first half, the increase in inventory was primarily in our position measurement product line. So we should be in a very good position when the market that peak arrives. Okay, thanks very much both. We're going on to a question that we received in relation to CapEx, I think that's probably going to come to you, Allen. So the question previous guide for Miskin was £30 [ph] million CapEx in FY â23 and over £60 million in total, versus now £65 million for FY â23. Are you accelerating the build out for what is driving the change in phasing? Not been any change in the phasing of the development. We spent about £7 million in the first half We're planning to spend around about £25 million in the second half. The balance is other production equipment. So whilst we're expecting £65 million for the total of the year £25 million of that is destined to further Miskin investment with the balance being paid in the first half of next year with completion due to take place at the end of December for whole three. Okay, thanks, Allen. Different area, now to move on to. This question, I think it's going to go to Will. And the question is, what is the likely impact on Renishawâs business of the US government's export control measures versus the Chinese semiconductor and telecom industries? Thanks. So the semiconductor stuff here, it doesn't affect us directly. So this is affecting our customers and particularly since really the customers that we sell encoders and laser encoders to. So in terms of how it's going to affect those customers and their demand, then probably the most relevant information is from looking at where they are selling to and their markets. What is interesting also coming through here probably though is the growth of the domestic Chinese industry here, so Chinese manufacturers have somebody that's an electronics equipment which seems to be accelerating and going well and these are customers of ours as well for our encoder family of products. So we are seeing interesting growth there in some accounts of the more domestic markets. So whether that's to do with US government export control on -- US controlled equipment, or it's just that the natural what is happening in the growing Chinese market, I don't know, but that's what I would comment of what we're seeing on the ground there. Thanks, Will. We'll stay with you. I think for this one. Please comment on how your order book is trending, growing, declining or flattish? If the order book is growing again, already, when did it through, I meant to say and again. Okay, so let me talk about -- we have a really healthy order book at the moment. It did peak back in the summer, but at the moment it's relatively flattish, we would say. So, no great changes there at the moment is not really ramping up quickly at the moment, though. Okay, thank you, Will. It's a question on price rises, how come you choose to raise prices only by 2%, given the highly inflationary environment? I think Will is going to take that one. Yes, so the 2% was the rounds that we have done of which is coming through at the moment. So actually, the impact of that in the first half has been relatively limited, we'd expect to see more of that coming through as that lag of orders comes through into the system. It's always tricky for us to choose what to do on pricing. So clearly, we're always looking at increasing pricing. But we also want to be making sure that we are -- what we operate in high margin, markets that so the margin we make on our products is high. So the number one thing we're really looking at here is trying to grow market share. So getting new accounts and new business in. Now, our real strategy for doing that is through the innovation that we put in and the quality of the products that we make, the support we give our customers. But actually, there are other reasons why we end up gaining market. And sometimes that's because it can patent lets a one of a potential customer dine through quality and reliability. And the other is through pricing, which tends to open up the opportunity for us to get in there and get that business and at the margins we're looking at that is a more profitable growth strategy for us often than trying to look at the pricing. So we're always balancing these things, decisions have been made, pricing increases have been cut in and we'll be looking at this again and going forward and seeing what we think we can put and it'll be different on all our different product lines. Okay, thanks, Will. I got a couple of questions now on margins, which I'm sure going to Allen. Firstly, do you expect margins to improve sequentially in H2 versus H1? The second related question, is what is the long term adjusted PBT margin that the group targets? Okay. Taking the first point. In terms of margin, our gross margin, we look to be somewhat similar to the first -- as in the second half compared to what it was in the first half. With the profit before tax, we're looking at a similar -- depends on the range, we're looking at a range from around about 21% to 23%, depending on the beyond the extremities of the forecast. With regard to long term adjusted profit before tax, group target. Internally, we got this target of around 25% ROS, is sometimes we achieve, but in over the medium term we've been around about 20% between 20% 25%. Okay, thanks, Allen. Next question, which I'm sure Will pick up. Can you specify the growth rate for semiconductor encoders in the half year and your outlook for recovery in this segment? That's going across to Will. Yes. So with semiconductor encoders what we're talking about here is our encoder family that we sell in semiconductor electronics market, so I'm taking the question of which we have two separate product lines, actually. And it's interesting to look at the difference here. So we have laser encoders, these go into early stage. So frontend equipment for semiconductor manufacturing. And what we're seeing here is we have actually seen good growth over the first half. And what we think probably is happening here is the lead time that our customers give their customers on these products is quite long and this is part of a very long strategic planning on these. Whereas the encoders, a lot of the encoders goes into the more back end semiconductor packaging up at the semiconductors and a whole range of different equipment there. We think actually, the lead times from our customers to our -- their customers on these are much shorter. And actually, this is an area that has seen a significant reduction in this first half. Now, because of these lead times this, this is the one that we always see it will cycle very quickly. Now, what we don't know, and we are struggling to understand from those customers I don't think they know themselves is exactly when this is going to recover. We know it will. We know when it does it will recover very aggressively. And our customers will expect those products very quickly in high volumes. But we just don't know at the moment any clarity from that. And exactly when this will happen. They never tend to forecast more than a few months from where we are at the moment. They just don't know. We had a question earlier about CapEx on Miskin. I think Will probably this is more relevant for you. It's related to that expenditure and expansion in Miskin. My question is given Miskin expands the production footprint by 60%. Is it reasonable to assume that is the level of growth you're aiming for in the medium term defined as two to three years by the questioner unconscious revenue might not scale proportionately with production space? And that, one for Will. Okay, so clearly our plans are for aggressive growth. That's -- that is us. But i.e. you should not draw a correlation between our manufacturing space and our growth targets. One of the bits here will be actually if you look at it, some of our newer products that are growing well, ranging from additive machines to gauging systems to enclosed encoders are significantly larger than the products that we're used to making and therefore need more floor space. So don't draw a correlation between those two. Okay, thank you. We're going to move on to a question now around currency. Given 1% overall constant currency growth, is it correct to assume that volumes overall were negative? And I think Allen's going to pick that one up. I think that the volumes are pretty similar, given the 1% growth, there is probably a small impact because of the price increases. But overall, we've seen sort of, in certain market segments, increased volumes, and particularly in the Semicon, we've seen a reduction in volumes. But overall, depending on market volumes are sort of similar. No huge changes here since what we saw at the end, the big bit this time of year is Chinese New Year, which is always with the importance of Asia to us is a quiet time for that region. That's coming back. And we probably expect with a combination of the COVID peak having been and gone in a lot of the China areas that that we are working with. And year over then it's going to be interesting to see how things start to accelerate going forward there. Thank you. Currency question here, which Iâm sure, Allen will pick up. The H1 results show 6% of the revenue growth is due to favorable currency. Can you give an indication of the currency impact on profit, with Sterling strengthening against the US dollar in recent months? Are you expecting currency headwinds in the second half? And that's going to go to Allen. Thanks, Chris. The 6% currency gain, which is around 20 million pounds is measured excluding the impact of the forward contracts we use. In our adjusted profit, we've four contract losses of circa 13 million, compared to a small gain of about 300,000 last year. Additionally, our overseas costs have increased by around £4.5 million due to currency. So the net benefit of these items on profit is around about £2 million. Looking to the second half, Sterling has strengthened against the US dollar, but it's weaker against the euro and yen. And we also have better forward contract rates in half two. So, based on the current rates, we would expect to see a benefit in profit in the second half. Okay, thanks, Allen. Another question here on capital expenditure. You possibly may have answered most of this, but I'll read it out anyway. Capital expenditure is estimated at around £45 million in the second half. Can you provide more detail on this and give an indication of ongoing CapEx plans? And I'll put that one on to Allen. Thank you. In the first half we spent around about £20 million of which most of that was on plant and equipment, and about 7 to 8 on property expenditure. I've covered earlier the spend on Miskin in the second half, which is going to be around about £25 million. We've also got -- we're also building a small facility down in Brazil, which is due to come online later in this fiscal year and further production equipment requirements. Going into next year, we're seeing the finalization of Miskin development primarily in the first half. So most of the spend will be in the first half. Then of course we've got the subsequent fit out to take place in the second half. So we're looking at probably a similar CapEx spend next year could be to what we're doing this year. Okay, thanks, Allen. Question here on Semicon, I think we've answered that one already. So it's a question -- so I think a question here on profitability at within our analytical instruments business. The question is, why did it fall so sharply on that sales? Who's going to take that one, is that Will going to? We saw the profitability has drop year-on-year from £1.6 million in â22 to just over £100,000 in this year, primarily due to labor costs and increased marketing expenditure. Yes, just so, the answered to the question. I think that positive part of it is we do have a strong orders that have come in for Raman, really strong order book and planning for a really good second half there, to really pull things through. So. Great, thank you. Some question now about relation to our metrology business. So could you expand on the difference you're seeing in the metrology business between strong five axis demand and weaker three axis job shop trends? Is the strong high end demand sustainable in current economic conditions? And I'll put that one across to Will. Yes, maybe if we start with the three axis job shop, so I believe here's what we're seeing from talking to manufacturers is that these are more often bought with credit a smaller companies, and that credit has become more expensive and more difficult to obtain. So they have cut back in some investment there. And these also on relatively short lead times. The five axis machine tools are far more complicated, much longer lead time and often going into more sophisticated, larger companies. So what we've got here is there is quite an order backlog here. If you were to go along and try and buy a high end five axis machine to at the moment, you're still going to be quoted a long lead time, probably more than a year. And I think in terms of the current economic conditions supporting that, then actually, what we've seen is some markets that have been weak for quite a long time. Defense, I think we've mentioned the saying, actually, that is really driving the need of some of these high end machine tools. So in general, we're not seeing much change there. And this market tends to move far slower than the stuff we're talking about, particularly with the electronics manufacturing earlier on in the webcast. It was a long question on price impact from Richard Page. But, Richard, I see that you have actually said that we have answered that one already. So if you're happy with that, we'll move on. So we'll take another question here, says that bland information on markets suggests no wider development of targeted business, are you able to provide any more encouraging details on your current strategies? And I think Will, you're going to take that one. Yes, that the bland information will goes back to where we are selling the end markets, which is our estimate from many of the channels we go through or where we sell to end users direct. So always take that in context of that is our estimate. We are never short on that. In terms of the encouraging on the current strategy. I think it's very positive at the moment. So we have seen as we've talked about existing customers taking less product from us because their demand is less. And what we have managed to do despite that downturn, is some of our newer product line strategies, which have been coming through which have been investing in have made that up and have compensated for that. So that's new market share, new products coming through. And some of this is from enclosed encoders. Some of this is from the more high value capital equipment that we are selling. So I think actually what it shows is in a depressed market in certain areas, we've managed to power through with the really important stuff that we are in control of gaining customers. Question here about China. You mentioned increased competition in Chinese markets. Are you experiencing attempts to copy your patented products? How difficult are they to defend? And I'll put that one to Will. Yes, so we'll certainly see people looking at Renishaw as the premium brand and the most recognized in many of the industries and therefore we are the other people that they try and copy. So what we see there is I think two things, in terms of copying, yes, in terms of trying to infringe patterns than less actually. So they will understand where we have patterns. If they're going to try and make success out of it by copying us they have to be able to market it without ending up often outside of China. So typically, they are not trying to infringe patents that have been a case of occasions of software, copyright issues or patents stuff. And we have had discussions on that. Okay, thanks, Will. Right, we got a very large question here. Thanks, Jonathan, for this. There's about four parts to it and quite different. So I think if we take them perhaps a one part at a time. Can you talk about the level of revenue generated from your multi laser AM machine? And how profitable is this product line? And what is the expected growth rate going forward? Will it continue at double digits? I think Will that's quite a substantial question there, so we'll stop at that point and we'll go back to the other bits. So Will, I'll hand over to you to take that first part. Okay. So I'm afraid on the first bit then we don't talk about revenue profitability with in the segments that we comment on. It is I will go -- it is a significantly smaller part of the business than some of our more established areas, which is why it's been particularly pleasing to see that the growth and it really starting to accelerate at the moment. For us is looking at maybe not at the immediate, it's looking at the medium and longer term with this, we see a few key things coming through here. So the first part of our strategy of working with significant potential volume accounts to repeat business is definitely working. So we are now getting the sales that people are established with our equipment, they need more capacity, they are buying. Then two things that we are putting in in terms of an engineering research and development, which is focusing on sort of continual improvement and some quite neat new features that we'll be bringing forward on our existing platform, adding more productivity to customers. And then secondly, we are also working on then the next generation, which is learning and all the stuff from existing, and really looking at the automation that we're going to put in to make this the sort of light site manufacturing of the future, which is where we think the real high volume growth is going to come from here. Okay, yes. So if I go on to the second part, then Will if I just read that out. So, you are putting through price rises, but are you also repricing the existing order book? And also what level of revenue visibility months? Does the order book give you for H2? So, no, we are not repricing existing order books. So that is why there has been a lag on the price increase coming through and why it's coming through stronger in this second half of this financial year than it did in the first. I said our order book is still healthy for the group. We've got three months or so of order book going forward now, which for us is good. Okay, thanks. And the third part of this question, I think is probably going to be quite short answer. But, when we last heard from you, you said discussions were ongoing about the 53% stake held by Sir David and John Deere, are these discussions still ongoing? So yes, these discussions are still ongoing and we're discussing it regularly. And we're good discussions on it. And unfortunately, as I think everyone knows, we really can't comment on this. Okay, thanks. And then the final part of this question. Can you give us a percentage split of encoder revenue between laser and optical? We've already touched on AM. But here's a slightly different question relating to additive manufacturing. What types of end products are your AM machines being used for? Look sure, Will is going to take that one. Yes, so a vast range actually already from the sort of traditional ones that have aerospace, defense, dental, auto implants, through to sort of some of the newer stuff that we talked about six months ago of consumer electronics, where the volumes are clearly much higher. So a wide range, I think the important thing here maybe is looking at the future. When this becomes more and more a proven way for all sorts of parts of the future and becomes a really established manufacturing process. Not just where you want meet new features or something special, but as a way of making parts more sustainably using less material and energy in the long term in the future. That's great. Thank you. Okay. We're going to appear to be the last couple of questions now if you do have any more questions then please send them through. Question here on working from home. So what percentage are still of your employees still working from home, if any, and I'll start with Will on that one. So you got to look really at the job function and the role of that employee within the business. So we still, and we will, I think forever have a high percentage of our software engineers working remotely or connected on teams, reviewing code on each other's screens and it's a highly effective way of working. At the other stream, clearly manufacturing, we're always in, I have always been in to make product. What we're seeing now is actually, really from a developing hardware versus software development in the hardware people are in working together developing new products, and that's the most productive way of doing that. So it's a really a split across the board. Okay, thanks. And this may well be our last question less than one would like to submit anything quite quickly. Distribution costs seem to have increased 20% against sales, increasing 7%. Should we assume distribution costs have stabilized here? Was there any abnormal expenses in first half as you caught up on expenditures, and I think that one's probably going to Allen? What we are seeing -- we are seeing here is an increase in more customer facing activities, and hence we're seeing an increase in expedition costs and travel costs, because not a lot took place during the pandemic. But we're not back to pre-pandemic levels, right now. There is nothing abnormal in the first half. So we've more normalized. And of course, there is the impact of the annual peer review that took effect in the first half of this year. Okay, Allen, well, that is all the questions that we've had submitted. So thank you very much to everyone that's attended. Obviously, we've done this in a slightly different way this year. So if there is any feedback positive or negative, then please do send that through to the communications@renishaw.com email address. That'll be much appreciated. As ever, we'll aim to publish a recording of this webcast on the investor relations section of our website by tomorrow morning. So on behalf of we've had actually we've had one question submitted just before the end, so we'll take it we have a few minutes. So the question is on a special dividend, question was asked during last webinar, on the Board was reported to be considering such a payment. Any update on that? Allen, Iâll [indiscernible], Thanks, Chris. Yes, I think this sort of forms part of what we have our capital allocation strategy. And maybe I'll just spend a moment just going through that. We -- our priority is focusing on our organic growth. And the investment is required in our existing businesses, including capital expenditure. We also then look at the minimum cash target that we've set internally deferred to accommodate any particular severe downturns that may occur. So that we've got, if you'd like rainy day money for that, to have a contingency fund to protect us in severe downturn scenario. We also there -- we also looking at maybe supplementing the organic growth with some small acquisitions maybe. And we also have what we call a progressive dividend policy for delivering regular cash returns to our shareholders. We do have significant cash balances and we do have minimum cash holdings that we determined internally and that possibly there could be a return or distribution to shareholders. But currently, there are no plans to do so. Okay, thanks, Allen. That really is that it now no more questions that come in. I hope you've enjoyed the session. We've almost gone to the full 45 minutes. So thanks again for attending. And have a good day everyone.
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EarningCall_815
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Good day, and welcome to M.D.C. Holdings 2022 Fourth Quarter 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. I would now like to turn the conference over to Derek Kimmerle, Vice President and Chief Accounting Officer. Please go ahead. Thank you. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2022 fourth quarter earnings conference call. On the call with me today, I have Larry Mizel, our Executive Chairman; David Mandarich, Chief Executive Officer; and Bob Martin, Chief Financial Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question-and-answer session, at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com. Before turning the call over to Larry and David, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operations, cash flows, strategies and prospects and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company's actual performance are set forth in the company's 2022 Form 10-K, which is expected to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides. Thank you for joining us today for a review of our operating results for the fourth quarter and full year 2022, and an update of our strategies for navigating today's new home landscape. MDC reported net income of $562.1 million for the 2022 full year, or $7.67 per diluted share, representing one of the most profitable years in our company's history. We generated $5.6 billion in homebuilding revenues and produced a gross margin from home sales of 22.4%, which is a testament to the strong demand environment we experienced earlier in the year and solid execution by our homebuilding teams despite persistent operational headwinds. We are proud of these accomplishments, and I want to thank all of our team members for their contributions in making 2022 such a profitable year. As we turn our attention to 2023, we face a much different housing environment than the one that was in place at the beginning of 2022. The demand tailwinds we enjoyed in 2021 in the first half of 2022 namely low mortgage rates and high consumer confidence turned against us in the second half of the year creating a much more difficult selling environment. Buyers became more cautious and the value proposition that homeownership presented became much less compelling through the combination of rapid home price appreciation and higher financing costs. These headwinds led to a sharp drop in new order activity and a big increase in cancellations in the third and fourth quarter, resulting in a much smaller backlog to start 2023 as compared to the beginning of 2022. In response to these new market realities, we have taken decisive steps to adjust our business practices and stay competitive in our markets. We delivered a significant portion of our high margin backlog in the third and fourth quarters of 2022, allowing us to be more aggressive in our approach to pricing and incentives as we enter the spring selling season. We realize that most homebuyers or trying to solve for a monthly payment that meets their budget, and we have multiple levers that we can at use to address their affordability needs. In addition, we have an increased and expect to continue to increase our spec home construction starts to appeal to buyers who are willing to forgo some personalization with their homes in exchange for a faster close. This should keep our inventory turns moving in the right direction, help reduce our cycle times, and reduce the number of cancellations as compared to the previous two quarters. Another way of bringing our cancellation rate down is through higher deposit requirements in our build to order homes, buyers in general must now put down 5% in order for us to move forward and a new build versus the 2% we required in more favorable times. In addition, we have modified our deposit requirements on options and upgrades purchased at our home gallery studios. These changes should result in a more stable backlog and give us better visibility into our delivery schedules for build to order homes. Despite the near term challenges facing our industry, we remain confident in the long term outlook for new home construction. Existing home inventory remains at a historically low level on a national basis, and there continues to be a strong desire for home ownership by a large segment of the population. We believe that comparisons made between this housing correction and the one we experienced during the 2007 and â08, financial crisis or unwarranted. U.S. households are in a much better shape today than they were 15 years ago. And today's unemployment levels remain incredibly low despite the best efforts of the Federal Reserve to slow the economy. In addition, we have a much more stable and closely regulated mortgage finance system in place today, which has curtailed much of the speculative activity that led to the last downturn. We also have the benefit of hindsight and wisdom that comes from weathering a difficult downturn, which has led to a more resilient and return focused industry. All of these factors give us confidence in the future of our industry and the outlook for our company. Now I'd like to turn the call over to David, who will provide more detail on our operating results this quarter. Thank you, Larry. The soft demand trends we experienced in the third quarter carried into the fourth quarter as buyers remain cautious about moving forward with their purchase. However, we did see a pickup in demand starting in December, once we reduced pricing and increased incentives. We believe this is a good sign that the price of elasticity exists in our markets and that the buyers remain active and engaged, despite the higher interest rate environment. Cycle times remained stubbornly long in the fourth quarter despite some improvements we've made in our internal processes, which reduced the time between sale to start and finish to close on a year-over-year basis. Ongoing challenges relating to municipal delays labor and product availability to finished arms continue to be a headwinds for our industry. We expect to see some relief on these fronts once the current slowdown in demand works its way through the system. Another area in which we expect to see some relief is on the cost side. Lumber prices have been moving down for some time and we expect to see the benefit of this downward movement in our results as we move through 2023. We have been working closely with our trades, suppliers and vendors to make sure the prices we pay stay a more competitive and reflect today's slowing market conditions. We are also being very vigilant about our overhead costs and we'll continue to look for ways to do more with less. With respect to land, we have taken decisive action to adjust our lot (ph) position and renegotiate the terms of many option agreements. We expect to see real opportunities for land investment as better terms and pricing has been recently available. Overall, we expect 2023 to be a year of continued adjustment for our industry, but I share Larry's enthusiasm for the future of our industry. We remain committed to the markets we're in and see a long runway for growth once industry fundamentals stabilize. MDC has been building homes for over 45 years and has been through numerous downturns. We know how to navigate through difficult times and how to capitalize on opportunities that arise from market dislocations such as this. We are well positioned both in a financial way and operational perspective to address the challenges of today and look forward to building on the legacy of MDC and Richmond American Homes. Thanks, David, and good morning, everyone. During the fourth quarter, we generated net income of $79.8 million, or $1.08 per diluted share, representing a 51% decrease from the fourth quarter of 2021. Pretax income from our homebuilding operations for the quarter were $94.5 million, which represented a 51% decrease from the fourth quarter of 2021. This decrease was primarily due to inventory impairments of $92.8 million recorded during the quarter, impacting 10 communities within our West segment and six communities within our Mountain segment. The impairments mostly related to communities already open for sale, as well as a few communities scheduled for opening during the first quarter of 2023. This decrease was partially offset by home sale revenues, which rose 4% year-over-year to $1.49 billion. Our financial services pretax income increased during the fourth quarter of 2022 to $18.7 million. This increase was primarily due to increased insurance premium revenue recognized by our captive insurance companies. Our tax rate increased from 22.2% to 29.5% for the 2022 fourth quarter. The increase in our current quarter rate was driven by an increase in our estimated state tax rate whereas the prior year benefited from the reversal of an uncertain tax position. For 2023, I would roughly estimate an effective tax rate of 25.5%, which includes our current estimate of the anticipated benefit under the new 45L energy efficient home tax credit. This estimate does not include any discrete items or any potential changes in tax rates or policies. We delivered 2,554 homes during the quarter, which represented a 4% decrease year-over-year, but exceeded the previously estimated range for the quarter of 2,200 to 2,500 closings. Our backlog conversion rate in the fourth quarter was 48%, which represented a 1,300 basis point improvement from the fourth quarter of 2021. This was due to an increase in the number of quick move-in homes we sold and closed during the fourth quarter, which accounted for nearly 500 closings or 19% of our total deliveries for the quarter. These quick move-in or spec homes were the result of cancellation activity during the second half of 2022 and to a lesser extent, strategic spec construction starts from earlier in the year. Our ability to convert these homes into closings played a big role in exceeding our closing guidance for the quarter. The average selling price of homes delivered during the quarter increased 8% to $582,000. This was primarily the result of price increases implemented during 2021 and the first quarter of 2022, which were partially offset by an increase in incentives. We currently anticipate home deliveries for the 2023 first quarter of between 1,500 and 1,600 units and we expect the average selling price of these units to be between the $550,000 and $560,000. There continues to be a heightened risk of underperformance relative to our forecast, as we look forward to the first half of 2023, due to the increased volatility of economic and industry conditions. Gross margin from home sales decreased by 850 basis points year-over-year to 15%. Excluding inventory impairments, gross margin from home sales decreased only 230 basis points to 21.3%. The decrease was primarily due to increased incentives as well as increases in land and construction costs year-over-year. These items were partially offset by higher base house pricing due to price increases implemented in the 2021 and the first quarter of 2022. We are currently expecting gross margin from home sales for the 2023 first quarter of between 18% and 19%, assuming no impairments or warranty adjustments. Our total dollar SG&A expense for the 2022 fourth quarter increased $1.8 million from the 2021 fourth quarter, driven by increased commission expenses as a result of the increase in home sale revenues. As noted last quarter, we continue to take steps to reduce our general and administrative expenses and saw these expenses decrease during the fourth quarter of 2022, both sequentially from the third quarter, as well as on a year-over-year basis when compared to the fourth quarter of 2021. We currently estimate that our general and administrative expenses for the first quarter of 2023 will be between $50 million and $55 million, which represents a $19.5 million or 27% decrease from the first quarter of 2022 at the midpoint. The dollar value of our net orders decreased 95% year-over-year to $74.4 million, due to a 93% decrease in net unit orders. Net unit orders were negatively impacted by the number of cancellations during the quarter, which nearly doubled from the prior year to 1,312 cancellations. While our cancellation rate as a percentage of homes in backlog has been above our historical average during the second half of the year, these cancellations have provided us with a source of quick move-in homes at a time when more buyers are looking for homes that can close quickly in order to provide certainty as to their ultimate mortgage rate at closing. As Larry mentioned at the outset, due to this change in consumer preference, and the ongoing uncertainty around mortgage rates that has negatively impacted the build to order market, we have pivoted our strategy to focus on more speculative construction starts to supplement build to order construction activity. Before cancellations, our gross order activity for the fourth quarter was down 55% year-over-year and 4% from the third quarter of 2022. 74% of our fourth quarter gross order activity was for spec inventory with a sizable portion of those orders contributing to fourth quarter closings. Looking at our average selling price of new orders, we analyzed this metric on a gross basis given the magnitude and mix of cancellation activity during the quarter. On a gross order basis, our average selling price of new orders decreased approximately 1% as compared to the prior year and approximately 6% as compared to the third quarter of this year. The decrease in our average selling price from the third quarter of 2022 was due to an increase in incentives as well as a decrease in base pricing across many of our communities. Our Active subdivision count was at 225 to end the quarter, up 20% from 17% a year ago. Looking at the graph on the right, the number of soon to be active communities significantly exceeded the number of soon to be inactive communities at December 31, 2022. This indicates a strong possibility that our active subdivision count will continue to increase as we enter the 2023 spring selling season. During the fourth quarter, we acquired 258 lots, resulting in total land acquisition spend of $38 million and incurred $119 million of land development costs. For the full year, we invested $1 billion in land acquisition and development, which represented a 46% decrease from the prior year. As of year-end, we had $19 million in cash deposits, $3.7 million in letters of credit and $3.4 million of capital costs at risk associated with the 3,703 lots remaining under option. Our financial position remains among the best in the industry as of year-end. With our slowdown in land acquisition and development activity during the year, operating cash flows increased to $905.6 million for the full year 2022 compared with $208 million of cash used to fund operating activities during fiscal 2021. We ended the year with $1.28 billion of cash and short-term investments. Thanks to our opportunistic senior note issuances during 2021, we entered 2023 with a very attractive capital structure, highlighted by the fact that we have no senior note maturities until January 2030. Our year end debt-to-capital ratio was 32.6%, and our net debt-to-capital ratio was just 6.6% to end the year. Our book value per share at December 31, 2022 was $42.60, which represented an increase of 23% year-over-year after adjusting for our industry-leading cash dividend. We ended the year with 4,770 homes under construction, which is a 34% decrease from the prior year end. Spec homes comprised 31% of our homes under construction at year end, and we expect this percentage to increase in the near term as we continue to supplement our build-to-order construction activity with the construction of spec homes. In summary, we remain confident in the long-term growth prospects for the industry given the underproduction of new homes over the past decade and the strong desire for homeownership in this country. Our strategic decision to build more spec inventory should provide us the inventory we need to satisfy current consumer preferences and give us the opportunity for another very profitable year in 2023. Similar to past home building cycles, we believe we are well positioned to navigate today's evolving market conditions given our seasoned leadership team and strong financial position. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Stephen Kim with Evercore ISI. Please go ahead. Yeah. Thanks very much, guys. Appreciate the color. I think you had even last quarter, talked about maybe changing the -- some of your policies regarding the deposit earnest money that you're taking. And it's interesting to hear you're talking about making this change to your spec strategy. So obviously, we've seen your spec count per community increasing in the back. You made it sound in your prepared remarks this time and also last quarter, that, that was kind of unintentional that, that was really just due to cancellations. So is it correct to think that this change to your spec strategy is something that you are really just starting to implement to be deliberately doing some more specs in January or was there some point in the fourth quarter where you made that change? And how many specs per community should we be anticipating that you'll run with for as long as the customer is behaving the way they are? Steve, it's Dave. Good morning. Good afternoon, in your case. You know what, I think that we made some changes in the fourth quarter and we did a little bit more changes yet this quarter, and maybe Bob can kind of go through some of the numbers. But we do think, based on the consumer today is they want a house, they want to close in three or four months. So we feel pretty good about the strategy of building some inventory houses. Plus, as you well know, today, people want to know what their house payment is going to be, and they're going to feel a lot better about buying a house that they can get closed into 60 to 120 days, and they'll know what the mortgage payment is. Bob, what can you add to that? Yeah. I think really in terms of the starts, intentionally starting the specs, you'll see that more in earnest here in the first quarter. The idea is to keep our production levels up. And as David mentioned, really make sure that we are meeting the needs of our customers. At the same time, we are still offering build to order as well. So I don't think there's a long-term target on the number of specs. I think we're going to play that by year and look at what the market is telling us. But we are committed to adding that spec strategy and maintaining it here in the near future. So you ran at 6.6 specs per community, I think, this quarter, you were five last quarter. Historically, you've generally run around two and change. Some of your peers that are kind of hybrid, I would say, are kind of running close to 10. So I'm inclined to model, but you're going to run at about 10 specs per community in the near term. So correct me, if I'm a little wrong on that, maybe too high or too low. And then in terms of your gross margin, I believe you had indicated previously the gross margin on specs as a little higher than on dirt closings. I was curious if that's still the case or if I remember that incorrectly, if you could just give us a sense for your gross margins on specs this quarter or quick move-in homes were they higher or lower than the BTOs? This quarter, they were about 100 basis points lower for closings due to some of the incentives that we offered during the fourth quarter. Yeah. I don't think it's unreasonable that that's the way the math would work out. I think you calculated roughly six per community at this point as you look at what is currently on balance sheet. So to see it migrate up or to a greater percentage of the homes we have under construction at any given point in time, I think it's a reasonable assumption. Hey. Good morning, everyone. Thanks for taking my questions. And Larry, please don't tap the Fed over the low unemployment rate. So Bob, just hoping you can give us a little color on January trends. When I'm looking at your fourth quarter orders, clearly, you had elevated cancellation rates, but now you're making changes to your spec strategy. You're pushing incremental incentives. Clearly, it's kind of muddied right now. So I'm hoping you could just let us understand how January is trending regarding orders maybe on a year-over-year basis? And how you all are kind of thinking about 1Q? Yeah. So year-over-year, I think it's a little confusing, Truman, because we were still in a period of time where rates were really low. So I'm not sure that's a really fair comparison. But versus December, and keep in mind, December was our best orders month, both gross and net for the fourth quarter. So relative to December, for January, I expect both gross and net orders to exceed our December activity. And that's with a lower number of cancellations in January relative to December. So that's something that we'd really like to see. Okay. Thank you. And again, I realize seasonality is a little strange right now, but would you characterize January as above normal seasonality as we sit today? It's tough to really peg seasonality at January versus December when you're coming off of a very simultuous time, but I would say it certainly gives us a good bit of optimism going into spring. Okay. Perfect. And then any chance you could help us quantify the magnitude of any potential cost tailwinds you're experiencing as of like today's starts, I realize lumber is down meaningfully year-over-year. It might have popped back up some recently, but hoping you can help us think through some of the potential cost savings outside of lumber. I think those are still materializing. We might, I think, relative to the peak be in the 4% to 5% range outside of lumber. But as you indicated, really lumber is the biggest potential tailwind at this point. Hi. This is Andrew (ph) on behalf for Mike. Thank you for taking my question. I wanted to ask if you would be able to give any color on the potential for any future land impairments or how we should be thinking about that? Land impairments is an analysis we do on a quarterly basis. And really, one of the biggest contributing factor is pricing and whether that's base pricing or incentives. So to the extent that we have a decrease in base pricing or an increase in incentives that is significant, we could realize additional impairments just as we did in Q4. So not really much more to say about it than that. We try to be very thorough every quarter going through our assets and making sure we do a very thorough analysis and take the impairments as appropriate. Okay. Appreciate it that. And I apologize if I missed this. Did you ever break out the incentives in the quarter as compared to last quarter? Versus Q3. So Q3, we talked about 800 basis points of incentives, and that's on sales. In Q4, that was closer to 1,200 basis points on sales. On closings for Q4, it was about 800 basis points. Hi. Thanks for taking my question. So in the past, you guys have really largely resisted doing more spec building for a number of reasons. And we agree with the interest rate dynamics, it makes it more attractive to home buyers having this quick moving product, but your business seems really built upon built-to-order from your sales strategy and revenue generation with your options and upgrades to your overhead structure. So how confident are you in being able to execute this pivot compared to other homebuilders who specialize in the sales model? And how can you compete from a cost perspective? This is David speaking. I'll tell you, we're very encouraged over the last couple of months because we are getting a percentage of what I call build-to-order houses. And I think this month, Bob will go through the numbers, but we're seeing a lot of customers that are coming in I want my lot in my house I'm going to give you a deposit, I want to pay whatever it is for upgrades at our home gallery. So we've got a number of customers that are looking at that kind of product. In the past, we've done mainly that kind of product. And so we're excited that there's customers out there that really are willing to wait for that kind of house, but they want their house on their lot with their options. So Bob, you might kind of go through the numbers. Just to step in here and clarify. I'm just curious about your ability to execute the spec strategy given that's kind of veering away from the build-to-order model that your business kind of built around. So in terms of like selling specs, particularly, how confident are you in being able to compete against some of your competitors who specialize in this strategy, the spec strategy? I'd say we're very confident. I mean, we executed it really well at fourth quarter. And Larry, I've been doing this for 46 years. So over time, we've had times where we did inventory houses. I think the last couple of years, we've just been built to order, but we're very confident on the execution and the product that we're putting out. Bob? No, I think that's absolutely right. There's a lot of experience during the period of time where it's much higher spec concentration, what we saw as a percentage for now. We were about 25% dirt for orders and about 75% spec. So we have pivoted. We think that makes sense. We think we can execute, and it's in line with consumer preferences. So we definitely have the team to execute on that strategy. Absolutely. Thanks for that. And then just a quick follow-up. Are you altering the product given presumably you generate a fair amount of revenue through your design studio. So how are you thinking about creating these spec homes? Are you just trying to drive the price lower versus your build-to-order product? Well, I'll just start off, and Bob can probably enhance it a little bit. But essentially, what we've done is we looked at customer preferences on dirt starts, we put those kind of preferences in our inventory houses, including what I call some sunrooms or patios or cabinet types. But we think we've looked at the metrics, and we feel really good about what our inventory houses would look like when they're finished. Yes, I think that's absolutely right. We basically looked at the take rate for both structural upgrades and design center upgrades, and we're trying to emulate that see what's the most popular. So as a result, it really should put us in the same range of options and upgrades that we had before. It just so happens that a lot of them are now going to be preselected for many of our consumers versus them selecting them. Got it. So is the ASP roughly on par with your build-to-order product when all said and done or what -- just lastly, what's kind of the variance there as it can today? Yes. I wouldn't see necessarily a huge variance in ASP just because of that. I mean right now, the metrics on spec versus dirt ASP could be a little bit skewed just depending upon where the cancellations have come to and therefore, where the spec inventory is the highest. But for now, I think the intent is not to reduce the average selling price because of the spec strategy. This concludes our question-and-answer session. I would like to turn the conference back over to Bob Martin for any closing remarks. Thank you all for joining the call today. We look forward to hosting you again when we announce our Q1 2023 results.
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Good morning, everyone, and welcome to the CMS Energy 2022 Year End Results Call. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] Just a reminder, there'll be a rebroadcast of this conference call today beginning at 12 PM Eastern Time running through February 9th. This presentation is also being webcast and is available on CMS Energy's website in the Investor Relations section. At this time, I would like to turn the call over to Mr. Sri Maddipati, Treasurer and Vice President of Investor Relations and Finance. Thank you, Adam. Good morning, everyone, and thank you for joining us today. With me are, Garrick Rochow, President and Chief Executive Officer; and Rejji Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. 2022, an outstanding year at CMS Energy, both operationally and financially. And even more than that, 2022 marks the 20th year CMS Energy has consistently delivered industry-leading financial performance. Many of you have been on this journey with us. And I appreciate you and I thank you. You see us put our words into action. Our performance is supported by our simple investment thesis, which delivers for our customers and investors. We continue to lead the clean energy transformation. Our net zero commitments backed up by the solid plans in approved Integrated Resource Plan, IRP, provide certainty for investments in clean energy and highlight the supportive regulatory construct in Michigan. Across the company, we are disciplined about taking cost out and working every day to get better. We use the CE Way from corporate functions to the frontline to achieve our operational and financial objectives. This focus keeps customer bills affordable. On the regulatory front, it's been an incredible year. We sold not one, not two, but three major cases highlighting the top-tier regulatory backdrop in Michigan. All of this leads to a premium total shareholder return you've come to expect from CMS Energy. I want to take a few minutes to share some of the big wins we had over the year. First, our commitment to people, our co-workers, who show up every day with the heart of service, and our customers who count on us to be there in any weather with safe, reliable, affordable and clean energy. In 2022, we were recognized nationwide as the Best Employer for Women in the Utility Sector, a Top Employer for Diversity and one of the Best Large Employers by Forbes, this team of co-workers, who continue to deliver results, utilizing the CE Way. In 2022, our co-workers commitment to being best-in-class in the operation of our generating assets saved our customers roughly $560 million. This is more than double what we delivered in 2021 mean our team continues to drive more value by running our own generation, more efficiently than the market. Just to make this real, in December, during the storm Elliott, when others were short power, this team and these generation assets were exporting energy out of Michigan into MISO. And I'm also pleased with the growth in economic development we've seen and helped lead in the state. As I shared in the Q3 call semiconductors, polysilicon and battery manufacturing, up all calling Michigan Home, 230 MW of new and expanding load with over $8 billion of investment in Michigan. A recent Department of Energy study ranks Michigan as a Top 3 state for planned battery plant capacity further differentiating our state and service territory. Our commitment across the state have delivered more load growth, more jobs and more investment, all of which create an environment. And our state looks strong well into the future. We remain focused on getting ready for that future with our IRP, which delivers even more savings to our customers with roughly $600 million in savings over our prior plan and reduces our carbon footprint by over 60% as we exit coal in 2025 amid 8 gigawatts of store and 550 megawatts of battery through 2040. We continued our long track record of managing costs and keeping prices affordable through the CE Way, and delivering $58 million of savings in 2022. This level of discipline to continuously improve has been a contributor to the successful regulatory outcomes in our settled electric and gas rate cases, which is highlighted by the $47 million of regulatory mechanisms to support infrastructure investments and assist customers. This year both our customers and investors will benefit from our $22 million voluntary refund mechanism, a $15 million bill credit and $10 million of customer assistance. These regulatory mechanisms de-risk 2023, while providing needed customer benefit. It's this strong execution in these results that you and we expect and meet our commitment to the triple bottom-line positioning our business for sustainable long-term growth. 2022 marks another year of premium growth. The team continued to deliver regardless of conditions. In 2022, we delivered adjusted earnings per share of $2.89 at the high-end of our guidance range. I'm also pleased to share that we are raising our 2023 adjusted full-year EPS guidance to $3.06 to $3.12 from $3.05 to $3.11 per share, compounding off of 2022 actuals like you would expect from a premium name like CMS Energy. We continue to expect to be toward the high-end of this range, which points to the midpoint or higher signaling are confident as we start the year in a strong position. Furthermore, the CMS Energy Board of Directors recently approved a dividend increase to $1.95 per share for 2023. Longer-term, we continue to have confidence toward the high-end of our adjusted EPS growth range of 6% to 8%, and we continue to see long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time. And finally, I'm pleased to share we have refreshed our five-year utility customer investment plan, increasing our prior plan by $1.2 billion to $15.5 billion through 2027. I have confidence in our plan for 2023 and beyond given our longstanding ability to manage the work and consistently deliver industry-leading growth. It's no coincidence that I started my prepared remarks with our investment thesis. We live by it and it works. On Slide 6, we've highlighted our new five-year $15.5 billion utility customer investment plan. This translates to greater than 7% annual rate base growth in support safety and reliability investments in our electric and gas systems and paves the way to a clean-energy future when net zero carbon, methane and greenhouse gas emissions. You will note that about 40% of our customer investments support renewable generation, grid modernization and maintenance service replacements on our gas system, which are critical as we lead the clean energy transformation. Bottom line, we have a long and robust capital runway. Beyond our core investments, we have growth drivers outside of traditional rate base. This includes adders built into legislation where incentives on our energy efficiency and demand response programs and the financial compensation mechanism, FCM we earn on PPAs. We also expect incremental earnings provided by our non-utility business NorthStar Clean Energy as they see continued growth in their contracted renewables, as well as better pricing from capacity and energy sold at our DIG facility. We continue to earn a 10.7% ROE on renewables to meet our renewable portfolio standard and are in the process of completing Heartland Wind Project in 2023. These regulatory incentives are a core part of Michigan's energy law which with our strong regulatory construct continues to support needed customer investments. In addition, the Energy Law provides certainty of recovery before looking 10-month rate cases in regular fuel tracking mechanisms and allow us to help smooth the impact of commodity prices for our customers. I used the word incredible to describe this earlier. We delivered across the board the settlements in IRP and our gas and electric rate cases providing more certainty for 2023 customer investments. This wasn't by accident. We have a supportive law, strong regulatory construct and our improved regulatory approach enables us to work with multiple parties on complex cases and provide the best outcome for our customers and investors. And we plan to continue the strong performance in the next rate case cycle. We filed our gas case in December and we file our next electric rate case later this year with those outcomes providing further certainty for 2024 customer investments. We know a robust customer investment plan in strong regulatory construct loan do not support sustainable growth. Our customers count on us to keep their bills affordable. Inflation has been top of mind for many throughout 2022 and remains so as we enter 2023. First, I'll remind everyone that CMS Energy is well positioned as it relates to the key sources of inflation including labor, materials and commodities. In addition, we delivered roughly $150 million in CE Way savings over the last three years and estimate over $200 million in large, episodic savings as PPAs expire and as we exit coal generation. We're also seeing significant new and expanding commercial and industrial load in our service territory. There is a broad spectrum of growth. Some customers have opened new facilities this year and some are in early construction. These new sales opportunities, both in the short and long-term, allow us to spread our costs across a growing customer base, ultimately reducing rates for all of our customers. It should be no surprised why I'm pleased with 2022, and confident in the 2023 outlook. This proven approach continues to deliver. As Garrick highlighted, we delivered strong financial performance in 2022 with adjusted net income of $838 million, which translates to $2.89 per share at the high end of our guidance range. The key drivers of our full year 2022 financial performance were higher sales, driven by favorable weather and solid commercial and industrial load. The latter of which is indicative of the attractive economic conditions in our service territory and rate relief net of investments. These positive drivers were partially offset by higher expenses attributable to discrete customer initiatives, which reduce bills, support our most vulnerable customers and improve the safety and reliability of our gas and electric systems. Our strong performance in 2022 provided significant financial flexibility at year end, which, as Garrick highlighted, enabled us to de-risk our 2023 financial plan to the benefit of customers and investors, which I'll cover in more detail later. To elaborate on the strength of our financial performance in 2022, on Slide 10, you'll note that we met or exceeded the vast majority of our key financial objectives for the year. From an EPS perspective, our consistent performance above plan over the course of 2022, enabled us to raise and narrow our 2022 adjusted EPS guidance on our third quarter call. From a financing perspective, we successfully settled $55 million of equity forward contracts as planned and more notably opportunistically priced approximately $440 million of equity forward contracts at a weighted-average price of over $68 per share. To address the parent company's financing need for the pending acquisition of the Covert natural gas generation facility in support of our IRP. The only financial target missed in 2022 was related to our customer investment plan at the utility, which was budgeted for $2.6 billion. We ended the year just shy of that at $2.5 billion, primarily due to the timing of a wind project in support of Michigan's renewable portfolio standard, which was largely pushed into 2023, and is now under construction. Moving to our 2023 EPS guidance on Slide 11, as Garrick noted. We are raising our 2023 adjusted earnings guidance to $3.06 to $3.12 per share from $3.05 to $3.11 per share with continued confidence toward the high end of the range. As you can see in the segment details, our EPS growth will primarily be driven by the utility as it has for the past several years and we also assume modest growth for non-utility business NorthStar Clean Energy. Finally, we plan for limited activity at the plant given the lack of financing needs in 2023, beyond the settlement of the aforementioned equity forward contracts for the Covert acquisition, while maintaining the usual conservative assumptions throughout the business. To elaborate on the glide path to achieve our 2023 adjusted EPS guidance range, as you'll note on the waterfall chart on Slide 12, we'll plan for normal weather, which in this case, amounts to $0.20 per share of negative year-over-year variance, given the absence of the favorable weather we saw in 2022. Additionally, we anticipate $0.14 of EPS pickup attributable to the rate - attributable to rate relief, largely driven by our recent electric and gas rate orders and the expectation of a constructive outcome in our pending gas rate case later this year. As always, our rate relief, figures are stated net of investment-related costs such as depreciation, property taxes and utility interest expense. As we turn to our cost structure in 2023, you'll note $0.04 per share of positive variance attributable to continued productivity, driven by the CE Way and other cost reduction initiatives underway. Lastly, in the penultimate bar on the right hand side, we're assuming the usual conservative estimates around weather-normalized sales and non-utility performance coupled with the benefits of the significant reinvestment activity deployed in the fourth quarter of 2022 through a regulatory filings and traditional operational pull ahead. These assumptions equates to $0.19 to $0.25 of positive variance versus 2022. As always, we'll adapt to changing conditions throughout the year to mitigate risks and deliver our operational and financial objectives to the benefit of customers and investors. On Slide 13, we have a summary of our near and long-term financial objectives. To avoid being repetitive, I'll limit my remarks to the metrics we have not yet covered. From a balance sheet perspective, we continue to target solid investment grade credit ratings and we'll continue to manage our key credit metrics accordingly. To that end, we'll look to settle the equity forward contracts for the Covert financing in the second quarter of 2023 and have no additional planned equity financing need until 2025. In the outer years of our plan, we intend to resume our At The Market or ATM equity issuance program in the amount of up to $350 million per year in 2025 through 2027, given the substantial increase in our five-year utility customer investment plan. And as such, you can expect us to file a - perspective supplement to reflect this revision to our ATM program later this year. Slide 14 offers more specificity on the balance of our funding needs in 2023, which are limited to debt issuances at the utility, a good portion of which has been priced and or refunded over the past several weeks as noted on the page. In fact, the $825 million of utility bond financings address to date include the $400 million tranche of debt financing required to fund the acquisition of Covert in the second quarter. So we have fully de-risked our financing needs for that critical component of our IRP well in advance with attractive terms to the benefit of customers and investors, which I'll cover in more detail later. To elaborate on the strength of our financial performance in 2022 on Slide 10, you'll note that we met or exceeded the vast majority of our key financial objectives for the year. From an EPS perspective, our consistent performance above plan over the course of 2022, enable us to raise and narrow our 2022 adjusted EPS guidance on our third quarter call. From a financing perspective, we successfully settled $55 million of equity forward contracts as planned and more notably, opportunistically priced approximately $440 million of equity forward contracts at a weighted average price of over $6 to $8 per share to address the parent company's financing needs for the pending acquisition of the covert natural gas generation facility in support of our IRP. The only financial target missed in 2022 was related to our customer investment plan at the utility which was budgeted for $2.6 billion. We ended the year just shy of that at $2.5 billion, primarily due to the timing of a wind project in support of Michigan's renewable portfolio standard, which was largely pushed into 2023 and is now under construction. Moving to our 2023 EPS guidance on Slide 11. As Garrick noted, we are raising our 2023 adjusted earnings guidance to $3.06 to $3.12 per share from $3.05 to $3.11 per share with continued confidence toward the high end of the range. As you can see in the segment details, our EPS growth will primarily be driven by the utility as it has for the past several years, and we also assume modest growth for our nonutility business, North Star Clean Energy. Finally, we plan for limited activity at the parent given the lack of financing needs in 2023 beyond the settlement of the aforementioned equity forward contract for the Covert acquisition, while maintaining the usual conservative assumptions throughout the business. To elaborate on the glide path to achieve our 2023 adjusted EPS guidance range, as you'll note on the waterfall chart on Slide 12, we'll plan for normal weather, which in this case amounts to $0.20 per share of negative year-over-year variance, given the absence of the favorable weather we saw in 2022. Additionally, we anticipate $0.14 of EPS pickup attributable to rate relief, largely driven by our recent electric and gas rate orders and the expectation of a constructive outcome in our pending gas rate case later this year. As always, our rate relief figures are stated net investment-related costs such as depreciation, property taxes and utility interest expense. As we turn to our cost structure in 2023, you'll note $0.04 per share of positive variance attributable to continued productivity driven by the CE Way and other cost reduction initiatives underway. Lastly, the ultimate bar on the right-hand side were stemming the usual conservative estimates around weather-normalized sales and nonutility performance, coupled with the benefits of the significant reinvestment activity deployed in the fourth quarter of 2022 through our regulatory filings and traditional operational pull ahead. These assumptions equate to $0.19 to $0.25 of positive variance versus 2022. As always, we'll adapt to changing conditions throughout the year to mitigate risks and deliver our operational and financial objectives to the benefit of customers and investors. On Slide 13, we have a summary of our near- and long-term financial objectives. To avoid being repetitive, I'll limit the metrics we have not yet covered. From a balance sheet perspective, we continue to target solid investment-grade credit ratings, and we'll continue to manage our key credit metrics accordingly. To that end, we'll look to settle the equity forward contracts for the Covert financing in the second quarter of 2023 and have no additional planned equity financing needs until 2025. In the outer years of our plan, we intend to resume our at-the-market, or ATM, equity issuance program in the amount of up to $350 million per year in 2025 through 2027 and given the substantial increase in our 5-year utility customer investment plan. And as such, you can expect us to file a prospectus supplement to reflect this revision to our ATM program later this year. Slide 14 offers more specificity on the balance of our funding needs in 2023, which are limited to debt issuances at the utility a good portion of which has been priced and/or funded over the past several weeks as noted on the page. In fact, the $825 million of utility bond financings addressed to date include the $400 million tranche of debt financing required to fund the acquisition of Covert in the second quarter. So we have fully derisked our financing needs for that critical component of our IRP well in advance with attractive terms to the benefit of customers and investors. And as a reminder, the acquisition of the Covert natural gas facility will enable us to exit coal generation in 2025 and which makes us one of the first vertically integrated utilities in the country to do so. To conclude my remarks on Slide 15, we've refreshed our sensitivity analysis on key variables for your modeling assumptions. As you'll note, with reasonable planning assumptions and our track record of risk mitigation, the probability of large variances from our plan is minimized. Our model has served and will continue to serve all stakeholders well. Our customers receive safe, reliable and clean energy at affordable prices. Our diverse workforce remains engaged, well-trained and in our purpose-driven organization, and our investors benefit from consistent industry-leading financial performance. Our simple investment thesis is how we run our business and has withstood the test of time. It delivers in a very balanced way for all our stakeholders and enables us to consistently deliver our financial objectives. 2022 was an outstanding year, marking our 20th year of industry-leading financial performance. I'm confident in our refresh $15.5 billion utility customer investment plan, the ability to execute on it and in our regulatory construct to support it as well as our solid track record of managing costs we keep customer bills affordable. Finally, we deliver regardless of conditions, not by luck, or accident, but by a great team who runs a proven model, who sees discipline in the work. This is what led to an outstanding 2022 and provides for a strong outlook in 2023 and beyond. Thanks. Good morning, guys. Good morning. So just Garrick, couple of quick questions here. The CapEx update now includes Covert. Can you maybe comment on the impacts of IRA in the plan you presented today? The Clean Energy segment went from 2.8 to 3.1. So it was kind of a fairly modest increase. Were there sort of any assumption changes around tax equity utilization? Or do you anticipate another IRP update would be needed for more fundamental changes to the Clean Energy outlook? Thanks. Thanks Sharh. The $15.5 billion plan, as you indicated, includes Covert and a nice tranche of renewables. And I'll also point out from a VGP perspective, that's that large customer renewable program. It includes the first tranche of that as well. And so happy to dive in a little bit deeper here. But remember this, that Covert and our renewables build is spelled out in our integrated resource plan. So that's the nature of this 5-year plan, both from a renewable and the development of renewals, the Covert acquisition as well as storage and storage deployment. So that's set. And that IRP really serves as the prudency review and then we go through the regulatory cases to recover on those. And so that plan reflects that. Now your specific question on the IRA, that's additional benefit for our customers. as we've shared, that production tax credit offers savings directly on the execution of that plan. By 2026, that's about $60 million a year of savings for our customers. And so that IRP when we originally filed it was around $600 million or settlement, I should say, was around $600 million of savings for our customers. That only grows as a result of the production tax credit and the IRA. And so that's the nature of how we're applying that. I would remind you as well, based on AMT, we don't anticipate being subject to AMT for really the remainder of the decade, the way that's framing up. And so I don't know, Rejji, do you want to add any additional comment to Shar's question? No, I think you laid it out pretty well, Garrick. The only thing I would add, you did ask about tax equity at the utility, we're not assuming a tax equity for financing for any of these projects. Got it. Okay. Perfect. And then just lastly, just a question on your updated guidance and sort of the embedded assumptions. You're showing $0.04 of cost savings as a driver for '23, but also highlighted roughly $30 million or about $0.10 of cost savings related to Kam 1 and 2 Covert retirements. What level, I guess, of cost inflation is embedded in the $0.04? Is there a headwind on labor materials? And then more importantly, how are you sort of thinking about that O&M flex beyond that $0.04? Is it closer to the $58 million you achieved in '22? Yes, sure. I'll cover most of this, and if Garrick wants to add certainly can. To answer your last question first. We're assuming around $45 million to $50 million of cost reductions attributable to the CE Way. So that's what we have embedded in the plan. And we've been pleased to observe over the last several years now that we're at a run rate now of about $45 million, $50 million, which we hit really the pandemic, sometimes necessity is the mother of invention. And so prior to the pandemic, the run rate was about $10 million of O&M reduction. And then we had a really nice inflection point during the pandemic of about $40 million to $45 million of CE Way-driven savings, and that's -- we've held on to that some time. And so that's the working assumption embedded in the plan. I would say Kam 1 and 2, we do anticipate those savings coming through. We'll see some of that in our power supply costs with just less coal procurement, but also, obviously, on the O&M side, there's clearly less staffing attributable to gas plants versus coal. So you'll see some of the savings there. And so that's largely the inputs that we have flowing through that cost productivity line item or the $0.04 that you're seeing in the waterfall from 2022 to 2023. Is that helpful? Hi, good morning. Just wanted to start off by digging into Dig a little bit if possible. And if I look at Slide 20 here, just wondering if you could walk us through, is this implant or is this upside plan? And just if you could elaborate a little bit, I guess, the future plan for DIG flip to the market or do Michigan customers want the asset? Just trying to see what's happening there. What could happen there? I like the way you teed that up. We're going to dig into DIG. It's kind of like my Ferrari comment when I talk about DIG. I mean you may not know this, but the big plan itself is right across from the River Rouge plant where they make the Ford Lightning. And I just happened to get me a Ford Lightning about three weeks ago. So it performs well better than Ferrari. I'll tell you that. So we're going to call the Ford F-150 lightning in the garage from now going forward. But bottom line, here's what we do at DIG. And it's been a historical practice, which really serves us well as we layer in capacity contracts, multiyear capacity contracts and energy contracts over time. And as everyone knows, energy prices and capacity prices have been continuing to rise. There's that upward pressure in there. And so as we layer in these contracts, it's provided additional benefit, additional return from that facility. And so that's what we're reflecting those contracts that have already been inked, you might say, for the improvement in performance. Now we anticipate that to continue to improve as we layer in additional contracts, particularly in -- we're about 50% contracted both for energy and capacity if you get out to the year '26, '27 in that time frame. So there's potential for upside there. And I'll have Rejji walk through what that upside looks like here in just a moment. But why don't you do that, Rejji, then I'll conclude. Yes. So just to go back to the page you referenced, Jeremy, Page 20 in the deck, you see these dark blue bars here at around $30 million. That's a pretty good run rate for the economics we have locked in through capacity and energy contracts here in 2023. And then as you get to the outer years of the plan, you see these light blue sensitivities in the stacked bar chart, and that represents the opportunity if we start to see continued tightening and therefore, improved economics in the bilateral market. And so in the event we see capacity prices go to about $4.50 per kilowatt month. You can see the incremental upside here from a pretax income basis. And then if it gets closer to CONE, and I'll remind everyone that Zone 7 is priced pretty much at CONE for 2 of the last three planning resource auctions. You could see us at a higher level than that with about $25 million of upside. And so as Garrick noted, we wouldn't see those economics until the out of years of the plan, but there's some opportunity as margin opens up in sort of the '25, '26, '27 time frame. And let me just conclude there. So there's -- that upside is not in the plan, just to be really clear about that. And to the degree there is upside I want to make sure everyone's clear, there's no sugar highs, right? We deliver 6% to 8%, and we have confidence toward the high end. So I just want to be clear on expectations going forward. That's very helpful there. And I just want to continue, I guess, with kind of bleed or element to the point here. And looking at the back half of the planned growth drivers outside of rate base. Can you walk us through time line for clarity on the pieces there? Just wondering if there's conservatism on those items as we look at kind of outside of rate base growth later date? And just -- thank you for the question, Jeremy. And just for everyone's reference, this is the content we have on Slide 6 of the deck. And so we've always talked about the additional growth drivers beyond the rate base as a result of the very constructive legislation. We have in Michigan. And so there's the energy waste reduction opportunities that we have, and we earn economic incentives on that. There's a financial compensation mechanism that we get on PPAs that has been solidified now in two integrated resource plans. And then there is the 10.7% ROE that we get on renewable projects associated with the renewable portfolio standard of Michigan, which we're still executing on. And then there's additional contribution from North Star. And so all of those offer growth to our earnings profile above and beyond what we get in the rate base. And so that 7% or so you're seeing for rate base growth. These would be additive to that. And I would say you get steady contribution for the majority of these. Jeremy, to get to your question. And so with respect to energy waste reduction, we do expect that to increase gradually over the course of the plan. The PPAs. Those will actually ramp up as we do more solar on the contracted side attributable to the IRP. And then we'll see probably more front-end loaded the wind opportunity and then just steady growth at North Star. And so that's really how you should think about the economic opportunity for those non-rate-base opportunities over the course of the plan. Hi, Good morning. This is [indiscernible] on for Julien. My first question is to just to elaborate on the DIG economics and the opportunity there, how do you see the move from a seasonal auction in MISO or two seasonal option MISO from an annual auction kind of impacting that opportunity, if at all? And how should we think about that there? Yes. So we are assessing MISO's new rules around sort of the seasonal auction. I still think when you cut through it, whether it's a historical process of the new process, you're still going to see a continued tightening of Zone 7. It's still a peninsula. You still have limited transmission importation access to the southern border, and you still have Covert retirements. And so when you have those sort of construct, you're going to see just an imbalance between supply and demand and DIG will start to open up in those outer years. And so we anticipate, as I said before, that we'll potentially see more attractive economics as energy and capacity starts to free up in the outages of the plan. The degree to which it's more attractive, we'll see. I think, obviously, there's -- it's early days. But we certainly think what we're showing on the page and that Slide 20 offers at least a representative or is at least indicative as to where prices may go if we see continued tightening. Again, those light blue bars, that upside opportunity is not incorporated in our plan to be very clear. And just to add to that, that old seasonal construct is out there to address resource adequacy. And when you -- the capacity that has been applied over units has the potential to actually reduce some capacity of units. And so that the need grows, certainly in the short to midterm across all of MISO, including Zone 7. So the value of a place like in a facility like DIG should only improve for Rejji's comments. Great. That's helpful. And switching gears a bit here. Can you quantify the aggregate voluntary regulatory mechanisms in 2022? And as we think about the updated 2023 guidance range, do you have any voluntary mechanism embedded in the range at this time? Yes. So to answer your last question first, Heidi, we do not presuppose any VRM for the 2023 waterfall, or sorry, for our 2023 guidance, and none of that's incorporated in the waterfall, I should say. With respect to the components of the [indiscernible] refill mechanism, we just filed that earlier this year, to be clear, it's $22 million and we're going to allocate a portion of that towards excess capital investments over the course of '22 attributable to emerging capital work like asset relocations demand failures on new business. And so that's a portion of it on the electric side. And then we allocated a good -- the balance of it towards our gas customers, particularly those who are most vulnerable, and we think that's a very prudent use of those resources during these challenging times for customers. And so that's really the spirit of it. Were you also getting at the electric rate case settlement commitments as well? Yes. And so there's none of that incorporated into the 2023 guide either and just to round out the numbers here. So in the electric rate case settlement, we committed to a $15 million bill credit that will benefit customers in 2023. And again, we recognize the expense of that in 2022, and then there was a $10 million again of low-income customer support, again, recognized in 2022 and customers will benefit from that over the course of this year. And so that's really how it works. And none of that is presupposed in our 2023 guide. And so if I pull up and look at the big picture here, this is why the Michigan regulatory construct is so strong. You have these mechanisms, whether it's the settlement or whether it's a voluntary refund means that allow us to derisk the future year and offer additional customer benefit. And that's exactly what this $47 million is. And so this gives us -- this is why I'm so confident, we're so confident in our ability and the outlook for 2023. Good morning. One thing I picked up on in your comments of front Garrick was I think you said improved approach on the regulatory side as kind of being key to some of the settlements last year. Can you just give a little more color on what you meant by that and what that means going forward in terms of like being able to consistently settle? Well, you remember Q4 call last year. And I was in this spot, and we were saying, hey, we need to improve. We didn't get the best order out of the commission. And we said a couple of things on that call. One, we needed to improve our testimony in our business cases. And we did that. We took two months. We delayed the case by two months, and that's exactly what we worked on. We also adjusted our approach for the electric rate case and how we deliver that and interface with the staff on it. That was a learning that we took from our integrated resource plan filing, we extended that to our electric rate case. And then as we got to August, we saw staff position, it was a very constructive staff position because of all the work that had been done in the testimony and business cases, the improvement that had been done. And that was the foundation. So once you have that constructive foundation, that constructive point where staff is, then it's really an opportunity to work through settlement. And that's exactly what we did working with a number of interveners, the Attorney General, the staff, business community, residential community as well as number of environmental interveners to really have a very constructive outcome with this electric rate case. And so as I look forward, we're going to continue to deploy those methods. We're going to continue to improve the process going forward so that we can set ourselves up for settlement or if we have to go to the final order that we can get a constructive order. Great and thanks, that's really helpful. And then just shifting to the CapEx plan and the clean energy spend. Can you guys just quantify like how much on a megawatt basis of renewables you're looking at over the plan and what that looks in terms of split between solar storage, wind? Let me - I'll take a crack at it here and Rejji will jump in a little bit too. So in our IRP, there's - obviously, we're replacing coal. And so, I'll just kind of walk through the whole piece of it, so you can see every component of it. So we're going to add about 1.2 gigawatts, that's the Covert facility. We got this RFP out there for 700 megawatts, 500 is dispatchable, 200 is renewables, which will have a PPA for that will get enough financial compensation mechanism on that portion of it. And then in addition to that, we got about 1.2 gigawatts of renewable build-out in that plan that's spelled out in our IRP. And again, 8 gigawatts over the longer piece of 1.2 roughly in that 5-year window. That's a mix of wind and solar. . And then bottom line, we have also in here, what I call energy efficiency and demand response. Those are also play out in that window as well. And then if you're doing the math on this, we're also keeping Kam 3 and 4 around. That's part of it as well, but that's just more of a capacity look. And so, we're in the process of constructing a wind farm right now. That's part of our renewable portfolio standard. That's the one Rejji mentioned in his comments. It's under construction that's about a couple of hundred megawatts of that plan. And the remainder out there is roughly solar and solar build. I will add this, and Shar asked this question earlier and I didn't finish it. But we also have in this plan 300 -- roughly 300 megawatts of voluntary green pricing. This is our large customer renewable program. We've talked about this over previous calls. It's about 1,000 megawatts. We have ability to build and we have subscriptions for that. And we've got our first, you might say, tranche of subscriptions. And then we're building the first - over the course of this plan, we're building the first 300 megawatts. Is that helpful? And Michael, the only thing I'd add is that you asked about storage as well. I think Garrick have numerated every last bit, and I'll just add storage. We're assuming around 75 megawatts storage in the plan. I mean, obviously, longer term for the IRP, we'll do more than that, but over the course of this five-year plan, about 75 megawatts. Good, she is sleeping through the night this week it's a miracle. I just want to elaborate on an earlier question about the non-rate base drivers. I guess my question is what are the offsets if rate base is growing faster than seven plus these adders you're clear that we shouldn't expect more than 8% growth, no sugar highs. So what's keeping the growth below 8%? Is it the equity in the outer years or something else? Andrew hi, it's Rejji. The only thing I would add is that to Garrick's comment is if you ever need help getting your baby sleep feel free to play back this call. We try to make these calls to the extent [ph]. But to get to your question, I would say, yes, you will see some equity dilution in the outer years of the plan. So as I mentioned, we'll be getting to up to $350 million of equity from '25 through 2027. So that's some of the offset to the non-rate base opportunities. And then we will have some parent funding costs in the outer years of plan beyond equity. So we'll start issuing a little bit of debt. And so that's the other bit as well. So I'd say it's largely on the funding side. I mean is this helpful. If I just add to it. It's also the mindset that we have. We're going to - we've got great mechanisms in the state in this construct with the VRM that allow us to offer benefit in the next year for our customers and for our investors and that really helps to derisk. And so, that's another reason why we think about it towards really the long-term versus one year in a sugar high. Sounds good. And then on the equity, the number went up. It was up to $250 million, now it's up to $350 million in '25 and beyond. Just wondering what's the driver of that increase? And I know it's up to, but why did it change? Yes, so it's a good question, Andrew. And just to be clear here. So obviously, the capital investment plan has increased materially from the prior vintage. So we were $14.3 billion in the prior five-year plan, we're now $15.5 billion. And we're effectively addressing the Covert needs and that drives about $800 million of that increase. But the balance, we still have incremental investment opportunities above and beyond Covert. And so it's really to balance out the funding for that additional CapEx and obviously maintain our credit metrics kind of in that mid-teens area, which we've always targeted for my prepared remarks. But I will also our general rule of thumb, obviously, is we always want to avoid block equity and we still think even at that level of up to $350 million per year, even where the market cap is right now that's up 2%. And in a perfect world, the market cap will continue to grow, and it will be a much smaller relative to the market cap at that point. So, we think we can triple that out comfortably without any overhang or material pricing risk. Agreed, it's definitely not a risk. Just trying to understand does that mean it's going to be more than $250 million and less than $350 million, the way you see it now? Good morning, I was wondering if you could just specify what you're assuming for load growth in the latest outlook. You had some good commentary too about industrial activity in the state. What are the recent trends you've been experiencing with resi and C&I activity as well? David, this is Rejji. I'll take that. So let me start with what we saw last year, and it was very consistent with our commentary over the course of each quarter, but we just continue to see good load growth on a weather normalized basis in Michigan. And so, we were down about 1% for residential as we have been highlighting that was actually a little better than plan. But then on the commercial side, we were up over 1.5%. And then industrial, excluding one large low margin customer, up over 2.5% so all in, about a point or 1% on a blended basis. And our expectations are, I'd say, a little tempered going into 2023. And so, we anticipate being a little south of that. And so, we would say probably flat to slightly up all in. Resi continuing to come in as people continue to go back to work. But still commercial, I'd say, roughly 0.5 point in industrial between 1.5% to 2%. So we still anticipate decent load growth, and that does not include any of the robust economic development opportunities that we see in our pipeline at the moment as a result of the Chips and Science Act, the Inflation Reduction Act, we continue to see lot of activity, whether it's semiconductor fabs, as Garrick known in his prepared remarks, battery, EV battery supply chain or other energy-intensive businesses. We do hope that we'll see some more, lumpy load opportunity in outer years of the plan so more to come on that. Yes, I just would add to that under Rejji's good comments there. The Chips Act and the IRA and even the IIJ, that's a super acronyms there. But bottom line, they've helped our business, and they've helped a number of other businesses here in the state from a growth perspective. In addition to that, we've been working closely with the legislature with the Governor's office or site incentives that really make our state as competitive as other states that are offering site incentives. That comes in terms of not only investment in the site from a state perspective, but also incentives to locate here, which has been very helpful. We introduced an economic development rate, which further encourages growth here in the state, and we're seeing some nice some nice low growth over the last year and commitments to Michigan, and I expect more here in short order. And so, I'm excited about that and what that means for our state, both from an investment perspective, growth perspective and particular jobs perspective. Great thanks for all that color, very helpful. And I was just wondering, just looking out the equity needs later in the plan and the balance sheet and cash flow at that point. I was wondering, are there any cash flow impacts that come over time potentially from IRA or as you start ramping up renewables and with tax credit dynamics, anything that could help operating cash flow, free up cash flow to further invest at that point that we should think about just as your investment profile shifts in that direction? Yes, it's a good question, David. So we currently are assuming about $12.5 billion of operating cash flow generation over the duration of this plan. So a healthy level, and that's kind of run rate of $2.5 billion or so per year. So clearly, we'll benefit, as Garrick noted earlier, from just lower costs as a result of the production tax will now apply to solar investments. Whether there's incremental upside opportunity for OCF, we'll see. But we try to plan conservatively, and we feel pretty good about the estimates for OCF and the financing plan going forward. And I think it's also worth noting that we don't anticipate being a material payer of federal taxes through the duration of this plan we'll be a partial taxpayer you start to get to '24 and '25, but federal tax cash payments are not a material source of outflow over the course of this plan. And that's kind of been sort of our norm for some time now. So the team continues to do a very effective tax planning to minimize that outflow. Hey good morning Garrick, thank you for taking my question. Hey just Rejji, I want to go back to the equity financing plan. So the CapEx in both '25 and '26 was raised by $100 million, and that seems to all sort of go the equity from $250 to $350 million. Did the assumptions change in cash flow or did anything else change or you're just building some flexibility in this line. So if you could just talk to that, please? I would say it's more flexibility than anything else. I mean, I would say it's not as formulaic. It's a $100 million increase in the given year equates to 400% equity financing. I think it's more you see about $400 plus million of incremental capital investment above the prior plan and exclusive of Covert. And so, we're just trying to fund that as thoughtfully as possible. But it's not as formulaic as incremental $100 million in '25 and therefore, incremental $100 million, it's much more is a little more art than that. So I would just say just because there is some flexibility. And hopefully, we don't have to do as much of that. But for now, the guidance is up to $350 million per year, and we think that prudently funds the business and keeps those credit metrics in the mid-teens level to keep the credit ratings we have that we've worked very hard to achieve. Awesome that makes sense. And then maybe just on the Slide 12 here. The $0.19 to $0.25 usage, non-utility tax and other, can you give a little bit of a more detailed breakdown of what's usage and some of the other items, if you can? Yes, so usage non-weather sales, I just provided that in the other question. But like I said, it's flat to slightly up, I would say, about - 25 basis points up all in. We expect residential down over 0.5% as folks come back to pre-pandemic levels. And then you've got commercial up about 0.5 point and then 1.5% to 2% for industrial, again, excluding one large low margin customer. The other big bucket within that $0.19 to $0.25 is just, remember. We had a little of discretionary activities in the fourth quarter. So namely, you've got the VRM which was $22 million, and then you've got another $25 million of electric rate case commitments and so all in that $47 million of Q4 lack [ph] is about $0.12. That does not need to take place in the fourth quarter of this year. And so when you think about that comp of Q4, '22 versus Q4, 2023, you see a lot of that in there. So I'd say it's a combination of those sort of discretionary items that don't need to recur. And then you've got - I'd say relatively modest load assumptions. We've got a little bit of uptick in NorthStar as well. That's the other component of that. And as you can see, we delivered actuals of $0.12 per share at NorthStar in 2022 and the guide for this year 2023 is $0.13 to $0.16. So that's a piece of it as well. It's really those pieces. Is that helpful? Yes, absolutely. Usage and half of it looks like the Q4 flex from '22 to '23 and a couple of pennies at NorthStar? Hey good morning, thanks for squeezing me in here. Just hopefully two quick ones, one was on DIG. Is there a desired amount of capacity you want to leave open in the plan? Do you look longer term and say we want to keep 50% open or 40% open? Are you guys are more opportunistic on that? Well, right now, if you look at '23, '24, '25, it's 100% or pretty close to it. So we want to in the upcoming two to three years, we want to fully subscribe - from a capacity and energy perspective. And as you layer in contracts time you get up to 2025, '26 it approaches 50%. So there's room there. And absolutely, we're going to take advantage of opportunities in the energy and capacity markets to layer that in so some longer-term contracts to see really to take advantage of the opportunity out there is with energy and capacity prices. Does that help, Anthony? Yes, absolutely. And then lastly, if I want to maybe look a little longer here, your next IRP filing, I mean the IRP, the guys finished, I guess, I don't know, the '22 or '21, very successful, transformational. What's the timing of the next IRP? And what's that going to look like? It just feels like I got through that this year with the settlement, like I'm celebrated. I'm still in my victory lap of that IRP. It was a landmark. And now you're asking about the next one, yes. So we have to be in there within five years. It's usually a three to five years though. We don't have a plan yet on when that will be. It usually helps to be in around three years just because of the timing of the cycles and of recovery, but no set time yet at this point Anthony, sorry, I can't give you a date yet, but we'll work towards here - the next few years. You actually couple questions ago, you answered my question about unpacking that other $0.19 to $0.25 on next year's earnings. Just one quick follow-up to that, the usage so that's seven that you used $0.07 on the 1% change in the electric side, especially, is that on the numbers that you talked about in terms of what's in the guidance or is that incremental to what's on that guidance to you? You understand my question? Yes, I do follow you. Yes, so the sensitivities that you see Travis on Page 15. This just highlights what the EPS impact would be if we saw another point good or bad relative to plan. And so, the sensitivity around on the electric side is about $0.07 for every percent. Now it obviously depends on mix. And so we're assuming, like I said, for the usage, about, call it, about 0.25% up on a blended basis with resi coming down a little over 0.5% commercial, about 0.5% up and then industrial 1.5% to 2%. And so modeling purposes, that's sort of the base case. And then if we saw any deviation, that's what the sensitivity, provides visibility on. Does that address your question? Yes, yes absolutely. And that could be weather sensitivity, right that's not necessarily just why they're normal I think weather benefit or determines. We have no further questions at this time. So I'll hand the call back to Mr. Garrick Rochow for concluding remarks. Thanks, Adam. I'd like to thank everyone for joining us today for our year-end earnings call. Certainly hope to see you on the road over the next coming months. So take care and stay safe.
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Good afternoon, and welcome to SiTime's Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakersâ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, the conference call is being recorded today, Wednesday, February 1, 2023. Good afternoon and welcome to SiTime's fourth quarter 2022 financial results conference call. On today's call from SiTime are Rajesh Vashist, Chief Executive Officer and Art Chadwick, Chief Financial Officer. Before we begin, I would like to point out that during the course of this call, the company may make forward-looking statements regarding expected future results, including financial position, strategy, and plans, future operations, the timing market and other areas of discussion. It is not possible for the company's management to predict all risks, nor can the company assess the impact of all factors on its business or the extent to which any factor or a combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. Neither the company nor any person assumes responsibility for the accuracy and completeness of the forward-looking statements. The company undertakes no obligation to publicly update forward-looking statements for any reason at the date of this call to conform these statements to actual results or to changes in the company's expectations. For more detailed information on risks associated with the business, we refer you to the risk factors described in the 10-K filed on February 25, 2022, as well as the company's subsequent filings with the SEC. Also, during the course of the call, weâll refer to certain non-GAAP financial measures, which we consider to be an important measure of company's performance. These non-GAAP financial measures are provided in addition to, and not as a substitute for, or superior to measures of financial performance prepared in accordance with U.S. GAAP. The only difference between GAAP and non-GAAP results is stock-based compensation expense and related payroll taxes. Please refer to the company's press release issued today for a detailed reconciliation between GAAP and non-GAAP financial results. Thank you, Brett. Good afternoon. First, I'd like to welcome you as well as existing investors to SiTimeâs Q4 2022 earnings call. SiTime is a leader in a dynamic new product category called Precision Timing. In electronics, timing is ubiquitous and ensures reliable functioning of systems. SiTime created precision timing to service the needs of applications like automated driving, 5G, enterprise and IoT. We are early in a growth as we transform the $10 billion timing market. SiTime has shipped 3 billion precision timing chips to 20,000 customers in 300 applications. We had a solid fourth quarter. Revenue for the quarter was $60.8 million and revenue for â22 was $283.6 million. This is a 30% growth over the previous year even though the second half of 2022 was challenging. Non-GAAP income was $14.4 million for the quarter and $82.9 million for the year, which is 29% of revenue. On the product side, SiTime introduced four new products since the last earnings call. Previously, we had introduced four key performance metrics as indicators of future revenue, SAM expansion, design wins, ASPs and single source business. While we don't expect to do this on an ongoing basis, given the current market conditions, we're giving further insight into our business by using these metrics this time. In 2021, our SAM was $1 billion. In 2022, we grew it to $2 billion. We're on track to get to $4 billion by the end of 2024. With a highly differentiated precision timing products, SiTime is creating a market where we continue to expand our advantages. Since our last earnings call, we introduced four new products and are on track to introduce five more in 2023. Customer activity for these nine new products, which includes architectural discussions and sampling, continues to be robust. Seven of these nine products are in our focus segments, Comms Enterprise, Automotive and Aerospace Defense. Last week, we introduced two new Endura product families that expand our presence in the aerospace defense market in applications such as position, navigation and timing, PNT, tactical communications, network service synchronization and surveillance. Both products deliver up to 10 times better environmental resilience, which is crucial for these applications that operate in harsh environments. Our funnel and design wins continue to grow at a higher rates than in previous quarters. In Q4 â22, our design wins grew 55% over the same period in â21. Additionally, 65% of these design wins were in our focus segments of comms enterprise, automotive and aerospace defense. Higher average selling prices or ASPs are an indication of the value that we provide to customers. Our ASPs continue to grow and are expected to be higher in â23 than in â22. As in the past few years, we are not seeing any meaningful loss of business to competitors even though their availability has increased and lead times have shortened. We attribute this to the highly differentiated nature of our products. The customer trust that SiTime has earned is of tremendous importance to us and a metric of that is a percentage of business that is single sourced. In â23, we expect to continue to have 80% of our business as single sourced. Looking further out, our funnel is in a similar single source position across geographies and market segments. Now coming to our guidance for Q1 â23. As we said earlier, the shortages of past few quarters that customers and their contract manufacturers to purchase more than they needed. SiTime is continuously evaluating the inventory situation at our top 50 customers and their more than 100 contract manufacturers. While most customersâ inventory is as we forecasted earlier, a new development is that our historically largest customer recently informed us that they have more inventory at their subcontractors than the previously thought. Despite the rest of the business being as expected, this will lead to lower revenue in Q1 â23 than previously thought. We continue to believe Q1 2023 will be the lowest quarter of the year as we expect Q2 to be higher than Q1 and the growth to resume in the second half. In conclusion, end customer demand continues to be generally healthy. Our design wins and SAM expansion continues to grow. Our connections with customers is closed and growing through design wins. SiTime continues to be the leader in precision timing, a category that we created and we are confident about our future success. Art? Great. Thanks, Rajesh, and good afternoon, everyone. Today, I'll discuss fourth quarter and full-year 2022 results, and I'll provide guidance for the first quarter of 2023 and make some comments on the year. I'll focus my discussion on non-GAAP financial results and refer you to today's press release for a detailed description of our GAAP results, as well as a reconciliation of GAAP to non-GAAP results. Revenue in the fourth quarter was $60.8 million and revenue for the full-year 2022 was a record $283.6 million, up 30% over 2021. Sales into our mobile, IoT and consumer segment were $24.7 million or 41% of total sales. Sales to our largest customer, which is included in this segment were $15.5 million or 26% of sales. Excluding sales to our largest customer, sales into this segment were $9.2 million or 15% of sales. Sales into our Industrial, Automotive and Aerospace segment were $20.3 million or 33% of sales. Sales into our communications and enterprise segment were $15.8 million or 26% of sales. Non-GAAP gross margins were 63.1%, down about 2 points from Q3, due to the lower revenue. Non-GAAP gross margins for the full-year were 65.2%. Non-GAAP operating expenses for the quarter were $28.2 million as we held spendings essentially flat with Q3. Expenses were $16.6 million in R&D and $11.6 million in SG&A. Non-GAAP operating margins were 16.8% for the quarter and 26.7% for the year. Interest income for the quarter was $4 million, up substantially from prior quarters, due to higher investment yields. Non-GAAP net income was $14.4 million or $0.64 per share. Non-GAAP net income for the year was $82.9 million or $3.66 per share. Accounts receivable at the end of the quarter were $41.2 million with DSOs of 61 days, compared to $44.9 million and DSOs of 55 days in Q3. Inventory at the end of the quarter was $57.7 million, up from $45.4 million at the end of Q3 as we bought additional wafer safety stock, to provide a cushion in the event of any future geopolitical or other supply chain issues. During the quarter, we generated $5 million in cash from operations, invested $8 million in capital purchases and ended the quarter with $564 million in cash, cash equivalents and short-term investments, essentially flat with the prior quarter. I'd now like to provide some financial guidance for the first quarter of 2023. The macro environment remains somewhat challenging and it is clearly having an impact on industry-wide semiconductor demand. It also appears that many customers and especially their subcontract manufacturers overordered when supply bottlenecks eased last year. This higher inventory coupled with the current demand environment has led many customers to reduce order rates as they work through excess inventory. And that is what we are experiencing now. Last quarter, we offered comments on Q1 of 2023 and said that revenue would be down sequentially from Q4 for two reasons. First, we expected the usual seasonal slowdown with our largest customer. And second, we expected a lull in comms and enterprise sales as our customers in those markets work through excess inventory. Our view on Q1 remains consistent with the comments we made last quarter with one exception and that has to do with our largest customer. As Rajesh mentioned, it now appears that their subcontract manufacturers have enough inventory to support their needs through the first-half of the year. This means that sales to our largest customer will likely be nominal in both Q1 and Q2. To be clear, we have not lost any sockets with this customer. Therefore, once they work through this inventory sales should rebound to more normal levels starting in Q3. As a result, we now expect Q1 revenue will be somewhere between $37 million and $39 million. Gross margins will be down a few points due to the lower sales and will be approximately 60% plus or minus a point. We will hold operating expenses relatively flat with Q4, so approximately $28 million. Interest income will increase to somewhere between $5 million and $5.5 million. Diluted share count will be approximately 23 million shares. So at the midpoint of that guidance, we therefore believe Q1 non-GAAP net income will be approximately breakeven. We also believe that Q1 will be the low quarter for the year. That revenue will increase in Q2 and that once excess inventory gets worked down, sales should rebound nicely in the second half of the year. I'd like to conclude my remarks by saying that even though we are going through this short-term dip, we firmly believe that our long-term growth story is intact. Our process and product developments continue as planned; we expect to introduce at least five more new product families this year with each spawning numerous derivative products. This will expand our SAM from about $1 billion a year ago to about $4 billion by the end of 2024. Design win and quote activity has been strong and that coupled with new product introductions and an expanding SAM should lead to continued long-term growth. Thank you. [Operator Instructions] Our first question comes from the line of Quinn Bolton with Needham and Company. Your line is open. Hey Art and Rajesh. I guess, I wanted to start with just the environment. Obviously, it sounds like inventory correction is going to keep results fairly depressed in the first half of the year, but wondering if you might comment today where do you think the natural level of demand or what do you think consumption of your products is running at on a quarterly basis, so that as we start to snap back to that consumption, we have some sense what the revenue ramp might look like in the second half of the year? Yes, that's a great question, Quinn. It's difficult to quantify that precisely. Clearly the demand is substantially higher than the guide that we gave for Q1. As both Rajesh and I talked about, there is a lot of excess inventory in the channel. As I mentioned in my discussion, I think you go back to 2021 and there are a lot of shortages in the industry and when those shortages eased, a lot of folks, a lot of our customers and certainly their subcontract manufacturers took advantage of the supply and over ordered. So they ended up with too much inventory that has to get worked down. So I'm not going to put a number on it. But clearly that is suppressing our revenue, I would say substantially certainly in Q1 and we will also do that in Q2. I think, if you just look at our historic numbers, I mean, for the year, we did $283 million in 2022 and there's some over buying in that. I think clearly in the first half of the year. But if you notch that down, that's going to be a normalized number for 2022. And I think longer term, our 30% growth rate is intact once we get through this dip. So people I think can kind of triangulate what the back half should look like and definitely what 2024 should look like given that kind of growth rate. So I know I didn't give you any numbers there. But try to add some color to what we said earlier. So maybe just trying to frame it, it sounds like that the $284 million in 2022, obviously included some amount of inventory burn. It sounds like it could be ballpark $20 million to $40 million and so it sounds like a run rate might be closer to $240 million to $260 million, is that sound about, right? I would not dispute that number. I don't want to get tied down to an exact number, but I think the logic there is founded. Great. And then just a sort of a quick follow-up just as margins historically have trended or followed revenue. I assume that since you think revenue is troughing in the first quarter that the 60% guide for Q1, would you expect that also to be the trough for the year and that as revenue grows sequentially through the rest of the year that gross margin would trend higher? Yes, absolutely. And we've talked about this before. Even though we're fabulous, we do have a certain amount of what I call fixed manufacturing overhead as the cost of our ops group and some depreciation on some of the back-end equipment that we own that's located at our OSATs. So -- and that's about 10 points of margin, so when the revenue is lower, the absorption rate is lower and that's what drove lower gross margins from Q2. There was 65% and change down to -- I'm sorry, in Q3, down to 63% in the quarter that we just announced and my guide down to 60% in Q1. So the direct answer to your question is yes, gross margins will increase as revenue increases. I would expect that we can exit the year with gross margins close to our historic margins again, we had gross margins just over -- non-GAAP gross margins just over 65% for the full-year that we just ended. And I think we should be able to get back to that level exiting this year 2023. Thank you. Please stand by for our next question. Our next question comes from the line of Chris Caso with Credit Suisse. Your line is open. Yes, good afternoon. So for the first question, I just -- I guess based on what you provided in guidance, if you can give some color on the additional segments. I mean, it seems like the guidance seems to imply sort of flattish revenue for both industrial auto, aero, kind of, enterprise. And then seasonal decline in the consumer part that's outside of your main customer. Is that a reasonable expectation? Any kind of color you could provide around that? Yes. I think that's a pretty good analysis. Again, comms and enterprise will be substantially lower from Q4 to Q1 for the reasons that I mentioned and that is our largest customers that's plural in that segment have enough inventory to get them through the first quarter. So their order rates are relatively low for Q1. So the biggest decline would be in comms and enterprise. In our auto and industrial segment, in total, that's going to be flattish, I think from Q4 to Q1. And then our IoT and consumer space excluding our largest customer will be flattish, but our largest customer of course will be down very substantially. Revenue to them as I mentioned was $15.5 million in Q4 and it will be quite nominal. Nominal means less than $1 million in Q1. Okay. That's clear. Thank you. As a follow-up, if you could speak about pricing for the remainder of your products and/or just made it clear that large number, the vast majority of products are sole sourced and knowing that those customers are buying the product for the performance. But as you see some of the more conventional quartz products decline in pricing. Is there a risk that the gap between SiTimeâs pricing and the more conventional pricings widened to the point that you do see some pressure? What are your customers telling you and kind of what are you seeing in the market right now? Right. The way I see it is that there are some products of SiTimeâs that have no comparable product. I would say that significant in comms and enterprise in significant part of auto and clearly in the military aerospace business. That's also true in some of our other products, but let's just focus on this one. On this, we see no competition, we see no quest for lower pricing, because our customers clearly understand how unique our products are in providing value. On the products that are pin for pin compatible, higher volume, typically in industrial, perhaps in consumer, maybe in some lower end of networking telecommunications. Even there, recall, Chris, that we still sell at a premium price. That means that even in those markets, we sell in the higher end of that customer's product, which also means that we don't see any pricing pressure. And to the extent we do -- we have been able to adjust for it in a particular way that it doesn't impact us. And continues to lead to growth in our blended pricing, including our largest customer for the last several quarters. So I'm very confident that SiTime is in a good position, primarily because of a highly differentiated products, whether they are in the focus markets or in our non-focus markets. Thank you. Please standby for our next question. Our next question comes from the line of Alessandra Vecchi with William Blair. Your line is open. Hi, thanks for taking my question. Just some additional color on your largest customer. Should we be thinking about to take that much revenue out for the next two quarters that really look like they've been building inventory over the last year plus? Should we be thinking about like normalized rates for that customer more in the kind of 2019, 2020 timeframe? Or do you think they can get back to 2021 levels at some point in the future? Yes. I think they can get back to 2021 levels. Clearly, they overbought or more precisely their subcontractors overbought. But we haven't lost any sockets there. And they're a great customer of ours. We work very closely with them. So yes, I think we can get back to those types of numbers. I think, Alex, there's been some decline in their natural demand. It's probably in the news as well. But in generally -- in general, it is they have a very complex, more than anybody else, they have a whole host of CMs. And I think that between the CMs and them, they -- it took a while for them to figure it out, but they did. And we look forward to any changed forecasting methods from them. And we've had some discussions on that. Perfect. That's helpful. I was just trying to think about on a more normalized level. And then similarly, not to harp on the consumer segment in general, but we've had conversations talking about the non-apple consumer portion being allowed to, sort of, bleed out over time as customers maybe go back to court. But in the fourth quarter, it looks like revenue, sort of, increased sequentially and I believe you said it would be flattish in Q1? Can you add some color on what you're seeing from customers in terms of their appetite to go back to courts versus stay with you? And how we should think about that over the next year or two? Yes. In general, as I said earlier, we see that wherever they have -- when our customers have differentiated products, they tend to use SiTime. And so we have found very little, if any, almost de minimis loss of business as a consequence of the increased availability of quartz crystal. So we think that ex our largest customer as well, that our business with consumer continues quite solidly. And in fact, we continue to get some nice design wins that will help us in the second half of the year, I believe. And Alex, I'll just add another comment to that. We have talked about that segment declining over time, but not going to zero. There are still as Rajesh mentioned, customers in the consumer space where we provide real value. So we're not expecting those numbers to go to zero. And as I mentioned in my script, it was $9.2 million in fourth quarter, that was up what $1 million maybe a $1.5 million from Q3. So I mean that's I think a reasonable run rate for us there. And over time, if we have the right customers that could even go up. Thank you. Please standby for our next question. Our next question comes from the line of Suji Desilva with ROTH. Your line is open. Hi, Rajesh. Hi, Art. Appreciate, Art the gross margin guidance towards the end of the year and the confidence there. I want to understand if that -- I imagine imply steady pricing is an assumption or if there's improved blended pricing has been that assumption to going back to mid-60s from end market or product mix uplifts? Well, I mean, one of our basic themes and one of the ways that we got our gross margins to expand from the high-40s three years ago when we went public to 65% for the full-year that we just finished. Is that most of our new products are focused on the market segments that Rajesh mentioned, which are generally higher performance markets, we get higher ASPs and higher gross margins. So over time, as those new products become a larger percentage of our sales, that will continue to help expand our gross margins. And I think we'll see some of that certainly in the back half of this year and going out for a number of years. That's right. And the confidence, I think some of the metrics that we gave Suji are all related. Our ASP's solidity and growth is related to a single source. It's related to our new products and it's related to our SAM expansion. They're all four tied together, which is why it's all part of one strategy. Deliver highly differentiated products that customers just got to have. And I think, of course, we see the benefit of that in the relatively short-term in the coming quarters. But the real benefit for that is going to come in growth and stickiness in 2024 and 2025 and so on. So I think as those products, we talked about nine products as they unfold, in the marketplace as we get the design wins, I think it will be really good. Okay, great. And then my follow-up question is those new products as they're coming in and winning. I presume they're more focused on the non-consumer markets, auto, infrastructure data center. What's the design cycle there and those programs to ramp? And is there sort of an elbow point when these new products were announced some of them late in â22 that we start to see them come in through design win ramps? Yes. So it's -- the typical thing would be to say that in the comms enterprise, automotive, aerospace defense, a rule of thumb would be about 18-months to ramp to revenue. That being said, we actually see sometimes enough of a desire for our products that they get rushed to markets quicker than we or ever thought. Also don't forget that while seven out of nine of these products are in fact meant for these focus segments, the remaining two are in fact for consumer, IoT and mobile. And those balance it out by a shorter design win, let's say, less than a year and shorter time to revenue less than a year. And so to get to its full glory, I think it takes maybe three years for a product in the focus areas. But again, a reminder that none of our products have ever been obsolete from the time we introduced them 12-years ago, 13-years ago, So they still continue to sell. So that's an important way of understanding the value. Yes. And again, these new products, this looks forward, but we also introduced a lot of products last year and in 2021 and going back to 2020. So even though some of these design cycles can be one, two or three years, we have a number of products that are in the middle of those design cycles, yes. Yes. Thank you, Rajesh. Thank you, Art. I had a question about your largest customer. Especially as far as then moving manufacturing around. I mean, I think this is sort of in the public domain too. And I'm just wondering if some of this inventory build and subsequent reduction, has anything to the diversification of the manufacturing base or do you think this is just more purely the front of manufacturers building tumor supply when supply were short? Yes, it's a tricky question to ask and there are some things we don't want to talk about too much. But I think they do have more CMs than anybody else, that's point one. The second point is that we understand that in tough times, all CMs, many CMs over order for a variety of reasons. Some good ones, some not so good ones. In the case of our largest, historically largest customer, we have spent a lot of time in the past years looking at forecast directly from them and comparing it to forecast from the CMs. You can almost say that in some ways, we were somewhat instrumental in helping all parties understand what the real situation was. So SiTime has been a value-add player in all of this. Yes, that's great perspective, Rajesh. And as my follow-up, your inventories. So again, given that your -- the sales to your largest customer is going to be basically nominal next two quarters. Can you just give us some confidence in that $58 million in inventory? You mentioned most of it should be in wafer or in raw materials? So again, just wondering how we should think about that $58 million given the big drop off this in the first half of the year? Yes. So first of all, we consciously increased our inventory, as you mentioned $57.7 million at the end of last quarter. And the increase is all in wafer stock, so as we've talked about many times, we get our MEMS wafers from Bosch, itâs our process with their factory. And we get our CMOS wafers from TSMC. And we bought wafers from both Bosch and TSMC and we did it to provide a buffer stock. If there's any type of geopolitical issues out there, if there's any type of supply chain issues out there, we have wafer stock that can support a number of quarters worth of sales. And remember, wafers do not go bad, they do not go obsolete. These can sit on the shelf for years and years and years if needed. They're not going to sit on the shelf for that long. We will start to work it down over the next couple of quarters. So you would expect it to come down during the course of the year to a certain extent, but wafers do not go bad. And that gives us a lot of comfort. And quite honestly, this gives our customers a lot of comfort for the reasons that I just mentioned, if there are any type of supply chain issues out there with so many of our customers being single sourced with us, they cannot afford for us to not be able to ship something to them. Right. So, yes, I wanted to underline some more on what Art said. I'm very comfortable with our inventory and we've done this somewhat deliberately for two, three reasons. One reason is, as we pointed out, none of our products have been obsoleted in the history of the company and wafers "don't go bad." that's one. The second is 80% of our business is single source and as we head into the comms enterprise, automotive and aerospace defense markets, it's important for us to reassure our customers that they are in safe pair of hands. The third is less defensive and more opportunistic or offensive. Nobody knows whether the back half of this year is a big -- the curve, right? We definitely expect it to be more than first half, but there's a case to be made for it to be made for that to be a big snapback to be a real snapback in demand in the second half. I'm not saying that it will be. I'm just speculating that if it is, I think it gives SiTime a great position to be able to capitalize on that with our programmability with our value proposition, and we think that, that it makes sense for that reason as well. Thank you. Please standby for our next question. Our next question comes from the line of Doug O'Laughlin with Fabricated Knowledge. Your line is open. Hey, Art. Hey, Rajesh. I was just wondering for the full 2023, will you be shipping below the run rate demand. I mean we just don't know what the second half looks like. Now I was wondering if there's a possibility that the entirety of the year, you'll be moving down the inventory? And then I have a follow-up. Yes. So we will clearly be shipping below end demand, right, because our customers have to work through some of their inventory. So whatever we end up shipping the end demand will have been higher. So I don't know if that's your question or if it has to do with our inventory. Okay. So I was more just trying to get the trajectory of the second half, right? Like there really is no way to know right now, but like -- for example, at some point in Q3, Q4, if your largest customer goes from essentially zero to some amount, I'm just trying to get a better shape. I was just essentially trying to ask what Q3 and Q4 could look like on the other side, but I understand that's pretty hard to forecast. So could I ask another question⦠Let me provide some comment on that. Yes, we believe that sales to our largest customer will come back in the back half for two reasons. One, in the first half, they're going to have to consume inventory. That disappear -- that situation disappears in the back half. And the second piece of this is that our strongest business with this customer has always traditionally been in the second half of the year. If you go back and look at preceding years, that is -- we ship a lot more to them in the back half of the year than the first half of the year. So I firmly believe that our sales to that customer will come back relatively strongly in the back half of the year. Okay. Perfect. And then on the design win side, you talked about 300 applications in the prepared remarks. Is there some kind of -- do you guys track the application expansion? And is there a way to see how much that's expanded over, say, â21 or 2020? We don't track it as a primary metric. It's one of the secondary metrics. What we track our design wins in particular segments rather than in particular applications. But I think it's safe to say that from the time that we went public, we've gone -- we have about doubled the number of applications. So in other words, we've probably gone from sub-150 to 300 applications, and we continue to add applications every month, really. Okay. And going forward with these design wins, do you think you'll be able to double that again? Like I'm just trying to get a kind of magnitude of the number of design wins like from the longer tail? Or is it going to be like a similar group of current applications that are just being sold into more and more, if that makes any sense? Right. Like our funnel is very strong, right? Our funnel continues to grow very, very solidly year-on-year. every year that we've been here, it's been growing a lot. And that's no surprise given that we've been adding new products, and we've been marketing stronger and so on. as long as our funnel growth continues, particularly around single source, particularly around our focus markets, particularly around our higher differentiated products. I think that the design wins will follow quite naturally. But we think that they will grow, but I couldn't say whether they double, and I couldn't give you that level of precision. So Doug, another way to think about it is we talk about our SAM a lot. And we calculate that SAM by looking at the different applications and how our products will apply to those different applications. Our SAM was $1 billion a year ago. Just recently, as Rajesh mentioned on the call, we think it's about $2 billion now. And by the end of 2024, we think it goes to $4 billion. And a lot of that SAM expansion comes from new products that are essentially going into new applications. Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to management for closing remarks. Yes. I'd like to just say that I feel very comfortable. Obviously, the decline in our largest customer's revenue is not to our liking, but we understand the situation very well because, as I said, we helped get some clarification in it. So we have good insight into that. We are also on the second half of the year, as mentioned by Art quite confident in the growth of their business. Ex that business, the rest of our business continues to do well. We continue to believe that Q1 is, in fact, the bottom and that we start to get back in Q2 and Q3, Q4, the -- it starts to ramp up. What the level of that ramp is? We're watching carefully. We obviously have strong views on that, but we're just watching for now, and we'll let you know as it unfolds. Clearly, though, what makes me feel very good about the place where we are is that in all of this, our ASPs continue to grow. Our single-source position continues to be at 80%. Our funnel continues to grow. Our products are right on time. And given the -- even in spite of the complexity, we are able to bring them out and connect with our customers. So all in all, I think we're in a great shape, and we'd love to give you more information as we go further in the quarter. Thank you very much.
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EarningCall_818
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Good morning, ladies and gentlemen, and welcome to the MAA Fourth Quarter and Full Year 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, the company will conduct a question-and-answer session. As a reminder, this conference call is being recorded today, February 22nd, 2022 [2023]. I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening comments. Please go ahead. Thank you, Natty and good morning, everyone. This is Andrew Schaeffer, Treasurer and Director of Capital Markets for MAA. Members of the management team also participating on the call with me this morning are Eric Bolton, Tim Argo, Al Campbell, Rob DelPriore, Joe Fracchia, Tom Grimes, and Brad Hill. Before we begin with our prepared comments this morning, I want to point out that as part of this discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the forward-looking statements section in yesterday's earnings release and our 34 Act filings with the SEC, which describe risk factors that may impact future results. During this call, we will also discuss certain non-GAAP financial measures. A presentation of the most directly comparable GAAP financial measures, as well as reconciliations of the difference between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial deck. Our earnings release and supplement are currently available on the For Investors page of our website atwww.maac.com. A copy of our prepared comments and an audio recording of this call will also be available on our website later today. After some brief prepared comments, the management team will be available to answer questions. Thanks, Andrew, and good morning, everyone. MAA wrapped up calendar year 2022 with fourth quarter results for core FFO that were ahead of expectations as higher fee income along with continued growth in average rent per unit and strong occupancy more than offset pressure from higher real estate taxes. Looking ahead to the coming year, there is clearly some uncertainty surrounding the outlook for the employment markets, the pace of inflation and the broader economy. In addition, while we do know that new supply deliveries in 2023 broadly will be higher than in 2022, we continue to believe that MAA is well positioned for the coming year as the leasing market returns to more normalized conditions. Our expectations for the coming year are built on a lease-over-lease pricing environment of 3%. This performance assumption, coupled with the earn-in from 2022's rent growth should drive growth in effective rent per unit of around 7% over the coming year. We will, of course, see conditions vary some by market and submarket location, but we believe that our portfolio is in a uniquely solid position to weather expected moderation from the historically high rate growth of last year. This view is really supported by three key variables: first, we continue to believe that our Sunbelt footprint maintains an advantageous position for capturing demand, given the stronger and more stable employment markets in the Sunbelt states. We continue to see job growth, positive migration trends, affordable rent-to-income ratios and low resident turnover. Secondly, MAA's unique diversification across the Sunbelt region, including both large and high-growth secondary markets, provides exposure to a good range of employment sectors and works to help soften some of the pressures surrounding new supply levels in a number of our larger markets. And thirdly, with a rent price point average for our portfolio that appeals to our broad segment of the rental market and it is around 20% below the price point of the mostly high-end new product being delivered, we believe we will capture more stability and top-line performance as leasing conditions normalize in 2023. In the event that we do find ourselves later in the year headed towards a more severe contraction in the economy or a recession, as MAA has consistently demonstrated over the past 20 years, we expect to perform with a lower level of volatility than what generally is seen with more concentrated portfolios and/or those costs traded in large coastal markets. The transaction market remains very quiet and we are likewise remaining patient with what opportunities we do see. I expect it will be the second half of the year before pricing data becomes more readily available. We do have plans to initiate development on four new projects in 2023 associated with sites that we already own or that are under our control. These projects will, of course, not actually start delivering units for another couple of years. In conclusion, I want to give a big thank you to our MAA associates for their tremendous service and record performance in2022. We have the company well positioned for the next cycle, as a number of new tech initiatives will positively impact performance over the coming years. Our external growth pipeline continues to expand and the balance sheet provides a good, strong foundation for supporting our current portfolio operations, as well as active pursuit of new growth opportunities. Thank you, Eric, and good morning, everyone. Same-store performance for the quarter was once again strong and ahead of our expectations. While pricing performance moderated during the fourth quarter from the record growth we had achieved September year-to-date, blended lease-over-lease pricing was up 5.7%. As a result, effective rent growth or the growth on all in-place leases for the fourth quarter was 14.9%, versus the prior year and 2.0% sequentially from the prior quarter. Full year 2022 blended lease-over-lease pricing was 13.9%, helping to drive full year effective rent growth of 14.6%. Alongside the strong pricing performance, average daily occupancy remained steady at 95.6% for the fourth quarter and 95.7% for the full year 2022. In line with normal seasonality, our January new lease rate of negative 0.3% improved from December's new lease rate of negative 0.9% and other than 2022 represents a higher new lease rate than any year since we have been tracking the data. Combined with renewal pricing of 8.6%, January blended lease-over-lease pricing was 4.2% and average daily occupancy was 95.7%. With new lease pricing moderating as expected, renewal pricing, which lagged new lease pricing for much of 2022 is providing a catalyst for the strong January pricing and is expected to be strong for the next few months before moderating to a more typical range. We are achieving growth rates on signed renewals of around 8% to 9% for the first quarter. We do expect new supply in several of our markets remain elevated in 2023, putting some pressure on rent growth, but the various demand indicators remain strong and we expect our portfolio to continue to benefit from population household and job growth. As Eric mentioned, should we see a more dramatic downturn in the economy from here, we expect our market's diversification and price point will help mitigate some of the impact to performance. During the quarter, we continued our various product upgrade initiatives. This includes our interior unit redevelopment program, our installation of smart home technology and our broader amenity-based property repositioning program. For the full year 2022, we completed more than 6,500 interior unit upgrades and installed over 24,000 smart home packages. As of December 31, 2022, the total number of smart units is over 71,000, and we expect to finish out the remainder of the portfolio in 2023. For our repositioning program, leases have been fully or partially repriced at the first 11 properties in the program and the results have exceeded our expectations with yields on costs averaging approximately 17%.We have another four projects that will begin repricing this quarter and five additional projects currently under construction. Thank you, Tim, and good morning. Despite execution challenges in the transaction market, our team successfully completed our disposition plan for 2022 by closing our last two dispositions in the fourth quarter. Our total disposition proceeds for the year were approximately $325 million, representing a stabilized NOI yield of 4.3% and an investment IRR of 17.7% for assets with an average age of 25 years old. In 2023, we will continue the discipline of steadily recycling capital out of older, higher CapEx properties with the intent to redeploy the capital into newer, lower CapEx, higher rent growth properties to drive higher long-term earnings growth within our portfolio. While transaction volume continues to be muted, we believe it's likely that the transaction market will provide more opportunities towards the back half of the year. Currently, the number of marketed properties is down substantially from 2022, with the majority of sellers waiting until at least the spring leasing season before reevaluating their planned sale timing. In the face of this lower volume, we have seen some upward pressure on cap rates with the degree of the movement varying based on property characteristics, embedded rent growth, as well as market and submarket location. However, until closed transactions materially increase transparency around cap rates will be difficult. When marketed deal volume does increase, we expect buyer financial strength and speed of execution to be attractive key differentiators and our balance sheet strength and capacity will support our ability to transact despite a more difficult credit environment. On our new developments, our team has done a tremendous job working through the challenges of elevated construction costs and permitting delays, leading to steady growth in our development pipeline. During 2022,we started construction on 1,253 units at a cost of $468 million, a record level of starts for MAA. During the fourth quarter, we started construction on two projects that have been in predevelopment for some time. These two projects will begin delivering units in two years and should finish construction in three years, lining up well with what we believe is likely to be a strong leasing environment. While the timing of planned construction starts can change as we work through the local approval and construction bidding processes, we expect to start four new developments during the back half of 2023. This includes two in-house developments, one located in Orlando and one in Denver and two pre-purchased joint venture developments, one located in Charlotte and the other a Phase 2 to our West Midtown development in Atlanta. Our construction management team continues to do a tremendous job actively managing our projects and working with our contractors to keep the inflationary and supply chain pressures from causing a meaningful increase to our overall development costs or our schedules. Despite these headwinds, the team delivered three projects on time in 2022 and under budget by approximately $4.5 million. During the fourth quarter, construction wrapped up on MAA Windmill Hill, and we reached stabilization at MAA Robinson, MAA West Glenn and MAA Park Point with operating results well ahead of our pro forma expectations delivering stabilized NOI yields on average of 6.6%. Leasing demand at our new properties remains high and the competition from other new supply has, to-date, not had a significant impact on our lease-up performance with rents being achieved well ahead of pro formas. Okay. Thank you, Brad, and good morning, everyone. Reported core FFO per share of $2.32 for the quarter was $0.05 above the midpoint of our guidance and contributed to core FFO for the full year of $8.50 per share, representing a 21% increase over the prior year. Same-store rental pricing and occupancy levels were in line with expectations for the quarter, while higher fee and reimbursement revenues, combined with strong lease-up and commercial revenues, to produce about two-thirds of this earnings outperformance for the quarter. This favorability was partially offset by real estate tax expenses, as final millage rates came in higher than expected during the quarter for several markets, primarily in Texas. Our real estate tax estimates were based on strong valuations supported by the very strong revenue trends over the last year, offset by expected millage rate rollbacks as counties managed overall tax needs and rollbacks occurred but were less than expected in Texas, particularly in Dallas and Austin. Our internal guidance for â our initial guidance, excuse me, for '23, which we'll discuss more in a moment anticipate some continued pressure in this area given its backward-looking nature. Our balance sheet remains very strong, as we ended the year with historically low leverage debt-to-EBITDA RE of3.71 times with 95.5% of our debt fixed at an average interest rate of 3.4% and with $1.3 billion available capacity to support growth and manage our debt maturities late in 2023. Also at the end of January, we settled our outstanding forward equity contracts, providing an additional $204 million of capacity at an attractive cost of capital. We currently expect to fund our near-term acquisition, development and refinancing needs with short-term debt capacity allowing the financing markets to continue to stabilize before locking in long-term financing. Finally, we did provide initial earnings guidance for 2023 with our release, which is detailed in the supplemental information package. Core FFO for the year is projected to be $8.88 to $9.28 per share or $9.08 at the midpoint, which represents a 6.8% increase over the prior year. The foundation for the projected 2023 performance is same-store revenue growth produced by historically higher rental pricing earn-in of about 5.5% combined with the more normalized blended rental pricing performance of 3% for the year, as well as a continued strong occupancy remaining between 95.6% and 96%for the year. Based on this, effective rent growth for the year is projected to be a solid 7% at the midpoint of our range, with total same-store revenues expected to grow 6.25%, slightly diluted from the other revenue items, primarily reimbursement in fee income, which grew at a more modest pace. Same-store operating expenses are projected to grow at 6.15% at the midpoint for the year with real estate taxes and insurance producing the most significant growth pressure. Combined these two items alone are expected to grow just over 7% for 2023 with the remaining controllable operating items expected to grow around 5.5%. These expense pressures are offset by the continued strong revenue growth with NOI for the year projected to grow 6.3% at the midpoint. We're also expecting continued external growth, both through the acquisitions and development opportunities during the year with a combined $700 million full year planned investment. This growth will be partially funded by asset sales, providing around $300 million of expected proceeds. We expect to fund the remaining capital needs for the year from internal cash flow and short-term variable rate borrowings, as we anticipate the financing markets to continue stabilizing over the next year, eventually providing better opportunities to lock in long-term debt rates. This does produce some slight pressure on current year FFO performance given high short-term rates, but is expected to be rewarded with lower long-term financing costs when markets stabilize further. So that's all that we have in the way of prepared comments. So Nikki, we'll now turn the call back to you for any questions. Thanks. Good morning, everyone. So I just wanted to start with the guidance on same-store revenue. So if you're at sort of right around 6% at the midpoint, I think you guys had an earn-in that was close to that number coming into the year. So, you have occupancy being roughly flat in the guidance. So just trying to understand kind of what might be the offset as to â and you are assuming some market rent growth, as well. So just trying to understand kind of the buildup there and if there is anything we're missing as to why the revenue growth guidance wouldn't be a little bit higher based on the earnings you've cited? Yes. Nick, I'll give you the components â this is Al. I'll give you the components of how we built it, and maybe Tim can give a little color, if he would like, on some of the components. But really itâs built on the earn-in. You talked about based on where pricing was when we think about earnings is pricing at the end the year if it were to carry-forward that same level, not up or down, what would it be built into our portfolio. That's about5.5%, that's the way we think about it. And on top of that, you get about half of the current year expected blended pricing. And as we talked about, we're expecting about 3%. So you add those two numbers together, you get right at the 7% effective rent growth guidance that we put out. Now that is, as we mentioned in the comments, a little bit moderated from other income items. About 10% of our revenue stream is from reimbursements and fees those things and they're expected to grow more modestly than that. So that's what gets to 6.25%, but in terms of the earn-in and the components, that's really what it is. Okay. Thanks. That's helpful. And then just the second question is just to get a feel for what type of economic scenario is baked into guidance whether this is a softer landing with modest job losses, any commentary from you guys on the economic outlook would be helpful? Thanks. Well, Nick, this is Eric. I mean broadly, as Al mentioned, I mean, we do expect that the overall rent growth for the market next year will be something around 3%, which I think is going to be fueled by what we expect to be a continued relatively stable employment backdrop to what we're seeing today. We're not seeing any real evidence, significant evidence building in any of our markets at this point relating to employment weakness or people losing jobs. We're not having any kind of issues surrounding collections. Migration trends continue to be very positive. And so, as we think about the outlook for '23, I mean, we're â it's definitely moderated from what it was 2022, but we're not seeing any concerns at the moment that a severe contraction or any sort of a worse â a materially worse decline in the employment markets were to occur now. If that does happen is, as I alluded to in my comments, we've been through recessions in the past, and we think that if we find ourselves in a more severe economic contraction, where broadly the employment markets start to really pull back, we think that that's where the sort of defensive characteristics that we've built into our strategy really start to pay a dividend for us and that's where our secondary markets come into play on lower price point of our product comes into play and the broad diversification to employment sectors that we have across the large number of markets that we're in, all provide some level of cushion, if you will, if we find ourselves in a more severe downturn. So right now, we're not calling for that, but we think that it should have happen, we would probably weather that pressure better than a lot of others. Hey, good morning. Just, first question is on development and your appetite for using capital. You said that cap rates overall for stabilized products are still sort of in flux. The debt market is clearly better for apartments, but CMBS, which you guys don't use or Fannie, Freddie, whatever, that's still â well, I guess, more CMBS remains sort of closed. So as you guys think about development, do you think more about starting on your own account or do you see the potential that you're better off buying from other people who may run into financial difficulty, where on a risk-adjusted, you're better off to pick from someone else rather than starting ground up from you guys? Yes, Alex, this is Brad. I'll start off with that. I'd say it's both. We're looking at both opportunities, both on our balance sheet and then working with partners, as well. I mean what we haven't seen broadly yet are developers kind of spitting sites, spitting land sites. We've seen it a little bit, but it's been sites that we're not really interested in. We've not seen the well located sites that have gone under contract kind of being let go, we've not seen that yet. So we will keep our eye on that for sure, because I think that's where the opportunity presents itself for our on-balance sheet developments where we can pick up some of those land sites that other people drop. I think what we are seeing short term is exactly what you mentioned is the difficulties in the debt market kind of showing up through some of our development partners, maybe they can't get the debt financing for some of their developments going or equity partners backing out on deals. We are seeing that short term. We've got a team of folks this week that are out at NMHC and we've already got a number of e-mails of projects, JV development opportunities that are a follow-up from that, where their shovel-ready, could start mid-year. So we'll begin evaluating those because I think those are the ones that are going to be impacted by the debt market and just how tight that is right now. But the long story is, we'll look for opportunities in both of those areas. Okay. And the second question is just going back to Nick's question on sort of state of the markets and the employment. One of the common refrains about the Sunbelt is, it always has a lot of supply, but the economic growth seems to be more than offset and you spoke about that relative to your ability to manage higher taxes, higher insurance. As you look at this year, and based on what your property managers see among the resident base and employment stats within your markets, do you see any like substantial risk that employment or economic job growth in your markets will not be able to exceed the new supply coming on? Or as you sit here today, your â as you guys sit around the round table, you're like, there are a few more markets that we're more concerned about now than we were back in, let's say, November, when you guys were assessing how 2023 would look? Well, Alex, this is Eric. As we sit here today, we continue to feel good about the demand side of the equation for us. As I mentioned, we're not seeing any â I mean, the lead volume and traffic that we're seeing is still strong. We are seeing â not seeing any evidence of stress with our renters in terms of collections. We're not seeing any evidence of people coming in, talking about losing their job because of â and needing to get out their lease. We're not seeing any roommating trends starting to pick up. And so, as we sit here â and then also, you look at the migration trends, we still saw 12% of the leases that we did in the fourth quarter were for people moving into the Sunbelt from outside of Sunbelt. So, we are still not seeing any worries build on the demand side of the equation at this point, moderating from what it was but still quite strong. Great. Thanks guys. I was just curious if you could share how â I believe the 3% figure you provided on lease-over-leases, the blended lease rate growth assumption embedded in guidance. And I'm just wondering if you could breakdown that between sort of the first half assumption and back half, as you alluded to, kind of renewals maybe trending a little bit lower as the year progresses? Hey, Austin, this is Tim. Yes, you heard me mention in the comments that renewals right now are the catalyst for us and kind of carrying the strength, new lease pricing outpace renewals for the bulk of 2022. So we knew we kind of had some runway on the renewal side that's carrying us through this early part of 2023. So, the 8% to 9% I talked about on renewals, I think that probably carries through the first quarter, call it, and then starts to moderate a little bit as you get into probably, June through the rest of the year, I would expect it to be a little more normal with sort of what you've typically seen from MAA, which is kind of in that 6% to 7% range and then on the new lease side, we're sitting slightly negative right now. I think that will slowly accelerate through the spring and summer and go modestly positive and then trend back down towards the end of the year. So, kind of higher renewals in the first half of the year, moderating a little bit, new lease rates growing slightly through the year and then moderating just with seasonality, as we typically would see in Q4 and then you kind of blend that all together and get to the forecast that we have for blended lease-over-lease. Well, on the new lease rate side, I guess what specifically â I mean it seems like that's fairly low relative to what you've achieved historically, pre-pandemic period and with 3% market rent growth, you would think that you kind of surpass that 3% into the peak leasing season before it moderates in the back half of the year. So, I guess I'm trying to understand that kind of cautious new lease rate growth assumption in your guidance? And then, could you also just share what would get you to the low end of the guidance range because that seems like a pretty draconian scenario to be able to achieve the lower end? Thanks. I'll give you sort of the forecast how it's laid out quarter by quarter, and Tim will give a little more specifics on it. It is fairly consistent around that 3% for the year with obviously more -- a little higher in the second two quarters of the year, as Tim mentioned, as we get more traffic and renewals hold stronger and new lease pricing becomes most robust. It's really going to come down to new lease pricing as the variable through the year. But the band is fairly tight around 3% in our expectation, just given the blend of over overall demand. And so... Yes, following up on the new lease rate, I mean, we again, absent last year that was record highs, new lease rates kind of November-December, early part of the first quarter, typically are negative. So it's not unusual kind of the new lease rates that we're seeing right now and then they start to accelerate as we get into the spring and summer. But in terms of getting to low end, I think it's kind of back to Eric's comments on the economy, if we see a further deceleration in demand or see something a shock on the economic front that could drive pricing obviously lower and that's how you get towards the lower end of the guidance and then the opposite a little bit better economic backdrop would push pricing higher and get us more to the higher end of revenue guidance. If That shot came, it would -- given that it's coming -- the impact will come through pricing, it would be manifest probably in the latter part of the year as those new leases blended in. Thanks. Eric, in your comments on the stuff, you talked about the strong balance sheet and have been in a position to capture any growth opportunities. It sounds like you think may emerge from your comments on the call, it sounds like maybe that's more of a second half '23 comment. But where do you think there's opportunities could come from? Is that more acquisitions, land, something else? No, Nick, I would tell you that my belief is that we've been through this in the past, where we tend to find the best opportunity is in projects that are in lease-up, fairly newly constructed. There are more not have already finished the construction. They may be at that 50%-60% occupancy level in their initial lease-up. They've been leasing for probably the better part of the year. So they're still â they are now getting to a point where they're starting to run into lease expirations and related turnover, which just brings that much more pressure on the lease-up effort itself. And these, as I say, are not yet fully stabilized assets and thus, they're more difficult to finance from a typical leverage buyer so that's where we're hopeful that we will find more emerging opportunities in that kind of a scenario. We've certainly seen that in the past. And one of the things I think is important to point out, I mean, our assumptions is built around â for 2023, our guidance is built around the assumption of a $400 million acquisition volume. Now we are assuming that their initial yield on this $400 million of acquisition is only 3%, reflecting that non-stabilized status of these investments, so while that is weighing on FFO performance for the year, we think that it has great value proposition, value opportunity going forward long term. And so we're â given the supply that's coming into the market, given the difficult financing environment we find ourselves in, we think that, that area of opportunity is going to emerge over the course of this year, and that's what we've kind of dialed into our guidance for the year. Thanks. That's very helpful. And then, I guess, we've spent a lot of time on kind of macro backdrop and the blended rent growth assumption and everything that goes into revenue. But if you think about from a market perspective in '23, given your kind of new guidance, what does that imply for which markets are kind of the top performers and which you're concerned about? Yes, Nick, this is Tim. I mean with the earned in, we talked about of our larger markets, I expect just rent growth or revenue growth should be pretty solid for several of our markets due to that earn-in. But if you think about some of the stronger ones that we think will continue into 2023, I mean, Orlando, continues to be a really strong market for us. It's been strong now for a couple of years. In terms of demand, it's our #1 job growth market that we're expecting for 2023. It is getting a little bit of supply, but it's not necessarily situated where our portfolio is in Orlando of some markets in our portfolio that are getting the most supply only one of those is in Orlando. So the demand, combined with the supply there expects Orlando to be strong. It's continued to have really strong blended pricing both in Q4 and January. And then Dallas is another one I'd point out that we think can show some strength in 2023. It's one of our lower supply markets we would expect. There is a couple submarkets that we're in, particularly in North Dallas, Frisco, Plano Allen, that will get some supply. But broadly, Dallas hasn't seen as much supply pressure, and we've seen the pricing both in Q4 and January been a little bit higher than portfolio average. So those are a couple that we've kind of got our eye on from a strength standpoint. Austin is probably one that on the downside that we're keeping our eye on more than anything. It's kind of got the extremes on supply and demand. It's one of the better indicators in terms of demand with job growth, migration, population, all that, but it also has absolute high supply coming into the market of any of our portfolios or any of the markets in our portfolio out of the various submarkets that we're seeing supply, 4 out of the top 20 are in Austin. So that's one we do expect to moderate, though it does have pretty good earned in rate growth. So, those area couple that we're kind of keeping our eye on. Thanks. That's helpful. So it sounds like maybe the large still outperformed the secondary markets in '23 or maybe that spread narrows a bit? Yes, it probably narrows a bit just with moderating rent growth. We typically see the secondary markets holdup a little more if we get into softer economic environment. But I think broadly in terms of revenue growth, again, with the earn-in, I would expect that the large markets hold up pretty well. Hi, good morning. Thanks. Just a question on new lease spreads and pricing going into the spring. What would cause you to get a bit more, I guess, confident on pushing rate more as you get to the peak leasing season, would it be just general improvement and economic sentiment, job to be where it is, the market continuing to do well? Just curious how you may change your approach to pricing in spring if things get a bit better? Yes. I mean, generally, it's going to be â it will be that. It's the economy and the demand, and we look at lead volume, we look at exposure, we look at rent to income and various things there that drives some of our decisions on â we are always sort of balancing how much we want to push price versus occupancy. So there's nothing â there is no blinking red lights right now that would suggest that we see any sort of downturn. We're kind of we're kind of monitoring all those various metrics right now and everything looks about what you would typically think during this time of the year, during the winter. So it will really be as we get into spring and summer as demand picks up and traffic pick up and we pick up that will be really the determining factor on where 2023 heads in terms of demand. Okay, thanks. And turnover seemed pretty consistent. And any changes in how certain residents responded to lease renewals, price increases? And any trends there you want to call out? Yes. I mean the turnover was â remains pretty low. Historically speaking, it was up a little bit in Q4, but the reasons for turn have been pretty consistent. We've actually seen the move-out to rent increase decline a little bit, but it's still â it's a job transfer and buy a house are still the two biggest factors, but those have certainly been down from what we've seen in the past. But no notable trends one way or the other. Hi, good morning and thank you for taking my question. Could you spend some time talking about the expense outlook for 2023, what would get you to the low end versus the high end? And guidance does talk about property taxes in there, but perhaps you could spend some time on other elements? And then, what are the markets where you see more tax pressures versus others? Thank you. Chandni, this is Al. I'll start with that and then maybe Tim can give some color on some of that. I think the way to think about that as you go into 2023 is, we're continuing to see general inflationary pressures a bit in our expenses, but really taxes and insurance are the drivers of the main pressure. And as I mentioned in my comments, those two together are over 7% and so that's really -- and taxes are 35% of all operating expenses. So it's very meaningful. And then the other expenses together are about 5.5%. I think we're beginning to see some moderation in personnel, repair maintenance and those things. And I think you'll see that manifest, and Tim can talk about components of it, but as we move more into the back of the year, you'll see a little more of that manifest in those loan items. But taxes and insurance, there's a pressure point. What could take us higher or lower to our guidance on the overall, which is primarily going to be taxes and insurance, would be we don't have a lot of information yet on either 1 of those. Taxes, when you go into the year, notoriously, you don't have a lot, you're going off -- you have a good idea what you think valuations will be based on cap rate markets, but you're totally guessing on millage rates, and that has been very volatile in the last year-or-so as municipalities deal with their budget issues. So we think we â and we've got a few fights left over from last year. I mean we've got some things that we're going to fight hard, and we continue to. In Texas, we'll formally litigate half of our properties this year than we did last year, and some of those have not yet finished. And so â there are things like that, that can make you go higher or lower. We feel like we've got our best estimate in there right now, and that's the appropriate thing to do. And so overall, we'll see some moderation in the controllable expenses, but expense pressure driven by insurance and taxes. Yes, Chandni, I'll add to that. As Al mentioned, about 40% of our expenses are taxed at insurance, call it, around 7%. And then the other 60% around 5.5%. So if I had to just thinking in terms of absolute year-over-year growth, I sort of rank them, I would say insurance is probably the highest, R&M probably the second highest in real estate tax is the third. So hitting on R&M, it's really driven by inflationary pressures, not so much we expect to get really any worse in 2023 that kind of carry over earn-in, if you will, on some of the inflationary increases that we saw in 2022,we've seen HVAC up 16%, plumbing up 18%, appliances up 17%. So that's expected to drive the pressure on the R&M side, but we still remain on a per unit basis lower than the sector average. I do think personnel moderates from what we saw in 2022. I think we have some opportunity there. But -- and then the other smaller line items are fairly manageable. So it's really on a controllable, if you will, side it's R&M, we think is driving the bulk of the increase. Thank you for all that details. For my follow-up question, I just wanted to clarify or trying to understand how are you thinking about bad debt in 2023? What's embedded in your guidance if there is anything and how does that compare versus 2022? And then as you've obviously talked about supply being higher in 2023, how are you thinking about concessions? Are you seeing more concessions in your markets, in your properties? Any thoughts around that would be very helpful. Thank you. I'll start with the bad debt. I mean I think in terms of what we have in our guidance, collection practices have come pretty much back to normal, not 100% maybe, but very close, I would say. something to say about that. But collections are very good. What we dialed in as close to historic normal, call it, 40 to 50 basis points delinquency, which is very low. And we have almost no collections coming from any government programs. We have the amount of our uncollected from history as it continues to decline. So we're in a very good position there. And so our forecast for the year reflects that. And so moderating or normalizing trends that we're putting our forecast really has collections about where they typically are in a normal environment. Yes. And, one, I'll add on the concession point, we're not seeing any significant increase in concessions at this point. It was 0.3% of rents overall in Q4, which is in line with what we saw in Q3. We are -- to the extent we're seeing them, it's still largely across the portfolio, more in some of the urban or downtown submarkets, which has seen more of the supply and seeing less concession usage on more suburban assets. But generally, no big change from what we've seen in the last couple of quarters. . Hey, good morning out there. Few questions from me on the external growth front. I was at National Multi-Housing, too, but heard that there is a â that buyers more institutional demand, but a shortage of sellers and products. But I guess I am curious if you would see an advantage to a selling more assets now is that perhaps the premium and perhaps be willing to sell a bit earlier in the year to capitalize on even if it doesn't mean to put a dilution as the way to redeploy in a more favorable acquisition market in the back half of the year? Yes. Haendel, this is Brad. I'll take that. As we entered this year, our disposition plan is really big component of that, as you mentioned, is the ability to redeploy that capital. That's a big part of what we're looking to do. And so we're not looking to time the market. We do a very in-depth review of our disposition plans in the third, fourth quarter of the year to really identify what we're going to sell for the year. And we generally don't factor in what we think are going to be the market dynamics in terms of just maximizing value. We want to do that. But broadly speaking, what we're trying to do is really build a long-term earnings within the company that really supports our ability to pay a growing dividend over time. And so we think that's better done on a consistent basis where we're in a position to be able to sell assets, maximize our proceeds to the best we can and then redeploy that capital into external growth opportunities. So what we have in our forecast right now is a sale of 1 asset earlier in the year. And the reason for that is we're targeting a strong primary market that's in Charlotte where we think we can kind of maximize the proceeds given the fact that there aren't a lot of sellers out there right now in that specific market. And then we'll come out with our other assets later in the year when we think the debt markets will be a little bit settled down a little bit, spreads will be a little bit less volatile than where they are right now and frankly, where buyers can get a little bit more visibility on values. We think that that's the best direction for us in terms of our dispositions and our external growth plan. That's very helpful. I appreciate the color there. A follow-up maybe on the different side, but external growth related. We've seen a lot of mid and high four cap rate trades of late, but hearing the bid-ask spread that remains fairly wide, 10-ish from some folks, so curious kind of what you're hearing or seeing on the bid-ask spread? And how this plays out? What do you think the market clearing price is or what you'd be willing to pay to get some deals done here? Thanks. Yes. It's hard to say. I mean there is just, as we looked at the market in the fourth quarter, honestly, in terms of the assets that we would be interested in buying and track, there was really only seven. So in the universe of us normally tracking 40 deals in a quarter to only have seven transact is a very, very small universe and we have seen cap rates move up. I would say, in the third quarter, they're around 4.5 on the projects that we looked at. In the fourth quarter, they were 4.75. We â but there is a spread, obviously, and it really depends on where the assets are located. We saw one in the fourth quarter that traded, call it, for 5.25, but generally, when you're getting into that cap rate range right now, we found that the quality of the asset or the location is not ideal and it's not generally a location that we're interested in. So for assets we're interested in, they're still in the 4.75 range. To your earlier point, I think part of the driver there is that there's just not a lot on the market. And I think as more volume to come to market, which we think will happen late second quarter and into the third quarter later this year, even as more properties come to market that those cap rates likely expand a bit. I mean the fact is interest rates are up substantially. Today, the debt rates are 5 to 5.5 and that's got to push cap rates up at some point, negative leverage is not something that we can maintain in perpetuity. But until you have a significant volume of assets coming to market, there's still going to be a number of aggressive buyers out there that are bidding hard at assets that are really setting a lower cap rate range. And then I would also say that a majority of what's selling right now continues to be loan assumptions. And so that kind of masks what true cap rates are out in the market, and we just need volume to really help us see that. That's really helpful, too, appreciate that. If I could squeeze in one more. I don't think I heard it, but did you guys share or can you share what your turnover assumption is for a full year '23? Thanks. Yes, Haendel, this is Tim. For now, we're expecting it to be pretty similar. I think some of the reasons that drove turnover this year probably moderate a little bit and maybe some of the other reasons go up a little bit. But in general, we're expecting similar turnover to what we saw in 2022. . Thanks. Good morning. My first question is on the expected deceleration of rent growth, obviously, in 2023, no one is surprised by that. But I'm wondering if you can sort of get into some more of the nitty-gritty detail of where you're landing, how much of it is proactive on your part? How much of is it reactive? Are you sensing fatigue from customers? Are you noticing occupancy moving around or turnover? I think you mentioned â Tim, I think you mentioned turnover uptick in the fourth quarter. Are there any things that you're reacting to that's causing you to pinpoint where you're headed for same-store revenue growth in 2023? Or are you just sort of protecting the downside given some of the uncertainty in the macro environment and being more proactive in your approach? Well, Rich, this is Eric. Let me try to answer that. I think that at the ground level, I would say that we're not really seeing anything at this point that causes us to believe that we're looking at a much weaker demand environment over the coming year. I mean as I touched on earlier, I mean we're still seeing no evidence of distress with our vendor base. Our rent-to-income ratios remain very stable relative to where they have been. Collections performance has been very strong. We're not seeing any behavioral changes with roommating, things of that nature. We're not in the trends to migrate â migration trends continue to be quite positive. Move outs to non-MAA markets and our move outs out of the Sunbelt continue to be quite low. So I think more than anything for us, we're just trying to keep an eye on the broader economy and the broader employment markets and any evidence that the employers are really starting to get aggressive at downscaling and downsizing their staffing. And we've not seen that yet, but that would be obviously a cause for concern. But at a macro level, move-outs to home buying continues to be quite low, and there's no evidence mounting that that's starting to change and move outs due to the people not wanting to pay their rent increase that we're asking for, still is our third biggest reason. But we're still having people come in after them when they do move out, willing to pay more than what we were asking the renewing resident to pay. So that's a â that to me, is a fairly strong indicator that the market is still holding up quite well. And so, I think we're just â we're moderating off of incredible highs and that's what's happening here. But in terms of any significant pullback in demand, we are just not seeing that at this point. Okay. Fair enough. Second question is, just closing the loop on the supply conversation, what always happens is developers chasing 2022 growth by delivering product in 2024. Always a smart strategy. But I guess my question is, do you feel like the environment and interest rates and everything else, do you feel like sort of the private developer model is on shaker ground than normal this time around? And perhaps even more of an opportunity for you to step in at some point down the road? Or is it sort of a typical environment, different, obviously, variables, but a typical opportunity for you a year or two down the road? Rich, this is Brad. I definitely think in terms of new starts, they're on much shaker ground, the privates are, for sure, in terms of getting financing. I would say that anything that is in lease-up right now. I mean there's not distress in that market currently. So there's not a lot of forced selling at the moment. Now there are still equity and capital folks that they want to cycle out of. As I mentioned earlier, our region is predominantly controlled or developed by merchant developers and they're really â their model is built on developing an asset and selling it, taking the profit, moving on to the next deal and rinsing and repeating. I'd say that's a little bit in flux right now with nothing selling and the inability to start new assets. I would say the private developer is a little bit more in flux right now because of those reasons. Hey, good morning, everyone. Last year, you had about just under $200 million of nonrecurring CapEx, how are you thinking about the spend for this year and is there anything in there that would drive down expenses maybe in 2023 or 2024? Wes, this is Al. I'll start and frame the capital. I mean overall, we're spending -- all the programs to get her probably around $300 million in recurring and enhancing together probably $180 million. And so that's about$1,800 a unit, probably $1,000 recurring a little more and the rest being rent-enhancing. We continue our programs in redevelopment program, which includes our smart grant. So we'll do those interior programs that's another $97 million and we'll continue our property repositioning program with Tim talks about taking properties and increasing their revenue potential of another $20 million or so. So overall, it's about $300 million. I mean certainly, there's some There's certainly some things in the revenue has we think whether there'll be some ESG investments or some things like that, that will have some potential for the future. We're also seeing some inflationary pressures in that as well. And then a large portion of that fee is just investment for the future in some of those programs, repositioning program, redevelopment and smart rents. So that's kind of how we think about that. Okay. And then I guess as we maybe fast forward for the next few years, does this ever start to ramp down or do you have just a big pipeline of when the smart rent is done, you just move on to something else? How should we think about a multiyear view on this? Yes. Wes, this is Tim. I mean, in total, I think it comes down a little bit. The Smart Brent installation is a fairly significant piece of that. we expect to finish that capital project this year. I think you'll see that come down. But I would expect both on the unit interior redevelopment program and the broader sort of amenity-based property repositioning program that we expect to continue those at similar levels. Exposure right now sit at about 7.5%, which is in line with what it was last year and kind of what we would typically expect this time of the year. . Good morning, guys. Brad, what are the markets represented by the four to six development starts over the next year plus? And given Tim's comments on R&M pressures, what are you seeing in terms of construction cost pressures going forward for new starts? Yes, Rob. So for the four starts that we feel we're in good shape on for this year. We've got one in Charlotte, we've got one in Denver, we've got one in Orlando and one in Atlanta. I think I had those in my prepared comments. So those are projects we've been working on for a while and plans are in process on those. So we feel pretty good about those. In addition to those projects, we own a number of sites and we've got some in Denver, another phase in Orlando. Second phase in the Raleigh market. So a number of those projects that would add up to that six over the next 18 months or so. But for this year, the 4 are the ones that I mentioned in my comments. In terms of construction costs, what we're seeing right now is that costs are not escalating like they were in 2022. We saw a significant increase in construction costs throughout the year. At this point, we're not seeing that at the moment. It's certainly our hope that as we get further into this year, the times where our developments will be starting second or third and fourth quarter that perhaps we get some relief there. The first signs of that are that we're getting calls from contractors saying they didn't think they had capacity to bid our job originally, but now they do. We're hearing that from subcontractors as well. So given where the single-family market is and the fact that we expect new supply starts to come down on multifamily, we hope to see some relief on the construction side but for now, it's just holding flat. Okay. And then, Al, G&A was 58.8 in '22 and the guidance is 55.5 at the midpoint for '23. Obviously, Tom's left, but what else is in that expected decrease? I think that's, well, let me start with Rob, as we talked about, we really look at overhead as a total. And so I would focus more on the 128.5 and then that's over 3% growth in total for the year, which we think is rise. But on that specific G&A line, the biggest item there is we had very strong performance in 2022. So you've got certain programs that performance incentive programs that are max and then we said our guidance for next year is based on target. So that's a big part of that. And then on the property management expense line, the growth in that, that you see is really investments in, primarily in technology, both to strengthen our platform and to support the initiatives that were going on. So, and I answered both of those because I think that's both together a part of that overall overhead growth for the year, Rob. Good morning. thanks for taking my question. What's the expected expense growth cadence during the year? Is that relatively flat or is that accelerating? And within that are you have a midyear renewal or insurance but easier compares in the back half, how does that reconcile? And then on real estate taxes, the midpoint of the guidance is 6.25%, but that would be lower than 6.5% last year. So, just trying to understand the shape of the expenses through the year and also why the real estate taxes would be perhaps slightly down this year? Okay. I'll try to answer that. This is Al. I think what you â the cadence for expenses, you should see the most pressure in probably Q1 and that's because you've got a continuation of sort of the inflationary levels that we saw in third and fourth quarter carrying sequentially over and comparing to Q1 last year with a lot of inflationary pressure wasn't yet built in. So the highest point would probably be Q1 and it will moderate down Q2 and Q3 to more level more that mid-single-digit range. So that's the main thing. In taxes, the 6.25%, I think we are â last year, what we saw in 2022 was looking back to a strong year, we saw millage rates come in that we thought would roll back more than they did. It surprised us a little bit in the fourth quarter as we talked about. And so that was â we ended the year a little higher than we expected in 2022. And I think as we move in 2023, we don't expect significant reprising key areas. Our â we got a pretty â we have a pretty good beat on what's revaluing this year, it's primarily Texas and part of Atlanta, parts of Georgia, there's primarily Atlanta, and so given what's revaluing and our expectations for millage rates, and we have a few of our cases from 2022 that we're litigating that are spilling over into 2023. And so we've got an estimate of what we think we'll win on that. We may be wrong, but we've got an estimate on that, included in that. So all that together gets us that that 6.25% range. And a lot of unknown in that right now, as we talked about, but we think where we stand, that's a very good estimate. Got it. And sticking with you, Al. NOI growth has been strong, but property values haven't had the same magnitude of increase due to the rise in cap rate. So does that leave more opportunity for successful appeals maybe in '24 and beyond? Thanks. Yeah, I think what we'd say is '23 is a year just that they're still looking back at very strong revenue. It's kind of backward-looking game, looking at the beginning of this year. Still looking at strong revenues for 2022 and a pretty stable cap rate environment has changed, but it's still fairly stable. So that's driving it. I do think your point, I think, is a very good point. As we move into 2024 that they're looking back in a more normalized year, we would expect some moderation in taxes, primarily in Texas, Georgia, and Florida. We're seeing that in most pressure because there â it's going to be driven by a normalized top line to your point. So we would agree with that comment. Hey, thanks for keeping the call going. Al, maybe just a few quick follow-ups on the property tax conversation. Could you just give me a rough sense what percentage of the portfolio you already have a high degree of visibility for the increases this year? Man, it's â what we have a high degree of visibility is pretty low other than we have a good beat on what we think the values are. Obviously, we know given the current cap rate environment is what they are. . And John, I mean, 70% to 75% of our tax exposure is from Texas, Florida and Georgia. So it's really going to come down to the millage rates. It's going to turn down to what municipalities need? What are they going to âwe expect to have continued strong valuations and probably millage rates rolling back again. Where that all ends up? It's hard to have precise visibility at this point. I mean I think we have consultants that help us. We have a lot of market knowledge. So it's based on â our estimates based on Texas Georgia and Florida, the key drivers of our expense. And that's â I wish we had more at this point, but I do think that our experience our history in the markets, our consultants give us a pretty good understanding at this point, as good as we can have until second quarter, John, we'll have more third quarter, we'll have not perfect, but very good knowledge, I would say. Okay and I understand there's a range around all the estimates. But just curious, A1, what do you think a reasonable worst-case scenario is for property taxes this year? That's kind of why we've been a little higher â I am sorry yes, that's a good question. That's why we put a little bit higher range or a wider range on that, John. You saw that we put seven at the top end of our â I think that's what we would say. I mean we're 6.25, it could go â you could have some things go either way. We're hopeful that we have some strong fights in these areas, but I think seven would be several things going against us that we didn't expect. I mean 8, 9 or 10. I mean, given what's revaluing and given the shape of where things are, I think 8, 9, 10 is probably low probability I do think 0 too low end is low probably, I mean the we're looking back again to a very strong 2022. I'm going to use that to put a cap rate on. And so I think it's hard to see much reduction in expectation this year. But as we mentioned, John, as you move into 2024, it would be hard to not be able to argue that some of those because so we would expect what moderation that we see at the beginning 2024. Hi, yes. Good morning, everyone. Thanks for keeping the call going. Just a broader general question about the regulatory backdrop. Again, I apologize if this has been asked, but again, just a lot of talk in several municipalities around additional rent control, even at the federal level you have the White House putting out guidelines. Just curious, your overall thoughts on this particular actually have any impact in the short, medium or long term. But if you kind of think maybe a lot of the suggestions are just things that may not impact you at all because it's all about just reading out the bad players in the industry? Tayo, this is Rob. I'll take a shot at answering that. I think really like if you start at the federal level and the White House blueprint that they put out a couple of weeks ago, it really does seem to focus a lot on â more on the affordable housing component of it. And really almost using the agencies as part of the leverage there, as we look at our states in which we operate and the municipalities, there is some rent control pressure or proposals that come up from time to time, but really don't ever see them gain any traction. So from a kind of a short, medium term, we don't really see anything as we're tracking legislation across the board that gives us any significant concern and still view it as really if affordable housing is the end goal, it's more of a supply-driven pressure that needs to be added to the system rather than focusing on rent control, which ultimately is a negative for both the owners and the residents. Great. Thank you. I guess just a follow-up on question, I mean, do you, in any way, include handicap any kind of rent control risk in your guidance or your rent outlook? Okay. And then, I appreciate all the color on so far in kind of markets. It sounds like things are still going pretty well. But I guess if you focus specifically on like Austin, Nashville, Raleigh, some of these big tech growth markets in recent years and probably market have more layoffs than others. Can you provide any kind of anecdotal evidence of anything changing there, whether it's different types of people backfilling vacancies or move-outs or anything like that, just those kind of markets versus the rest of the portfolio would be helpful? Thank you. Hey, Jamie, this is Tim. I mean I think the ones you point out are right in terms of Austin, Nashville, Raleigh are the ones where we would have more tech exposure than some of the others. But as of now, we haven't seen it. I mean we're keeping an eye on what it exactly means in terms of which staff are going to be impacted by some of the announcements that have already been made, but to date, we haven't seen any impact from that. No trends different in those markets other than sort of the broader we talked about Austin with broader supply/demand concerns, but we haven't seen anything yet, but those are the ones we would be keeping an eye on, for sure. Not really. I mean, a lot of these markets aren't quite the Silicon Valley in terms of the types of employment that we had there. It's a little more call it, mid-level or if you want to say more a little more blue-collar-type tech, but we've not seen it yet. Like I said, it's some we're keeping an eye on, and that could be what drives more of the downside risk on our forecast for 2023, but nothing reportable so far. Okay. Well, we appreciate everyone joining us this morning. If you have any other thoughts or questions follow up, just reach out at any point. So, thank you for joining us.
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Good day and thank you for standing by. Welcome to the Humana Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakersâ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Lisa Stoner, VP of Investor Relations. Please go ahead. Thank you, and good morning. In a moment, Bruce Broussard, Humanaâs President and Chief Executive Officer; and Susan Diamond, Chief Financial Officer, will discuss our fourth quarter 2022 results and our initial financial outlook for 2023. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. Joe Ventura, our Chief Legal Officer, will also be joining Bruce and Susan for the Q&A session. We encourage the investing public and media to listen to both managementâs prepared remarks and the related Q&A with analysts. This call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humanaâs website, humana.com, later today. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission and our fourth quarter 2022 earnings press release as they relate to forward-looking statements along with other risks discussed in our SEC filings. We undertake no obligation to publicly address or update any forward-looking statements and future filings or communications regarding our business or results. Todayâs press release, our historical financial news releases and our filings with the SEC are all also available on our Investor Relations site. Call participants should note that todayâs discussion includes financial measures that are not in accordance with generally accepted accounting principles or GAAP. Managementâs explanation for the use of these non-GAAP measures and reconciliations of GAAP to non-GAAP financial measures are included in todayâs press release. Finally, any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Thank you, Lisa, and good morning, everyone. We appreciate you joining us. Today, Humana continued the momentum seen throughout 2022 and reported another quarter of strong operating and financial results. Adjusted earnings per share for the full year were $25.24, which was above our previous estimate of approximately $25 and represents an annual growth of 22%. We achieved this compelling earnings growth while also making meaningful progress in advancing our strategy, which I will touch on more in a moment. Looking forward we provided full year adjusted EPS guidance for 2023 of at least $28 representing growth of 11% over 2022, consistent with our previous commentary. We anticipate this strong growth despite the headwind we faced from the divestiture of 60% interest in Kindred Hospice. We also reaffirmed our expectations for a full year individual Medicare Advantage membership growth of at least 625,000 members, a 13.7% increase year-over-year. Recall that our 2025 adjusted EPS target of $37 is underpinned by an assumption of return to individual MA membership growth at or above the industry rate by 2024. We are very pleased to have accomplished this goal ahead of expectations. Before providing additional detail on our operations and outlook, Iâd like to take a moment to address the RADV final rule released Monday. I want to start by emphasizing the strength of the Medicare Advantage program, supported by a value proposition that is superior to fee-for-service Medicare. 30 million seniors have chosen to enroll in MA, of which nearly 34% identify as racial and ethnic minorities. The MA program delivers high-quality and improved health outcomes, resulting in a 94% satisfaction rate and lower total cost of care through improved care coordination providing savings to the Medicare program while helping seniors achieve their best talent. The strength and support of MA is an important backdrop as we talk about a long-awaited final RADV rule. Iâd like to reiterate Humanaâs core belief when it comes to RADV. Namely, we believe risk adjustment is an important element of the program and incentivizes plans to cover all individuals regardless of health status. We have long supported CMSâ desire for greater transparency through auditing, and weâll continue to partner with CMS to promote program integrity. We strive to have a fair, compliant and transparent system. While weâre still reviewing the final rule and considering its impact, I will share some of our initial observations. First, we support CMSâ decision not to extrapolate the result of any audit payments for the years prior to 2018. As CMS acknowledged auditing such age time periods represent a unique challenge that may produce results that are not truly reflective of the plans compliance or coding accuracy [ph]. The important part of RADV ruling is the audit methodology. Therefore, we look forward to working with CMS to learn more about the methodology, including contract selection, sampling and extrapolation as a rule did not provide the details needed to fully understand the potential impact of the future audits. And finally, we are disappointed CMSâ final rule did not include a fee-for-service adjuster in the process, which we believe is necessary to determine appropriate payment amounts to MA organizations. We are considering all our options to address or challenge this admission and obtain clarity about our compliance obligations. With that said we are committed to working productively with CMS to ensure the integrity of the program has maintained, and beneficiaries do not face higher costs and reduced benefits as a result of this rule. For years, MA has been an example of a successful public-private partnership that works for Medicare beneficiaries, providers and taxpayers. And weâre committed to working with CMS on a path forward to ensure that MA continues to be an option that millions of seniors have come to depend on. Now turning to an update on our operations and outlook. We entered 2023 in a position of strength. Industry leader in the delivery of senior-focused integrated value-based care, delivering high-quality outcomes at a lower cost. Our deep focus on value-based care, both through our CenterWell platform and our highly diversified value-based care solutions and locally oriented provider relationships is one of the differentiated capabilities that gives Humana a durable competitive advantage. We closed 2022 with 70% of our individual MA members engaged in value-based arrangements, which incentivizes providers to comprehensively manage patient needs and reduce total cost of care. Our extensive experience in value-based care combined with our use of deep analytics and digital capabilities, first-mover deployment of interoperable solutions, as well as our customer-centric products and solutions. Thatâs Humana apart from peers. We believe these differentiated capabilities have contributed to our durable success in quality and customer experience as demonstrated by five consecutive years of leading Stars results, and individual MA membership growth of 10.4% on a four-year compounded annual growth rate from 2018 to 2022 as compared to industry growth of 9.7%. We complemented our differentiated capabilities with targeted investments and benefits, marketing and distribution for 2023, which has accelerated the strong momentum in our MA franchise. The improved plan designs have resonated with consumers and brokers resulting in our above industry growth expectations of at least 625,000 members for the full year. Our 2023 growth outlook includes strong growth in the D-SNP space, where we have grown 72,000 members as of January, a 50% increase over 48,000 members added in the 2022 AEP. And importantly, the majority of our growth for 2023 is coming from the larger non-D-SNP space. We added approximately 422,000 non-D-SNP members through 2023 AEP, a significant increase from the 90,000 added in 2022 AEP, and representing an impressive 10% year-over-year growth in non-D-SNP membership. We achieved our strongest growth in states with robust or growing value-based provider penetration. For example, our top states by absolute growth were Texas, Georgia, Florida and Illinois, which are highly penetrated value-based markets. Together, they grew 163,000 members in 2023 AEP, a 450% increase over the 29,000 members achieved in those states last year. The robust membership outlook reflects high-quality growth, with retention improving over 200 basis points year-over-year better than our initial assumption of a 100 basis points improvement. We are pleased to see our external call center partners improve retention by 380 basis points year-over-year, reflecting their enhanced focus on quality and customer satisfaction. In addition, approximately 50% of our new sales reflect members switching from competitor MA plans, which was higher than anticipated and significantly improved from the 30% experienced in 2022. We also saw a shift in our overall sales channel mix to higher-quality channels. Our internal sales channel and our external field broker partners represented 53% of total sales in the 2023 AEP compared to 44% last year. As shared before, these channels drive better engagement with members leading to greater planned satisfaction, retention and lifetime value. Our strong 2023 membership growth was broad-based across our geographic footprint and benefits not only our MA business, but also our growing and maturing payer-agnostic CenterWell platform, enhancing our ability to drive more penetration and integration of our CenterWell assets. Our primary care organization also experienced strong growth during AEP and is expected to add 8,000 to 10,000 new patients across our de novo and wholly owned centers. And we are happy to share that nearly 60% of these new patients had appointments scheduled as of December 31. This is a key metric for us to measure the engagement level of new members and engagement is a key driver of retention. For the full year, we expect to grow patient panels by 20,000 to 25,000 through organic growth and programmatic M&A, meaningfully higher than the approximately 13,500 patient growth experienced in 2022. Our center expansion remains on track, as we ended 2022 with 235 centers and are scheduled to open an additional 10 centers to 15 centers in the first quarter alone. We expect to come in the near â the high end of our previously communicated annual center growth of 30 centers to 50 centers in 2023, through a combination of de novo build and programmatic M&A. In the home, we have continued to expand our value-based model, which coordinates care and optimizes spend across home health, DME and infusion services. We are now supporting approximately 15% of our MA members with the model, expanding coverage to an additional 433,000 members during the fourth quarter. We remain on track to cover approximately 40% of our MA members with a fully based, value-based model by 2025. In addition, as previously shared, we are implementing some of these capabilities on a stand-alone basis to accelerate value creation. We rolled out the home health utilization and network management capabilities to 1.4 million members, bringing the total of covered members to 1.9 million, creating incremental enterprise value in advance for the full value-based market rollout. Finally, in our pharmacy business, we once again increased our industry-leading mail order penetration levels in 2022, driving 38.6% penetration in our individual MA business, a 40 basis point increase over 2021. We anticipate maintaining this industry-leading position in 2023 as we further invest in the consumer experience and encourage the continued use of mail order despite comparable co-pays in the retail setting beginning this year. Before turning it over to Susan, I am excited to be able to speak to the senior leadership appointments we announced this morning. Dr. Sanjay Shetty is joining Humana as the President of CenterWell effective April 1. This newly created role comes as we continue to meaningfully expand our CenterWell capabilities, strengthening our payer-agnostic platform and integrating the clinical experiences for patients across the CenterWell platform. Sanjay comes to Humana from Steward Health Care System, where he currently serves as the President. He will draw on his extensive experience leading a large health care system as well as his deep understanding of technology and application of data and analytics and modernizing workflows to accelerate the integration of our CenterWell assets. Sanjayâs addition to the management team, he brings new and differentiated skills with extensive health care experience across a broad spectrum, including Medicare, Medicaid, physician groups and value-based care, and we are excited to have him on board as the President of CenterWell. In addition, we are thrilled to announce that George Renaudin has been promoted to President of Medicare and Medicaid and added to the management team effective immediately. George has been integral to our success of the company joined and having joined the company team in 1996, spending the last 26 years dedicated to core operations of our Medicare business. Bringing Medicaid under his leadership complements his current responsibilities for the operations supporting more than five million Medicare Advantage and Medicare Supplement members. With the addition of Sanjay and George to the management team, we have closed our search for the President of Insurance. We are confident that the depth of talent we now have in both the management team and across the broader leadership within the organization, positions us well to continue to execute against our enterprise strategy. As with any company of our size and caliber, we will continue to evaluate strategic additions to and the evolution of our leadership team as we advance our strategy to develop strong synergistic growth across the enterprise. In closing, I would again reiterate that we are entering 2023 in a position of strength. The strength is bolstered by Humanaâs differentiated capabilities and grow our payer-agnostic platform, and underpinned by the strong fundamentals in the Medicare Advantage industry. Importantly, the robust membership growth and financial outlook for 2023 puts us on a solid path towards our mid-term EPS target of $37 in 2025. We look forward to providing additional updates on our progress towards our mid- and long-term targets throughout the year. Thank you, Bruce, and good morning, everyone. Today, we reported full year 2022 adjusted earnings per share of $25.24, ahead of our expectations of approximately $25 and representing a compelling 22% growth year-over-year. As Bruce shared we delivered as impressive earnings growth while making significant advancements in our strategy, including a quicker-than-anticipated return to above-market individual Medicare Advantage membership growth for 2023 and further advancement of our CenterWell platform. Before discussing details of our performance and outlook, I would note that we realigned our reportable segments in December, moving to two distinct segments, Insurance and CenterWell. I will speak to our 2022 results and 2023 outlook in terms of the new segment structure with references to the old segments to provide clarity as needed. I will start by discussing our fourth quarter results and underlying trends before turning to our 2023 expectations. We reported fourth quarter adjusted EPS of $1.62, above internal expectations and consensus estimates. Results for our Insurance segment were modestly favorable to expectations. As recently shared, total medical costs in our Medicare Advantage business ranged slightly above previous expectations during the fourth quarter, driven by higher-than-anticipated flu and COVID costs, as well as higher reimbursement rates implemented for 340B eligible drugs. Collectively, these items had an impact of approximately 80 basis points on the fourth quarter benefit ratio for both the Insurance segment as well as the previous retail segment. Importantly, these are discrete items in the quarter and do not have a carryover impact into 2023. Excluding these items, total medical costs in our Medicare Advantage business were modestly below our previous expectation. Our Medicaid business continued to perform well in the quarter with lower-than-anticipated medical costs. In addition, the favorable utilization seen throughout the year in our commercial group medical and specialty businesses persisted in the fourth quarter. All in, excluding the discrete impacts related to flu, COVID and 340B, I just described, medical cost experienced in our Insurance segment were favorable to expectations in the quarter, continuing the trends experienced throughout the year. This segment also benefited from administrative cost favorability driven by our ongoing cost discipline and productivity efforts while also covering incremental marketing spend. Within our CenterWell segment, each business performed largely in line with expectations in the fourth quarter. Our primary care organization continues to improve the operating performance in our wholly owned centers and weâre pleased to report that we increased the number of centers that are contribution margin positive from 88 at the end of 2021 to 110 at year-end 2022, a 25% increase year-over-year. In addition, we increased the number of centers that have reached our $3 million contribution margin target from 18 in 2021 to 31 at the end of 2022. In our de novo centers, we grew over 9,000 patients in 2022 or 91%, while our de novo center count increased by 18% or 56%. As Bruce shared, we expect both center and patient growth to further accelerate in 2023. In the home, total admissions in our core fee-for-service home health business were up 9.1% year-over-year for the fourth quarter and up 6.3% for the full year in line with our expectations of mid-single-digit growth. In addition, we continue to expand our value-based model at the expected pace. We implemented the full value-based model in both Virginia and North Carolina in 2022 and ending the year covering just over 760,000 members or 15% of our Humana MA members, up from 5% coverage in 2021. Finally, our pharmacy results remain strong, reflecting industry-leading mail order penetration at 38.6% for our individual Medicare Advantage members. The benefits of mail order extend beyond our pharmacy operations, leading to better medication adherence and health outcomes, benefiting our members and health plan. As an example, members who utilize CenterWell pharmacy demonstrate medication adherence rates ranging from 650 basis points to 840 basis points higher than we see in traditional retail pharmacies for cholesterol, blood pressure and diabetes treatments. Now turning to our 2023 expectations and related assumptions. Today, we provided adjusted EPS guidance for 2023 of at least $28. This represents a 11% growth over 2022, which is in line with our previous commentary and overcomes a headwind of approximately $0.92 or 3.6% related to the divestiture of a 60% interest in Kindred Hospice in August 2022. Our 2023 outlook reflects top-line growth above 11%, with consolidated revenues projected to be north of $103 billion at the midpoint driven by growth in our individual Medicare Advantage, Medicaid and CenterWell businesses. These increases were partially offset by the divestiture of a 60% interest in Kindred Hospice, and expected declines in our Group Medicare Advantage, commercial group medical and PDP membership. At this time, we expect first quarter earnings to represent approximately 35% of full year 2023 adjusted EPS. I will now provide additional detail on the 2023 outlook for both of our business segments, starting with Insurance. As Bruce discussed, we anticipate individual Medicare Advantage membership growth of at least $625,000 in 2023, a 13.7% [ph] increase year-over-year. We added approximately 495,000 members during the annual election period and anticipate continued strong growth for the remainder of the year. Touching on Group MA, we continue to expect a net reduction of approximately 60,000 members in 2023. This reduction is primarily driven by the loss of a large group account partially offset by expected growth in small account membership. We remain committed to disciplined pricing in a competitive group Medicare Advantage market. For our PDP business, we now expect a membership decline of approximately 800,000 members for 2023, an improvement from our pre-AEP estimate of a one million member reduction. This improvement was driven by better-than-expected sales and retention in our Walmart Value plan. We are committed to providing affordable coverage for beneficiaries while also improving the contribution from our PDP business and remain focused on creating enterprise value by driving mail order penetration and conversion to Medicare Advantage. We are projecting approximately 80,000 of our PDP members to convert to a Humana Medicare Advantage plan in 2023, which represents a disproportionate share of all Humana PDP members who are expected to switch to a Medicare Advantage plan in 2023. In our Medicaid business, we anticipate that our membership will increase 25,000 members to 100,000 members in 2023. This change reflects membership additions associated with the start of the Louisiana contract, which went live January 1, as well as the Ohio contract, which began today. We expect to add approximately 140,000 members in Louisiana and 65,000 members in Ohio at implementation with Ohio membership ramping to 130,000 by year-end and to a total of 225,000 in 2024. The 2023 membership gains in Louisiana and Ohio will ultimately be offset by membership losses resulting from redeterminations beginning April 1, which will continue for 12 months. We are proud that our Medicaid footprint will now span seven states and cover over one million members, a strong platform that we have established largely through organic growth. We intend to continue to invest to grow our platform organically and actively work towards procuring additional awards and priority states. Finally, we anticipate the total commercial medical membership including both fully insured and ASO products will decline approximately 300,000 members in 2023 as we remain focused on optimizing our cost structure and margin in this line of business. The Insurance segment revenue is expected to be in a range of $99.5 billion [ph] to $101 billion, reflecting an increase of nearly 13% year-over-year at the midpoint. The year-over-year change includes the impact of the phase-out of sequestration relief beginning in the second quarter of 2022 as well as the impact of changing member mix within our Medicare Advantage business. This segment benefit ratio guidance of 86.3% to 87.3% is 20 basis points higher than the 2022 benefit ratio of 86.6% at the midpoint, driven by the targeted investments made in our Medicare Advantage plan designs in 2023 as well as Medicaid growth, which carries a higher benefit expense ratio. Importantly, we have assumed a normalized trend into 2023 including the expectation that provider labor capacity will improve modestly throughout the year. In addition, we have assumed the flu favorability seen to date in the first quarter is offset by higher flu costs in the fourth quarter. In summary, we are guiding to Insurance segment income from operations in the range of $3.2 billion to $3.5 billion for 2023, an increase of more than 12% over 2022 at the midpoint of the range. For our CenterWell segment, we expect EBITDA in the range of $1.3 billion to $1.45 billion for 2023, a slight decrease from 2022. The 2023 outlook reflects the impact of the divestiture of a 60% interest in Kindred Hospice in August 2022, which created a $150 million year-over-year headwind, largely offset by continued growth in our primary care, home and pharmacy businesses. In our core fee-for-service home business, home health admissions are expected to be up mid-single digits. While we have strategies in place to continue to take share in fee-for-service Medicare, we do acknowledge it is a shrinking market with the increasing penetration of Medicare Advantage. Accordingly, our projected admission growth for 2023 reflects a slight decline in fee-for-service Medicare admissions year-over-year, more than offset by strong growth in Medicare Advantage. In addition, CenterWell home health is focused on increasing nursing capacity through recruiting and retention initiatives. Our voluntary nursing turnover improved from 31.9% in 2021 to 30.6% in 2022. We continue to invest in clinical orientation and mentors and technology focused on reducing administrative tasks and drive time for clinicians, which we expect to drive further improvement in nurse recruitment and retention. With respect to our value-based home model, we expect to expand coverage to approximately one million additional members by year-end 2023, 800,000 of which are currently served under the utilization and network management model. In our primary care business, as Bruce shared, we expect significant center expansion throughout the year through a combination of de novo bills under our joint venture with Welsh, Carson as well as programmatic M&A. All in, we anticipate adding nearly 50 centers in 2023, an increase of approximately 20%. In addition, we expect to add 20,000 patients to 25,000 patients during the year in our de novo and wholly owned centers, representing nearly 12% growth year-over-year. Finally, our pharmacy business will benefit from the significant growth in individual Medicare Advantage membership in 2023, as we anticipate maintaining our industry-leading mail order penetration rate. From an operating cost ratio perspective, we are guiding to a consolidated operating cost ratio in the range of 11.6% to 12.6% for 2023, a decrease of 100 basis points at the midpoint from the adjusted ratio of 13.1% in 2022. This decrease reflects the divestiture of a 60% interest in Kindred Hospice in August of 2022, which has a higher operating cost ratio than the companyâs historical consolidated operating cost ratio as well as the incremental run rate impact of our value creation initiatives. Touching now on investment income and interest expense. We anticipate investment income will increase approximately $450 million in 2023, resulting from the higher interest rate environment, coupled with the impact of approximately $100 million in realized losses experienced in 2022 that are not expected to recur. From an interest expense perspective, while the majority of our debt is fixed rate, we do expect interest expense to increase approximately $110 million year-over-year. I will now briefly discuss capital deployment for 2023. We will continue to prioritize investments to drive organic growth. From an M&A perspective, we remain focused on opportunities to enhance our CenterWell capabilities with a particular focus on growing our primary care and home businesses. And finally, we recognize the importance of returning capital to shareholders and expect to maintain our strong track record of share repurchases. We will consider the use of accelerated share repurchase programs as well as open market repurchases to ensure we maximize value for our shareholders. We also recognize that dividends are important to our shareholders, and we are committed to growing our dividend. In closing, I would like to echo Bruceâs sentiment that we enter 2023 in a position of strength. The strong earnings growth delivered in 2022 combined with the robust membership growth and financial outlook for 2023 increases our confidence in the midterm target of $37 in 2025. We look forward to providing continued updates on our progress towards our mid- and longer-term targets throughout the year. With that, we will open the lines up for your questions. In fairness to those waiting in the queue, we ask that you limit yourself to one question. Operator, please introduce the first caller. Hi, thanks. Good morning. I want to focus on CenterWell, and I understand the decline from the hospice sale. But maybe if you could give us some color on whatâs the organic growth rate around both the revenues and EBITDA. And then if you could talk about your recruiting initiatives and how youâre trying to bring physicians into the centers? Thanks. Yes. Hey Josh, thanks for the questions. On the recruiting side, we do it both nationally and locally. And what weâre finding in the â we have a dedicated team also to the recruiting area. What weâre finding in the recruiting is that we are really the younger population weâre able to recruit to, and then also the older population, the more the experienced ones that are really looking to change their approach and clinical area and specifically around moving from an And what weâre finding is once we â they are experienced with the value base, the retention side is much greater because itâs a better quality of life for them. But more importantly, itâs also much aligned with what they went to school for around proactive care and care that is more oriented to prevention as opposed to just the treatment side. So through a centralized approach and also oriented to locally, but really oriented to people that are looking for value-based payment options. And Josh to address your other question related to just the organic growth that we anticipate for the CenterWell segment. So in total, the segment is expected to grow revenues about 6% year-over-year with pharmacy slightly above that number based on the strong individual MA growth, although theyâre also impacted by the decline in the PDP membership. The home is slightly down, and thatâs again reflective of the growth that I had mentioned in my commentary about the core fee-for-service expansion as growth as well as the expansion of the value-based model, but obviously offset by the disposition of the 60% interest in hospice and the movement of that line of business to below the line is a minority investment. For CenterWell primary care, that business continues to grow. But as you know, the majority of the de novo growth is off balance sheet as part of the Welsh, Carson deal. So also isnât reflected in our actual revenue growth and EBITDA itâs going to be reflected in that minority investment as well. But specifically, the segment in total is expected to grow 6% for the on-balance sheet portion. Okay. Hi, everybody. I think sheâs calling on me, it was a little jumbled there. Thanks for the comments on the RADV rule, and I know thatâs still under review by you guys and the industry. One of the things in some of the data that was released by Kaiser and others running up to the rule release was some data suggesting various error rates on audits done on results from the 2011 to 2013 time period. And one thing that got some play was the fact that Humana seem to have a little higher audit error rate or somewhat higher error rates than some of the peers. I know that was years ago. Iâm sure the entire industry has invested in making sure that they do better in future audits. But Iâm wondering if you guys could give us your perspective on that and any initiatives youâve done to try to make sure that going forward, that wonât be an issue. Hi, A.J. Thanks for the question. In terms of the variation that was reflected in the report that came out, I would say first, we donât have access to the data, obviously, to be able to really evaluate or assess those differences, so I really canât comment on the variation. More generally, I would just say that we donât have any reason to think that the inherent error rate within the Humana population would be meaningfully different from others. And so maybe just reflective of the audit selection and process that theyâve used historically. In terms of the question of what we might expect going forward, I would say, that is also impossible to really assess. Even in the periods they have audited, they have used different methodologies over that period. And as you saw in the final rule that came out earlier this week, they did not provide specificity on what the audit methodology will be going forward. And so the error rate that you might expect is going to be highly dependent on the audit methodology and extrapolation that they ultimately define. And so that is one of the things that we look forward to working with CMS on to better understand to fully assess, what might be expected going forward. Thanks. Good morning. I guess, first, Iâll just follow-up on A.J.âs question and then ask my own. Maybe the â I assume â I know CMS methodology changing and they didnât give a lot of specificity, but I kind of would assume an error rate is an error rates. So maybe you can just tell us, I mean, even CMS has said errors rates for the industry have improved. So one, are you doing your own audit to see how this has trended over the last 10 years? Maybe you can give us some color on how the error rate, forget about extrapolation and all that, but just how the error rate in these in your own audits might have been trending over that period of time? And then my question would just be, as a follow-up. The â as you think about CMS in 2018 will be the first time they use extrapolation on an audit. Whatever that error rate is, can you give us some color in terms of how you share that with investors. And more importantly, kind of how you would think about it from a bidding perspective? Would you kind of take a onetime charge on something that was from 2018, whatever that repayment might be? Would you build it into the bids going forward as kind of a reserve and just assume itâs a lower revenue number, a premium number like a rate cut? Can you give us some color on that as well? Thanks. Sure. Hi, Justin. To your first question about just broadly how to think about how error rates may have trended over time. What I would say is that generally, the growth in value-based provider penetration as well as the increased activity within in-home assessments over that timeframe as well as just the normal course activities that all health plans undertake to â as part of Medicare risk adjustment, frankly, all work to improve accuracy. And so I would expect that some of those programs have grown, particularly value-based care and home assessments that we would see hopefully some improvement relative to those initiatives. But in terms of what might be happening in the broader sort of and much larger organic base of provider claims, it thatâs difficult to say because again, we donât have that information. And it will ultimately depend on how the audit methodology is defined in order to fully assess the impact of that. In terms of how we might think about the impact of this from 2018 and forward, I would say that from a 2024 bidding perspective, based on what we know today and given that the 2024 bids are due in just a few months, I would say itâs unlikely that there would be any impact to 2024 bids. But weâll certainly need to look to see if CMS provides any guidance in the advanced notice and bid instructions given just the uncertainty that exists regarding how the contract selection and audit methodologies will be defined in the future. But our focus will continue to be on delivering value and strong value within our MA claims to members, including the goal of stable premiums and benefits in 2024. So we look forward again to working with CMS to better understand the planned audit methodology going forward and assessing any future impact, but unlikely that will be finalized in time for the 2024 bids. A little more color on your insurance MLR guidance. I think in your comments, you mentioned that itâs up in part due to and they benefit design improvements. I guess, I was under the impression that you guys were trying to target stable margins on the MA business. So just want to understand that nuance. And then you mentioned Medicaid pressure due to new contracts. So, I was wondering if thereâs anything in there about redeterminations? And then finally, any color on commercial would be great. Thanks. Hey Kevin, this is Susan. Yes. So in terms of the MLR guide for 2023, the way you should think about it is that we did through our value creation initiative, create capacity with the enterprise to fund those targeted investments without impact to overall earnings and EPS. But keep in mind that the enterprise savings that were generated were across the entirety of the enterprise. They wouldnât have all been generated by the Medicare line of business. And so given all of that investment was redirected to Medicare, you would see some impact to the MLR, all other things being equal for Medicare. And then as always, you have to consider, given the growth that we saw and some of the dynamics that Bruce mentioned about new members, switching members and retention all of those would go into our estimates for MLR for the year as well. Outside of just the Medicare trend, as you pointed out, the Medicaid growth will also impact the MLR Medicaid in general has a higher MLR. And given the growth that will happen at the beginning of the year â will be in Ohio, that will certainly impact it and be mitigated over the course of the year through redeterminations. And as weâve commented previously, the members who had access Medicaid through the deferral of the redeterminations did tend to be lower acuity and higher contributing. So as they roll off, that would have an impact to the Medicaid MLRs as well. So those, I would say, are the two main drivers as well as just more generally, our continued approach of a more conservative initial guide as we set expectations with the â they intend to certainly mean and hopefully exceed those expectations. Thank you. And our next question will come from Stephen Baxter of Wells Fargo. One moment. Stephen, your line is open. Hi, thanks. I wanted to ask about retention in Medicare Advantage. I think you said you more than doubled the improvement that you targeted for 2023. So it sounds like youâve gotten retention back to where you would have initially planned heading into open enrollment for 2022. I was hoping you could talk about what your outlook is for retention as you continue to evolve your channel strategy? Do you think retention is stable from here? Do you think it can improve? And if it can improve? Any sense of what the pacing would look like would be great. Thank you. Thanks for the question. Yes, as you articulated, weâre very happy about the 200 basis point improvement in the retention this year. It is a combination of both internal work and the combination of our partnership with the channel, they increased 350 basis points. As we look forward, itâs probably going to be more stabilized as we think about it with some improvement, weâll continue to work on it. But with the large increase in improvement in the channel outside that really contributed to the 200 basis points. And I donât know if youâre going to see that, is that large of an improvement in 2023 and 2024. [Technical Difficulty] This is your operator. Unfortunately, you could not hear me speaking. I have introduced Scott Fidel [Stephens] twice. Scott, your line is open. Okay, good. Just wanted to follow-up on just the home, the home outlook and appreciate the details you did give. Just interested give, just given some of the moving pieces with the hospice divestiture. When just looking at the home health business, can you give us your view on what youâre expecting the revenue growth trends to be there when considering some of the volume indicators that you gave us? And then also just interested in your expectations for home health margins in 2023. Just when considering both the final fee-for-service rates and the shift thatâs playing out to value-based care? Thanks. Sure. Hi Scott, this is Susan. So in terms of revenue trends, because of the hospice divestiture, you will see a decline year-over-year. Itâs just over $100 million decline. We have a meaningful offset in the growth of the value-based model, in particular, which is a risk-based capitated arrangement with the health plan. And so as we significantly expand the coverage of that to one million members that does drive meaningful revenue appreciation, consider that close to $1 billion for 2023. Thatâs offsetting what otherwise would have been pressured from the 60% divestiture of the hospice asset. From an EBITDA contribution, you can think of, again, this segment is being down year-over-year, and thatâs primarily a function of that higher-margin hospice divestiture being replaced with the less mature value-based model contribution. We expect increasing contribution in markets over time. They donât start immediately at full impact. And so the value-based model expansion, you can think of is closer to breakeven in 2023. And then that being offset by the loss of the hospice earnings in our reporting. And I would say on the core home health services, we do expect, I would say, relative margin stability. Weâll certainly continue to watch labor trends and make some further investments in nursing, recruiting and retention, as I mentioned in my commentary, but Iâd say relatively stable margins in the home health business. Hi. Yes, Iâve had my questions, so Iâm happy to give you the floor back and move to the next person. Hi, good morning. I wanted to ask about the 2023 MLR guidance, but maybe come at it from the other side of the angle from what Kevin asked. We tried to look back at years in the last decade where you had really above-trend enrollment growth like 2014, 2015 and 2019. And generally, MLR was up in those years, although 2019 was probably mostly the HIF holiday. But Iâm just trying to think through your commentary about retention being higher, which should imply keeping more comprehensively coded patients and 50% of enrollment from plan switching, which should also imply more comprehensively coded patients. So, Iâm just wondering if inherent in the MLR guide is an assumption that your new class of 2023 is better profitability than typically you would ascribe to a new class of patients and any implications on kind of that margin improvement progression we would expect in the 2024. Hi Gary, great question. So there are a number of things that will impact the MLR as a result of the membership mix. As you said, the higher than typical rate of members â new members coming from competitor MA plans would generally be viewed as positive. Those numbers do tend to be contribution margin positive even in the first year. Weâve many times commented on, in general, when you think of the full new cohort of new members as being breakeven from a contribution margin basis, but thatâs based on that historically lower switching rate. So the fact that we saw more switchers, incrementally that would be viewed as positive. As you said, relative to our previous expectations, at least, the higher retention is certainly positive from a contribution margin perspective as those are going to be the most impactful from a current year contribution standpoint. The other two things I would say, work negatively against MLR. One is, one plan in particular, the plan where we offered a meaningful Part B giveback. We do expect that plan will attract an overall lower acuity membership given the plan design and the way itâs structured, and we did see stronger growth in that plan than we had originally expected. So again, that relative to all other members would likely be a negative to MLR. And then finally, I would say the plan-to-plan switching that we saw this year, and we commented on this at JPMorgan as well. For the existing members that we do have, we did see more members switch to another Humana offering than we had initially anticipated. Typically, thatâs where they will see a richer plan in market and select that plan. So while still positive and more so than an otherwise new member, year-over-year, they would see less contribution given the planned change that they initiated. And the last thing Iâll just point out that is a bit unique this year is in order to make the level of investment that we did in our Medicare offerings, the way the bid dynamics work, we have to create savings for relative to A&B cost to fund those additional benefits and recall that CMS shares in those savings through the rebate. And so in order to invest $1 billion in benefits, you have to actually save more than that and then share some of that with CMS. And so the implication of that is and otherwise increased to MLR relative to what it would have been at a lower investment level. So all of those things are contemplated in our current year guide as well as, as I said a moment ago, just our continued approach of taking a conservative view of the guidance at the beginning of the year. Hi good morning. Thanks for the question. I wanted to go back to RADV, if I could. It looks like the elimination of the fee-for-service adjuster, is set to go into effect. I guess, how significant of an impact could that element have relative to some of the other factors you mentioned where there seems to be a bit more uncertainty around contract selection and sampling methodology? And then Susan, I think you had previously talked about potential for the industry to litigate the outcome of the final rule to try to resolve some of these uncertainties. Itâd be great to get your kind of updated thoughts on how you think that process could play out? Sure, Nathan. So, I would say, as we think about the ruling, as Bruce mentioned, the fact that they will not be extrapolating to periods of 2017 and prior, we certainly view as positive and we would consider the exposure for the audits that have been completed for those periods to be immaterial. So that was definitely positive. As we think about what CMS has shared for 2018 and forward, and as we said in our commentary, it will be â we will need to evaluate obviously, the audit selection methodology and extrapolation methodology. And also understand our compliance concerns as part of our normal course MRI activities. And as we do that, we continue to evaluate all of our options to ensure that the omission of a fee-for-service adjuster and the resulting impact is addressed. And so again, at this time, thatâs really all we can say. Thereâs going to have to be additional collaboration with CMS to better understand some of the go-forward activity, but we just continue to â and weâll continue to evaluate all of our options to address the primary issue of the lack of acknowledgment of the need for a fee-for-service adjuster. Hi, thanks very much. Good morning. Susan, I was wondering if you could just maybe discuss your expectations around the number of patients that will be in capitated relationships for 2023. And maybe just overall, the number that will be in any type of risk relationships as we think about 2023? Sure. Hi, Lisa. I would say that â we would probably expect relatively stable percentages and as weâve disclosed historically, you consider about a third of our membership in full capitated arrangements another third in some form of value-based arrangement, and then the final third in more fee-for-service type arrangements. And just given the strong growth, our goal every year is to a minimum maintain that penetration and ensure that the new members who are enrolling with us get to that penetration level. So given the strong growth this year, youâll certainly have to evaluate that. But as Bruce said, we saw very strong growth in highly penetrated markets. So hopefully, that may be a bit of a tailwind as respect to those ratios. But generally, you can â given the high penetration already, the goal is to maintain that as we continue to grow at or above the market rate. And if you see better penetration, can you just remind us, will that help to improve the initial guidance that youâve given here around medical cost trend for 2023? I would say, weâve evaluated the 2023 membership growth and the quality of that. And as weâve said earlier in the commentary, net-net, you can think of that all in as net positive relative to what we would have previously expected, but immaterial really to our overall estimates for 2023. And certainly, weâll evaluate the claims trend as we do every year. And if we do see some positivity, weâll certainly keep you apprised. But I would say from the growth itself, while positive, would not be considered material to our overall estimate. Hi, thank you. Just a quick follow-up on Susanâs response to Garyâs question and then the quick one value creation plan. So at least Susan mentioned existing MA members switching to a plan with a higher Part B rebate had a meaningful impact MLR. Just wondering how many approximate members is related to larger impact MLR? And then quickly on the value creation plan. I understand itâs tracking very well. I think on track to exceed $1 billion in savings. So thatâs great. And just a couple of questions, like how much in excess of $1 billion are you now targeting to save for 2023? And then now the AEP is over, you think about that $1 billion in relation to strong membership growth, increased planned investments and sales margin? And how does it compare to your original expectation? Are the investments tracking in line with the $1 billion? Thank you. Hi, Mike. Yes. And just to clarify, the enrollment in Part B plans was a broad comment. We saw a strong sort of choice within that product from new members. And Iâm sure some of our existing members may have switched to those plans as well. But I would say the majority of the outperformance in that product was more related to new members than switching. But certainly, provides a different alternative in terms of the way the benefits, the guarantee Part B giveback on the premium side, and there is a trade-off for the relative richness of the benefits relative to other plans. So again, just based on, I would say, more of the acuity of the membership that we expect those plans to attract being lower is why I would say that, that would sort of all other things being equal, negatively impact the MLR that you would expect. The plan to plan change broadly is just recognizing that typically when a member changes plans, itâs usually because theyâve identified a plan that has richer benefits that they will move to. And so year-over-year, their contribution, while positive, will just be less than it was in the previous plans. In terms of the value creation plan, yes, as you said, we did outperform our initial goal of $1 billion. I would say you can think of that as sort of a 10% to 15% outperformance. As we mentioned, though in 2023, we did plan for the intent to reinvest some of those savings into other admin categories and investments, particularly marketing and distribution with the intent of continuing to take progress on shifting some of our external call center market share back to our proprietary channels, which weâve described historically is requiring some upfront investment, given that we fully fund the marketing for our proprietary channels. Weâll see lower commissions over time, but relative to the external channel, those costs are a little bit more front-loaded. And so our 2023 plan does continue to contemplate that, increased investment in 2023, so that we can make further progress. Having said that, we will certainly evaluate the stronger-than-expected results that weâve seen so far in 2023 overall, but also by channel and the team is currently evaluating all of the marketing metrics and developing sort of a point of view of how we will think about our go-forward plan, particularly for 2024 AEP and whether thereâs opportunity to optimize what we might have initially expected. So more to come on that, but our claim does contemplate the same level of increased investment that we planned for at the time of our bids last year and the planned use of some of those value creation savings to fund that investment. Yep. Great, thanks. Yes. Good morning everybody. Thanks. Yes, we talked about the MLR guidance for 2023 a lot on this call so far. Just one other question around that sort of a clarification. But you mentioned that you expect the provider labor capacity to improve modestly throughout the year. Just wanted to get some quick clarification around that in terms of â do you consider that to be a pent-up demand when youâre referring to that? And maybe just the other question would just be at the midpoint of the MLR guidance, are you assuming any sort of pent-up demand related to elective procedures or any other pent-up non-COVID care coming out of 2022 that may have to be absorbed in 2023 at the guidance midpoint. Thanks. Hi Steven, so as we thought about the MLR and specifically the mention of provider labor capacity, I would say that is more a broad belief that over time, we will see improved clinician labor capacity which, as we all know, has been impacted throughout COVID, and we believe still at lower levels than we would have exchanged in the absence of COVID. So our belief is that over time, it wonât be an immediate correction, but over time that we will see clinician labor capacity increase and that when we do additional utilization will also follow. And I think as weâve commented before, one of the spaces that we continue to see lower than historical utilization is in the observation space within the hospital systems. Today, what weâve seen throughout COVID is ER utilization in inpatient stays, observation stays, which you can think of as the sort of shorter duration stays are materially lower, which makes sense as the hospitals would certainly look to maximize sort of the revenue within their beds for any given patient. So we would expect as labor capacity increases. That will be one area where I imagine we will start to see some return to pre-COVID levels as there is sufficient capacity to support those additional patients in the facilities. So I would say itâs not explicitly pent-up demand. And based on all the analysis weâve done, we donât believe thereâs a large amount of pent-up demand sort of that needs to work its way through the system. Historically, we have seen some evidence of that, but itâs typically after a very large COVID spike where thereâs significant depressed non-COVID utilization, which fortunately we havenât seen for some time, and we are not forecasting that type of event to occur again in 2023. So our guide does not have an explicit assumption around pent-up demand, but rather just taking the resulting sort of baseline trend we experienced in 2022. Increasing that for normal course trend as well as the expectation of some higher utilization is labor capacity returns. And as I mentioned in the commentary and expectation that flu will also see higher costs than we saw in 2022 as well. Hey, good morning guys, and thanks for taking the question. Susan, I hopped on a couple of minutes late. I was wondering if you could just spend another minute talking about, what drove the increased cost in 340B and the duration after this year. And I guess I would just know â Iâm sure you guys thought it was a court ruling on Monday that looks like itâs going to give the manufacturers more flexibility with which pharmacies they want to participate with and which drugs they kind of want to provide discounts around. So just kind of would love more color on kind of what happened in 340B and what you guys see going forward? Sure, George. So the impact that we saw in the fourth quarter of 2022 was a result of an increase in the ASPC schedule. That was defined as for claims paid on or after September 28, 2022. And there was no ability for CMS to provide any budget neutrality offset in 2022. And so the lack of a neutrality offset is what caused the higher cost that we incurred in the fourth quarter that we had not previously anticipated. As you think about going forward in 2023, we will have that same higher ASPC schedule in effect. However, CMS did implement a change in the outpatient conversion factor, which reduces the cost for other services and drive something much closer to budget neutrality, which is why you havenât seen ongoing run rate impact into 2023. Yes. Hi. Thank you very much. With regard to CenterWell, youâve noticed focus on payer-agnostic platform, but youâve also noted strong margin contribution from integration with your MA book. Can you remind us how you are prioritizing engagement with your MA plans versus payer-agnostic development as you plan de novo center development going forward? Thank you. Well, we actively pursue and engage other payers on this. We do believe thatâs an important part of our growth strategy and in addition, continuing to provide value back to the MA industry overall. But it is highly dependent on the growth of the plan. So this year, you saw significant growth as a result of our MA â the insurance side doing quite well. And so I would say our engagement is very broad and very oriented to continuing to be payer-agnostic, but itâs highly dependent on the insurance plans ability to grow. Thank you, operator, and thanks for your continued support. And most importantly, thanks for our 65,000 teammates that allow us to really report these wonderful results. As Susan and I have reiterated, we are entering 2023 with â in a position of strength and look forward to continuing to provide you updates throughout the year on based on this strength. So thank you and everyone have a wonderful day.
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Good day. And thank you for standing by. Welcome to the Fourth Quarter 2022 Hubbell Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded. Thanks operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter and full year 2022. The press release and slides are posted to the Investors section of our website at hubbell.com. I'm joined today by our Chairman, President and CEO, Gerben Bakker; and our Executive Vice President and CFO, Bill Sperry. Please note our comments this morning may include statements related to the expected future results of our company and are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release and considered incorporated by reference on this call. Additionally, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides. Great, good morning, everyone. And thank you for joining us to discuss Hubble's fourth quarter and full year 2022 results. 2022 was a strong year for Hubble, we effectively served our customers through a challenging operating environment, consistently delivering high quality, critical infrastructure solutions, which enable grid modernization and electrification in front of and behind the meter. We also delivered strong results for our shareholders with full year organic growth of 18%, adjusted operating profit growth of 29% and adjusted earnings per share growth of 32%. We began 2022 by completing the divestiture of our C&I Lighting, successfully positioning the Hubble portfolio for structurally higher long-term growth and margins. We also stepped up our investment levels to bolster our positions in key strategic growth verticals, through acquisitions and organic innovation, expanded our capacity in areas of visible long-term growth, and to improve our manufacturing and distribution footprint for future productivity. Importantly, we've been able to fund these investments while still expanding operating margins, driven by strong execution on price cost in the face of significant inflationary and supply chain pressures. Our employees have worked hard through a challenging environment to sustain a culture of excellence, delivering industry leading service levels for our utility and electrical customers, along with differentiated financial operating performance. The critical contributions of our employees and partners are what led to it highly successful 2022 for all of our key stakeholders. Looking ahead, we believe that Hubble's unique leading position in attractive markets will enable us to continue delivering on each of these fronts in 2023 and beyond. We will talk more in depth on our near-term outlook later in this presentation. But we anticipate continued market growth and strong execution, driving positive price cost productivity to fund investments back into our business, which will generate long term value for our customers, while delivering attractive returns to our shareholders. Turning to page 4, our fourth quarter results were generally consistent with year-to-date trends. Utility customers continue to invest in upgrading, hardening and modernizing aging grid infrastructure. Orders continued to outpace shipments, and we exited â22 with record backlog levels, which gives us good visibility to continued growth in 2023 though continued investment is required to address areas of capacity constrained. In Electrical Solutions, orders and volumes softened in the fourth quarter, as customers actively managed inventories and cash flow into yearend. These dynamics were anticipated and contemplated in the outlook we provided last October. Operationally, we expanded operating margins by over 200 basis points in the quarter. While the overall environment remains inflationary, using raw material inflation and continued traction on price drove a net price cost productivity benefit. Finally, we continue to accelerate our investment levels. Most notably, we invested over $60 million in capital expenditures in the fourth quarter as we're able to execute several large capacity and productivity projects. For the full year, we invested just under $130 million in capital expenditures, up $40 million from â21 levels. And we expect another year of elevated CapEx in â23 as we believe that these high return investments are the best current use of our shareholders capital. So overall, the fourth quarter was a strong finish to a strong year for Hubbell. Let me now turn it over to Bill to provide you some more details on our performance. Thanks very much, Gerben. And thank you all, for joining us this morning, looking forward to talking about fourth quarter full year, and in particular, our outlook for 2023. I'm going to start my comments on page 5 of the materials that Dan referenced. And we'll start with the fourth quarter results for the Hubble Enterprise. You see sales growth of 11%, up over $1.2 billion, that 11% is comprised of high single digits of price, low single digits of volume. And one point from acquisition. We look at our sales performance through a few different lenses here. The first is against prior year. Thereâs double digit growth against double digit growth and last year's fourth quarter shows good compounding, and good robust levels of demand. We also look at it through the lens of comparing it to the third quarter. We're down sequentially, about 7% roughly in line with fewer days and the per day shipment level reasonably flat to the third quarter sequentially. And we also believe that there was some, the channel was managing their inventory levels and we'll talk more about that in a couple of pages when we get to the electrical segment. The operating profit on the upper right of the page very impressive growth of 27% very healthy margin expansion of two points to 16%. And when we look at the incremental drop through on the growth, you see about mid-30s dropped through which we think is quite good. Price is really a very important part of the success of this financial performance. The price is sticking, Gerben made reference to the critical products in our customers, adding to their structural solutions and having this sticking price is really helping us as inflation is continuing to affect us in the non-material and value added places. And when we talked about next year, we'll give you a little bit more breakdown about how we're anticipating price costs. On the lower left, you see earnings per share growing at 26% in line with the profit growth. On the non ops side, we had some headwinds from taxes as well as from pension. But Gerben had referenced that we started last year with the disposal of the C&I Lighting business and we use some of the proceeds of that sale to buy back shares, which partially offset these non op headwinds. The free cash flow, you see is down 9% That's -- that more than explains the CapEx increase that Gerben described. So the OCF side here is quite healthy, and we're being quite intentional. I'm making these investments in order to position Hubble for the future to be successful. Page 6, we'll switch to breaking the fourth quarter down between our two segments. And page 6 starts with the utility segment. And you see a really strong finish to an outstanding year by our utility franchise set up for success for 2023. You see total sales growth here of 17% to about $716 million of sales, that 17% of sales is comprised of a low double digit increase in price and a mid-single digit increase in volumes. Demand continues to be very robust despite high double-digit shipments here, we continue to add to the backlog in the fourth quarter. You'll see that the T&D Components, the historical Hubble power systems infrastructure business, showing the most growth at 27%. The trends continue to be driven by the need for grid hardening and for renewables, and continues to reinforce the shift that we've seen from mere kind of GDP type replacement levels of spending to the need for our customers to really upgrade the grid. And I think you'll see the evidence of our strong positioning, as utilities continue to turn to us with these critical needs. That's really helping inform and drive some of our CapEx decisions that Gerben had mentioned, to continue to support our customers here. On the Communications and Control side, you'll see a decrease of 10% in sales while demand was still strong. There are two drivers to that contraction. Number one is the persistent shortage of chips from the supply chain that's really preventing us from growing and that's been a persistent problem for the last few quarters and has kept our communications and controls business relatively flat. In addition, we had a onetime event in the fourth quarter where we recognize the commercial resolution. This was stemming from a legacy dispute that preceded Hubble's acquisition. And it became obvious it was time to resolve that so that we could move forward with a constructive relationship with a big customer and to our mutual benefit we believe, but that had the impact of driving down sales in the quarter for the communications and control segment. We expect this chip situation to improve during 2023. So while the quarter was down, we have expectations of the comms business growing, that it may still be a little choppy in Q1. But we're anticipating getting this chip supply situation to improve during the course of the year. And we're looking forward to returning that business to growth. You can see on the right side of the page, very impressive operating profit growth of 42%, adding three points to operating profit margin, up over 17% in the fourth quarter by the utility team. That performance being driven by price, which we've really needed to overcome inflation, as well as inefficiencies in our plans that coming from some of the disruptions from the supply chain, the mid-single digit volume growth is also dropping through at attractive levels. So really good year by our utility franchise, and you can see a good quarter setting us up for a good year next year. On page 7, we've got the electrical solutions results, and you'll see 3% sales growth more modest than on the utility side, but a good 60 basis points margin expansion, 8% op growth to a 14.3% margin. That 3% is comprised of mid-single digits price, and volume compared unfavorably to last year. We think that the fourth quarter results significantly impacted by some of our mix. So you see residential sales down significantly. So strong double-digit decline for resi as consumers continue to struggle with high interest rates. And we saw some growth in some of the verticals we've been investing in, namely datacenters, renewables and telecom and the balance being more exposed to the non res cycle. And so, we also thought that we were able to perceive some destocking activity in the quarter. We've mentioned this before with you all. Some of that observation is based on anecdotes and discussions with our customers. And other places, we have hard data where we can analyze point of sale and point of purchase data and see that our replenishment orders given to us or below what's going out the door. We believe that the way the channels incentives or structure, whether on the volume side those incentives may have maxed out, or on the cashflow side, where obviously managing inventories in December becomes very important to our customers. So I think there's a little bit of distortion in the fourth quarter. As we've seen the first several weeks of January, we've seen a nice rebound in orders. And so we'll continue to watch that quite carefully obviously. On the operating profit side, you see the nice margin expansion and again, price and material tailwinds enough to overcome the impact of lower volumes and enable us to operate very well through the operating disruptions, but also overcoming some of the drag coming from the resi lighting business. We thought to be constructive on page 8, to step back and discuss the full yearâs performance and really illustrates some of the trends that Gerben highlighted in his opening remarks. Sales of 18% very strong growth, mid-single digit volume and double-digit price, very robust demand environment for us. You see the 140 basis points of margin expansion to just under 16% on the OP side 29%, growth in OP, diluted earnings per share growing a little bit better than in line with that operating profit and the cash flow being up 20% year-over-year, being held back a little bit with the heavy investment in CapEx that we had mentioned, as well as significant investment in inventory, as we continue to try to support our customer service, but you really see the trends for the whole year that have persisted strong demand number one. Number two, a tough operating environment where the availability of our people, materials and transportation has been inconsistent throughout the year and leads to operating inefficiencies. Three is the execution on price, which was excellent job by the Hubble team really required to counter inflation, as well as those inefficiencies. And the fourth trend was investment, acquisitions, CapEx and inventory all sources of investment. On the acquisition side, we closed on three deals in the year, we invested about $180 million to do so. We were quite intentional about adding exposure to desirable verticals that are exhibiting higher growth and higher margin potential than our average. So we added to our utility tool business, we added datacenter exposure, and we added a nice bolt-on to our [inaudible] grounding, business and connect her business that, again, is supporting high growth high margin there. So we'll switch now from 2022, wrap a bow on that and start to look forward to â23 in our outlook, we were proposing to go through this a little bit differently than we have in the past, we've got a little more granularity in our discussion of the different pieces and parts. So that we can help provide a little more context to why we're guiding the way we see it. So on page 10, we're starting with our markets outlook. And you'll see on the yellow call out box at the bottom of the page, a mid-single digit expectation of organic growth. And you'll see from that's driven, really by the strength of the utility business on the left of the page, those growth drivers remain intact. We see our customers continuing to need material, continuing to install it at a high rate in response to the need to modernize their grid and respond to renewable needs. We starting the year with a highly visible backlog. And in addition, we've got some support for funding from the policy side here and without line away where we believe that the IIGA probably gives us a lift of a point or two above what otherwise the markets who would give us. So we're anticipating the utility markets giving us mid-single digit plus. More modest on the electrical side. And we've decomposed our exposure in this pie graph here to try to give you a sense of residential, really, we think is the starting point of the cycle they're in a point of contraction right now, will continue to be in â23 we believe. Consumers dealing with high mortgage rate high interest rates affecting demand there, usually non res follows the resi cycle, and then into industrial. And you see, we've added this blue segment where we think our electrical business is exposed in a much less cyclical, much more resilient set of end markets, namely the datacenters, renewables and telecom as well as some of the enclosures we sell as connectors to the to the utility businesses there. So if we continue to believe resi will contract that gives us a low single digit outlook for the electrical segment. Our visibility, frankly is better to the first half than it is the second half. And we may even argue that the first quarter better visibility than the first half. So we've got a little bit of caution built in there for what'll happen second half in the non res markets. We also on page 11 wanted to peel back our view of price cost productivity. And at the bottom, you'll see we're anticipating about $50 million of tailwind coming out of our price cost productivity management scheme here, we'll start on the edges where it's a little bit more straightforward on price. We believe we've got about two points wrapping around from our actions we've taken in â22. And we continue to hear feedback from our customers that despite on time service being below where we typically are that we're still leading in those service levels. And so we anticipate that price sticking on the productivity side, we're anticipating in the ballpark of about a point of contribution from productivity. And this cost pie, you'll see we've disaggregated into two halves, the material and the non-material half. On the right, in the blue section, the non-material, mostly labor, and manufacturing costs, we're anticipating mid-single digit inflation there. Likewise, on the material side, you'll see that the raw materials were anticipating there to be benefits and tailwinds as there's deflation in the raws. But our component pie where there's value add is larger than that. And we're anticipating the same mid-single digit inflation rate there. So the netting of all that gets us to about $50 million. And on page 12, you'll see we're anticipating investing about half of that benefit in the future success. And so page 12 shows our investments, starting with footprint and successful multiyear restructuring program that Hubble has implemented, where we spent about $17 million in 2022, which was an increase from $10 million in â21. So our margin performance absorbed, extra expense in â22, we're anticipating to keep that flat in â23. So nothing incremental, as far as the income statement is concerned. But still good activities with good projects that typically give us we find in that three-year average payback range. As for capacity, we continue to find in the utility side and parts of electrical that we need to invest in our capacity. So we've got our CapEx has moved impressively from $90 million in â21, to about $130 million in â22. And we're anticipating this year up to about $150 million. And that ultimately results in about $15 million incremental operating expense, that we would add another $10 million or so of innovation expense. And those of you who joined us for Investor Day, saw some of those innovation ideas. And we continue to be encouraged by early results. But for us to get impact, it's still going to take us some time. But we've got a good business case of getting about 0.5 point of growth above our markets from those activities. So those pieces we thought we'd give you the puts and takes. And let Gerben on our last page kind of sum it out and netted out in our typical waterfall format that you're used to see. Right. Thanks, Bill. And as you said, let me summarize it here on page 13, Hubble is initiating our 2023 outlook, with an adjusted earnings per share range of $11 to $11.50. We believe this represents strong fundamental operating performance for our shareholders, and we are well positioned to deliver on this outlook in a range of macroeconomic scenarios. From a sales standpoint, we expect solid mid-single digit growth organically driven by 2% to 4% of volume growth and approximately two points of price realization. We believe this is a balanced view with good visibility into utility demand and less certainty in electrical markets at this stage. We expect the +2022 acquisitions of PCX Ripley Tools and REF to add an additional 1% to â23 revenues. Operationally, we expect that continued execution on price cost productivity will fund attractive high return investments back into our business. Our outlook range embeds solid margin expansion with high single digit to low double digit adjusted operating profit growth. This operational growth rate is consistent with the long-term targets we provided our at our Investor Day last June, despite the current macroeconomic uncertainty and a higher 2022 base following significant outperformance last year, and it puts us well on the path to achieve our 2025 targets. We expect the strong operating performance to enable us to absorb below the line headwinds from pension expense. And the previously communicated non repeat other income from the C&I Lighting divestiture. Overall, our 2023 outlook represents a continuation of the strong fundamental performance that Hubble demonstrated in 2022. With leading positions in attractive markets underpinned by grid modernization, and electrification mega trends, as well as a growing track record of consistent operational execution, I am confident that Hubble is well positioned to continue in delivering differentiated results for shareholders over the near and long term. Thank you. Good morning, everyone. Hey, couple questions, maybe mostly focused on the utility side, first, on the IIJA and thanks for taking a shot at that a lot of companies have not been able to quantify or are a little worried to try to quantify it. But the nature of my question is really how that interplays with for lack of a better term spending that would have happened anyway. You're presenting it here like it's incremental. But I just wonder your confidence in that. Whether or not it's just replacing other investment or using government stimulus to spend what was going to be spend, be spent regardless? Yes, I mean, I think, Jeff, ultimately, the dollars ultimately are fungible. But certainly, the customers, we've spent a good deal of time talking to have very specifically increased their CapEx assumptions because of it so. But that's so for us, it's important to kind of quantify it, though. It's ultimately contributing a pointer. So to a mid-single digit. So I agree with you there's a little bit of fungibility there at the end of the day. And then just on the on the capacity if, as you know, some of it is tied to efficiency and supply chain resiliency. I mean it looks like demand will stay at a high level, right, but the rate of growth will maybe settle down to something more normal, maybe it's mid-single digit plus for a few years. Could you just to address the concern that maybe it's the wrong time they have the capacity and how you see the capacity being used, or what bottlenecks that might be uncorking for you. Yes, I think it's important that it is on uncorking bottlenecks. So one of our specific areas has been on enclosures, Jeff, which has been a really high growth, high margin area. And there are we feel very good that the return on capital of that is going to be because we have such good visibility on that demand is going to be there. So we were -- we feel real good about it and excited about being able to serve our customers better. And I think they're rewarding us relationship wise as we're doing that. And maybe, Jeff, I can provide to a little bit in addition to what Bill said and specifically he's referring to our utility enclosures in the utility business. But this is a business that and these are enclosures don't only serve utility market, but they serve communications markets, and they serve water markets that all have these applications. So it's not only do we see divisibility on the utility side, but these other markets have been high growth markets. So we're very, very confident here that this is a more sustained growth level. If you think about this investment, and we talked about this, this is a new facility that we're opening up in Oklahoma City, expanding not only the capacity of enclosures, but at the same time, we're consolidating some factories as well. So there's an element of productivity in these moves as well. So we believe and this is just one example of high return investment that we believe will serve our customers well, and will serve our shareholders well, long term. And then just one last one for me, if I could, could you just elaborate a little bit more? What happened with the Clara in the quarter, I guess, I tend to think of a quote unquote, commercial resolution being a cost item, not a revenue item. But the way you're laying it out, you're at some kind of adjustment to revenues, or headwinds to revenues. So they'll expect you to name the customer, but maybe you could give us a little bit more color on what actually happened and what you resolved. Yes, just the nature of it resulted, ultimately, Jeff, in the character of a price concession, so it hits the top line, and drop through to the OP line as well. Hey, guys, good morning. So can you talk about your price assumptions like first half and second half? You said, I think 2% embedded in the numbers. Maybe I'm thinking about a different call, I have been up five this morning. But any color on kind of that first half to second half price? No, it's, you're right on the two. That's basically been layered in throughout â22. So as it wraps around, it sort of does have a tapering effect. But when you think about price cost, some of the commodities are coming down to and so really, how it nets, it does net a little more favorable early, in a little bit more favorable first quarter, first half. And but that's, Steve, ultimately, the net will be determined. I mean, we have a little more confidence in what we see in the price, but the cost side is obviously kind of what we'll have to react to. Okay. Where would we-- where would you look within your product lines to is the kind of canary in the coal mine on that front? Yes, where would you expect? You're not seeing it today. I don't think anybody's really seeing it today. But where would you be watching for that? Where would you be most concerned? If there were to be some pressure some pushback? Yes, my guess is it would show up maybe on our electrical side, and maybe some of the more current, first of all resi products, there is sort of seeing contracting demand there with commercial that would maybe be most cyclical, responsive to that some of the more rough and electrical that might be where we will be paying a lot of attention, Steve. Yes, and I think it's less about that certain product lines are going to see more cost, if I think that's pretty spread. And especially with a chart that Bill shows the raw materials, actually a fairly small percentage. So I think all of our product lines are exposed fairly similar to that other inflation. So I think it has more to do with the market dynamics and if there is a potential slowdown in the second half, that could put them additional pressure and that would be in the more on the electrical side and the utility. Great, thanks for the caller. As always, all the details are helpful and I echo what Jeff said on the IRA stuff giving us a little bit of precision on that versus other companies that you just say it's great. So we appreciate it. Thanks. Good morning, and thanks for taking my questions. Also really appreciate the price cost productivity, glad you provided with all the details, especially because now we get to keep asking you about it. But jokes aside, here, the pie chart is very helpful. And you called out two, and the larger two of the components that are on your cost side, you continue to expect inflationary pressure, but on the raws, obviously, there's some easing anticipated there. And my suspicion might be, that would be the most visible and most talked about from the customer standpoint. And so my question is, if you're going to realize the two points wrap, which is really I think, just to hold price through the year, have you had to reframe or provide any increased visibility to your customers, as you're facing more than quarters of your costs is inflationary. They're not going to see that as much. How do we get confident you can hold? Tommy, we have to use very similar visuals as what we're sharing with you. And I think it's our customers are very alive, for example, to labor inflation and wage inflation. And so I think that they kind of relate to where they see the inflation. And as you point out, when you look on a futures market, and you see the raw metals getting cheaper. That's really only a small part of the whole picture. So we've had to have that be part of a conversation part of a relationship discussion, right. It's not pure transactional, it's not sending people letters ,right. It's about having conversations and sharing the kind of analysis that you're looking at today. Appreciate that, Bill. As a follow up here on the electrical solutions, and market visibility you provided, it sounds very similar to the early peak you gave us for 2023 a quarter ago, at least in terms of the direction. But has anything changed versus a quarter ago? It sounds like your visibility is pretty limited first quarter, maybe first half? But is there any change versus what we heard from you last quarter? Yes. I think the part that we gained insight was the inventory management actions that appeared to us to have taken place in the fourth quarter. And if those are the new, Tommy, you could argue it might be a little softer than we had communicated. And that's why it's so important to us to see the pickup in orders in the first three plus weeks here in January. So I know it's a month is not the largest set of data points, but at least it's been sustained through the month. So I think that those two offsets, yet probably do get us back to where we were when we talked to you in October. But they're kind of equal and opposite reactions, I think. Hi, good morning, guys. So not to look a gift horse in the mouth with the IIJA disclosure and all. And I'll echo what everyone else has said on how helpful that is. Maybe just to wonder if you could maybe estimate IRA, is that in your mind, bigger, smaller, longer duration, shorter duration, like how do you feel about that relative to what you put out there with IIJA? Yes, I would say, Josh, the IRA impacts us to a lesser extent, but it does benefit us as well and here rather than direct funding, this is more about tax credits. But if you think about it, they extended the renewable tax credits for solar and wind. And that's an area that both our utility and electrical businesses benefit from the EV incentives. And while we're not directly in EV the balance of systems that goes around with this infrastructure, we benefit well, of as well. So I would say it does affect and coming back to it's so difficult to pinpoint what exactly what percentage of our growth will be tied to this. I would say it's helpful as well. Got it. That's helpful. And then, Bill, your comment there on the destock. And then the order rebound. Seems like a lot of that is maybe washed out, but any more detail you can give on kind of portfolio breath that was impacted and sort of order of magnitude on size. Was it like, a five-point correction on inventory? Or like a 20 that came down sharply, and then came right back up? Yes, I mean, I think it was fairly broad based. I think if you interviewed our customers, they were feeling a little overstocked. I think, Josh, some of that, driven by when promise dates were extended, they had customers who wanted materials. So they were just making sure their shelves were stocked, I think there's also been places where they may be bundling or kidding something, and they may have a decent chunk of inventory that needs one last part to the bundle, and then that'll get shipped. And so I think what we care a lot about is our orders going to come to a sustainable level through a nice, orderly overtime process as promised delivery dates get shorter. Or is there going to be something a little more sharp or reactionary. And I think through the fourth quarter, and now through one month in the third, the first quarter of New Year that feels, it just feels manageable. So the breath that you're talking about is preventing any real spiky kind of problematic situation right now. So for us the way that it's kind of evolving here is it feels manageable to us right now. Good morning, all. Hey, I just want to come back to the communications controls business. So down 10% driven by chip supply, could you just talked about the timing of the chip situation improving, and really anything the team is doing in terms of redesigns or reengineering to help monetize some of that backlog? Yes, let me provide some content, maybe Bill, fill in as well. But chip availability has been the Achilles heel, throughout the pandemic, and we're all aware of that. So we pretty early on realized that there just wasn't going to be a short-term turnaround. So to your point of redesign, we have -- we've been very active in that, as a matter of fact, it's what had taken a good part of the engineering resources of a Clara to do. This isn't a simple chip replacement. And you go there's a ton of design in it, and then a lot of testing to make sure that this product functions in the field. So we right now have a product out in the field, that's being tested. And if that continues, as we expect, we will be able in the second quarter to substitute chips. And that's part of the reason we believe that even if the supply chain is still a challenge, we should be able to start seeing growth back into that business. And the other thing is we read about chip availability getting better. And of course, we track this very closely as well with our suppliers and it's really the types of chips that matter and we've certainly I've learned a lot about chips over the last year, but the memory chip, those kinds of chips that are used in phones have become much more available. The types of chips the microprocessor types of chips that we use in our products have been the one they'd have been still more challenged from our supply perspective. We do anticipate that improved throughout this year. And the combination of just a general improvement with our redesign is why we're optimistic and confident we can grow throughout 23. Thanks for that, I guess just a follow up, I imagine there's a lot of labor underutilization factory and efficiencies and so on in that business. Have you tried to size what that magnitude could be? And really, if you can uncork some of the backlog improve continuity of supply and so on what the earnings power could be as part of the clear recovery. Yes, I maybe thought more general into efficiency in the factories and certainly this business, it's felt that although to this business, there's also a component of contract manufacturing, that happens to a certain extent, and we're shielded. But in our business in general, that's absolutely a right common tomato with all the disruption it's driven, more inefficient factory and I would say if â22 was all about pricing and managing price cost productivity. â23 will continue to be that but a high focus of us in returning to higher productivity in our footprint. Good morning, everyone. Hi, guys. So just want to go back to the commercialization of Clara, did I get that right, Bill came through with a price concession. So that impacted the headline price in utilities? Okay, great. Okay, this is my clarification questions. And then moving on to my real questions. So on the inventory, did you see that hidden primarily within residential products? Or was it much more sort of generalized immunity clearance? Yes, I would say much more generalized. So utility, which is -- had very impressive growth, but we invested in utility inventory too right, so trying to, we're still going to have our AA items on time delivery, performance levels where we want them, Nigel, so that inventory has been kind of across the board. It's skews at this point, if you looked at our yearend balance sheet, it skews in a raw versus finished good or [inaudible] maybe that's obvious, because if it was finished, we would have shipped it but so is that still has to work its way through the factories and get converted. And so that's kind of part of what Gerben saying, we should be able to run the factories a little bit hotter and get some efficiencies as we burn through a lot of that raw material. Right. Okay. And then just a quick one on below line item, I mean, pension in any kind of big swings on pension, and I think there's some TFA income rolling off this year. So in any impact there would be helpful. Yes. So both of those you saw when Gerben walks through the waterfall, we've got this red bar at the end. So the nonrecurrence of the PSA is part of it and the pension, while we've benefited from our liabilities going down with higher interest rates, the gap between return. expected return on assets and discount rates it has narrowed and so that creates a cost headwind for next year, that's its pension that is not cash, but it does create an income statement headwind for us and that other. Thanks. Good morning, guys. Just curious your thoughts on the acquisition pipeline, couple angles, anything in electrical or focused pretty much on utility and part of the thought there is maybe more premium on the utility side deals, but obviously, you can add lots of value. And also, should we be thinking exclusively along the lines of the typical bolt-on sizes? Yes, so I would say, Chris, the pipeline is equal opportunity. So two of the three deals we closed in â22 are electrical. So I would not think about it being exclusively utility. If you thought about activity doing 180, in â22, for me is slightly disappointing I would have rather had a fourth you get us into the mid twos as an annual kind of investment rate. And so we've got the cash to keep doing that. And I think the year was a little challenged for us in getting, I think, sellers to accept sort of the uncertainty of the macro. And so I think it was a little harder to get buyers and sellers to agree, at the end of the day. So we had a couple that we thought maybe could get done that ultimately didn't. And so we're looking to be more active. The pipeline, though, is supportive of that activity level. But you're asking about is the size going to be more typical traditional historical levels? I would say, yes. But I would think about there being opportunities in both electrical and utility, Chris. Great. Thanks for that. And other question was on the electrical margin. Historically, you have a little bit more of a seasonal margin tail off in the fourth quarter over the third quarter. But last year was moderate too. Are there any particular sequential factors that ease that? Or is the last couple of years really a better guidepost to your margin even historically? No, I mean, look, I think the seasonality can be driven by fewer days in the fourth quarter. And then if the weather prevents construction, right. Those are the two factors, I'd say. And I do think we've been operating with backlogs such that maybe you'd see less than that weather impact, maybe, but the days are there. And the electrical side has less backlog than the utility side right now. So I think the biggest sequential factor continues to be price costs tailwinds and contributions from that help lift that helpless margins. Thank you. So guidance puts electrical at low single digit organic growth in 2023. So flat to up versus 1% in Q4, and with price fading, we think that guidance for volumes to increase from here. Is this solely the result of moving past this customer inventory digestion period or something else driving volumes higher from this point? Thanks. Yes, I mean, I think that's a sequential fact from the fourth quarter. Do you think the fourth quarter is a little distorted by that? They're very well could be destocking throughout â23, though, as well. Hopefully, that's kind of measured. But I think that if you just look year-over-year and you go kind of high-end market, we're anticipating resi contracting significantly. That's creating ultimately a drag. We think those blue markets that line up, that we think are going to be quite resilient to a consumer led recession and some of the inflation and interest rate problems that consumers are having. We think those are a little more secularly driven right now and then the balance of non res and industrial we see industrial being in slightly probably stronger shape and the non res being a little more, maybe quick to follow resi. And so, I think we have kind of a range like that Chris of kind of confidence. And that's you'll hear us maybe be a little bit more confident in the first half a little more visibility and a little more uncertainty in the second half, I think. No, yes, I really appreciate that color. And obviously a tough macro. But I guess just the follow up -- incremental -- for â23, I'm sorry, hearing background noise, and then also anything to worry about on datacenter or telecom. Some other companies have kind of flagged some slowdown concerns there. Thank you. Yes, but I think when you talk about datacenters, you think about the two segments of that market, the mega centers and being run by the fangs in the big tech world. And you certainly see them reacting with headcount reductions, for example. And could that lead to some slowing of growth on the capital side? I think it's, that's possible, and it could, I think, the telecom side, we still see the build out. So we're still, I'd say, in the medium term, we're both -- we're very bullish on both of those factors. Even though I do agree that there could be because the second side of datacenters, outside of the mega, all these colos, I think there's probably going to be demand at that part of it. So could be maybe a reshaping of mix inside of datacenters. And so I do think your questions important to figure out what net effect it has, but I think we're still anticipating growth out of both of those. Yes, and maybe to your second part of is there further destocking? We would say that there probably is, especially if you look at sales, that some of our distributor partners are still struggling with getting supply. So they have a lot of the materials they need for project, they're missing something. And when that comes in, that will naturally cause inventories to come down a little bit further, we believe our products are less exposed to that because we've certainly performed relatively well through it, but we would say there's still probably some destocking in the early part of â23.
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Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the DXC Technology Third Quarter Fiscal Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn today's call over to Mr. John Sweeney, Head of Marketing and Investor Relations. Sir, please go ahead. Thank you and good afternoon everybody. I'm pleased that you're joining us for DXC Technology's third quarter fiscal year 2023 earnings call. Our speakers on the call today will be Mike Salvino, our Chairman, President and CEO; and Ken Sharp, our EVP and CFO. This call is being webcast at dxc.com, Investor Relations. Webcast includes slides that will accompany this discussion today. Today's presentation includes certain non-GAAP financial measures, which we believe provide useful information to our investors. In accordance with the SEC rules, we provide a reconciliation of these measures to their respective and most directly comparable GAAP measures. The reconciliations could be found in the tables in today's earnings release and in the webcast slides. Certain comments we make on the call will be forward-looking. These statements are subject to known risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of these risks and uncertainties is included in our quarterly report on our Form 10-K and other SEC filings. I'd now like to remind our listeners that DXC Technology assumes no obligation to update the information presented on the call except as required by law. Thanks, John, and I appreciate everyone joining the call today, and I hope you and your families are doing well. Today's agenda will begin with an overview of our strong Q3 results, where our execution drove record bookings along with margin, EPS and free cash flow that all exceeded expectations. Next, I will discuss our transformation journey and how it has helped us drive these strong results. Ken will then discuss our financial results in more detail and provide our updated guidance. And finally, I will make some closing remarks before opening the call up for questions. In Q3, revenues were $3.57 billion, and our organic revenue growth was negative 3.8%. This was a direct result of the weak bookings in the first half of the year. However, our organic revenue grew for the second consecutive quarter sequentially, and it is notable that we have driven the same level of revenues in constant currency, excluding dispositions for all three quarters in FY 2023. Our adjusted EBIT increased from 7.5% in Q2 to 8.7% in Q3, highlighting the strong execution of our cost optimization efforts while not negatively impacting our customers. Our non-GAAP EPS increased to $0.95. Our book-to-bill of 1.34 is the strongest book-to-bill results since I've been CEO. This quarter we almost hit on all cylinders by having five out of our six offerings deliver a book-to-bill of over 1.0 Overall, Q3 showed strong execution and has created good momentum for us. So now let me give you some additional color around our transformation journey, which is at the core of how we are creating these results. The first step is to inspire and take care of our colleagues. We are seeing improved attrition due to the way we are taking care of our colleagues and our efforts to change the culture at DXC. I am proud of how we are taking care of our roughly 4,000 colleagues in the Ukraine, and we continue to be impressed by their resiliency to take care of their families and our customers. Concerning COVID-19, we were just awarded the President Certificate of Commendation in Singapore. This prestigious honor has awarded the organizations that made exceptional efforts, which had a significant impact in Singapore's fight against COVID-19. I want to thank the women and men of DXC, along with my leadership team for their continued execution. And as we look to 2024, we will continue to take care of our people and continue to adjust and add to my leadership team to deliver on our commitments. The next step in our transformation journey is to focus on our customers. The key metric here is our Net Promoter Score. And our most recent NPS score was 27, near the top end of the industry benchmark. This solid customer delivery has driven sequential organic revenue growth in constant currency for two quarters in a row. The key thing I would like to highlight is that we have now delivered roughly the same level of revenue in constant currency, excluding dispositions for all three quarters in FY 2023, and you will hear from Ken that we are guiding to a fourth quarter at a similar organic level. Now this is a great accomplishment as we have been a company with declining revenues for the past several years. Also, you will see our strategy for GBS and GIS working. In GBS, we continue to grow the business and expand margins. This is the seventh quarter of consecutive organic revenue growth. As a result, GBS continues to become a larger part of DXC, now accounting for approximately 49%, up from 48% in Q2, demonstrating that the business mix is trending towards the new tech of GBS. In GIS, we continue to stabilize revenue and expand margins. We are seeing our increased financial discipline and ITO payoff as the demand we saw in the market translated into strong bookings this quarter, which we expect to drive future revenues. So you can see we are executing on both parts of our growth strategy to accelerate growth in GBS and moderate the declines in GIS. This execution of our growth strategy is why we expect to drive flat to 1% organic revenue in FY 2024. The third step is to optimize cost. Clearly, we are executing on our cost takeout numbers as we expanded our margins from 7.5% in Q2 to 8.7% in Q3. We continue to take a thoughtful approach to cost takeout by focusing on our entire organization, while delivering for our customers. This approach gives us confidence that we can continue our efforts for the remainder of FY2023 and into FY2024. The other piece of our cost optimization efforts is portfolio shaping. You will hear from Ken that we were able to generate approximately $375 million of cash from the sale of data centers in the quarter along with the German banks in early January. In the area of seize the market I am extremely pleased with our bookings this quarter. A record book-to-bill of 1.34x brought us back to over 1.0x on a year-to-date basis for FY2023, and this shows strong momentum as we are completing FY2023 and heading into FY2024. In GBS, all three offerings delivered a book-to-bill of over 1.0x and we continue to see momentum in our engineering and software capabilities that we discussed last quarter. But this quarter we saw even greater success in applications. In GIS, our more discipline approach to deal making has paid off. In Q3, we signed over $800 million of ITO deals that were delayed from the first half of the year and signed two new logos by closing deals with SAP and Georg Fischer in Modern Workplace. Again, this shows good execution and momentum as these deals will create future revenue. It is clear that there is demand in the market for our offerings and we need to be patient because we are taking work from our competition at better economics. Our final step is our financial foundation where we generated $463 million of free cash flow this quarter. The execution in this area was outstanding and it gives us great momentum to hit our yearly guide for free cash flow. This free cash flow result, along with the cash we generated from portfolio shaping, including the sale of the German banks in January, totaled $840 million. We anticipate that we will use approximately $400 million to pay down our debt further, enhancing our investment grade profile, and we plan to repurchase approximately 400 million of DXC shares to complete our previously announced $1 billion share repurchase program. Now, before I turn the call over to Ken, I want to reiterate what we said in our October 4 press release. Management has been approached by a financial sponsor regarding a potential acquisition of the company. Consistent with our fiduciary responsibility to maximize shareholder value the company is engaged in preliminary discussions and is sharing information. We do not have any further update on this situation today, and we will not be commenting on it further. Adjusted EBIT margin and non-GAAP diluted earnings per share were above the top end of our guidance range at 8.7% and $0.95 respectively. Free cash flow was $463 million in the quarter. The team is making great progress with what we expect will be two consecutive years of positive cash flow of at least $630 million. This is quite a turnaround from two years ago with over $650 million of negative free cash flow. Moving to our key financial metrics, third quarter gross margin declined 60 basis points on lower volumes. SG&A as a percent of sales increased 10 basis points. Depreciation was lower by 10 basis points. Other income increased 60 basis points primarily due to asset sale gains of $24 million and FX hedging gain of $11 million, partially offset by lower pension income. As a result, adjusted EBIT margin was flat compared to prior year and up 120 basis points sequentially. EPS was up $0.03 compared to the prior year due to $0.08 from a lower share count, $0.06 from a lower tax rate, $0.02 from lower interest expense, these benefits were partially offset by $0.13 from lower revenue and FX. Let's turn to our segment results. Our business mix continues to improve as our GBS revenue mix increased 110 basis points to 48.7% of DXCâs revenue. GBS grew 0.2% organically. The GBS profit margin declined 220 basis points year-over-year and was up 130 basis points sequentially. GIS organic revenue declined 7.4%. GIS profit margin increased 190 basis points year-over-year and was up 50 basis points sequentially, benefiting 80 basis points from settling a commercial matter in the current quarter. Turning to our offerings, Analytics and Engineering continued with solid organic growth up 11.7%. Applications declined 6.8% on lower project revenue, coupled with a difficult prior year compare as Q3 was the strongest growth quarter in FY2022. Insurance Software & BPS is up 3%. Our Insurance Software business is about $550 million of annual revenue and grew approximately 7% in the quarter. Security was up 4.2%. Cloud Infrastructure & IT Outsourcing declined 5.4%. Modern Workplace was down 15.3%. We are encouraged by the recent new logo wins. Let me tie the year-over-year organic revenue declines above with Mike's earlier point on sequential quarterly revenue. I am pleased to note that we've delivered three quarters of revenues that are flat on a constant currency excluding divestitures basis. Further, we are guiding to a fourth quarter that is also going in a positive direction all while on the backdrop of very strong Q3 bookings, demonstrating our momentum. Turning to our financial foundation. Debt is $4.7 billion. We continue to tightly manage restructuring and TSI expenses. These expenses totaled $55 million in the quarter. And year-to-date, restructuring in TSI is $147 million, down $124 million from prior year. Capital expenditures and capital lease originations as a percent of revenue were 6.4% in the quarter, up 120 basis points as compared to prior year. We continue to believe our capital intensity presents a long-term opportunity to improve cash flow. Free cash flow for the quarter was $463 million on January 3. We closed the sale of our German banks. Customer deposits were $70 million lower as compared to the start of the year, thus creating a free cash flow outflow. With the sale of our German banks for â¬300 million, we have substantially completed our $500 million portfolio shaping and asset proceeds goal. Last quarter, we announced a new $250 million asset sale proceeds goal. While selling these real estate assets will bring in real cash, we expect to incur a noncash loss that is not incorporated in our guidance. In Q3, we closed on four facility sales, yielding $56 million of cash proceeds and recognized a $16 million gain. The combination of our Q3 free cash flow, sale of our German banks and our Q3 asset sales delivered $840 million in cash. To put a finer point on the $840 million of cash, it is over 12% of our market capitalization. We expect to deploy $400 million to repay a portion of our debt, and we'll adjust our target debt level to $4.5 billion. With the bank sales, customer bank deposits are no longer part of our cash balance. Accordingly, we are reducing our target cash balance to $1.8 billion. As these new target levels, we have an additional $400 million available to repurchase our stock. Turning to our capital allocation on Slide 19. We repurchased approximately $600 million of our stock to date. With cash on hand, we feel good about our ability to deliver on our $1 billion share repurchase. Our Q4 guidance. Organic revenue decline of minus 2.6% to minus 3.1%. Adjusted EBIT margin of 8.7% to 9.2%, and non-GAAP diluted earnings per share of $1 to $1.05. Turning to our FY2023 guidance. Organic revenue decline of minus $2.6 million to minus 2.7%. Adjusted EBIT margin of 8% to 8.1%. Non-GAAP diluted earnings per share of $3.45 to $3.50. As I mentioned earlier, our free cash flow was negatively impacted by $70 million due to lower customer bank deposits held in our German banks. Accordingly, free cash flow was adjusted to $630 million. As Mike and I reflected on our FY2024 guidance we gave almost two years ago, we envisioned a business that could grow with solid margins and good quality cash flow. We still envision that same business today. Let me provide you some context on our original FY2024 guidance. At the time, organic revenue was declining double digits, and we guided to organic revenue growth of 1% to 3%. Adjusted EBIT margins were approximately 6%, including 190 basis points of noncash pension income, and we guided to a 10% to 11% margin. Free cash flow was negative $650 million, and we guided to $1.5 billion of free cash flow. Lastly, let us not forget the $900 million of annual reoccurring restructuring and TSI costs that we guided to $100 million, all while expanding margins. From our vantage point, we have come a long way over the last two years as the business is on a much stronger foundation. Let me take a minute to update you on our preliminary FY2024 expectations. For organic revenue, we are working plans to drive the business to flat to 1% growth, adjusted EBIT margin to expand above FY2023 levels, but do not expect margins to exceed 9%. When we provided the FY2024 EBIT guidance, pension income was 65 basis points higher than where we are in FY2023. We are assuming pension income continues at a similar level and is a 65 basis point headwind from our original FY2024 guidance. Free cash flow to increase above FY2023 levels, but do not expect to exceed $900 million. When we set our FY2024 $1.5 billion free cash flow guidance, we had $900 million of capital lease payments. The capital lease payments are not part of free cash flow, but we're a significant consumer of free cash flow, leaving $600 million of cash generation. As we sit here today, we expect to originate about $200 million to $250 million of capital leases in FY2023. Our lower originations over the last couple of years has driven down the capital lease payments to about $400 million next year. We will refine our FY2024 guidance on our next earnings call once we complete our annual planning process. Thanks, Ken, and let me leave you with a key takeaway. We will achieve our inflection point at the end of FY2023 and deliver the business we have always envisioned in FY2024, albeit with slightly lower guidance. As we exit FY2023, you can see that we have cleaned up many of the challenges from our past that Ken just outlined. Our clear execution of our transformation journey has built a quality company that you can depend on to deliver revenue that is not declining, change the mix of the revenue to the higher-value tech offerings of GBS, expand both margins and EPS, win new work in the market as our offerings are relevant and in demand, generate strong free cash flow, manage our debt and return cash to shareholders. Now this is great execution, but we didnât come here to DXC to fix the challenges. With the momentum that weâve created in the business, we have confidence that we are poised to deliver the business we had envisioned in FY2024, as we can see the ability to drive revenue flat to 1% growth, expand both margins and EPS, rotate the revenue to the new tech of GBS and generate increased free cash flow. Getting this inflection point was no small task, and my management team and I are proud of the quality company we have created, along with being clear and excited about the future of DXC. Hey guys, how you are doing? Good afternoon. Thank you. Wanted to start on free cash flow. So Ken, just hoping to dig on the moving pieces here to make sure we understand this for 2023 and 2024. So can you first talk about some of the factors that drove the strong 3Q performance? Should we expect the continued lumpiness in free cash flow generation going forward? Or does that start to kind of smooth out? And then just to clarify on the last point you made there after capital leases, it sounds like the real net free cash flow difference in your fiscal 2024 post capital lease payments is about $100 million, given youâve taken the number down. So a couple of combo questions are on free cash flow to start, please. All right. Great, Bryan. And look, if I need to clarify, feel free to jump back in. Look, its great work from the team, right? Weâve been at this for a couple of years, right? If you wind the clock back, the business had negative free cash flow. Weâve done a lot of work. Probably the biggest, you look at it now two years in a row of positive cash flow over $600 million. So itâs really not lost on us, right? A lot of good work from a lot of people across the entire business. The biggest driver, right, if you had to just kind of look holistically at the business has been the focus on driving down the restructuring in TSI. So I think thatâs been somewhere around $600 million swing, so year-to-year. So I think thatâs a pretty big piece. And then just this quarter, we had built up some AR. Itâs a little bit hard to tell on the balance sheet but â because of FX movements and so forth. But we had built up some AR in the last couple of quarters and brought that back down this quarter to kind of a more normalized level. So really, the team has done a nice job just driving across the business. And then when you look to FY2024, I think the net is a good way of looking at it. The leasing was out of probably a little bit, it didnât have the right economics from our perspective. So when we looked at it, and it also creates some, I would say, business oversight challenges. When youâre leasing a lot of assets, itâs not always as economic as you want it to be. So we went through a process of making sure that when you lease assets that it goes through kind of the right economics and has the right hurdles to it. So when we did that, of course, we brought down the level of leasing pretty dramatically. I think everybody knows this, right, but it gets a little confusing on the cash flow statement. If you lease assets, they drop below free cash flow because they are financing purchase basically. If you buy them straight out, they go rate through CapEx. So as we squeeze down on the leasing, certainly that some of that capital ends up in the CapEx, which directly impacts free cash flow. So in that way, is certainly a good way to look at it. I mean, certainly, I think when you look longer-term, weâve got opportunities to improve it. Our CapEx as a percent of revenue is higher than a lot of our peers, so I think thatâs a place we need to continue to work on. And then your question around the lumpiness of the cash flow. Q1 is always going to be a little bit, and I think most companies have this, right? Thereâs a lot of cash outflows that go through Q1. So I think in the future, youâll see that continue to be a bit more of a negative quarter. Weâll work at it. Q2, I think weâve got some work to do to make sure that we level that out. And hopefully, Q2 is more positive than this year. I think it was slightly positive, but like to keep working that. Q3 and Q4 always have been pretty strong cash quarter. So weâll keep at it. Yes, please. Just on bookings and demand, Mike, so good to see the broad-based performance across the offerings. Can you talk about near-term pipeline now youâve got some of those larger deals over the line that you were holding back? And just any change in client sentiment and sales cycles and things like that, just given the macro? Well, look, the client sentiment is pretty simple. We â the whole industry is focused on efficiency. Itâs focused on cost savings. And what weâre seeing is that the deals will be larger, just like the $800 million number that we gave, and theyâre taking a little bit longer. The other thing that weâre seeing out in the industry is the fact that, look, customers are still focused on revenue, but it needs to be immediate impact. So when I boil that all up and look at our offerings, I look at the ITO offering, thereâs not going to be too many audit committees at these companiesâ Boards that will take that spend down. And the reason for that is because they donât want any cybersecurity attacks. So weâre still seeing demand for that offering. The second is when you look at modern workplace, weâve still got a lot of companies that are supporting a major, major part of their population, their employee base and a virtual mindset. So you canât really curtail that spend too much. And then when I look at the ability to drive revenue, thatâs what our engineering business does. And Iâve said over and over again, weâve got unique skills. I continue to look at that business and see double-digit growth, along with a very solid book-to-bill. So from a demand standpoint, itâs hard not to be cautious. But look, I mentioned on the last call that Iâm adjusting the sales model. And I think focusing on what I call relationship selling in GBS, which means we go build the deep relationships and then sell our offerings based on strategic points of view that will either drive revenue or decrease cost. And then look, the GIS business is always going to be there, and what we need to do is continue to win in the marketplace. So I love the new logos, and I love the better economics. So Bryan, thatâs how Iâd answer your question. Hi, Mike. Hi, Ken. Good evening and good to hear from you all. I want to go back to free cash flow, but talk about deployment. I see the deployment notes with regards to the immediate buyback pay down. Could you talk a little bit more granularly about the timing of those? And it was interesting to see that tuck-in M&A was not specifically noted. Basically, what are you broadly thinking as it relates to ongoing deployment of free cash flow? Sure. It sounds good, Mike. So just, Ashwin, on the timing, we put out a $1 billion commitment on the share repurchase. And I think our perspective, that kind of looks like the end of this fiscal year when we file the K. So ideally, that would be the kind of ballpark timing we would hit. We always like to deliver on our commitment. So weâll work at that. It always depends on what the share price does, volumes and all those things. Because as you know, repurchasing shares, itâs highly regulated, and thereâs processes you need to follow. So weâll do that in good stead, so we should be in good shape. The debt retirements, I think youâre also asking about, we just â we like to run somewhat fiscally conservative. We like to keep our leverage ratios in line. So we have some European commercial paper. Itâs relatively short duration. Thereâs no cost to take it out, so weâll reduce that. Weâve got also some preferred stock thatâs a little bit higher yield that itâs a mandatory redeemable. It also comes up at the end of the quarter. So weâll clean that up and be in good shape. We do tend to keep a little bit of a cash buffer as well. So to the extent Mike wants to do some tuck-in M&As. Weâve always kept some reserves in one hand. So Iâll let â Iâll turn that to Mike for the remainder part. So Ashwin, in terms of capital allocation moving forward, what I would say is focus on that inflection point. I made the inflection point about us getting to the end of FY2023. What you see is the revenues now arenât declining. Weâre definitely changing the mix of our business to GBS. Weâre expanding our margins and EPS, and weâre generating good quality free cash flow. So as I look into 2024, one of the things that weâll be discussing here is it feels like itâs time to start looking at the tactical tuck-ins. My two favorite slides in this deck are 15 and 23. And if you look at 15, you see the stability of the revenue. We basically are now in the same amount quarter after quarter after quarter. So now itâs a matter of letâs look at the new bookings, letâs look at the things that are potentially complementary to our business. And then when you look at Page 23, you can see the challenges that weâve come through. When we talk about the quality company, you can see how we measure that, and then you can also see how weâll take the thing forward. So there will be some balance to the capital allocation. Iâm not ready to say one way or the other. Weâre going to get through our 2024 planning, but weâve gotten to that inflection point, where I do think itâs time to start considering that. Do you have a second question, Ashwin? Yes, I do. Thank you. So investors are obviously very interested in revenue visibility, and youâre guiding to not just obviously the next quarter, but you gave initial outlook, new initial outlook for fiscal 2024, so speaking 15 months out. And I just wanted to ask you to kind of comment on your visibility sort of in terms of the bookings you had, but also the pipeline replenished, the segment level granularity that youâre seeing the model going forward, if you could comment on that. Okay. So look, in terms of the visibility, thereâs nothing better than seeing that that revenue being stable. So weâre not fighting a lot of the challenges around customers, around terminations around that sort of stuff. Thatâs why I give you all the NPS number each quarter, which again is at 27. And weâre doing that on the back of also continuing to expand our margins. So when I look at that stability, that means step one should be completed, meaning weâre not going backwards anymore. So now itâs time to go forward. So we feel pretty comfortable that the revenues will be stable. Love the fact that that book to bill came in at 1.34x, we didnât deplete the pipeline. I expect to continue momentum into Q4 and you start stacking up a few more quarters and Ash when I think weâre going to be right where we wanted to be. So thatâs how I would answer that question. Hey, guys. How you doing? I kind of had a follow up on that one on Ashwinâs question there. Because I guess in its history, Mike, DXC had trouble getting to that inflection point. And weâve heard it from multiple management teams over the years that weâre going to see the inflection point and it just has never come. Maybe you can just talk about⦠Yes, and thatâs what Iâm trying to get at here because it feels a little more real this time. Because in itâs history it hasnât been able to do it. But it sounds like maybe with fixing the troubled contracts and fixing the mix of business, that weâre finally at a point that the visibility is strong enough that you feel confident this can be a positive organic growth, not only next year, but just from years to come. Yes. I mean, Bryan, look, hereâs what I see. Again, we went â we focused on putting 15 in for a reason, okay? And you guys can see all the adjustments that Ken and I talk about in terms of FX and disposition and so forth. But when you look at 23, the biggest thing we will have achieved is customers that count on us, stable revenue that is not declining and the change of mix. Weâre almost at 50%, which is all stuff that when Ken talked about how we envisioned the business two years ago, this is where we wanted to be. So the reason why we kept saying that, hey, weâre also guiding towards a fourth quarter at about the same revenue, thatâs a clear indication that as we flip to next year, if we continue to keep the book to bill, and when I look at book to bill, again, I know we had a great quarter, 1.34x. But the trailing 12 month book to bill is what Iâm looking at that 1.06x that increased thatâs good stuff. The other thing thatâs good stuff is literally looking at the individual offerings. Okay? So if I go to the businesses first, GBS and GIS. GBS grew for the seven consecutive quarter. The point too, there was a tough compare there. We did do a perpetual software sale of about $36 million last quarter. I totally expect that business to be back up around 3% in Q4. Then when you look at our strategy for GIS, itâs awesome. The fact that we are literally taking our time with these deals, the deals are out there. I can now stop talking about them. We could show you guys the results. $800 million is a big basket of deals at better economics. So when I talk about the clarity and the excitement at DXC, youâre leaning into what you should feel now because I meant what I said. Youâve never heard me say, all right, flat to 1% within a very short timeframe. And look, I mean, weâre pretty happy about the fact that two years ago we called 1% to 3% and weâre still looking at that at 1% pretty closely. So Bryan, do you have a second question? Yes. My second one is just on the â I know you canât comment about whatâs going on with the strategic kind of review. But usually these things take one or two months. This one seems to be taking longer. Iâm just curious why the length of period, and Iâm a little concerned, does it have any impact on the business fundamentals, the length of the review? I mean, look, I reiterated that we werenât commenting on any further. I mean, look, the press release still stands that confirms that weâre still having discussions. And Bryan, thatâs about all Iâm going to say. Anything on the â has it hurt anything in the fundamentals of the business, the review or you think thatâs not been⦠No, not at all. I mean, thereâs no way you can go expand margins, increase GBS, GPS or EPS, drive the free cash flow and book 1.34x if it was really having a big problem. Hey guys. Thanks. Hey, Mike. Itâs good to see the momentum on this the trajectory you guys have been showing. I guess, I just want to sort of circle back to a couple of the answers you gave on whether itâs the question Brian was just asking or the question around M&A, but broadly, I mean, is the portfolio that you have now, Mike, the right portfolio of assets for the next few years for DXC, I mean, I know you mentioned some tuck-ins, but anything else to divest? And then really where are you focused from a tuck-in standpoint if youâre going to make some moves? Or are we going to just digest what we have now, and let the company operate, and see if we can execute towards those fiscal 2024 targets? Well, I mean, look, I think itâs a combination of all those. And what I would tell you is where the market is right now, there should be some pretty good buys. If we did do anything, we would do it in GBS, because what weâve been saying the whole time is we need to change our mix, change our mix. Now having said that, Iâve also said over and over again that the GIS business can be a good business for us, and we do think that can produce good cash for us. So, when I look at it, there is now a part of me that you know my past history that I did eight tactical tuck-ins in seven years. So now in terms of stuff that we are continuing to look at, youâve now heard Ken say for two quarters that we have $250 [ph] million of data centers and facilities that were going hard after and we sold a few this quarter. So we will keep doing that. The next thing is, I look at countries in terms of, this is still part of what I would call the cleanup, meaning I think weâre in too many countries that we quite frankly shouldnât be in. Thereâs not a real strategic reason that we need to operate, but that was nothing more than taking HPE and CSC and putting it together and we can finally go after that. And then thereâs still a few other businesses like the dynamics business that we still would like to move on. So look, youâll see, I think a whole combination of those things, Darrin. I mean, weâre certainly not done, and I think what youâve seen in us is, weâre not going to wait around. Weâre going to continue to be aggressive with the business, because we do think itâs got a lot of merit. We do think weâve got more clarity in terms of what we see now, and I think we can get more focused on some of the last few things that we need to clean up. Darrin, you got a second question? I do. And it goes back to the demand discussion that somebody asked earlier. I guess, the bookings, obviously some of it was like you talked about, last quarter pulling into this quarter, flowing into this quarter, which helped. But could we just revisit that for a minute in terms of what youâre seeing, in terms of what kind of projects are looking like theyâre winning bookings now? Because the book-to-bill ratios are strong in both GIS and in GBS this quarter, even like you said, even modern workplace, I think you talked about having; it was great to see the new logos. So, can you give us a sense of what youâre actually seeing and if thereâs been a change in sentiment on demand from the enterprises that youâre working with? Okay, so Iâll take each offering individually. So what weâre selling in A&E is engineering, and a lot of our engineering projects are in automotive and we still see quite a bit of demand in banking. And a lot of that stuff is analytics around also, can we help a client â customer generate new revenue. So thatâs what weâre selling there. So think projects theyâre smaller, but theyâre quicker to generate revenue. And applications, what weâre dealing with there is, weâre dealing with custom apps. So think something Iâm building from the ground up, and then weâre also seeing ServiceNow and weâre seeing SAP. And then in insurance, Ken mentioned the insurance software business. Look, weâre right at the heart of a lot of the insurers, because thatâs software enables a insurer to write new books in business. So the fact that, thatâs growing 7%. Weâre not only selling the software. Weâre implementing it, Darrin, and weâre also running it. Then if you drop down into GIS, thereâs always going to be security projects. So that 4.2% growth, you saw this quarterâs kind of nice. And then ITO is making sure that these infrastructures that havenât moved to the cloud and then the ones that have moved to the cloud are basically, letâs call it bulletproof. So thatâs what weâre seeing is the maintenance, the upgrades of that, those environments so that they donât tip over. And then modern workplace, I think youâll see that our uptime product is doing very well in the market. For SAP to have gone with us is a big deal. They kind of know one or two things about software. So thatâs what weâre seeing, Darrin. Look, I wish that I could be more clear that the sentiment thatâs out there that I read after every single one of my competitorâs earnings calls is that the thingâs going to go backwards, but showing up with a one, three, four and saying that look, it may be luck made a little bit lumpy, but we still see very good demand for our services in the market. So, to go back to the last point of your first question, do I think DXC has everything it needs to have to take this thing into the future? We definitely have a good foundation. I would tell you that. Weâve got more than enough to make this a very good technology company. And like I said, I like Page 23. It can literally show you the course that weâve been on in terms of fixing the business, getting to a quality business, and now where weâre going to go. Good evening, excuse me. I did want to drill down on Modern Workplace a little bit. Itâs a small part of your revenue, but itâs still over a point of drag on growth. And how does that shape out over the next one to two years? Can you get that the flat or what happens because it still is frankly a drag? Okay. So Keith, let me give you the exact numbers, because if you go back to Page 15, Modern Workplace mimics a lot of the overall business. So if you look at the revenue for Q1, it was 447. If you look at the revenue for Q2, itâs 436. If you look at the revenue for Q3, itâs 433. So that thing is basically stabilized out, meaning remember when I put the business up for sale, we lost a number of contracts because why are you going to go with somebody thatâs potentially going to sell the business? So I think weâre through that puzzle piece. The fact that, like I said, weâve got good new logos coming our way, I think in Q4 youâre going to see a pretty significant change in that negative 1615 that weâve been showing for the entire year. And then I do think we can get that business to flat to grow. Yes, it makes sense. And then I want to try to ask visibility a little bit differently. But in terms of the pipe as weâre progressing over the next couple quarters, how should we be thinking about the book-to-bill? I mean, this quarter, it was obviously pretty strong. You focus on the latest 12 months, but anything you want to call out, as we think about the next couple quarters on book-to-bill, thatâll give us confidence that the zero to 1% growth is not only attainable but sustainable? Well, Keith, think of it this way. Iâm literally guiding to minus 2.5 to minus 3 in Q4. So that should suggest that the demand that I just knocked down is going to show up, right, sometime in 2024, okay? So especially with the new logos in Modern Workplace, those are not project type things, thatâs outsourcing type work. The second thing I would tell you is having the business hit on all five out of six offerings shows that, look, we still have not only relevancy in the market, but there is demand. So look, can I tell you whatâs going to happen to the economy? I mean, you look at everything, you read the scripts, people say this is the year of efficiency. We do efficiency well, Keith. So if people want cost savings, and if people want somebody to run something efficiently, thatâs us. So like I said, I mean, I canât call out exactly whatâs going to happen in 2024 or two or three months or two or three quarters down the path. But what I can call is that we feel good about Q4 and we feel good about the momentum weâve created so far. Thanks. Hi, there. How are you? Thanks for taking the question. I just wanted to ask the first one on organic revenue growth. I mean, I know in the quarter it was a little below plan, I guess fourth quarter is coming in a little below what was previously expected. So just as you unpack that, I mean, where would you say the shortfall has been relative to what you had previously anticipated, which of the service lines? It was Modern Workplace and Applications. So we expected that we would turn Modern Workplace quicker than we did because I kept telling everybody that thatâs following the exact same transformation journey as ITO. Youâll see that we turned ITO within probably about a year. So we thought we would turn that a little bit quicker. And then Applications, we expected to get more project revenue out of that. When you looked at our plan for FY 2023, it was back end loaded and we expected to get a little bit more out of apps. But I think apps will, youâll see a turnaround in apps, just like youâll see a turnaround amount of workplace in Q4 based on the bookings we just knocked down. Okay. And then my second question was just more of a clarification, I guess, Ken, I think youâve said in the script that there was some kind of commercial matter that was settled that, and I donât know if I got this right, so correct me if Iâm wrong, help. GIS margins by 80 bps in the quarter, is that what it was? And is that just kind of a one-off? Hey. Hi. Thanks for taking the question here. I just wanted to also hone in on the booking side. You, Mike, you talked about not depleting the pipeline and demand is still good, but visibility obviously is driven somewhat by macro. Is there wiggle room if large deals slip or if project work gets pushed out for you to still see that inflection that, that you're calling out here today? And also similarly, just want to better understand, you mentioned better economics, including on uncompetitive takeaways. I'm a little surprised by that given the cost focus of clients, so just curious on what's changed there, if you don't mind elaborating on those two things on bookings? Thanks Either one that's easier, I kind of rambled a little bit. Just thinking about the wiggle room, maybe starting with that and even if things get pushed out a little bit, maybe on larger deals or project work. For example, it sounds like you got a good backlog. You feel good about the fourth quarter, so... Let's just, yes, 100%. Let me start with that one first. So when you think about wiggle room, I mean, look at what we've done on the revenue on the back of 0.83 and 0.87. So when I â when I look at that 12-month trailing book-to-bill, I can all â I can go all the way out five quarters 0.92, 1 â 1.02, 1.02 [ph], 0.87, 0.83. Why am I doing this for you? There is wiggle room, okay, in terms of us making sure that we can sustain that revenue, okay. And like I said, the 1.34 is nice because that means that we're going to be executing against all that, all that bookings come Q4 and then into FY 2024. So the backlog doesn't have to be perfect for us to get to that flat to 1% guide. No. This is clear. So when I say that, it's ITO. Okay? And if you think about what's happening in the space, our competition is struggling a bit. And what's interesting about the market right now is I remember those days. So when I took over DXC, we were the ones that were struggling in terms of customer satisfaction, in terms of our balance sheet, in terms of our free cash flow, all that stuff. And if you go back to 2023 that's not where we're at anymore, all right? And I've talked on numerous calls that we're now the safe pair of hands, all right? And you're talking to a CEO that literally likes the GIS space, all right? And as always said, that is key to what we're trying to get done because we do think it can generate cash. Okay. Now here's the second piece. When those deals that we're looking at, Tien-Tsin, were done five, 10 years ago that ITO space was a commodity space. It was a race to the bottom in terms of pricing. And we're not â when those clients call us now, whether we're joint with one of those competitors in a large client or it's a brand-new logo we are very clear about the economics that we're going to do. One of the things that I talk about is going to infrastructure light. That means we definitely get cola that means we pass on things like electricity. We pass on things like hardware upgrades. We pass on things like software increases. And Tien-Tsin, you knew that was the playbook that I ran us the old place. So when I say better economics that's exactly what we're doing it's taken me a little bit longer than I wanted to, to get there because we had stabilized a lot of delivery, but I like where we're at. Hey guys. Hey I have a question about bookings traction and a question about capital intensity. I'll start on the bookings side. Your booking strength in the December quarter was pretty disconnected from less good trends in the broader IT infrastructure services market. So I want to ask, how much of your recent booking strength was due to push-outs from earlier in the year versus a real inflection point in your market traction? And if you are seeing a real inflection point, can you share more about what's enabling that inflection point? Okay. So first, I'll talk about the bookings. So if you take out the $800 million that we said was basically caught up in the first half of the year, we're still at a book-to-bill of 1.12. So that's just the math. That's a very strong quarter. Also, the way I look at it, Rod, is we're back over 1.0 year-to-date. So you can look at it that way. You can look at it the trailing 12 month increasing from 1.04x to 1.06x either way you look at it, the demand was good, okay, which, this is where I keep going back to. We do all right, see not only the demand, but we also, thereâs a need for our services out there. Thatâs what I just keep coming back to. Now, what weâre not going to do is raise to go do some book-to-bill, just to do the book-to-bill, because on the GIS piece, weâve talked about our discipline over and over again that weâll get that at the right economics. And then look, I really like what weâre doing in GBS when you look at all those offerings, 1.32x book-to-bill and apps 1.15x in A&E, 1.06x in raise insurance business. Thatâs all goodness. So Rod, what was the second part of your question again? Yes, well it relates to the discipline topic in the, GIS business. So maybe itâs a good topic to end on. Capital intensity in the business is something that has been wrestled with here for years. So, can you talk about the levers you have to get capital intensity down, while youâre also achieving better revenue stability in GIS? Yes, sure. Yes, no, Rob, weâve been â this goes back to our whole governance process. Weâve put a thoughtful approach around free cash flow, cash generation on deals. And as Mike said, it just takes time to work its way through the system. Thatâs probably the first part. And then, your comment about historically I think there wasnât this cash culture and putting that in place and, part of the business came out of a hardware business. So, I think their desire to, refresh and not really kind of manage CapEx that like a, like we need to, we just need to keep working that, right? So, weâve even put some tools in place, which are going live this quarter to better, forecast, manage, create accountability, tie back to, the commercial team that Mikeâs been building out, which I think will be a big part, long-term. I mean, our focus is absolutely support our customers, but we also need to make sure weâre getting a proper return on the business. And when you look at the capital intensity and the margins and the GIS space, you could easily argue weâre not getting the right return. So, weâll keep sharpening the pencil there and drive our way down through it, but thereâs certainly an opportunity to make headway there. And if you look at our peers, right? You kind of quickly get back to the GIS space ought to be somewhere around 5% of revenue, maybe 6% on a bad day. And the GBS space ought to be kind of a 1% to 2%. So, on that thesis, right there ought to be an opportunity to get the CapEx down the 3% to 4%, with a little bit of work. And thatâs what we just need to do and we need to keep at it. So Rod, let me leave you with these comments. When I look at that space in the three plus, three and a half years Iâve been here. We first talked about is there even a need for that business that work, that infrastructure work? And I gave you all data that said, hey, that stuffâs not going to go away. Not everything is going to go to the cloud because all of our competition is always talking about the cloud, the cloud, all right? Second is nobody liked that business because it was commodity. All right. So a lot of people could do it, and that meant a race to the bottom on price. Okay? So, now where are we today? All right. Thereâs definitely a need because not all of the mission critical stuff has gone to the cloud. All right. Some of it has, some of it hasnât. Second is the industry isnât as commoditized as it once was, because weâve got competition thatâs fallen off, all right? So therefore us being there, right to take the business, to make sure that we can deliver on what we said we were going to do is huge to get better economics. Now the last thing I will say is, Ken was being very detailed, I would add to his detail by saying using our balance sheet to do deals is not something that we want to continue to do over and over again. And Iâll just leave it at that. So Rod, did you have a second question or should I wrap the call up? All right, Rod, thanks so much. Look, I appreciate everyone joining the call. Also, I want to thank everyone for joining the call. Some of you made the time for DXC this quarter, and I do really appreciate it. What I would end with is this. We definitely have both execution and weâve created great momentum in our business to get to what I think the inflection point will be at the end of FY 2023. And we expect to deliver, like we had always envisioned the business in FY 2024. And we are very proud about the quality of company that weâve created and weâre also very clear and excited about our future. So, I look forward to updating you all in May. And operator, please close the call.
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[Foreign Language] and good evening, ladies and gentlemen. My name is Sanjay Kapoor, and I'm the General Manager for Performance, Planning and Review Department of the bank. On behalf of the top management of SBI, I extend a warm welcome to all of you joining us today on SBI's Q3 FY â23 Earnings Conference Call. On the call today, we have with us our Chairman, Mr. Dinesh Khara; Mr. C.S. Setty, Managing Director, International Banking and Global Markets and Technology; Mr. Swaminathan J, Managing Director of Operating and Subsidiaries; Mr. Ashwini Kumar Tewari, Managing Director, Risk, Compliance and SARG; Mr. Alok Kumar Choudhary, Managing Director, Retail Business and Operations; Mrs. Saloni Narayan, Deputy Managing Director of Finance. To carry forward the proceedings, I request the Chairman sir to give a brief summary of the bank's Q3 FY â23 performance and the strategic initiatives undertaken. We shall thereafter straight away go to the question-and-answer session. However, before I hand over to Chairman sir, I would like to read out the safe harbor statement. Safe harbor provision. Certain statements in these slides are forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual outcome may differ materially from those included in these statements due to a variety of factors. Thank you. Thank you very much. Good evening, ladies and gentlemen. Thank you for joining this analyst meet post announcement of the quarter three results of the financial â23. The Indian economy has exhibited remarkable resilience through 2022 in the face of the deteriorating global situations triggered by Russia-Ukraine war, monetary policy tightening and recurring waves of the pandemic on the back of the strong financial and macroeconomic fundamentals. An important factor in the overall outcome has been the measured response of the monetary and fiscal policies in sharp contrast to the aggressive tightening worldwide. The New Year brings hope for continued momentum in India's growth story, backed by the sustained strength in domestic demand. The World Bank has gone on record to say that the nation was well placed to steer through any potential global headwinds in 2023. The IMF have also said that India remains the bright spot and would account for the significant portion of the global growth in 2023. Several high frequency activity indicators like vehicle sales, petroleum consumption, railway passenger traffic, air traffic, RTO revenue collections, fertilizer sales have all shown improved y-o-y momentum in quarter three of financial â23. GST revenue also continues to remain robust with 15% higher revenue in quarter three compared to the same period last year. In financial â23, credit growth has continued to grow in double digits. The incremental nine-month credit growth has doubled in financial â23 compared to financial â22. Credit growth in the system is currently at 14.9% as against 9.2% in last year. The good thing is that, credit growth has got base and not limited to a few industries or sectors. So we expect the pace to continue in the next financial year also, but some audition can happen. At State Bank of India, we have always maintained that our long-term strategy is to build sufficient resilience in our balance sheet. So while we've continued to pursue growth in core operating income, we have also been proactive in identifying any potential risks and build adequate presence for the same. And our operating results for the quarter are aligned with our long-term strategy. I'm pleased to announce that for the second quarter and running, we have again posted our highest ever quarterly profit at INR14,205 crores, our wages growth numbers are strong, and in terms of asset quality, our gross NPAs have dropped to its lowest level in more than six years. Let me now give some color on the Bank's number for this quarter. Net profit for the quarter increased by 68.47%, Y-o-Y to INR14,205 crores, while operating profit at INR25,219 crores increased by 36.16%. ROA at the Bank for the nine months period improved by 23 basis point on Y-o-Y basis and it stands at 0.87%, and ROE improved 458 basis points on Y-o-Y basis and it is at 18.59%. Most other core profitability metrics have also improved over previous year, as well as sequentially, net interest income increased by 24.05% Y-o-Y on the back of improvement in yields and continuing credit offtake. Domestic NIM also grew by 29 basis point Y-o-Y and 14 basis point sequentially. Non-interest income grew by 32.22% Y-o-Y. Operating expenses increased by 16.69% as we have started building provision for the wage revision, which has fallen due from November â22. Other than that, our overhead expenses as well as staff costs are within control and our cost to asset continues to remain among the lowest in the industry, reflecting our efforts to build a long-term cost efficiency. On the wages front, the growth momentum in domestic credit offtake has continued in this quarter also with growth coming from all segments. Domestic advances grew by 16.91% Y-o-Y headlined by retail personal advances which grew by 18.10% Y-o-Y and corporate segment which grew by 18.08% Y-o-Y. SME and agri advances also posted double-digit growth at 11.52% and 14.16% Y-o-Y, respectively. Our personal retail loan book, excluding housing segment has crossed the milestone of INR5 trillion. Domestic deposit grew by 8.86% Y-o-Y, driven by growth in savings bank deposits and term deposits. Our foreign offices have continued to perform well with good growth in advances as well as deposit. Coming to asset quality, we continue to post improving outcomes, our gross NPA has dropped below INR1 trillion and stands at INR98,347 crores. In terms of ratio, our GNPA has come down by 136 basis point on a Y-o-Y basis and stands at 3.14%. Our net NPA ratio has also declined by 57 basis points and stands at 0.77%. Slippage ratio for the quarter stands at 0.41%, consistently improving asset quality is also reflected in our credit cost which is at 21 basis point for the quarter and is down by 28 basis points on Y-o-Y basis. On the restructuring fund, our total exposure under COVID Resolution Plan 1 and 2 stands at INR26,035 crores. As at the end of quarter three of financial '23, the restructuring book has behaved well with almost around 10% of the current exposure falling under SMA1 and SMA2. We are holding sufficient additional provision against the restructured account. The Bank remains well capitalized, and we expect that our internal accruals will be adequate to take care of the normal business growth requirements. Our capital adequacy ratio without adding profit for the nine months stands at 13.27% and CET ratio at 9.26%, well above the regulatory requirements. Digital continues to be an important acquisition engine for the Bank across assets as well as liability products. During the quarter, we have sourced 64% of the savings bank accounts and 41% of the retail accounts, retail asset accounts digitally through YONO. Our subsidiaries have also consistently performed well and continue to create significant value for all the stakeholders and, most importantly, for the customers. Most of our subsidiaries are leader in their respective segments, we will continue to nurture these subsidies and see them creating value for their own shareholders and as well as the shareholders of SBI. Now before I conclude, I thank you for your continuous support for the Bank. We consider it a privilege to be able to contribute towards the growth of our economy. We remain committed to reward your trust in us with superior sustainable returns over the long-term. I wish everyone here good health and very happy weekend. Thank you very much. [Operator Instructions] We have our first question from the line of Mahrukh Adajania from Nuvama. Please go ahead. Hello sir, good evening. Sir, a couple of questions. Firstly, the write-offs are slightly higher this quarter. So, if you could explain and also on trading gains, the -- I mean, the profit -- the treasury bid, why does it look so high this quarter? So, these are my first two questions, and then I have one more. Yes. write-off is in the normal course of rates. It is nothing very unusual. I think it is about INR10,000-odd crores. There's a write-off amount. And it is in the normal course of business. So nothing very unusual. Yes. I think normally, we undertake write-offs towards the third quarter and the fourth quarter. So that is why it has -- this kind of tend to see this year, and it has not there in the past. On the treasury part, it also includes the markup write-back of the MTM because the MTM requirement has come down. The mark-to-market losses have come down. So that is getting reflected in the treasury account. Got it. Sir, and in your exposure to a large group in press, you've made some comments that is 0.86% of total exposure, but what is the total exposure because we get to see only your gross advances so and your part. It is there and normally, we don't entertain questions relating to a particular account, because there's a customer privacy issues involved. Okay, sir. Sir, and if I can squeeze in just one last question. What do you think is the outlook on deposit growth and therefore margins, right? You've done -- your operating performance has been phenomenal. Deposit growth is not great, but you don't even need it because you have been running the lowest CD ratio once the lowest CD ratio in the industry on the domestic front. So, what is the outlook on deposit growth and therefore, margins from here on? When do you -- do you think margins sustain at the 3Q levels? Do they drop? When do they drop? How does deposit growth accelerate? As of now, we are having excess SLR to the tune of about INR3.2 trillion. And we are very mindful that I've said it in the past also deposited the franchise, and we always remain mindful of the depositor interest. So, in the buckets where we feel that we can attract the retail deposit, we are ensuring that we must be in line with the market trends. And that's the policy which we have adopted, and we'll continue to follow that. So based upon that, since you are also acknowledging the fact that we still have one of the lowest credit deposit ratio. Depending upon the need, we will be calibrating our interest rates. But I would also like to mention that our -- about 74% of the loan book is linked to either EBLR or MCLR. And although the 74%, I would say about 40% would be on account of MCLR. And if at all, we increase the deposit interest rates, that will also give us algorom for increasing the MCLR and which will help us in ensuring that the NIM should not get adversely affected. Thanks. Good evening, sir. Just a couple of questions. Number one on the provisioning bid, so we've seen a jump in standard asset provision in this quarter and I think outstanding standard asset provisions were about INR23,000 crores. So just wanted to understand why are we carrying such a large provisions here, is there an element of contingency also that has been factored in here? Yes, there is one-off costs when our loan book has grown, that has also led to an increase in provisioning because we are required to maintain standard provisions for standard assets also. Secondly, of course, we are always very mindful of, if at all, we get to see any kind of a stress on the ground in any of the accounts. We do make some provisions which are floating in nature, and much of it will depend upon how the account at what is a trajectory of the account and accordingly, we crystallize those provisions. So partly it is on account of our increase in the loan book and partly, it is on account of our policy in terms of making the provisions proactively as against -- after the event. Sir, this translates into roughly about 75 to 80 basis points of the loan. So fair to say 30 to 40 basis points may have been built just for any future contingencies. Yes, would be like. As I mentioned that if at all we get the visibility of any kind of a stress in our own loan account, we rather believe in making provisions. Got it. Thanks. Sir, just on this provision for employees of INR5,429 crores in this quarter. So, what is the element of one-off here? Or this is going to be the recurring quarterly number? No, we have a provision relating to our revision, which is about INR996 crores is on account of that. And other than that, the provisions which have been made based on the astute assessment for lower retirement liabilities, et cetera. So, it is as per the yes. On an average about it is for every month, it comes about most about INR500 crores every month. That will be the provisions which will be required to meet the liability relating to the wage revision. No, about INR996 crores is something which we have provided for. And this is a provision for two months' time. Okay? And apart from that, about INR500-odd crores. So, every month, INR500 crores will be the provision for the major reason. And apart from that, some provisions, we have made on account of the pension and gratuity liabilities, which is essentially on account of the discount rate and also as for the recommendations of that gratuity. Sir, just 1 more question. Again, going back to the exposure that is, of course, in the public discourse. Can we get some more colour as to the exposure. I think towards the end of this week, I mean, after I complete all your answers, I will make some statements, comprehensive statement relating to the exposure to that particular group. Complements to you, Khara saab and the entire team. I think for the mind blowing profit, one of the highest I think operating profit in last maybe four, five years, even in the net profit, even the asset quality has improved tremendously, overall performance of the bank is so robust that even if there is any problem concerning to this large group, which may not be even in the top 15 group of your -- as far as the exposure is concerned, I don't think the bank like State Bank of India will have any problem when you're operating profit itself is INR26,000 crores per quarter. So having said that, sir, we will wait for your final comments on the total overall exposure to this growth fund based, non-fund based, bond, equity, foreign bonds which you have assured that you will give the statement at the end of the question-and-answer session. Having said that, sir, I have some couple of -- some data points and some information, we have gone slow in this quarter on the corporate credit, so what is our basically ratio which will settle down If you take the whole FY â23 by March the composition between the RAM and the corporate? I think it will be more or less where it is in the month of December. It will be -- marginal movement for many of the segments, but it would be more or less on these lines only. All right, sir. Sir, if we go on the income side, the other income has gone up to INR11,467 crores from INR8,870 crores in the last quarter, and I think the major part of it is they come from treasury profit. So, profit and sale and revaluation of the treasury is INR2,937 crores as against INR457 crores in the last quarter, whether this trend is going to be continued in the coming quarter January March also and how do we see now with the interest rate almost peaking up maybe another 25 basis points, where do we stand on the treasury side, sir? So, as well as the treasury slide is concerned, there are two components; one of course is the improvement in yield on investment. And secondly, in this quarter, we have booked some MTM gain which is about INR2,200-odd crores, which is more of a write-back because, if you recall, in the first quarter, we had made MTM loss which was about INR7,500 crores. Out of that, we had some MTM gain last quarter also, which we did not book. For the reason that we had seen that yields were somewhere it has again shooted, so that is the reason why we did not booked at that stage, but now we have seen that yields are now coming within the range and that's the reason why we have done this. So, I think that is the major reason when it comes to the movement, we are observing in the treasury such as ours. Other item is, we had some derivatives which are again rupee dollar swap, which we have done. So, some loss component is there on those derivatives, so that is also booked in that particular head. Sir, our credit cost and cost to income ratio both have improved tremendously, do we see this trend to continue, like cost to income coming down and the credit cost both are come down even at this low level, in this coming... I think quarter ending March â23, I can say for sure. And I think we will be in a position to give some guidance as we move further, depending it will be -- it will also be the function of how the economy in general macro economy will be moving. But nevertheless, as of now, it looks like that for the quarter ending March â23, we should not be -- we should have a similar credit costs. My last question in this round sir is on PLI, how much provision on PLI, the Bank has made for the nine months, because you have done the... [Multiple Speakers] provision would be in line with what the number is likely to be, the cost is -- it could not be very significant amount and it would be very small number, which is there. So, it is for 5% increase, it is five days salary. And for 10%, it will be10 day salary, so it would not be very significant component. That's always there. Now we have so many pockets where we are keeping so much of non-NPA provision as I hear about INR33,000 crores. Yes, sir. I think the concern of the market is an absolutely unfounded, but anyway all the best to you. I think the sooner or later, the bulk market will understand the economics of the bank of the bank and the financial. Thank you very much and all the best to you, sir. Yes, thank you sir for the opportunity. Sir, we've heard about lot of resolutions in the pipeline right now like SKS power and all, do we have any resolution pipeline particularly for the fourth quarter and over the next six to nine months that we can talk about? There are so many resolutions in pipeline such as but it penetrates lies because it is always a process which is carried out in all these matters and how much time will be taken at each of the step is actually at times is not very certain. So that is one of the reasons why saying it so much of uncertainty that in the last quarter, we'll have so many resolutions coming through, it will not be in order for us. But nevertheless, I'll ask Mr. Tiwari if at all he can throw some -- he can give some colour in this direction. Many cases which are in primary stages, but we cannot be sure and theoretically there is legal proceedings tough to give a timeline or a date. And sir, I give some high-level numbers high level. I'll give you high level number going forward in the quarter. Sure, sir. That would be great. Sir, secondly is the outlook on margins. I think this quarter also we have seen a meaningful margin uptick. We still have some room in terms of earlier improvement. And as you said, that MCLR also would increase as basically the cost increases. So, I would suggest that let us keep -- as guidance part is concerned, I would like to keep the guidance at this level and if at all they'll be room for improvement, we'll certainly ensure that. Incidentally, in this NIM also it would have been even better, but because in the last year we had the income tax refund because as high as about INR2,400 crores as against that, but this year we have got income tax refund, which is as about INR800 crores. Interest on income tax refund, so that is the other reason, it will have an impact towards excellent basis points overall. But yes, of course, if at all, we do apple-to-apple comparison, for us, the impact change can be even better, so this is just for information. Hi sir, good evening. Actually, just one request when you make a comment on the large conglomerate, if you could clarify whether this INR27,000 crores includes LC/BG in non-fund based and overseas loans. So just at the cost of repetition is requesting that. And also, if you could also clarify that is there a refinance opportunity given that you said that... The second one is, if there's a refinance opportunity given that your large exposure framework wise, there is lot of headroom and the group like several projects appear to be credit-worthy, then would you do it. So just these two things if you could cover in your comment, maybe now or later whatever that would be very useful? I think second question, I can answer you right now that is if at all any refinance opportunity is always evaluated on merits. So, for me to say that anything right now will not be in order and as when any such demand will come, we have not received any such demand or any such request, if at all any such request will come, it will be evaluated on your merit and while evaluating we're always very mindful in terms of the stake of the promoter or of the entrepreneur and risk which it is, and based on that very comprehensive assessment only, views are taken. It is not merely simply one request comes and we run the facilities. Understood, sir. That's useful. And my second question is actually on international loans, now sequentially there's been flat issue I think couple of quarters back we were talking about being a little aggressive there then looking for opportunities outside. What is the outlook there, sir, next one year, are you looking to grow that maybe to higher percentage of loans or what's the strategy? In terms of dollar, our international book has grown by about 9.15% and though when it comes to dollar rate -- when we convert on the dollar rate, it looks like that it is growing at 20% plus, but the factor is dollar in terms of dollar, it is just about 9.15%. And now our focus is in for improving the NIM as far as our international is concerned. So that is the reason you might have observed that our NIM's have improved significantly we're move towards 1.67 as for our international NIM's are concerned and it is on a quarter-on-quarter basis, an improvement of over 23, 24 basis point. So that's how it is. And when it comes to composition of the international book, it is essentially local lending and those markets which is not necessarily to the Indian corporates only, it is too -- even to the local corporates and we are participating in the local syndications. And also, when it comes to India linked loans, they are majorly ECB's and ECB's to either AAA or AA rated entities only, and that's all this whole complexion is. Apart from that, last component to trade finance, trade finance group, wherever we are getting the margins, we are participating on the platforms and wherever we are in efficient to get the margins there we are actively involved. Perfect, sir. Thank you. And just one question I squeeze in. On SME, no for several quarters that book was not really growing, as this quarter there is about, I think 10% Q-o-Q jump in that book. So, if you could share this -- what has changed, is it a change in product geography, customer focus, what has really changed over there and whether this is sustainable? Yes. We have -- in SMA, we have invested well in terms of structures, in terms of capacity building and also in terms of focus. That is something which has been brought in for last year plus and the results we have now in efficient to see, last quarter also we saw a decent growth in SMA book and this quarter also we are seeing a decent growth in SMA book. And, I would like to mention that we are having a focus on the distributor finance, vendor finance, balance sheet this lending and also, we have come out with another loan product, which is essentially run through YONO which is a pre-approved business loan where we are looking into the transactions and current accounts, and based upon their transactions were in efficient to offer the loans to also such entities also which are actually small in nature. But this is something which is becoming very popular. So, these are some of the contributing factors and we have grown SMA by almost for INR43,000 crores on a year-on-year basis and these are some of the contributing factors. It has become a continuous focus area and also, we are very mindful in terms of quality of our lending and we are -- we have created a loan management system where we are having a adequate visibility in terms of the unstructured information through the GST and et cetera, et cetera. So that way, we have significantly strengthened our underwriting practices in SMA, we have invested in terms of manpower, we have invested in terms of product. So, all that is showing up, and to my mind, it is sustainable. We have set a target for reaching 4 trillion number by the year March â24 but the way things are we should be very near to that by March â23. So, there is a question about how much recovery resolution we can expect. So, basis the past record plus the recovery already done and subject to of course the court decision in few cases, we should have a number between INR3,000 to INR3,500 in quarter four. Yes, congratulations, good set of numbers. So firstly, sorry, just to touch upon in terms of the recoveries and upgrades. So, ex of the resolution, which you have highlighted maybe the run rate which is there for this quarter of INR1,700 odd crores should that be the normalized one or this is relatively on the lower side? Actually recoveries, which you are seeing here also we have to keep in mind that last year about INR1,692 crores was on account of a particular account, which was one account. So, if we ignore -- if at all, we have to do the apple-to-apples comparison then perhaps our growth in recovery this quarter, as I would was 18% to 20%. So, I think we expect that going forward we don't have chunky accounts which are awaiting resolutions and perhaps it might take a little longer also but nevertheless the efforts which have been put in, in terms of OTS, in terms of NARCL and those things have helped us in sort of ensuring that recovery has happened faster and we expect that we should be in a position to maintain this kind of a number at least in this quarter also. Sure. So compared -- when we look at it, say, in Q1, Q2 it was somewhere around INR5,200 odd crores, last whole year it was INR21,000 crores in terms of recoveries plus upgrades compared to maybe almost like INR1,600 crores number for this quarter. So, you are saying maybe ex of any resolutions this can ideally be the run rate even though focus is there in terms of improving it? Actually, since you would have observed that the stock has come down quite a lot. It is now less than INR100,000 crores, so that itself will leave the, these are also -- the amount is also small in each of the cases. So, each of the resolutions, when it comes to effort, it takes almost the same amount of effort, but the recovery may not be as commensurate to efforts. So that's why number may look small, but in terms of the recovery, it will be a sustained effort and normally we get to see some better recovery in the last quarter, we hope that there would be a marginal improvement over what we have done in this quarter. Sure. And secondly, in terms of the corporate exposure and say getting into Infra, there is some rundown of almost INR15 odd crores say on telecom and even in power. So, is it more of repayment of the account or is it a refinancing at the lower rate by the competitor, what is actually leading to that and what would be the overall outlook on the corporate credit growth? The corporate credit growth we have got proposals in pipeline as high as about INR1.9 trillion and where weldment is yet to be taken both in term loan and working capital underutilization that could be as a concerned INR10 trillion. So overall, about INR3 trillion is the number in the corporate book, which we are having some possibility of converting into at least unutilized well certainly happen but one positive trend, which I must mention is relating to the availment of the term loans under non-availment of term loan has come down quite a lot and that still -- that is normally toggles well because generally after that the working capital improves. So, I think with that kind of a scenario I expect even working capital utilization will also improve, it has come down from about 56% to 54%, but we have also seen the increase in credit growth up which -- sanctioning has gone up by about 24% as far as the large corporate credit is concerned. So, I think overall, I expect that we'll have a good visibility of opportunities coming in here and also the quality loan we should be in a position to next. This is actually year-on-year run down, this Slide number 10 carries the year-on-year reduction and this is usually repayment as well as the reduced utilization and customer accounts. Okay. Yes, so compared to like September, September also it was almost INR43,000 crores, INR44,000 crores and that's down to 20... Okay. So, these are the repayment, it's not like refinancing and maybe some a rate competition and losing out to the competition - maybe? Hi, sir, good evening. Sir, last time you had given loan growth range of around 14% to 16% for â23. This quarter, as you said, corporate growth we usually have some seasonal uptick in fourth quarter and you mentioned a decent amount of pipeline, which could be disbursed or what would be your outlook on the loan growth for the full year and for â23 and maybe beyond, if possible? I think, I expect that the loan growth should be somewhere in the range of 14% to 16%. I still maintain my expected indication which I had given last time also. Okay. And sir, you had mentioned your excess SLR at INR3.2 trillion and within which there how much would be the scheduled redemption because that is what possibly will help you offset the deposit thing, I mean what could be scheduled redemption amount out of this? The remaining period the redemption will not be much, for the current finance year, it would be just about INR20,000 INR30,000 But we are also adding the same time INR50,000 I think there are investments happening in the SDL also. And broadly, we expect that this excess SLR will remain at this level for some time. All right. No, because, sir, your loan to deposit ratio is now 73. It is lower relatively but it is still... If at all we put the IBG also -- if at all we look at domestic, it would be somewhere around INR66, INR67 only. The IBG funding is very different. For IBG funding we have to It's -- we run our International Banking Group more like a corporate bank and there the loans are not necessarily funded from the deposits. Right. So, speaking on overseas thing, sir. This quarter, the book has been flattish on Q-o-Q basis, so how should -- and you mentioned that the dollar growth is only, let's say, around 9%. How should we look at the growth in overseas book sir specifically going ahead, assuming in dollar terms, you may explain? We are very mindful in terms of the NIM which we're generating there and that is the reason, it was a conscious effort, it is not that we don't have -- we're not having opportunities since we are trying to maintain the NIM at -- improve the NIM, that is the reason why we're at this level. And considering the economy which you are seeing across the globe 9.15 in the international space is a decent number. And today, this group is comprising is actually contributing 15% of our total loan book of the bank. And sir. Question on your agri loan growth. So, you're agri loan growth has been consistently lower than overall loan growth, right, in this quarter this is like 11%, 12% --11% and overall loan growth is 18%, 19% or 18% and as of FY â22 we were PSL decision now, so what are you thinking in terms of PSL compliance especially on agri side because that growth has been very lack luster whereas the overall growth has been reasonably strong? There are -- in fact, the way we started working on SMA, we have already started working for agri also, and we are trying to actually work in terms of the realignment of the agri book and that process is already on. Earlier, we were into no value or small value working capital loans only. We have already done about 40% of this book has become agri gold loan and the remaining book also, we are looking at it, how can -- in fact, we are already working on it. High value agricultural loan as well as getting into agri finance for the agri techs and agri infrastructure, so that is something which we are working on. And this is a result of that conscious effort which has been put in, and hopefully we'll be the question, we have set a target of 3 trillion for the financial year â24 for this book to reach, but we are quite hopeful that in this quarter also will get to see a decent growth and we will -- we are much on course as well as our internal target distance. Also, the supplement sir, PSL is also contributed by SMA and affordable homes. So, there are other contributors for the case, only... So, if I can add there, as far as agri PSL is concerned, it's not a challenge. In terms of the agri mandate to 15%, it's not at all a challenge, we all compliant with that. And for some of the other case or subsegments where PSL it calculated from that we have methods like buying PTC, PSL certificates. So that will do, but what agri front, there is not an issue. And to add to what the Chairman said about agri, we are concerned about the quality of agri which would you create or you have seen the agri in TV which is the higher 12.33% that we NPA efficiencies, which you're seeing in the presentation. So, the color and completion of agri book hasn't changed entirely as of now, remains creating new products. It also means targeted approach towards lifting customers as well as use of analytics and technology. So, all these things are getting so it's getting turbocharged in order to get a better quality sustainable agri portfolio. Yes, hi, sir. Thanks for this opportunity. Just two things -- one data keeping, what is the SR outstanding on our book? Assets have already been provided for whatever assets were there. We have 100% provided for those assets. it's about INR7,000 odd crores. Got it. Sir secondly, when I look at the margins and you probably said that we'll be able to sustain the margins. So, when I move into FY â24 should there be cognizant that we should be essentially be equal to average of what we have reported in FY â23, because we have seen sequential uptick in FY â23 at every quarter. So, to that extent, if I were to average that out despite the cost individual happened, we probably be maintaining a similar instrument in FY â24, is that a far statement? Got it. And just last but on this you're trading so probably, you said that around INR2,200 crores of unwind that we have probably seen this quarter. Now, in Q1 we had around INR7,000 odd crores, so when do we expect the balance to get unwind over a period of two, three years or how we should look at it? Yes, sir. Thank you for the opportunity. I have only one question on the short-term liquidity in the market -- intermediate market has tightened recently, and because of that the CD rate has also increased. So how do you see the funding environment in the wholesale market given the busy season in the quarter four? See, I think as we keep saying our funding of the credit growth, we use various instruments. Deposit of course is the main stage and market volumes is one, but our ability to borrow from the market at very competitive continues to be available to us. And in terms of the deposit. I think there could be some small uptick on the bulk deposit rates and we based on our requirement. we aligned to the market rates. I think broadly, we were able to contain the cost of resource if you see, I think we expect that in Q4 also that time will continue. The other thing which I would like to add here is what Mr. Setty has mentioned, you have observed that in the current financial year, we have already gone to market and raise infrastructure bonds and at a very, very competitive rates. So, I think that also is another source and since we are having a reasonable portfolio of infrastructure assets, that's the other source which is available and which actually becomes much more competitive in terms of cost. So already INR20,000 we have raised, and that is something that will be the strategy going forward also. Okay. And one small point on the equity capital raise plan for the bank for -- so any plan for that to raise the capital to support the growth? We are as of now, once the profits will be brought back after the March quarter, our rough estimation is faster the capital adequacy ratio is concerned, we'll be at about 14.5%. And at 14.5%, we have made some rough assessments and it indicates that we can support the loan growth of at least INR7 trillion, so we will be very closely evaluating the situation and wherever required whenever required we'll certainly raise all kind of resources, not only equity we will also be looking at 81, 82 whatever is required to be done. Yes, good evening and thank you for the opportunity. So, when you said about wage revision monthly run rate was about INR500 crores that assumes what rate of wage inflation 10%, 12%, 15%? 10%. Okay. Second question, sir. On the standard asset provision of INR23,000 crores that you are carrying, roughly how much is it that you would think is additional or extra and under what situation will you be dipping into it? This provision which we are carrying I would say roughly one is this additional provision for restructured standard accounts, this is essentially for the restructured book, which we are carrying on the balance sheet. So that was -- it is about 30% of our restructure book which is about INR24,000 odd crores. And the remaining one is INR23,115 crores, which is a standard assets, as I mentioned that part of it is on account of our standard test as it is, and part of it is on account of whatever visibility of stress we had on ground. So how long we'll carry will normally take stock of the situation quarter-on-quarter basis and based upon that, we will take a call. It may or may not happen, it may or may not capitalize but depending upon the situations, which is obtaining at the end of the quarter, we'll be taking a call. Sure, sir and couple of times, you've mentioned that our LDR at least domestic LDR remains pretty low, but at the same time during the quarter, borrowings have gone up by about INR60,000 crores, and you also entered at potentially raising more borrowings. I'm just wondering, given the excess SLR and low LDR, why would you consider raising money via debt borrowings? This is more of a market operation because we have to evaluate all the options and ensure that our cost of resources remains the lowest. Okay, last question, sir in the budget, the Finance Minister has enhanced limit for certain small saving schemes and introduced a new scheme as well. Do you think that puts pressure on retail deposits for the system either in terms of availability or rate? Total size of that deposit is about INR2 trillion and when it comes to banking system, banking system deposits are somewhere around INR140 trillion, INR150 trillion plus, so it might have some impact, but not as significant which we should really -- because we have seen in the past when it comes to specialty deposit schemes, there have been always carrying an interest rate which has been quite high as compared to bank deposits, but I don't think it could make a significant dent into the deposit base or the banking system. So that's how I look at it and apart from that when you keep deposit with the banking system. It is also -- liquidity is something which is available and keep deposit like that, the liquidity is not available. So, it's more like a premium somebody is paying for keeping the illiquid asset, you understand it better, you are into the finance world. Yes, sure. As far as the exposure relating to large conglomerate is concerned, we have seen over the last five to six years, the share of ex wasn't the Indian public sector banks as a percentry of the total debt has consistently declined from 55% in 2016 to 31% by the end of 2022. During this period, the debt to EBITDA which is a key monitorable has been improving for the better, demonstrating the Group's ability to complete and generate cash in a timely manner from project which in the undertake. As is known, most of the recent acquisitions have been financed through overseas borrowing and market instruments. And so, we don't envisage any risk build up to the Indian banks on discount. As far as we at SBI are concerned, our Group exposure is well below the large exposure framework and the loan outstanding exposure stands at 0.88% of our SBI's total loan book as on 31st of December â22. Majority of the SBI loan outstanding are towards operating assets and projects that have been completed and generating cash accruals, the projects that are under construction are on schedule as of now. The loan extended via SBI are secured by the project assets and there is no facility granted on unsecured basis, the cash flows are routed through the designated accounts, escrow mechanisms are in place to ensure timely servicing of the dues and there has been no record of any delay or default till date. We have not extended any finance against pledge of promoter's equity wherever shares have been pledged in favour of SBI in certain entities there in the nature of additional collateral security. Non-funded exposure of SBI is mostly towards letter of credit, bank guarantees, both performance and financial, non-guarantees issued towards securing their other financial obligations are no guarantee an issue. There are no concerns on the Group's ability to service the loan book at this point in time. We hope it clarifies. I hope it is -- I have tried to address the majority of the concerns of all concerned. Thank you, ladies and gentlemen, due to paucity of time, I would now like to hand the conference over to Chairman, sir, for closing comments. Thank you very much to all of you for taking out time and to be with us on this weekend evening, I take this opportunity to wish all of you the very best and have a great and enjoyable weekend. Thank you very much. Thank you. On behalf of State Bank of India, that concludes this conference. Thank you for joining us, and you many now disconnect your lines.
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EarningCall_823
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Ladies and gentlemen, good day, and welcome to 3Q FY 2023 Vedanta Limited Earnings Conference Call. 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. Sandep Agrawal, Group Head, Investor Relations, Vedanta Limited. Thank you and over to you sir. Thank you, Pratham, and hello everyone. I am Sandep Agrawal. On behalf of Vedanta Limited I am delighted to welcome you to our third quarter of this financial year earnings call. The transcript of this call will be made available on our website as well as audio. The financial statements, press release and presentation are already available on the website. Today from our leadership team we have with us Mr. Sunil Duggal, our Group CEO; Mr. Ajay Goel, Group CFO. We are also joined by leaders from a couple of key businesses, Mr. Arun Misra, CEO of Zinc business; and Mr. Rahul Sharma, Deputy CEO Aluminum business. Please note today's entire decision will be covered by the cautionary statement on Slide 2 of the presentation. We will start with update on our operational and financial performance and then we'll open the floor for question-and-answer. Thank you, Sandep. Good evening everyone, and welcome to quarter three conference call. During the third quarter, the Indian economy remains strong and resilient on some macroeconomic fundamentals in healthy domestic consumption. Despite rising interest rates, robust growth was witnessed in macroeconomic sectors like housing, automobile, consumer durables. However, the global economy continued to grapple with multiple headwinds like monetary tightening, high inflation, geopolitical instability and volatility in financial markets. Commodity prices also witnessed sluggishness. In this macro environment, our team has performed commendably. We stood several initiatives, achieved strong operational performance. We delivered good set of financial results despite weaker commodity prices. Our third quarter EBITDA stood at â¹7,100 crore. Free cash pre-CapEx for the quarter stood at â¹6,500 crore with focus on working capital and cost optimization. In line with our repurposed ESG strategy, we work to uplift the quality of life of communities through various initiatives around drinking water, sanitation, healthcare, community infrastructure, children's wellbeing and education among the rest. We spend more than â¹216 crore in the first nine months of the year and positively touched 3.14 plus million lives. But ESG focus and action have been recognized by several major ESG rating agencies. Vedanta Limited is now ranked six globally among top 10 diversified metal and mining peers in DJSI. It has been inducted into Dow Jones Sustainability Emerging Markets Index. Our MSCI ESG rating has improved from CCC in 2020 to DB now, and Sustainalytics have also improved our ESG risk score by 4.5 points. Across the board improvement in our ESG risk rating is a testimony of our team's diligent effort to become an ESG leader in the industry. Furthering on our goal to deploy 2.5 gigawatt of around-the-clock renewable energy for our operation by 2030, I'm delighted to share that we have approved plans for another 941 megawatt RE power under group captive RE power development program for our operating across India, including Hindustan Zinc. During the quarter, our aluminum business procured 390 million units of RE power and are conducting biofuel trials as green alternative for ladle preheating and heavy vehicles. We successfully conducted biomass trials at [indiscernible] to explore alternative sources of clean energy. We have also joined as HZL, Cairn India and Iron Ore Businesses in Net water positive operation. Cairn signed MoU with Gujarat State Forest Department for development of 60 hectares of Mangroves Forest, 50,000 saplings, in coastal area of Surat in our effort to promote biodiversity and reserve environment. We introduced an industry leading EV policy for all of our employees. The policy will lead to increase adoption of EVs amongst employees and drive the mindset change aiding India's green mobility push for its sustainable future. When I come to operations and first on aluminum, our quarterly CoP further reduced by 12% to $2149 per tonne on account operations and buying efficiency. Linkage coal materialization improved to 66%. We have commenced operation at Jamkhani Mines. We continue to focus on volume growth and vertical integration projects to unlock its full potential. Zinc India achieved best of mine and refined metal production in nine months. Itâs quarterly refined metal production improved 5% QoQ. With better plant and mine metal availability, it continues to be in the first quartile of global cost curve. Zinc International operations are now steady at 280 plus KTPA MIC production run rate. It achieved best ever MIC production in nine months. And of course, cost of production excluding TcRc in this quarter decrease 12% vis-Ã -vis with operational efficiency and higher production volumes. Gamsberg Phase 2 extension is progressing well. In Oil & Gas business our average gross production increase 3% QoQ to 140 price kboepd as natural production decline was off offset by infill well in Cambay and RDG. We have successfully drilled one exploration well in Ravva and have put that to production adding close to five kboepd. We commenced first gas and condensate facility in Jaya field, which is OALP. As you know that the government has extended the PSC for 10 years and we have signed the addendum to extension with effect from May, 2020. In iron ore business our production of saleable ore in Karnataka increased by 32% QoQ. Sale was sluggish due to common imposed duty and export, but now it has picked up. VAB production was up by 66% QoQ to 200kt as all of our furnaces were online for post maintenance shutdown in the previous quarter. However, we saw a quarterly decline in VAB margin owing to price correction. Liberia operation achieved first ever export shipment in this month. Still one of our blast furnaces was put on maintenance shutdown, resulting in a 6% quarterly production decline. Our quarterly CoP excluding the impact of iron ore mine cost improved on account of lower coking coal cost. However, ESLâs margin were affected by declined steel prices and high cost production, the newly acquired iron ore mine owing to regulatory charges to repair on iron ore production. In FACOR, nine-month ore production grew 15% YoY. Due to operation efficiency our 60 KTPA furnace is undergoing test run and we are on track to get first production in the month of February, current quarter. Overall, we have made significant progress across our strategic priorities, creating value for our stakeholders. Our world-class assets have delivered outstanding financial results driven by operational efficiency. I would also like to share that President of Board has approved the sale offers ZI assets to HZL at valuation of $2.98 billion. Consolidation of ZI under HZL will fast track ZI's growth by using HZL's best-in-class expertise in underground mining, melting and metal marketing. HZL's combined R&R would be one billion ton plus, and it would have benefit of improved access to developed market and strong foothold in African subcontinent for expansion. This monetization will provide greater flexibility to Vedanta for future growth projects and manage leverage at group level. This transaction is a win-win transaction and will unlock significant value for both HZL and Vedanta shareholders. Moving forward, we are optimistic on the commodity market and macro data that we see now is improving. Chinaâs reopening post zero Covid policy, property market stimulus and front loading of infrastructure investments to expand is another positive for metalsâ global demand. At the same time, India's economic situation is expected to be better than the rest of the world due to strong domestic consumption. Moreover, this is seasonally a good quarter for commodity demand in India. India being our largest market, it's continued strength offered well for our business performance. With our outstanding portfolio of low-cost assets, multi-commodity credit, strong balance sheet and a commitment to ESG leadership, we are well positioned to deliver value to our shareholders and our communities. With this now I would like to hand over to our CFO, Mr. Ajay Goel, for financial performance. Over to you Ajay. Yes, thank you. Thank you, Sunil. And good evening everyone. Third quarter witnessed a falling inflation and improving the sentiments, which has driven recent metal outperformance. Indian economy remained buoyant and saw strong growth in metal consuming sectors and India's manufacturing sectors ended 2022 on a strong moat, with the manufacturing PMI rising to two-year high of almost 57.8. India's inflation is to grow RBI upper tolerance level for the first time in December to 5.7%. We believe that the commodity prices are now under the influence of demand recovery and will stay elevated in calendar 2023 and beyond. This quarter performance witnessed steady production, easing off inflation that helped in a lower operating cost. At the same time, the profit was impacted by further softening of commodity prices. Numbers for the Q3 are reflection of continuing our various improvement initiatives in terms of enhancing production, lowering operating cost, and focus on free cash flow. I want to share some of the highlights for the current quarter. That being the console quarterly revenue stands at about â¹33,691 crores, down 7% quarter-on-quarter impacted by lower LME and brent, the quarterly EBITDA at â¹7,100 crores with the margin of 24% supported by easing off input inflation and also strategic hedging. The highlight â the main highlight for the current quarter remains our profit after tax, PAT, which is at about â¹3,092, which increased by 15%, quarter-on-quarter, healthy free cash flow, pre-CapEx â¹6,504 crores. And also we continue to maintain strong double-digit ROCE of almost 23%. You heard that we also declared â¹12.5 per share, fourth interim dividend. That makes total for the full fiscal at about â¹81 per share of YTD and that also makes Vedanta the highest dividend paying company among its peers in India. Before I move ahead further in Q3 performance, I would like to also highlight that our key metal businesses that is Zinc India, Zinc International and aluminum recorded highest ever MIC and metal production in the last nine months. This demonstrates that our long-term fundamentals remains strong and we will deliver a robust year in terms of operational growth. We have an income statement in appendix, which will find details against each head of profit and loss account. Iâll now move to EBITDA bridge. When compared the third quarter EBITDA to the second quarter, the largest driver was the lower input inflation and first gain, which was partly offset by lower metal and brent prices. Further, if you look at items that were under our control during the quarter, we did well in terms of operational performance on cost front, which was the outcome of various improvement initiatives running across the businesses and to some extent, strategic hedging in Q3 as well. But if you compare last quarter, the benefit of hedging was lower competitively and therefore, it also impacted the EBITDA for the quarter. Moving on to next page on net debt bridge. Net debt as on December 31, stand at about â¹38,000 crores with net debt-to-EBITDA, the leverage ratio at 0.96, which is maintained at low levels amongst Indian peers. The increase in the debt in the current quarter is a result of spending on various sustaining and growth CapEx at businesses and also the money returned to shareholders that resulted in better debt mix as overall Vedanta Group level. As we are committed, earlier, our net debt-to-EBITDA level remains comfortable and well within the range of our capital allocation framework. Moving onto the balance sheet, we have built a more harmonious balance sheet with assets and liabilities moving towards better equilibrium and by which I need to say the overall debt at holding company has come down significantly in the current fiscal. We are well positioned to address our current maturities, focusing on driving improvement. We also continue to have solid balance sheet with our net debt-to-EBITDA maintained at comfortable low levels and we finished the quarter with almost $2.8 billion of healthy cash and cash equivalents. Our average maturity is maintained at about 3.7 years with average cost of borrowings at about 7.7%. Our credit rating continues to be at double-eight with a stable outlook both by India ratings and CRISIL. We moved a step closure to our commitment of reducing holdco debt by $4 billion over three years. In the first nine months, which is April to December, in the first nine months, we deleveraged holdco by $1.7 billion. Finally, we are confident in our ability to close the year with a strong performance as we have expertise to drive improvements across businesses while successfully weathering macroeconomic uncertainties. We have numerous initiatives that support our strategic priorities and collective needs. These will position us to meet growing demand for net zero transition at the same time returning capital to shareholders. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Pinakin Parekh from JP Morgan. Please go ahead. Yes. Thank you. Thank you very much sir. Sir, my first question is on the proposed transaction with Hindustan Zinc. Now given that in the past the government apparently did not approve the transaction back in 2012 when it was proposed to buy, what gives us confidence this time that the government representatives will be on board to approve the transaction? See this transaction is value a critic for both the organization. So I mean the kind of reserve and resources, the â that I have at that point of time and now it has [indiscernible] has been put up as well as already ramped up to almost the full production. Second project is in pipeline, so that means the businesses on track to deliver 600KTPA of volume in the next two years time. Along with that a lot of exploration success has come and from the time then to now, you can see that the total contained metal in [indiscernible] is more than the funding at this point of time. So it creates a huge synergy and the success of the Hindustan Zinc transitioning to underground, putting up the smelting capacity integrating the operation. So I think it is a winning combination and with that winning combination, the common games and you can see that ONGC [indiscernible] other common company. Now the government has set up KABIL to acquire the assetabroad which is under the minor ministry today. So they â the government is looking at the global footprint. We believe that this proposal could be exciting for the country, for the government and why should government not support. Sure sir. And my last question is that with the expected proceeds I think $2.4 billion upfront and then the remaining over the â over a timeframe what does Vedanta India plan to do with the cash? Would that be entire amount be distributed as dividends or will it look at some kind of acquisitions? Yes, yes, sure. So Pinakin, I mean, you remember our policy allocation of capital â and the entire proceed of $2.4 billion plus $0.5 billion in terms of time will be used and itâll be guided by your policy and allocation of capital. Now, it may have multiple usages. Example remains using that the money for funding our project in terms of group captive and including the payment of dividend and deleveraging both VEDL and also VRL as a group. But any deleveraging at VRL would be done via dividends from Vedanta Limited or can we expect inter-company loans or asset buybacks from Vedanta Resources to Vedanta Limited? Any kind of IC the inter-corporate loan is out of vision and I covered this point also in a couple of the earlier calls. So there is a no ICD plant. And in terms of how this money we can repatriate be it dividend or other means, I think that is something we are working on for nothing. But as I mentioned, allocation of capital policy remains the working team, so it is used â itâll be used for funding our growth CapExâs, any acquisitions at the same time, payment of dividend and deleveraging of VEDL or VRL. ICL we have spoken at many front and many times. Hello, sir. Good evening and congratulations sir for the deal with Incident and itâs really reassuring that youâve committed again that there will be no ICD replica. Itâs reassuring. Couple of questions, on Aluminium Business, how do we expect the CoP to progress in Q4 FY2023 as remain the coal linkage is materialized at 65%, 70% and all other sources of Kolar price where they are today. What is the CoP that you can expect in Q4? So I have colleague in the name of Rahul Sharma, whoâs the CEO of Aluminium Business with me. But in the meantime, you can appreciate that we reduce the cost by say around $300 in quarter three compared to quarter two. But we feel that broadly the journey could continue depending on how much of the coal realization linkage, coal realization NPA movement would come. But there are lot of leverage in hand and we believe that we may have good cost reduction. So any guidance, Rahul, you want to give. Thanks, Mr. Duggal. I think first I would just like to â maybe â just to take your flashback in terms of from in Q2 will, if you recall, we have said that weâll reduce our cost by $200 and that was H2 guidance. If you see in Q3 itself, we have reduced $280, which is 12% reduction. And that is purely comes from three factor volume for sure is a coal cost, improved official KPI and also the buying efficiency. But coming to the Q4, I think we see that â itâs going to better from here, especially the lever which we see because we are going to have the 100% coal metallization and also the Jamkhani coal mine, which is started in December. We are looking quantity from Jamkhani mine and also softer the commodity price, we see that there is going to be the â further reduction and maybe â maybe around 5% to 7%. Understood, sir. Thank you. And so my second questions on the oil and gas business. Sir, am I missing something with the realization on QonQ or lower because of the lower coal prices? The volumes are same, CoP same, however, EBITDA and revenue are the same despite lower realizations. So is there any mix issue there or what is it that Iâm missing? See, the volumes are up slightly. The volumes are up by 3%. The cost is down by $1 per barrel or so. So there are positive levers around the operation because of which, what is the percentage increase in EBITDA from oil and gas. Yes. Hi sir. Thanks for the opportunity. Sir, couple of questions. First is, I just wanted to have a sense and understanding of the debt maturity profile at Vedanta Resources. Please correct me if Iâm wrong, but what I understand is we have an total outgo from $2.5 billion. I think we are trying to tap into PSUs probably look to roll over at Barclays and even potentially looking to top up at Oaktree. So I just wanted to understand how should one look at the cash flows from now till June, if one has to take care of the cash flow requirement at the parent level? Not sure it is. Yes. So if you look at theâ maybe the two quarters, the one is a fourth quarter, the current quarter again of March, the need for the funding at [indiscernible] and with the current dividend of â¹12.50 and the renewal amount. So we are fully covered. So the entire cash requirement in terms of source and application are fully in equilibrium for the current quarter. If you look at the Q1 of next fiscal, which is April to June, the total requirement at Vedanta Resources is almost $2.1 billion, in fact $2,050 million to be precise. Now again multiple discussions, youâre right, are going on. I would say three large bucket of to meet the $2.1 billion. First of all, the oak tree upsizing by almost $750 million is one event. Secondly, we are in talks with the various banks based PUC or multinational banks, and at least $0.5 billion we assume weâll get from there, so $1.2 billion. Reminder amount is a combination of I guess of brand fees, which you pay in the first quarter and dividend. So both for Q4 we are fully locked in. And Q1, we are in the advance stages of closing all of those over next two weeksâ time. So sir if I just go by the numbers, what you indicated, assuming oak tree at $750 million, brand fee at the $300 million, PUC of $550 million, mark cap at $150 million, it still lives with a gap of nearly $750 million. So is this what you are saying is it could be by way of dividends, and are we pretty much okay that the cash flows from India operations will be able to cover up for this post CapEx? Well, I think those are the ones which are already in the pipeline out, Ritesh. And even the numbers can go hard, but with a combination of $750 million, $0.5 billion and the brand fee, weâll be covering almost $1.7 billion or so, and that leaves a small number, and even that we can cover, any additional payment of dividend always in option in Q1. Sure. And sir, I just wanted to understand we were striving for GR2RE, which I think the court has actually put a spanner. How does your thinking change basically when we are looking at a cash flow for the next year specifically, given that is again upwards of $2.5 billion plus of maturity for Vedanta Resources? So Iâm just trying to understand your thought process so when it comes to matching the cash flow requirement of the parent? Yes, sure. So the whole proposal, as you remember, we spoke in last also a couple of investors call, the whole movement from GR2RE was a juristic. Knowing that the whole GR concept is basically a pass under new Complete Act, including I would think in very contemporary technical accounting. And companies are doing it even to manage things for those futures. Amount that is paid in the last fiscal, including the two days amount is from the current reserve and profitability. The hearing at NCLT has taken place and all the hearing by both the parties have been finished. Now the order is reserved and we are expecting the order to come over next four to six weeksâ time. So what we are doing right now is to get anything from the bankers and we have significant portion more than 50% bankers are doing NOC. So we expect that the whole GR2RE closure will be happening within the fourth quarter. Perfect. Sir, last question. Sir, are there any covenants that one has to be mindful of? We understand Vedanta India balance sheet is pretty much okay. But when we look at the bond documents we have in past taken leave it to actually basically soften out the covenants. Are there any hard covenants that one needs to be watchable for? I think all the covenants even at the Vedanta Resources are quite I think routine and standard. Nothing that I think we need to worry about. Hi sir, two questions from my side both again on the transaction. First, what would be the tax incidence of this inflow that we will get about $2.98 billion? So what is the kind of cost on the books that we have and if thereâs any tax incidents on this? Sure. So again, Indrajit, in terms of taxation, once you look at impact the two aspect, one is the international one. And the entire transaction from the international tax viewpoint is fully tax agnostic. So the $2.98 billion one would receive the full consideration, there is no tax implication. Secondly, from the Indian tax perspective, I think thatâs where we are still evaluating certain tax optimization ideas. So even if we upstream this as a dividend, will there be a tax [indiscernible] or that is still under consideration? Sure. My second question is on the first trans estimate of $2.5 billion or $2.4 billion. So what are the milestones or approvals that we are awaiting post we will see that this amount will be upstream to us. What kind of numbers are we looking at? What kind of milestones we are looking? So in terms of approvals, this is an RPT as we know, and that too also material RPT, which is crossing â¹1000 crores. So in terms of approvals, it is the audit committee of both the companies, Zinc and Vedanta Limited, which is done. Board of both the company also has clear transaction. Now the third step, of course is sending a postal ballot and getting the approval by the shareholders. There we need the majority of the minority. The entire process both from the Zinc side and from the Vedanta side will be finished over next six weeks time. So early March, it'll be finished. Thereafter the 2.4 billion state consideration, leaving that deferred consideration can finish pretty quickly over next one monthâs time. No, it's a board matter. So the board has already approved this and post that we have to get the shareholder approval as explained by Ajay. Yes, hi sir. Thanks for taking my call. So I had a couple of questions firstly on, can you give some update on the expansion of Alumina and Aluminum at it was Lanjigarh and what is the status over there? When can we see additional output coming from there? So the erection work is in full swing. So the expansion is in two parts. One is 1.5 billion tonne Train I, 1.5 million tonne Train II. So as we speak, the Train I mechanical completion is getting over. And by this quarter end or the early quarter, next quarter the plant will be fired. And we are hopeful that in the next one to two quarter, it should ramp up to the full volume that is Train I. And the second Train, I think by the middle of the next year, the mechanical completion will be over, and then thereafter it will take one quarter or 1.5 quarter to fully ramp up. So by the end of the next year exit the total Alumina refinery up to a capacity of 3 million tonnes will be up and running. No, I was asking that whatever dividend payment we will get from the sale of conclusion, the transaction and whatever money we will get will be just paid out as dividend? I covered this ballet in the call, so I said, so in terms of this entire money 2.4 plus 0.5 in terms of utilization will be guided by companies policy and allocation of capital, and it can be used for funding our CapExâs both growth and sustaining at the same time payment of dividend and deleveraging for VEDL and VRL, but substantial portion we intend to use for deleveraging at a good plan. Hi, sir. Thanks for the opportunity again. Duggal sir question for you, sir how should we look at the incremental capital allocation? I think we have been awaiting clarity specifically on the semiconductor for â if you can provide some color over there. I think secondly, after Athena, we have gobbled another asset in Meenakshi at pretty attractive valuations. So I just trying to get a sense on incrementally on capital allocation. And how are we marrying this decision specifically with the ESG targets that we already stated? So semiconductor business as of now is not under ambit of Vedanta. So if any call will be taken. So we'll discuss this, this question at that point of time. Sir, if I may just if I had, if hypothetically it goes at the parent or at Vedanta India listed entity, how should we look at the financials or if you can, if it's possible, if you can indicate what is the quantum of CapEx, which is required. I assume that the JV, that Foxconn 50-50 and there might be 30-70, so the effective outcome might be a bit low. Can you give us some comfort with some numbers over here? So basically we can take, which we can understand it better. So Ritesh you have to appreciate that once this transaction is not approved, I am not supposed to discuss this numbers also at this point of time. But you can do your math. Solve the number you are doing in your mind is also right. But it would not require much of a CapEx with the participation of Foxconn and the government subsidy you understand and there is a state subsidy also over 50% subsidy from the center. No problem. And sir, on power, and secondly, basically Hindustan Zinc incremental basically worthless if at all. So after Athena we have Meenakshi, anything on that side specifically we have seen targets one on ESG? See, as far as ESG is concerned, we made the 10 commandments declaration to the market that what are we going to do. Now one of that was that 25% of our operation will be decarbonized by 2030. And there are various approvals, project initiatives, various entities are taking. And the plan is that we put 4-gigawatt of the capacity in the pipeline this quarter itself. So when â even when we did the PLF of 4-gigawatt, it will reduce the carbon footprint by 15% from our current level. So against our overall declaration of 25%, if we are able to decarbonize 15% in the next two years time, I think we should pat ourself on the back, number one. Number two, as far as Athena and Meenakshi is concerned, see the power demand in country, you must have seen last year has gone up by 8% to 10%. And the way the GDP growth is projected and the way the standard of living of the people is going up. I feel that the power growth â the power demand growth is going to be 8% to 10% in the next few years time. So these are idle affects. It is in the best interest of the nation that is idle affects should be put into operation. So from that point of view, our footprints are not increasing from our operations. But this is the initiative I think which is in the best interest of the society and the country. And that is why, we think that what we are doing is the right thing to do. So we have â sir, thank you for the question. We have conducted roadshow extensively spanning many countries along with Government of India and a very positive feedback from the potential bias. So with certain government is working out in what form, how many trenches they would do, and letâs wait for that. Thank you, Mr. Shah. We request that you return to the question queue for follow-up questions. Thank you. Weâll take the next question from the line of Alok Deora from Motilal Oswal. Please go ahead. Good evening, sir. Sir, just question on aluminum growth outlook on the volume side, if you could just highlight howâs demand scenario looking and what kind of volume growth we could look at on the aluminum side? While the world is very excited about the green metal and the demand is going to grew, but Rahul, what do you have the detailed information from your side? Yes. No. Thanks for the question. I think aluminum is a strategic metal. And we know that this calendar year, CY 2022, primary demand was 70 million and we see that it is going to be a CAGR of 4% to 5% as a growth, which is likely to happen. And if I talk about India per se, India demand if we see that on the backdrop of 17% YoY growth has been seen in the last nine months. And we see that the demand for the country, especially for India last year was 3.9 million, and this year is going to touch 4.5 million. So we can see that there is a very strong demand, especially India is, so, demand has been increasing electrical and power sector. And another factor also, China is coming back and we see that China is also growing for 4.4% year-on-year growth. Overall demand is quite robust and is strong. And that's what I think as in on the line, same line, we are also looking to expand our capacity from, â¹2.3 million to â¹2.8 million, then we are taking up to â¹3 million. Sure. And also sir on realization, how do you see the realization moving now going forward because, the prices started to go up. So just your thoughts on that from near to medium term perspective? Yes, again price point of view, I can only say that, key indicator which drives the growth and I have said few, but the important is that I think China removal of COVID related restriction, that's one. Second is India, which I have already spoken. That is that U.S. inflation dropped by 6.5% in December for vis-Ã -vis 7.1% in November, U.S. dollar index also dropped, from 115 to 102 and other side, if I see that, the kind of production cut, which is 2.5 million in China and 1 million in Europe. And there is also, if you see the inventory level, which is I think the lowest since 2002 is 1.4 million. So all the indicator, if you see that that is a very strong indicator to have a better level from the current, which maybe has gone to 2200, kind of, I will only say on that point. Sure. And just last question so this, you mentioned during the call that, I know after this export ban removal, just the exports are picking up. So is it normalized now or it's it'll take, still take one quarter? No, we export last quarter you see when the ban was removed and we took a conscious call of slowing down the domestic sales because there we, there is a increase a bit of by around $8 to $10 per tonne. So as we speak we have been able to, move some shipments already and I feel that the from the current month it'll be the dispatch and the sale would come up to the normal level. So that means around 6 million tonnes, 0.6 million tonnes this month itself, it'll take. So that is what the story. Although we still will have some inventory at the end of this month, which will be able to capitalize in the current quarter. Good evening sir. I have a small question. Could you please elaborate on the amount of hedging gains? Specifically, we had in this quarter, and if at all some portion we have that can come in Q4? Yes, sure. So the hedging gain in the third quarter is almost â¹475 crores. And if you look at maybe for the first nine months, itâs in fact almost touching â¹3000 crores, the number is actually the â¹2009 crores or â¹2005 crores. So almost 3000 crores for the full nine months. And the â¹475 crores for third quarter. The quantum of hedge impact is tagged low for the first quarter. And we also can evaluate taking further hedges specifically in the aluminum side. But right now, if you look at mark-to-market for the quantity hedged, the gain is almost still about 50 odd million for the fourth quarter. So the answer to your question is specifically the â¹475 crores for third quarter. Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Sandep Agrawal for closing comments. Thank you and over to you, sir. Thank you. Ladies and gentlemen, on behalf of Vedanta Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.
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Good afternoon, ladies and gentlemen. Thank you for standing by. I'm France, your chorus call operator. Welcome and thank you for joining the Deutsche Bank's Q4 2022, Analysts Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will follow with our question-and-answer session. [Operator Instructions]. It's my pleasure, and I would now like to turn the conference over to the Ioana Patriniche, Head of Investor relations. Please go ahead. Thank you for joining us for our fourth quarter and full year 2022 preliminary results call. This call, we will start with our Chief Executive Officer, Christian Sewing, followed by our Chief Risk Officer, Olivier Vigneron, and then our Chief Financial Officer, James von Moltke. The presentation as always, is available to download in the Investor Relations section of our website db.com. Before we get started, let me just remind you that the presentation contains forward-looking statements, which may not develop as it currently expect. We therefore ask you to take notice of the precautionary warnings at the end of our materials. Thank you, Ioana, and welcome from me too. Today marks a very significant milestone for us. Three and a half years ago, in July 2019, we came together with you to discuss our plans for a fundamental transformation of Deutsche Bank. And we set ourselves some key financial goals for the end of 2022. Today, we would like to talk you through what we have achieved despite facing significant challenges from a pandemic and the war in Ukraine. We would also like to highlight how Deutsche Bank today is a fundamentally different bank, positioning us for further sustainable growth. Let's start with the five decisive actions we took as we launched our transformation strategy in 2019 on Slide 1. Firstly, we created four client centric divisions, which has delivered stable growth as promised. In 2022. These four businesses contributed to our best profits for 15 years. These divisions complement each other and provide well diversified earnings streams. We are now a better balance bank. We are particularly pleased that the corporate and private banks together more than doubled their contribution since 2018, contributing just over 70% of the group's pretax profits in 2022. Secondly, we exited businesses and activities, which were not core to our strategy. We exited equities trading, transferred our global prime finance business, refocused our rates business and downsized or disposed of other non-strategic activities. Our Capital Release Unit reduced leverage exposure from non-strategic activities by 91% and risk weighted assets by 83% excluding RWAs from operational risk. This has enabled us to re deploy capital into our core businesses. Thirdly, we cut costs. Compared to the pre-transformation level of 2018, we reduced our cost/income ratio by 18 percentage points. We achieved this while absorbing more than â¬8 billion of transformation-related effects and facing an inflation rate we have not seen for decades. Fourthly, we committed to, and invested, in controls and technology to support growth. We also signed state of the art agreements with Google Cloud and other partners. Our focus on technology has allowed us to grow revenues through closer interface with clients, reduce costs by removing complexity in our technology and improve our control environment. Finally, we managed and freed up capital. As promised, we kept our CET1 ratio above our target minimum of 12.5% through all 14 quarters of transformation and finished the year at 13.4%. This was despite an impact of around 170 basis points from regulatory changes, 100 basis points from transformation-related impacts and of course supporting the growth of our businesses. The Capital Release Unit played an important role here too, contributing around 45 basis points, on a net basis, to our CET1 ratio. All of this progress since 2018 has enabled us to start returning capital to our shareholders, through both share repurchases and dividends. We plan to propose a dividend of â¬0.30 per share in respect of 2022 and we reaffirm our commitments for 2025. Most importantly, pride returned to the organization, which in turn supports our positive momentum. Commitment and enablement scores materially improved over the last three years. This positive atmosphere will of course help to further shape the future of our bank and even accelerate our momentum. Let me now turn to our performance in 2022 on Slide 2. These five decisive actions, and the renewed belief and pride of our people, have positioned us to build and maintain a trajectory of sustainable growth and this is reflected in our 2022 results. Revenues are above â¬27 billion, well ahead of what we had planned in 2019, despite the business exits I mentioned. All four core businesses produced positive operating leverage compared to their pre-transformation levels. In 2022, our reported return on tangible equity was above 9% including a deferred tax asset valuation adjustment James will outline in more detail. In terms of profitability, we delivered our highest profits since 2007, at â¬5.6 billion before tax. Our cost/income ratio is 75% and significantly below the pre-transformation level of 93 in 2018. Pre-provision profit for the group was nearly â¬7 billion in 2022, and diluted earnings per share were â¬2.37. Deutsche Bank has proved its resilience during the challenging environment of the past few years. We have maintained disciplined risk management and a strong balance sheet, as Olivier will discuss in a moment, and we maintained robust capital and leverage ratios. Germany's provision of support to households and industries during times of stress is another testament to the strength of operating in the German economy as our home market. Letâs now discuss the key aspects of our transformation in more detail, starting with revenues on Slide 3. In 2019, we re-focused our business and looked to grow our Core Bank and our efforts have clearly paid off. 2022 revenues were over â¬27 billion, 7% higher than pre-transformation levels and well ahead of our original aspirations, thanks to growth across all our core businesses. This more than offset the forgone revenues from business exits, as the core businesses outperformed their targets for revenue growth. So, as a result, we are now not only operating a more focused bank, but also a more productive one. Revenues per employee are now 16% higher than pre-transformation levels Turning now to our costs on Slide 4. Our cost/income ratio in 2022 was 75%, an improvement of 18 percentage points compared to pre-transformation levels, at the higher end of our guidance. We significantly reduced costs and generated annual run-rate savings of more than â¬3 billion from our transformation. Our focused restructuring efforts more than offset investments in our franchise, and investments in technology and controls, which I will discuss in a moment. As a result, profit growth has been driven by significant operating. Leverage. But we know we also need to continue to focus on generating further operational efficiency. In addition to the â¬2 billion of efficiency measures we announced in March 2022, which James will provide an update on later, we will focus our efforts on generating further incremental cost savings. These additional measures will relentlessly focus on a more efficient workforce structure, including but not limited to reviews of layers, cost per seat and location. We will also streamline our non-client facing divisional functions and infrastructure teams. And of course, this also means a continuation of a very disciplined and agile management of our total headcount numbers. Furthermore, we will also take advantage of further automation opportunities for our front to back experience, leveraging technology to augment client service processes in the corporate and private banks. Over the last three years we have successfully developed internal tools, which together with external benchmarking gives us the support and transparency to drive these incremental cost savings. We are pleased with the progress we have made to date with the drivers of the â¬2 billion of efficiency measures and hence we are confident we can deliver these additional items Let me now go through the diversification of our businesses on Slide 5. The Core Bank produced pre-provision profits of nearly â¬8 billion in 2022, more than double pre-transformation levels, and diversification has been a key contributor. The Corporate and Private Banks together contributed about â¬5 billion, more than 60% of the Core Bank total. With four strong businesses, we have delivered resilient financial performance through a very unpredictable economic environment and volatile financial markets. This enabled the Core Bank to deliver a return on tangible equity of 11.3% in 2022. Let me now turn to the performance of these businesses in more detail on Slide 6. All four core businesses have significantly improved profitability through the transformation period, on all key metrics; revenue growth, cost/income ratio improvements, and higher returns. The Corporate Bank delivered its best-ever profit before tax, of over â¬2 billion in 2022, with a cost/income ratio of 62% and return on tangible equity of 12%. The business leveraged our global network and capabilities to build out its franchise; deposits are up by nearly â¬35 billion over pre-transformation levels, enabling us to take advantage of rising interest rates, and loans are around â¬8 billion higher than in 2018. The Investment Bank has tripled its return on tangible equity and improved its cost/income ratio by more than 20 percentage points since 2018. The work undertaken within our FIC business since 2019 has led to significant revenue growth. While we appreciate this took place in supportive markets, importantly, we have also been able to materially grow market share, supported by improved external ratings allowing clients to come back to the platform. The investment into our diversified platform will enable us to consolidate our current market position, whilst continuing to identify targeted areas of further growth. In 2022, FIC revenues were nearly â¬9 billion, the highest for a decade and up around 60% over 2018. We have further strengthened our European bond franchise in the Investment Bank. We were number one by volume in European investment grade bond issuance, and we saw our highest electronic market share of EGBs for over 10 years, building on 2021, which was the previous high. Lower activity and volumes negatively impacted Origination and Advisory in 2022, but the business had areas of positive momentum including regaining the number one position in German M&A. Private Bank has significantly improved both cost/income ratio and return on tangible equity, outperforming their targets and resulting in profit before tax of â¬2 billion, its highest-ever. The business has adapted to the changing needs of clients, automated processes, made progress on consolidating our IT platform in Germany, and reduced branches by nearly 500 since 2018. Business volumes have grown by â¬130 billion over pre-transformation levels with new client loans of around â¬50 billion and assets under management up by about â¬80 billion, since 2018. Asset Management has seen its return on tangible equity rise to 17% since 2018 while improving its cost/income ratio by around 9 percentage points. The business has continued to invest in the future and demonstrated its resilience in tougher financial markets. Despite challenging markets in 2022, assets under management are now around â¬160 billion higher than at the end of 2018. Simply put, all four businesses have demonstrated positive momentum on all three dimensions, and this positions us well for the future. Again, supported by our improved ratings with all three leading rating agencies, we continue to see clients coming back to the platform. Combined with the continued expected interest rate tailwinds and the strength of our underlying franchise, we are confident that our strong performance will continue. Let me now turn to another of our key decisions in 2019, investing in technology and controls, on Slide 7. We committed to spending a cumulative â¬15 billion on technology, and an additional â¬4 billion on our control environment as part of our transformation. The benefits of our delivery for clients, costs and controls have been substantial. Let me give you a few examples. We took advantage of cloud technology, both through strategic partnerships and our own efforts. We now have more than 200 apps in Google Cloud and have migrated over 1,000 databases to Oracle Private Cloud. We simplified our IT landscape by retiring apps, which helped deliver a reduction in annual spend of around a quarter of a â¬1 billion per year. We have built a closer interface with FIC clients by automating our flow trading capabilities. We made progress in migrating contracts of Postbank clients and related business volumes onto the Deutsche Bank IT platform. This migration is expected to be completed halfway through the year, with planned run-rate savings of around â¬300 million by 2025 in the Private Bank. We have reinforced our control functions, increasing the number of dedicated professionals by more than a quarter. We continue to focus investments on our cybersecurity capabilities and we have improved our processing capacity and improved quality assurance in KYC. Building a more sustainable Deutsche Bank was also part of our transformation agenda. We have made considerable progress, which we summarize on Slide 8. We have rolled out a comprehensive sustainability strategy and installed a clear governance structure which establishes sustainability as a core part of the way we run Deutsche Bank. We set clear targets for business volumes in ESG financing and investment and made each business accountable for delivering on these targets. We have strengthened our controls further and have embedded sustainability criteria into senior executive compensation. Our businesses have outperformed against our original targets, and this enabled us to accelerate the timeframe for delivery, twice. From 2020 to 2022, we outperformed our target of â¬200 billion in cumulative ESG financing and investment volumes, with a total of â¬215 billion in our core businesses excluding DWS. In last yearâs difficult market environment, we increased volumes by â¬58 billion. In the fourth quarter of 2022, we published pathways to net zero for the most carbon-intensive sectors in our loan book and we have created a Net Zero Alignment Forum in which Business, Risk and the Sustainability Office manage our footprint accordingly. We look forward to providing you with an update, and details of our future plans, at our second Sustainability Deep Dive on March 2 this year Before I hand over to Olivier, let me say a few words on the next phase of our strategy through to 2025 on Slide 9. The progress we have made in transforming Deutsche Bank leaves us well positioned to deliver sustainable growth through 2025. When we set out our strategy in March last year, we outlined the key themes which underpin these goals and ambitions, and these themes have become even more important in the light of the geopolitical and macroeconomic upheavals of 2022. In an environment of macro-economic and geo-political uncertainty, we will leverage the more favorable interest rate environment, deploy our risk management expertise to support clients, and allocate capital to high-return growth opportunities. With sustainability being so important, we will deepen our dialogue with and support for clients, expand our product range, and broaden our agenda for our own operations. And as technology continues to evolve, we will reap further cost savings, accelerate our transition to a digital bank, and expand on our strategic partnerships, which are already creating significant value. Finally, a word on our 2025 targets on Slide 10. We are confident we can build on the momentum we have generated, in all our core businesses, on all dimensions, as we continue to transform the bank. And we reaffirm the financial goals we set out last March. Our target is a return on tangible equity of above 10% in 2025. The performance of our Core Bank in 2022 gives us confidence that this goal is very achievable. We reaffirm our target for compound annual revenue growth of between 3.5% and 4.5%, supported by the momentum we already have in our core businesses from a dynamic interest rate environment, and the performance we have delivered in the divisions to date. With this revenue growth, and the additional efficiency drivers I outlined, we also reaffirm our goal for a cost/income ratio of below 62.5% in 2025. For 2023, we remain focused on continuing to deliver positive operating leverage and our strong performance in January supports this. We also confirm our capital objectives. We will build capital to support profitable growth and absorb future regulatory changes; and we continue to aim for a CET1 capital ratio of around 13%. We aim to achieve our capital distribution objectives through a combination of dividends and share repurchases, in line with our previous guidance, aiming for a payout ratio of 50% from 2025 onwards. We outlined a clear dividend path, which we reaffirm today. We propose a dividend of â¬0.30 for the financial year 2022, but given the remaining uncertainties in the market environment, it is too early to comment on the exact amount and timing of share repurchases in this year Thank you, Christian. I am Olivier Vigneron and as you know, I became Chief Risk Officer in May. I am proud to say that I rejoined a bank with a strong and stable balance sheet but more importantly, a bank that is renowned for its disciplined risk management. This has enabled Deutsche Bank to withstand many challenging and uncertain environments in recent years, and to demonstrate its resilience during times of stress. In my first months as CRO, I have been particularly pleased to experience a strong risk culture supported by well-established risk appetite frameworks. In order to maintain this discipline going forward, we continue to invest in our people and risk management capabilities, as well as controls and technology which support timely and proactive risk management. This enables us to manage risks dynamically within our frameworks and most importantly within our risk appetite. We continuously monitor emerging risks, run downside analyses and stress tests, and operate a comprehensive limit framework across all risk types. In this way we can respond proactively to changes in our operating environment, as you have seen us do in 2022 during the escalating war in Ukraine and the stress on European energy supplies. Despite challenges throughout the year, our risk management approach helped us maintain strong risk and balance sheet metrics. Our CET1 ratio was 13.4% and our provision for credit losses was 25 basis points of average loans for 2022, in line with our guidance provided back in March. Our liquidity metrics have remained sound, and we managed to keep operational risk losses stable over the course of our transformation. Entering 2023 on this strong foundation positions us well to continue navigating through an evolving and uncertain risk environment. We relentlessly scan the operating landscape to identify and monitor risks that impact us, and the wider banking sector, making sure we are proactive in our positioning for any emerging risks On Slide 13 you can see which themes we believe may influence the banking sector in 2023 and beyond. These range from geopolitical developments, volatility in financial markets and a potentially deteriorating credit outlook, to various other risks. We are able to manage these challenges because our risk framework provides us with multiple layers of protection, which we outline on Slide 14. Our risk appetite is calibrated to capital adequacy and earnings stability with the key metrics of the bank cascaded down to individual businesses. We employed thousands of risk limits, across country, industry, asset class and individual clients, and across a variety of risk factors and markets. In addition, we manage credit and market risk limits dynamically, and monitor liquidity daily on multiple dimensions. We also strictly control appetite for non-financial risks. Our non-financial risk monitoring has more than 1,200 controls that are mapped to different risk types and regularly assessed for their effectiveness. In October 2022, we introduced sector-specific targets to reduce the carbon intensity of our loan book. We mitigate risk through extensive use of credit enhancements via external hedging in addition to high-quality collateral and structural protection, such as selecting first lien positions. Our loan portfolio thus benefits from â¬39 billion in collateralized loan obligation and credit default swap hedges, as well as other risk mitigation through private risk insurance on certain portfolios. Our dynamic market risk hedging strategy has again proven highly effective in the volatile environment of 2022. Our rigorous stress testing approach takes into account a range of severities and is built around a number of historical and hypothetical scenarios. This enables us to identify and address potential vulnerabilities in our portfolios, including emerging risks, and supports assessment of non-financial risks. We benefit from well-established crisis management procedures, robust non-financial risk management frameworks, and clear governance around our risk culture and conduct. We have established our internal framework for net zero targets, and we will continue to extend the scope of these in 2023. We continually review the maturity of the bankâs security framework and employ a threat-driven approach to direct and adjust our investments in information security. Let me now turn to our loan book on Slide 15. Almost half of our â¬489 billion loan book is in Germany. We see this as an advantage as Germany is well positioned to withstand times of stress and volatility. It is Europeâs most stable economy and has many multinational companies which have displayed great resilience in times of uncertainties in the past. And according to the most recent consensus, Germany is not expected to see an energy supply squeeze in the remainder of this winter. Outside Germany, around 40% of the loan book is equally distributed across EMEA and North America with the remainder largely in the APAC region. Looking at our business mix, almost 80% of our portfolio is in stable and mostly lower-risk businesses in our Private Bank and Corporate Bank. The Investment Bank accounts for 21% of the book, distributed across a variety of product and regional portfolios. Lastly, you can see how well-diversified our loan book is. Household loans, which are mainly low-risk mortgages and, to a small extent, consumer finance, account for 44% of the portfolio. 24% of the loan book relates to financial and insurance activities, which span a variety of client segments, from exposures with top tier banks to collateralized activities with funds. The remaining â¬158 billion, or 32% of the total loan book, is split across multiple sectors and remains well diversified. All exposures are tightly managed, based on conservative underwriting standards. In the next slides I will provide more detail on our confidence in the credit quality and resilience of selected key portfolios. Let me start with some additional detail on our German loan book of â¬235 billion on Slide 16. Around three quarters of this book is within the Private Bank and nearly 90% thereof are low-risk German retail mortgages. In the German mortgage market, clients typically lock in fixed rates for 10 or more years, so our portfolio comprises long-term, fixed-rate loans with a loan-to-value of 66% based on current market values. As a consequence, this portfolio is generally not at risk of being impacted by the rising rate environment and demonstrates good repayment discipline. We view German mortgages as low-risk, supported by high employment levels and low household indebtedness. However, in light of the current environment, we have adjusted input criteria for our decision engine to account for price levels of goods, energy and interest rates. We have seen stable default and recovery rates since 2019. Only â¬16 billion of the Private Bankâs German exposure relates to consumer finance, mainly personal loans, and we continue to see good repayment discipline, despite the more challenging environment. We do not operate a significant credit card financing business. Our corporate loan book of â¬63 billion in Germany consists mainly of trade finance and commercial lending This exposure is also well diversified across a large number of clients and the average exposure per client is around â¬260,000. In line with our frameworks, we have limited concentration risk, and the top 15 names account for only 6% of this portfolio. Credit quality is high with 71% of loans rated investment grade, and the exposure is predominantly to multi-national corporates The portfolio is closely monitored and actively managed with threshold-based hedging and the use of collateral and guarantees for risk mitigation purposes. We have intensified the dialogue with clients in order to identify pockets of risk early, and we continue to support clients with their needs. All in all, our strong and high-quality portfolio gives us comfort around our German exposures, supported by a resilient corporate backdrop and ongoing government actions. Despite their relatively low share of our loan book, our Commercial Real Estate focus portfolio and Leveraged Lending exposures remain in focus due to their vulnerability to rising interest rates and market volatility as well as the ongoing impact of post-pandemic trends on selected CRE sub-portfolios So let me give you some additional color on these categories on Slide 17. The CRE focus portfolio of â¬33 billion, or 7% of our loan book, consists of non-recourse lending within the core CRE business units in the Investment Bank and the Corporate Bank. Our CRE lending activities are mainly first lien mortgage-secured and structured with moderate loan-to-values. The portfolio is well-diversified across regions with 51% in the U.S., 36% in Europe and 13% in Asia. Loan originations are primarily focused on assets in liquid regional markets such as top-tier gateway cities, and with high quality institutional sponsors. The portfolio is well diversified by property type also, with the largest concentration in Office, at 34%, while Hospitality and Retail account for only 12% and 10%, respectively. While Office is facing headwinds and uncertainty from the adoption of hybrid working models, we benefit from good quality assets in primary markets, moderate LTVs and, again, strong sponsors. Weighted average LTV is around 61% in the Investment Bank CRE portfolio and 53% in the Corporate Bank. The latter portfolio has shown strong resilience, with no credit losses through recent volatility including the pandemic. Other real estate exposures, such as our recourse lending, are of a high quality and have seen low losses in the past Stage 3 provisions in the Investment Bank CRE portfolio increased in 2022 as market conditions deteriorated in the second half of the year. However, the increase in provisions was well within the businessâ earnings capacity. We expect the challenging market conditions to continue into 2023, and we continue to closely monitor loan performance with a focus on near term maturities. We are proactively working with our clients to find optimized refinancing solutions in order to reduce leverage in specific transactions. And we are also tightly managing our CRE underwriting pipeline and reduced our market risk limits in 2022. Our Leveraged Lending portfolio of â¬4 billion represents just 1% of our total loan book. The portfolio is well diversified across industry sectors without any undue concentration risks and the top-10 names account for only 11% of the portfolio on a gross notional basis. Around 79% of the exposure is in the form of first lien secured credit facilities, mostly of revolving nature. The remaining 21% is asset-based lending, which is almost entirely U.S.-based and has a negligible loss history. In the more uncertain market environment in 2022, we actively curtailed our underwriting risk appetite and de-risked our underwriting pipeline. Overall, Leveraged Lending remains core to our franchise. We are entering 2023 well positioned and with a significantly de-risked underwriting pipeline. While the macro outlook will weigh on the portfolio, we see limited refinancing pressure due to an overall low maturity profile in 2023. Now, moving to Slide 18, I will take you through our management of market risks and non-financial risks. Market risk has been another focus area over a period of increased volatility throughout last year and this is expected to persist in 2023. We have supported our clients in navigating through this volatile environment and will continue to do so. At the same time, we continue to manage exposures tightly and ensure we stay within our risk appetite. Risk-weighted assets associated with market risk have been at elevated levels throughout 2022, driven by an increase in market volatility that translated into higher Value-at-Risk, which for the fourth quarter rose to â¬47 million, compared to â¬34 million in the prior year quarter. To manage elevated volatility throughout the year, we have been proactive in containing and mitigating exposure in periods of stress. We did so during the first half of the year during the volatility caused by the war in Ukraine, and continued to support issuers and clients throughout the Gilt market volatility in the third quarter. We actively managed balance sheet interest rate risk over this period of unprecedented rate rises in order to protect capital, as well as managing the risks around our net interest income. Moving to non-financial risk exposure, we are satisfied with the progress we have made on risk remediation, and have reduced the highest-category risks by 47% since January 2021. In addition, we have made good progress in increasing the number of key controls assessed through our quality assurance process. This improves robustness and transparency of our risk and control assessment, which is a cornerstone of our non-financial risk management framework. At the same time, we remain proactive in the identification and mitigation of potential threats and control vulnerabilities. We regularly conduct scenario analyses and deep dives that help us understand potential risk exposures. We continually review the maturity of the bankâs security framework and employ a threat-driven approach to direct and adjust our investments in information security. Finally, let me turn to provision for credit losses on Slide 19. We have a very good track record when it comes to our guidance for provisions for credit losses, even through volatile and unpredictable environments. This is due to our robust lending and underwriting, our active portfolio monitoring and provisioning processes, reflecting the true risk we anticipate. We have outperformed our peers over a five-year average period, which reflects our asset quality, but also risk management that keeps our risk profile less pro-cyclical and more stable. And even though 2022 was characterized by a high level of uncertainty, we again delivered provision for credit losses in line with our guidance, without any reliance on excessive overlays. In June we introduced a downside scenario which implied an additional 20 basis points over an 18-months period in case of a severe gas supply disruption in Europe. This scenario did not materialize. Gas supply remained stable and storage levels high, as gas from Russia was substituted through other sources and the winter was milder than expected. For 2023, we initially expected provision for credit losses to be in the range of 25 to 30 basis points of average loans, reflecting persistent macroeconomic and geopolitical uncertainties. Unlike 2022, we expect provisions for this year to be driven by single name losses rather than deterioration of macroeconomic forward-looking indicators. As such and given the recent improvement in the global macroeconomic outlook, we now foresee provisions at the low end of this range. With that, let me make a few closing remarks on Slide 20. We have again navigated well through another year of significant market volatility. Our disciplined risk management provided a strong foundation which allowed us to be proactive in identifying, monitoring and managing risks. We have a conservative risk profile and a well-diversified loan book across clients, regions, products and businesses. Our strategic positioning benefits us with a low-risk and high-quality German portfolio. As a result, provisions could remain contained closer to 25 basis points of average loans for 2023, or essentially flat to 2022. Thank you, Olivier. Let me now cover the impact delivering the transformation plan has had on our profitability and financial stability. We are pleased that all divisions delivered significant positive operating leverage on an annual basis since 2018. We intend to continue to deliver operating leverage for the group on an annual basis going forward. Our returns have improved every year since 2019. We've reduced non-interest expenses over the period. We will continue to be disciplined on costs including working on additional measures to offset cost pressures, in line with our 2025 target of a cost/income ratio below 62.5%. Finally, our capital remains resilient. Since 2018 we absorbed around 270 basis points of capital headwinds, from regulatory impacts and our transformation plan and ended the year at 13.4%, around 300 basis points above our regulatory requirements. Letâs now turn to the fourth quarter and full year 2022 performance on Slide 23. Starting with the fourth quarter, total revenues for the group were â¬6.3 billion, up 7% on the fourth quarter of 2021. Non-interest expenses of â¬5.2 billion reduced by 7% year on year, with all cost categories flat or down, which I will detail later. Our provision for credit losses was â¬351 million or 28 basis points of average loans. We generated a profit before tax of â¬775 million, up from â¬82 million in the fourth quarter of 2021. Our net profit of nearly â¬2 billion reflects a positive year-end deferred tax asset valuation adjustment of â¬1.4 billion. This deferred tax benefit reflects a recovery in the accounting value of our tax loss carryforwards in the U.S., as profitability has significantly improved since 2019, due to the successful transformation of our U.S. business. The return on tangible equity for the group for the quarter was 13.1%. Our cost/income ratio came in at 82%, down 12 percentage points compared to the prior year period. Tangible book value per share was â¬26.70, up â¬0.23 on the quarter, and 8% year on year. We reported diluted earnings per share of â¬0.92 for the quarter, which brings the full year total to â¬2.37. For the full year 2022, we generated a pre-tax profit of â¬5.6 billion, up 65% over 2021. Return on tangible equity for the group was 9.4% for the full year, compared to 3.8% in 2021. Excluding the benefit of the deferred tax asset valuation adjustment, our return on tangible equity would have been 6.7% for the year and our full year tax rate would have been 24% in line with our previous guidance. For 2023 we expect an effective tax rate of 29%. Letâs now turn to the Core Bankâs performance on Slide 24. Starting again with the fourth quarter, Core Bank revenues were â¬6.3 billion, up 7% on the prior year quarter. Non-interest expenses declined 4% year on year with adjusted costs also down 4% for the same period. We reported a profit before tax of â¬1 billion, more than double the prior year quarter. Our Core Bank return on tangible equity for the quarter was 14.9%. Our cost/income ratio came in at 79%, down from 88% in the prior year period. On a full year basis, revenues in the Core Bank were â¬27.2 billion, up 7% compared to 2021, while non-interest expenses of â¬19.5 billion were down 3%. The cost/income ratio improved to 71% from 79% in 2021. In 2022, we generated a pre-tax profit of â¬6.5 billion, up 37% year on year and the highest since we began our transformation in 2019. We reported a return on tangible equity of 11.3%, or 8.5% excluding the deferred tax asset valuation adjustment, slightly below our target of above 9%. Turning to net interest margin on Slide 25, we can see the continued favorable impact of the interest rate environment with NIM at slightly above 1.5% in the fourth quarter. This increase has been achieved despite the non-recurrence of the third quarter buyback gains. Net interest earning assets are slightly down, due to the impact of the weaker U.S. dollar, and the partial prepayment of TLTRO III. We expect NIM to remain strong given the ongoing rate rises and we expect to see a material year-on-year NII tailwind in 2023, which I will detail on Slide 26. Let me now provide an update on the interest rate tailwind we expect to see going forward. In March 2022, we guided that interest rate tailwinds, net of funding cost offsets, would add approximately 1 percentage point to the revenue compound annual growth rate from 2021 to 2025. This figure has risen to approximately 1.5 percentage points from our 2022 landing point, based on rates and funding spreads as of January 20. As you can see, the divisional CAGRs net of funding impacts on the right of the slide. As we want to give you a consistent view across rate and funding cost impacts, these figures are based on the evolution of our planned liability stack rather than a purely static balance sheet, but do not include the impacts of planned lending growth. In 2023, we expect to see strong interest rate impacts due to the timing effects from the rapid pace of interest rate rises. By 2025, the rollover of our hedge portfolios will have offset the reduction in this timing effect, resulting in the NII benefit being maintained. As I noted at our third quarter analyst call, the sequential tailwind from '22 to '23 is expected to be approximately â¬1 billion for the full year. Moving to costs on Slide 27. We've reduced adjusted costs excluding transformation charges and bank levies by â¬3.1 billion or 14% since 2018. Excluding FX movements, costs were down 16% during this period. Compensation and benefits costs decreased by â¬1 billion driven by changes in workforce size and composition. Non-compensation costs were lower across all categories. Both professional services and IT spend were down by nearly â¬0.5 billion. The IT spend reduction was in line with the overall cost reduction. As Christian indicated, our cumulative IT spend was â¬15 billion over the past four years. Within this spend, we saw reductions in our running IT operating expenses, as the benefits from simplified architecture came through. At the same time, we continued to invest into our technology and people to future proof the bank. The â¬1.1 billion lower costs in the other category reflects reductions across a number of line items with major contributions from building costs, regulatory fees, operational taxes and insurance expenses. If we look at the twelve-month comparison for 2022 on Slide 28, adjusted costs excluding transformation charges and bank levies stayed flat at around â¬19 billion, or down 3% excluding FX. Increases in compensation and benefits of â¬399 million were mostly offset by reductions in non-compensation costs. Reductions in non-compensation expenses reflect our continued cost management efforts, specifically from reduced costs for outsourced operations and lower occupancy related spend. You can also see that fourth quarter adjusted costs excluding transformation charges and bank levies were down by 2% year on year, or 4% excluding FX. Let me now give you an update on the key pillars of the efficiency measures for the group we outlined in March at our investor day, which will contribute to our 2025 targets on Slide 29. These initiatives are expected to deliver structural cost savings of more than â¬2 billion between 2022 and 2025. Let me give you some examples. The Germany platform optimization, entailing branch reductions and the technology integration of the IT platform, shows how we are creating efficiencies by simplifying our overall architecture. We recently completed the second migration wave, which converted around 4 million additional Postbank contracts to the Deutsche Bank IT platform. One of our key priorities for 2023 is to complete the IT migration and start decommissioning the legacy IT Postbank system. We expect these actions to generate around â¬600 million of savings by the end of 2025. Another part of our technology upgrade is the re-architecture and simplification of our application landscape. In 2022, we decommissioned 9% of our total application stack and plan to decommission a further 500 applications by 2025. Supported by our cloud-based infrastructure, we have also migrated key applications to the cloud and will continue to build on this progress. While we expect these savings to come through closer to 2025, we expect to deliver around 600 million euros of savings overall. Our front-to-back process re-design has also delivered tangible results with more automated processes, supported by improved controls, and we will specifically continue to focus these improvements on loans processing, risk management and reporting activities. For example, we have designed a more efficient KYC process that will eliminate unnecessary client KYC questions by 40%, while enhancing control effectiveness, via smart forms and workflows determined by client-specific characteristics. Overall, we expect these actions to deliver around â¬500 million of savings by 2025. In addition, we have also identified around â¬500 million of cost savings primarily in infrastructure efficiencies. In line with the plans we outlined in March 2022, we've optimized office space resulting in a significant reduction of 170,000 square meters in 2022, representing around 6% of our total global footprint. Going forward, we will continue to focus on optimizing our workforce management including a more streamlined corporate title distribution. Turning to provisions for credit losses on Slide 30. Provision for credit losses for the full year 2022 was 25 basis points of average loans, or â¬1.2 billion, in line with previous guidance and confirming the resilience of our loan book. The year-on-year development reflected the impact of the war in the Ukraine and weaker macroeconomic conditions, while 2021 benefited from economic recovery post the easing of COVID restrictions. Provision for credit losses for the fourth quarter was 28 basis points of average loans on an annualized basis, or â¬351 million euros, very much in line with the previous quarter. Stage 1 and 2 provision release of â¬39 million, compared to a net release of â¬5 million in the prior year quarter, benefited from a stabilization of macroeconomic forecasts towards the end of year, the release of an overlay from previous periods and improved portfolio parameters. Stage 3 provision increased to â¬390 million, compared to â¬259 million in the prior year quarter. As with the previous quarter, the increase reflects an overall higher number of impairment events, but we have not observed specific trends emerging, and in particular did not observe a material impact of higher energy prices on provisions Moving to capital on Slide 31. Our Common Equity Tier 1 capital ratio came in at 13.4%, a 3 basis points increase compared to the previous quarter. FX translation effects contributed 2 basis points, 3 basis points of the increase came from capital supply changes, reflecting our strong organic capital generation from net income, largely offset by higher regulatory deductions for deferred tax assets, shareholder dividends and additional Tier 1 coupons. Risk weighted asset changes drove a 2-basis-point reduction in our CET1 ratio, principally due to higher market risk RWA partially offset by net reductions in credit risk RWA; operational risk RWA remained broadly unchanged quarter-on-quarter. The higher market risk RWA resulted from higher sVaR levels, mainly driven by a change in the applicable stress window versus the previous quarter. Credit risk RWA reduced during the quarter as the impact of regulatory model changes was more than offset by tight risk management in our Core Bank. Looking ahead, we expect our CET1 ratio to remain subject to volatility, principally due to regulatory model reviews and ECB audits. In 2022, amendments were made, in particular, to models for our midcap portfolio and our German retail portfolio. Now, we expect model changes for the wholesale portfolio to follow in phases; a first set was implemented in the fourth quarter of last year with a RWA impact of around â¬2.5 billion. The models for the larger portfolio of financial institutions and large corporates are expected to follow over the course of this year. We expect to be able to absorb model related impacts via continued retention of earnings, but the timing of regulatory model decisions is likely to create CET1 ratio volatility. That said, we aim to end 2023 with a CET 1 ratio of 200 basis points above our maximum distributable amount threshold, expected to be We ended the year with a leverage ratio of 4.6%, in line with our 2022 target of around 4.5% and an increase of 25 basis points versus the previous quarter. FX translation effects resulted in a 5 basis point leverage ratio increase 11 basis points came from higher Tier 1 capital, reflecting higher CET1 capital and our AT1 issuance in November 2022. Finally, 9 basis points increase came from the seasonal reduction in trading activities at year-end. With that, letâs now turn to performance in our businesses, starting with the Corporate Bank on Slide 33. Full year revenues for the Corporate Bank were â¬6.3 billion, 23% higher year on year. Strong revenue growth was driven by increased interest rates and continued pricing discipline, higher commission and fee income, as well as deposit growth and favorable FX movements. Momentum was strong in the fourth quarter, with revenues increasing by 30% year on year mainly driven by the improved interest rate environment and solid underlying business performance supported by higher client deposits. Non-interest expenses of â¬3.9 billion decreased by 5% year on year, as positive contributions from non-compensation initiatives and lower non-operating costs were partly offset by FX movements. Loan volume in the Corporate Bank was â¬122 billion, down by â¬1 billion compared to the prior year quarter, and down by â¬7 billion compared to the previous quarter driven by FX movements and increasing selectiveness of balance sheet deployment towards the year end 2022. Provision for credit losses increased from essentially nil in the prior year to 27 basis points for the full year, reflecting the more challenging macroeconomic environment. Profit before tax was â¬2.1 billion for the year, up by 103% year on year. The cost/income ratio came in at 62% and return on tangible equity was 12.5%, in line with our commitment for 2022. I will now turn to revenues by business segment in the fourth quarter on Slide 34. Corporate Treasury Services revenues of more than â¬1 billion increased by 26% year on year driven by increased interest rates across all markets and higher deposits. Institutional Client Services revenues of â¬442 million rose by 28%, benefitting from higher interest rates and deposit growth. Business Banking revenues of â¬273 million grew by 51% year on year, reflecting the transition to a positive interest rate environment in Germany. Iâll now turn to the Investment Bank on Slide 35. For the full year, revenues ex specific items were 3% higher compared to what was a very strong 2021. Revenues in FIC were significantly higher, with strong year-on-year growth across the majority of the franchise. This was partially offset by significantly lower revenues in Origination & Advisory in an industry fee pool down 36% versus the prior year. Non-interest expenses were slightly higher versus the prior year, but essentially flat once adjusted for the impact of FX translation and increased bank levies. Our loan balances increased year on year driven by higher originations primarily in Financing, combined with the impact of U.S. dollar appreciation versus the Euro. Leverage exposure and RWAs were essentially flat year on year, as underlying business reductions were offset by the impact of FX movements. Provision for credit losses was â¬319 million, or 32 basis points of average loans. The year-on-year increase was driven by a weakening macroeconomic environment, whilst the prior year benefitted from a post-COVID recovery and lower levels of impairments. Turning to revenues by segment on Slide 36. Revenues in FIC Sales & Trading increased by 27% in the fourth quarter when compared to the prior year, the highest fourth-quarter revenues in over a decade. Adjusting for the impact of a concentrated distressed credit position in the prior year quarter, the year-on-year performance was approximately 70% higher. Very strong performance across the majority of the franchise was partially offset by significantly lower revenues in credit trading. Rates revenues were up over 400%, with emerging markets and FX revenues significantly higher. The strong performance was driven by the ongoing heightened market activity and strong client flows. Financing revenues were slightly lower year on year, as increased net interest margin was offset by reduced activity in Commercial Real Estate and the APAC business more broadly. Credit trading revenues were significantly lower, due to the non-recurrence of the aforementioned concentrated distressed credit position in the prior year quarter and a market environment that continues to be challenging. In Origination & Advisory, revenues were down 71% against what was a record fourth quarter fee pool in the prior year and reflecting the underlying product mix of our businesses. Debt origination revenues were significantly lower due to materially reduced leveraged debt capital markets revenues. The leveraged loan market continued to be largely inactive, and we remained selective in our new business dealings, with a focus on reducing our existing commitment pipeline. Loan markdowns during the quarter were minimal. Investment grade debt revenues for the quarter were also significantly lower, as was the industry fee pool. From a full year perspective, our revenue decline was less than the industry average. Equity origination revenues were significantly lower, reflecting an industry fee pool reduction of over 60%, with the IPO market down over 80% Revenues in Advisory were significantly lower, as the industry fee pool declined materially against a record prior year quarter. Turning to the Private Bank on Slide 37. Private Bank revenues were â¬9.2 billion for the full year, up 11% year on year, or 6% if adjusted for the impact of the BGH ruling in 2021 and specific items. Those items include the previously disclosed gain on sale of around â¬310 million related to the Financial Advisors business in Italy. From an operating perspective, revenues increased, driven by higher net interest income and continued business growth. This more than compensated lower fee income mainly reflecting current macroeconomic uncertainties. Non-interest expenses declined by 11% supported by net releases of litigation provisions and lower restructuring expenses. Adjusted costs declined 5% year on year, driven by savings from transformation initiatives including workforce reductions and branch closures as well as lower internal service cost allocations. The Private Bank attracted net new business volumes of â¬41 billion, in the year with â¬30 billion of inflows in assets under management and â¬11 billion of net new client loans. Provision for credit losses reflects a high-quality loan portfolio, especially in the retail businesses, as well as tight risk discipline. The International Private Bank was impacted by single exposures, primarily in margin lending. Profit before tax rose to â¬2 billion for the full year, and more than doubled to â¬1.6 billion excluding specific revenue items, transformation costs and restructuring charges. Turning now to revenues by segment on Slide 38. Fourth quarter revenues in the Private Bank Germany were up 7%, or 10% if adjusted for the net impact of the BGH ruling, since the fourth quarter in 2021 included a positive true-up associated with estimated revenue losses. Higher net interest income more than compensated for lower fee income, which was impacted by lower client activity and more challenging markets as well as -- Welcome back everybody. Apologies from us for the interruption. Just for those on the phone to be aware, the webcast late in the prepared remarks, switched to hold music and hence the phone call and the webcast were no longer in sync. We're back up in both mediums. We wanted to ensure that we engage with all of our investors through the technology but also to meet our regulatory obligations and hence the delayed to reset. Daniele, if you're still on the line, perhaps in the interest of everybody hearing the question-and-answer, I could ask you to go back and repeat the question when you began our call with. Thank you. I mean, the first question was really a bit high level. And obviously 2022 was the basically the final year of the compete to win strategy. And I was just wondering, obviously, there is clear achievements, there was also probably some disappointments, there was tailwinds there was headwinds. And I was just wondering whether you could share your thoughts around this and how you assess all that? And probably also, though, into 2023 how you think about the key uncertainty, right? Is it advisory origination coming back? Is it fixed rating, resource cost? Just how you feel about this? And then secondly, the second question was really about the 2023 revenue outlook. And here, I mean, you gave the group but can you talk a little bit about the divisions? What the drivers are? And how we should think about this one, and probably how the U.S. started so far, that will be useful. Thank you. Right, Daniele. Thank you very much for your question. Also, from my side, apologies for the interruption for those of you who listen to my first answer to that there's one additional item which we need to improve on that is on the vendor side, for the webcast here. But we will take care of that after this call. So on your question, I do think that before we go into the individual strengths, and potentially also areas of further improvement, let me first of all, say, Daniele, that I think this bank is immensely proud of that what we have achieved. And this -- not a lot of people thought that this turnaround, which is an absolutely sustainable turnaround is doable, but we, who have been close with the bank and being in these positions oversaw the potential. And I think the most important, what we achieved over the last three and a half years, is actually the reinvigorated passion, the focus and the pride of the organization. And I really would like to highlight it here, because I think people too often really miss the point that we are talking about people's business with our employees, but also with regard to that the key item we're doing is covering clients. And therefore, you need absolutely proud people who are doing their job with passion. And that's what we managed over the last three years and that's actually which is also the basis for everything which we think we can achieve in the next three years. Now, why did we do this? Because I think this organization found its balance, found its direction and found its strategies. And this is, I would say to your question one of the clear achievements of this transformation and also what we have seen in 2022, is actually our strong focus on the four business areas, where we think we are able to compete and where the clients really want to work with us. And we see that when we look at gaining market share, by the way, not only in the FIC business, but also in other areas of the bank, Corporate Banking in Germany, Wealth Management International, we clearly win market share, because we know we are acting there and we operating there, where we have our strengths. Then I do think, over the last three years, we would have never been able to actually do this what we have done without first class risk management. We had two crisises so to say, to manage the pandemic, but also obviously, the impact of this awful war in the Ukraine. And you can only do it if you have complete belief in your capacity and capabilities as risk manager. We have had that for the last 13-14-15 years, you'll see that with our results. And again, in 2022, we had an outstanding year in terms of risk management, by the way, Daniele, both on the front office side, as well as on the back office side in risk management itself. And then obviously, the focused discipline, which we had in the CRU, James was talking about that, which really helped us to create the capital, which we then use in order to invest it into the business. And last but not least, is the cost culture. And that is something in Deutsche Bank, which we haven't had before. And I think I can judge on it, because I've been here for 33 years. But the cost culture for three and a half or four and a half years now, where we took out over the last three years more than â¬3 billion of costs is something which earmarks a new era. Now this brings me to the point of where our areas of improvement? I wouldn't call it area of improvement, but it's clear that we cannot lose this cost focus. And James talked about this in his prepared remarks, how we want to take out the next â¬2 billion just in the in the year '22. Out of the â¬2 billion, we already took out â¬490 million out of these four areas, i.e., German restructuring technology architecture, front to back process redesign, infrastructure efficiency, all the measures he mentioned on Page 29 of his presentation, â¬490 million has been already done in 2022. And that focus will go on. And on top of that, we know we need to do more. And therefore, we set up an incremental cost management program, which even delivers more also in order to find the right response to the inflation, which we see in the economy. And therefore I think costs cannot go away. Second point where we need to a margin improve is regulatory remediation, we know there is a lot of work ongoing. We have achieved a lot, but we cannot let loose. We need to do it. It's a foundation in order to grow sustainably and hence all focus also on that in the year '23. And last but not least, I will say while we got really good at it, I think we can even further improve the way we are doing our portfolio allocation, capital allocation, in particular in volatile times like we have it right now. I think we have shown the strength in 2022, otherwise, we wouldn't have been able to show these results. But obviously you can learn from that. And with all the tools and techniques and instruments we have to even make sure that we shift our business there, where from a capital return within our global house bank strategy, there is the best return. So if we think about this, then I will say these are the clear strengths, and also areas where we can improve. And if I take that forward, then I do believe this really is paving the way for '23. And '23 to your second question, clearly we see an upside on the revenue side. James was talking about the net interest tailwind which we have of approximately â¬1 billion years. But it's not only that, it's also the underlying business which we are doing in particular on the stable business which are growing. The Corporate Bank is growing quarter by quarter. And if I look into that what we have achieved in Q4 compared to Q3 Q2 steady improvement. If I now see how January started, by the way, not only the Corporate Bank, also in other businesses, but also again in the Corporate Bank and see the forecast for Q1, this is a steady increase of the stable business not only based on the net interest income, but also by the underlying growing volume we are writing with our clients. And we feel confident about the â¬28.5 billion of revenues with a clearly increasing revenue side on the Corporate Bank. Also in the Private Bank, from an operating side we are clearly increasing the revenues, obviously having the tailwind of the interest rates. We had a very good start also in asset management because you've seen where the markets are. I think we plan cautiously there, so I see real momentum there. And in the Investment Bank, to be honest, I'm hugely proud of what we have achieved. You have seen the market share gains. And even January, again shows me that the underlying flow of our business with the clients is absolutely showing the momentum, which we have seen before. And therefore, I think we have a good chance actually in the Investment Bank to show revenue result on previous year's basis. Even if there is a slight decline in the macro businesses or in the FIC business, we can also see that parts of the O&A business is coming back with a very stable financing business. So you have two business with clearly increasing revenues, Corporate Bank and Private Bank. You have a stable Asset Management and you have an Investment Bank, which is stable in itself and very sustainable. And then you take the net interest income, which is obviously a tailwind into account. And hence, we are coming to a clearly increased revenue line in '23. Taking then flat costs and flat LLP where we see the environment into account, we see another nicely evolving pretax profit next year, which is better than this year. Thanks for taking my questions. So first, on costs, what gives you the confidence on holding non-expense, non-interest expenses flat in 2023, especially in light of that cost miss in 2022? Can you provide any further details regarding the building blocks there that underpin those assumptions? And also any updates on the medium term cost outlook and cost measures? Then, secondly, on the 2025 targets, which you've reiterated, has the makeup of how you get to those targets changed significantly, given what we've seen, I mean, the moves and rates, moves in inflation, the broader macro, and obviously credit conditions? And then finally, just on share repurchases, following up from one of your earlier comments, James, what are the regulatory headwinds you're waiting to hear on? How large could they be? When do you expect to have that clarified, and therefore, when do you expect to be able to give a number on the buybacks? Thanks for the questions, Chris. I'll take all three and Christian and Olivier may want to add. First of all on costs, look, we've established a run rate. So what gives me confidence about '23, is we exited '22 at the run rate we essentially have to preserve now through the year. And that means that a lot of the initiatives that we've talked about, as Christian mentioned, that the key deliverables that we bucket for you on Page 29 of the deck that are in flight. And that's I think an important thing to understand. This isn't stuff on a whiteboard, this is where the initiatives are funded. We have delivery underway, we already have delivered on a significant portion of it. And we have great governance and tracking of how we bring this all to fruition, that's underway. And in a sense, those deliverables offset the impact of inflation and other investments that we make in the business over time. But the critical thing is to continue to manage that to that run-rate. Now, obviously, there's some variability if it's about, 1.6 -- â¬1.65 billion per month, there obviously be some variability, but in essence, it's trying to manage that flat, given all of the moving parts. We'll also have the single resolution fund assessment, non-operating expenses, and where possible, we obviously seek to influence those to be as small as possible. In a sense, that has to continue now for several years. Obviously, there'll be some FX impact over the years on that run-rate, but that's sort of what the mindset is, and how we think of the building blocks. As Christian outlined, we're always working to find more measures on the expenses and peel the on, and then to be honest, the deeper you get into it, the more tools you build, to understand and control your expense base, I think the more opportunity you also find, which is good. Because as I mentioned, inflation has been running ahead of what we anticipated, say a year ago. On the targets and the path to the target, it's a similar story. Revenue growth with flat expenses drives operating leverage and the cost income ratio down ROTE up. We feel really good as Christian outlined about the compound annual growth rate in revenues that we laid out in March and if anything, the '22 start on that path was better. Interest rates a little better and the underlying drivers also better. On credits, we entered a cycle that perhaps we didn't expect prior to the beginning of the war, but we see a normalization of credit, as we get into '24 and '25. And we feel pretty confident on the book, as you've heard -- Olivier describe and he can go into as well. So while the environment has clearly been dynamic, and the cost base has reset upwards in part with inflation, in part, with some investments that we made last year, I'd say the overall picture is actually pretty consistent with what we shared with you in March. Lastly, on the share repurchases. The REG items that are on the way, really the most significant is what we refer to as the wholesale IMI or Internal Models Investigation. So where we've been, as you know, other banks as well, they've been reviews underway on the applicability of new EBA guidelines in our model environment. And there, the reason for caution is both the timing and magnitude of that item, as well as potential offsets that we've been working on whether to do with other models, or limitations that have been applied in our IRB, sort of world. And so with, with the uncertainty, as I say, timing and magnitude, and therefore volatility, we think it's just prudent to hold on to the capital to ensure that we wouldn't be distributing an amount that while by the end of the year, we would have been very comfortable distributing on an interim basis, it might have made us look a little thin and potentially influenced our ability to support balance sheet growth, support clients in this environment. So hopefully that gives you a little color on how we've been thinking about it and what is coming down the pike. It's good morning. Thanks. Good afternoon, sorry. Thanks for taking my question. I have two, please. One on risk management and one follow up on costs. The first one on risk management, you mentioned your guidance of 25 to 30 basis points cost of risk. Wanted to know, what are your underlying assumptions beyond this, range before 25? And what would drive an increase to 30 basis points? So in other words, what's your sensitivity into this range? And if we could also add a bit of color and where we stand vis-à -vis the scenario of the compete gas cut off within this guidance? And the second question, the follow up on costs, is if your revenue growth does not materialize, as you expect, what kind of flexibility do you have? Because, notably, in your prepared remarks, you mentioned additional potential measure on costs, notably in agile management of headcount numbers. So if we could have a bit of color on this item, please. Thank you very much. Sure. Thank you for the question on credit loss provision. As you know, we have guided a range of 25 to 30 basis points. And your question is, really how do we get to the bottom of this range i.e. 25 basis points, which would take us flat to what we've done in 2022? Well, really the tailwind that I can identify, number one, the prospect of perhaps a short shallow recession in the U.S. Inflation is trimming back and we have a prospect of normalization of interest rate rises this year and also the decline of around energy concerns, due to the mild winter to the different measures, consumers have taken and also the Germany's â¬200 billion package on energy prices is a key factor. The fourth one is really China reopening that nobody forecasted and that is beneficial to growth. So for instance, different research are now not forecasting. Really a recession was a full year for Germany, but perhaps more stagnation. So all these tailwinds would get us towards the bottom of the range. To your question of how do we good go to the top of the range would be any downside risk around these factors, really. So that would be my answer. The second part of your question concerns, at the end of Q3 when we had a lot of uncertainty and we were very concerned coming out of the summer around the possible energy squeeze. We did a lot of detailed work in our book to estimate the possible impact around that. But both -- and we guided for the next 18 months or 20 with downside, but both in terms of likelihood, but also in terms of impact, because of the measures I've mentioned about the government, and how people are adapting with new energy supplies. We see these downside risk as to be discounted, both in likelihood and in magnitude. And Nicola, on your second question, the flexibility of the expense base to adjust to the downside potentially in revenues, is something we've talked about over the past several years. And as you know, our answers have been we weren't comfortable in an environment where we were managing a shrinking expense space, and going through the transformation. We didn't feel that the levers we had to the downsides of variable expenses were really sufficient to offset their ability on the revenue side. We think we're pivoting to a better place in that regard over '23 and the subsequent years. And why do I say that? I think it's on both lines. As more of our expense base shifts to the quote, unquote, stable business more predictable, you have less variability if you like that you need to account for so. So that helps in the equation. And the other thing is, as we now move to an environment where we have cost saves underway, we have an investment profile that is if you'd like fully funded and we're in execution mode, if you like on the cost reductions, I do think we get to a different place in terms of flexibility. We started talking about this a little bit, and so it's not just marketing expenses, bonus and retention and the truly variable expenses in the cost base. There's also decisions we can make more in discretionary costs and investment timing, that would will over time, give us more flexibility. So the answer your question is I think we've made some real progress towards having more flexibility to manage. As you heard us say, in the second quarter, we're very cognizant though of preserving investments that are critical to our future. And hence that's the balance we'd be working to strike. Thanks for your question. Yeah, thank you very much for taking my question. The first one is a follow up on the cost. Sorry, if I missed it. But what is sort of like the direction in cost from '23 to '25? Is it considering the cost savings and less SRF and inflation? Is it -- should it be sort of like flattish or could it be even trending down? And maybe, what inflation assumptions have you taken in there? And then on the revenue guidance and your increase in upgrade from your higher rate benefit to the 0.5 percentage points in the CAGR? Wouldn't it be -- why didn't you change the CAGR, the 3.5 to 4.5, as it just or only was I guess everything else sounds a bit more optimistic as well or am I mixing up different years here? Thank you very much. Okay, let me take the first one on the cost side. So overall, obviously, with the inflation where it is, it is not that easy to exactly forecasted. But our view when you look at the next three years is actually to operate on the basis of flat costs. That's what we want to achieve. Therefore, we came out last year in March 2022, and says we think we need to take out and we can take out the extra â¬2 billion. This is exactly what is detailed out on Page 29, where we're making good progress. And as James is saying, this is not just the power point, there are underlying key deliverables which are monitored on a weekly and monthly basis. And we are confident to achieve that. Now, given the situation where we are in with inflation a bit stickier and higher than we even thought in February and March, we do believe that we need to do more things like James was saying. And hence, we are working on additional incremental measures in order to make sure that our costs are staying flat over the next three years and that obviously then works into our operating leverage. So in this regard, we have an assumption that the inflation is coming back clearly to below 5% in 2024 and then to 2% in 2025. We know this is always very complex to forecast at this point in time, but that is something, in which we have so to say in our plan, but the key assumption is, and what I can see also from the additional tools, James and Rebecca are working on, for instance, on driver-based cost management, and the way we can now really see the transparency and drive the cost is that we need to do more than the â¬2 billion, and we are able to do it. And then on the compound growth rate. Look, we liked the idea of reiterating the targets. Obviously, our confidence in the high end and potentially exceeding it is higher today than perhaps a year ago. But we didn't see a need necessarily to raise that target at this point in time. We can happily live with a target that looks conservative as things stand. Remember, again, FX has a pretty big impact and there's lots of other things. The other thing I just want to say is, remember that there was a business growth aspect in the compound growth rates that we provided in March. So we broken out the interest rate driven improvement, which is good but we're also confident about the underlying growth rate, given the drivers that you've seen, for example, the â¬41 billion of net new business volume in the PB in 2022. So we're going to keep on working with that. And if we can exceed that target so much the better. Hi. Just couple of questions for me, please. So on the deposit beta, it's been a big topic over the last few months. If you could just provide us with some color on the retail corporate deposit dynamics? And does it remain below your target rate? And then secondly, on capital/buybacks. I mean, if I'm not mistaken, you said maybe January 1, next year, you'll be operating with about 13.2% go to level. And in the meantime, we've got a lot of other inflation. You've got Basel III kind of finalization stuff coming through payouts of dividends and so forth. It feels that even if the market conditions there's going to be up, the chance of a buyback still pretty low, is that fair? Is that the best way to understand? How should I kind of understand that? Thank you. Thanks for the questions, Tom. And so on deposit beta, we talked about this a little bit last quarter. We look at, in essence four portfolios, dollar, and Euro, and then our Private Bank that is retail and Corporate Bank books. And what we're continuing to see at the moment is the betas or elasticity, as we see it, showing a very large lag. It's very significant in percent percentage terms. Obviously, we don't go into it in detail. But that lag continues, in essence to surprise on the upside at the moment, reflecting I think that the models that we build around this historical behaviors don't really capture what happens in a rate cycle where your starting point is negative, or zero, depending on the currency and the pace of the rate increases at the short end, is as rapid as it has been. And so we've seen that lag, obviously in dollar. It's catching up to the models over time more quickly than in euros where we're still at the very early part of the tightening cycle. But it's one of the reasons we saw, I think, pretty significant upside in '22. Some of which will carry into '23 on lag benefits relative to our earlier models. So that's really encouraging. No, I mean, that James referred it. Look, first of all, I think it's a clear statement that we reconfirmed our â¬8 billion of capital distribution until 2025, or for the years '21 to '25. You have seen that despite there is quite a volatile environment out there outside there. We increased our dividend. But to this distribution, there is obviously or this consists obviously of the instrument of buybacks. And, we remain optimistic that we will use this instrument and that we also have a chance to use it this year. But I think you also deserve a Deutsche Bank management, which is always looking at it from a conservative point of view. James just outlined that there are still some uncertainties in particular, on the regulatory side, we want to wait for that. But if I look also how we started into the year from a capital ratio with 13.4, which by the way, I think was a very positive jump off. If I see how the business is going, I remain very optimistic that we can do this. But you deserve it at a time where we can talk exact numbers and exact timing. And hence, you see an optimistic management also with regard to that instrument. Okay, thank you, James. Just a quick follow up. I mean, on the Basel finalization impact, is there any update on that because one of your peers, seem to be diluted a little bit versus say a year ago's expectations? Is there any changes in Deutsche? Yeah, Tom. So a lot of moving parts in that as well. I mean, the truth is, the capital calculations and forecasts are -- have lots and lots of moving parts. On Basel III, we're encouraged by what we see in the proposals that have come out of Brussels and going into the dialogue. So in fairness, we'd probably assumed in the estimate we gave you last year, consistent by the way, going back several years of around â¬25 billion in RWA terms. There's been some puts and takes in terms of the various moving parts of it. And of course, the other the other question is, what's your step off going into the move from December 31, '24, to January '25, so lots of moving parts. We don't see an improvement versus the '25. Right now, we actually probably see a deterioration of perhaps â¬5 billion but really all driven by up risk RWA. And that, in turn, would be driven by higher revenues in 2025. But that's an estimate. And that require -- it's going to be lots of moving parts, again, their FX revenue growth and the final rule, so I wouldn't want to paint too negative a picture, but I also wouldn't want to study them suddenly go away from the that â¬25 billion estimate that we've given you now, pretty consistently since I think 2018, or maybe 2019. Afternoon. Thank you for the questions. I just want to clarify on capital and REG inflation. If you're taking REG inflation this year, I mean, does that frontload any of that Basel impact? Clearly, you've got all of your inflation ahead of a credit risk flow, either input or output, then you pick one would be kind of just frontloading that impact. And so is it just a timing issue when it comes to this year's REG inflation? And then secondly, I wanted to ask on the DTA writer. Obviously you're taking â¬1.4 billion, I'm less interested on this year, but more how quickly that comes back through your capital. So you've given us your tax rate expectations, and what does your cash tax rate look like? I assume it's significantly lower meaning more capital generation in the next few years. So any color on those would be great, thank you. Thanks, Adam. So on REG inflation, again, it's one of the moving parts, as I mentioned, step off is a consideration in terms of how much comes on overnight from December to January? Yes, there is a little bit of netting in terms of higher floors, LGD and PD floors in the IRB going into Basel III implementation and '25, but there are other things that move in the other direction. And hence my answer to Tom, which is lots of moving parts. Up risk is probably the only one that if you net it all out that is probably moved in the negative direction, but it includes that concept of bringing forward. On the DTA write up, a couple of things to say first of all, this year's impact as was last year's is really on the U.S. tax position, the U.S. tax loss carryforwards really encouraging given it reflects the enhancement of the value of a franchise. Around cash taxes, look, because they're disregarded the DTA itself is disregarded in the ratio. And then the gap earnings essentially reflect an accrual, the impact is relatively modest and over time as to the value of the cash of the tax shield reflected in your capital accounts. So I wouldn't see that as a major driver of capital accretion. The other complexity that exists around this in the U.S. is, as you know, the U.S. is become as a jurisdiction for tax much more complicated over the past several years with the beat and the minimum tax level. So we've factored all of that into to our current estimate of the utilization of those tax characteristics. But as you can imagine, there'd be some considerable moving parts there as well. But that one point forward should come into capital at some stage, but just need to be very, very patient for it. Thanks very much, I've got two. One is about the cost of FIC target and another one about volume. And what you see from the kind of client business perspective in corporate and PB. So maybe first on the cost of risk? I know we've discussed it a little bit already, but my first question really is, when you look at that range, and I know we've kind of talked about kind of various, what can what can get us to the bottom versus the top of the range a lot of macro assumptions. But what is your underlying base case macro? And it's kind of underpinning that range? What is that scenario with key variables? And secondly, I'm very interested what you think about the kind of idiosyncratic risks as well as the sector ones. Because, of course, over the last couple of weeks we have seen kind of news flow of Adani or Americanas. And of course, you can argue that this is -- these are accounting issues, but we kind of seem to be having these idiosyncratic kind of relatively large risks or potentially large risks, versus the sector ones more macro driven ones. How do you reconcile those risks as well within the guidance? And the question around the volumes around the Corporate Bank in particular, because, of course we talked about the revenue growth in 2022, which I have to say across the board impressive. But what sorts of business volumes do you actually see in a corporate bank over the next let's just say two years. Because, we are kind of starting to see weakness in originations across the board. Thank you. Thank you for your question. I'll start on the on the cost of credit risk. So for 2023 we see the credit cost provision that we said would be between 25 and 30 basis points on our loan book at amortized cost has being driven really by Stage 3 provisioning, right. So meaning that we've done quite a careful bottom up analysis in the different sectors of our book, where we want to provision to take into account, higher rates, recession, so, especially on midcap on commercial real estate, leveraged lending. And we do not see really forward-looking information or macroeconomic variable as being a key driver like it has been in 2022, where we had thrown in â¬58 million I believe about one over 25 basis points driven by the deterioration of macroeconomic environment. So the base case in -- the base case of the better outlook would definitely mean that we could have some relief coming from these effects. But, really the rest of the of the credit cost provision are driven by these bottom up analysis that which are sectoral analysis and have taken into account the headwinds that we've all talked about higher rates higher -- from high inflation, recession, et cetera. In terms of idiosyncratic risk, of course, when starting this exercise, you don't foresee everything that you can account during the year, you do you do account for some. I won't comment on specific situation as you can expect, but as I have outlined in my in my talk, we do have for every exposure way to clear framework, either industry risk limits that prevent exposure to higher risk industries, it contributes framework that's quite robust that would limit exposure to higher risk country as well as a concentration framework that also very important to avoid large concentration risk. And when structuring lending, our lending standard do lead to outcomes where we well collateralized and aware we have structural enhancements. And that's what I would say that gives us some confidence around our loan book and managing idiosyncratic event. Magdalena, and on the growth side, in the Corporate Bank, and then later on the Private Bank. Look, on the one hand, we see still, an increasing loan book and in the Corporate Bank. It's a little bit more in the short term side, that's the change, which we have seen in the second half of 2022, because corporates are also obviously securing the liquidity, a little bit less on long term investment facilities. But in particular, the Corporate Bank next to obviously the benefit of the NII, we see an increasing flow and revenues from payments, trade finance, and our overall cash management business, not only for corporates, but also with regard to our financial institutions, where we're doing cash management with. And that is where we focused our business on where we also invested a lot into technology. So if you think about the growth rate for the next three years, then actually a lot of people think that most of that will come from the NII, is actually that even more is coming from the underlying volume, which we see in cash management payments, and then the trade finance. So it's very much diversified. And that's exactly also what we see now in the month of January. In the private bank, it's also very balanced. We see growth next to the NII in particular coming from the International wealth management business. We are gaining market share, in particular in Asia. So we are focusing on that business. In Germany, I think, a good revenue development, of course with less in for instance, private mortgages, because the demand of private mortgages is reduced, given the environment we are in. But if I then look at the investment business, at the payment business in the Private Bank, but also actually on the consumer finance business, we are doing well. And therefore, I would say that we are also seeing there an increase even in the year '23. So overall, next to NII a pretty diversified revenue stream. And the nice thing for us is that the revenue increase outside NII is at least exactly the same amount or if not higher than simply than the NII contribution. Hi, there. Thanks for taking my question. But first, congratulations on me too, on the compete to win plan which include that from a number of factors you achieve the strong turnaround with bank during a tough macro period confounding me the naysayers like me. So I think you Christian James, and the rest of the management team can rightly be very proud of that turnaround. More mundanely. I had to short number questions, please. On the regulatory headwinds to get to 13.2% at the end of '23, from the starting point of 13.4, and coming up with 60 basis points of regulatory headwinds. Does that sound correct? And then secondly, at the last invest the deep dive, you talked about an ambition of â¬800 million of green revenues in 2022. What was the actual number please? Thank you. Stuart, thank you for your kind words, and we appreciate it and also the attention you paid to this process over the years. So on the REG numbers, I would say on balance, if you like net, that number would be high. Obviously, lots of ingredients into the calculation this year, so organic capital generation distributions, including AT1 other elements in the calculation like, you know, offsetting employee compensation items and what have you, and then business growth. So, there's a lot of moving pieces in that picture. But I would say on a net basis that the 60 basis points looks high. The other thing, just to remember is, is that is that Basel III bills. So yes, our guidance would be would be 200 basis points above NDA, so 13 to at the end of the year. As we get close to the end of the year and look at business growth, and the path to Basel II, we will also have a clearer view on what we need as a step off at the end of the year, into next year. So lots of moving parts, but I think your math is a little high. I'm not going to get drawn on go fix with the numbers if you're -- but we can we can talk a little bit more. And on your green revenues, to be honest, I can't tell you the exact number, we will get back to you. Because we have fortunately and very proud of that achieved our â¬200 billion goal as you have seen. We are also pretty confident that we can from here on take of the â¬500 billion, but we will provide you with these numbers when we get on March 2 in our Sustainability Deep Dive. So give us a little bit of time in order to come up with this number. Hello, thank you very much. Firstly, I just wanted to, if you'll allow me to keep going a little bit on the moving parts around capital, just two specific points, please. So he could you put a range of numbers around that wholesale model impact that you're expecting. If you could give us a rough range of what that could be, that'd be helpful. And then the second specific is, you had quite a big balance sheet reduction at year end. And I wondered whether you expect that to re-expand in Q1 just for sort of seasonal shrinkage and growth again? And then my other question is on the provisioning discussion and credit quality use. If I can play with other banks, including some of the U.S. banks, as well as European peers. Some of the others talk much more about buffers for the sake of buffers over and above what they think is necessary, but just to play safe. Whereas, acknowledging that you've done an extremely good job of risk management, your provisioning seems to be more close to what you expect to happen. So I just wondered what your thoughts were about that sort of buffers discussion. Sure. Jeremy, thanks for the questions. And maybe I'll go in reverse order. On the buffers, you're absolutely right. We essentially stick to the model outcomes unless we see some compelling reasons to move on that. And we finished the year, we didn't see a reason for that. And so the number you see is what we believe is necessary. And we've been consistent on that I think it served the company well and is in line with what is expected of us, certainly from an accounting perspective, and should also arguably for regulatory expected. On balance sheet reductions at the year there was seasonality as there always is in leveraged exposure in the markets business, and then a little bit of a short term decline in loans, particularly in the corporate bank. And we'd expect some of that to come back in Q1, which is also why I think on the capital side, the step off is probably surprised us as on the upside and it was mostly in credit risk RWA. On ranging the wholesale IMI, I won't be drawn on that because it's a wide range, there's uncertainties in the model, and it's, in essence, our largest portfolio. So there's a lot of work to do to tie that all down. And what we're really focused on, as I mentioned earlier, is the timing, not just of that, but also of some offsets that we see coming into the into the capital calculation. So in essence, it's the volatility, which is also why I think I don't want to be drawn at this point into Stuart's question about what is the net impact through the year, as you think about capital build. And your first question about moving parts, really, I think I answered that and hopefully I've given you some color in the various answers as to what we're dealing with. And I think Christian has been very clear about management's sort of direction of travel once we have more clarity here on the various moving parts. Good afternoon, two follow ups to Christian please, if I may. The first was on this point about with alpha versus beta in terms of the revenue growth. If I look at your guidance for 2023, up to â¬28 billion to â¬29 billion versus 26.7 in 2022, on an adjusted basis. You've said that rate after adjusting for higher funding costs will be â¬0.9 billion of that. So at the lower end of your range, it does appear that rates are actually the majority of the expected growth in 2023 unless you're assuming a normalization in market revenues or something else? Perhaps if you just elaborate on that. And then my second question would be, in response to the answer you gave to Daniele, the first time round, before the conference cut off. I think you talked about some of these regulatory model reviews. And you were saying about how there's the risk that in the end, create regulatory soundness, the regulator almost goes too far for European banks to remain competitive. And some I wanted to ask your view that in light of heightened capital requirements, or any businesses, which you think are now uneconomic and where you can't compete, and where you would be better off exiting, or at least downsizing? Thank you. So, Andrew why don't I start? And I think -- and pass it on the Christian on how it informs capital allocations? I think it's a really good question. Just briefly on the revenues. Yeah, if you take the, the gain on sale out of the 27.2, our starting point is 68.9 -- 26.9, sorry, at the 900 million to get to 27.8. And to get the middle of the range, we'd have to grow in every other aspect of the company by about â¬700 million. That doesn't seem too stretchy to us, given the momentum in the businesses on all of those drivers, and also some unusual items we had in the year valuation. And timing is always a little uncertain, as we've talked about. So hence, if you like the confidence you're hearing from management about the path forward. And in the beta discussions, we've talked about, we've brought forward some of the benefits that would other have -- otherwise have been in the '24 period, a little bit in '25 into '22, and '23, hence some of what you're seeing. On the REG side, yes, you've heard us say this a few times. The more you put floors into the IRB models, the more things outside of economic risk drivers are reflected in how we need to capitalize the businesses, it does affect the return on capital that we earn from them. And it means we have to look at capital allocation carefully. So that's something we've always been focused on remain intensely focused on, as we adapt now to a changing regulatory environment. Yeah, there was hardly anything to add, Andrew. But, when I talk about this regulatory items, it's not only the model discussion, which James, I think talked a lot about now. In Europe, also these additional items like SRF counter cyclical capital buffer and of course, you are looking then from a portfolio allocation also, next to all the impacts from Basel III, what does it mean? And this is exactly what we are doing. And there we are thinking and that was one of the comments I made, where we can I think even get better in the final when the fine tuning of the portfolio allocation and thinking about what does it mean in two or three years for that in that business. I think we have shown it already also in parts of the investment banking business, within our transformation, that we made the right calls. We showed it last year, not only when we foresaw the weakness in the leveraged lending, but also with the additional capital, which we had to accept that we are obviously then also right sizing there our appetite. And the same thoughts we will do when it comes to German mortgages, when it comes to the extra capital, which we have to preserve for that. I think in this regard, it is it is something which is taken into account. But there is nothing actually which makes us nervous, and which prevents us from achieving our goals. It actually -- it is something which in my view, is not only fine tuning but optimizing our capital allocation. That's exactly what we need to do. Yeah, thanks for taking my questions. And the first one is just quickly to clarify the decision not to have a buyback. It's your decision or is being asked by you to wait until further notice? The second question is related to cost. If I look at the '23 stated cost relative to '22, clearly there are some not one of items but some transformation costs in there, some litigation costs in there roughly 550 or so have you added together. Should we assume to a similar amount of these kinds of costs in '23. And in that respect, you mentioned that this business will make a loss of â¬1.2 billion that includes the CRU. And can you tell me the cost of the C&O business so I can get a bit of a better clarification on my modeling? \ And then the last one is I made it very quickly. You used to have a cost guidance of â¬18.5 billion to â¬19 billion in '25. Should we just ignore that now, as we are in a new world? And if that's not the case, clearly with your guidance on CAGR, you're not getting to your 62.5%. So just trying to understand is there some kind of cost improvement element in the later years on a net basis, rather than just sort of gross basis, or all of that has to really come from revenues? So Kian, thanks for your questions. I'll try to be brief on all of them. So on the first, let me be really clear. The decision on the buyback was ours, it was management's decision did not reflect any influence from the regulators. On the cost going forward. So starting with the C -- corporate and other area, the 1.2 we gave hopefully a little conservative when all said and done includes the CRU. So it is a number that is pro forma for all the changes that I mentioned in terms of the push out in DBCM, in the CRU. And we'll be able to give you some more numbers over time on the on the restated basis for that. So, lots of ins and outs, but the net is down. There will be the sort of call it â¬500 million or so of now of shareholder expenses, and then a little bit of volatility around things like restructuring and severance plus the CRU expenses in there. Those CRU expenses are coming down significantly over the years to come. So we'd see some improvement from that over time. And only 18.5 to 19, look, let's start with just FX, which is I think we disclosed something like â¬600 million, added â¬600 million to the expense base. Some of that of course, will have come back a little bit with the rally in the Euro so far this this year. So there's a little bit of FX, a little bit of incremental investment that we've now built in. But remember, if revenues in 2025 are a â¬1 billion or â¬2 billion higher than we had at least initially anticipated, through the sum of everything that we've talked about each billion of cost at 62.5% supports, â¬625 million of additional expenditure. So there's flex in the ratio. If we travel at about the level we were this year, our math tells us we should be right in line with that. And then lastly, on the litigation item, litigation ran higher than we expected this year for sure. And some of the items were frankly unexpected. And so we would hope that that goes back to a more moderate level in the years to come. So, again, lots of things to manage in the years ahead, but we think our model works well. Hi, afternoon. Thanks for taking my questions. So first of all, well done on the operating leverage coming through in the Corporate Bank and a Private Bank. But it seems tainted somewhat by what's going on in the corporate and other division. You seem to have quite large outsized negative revenues and large costs. Can you tell us what exactly happened in the fourth quarter? Whether these should be temporary in nature and move back down to a lower level? Secondly, on the IB side, I think you've talked about the robustness of trading coming into '23. Could you give a bit more color on whether this is macro driven or credit driven? And maybe give us a sense of year on year increases for January. And then on the IBD side, you've been weak there. This is origination and advisory of course. Have you seen a sense in January that this is rebounding strongly with the rally markets that we've seen? And then thirdly, I've got to come back to this buyback issue. I just can't rationalize it in my head why you're pausing this. I mean, you've given an answer leading to modeling considerations. And these happen to be taking into account. But at the same time, I can't sense that things have actually deteriorated in terms of macroeconomic outlook in the past quarter and you yourself say that cost of risk is actually going to be flattish year on year for '23. Is that really an issue what's happened in the past quarter to make you more cautious there? And if it's not really that if it's more to do with, like credit risk rate inflation, as you've alluded to. Is there a sensor that maybe the CET1 ratio might come under a bit of pressure from the 13.4% that you've just reported? So a bit more color there, please? Sure, Andrew. I'll try to get through as much of that as I can. So in the fourth quarter, the biggest expense, that was the litigation item, which is in corporate and others. So the biggest if you like variance to Q3 was a litigation item. In general, to your point the push out of those expenses, that you'll see on a pro forma basis, and then going forward represents depending on the business, maybe to up to 4%, of a cost income ratio. So it's a significant impact, but over time, given the efficiencies that we're working to achieve, especially in infrastructure we think that essentially washes out by '25 and the guidance we gave in March for the businesses assumed that push out would take place. So I don't think in substantive changes really much about the businesses in their trajectory. On the Investment Bank, we've talked about solid performance, it's encouraging what we're seeing the beginnings of recovery and originations and advisory, as you've seen, debt capital markets, on the investment grade side got off to a very strong start, both in the market and our market share perspectives. And you've started to see the reopening of high yield markets. And there is a pipeline if you like a backlog of M&A transactions to close. Now, clearly, there needs to be more recovery in the episodic over the coming months really to see that momentum pick up again, but what we've seen so far this year is encouraging. I don't want to go through a year on year sort of detail. But another encouraging feature is just, and this underlies some of Christian's commentary that the franchise nature of the revenue performance across flow in particular in January so far is very encouraging to us if we compare to the prior year. Lastly, on the buyback, look as Christian said our goal is to be conservative. We frankly built our plan last year on a set of assumptions looking into the future, not just our financial plan, but also our capital plan. At a time, when I'd say the optimism or the risk on environment that we're seeing today wasn't present. And the step off wasn't known to us. So your question is a fair one. Does it really reflect what we see today? And the answer is no. We think the environment is more favorable than the basis on which we built that plan and capital plan. Nevertheless, given the uncertainties, we think it's the appropriate decision to have held back at this point. And, frankly, if that conservatism was unwarranted, then that capital is in fact excess and can come out later in this year. So I think it's as simple as that. And sorry, and just on those buybacks. Can you can you make the decision at any point during the year to bring those buybacks through? Yeah. And hence, the flexibility of the buybacks. And I think by the way, obviously peers are doing what they do and is appropriate to them. And it's exactly the point with buybacks, right, that you have the flexibility to govern both the timing and the amount based on what you see and the confidence. So I think the idea that it's that that people lock into the view that it's a January announcement of a certain amount is probably not appropriate to buybacks. We've been really clear on the dividend path. And as you know, the dividend path is a significant component of the total capital return, â¬5 billion through '24 and â¬8 billion through in respect of '25. And we think we're on a good path. Of course, we'd like to see more of the buybacks front end loaded rather than backend loaded. And we think they're a powerful tool but, but we also think prudence and flexibility are also important features of thinking about buyback in the toolkit. Hi, thank you. Two questions, hopefully relatively quick. The first one -- so thank you for the update on the risk piece. I am getting questions from investors about potential exposure to the Adani Group. The group did comments about Americana's exposure, I think in the past, so any, any color there would be helpful. And then secondly, just again, I mean, going back to kind of revenue outlook sustainability. In terms of FIC business, I guess a couple of years ago, the thoughts were maybe â¬7 billion or so would be a sustainable kind of run rate. We're expecting a bit more than that now. I'm just curious what you're thinking the sustainable basis going forward for the next kind of year or so. Thank you. Thanks, Amit. So on specific clients, as you know, we just don't comment on specific clients. I think the Lojas Americanas situation was a bit unique insofar as there was erroneous information in the market. So we felt important to clarify quickly. Generally, we pledged to Olivier's statements that we manage our loan book carefully and its underwriting in the security interests and what have you. And so hence, we look across the portfolio, as we've indicated with confidence. On the fixed sustainable rate, it's an interesting question, I tell you that if I go back to the materials that Rahm went through with you in 2020 IDD, we've cleanly clearly outperformed those assumptions, which is great. I think that franchise enhancement and our ability to invest further in it than we had anticipated tells you that there was more potential there that we had to -- than we thought at the time. And I also think that the underlying dynamics have become more favorable, perhaps than we assessed. Can we turn that into sort of a reliable run rate, it's hard. And maybe we come back on that question as the year goes by. We're not saying that â¬8.9 billion is a new run rate, and we'd expect to grow from here. We definitely think there's some normalization over time, but I think we would take the views of the baseline is simply moved up based on both the environment and the way we've, Rahm and his team in particular have executed on the opportunity. Hi, thank you very much. I'll keep it to one in the interest of time. And just to follow up on the earlier discussion around the volume contribution to revenue growth. I think Christian mentioned that that could be similar to or more than the rates benefit in 2023. Just wondering how that compared to '22. So when I try and do those numbers, I get to a little bit over â¬0.5 billion so you seem to be indicating something unlike a doubling in the volume benefits in '23 versus '22. So just wanted to get your thoughts on that, please. Sure, thanks Rohith. I mean, to begin with, remember that there's a grow over piece of this, right. So we probably exceeded our estimates of the business volume growth in â¬41 billion for example, between net new assets in Private Bank and the loan growth exceeded our expectations. So there is a grow over element of that and then this year's originations. There's also a bit of a mix shift that takes place in the businesses. So we would think that, that a little bit more of the growth will shift, for example away from Germany into the IPB, and particularly Wealth Management, and the bank for entrepreneurs and also in the Corporate Bank, we could see some shift, as Christian noted from some of the short term lending, lower spread lending to more structured. So I think there's a variety of features that underlying the view that we have on how volumes and mix shift and also spread can help support that just the interest rate only piece of it. And sorry. Would you compare the revenue contribution from growth in '23 versus '22? Is it significantly bigger in '23 and '22? Is that we're expecting? Hi, good afternoon. So thank you for taking my questions. I have questions on PB and CB, please. So starting with a quick one on PB. Could you please attach a number of the branches that you plan to close this year? And also, is it fair to assume that the benefit was most likely or most of that would be reasonable only in next year? So this will be a question number two, and number one. And secondly, looking at your Corporate Bank business, would you -- could you give some color on the extraordinary growth in the business banking subdivision? I mean, that will be outside the treasury and institutional services that also -- both of them posted strong growth, but the subdivision was above 50%. So this would be interesting. And also if this is something that could be repeated as well. Thank you. So on the second question, it is the -- it's the sensitivity there and the fact that it's uniquely on the on the Euro book. And they benefited from the two rate hikes. Because remember, the first the hike to positive took place very late in the third quarter, so you essentially had the impact of one full and one partial rate hike in that business. And it's just more sensitive and had a very, very pronounced lag effect. On the branches, I don't have a precise number for you. We talked about potentially disclosing that but backed off a little bit. I would say, not far off the pace of this year. I don't think quite as many as this year, but still a considerable program or branch closures that we have the scheduled. Look, the timing of it does take a while to flow through. And the paybacks for branch closures, aren't as attractive as you might think. But that is taking place and rather like the earlier conversation, there is a grow over benefit in '23 from the branches that were closed during '22. So, so we'd expect to see a little bit of help on the expense line there as well. Thank you for joining us for our fourth quarter and full year 2022 results call and for your questions. And thank you again for bearing with us during the delay given our technical difficulties. As ever, please reach out to Investor Relations with any follow up questions. And with that, we look forward to speaking to you at our first quarter results in April. Thank you. Ladies and gentlemen. The conference is now concluded. And you may disconnect your telephone. Thank you very much for joining. And have a pleasant day. Goodbye.
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Greetings. Welcome to TrueBlue Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. Good afternoon, everyone, and thank you for joining today's call. I'm joined by our Chief Executive Officer, Steve Cooper; and our President and Chief Operating Officer, Taryn Owen. Before we begin, I want to remind everyone that today's call and slide presentation contain forward-looking statements. All of which are subject to risks and uncertainties and we assume no obligation to update or revise any forward-looking statements. These risks and uncertainties, some of which are described in today's press release and in our SEC filings, could cause actual results to differ materially from those in our forward-looking statements. We use non-GAAP measures when presenting our financial results. We encourage you to review the non-GAAP reconciliations in today's earnings release or at trueblue.com under the Investor Relations section for a complete understanding of these terms and their purpose. Any comparisons made today are based on a comparison to the same period in the prior year, unless otherwise stated. Lastly, we will be providing a copy of our prepared remarks on our website at the conclusion of today's call, and a full transcript and audio replay will also be available soon after the call. First, I want to welcome Taryn Owen to the call. Taryn joined PeopleScout in 2010 and has served as President of PeopleScout since 2012. Taryn has also served as President of PeopleReady since 2019. In 2022, Taryn became President and Chief Operating Officer of TrueBlue. In this new role, Taryn is responsible for all operating brands, along with our people and technology strategies. We plan to have Taryn join us going forward to offer additional insight into our operational performance along with our people and technology strategies. Before discussing our fourth quarter results, I'm going to take a moment to reflect on 2022. The year was marked by one of change, not only at TrueBlue but also within the business environment. Since returning as CEO in June, what has been clear is the strength of our people who possess an unwavering commitment to serve our clients and the people we put to work. As we started the year, demand for our services was high as clients needed supplemental labor to support growth. As the year progressed, the impact of inflation, combined with higher interest rates fueled economic uncertainty, leading certain buyers to take a wait-and-see approach to hiring. However, the labor market has remained historically tight with over 10 million job openings across the United States, many of which are for blue-collar positions in which we specialize. Despite the economy slowing in 2022, I'm pleased with our performance over the past 12 months with revenue growth of 4% and operating income growth of 5%. Moving onto results for the quarter. Total revenue was $558 million, down 10% compared to Q4 2021. Results across the business segments were mixed. We saw steady underlying revenue trends at PeopleReady and at PeopleManagement in Q4. At PeopleScout, we started to see the need for permanent staff at our clients begin to slow. While operating income and margin were lower due to the decline in revenue, we maintained pricing discipline at our staffing segments and remained focused on costs across the Company. Turning to the segments. PeopleReady is our largest segment. It represents 57% of total trailing 12 months' revenue and 59% of total segment profit. PeopleReady is a leading provider of on-demand labor and skilled trades in the North American industrial staffing market. We service our clients via a national footprint of physical branch locations along with consolidated service centers both supported by our JobStack mobile app. Revenue for the quarter was down 13%. If you recall In the fourth quarter of 2021, PeopleReady benefited from a demand surge across the business, as our customers found themselves in desperate need for labor during the peak of a post-COVID recovery creating a year-over-year headwind this year. Setting this factor aside, our sequential revenue trends remained consistent with typical historical patterns. PeopleScout is our highest margin segment representing 14% of total trailing 12 months' revenue and 30% of total segment profit. PeopleScout is a global leader in filling permanent positions through our recruitment process outsourcing services. PeopleScout revenue declined 16% in Q4 this year. Changes in demand for RPO services typically lag our traditional staffing business. We're seeing this dynamic play out today, which is being compounded by more normalized hiring volumes. PeopleManagement represents 29% of total trailing 12 months' revenue and 11% of total segment profit. PeopleManagement provides onsite industrial staffing and commercial driver services in North America. The essence of a typical PeopleManagement engagement is supplying an outsourced workforce that involves multiyear multimillion-dollar on-site and driver relationships. Revenue was down 2% in Q4 with monthly revenue trends holding steady throughout the quarter. I'm going to spend the next few minutes talking about our strategies and will then pass things over to Taryn to talk about a couple of our operating priorities for 2023. Our strategy at PeopleReady is to digitize the business model to gain market share and improve efficiency. The United States temporary day labor market is highly fragmented with the bulk of the market made up of smaller companies in the industrial staffing segment where PeopleReady operates. These smaller more regional companies not only lack an expansive branch network but also are typically unable to invest in digital applications like JobStack with over 90% associate adoption and 30,000-plus client users. JobStack provides a frictionless user experience for associates and clients and has driven operational efficiencies. The technology and the brick-and-mortar combination makes us a one-stop shop for national and local accounts and is what makes us a leading provider within the on-demand industrial staffing market. We believe the market for general labor has the best opportunity for digitalization as it is less complex than other types of staffing. And by further investing in JobStack, we will be able to increase our traction and improve our appeal with clients and associates. At PeopleScout, our aim is to capitalize on a strong brand reputation and ability to hire in high volumes to gain market share within the RPO industry that has consistently produced double-digit annual revenue growth in favorable economic conditions. In 2022, PeopleScout achieved record revenue as companies sought our expertise to find talent in tight labor markets. A big reason for the success was Affinix, our recruiting platform which has allowed us to place better talent faster. As we move forward, we plan to further diversify our hiring mix and target high-growth sectors such as life sciences and technology. Our positive track record penetrating healthcare, depth of experience and Affinix make this possible. PeopleManagement strategy is to supplement our traditional on-site staffing services with higher-margin product offerings, like on-site workforce solutions and commercial trucking and expand geographically within the United States to increase market share. Now I would like to turn the call over to Taryn, who will discuss specifics on some key priorities as we enter 2023. I'm pleased to be here today to provide some insight on key priorities that are underpinning our strategy. Before I get into the details, I want to share some bigger picture perspective on how we are approaching our priorities. As Steve mentioned, we have been on a multi-year journey to digitalize our business. This strategy is based on worker expectations for fast and frictionless access to jobs and client requirements for efficient access to talent and to recruiting and staffing platforms that offer a superior candidate experience. At the same time, we are a people business, and our relationships with our clients, candidates and associates remain essential. Our field team members, salespeople and recruiters, all play a vital role in building those relationships and we are working hard to ensure that our teams have the tools and resources they need to succeed. By striking the right balance between relationship-driven service and technology enablement, we will remain well-positioned to help our clients access the talent they need through our on-demand and outsourced solutions. So it should come as no surprise for 2023 that our people and technology will remain the primary focus for TrueBlue. We are a people business. So, ensuring that we have an engaged and high-performing team is a top priority. In order to attract and retain talent, we continue to build and enhance program designed to enrich our employee experience and to emphasize learning and development. We are also making focused investments in new positions to maintain sustainable staffing levels and strengthen our ability to deliver the services our customers expect. We are augmenting learning paths and development planning across the business. For instance, an important focus in 2023 will be ensuring our sales training is scalable and repeatable in all sales roles throughout the organization. With this training, we emphasize effective client interactions and win angles, as well as a thoughtful approach to driving repeat business and customer reactivation, coupled with training and development are targeted investments in field-based positions to provide greater geographic and vertical coverage. At PeopleReady, we are placing account managers in new markets to capitalize on staffing demand in skilled trades. We are also providing our branch managers with expanded sales training and increasing our capacity to sell our services. At PeopleManagement, we will continue to target market expansions to respond to ongoing demand for drivers. And finally at PeopleScout, we are augmenting our sales team to enable greater specialization in the healthcare vertical. These investments are directed towards increasing sales activity and enabling operational excellence. This will enable us to capture topline growth in the short term and will ensure that we are well-positioned to expand market share when our customers return to growth. Now shifting to technology. It is imperative we continue to invest in platforms to better service our clients, attract workers and support our people. Through our PeopleReady JobStack application and PeopleScout Affinix recruiting platform, we have brought differentiated experiences to those we serve. With JobStack, we are focused on improving the associate experience in the near term. We are making upgrades to the application, which will allow associates to register faster and reduce the time it takes to get them to work. We are improving the ease of time entry, so our associates can be paid more quickly. And finally, we will be introducing conditional dispatches. This functionality allows associates to accept a job prior to fulfilling all requirements such as documentation of a specific certification and to subsequently be dispatched once they have met the requirements. These product enhancements are aimed at improving the quality and quantity of supply. They position us to improve associate retention and increase our client fill rate, both of which will lead to higher customer satisfaction and ultimately, more wallet share. Affinix is our PeopleScout recruiting platform designed to meet candidate expectations for a seamless experience. Affinix combines many facets of the recruiting process, including recruitment marketing, applicant tracking, candidate relationship management and interviewing to quickly bring a highly qualified talent pool to our clients. Affinix has been instrumental in securing new client wins, renewals and expansions. And as we look forward, the relevance of Affinix will continue to increase as clients further prioritize the candidate experience, providing us with a catalyst for future growth. I look forward to providing an update on the progress we make on both fronts on future calls. Total revenue for Q4 2022 was $558 million, a decrease of 10% compared to Q4 last year. As Steve mentioned, PeopleReady benefited from a demand surge in the prior year period as the peak of the post-COVID recovery left our customers in desperate need for labor. As expected, the surge did not repeat this year, contributing 6 percentage points of total revenue decline year-over-year. The remaining four point decline reflects the Company's underlying revenue trend, a decrease from our third quarter 2022 total revenue results, which were flat. In the fourth quarter, our PeopleScout business experienced lower volume from existing clients and to a lesser extent, so did our PeopleManagement business. As you might recall, our PeopleReady business was the first business unit to see a meaningful reduction in demand earlier this year. PeopleReady is typically where we first see an impact from macroeconomic conditions given the short duration and supplemental nature of the job assignments. We were pleased to see stable weekly sequential revenue trends for PeopleReady during the fourth quarter that were in line with typical historical patterns, which has continued into January. Net income declined 65% and adjusted EBITDA declined 42% while net income and adjusted EBITDA margins declined 190 and 200 basis points respectively. The decline in profitability was primarily driven by the revenue decline, operational deleveraging associated with the revenue decline, and changes to business mix given the larger drop in revenue within our PeopleScout and PeopleReady businesses, which carry a higher margin than our PeopleManagement business. Adjusted EBITDA margin contracted less than net income margin due to certain PeopleReady technology costs, which were excluded from our adjusted results. Gross margin for Q4 2022 of 26.5% was down 30 basis points. As mentioned earlier, a change in business mix had a contracting impact on gross margin, which was partially offset by lower workers' compensation expense, and a positive bill pay spread. The better workers' compensation results are from a combination of favorable development on prior year reserves and fewer workplace injuries this year. The positive bill pay spread results are due to disciplined pricing efforts in our PeopleReady business. SG&A decreased $4 million or 3% compared to Q4 last year as we remain focused on cost management. SG&A increased as a percentage of revenue due to operational deleveraging associated with the revenue decline. Our effective income tax rate was a benefit of 1% due to hiring tax credits exceeding the income tax expense associated with our pre-tax income. Now, let's turn to the specific results of our segments. PeopleReady revenue decreased 13% while segment profit decreased 18%, and segment profit margin was down 50 basis points. As we've mentioned, PeopleReady benefited from a demand surge in the prior year period, which accounted for 11 points of the year-over-year decline. The remaining decline of two points reflects PeopleReady's underlying revenue trend for the quarter, which was roughly in line with the total revenue decline for this business unit in Q3 2022. The drop in segment profit and related margin came from the revenue decline and operational deleveraging, which were partially offset by lower workers' compensation expense and favorable bill pay spreads. Pay rate inflation in the PeopleReady business has moderated during the back half of 2022, yet bill pay spreads have continued to be robust. Bill rates grew 8.4% while pay rates grew 6.4% resulting in a positive spread of 200 basis points. PeopleScout revenue decreased 16% while segment profit decreased 78%, and segment profit margin was down 10 percentage points. During the quarter, we saw RPO business volumes at some clients revert back to pre-COVID levels while others reduced hiring as a result of the macroeconomic environment. In addition, we made a revenue reserve adjustment which dropped straight to the bottom line. Segment profit and related margin were down due to the revenue decline, revenue reserve adjustment and operational deleveraging. PeopleManagement revenue decreased 2% while segment profit decreased 8%, and segment profit margin was down 10 basis points. Monthly revenue trends were steady during the quarter performing in line with historical patterns. The decline in segment profit and related margin was mainly due to the decrease in revenue. Now let's turn to the balance sheet and cash flows. We finished the year with $72 million in cash and no outstanding debt. The business is producing strong cash flow with full-year cash flow from operations totaling $121 million and we returned $61 million of capital through share repurchases during the year, leaving $89 million authorized. Now I'd like to take a moment to provide additional color on some forward-looking items. We expect a revenue decline of 18% to 13% in Q1 2023. Similar to Q4 of 2022, Q1 of 2023 is also facing a demand surge of 7% in the prior period comparison, which translates into an underlying revenue decline of 8% based on the midpoint of our Q1 2023 outlook. The Q1 2023 underlying revenue decline is expected to be a bit larger than it was in Q4 2022. This is primarily due to an expectation of less year-over-year growth in our green energy business in Q1 2023 associated with the inherent lumpiness in the timing of projects rather than a more pessimistic view of future revenue opportunities. As we look forward, Q2 2023 will also face a headwind of four points due to the demand surge in the prior year. I will also highlight one change to our adjustments to net income. As we transitioned certain on-premise technologies to the cloud, we felt an adjustment for Software-as-a-Service amortization was helpful for comparability purposes. Now that this cost has somewhat stabilized, we will no longer be including it as an add-back in our adjusted net income calculation. However, it will continue to be included in our adjusted EBITDA calculation given that these costs are reported in SG&A and are taking the place of depreciation for former on-premise technologies. One last item before we wrap up. As a reminder, the 2023 fiscal year will have 53 weeks, which is a typical occurrence every five to six years since we operate on a 52-week fiscal year versus a calendar year. This extra week will provide incremental revenue for the year of $22 million to $27 million but will not contribute additional profit as it is an annual low point for weekly revenue. For additional details on our outlook, please see our earnings presentation filed today. Hi, good afternoon. Derrek maybe or just any - I guess, anyone on the management team, I apologize. Just your thoughts on kind of the economic outlook I know, I think you've talked about labor market being tight obviously. And I'm just wondering, in relationship to kind of where the - where you thought the economy was maybe in the fourth quarter, or you kind of see it now, and just thoughts going forward? Hi, thanks, Kartik. This is Steve. I think that's in the middle of a bull's eye that question about where are we going in and how fast in this economy and as Derrek said in his remarks, it's hard to grow this business without a good economy. And we've all seen the impact of interest rate and the slowing that has done. But we've also seen this powerful news in how many job openings that we have. So, balancing those two and trying to figure out where spend will be is part of our supply and the resources in the right spot at the right time. We're feeling good about it that this trend at labor - or the PeopleReady has been on of consistency for over a quarter, four, five months of pretty consistent pattern except for the prior year surge that Derrek called out. That gives us a lot of confidence that we are participating in a pretty good economy where we are, except for the prior year's surge that it happened. Second to come with that is full time hiring and these positions are open, yet, there's a lot of companies that are - I don't know if it's a freeze is the right word, but some caution in their hiring is out there that we know of. So we're in a spot of, I don't know if we're at equilibrium yet that we're ready to start growing through all of it. But we're pretty happy with where our industrial staffing business sits and we're watching carefully where our RPO business sits. And that's what I'll say about that. So the interest rates have definitely hurt buying activity and the movement of goods and we'll see where that ends up later in the year, too. Derrek wants to add anything to that. I'll add a little bit too. I'm glad you asked the question, Kartik. We're looking into 2023, we're still approaching it with caution, we're planning our business that there's going to be softer macroeconomic conditions. We think that's a prudent thing to do. However, where we stand today, if we're talking about, well, how are we feeling today about the future for 2023 to where we were a quarter ago? We are incrementally more optimistic about it from where we were. As Steve mentioned, the activity that's going on with jobs. I mean the number of open jobs just went up to 11 million. The job hiring activity has been relatively strong and then we saw the ADP report they say that's where the result stay tuned on that, but if you take a look at that and a strong GDP quarter that just finished, given all of the interest rate hikes and inflation coming down. So it's just suggesting to us from what we can see the labor markets, which we think is a really important part of the economy is navigating its way through some of these challenges that have been presented this year. So I think that's our overall take right there. No, that's helpful. And just one last question, just on SG&A, if there is an unfortunate incident and the economy starts kind of trailing off faster than anybody is anticipating, I guess, how quickly can you adjust on cost and how quickly would you? Well, I think it would depend on what we actually experience in the severity of a downturn. As I talked about earlier, we are expecting softer macroeconomic conditions. However, we put out annual guidance for at least on the SG&A line, that's relatively close to what - how we finished up 2022. We took $40 million of cost out in 2020, $30 million of that still sits rolling outside of our cost structure. A lot of that's in the PeopleReady business. So we've really, slimmed that business down to the minimums of what it takes to keep these operations open. Yes and so cutting anymore there we're really concerned for if we cut $1 of SG&A, we're going to lose even more in gross profit dollars. And so, we're really trying to look at managing this business to maximize the amount of profit over complete economic cycle and with where labor conditions are and the tightness of the labor pool that's not just for our customers, it's for us too. And as much advancements that we've made from a digital perspective, from a technology perspective, we still need people and relationships with customers. It's sold face-to-face, things happens service-wise that need adjustments, we need good people that know our business, know our technology, know our processes and most importantly, our customers' needs change through the year. We have to stay close to that. So we're being very mindful to not take that too far. Now, if we get into a - deeper darker recession, we're going to have to take another look at that, but that's not in our plans as we sit here today. Yes, and I appreciate the question there Kartik, because of the balance with your first question on the thoughts to the outlook. The fact that we're playing this SG&A card to run strong and keep - and as Taryn had mentioned, keep people trained and keep our staff in line is - we're playing the card that we believe we're ready to balance and that we're ready to take advantage of the upswing. Your second question though is how fast we can react if something different happens. And really built into our model is that our recruiters - at PeopleScout, that's a variable cost and to some degree, dependent on how bad it gets - at PeopleReady that becomes a variable cost based on how many branches we have running and how many people we have in those branches. So we have a lot of variability and then all of our bonus programs that we're paying these recruiters and staffing specialists is all on a variable model also. So this will ramp up and down and we'll watch very closely. But for now, we like the card we're playing because we want to be ready on the bounce back. Thanks so much. And I just wanted to welcome Taryn to the call as well. Before I ask my question, I just wanted to state something publicly. It looks like the data services had an incorrect estimate for us for the quarter. We were actually at $0.38, not the $0.69 that they show, which mean consensus was probably closer to $0.41, not $0.52. Because the headlines say that you missed report - consensus estimates. You might have actually reported it slightly, we're trying to have this corrected, but I just wanted to let everybody know that first. Just moving on to my question...? Yes, no worries, just moving on to my questions. Can we talk about trends intra-quarter and what you've seen in January? If it's possible to give that by segment, that'll be great? Yes let's talk about it. Our PeopleManagement, the quarterly trends were very consistent actually for all three segments. The quarterly trends, or excuse me, the monthly trends were pretty consistent throughout the quarter. So there's nothing really to point out through the quarter. Now as we go into January that continued for the PeopleReady business. The underlying trends still hold are holding up quite steady our PeopleManagement business was low single digit in growth in the fourth quarter that held on a monthly basis going in the first quarter, though, we're seeing some softening there. We've got clients that are in retail and transportation that they're just saying, we're expecting to have a little bit lower volumes retail held up quite well in Q4 compared to their original expectations, where they're going to be. But some of that was through discounting promotions of inventory, which won't carry into the first quarter and for PeopleScout, we don't bill on a weekly basis. As you saw from our results here in Q4, we were down about 16% in Q4. We're looking at about the same trajectory in Q1. Now, I will say that People Scout 16% decline, half of that was from one client that is having its own challenges. We're still expecting though about the same amount of revenue decline in our outlook for the first quarter for January. We're seeing clients coming back and saying, hey, we're just - we're going to hold for this month. We're going to delay till next month. So there is some softness coming from that. But I'll also say we're not surprised by that. Our PeopleReady business leads. It has - we saw that in the second, third quarter, we talked about that holding steady and seeing some softness following in the perm area is not a surprise to us at this point. All right. That's helpful. If I could dig down a bit further in PeopleScout. I don't think you broke that brand out separately in prior recessions, but you had it during the pandemic, and looking at my model, PeopleScout revenues fell over 40% in one quarter but recovered fairly quickly. Should we expect that kind of volatility if we are heading into a recession? Would this be the most volatile of your three segments? Well, I would be really surprised if we had anything as volatile as what we had in 2020. Now, remember, when we had that significant decline that you just mentioned, most of that was around different forms of hospitality. Airlines, hospitality, hotels, that was a third mix of our business and as you know, in 2020, that segment got really hammered. So I wouldn't expect that kind of volatility. Now the PeopleScout business in and of itself is a little bit more lumpy because the revenue per customer is - the proportions to the total revenues is a higher, there's not near as many customers there as there is in, say, a PeopleReady business, so it can be lumpy at times, but I wouldn't - I'd be really surprised to see that kind of revenue decline again on a year-over-year basis. Okay. That's really helpful. If I could just sneak in one quick one. You mentioned a revenue reserve adjustment in PeopleScout in the quarter, can you just quantify what that was for us? Sure. That was maybe about $3 million. When it comes to revenue recognition for our PeopleScout business is pretty straightforward. We go and find candidates, we turned over some candidates to hiring manager, they select one, and right around that point, revenue gets recognized. Now with that said, we do have other agreements with those same customers around volumes - annual volumes that have to be estimated, certain turnover ratios, different things that are built into these. So we've always had some form of what we refer to as a revenue reserve adjustments that are made. It's usually a few little ones that go one way, a few that go the other way. This particular quarter, they just all seem to go one way. So this is the first time that we've talked about it in 10 years and I wouldn't be surprised if we didn't talk about this for another 10 years. Yes. I just want to follow up on some of Jeff's questions. With regards to just PeopleScout, Taryn, welcome to the call. I'm wondering, given your expertise in the area, can you describe a little bit more about like what you were seeing there, just in terms of the one large client that accounts for half? Is that kind of a temporary one-time thing or were they just over-hiring post-COVID and now it's getting back to normal? And then what did you see with the other players, and were there any clients that have been lost or anything along those lines? Thank you so much for the welcome. Excited to be here. Related to the customer that have the decline this quarter, it's a large retail customer who had declining volumes within their business in the quarter. We hope this customer with their surge hiring during the holiday season and during other periods of surges within their business. So we had a combination of a couple of things going on. First, they didn't need to hire as many people. And secondly, they didn't have as many people that are on staff busy with work on the sales floor. And so they have those individual supplements by doing some recruitment themselves. So that's what drove that decline in this quarter with the large customer. Great. And then what are you seeing with the others? Is it fairly steady? And have you retained all of your customers? Are there any sort of contracts that might be terminated or winding down or anything along those lines? Yes. I would say just overall, the sentiment that we're hearing from our customers is really around uncertainty about their short-term staffing needs. And so, in RPO specifically, customers were seeing a lot of activity from first-time buyers. They're really interested in getting support with their hiring. However, they have been slower to make long-term hiring decisions. So we're seeing a surge in some of our shorter-term offerings like recruiter on demand and some project RPO work where we're able to support our customers rapidly with their needs now, while they sort through what their hiring volumes are going to be for the long term. But otherwise, as Derrek mentioned, we have some customers that are slowing down their hiring. They're being more hesitant, they're going on and off holds, and really just trying to sort through what their hiring volumes are going to look like this year. But otherwise, we are just in current course of business, trying to support them with the needs that they have right in front of them. Yes. Mark, this is when it comes to the PeopleScout business, this is really a story about our customers' hiring volumes coming down. Interestingly enough, it's not because they don't still have open jobs. They do. With all of these customers, they're not sure where things are going. At a company, one of your worst fears is you hire some people in two, three, four, six months later, you're going back to those people and saying, we're sorry. We got to let you go. That's not good for the people, it's not good for the business. And so there are many of our customers that are in that spot trying to understand where things are going and they're saying, we're going to this hold, we're going to pause, we're going to delay this month and everybody is talking to their employees. Everybody has just going to have to get by. Everybody's going to have to get by till we get some more direction on where our own business is headed and that's what we're seeing. Yes. And I would just add one more point. We felt volumes in 2022 with our customers that were really high because they were experiencing turnover like they had never experienced before. And many of those customers have put good plans in place to bring that turnover down, which is just naturally bringing down that turnover in the hiring volume accordingly. That's great color. And then, just given the comment with regards to the one large one having that surge in Q4 the prior year and not having it this year, does that mean that - how should we think about the revenue decline that we ended up seeing here in the fourth quarter? Should that continue into the first quarter? Because presumably that retail client wouldn't have had the same level of surge hiring in Q1 a year ago. Yes. We're expecting the revenue decline in Q1 for the PeopleScout business to be pretty close to what we had this quarter, albeit from a different path. So, yes, if you took the 16 points of revenue decline and you adjust this for this one customer we talked about, we'd be more at about 9% excluding that customer. However, going into the first quarter, we're hearing from more clients, not anything big but more positive. And so we're getting - we're expecting to be at about the same revenue decline, it's just getting there through a slightly different path than what you saw in Q4. Okay. Great. And then how should we think about the staffing levels internally within TrueBlue for the PeopleScout division? How should we think about the expense profile of that business if things are going to continue along these - this kind of path? Yes. The great news at PeopleScout is that the model is built to scale up and down to meet the hiring volumes of our customers. And so from a recruiter and a recruiting coordinator perspective, we do have a flexible staff that we are able to scale based on the hiring volume. It's built into the model. It's a big reason that customers choose to outsource to us so that we can bring them that level of scalability. So, Taryn gave you the most important big picture, I'll just give you just a little bit of geography. So just to also understand as we make those adjustments, it won't show up in our SG&A. Our recruiters are actually in our cost of sales. And so what Taryn is talking about, our actions will be taken as it's needed as volumes come down to scale the recruiting resources to the amount of demand to keep the gross profit percentage in that business whole. Great. And then can you give us a little bit more granularity with regards to PeopleReady just in terms of like what you're seeing in different regions, different end markets. Just in terms of what's going a little bit softer. Aside from the retailers that you had already mentioned in prepared us for what else seems to be either changing on the margin, and what are you seeing any green shoots in terms of areas that are, that are picking up more? Yes, if we talk from a geographic perspective, there's not much news there. You can take a look at the states and the trends there, you take a look at them, and it's just very close to the aggregate for the overall PeopleReady business. If you take a look at by industry, there are some different bands, the areas where we see the most pressure if you're taking a look at year-over-year trends transportation services and retail. Those would be the leaders of the pack and those declines would be higher than - the aggregate percentage revenue decline that we reported. Areas that are not experiencing as much pressure and would be below that would be construction manufacturing hospitality still having some declines, but holding up better. The green energy space is one that's been growing for us this year. That's a bright spot Canada's been a bright spot for us Taryn could probably elaborate a little bit more on our green energy plan, but with - some of the legislation that was passed in the Inflation Reduction Act. There's, a lot of incentives around green energy, and that's an area that we're pretty bullish on. And then Steve, can you talk a little bit about where you're, how you're thinking about this, the office program with regards to PeopleReady it sounds like we put some things on hold in terms of centralization. Any updates in terms of their or stats with regards to JobStack and what percentage of the volume is being filled through JobStack now? Yes, I'll kick off that and I'll let Taryn add a little color to that, but we recognize the importance of these branches, this is what's worked for us for 30 years and we understand that and taking care of the employees, to take care of the customers. When they're out there doing two for Tuesday, two people two for two days and that blocking and tackling that it takes to run that business. It's very contact sport where you've got to add your teams focused on the right things and - Taryn and her leaders in PeopleReady are doing that where we're focused on local accounts growing local accounts. I was in a market last week and seeing seven, eight different branch managers and two or three of them that are really great at blocking and tackling and winning local accounts. So it's very possible and that's where our energy is right now. Centralization is a great idea. And that's a great way to save some cost, but not at the cost of losing revenue and losing employees. So we are calling a time out there for a bit. Until we have a few more of a reduction to roll on, what it really takes to roll that out with the power that is good for our customers and good for our associates. And we're close, but we just didn't quite hit the nail on the head. So we're going to pause that for a bit. We're going to stay focused on these branches that's, where we've been, and where we do have service centers they are okay and will ensure that we're doing, okay. There's one big area of our PeopleReady that went first and we close branches and actually, the results are holding pretty steady to the rest of the company. So the reason did not go faster is, we've got to do better for our customers and our associates when having the right technology and having the right training programs and play in those centers. So, we'll come back to it, Mark, but you're not going to hear us beat that drum a lot until we're prepared and do a bit better. Let me ask Taryn will give color there. And she can also talk about how we're doing with JobStack. Yes, absolutely. Steve said it well. We're just squarely focused right now - to ensure that we are providing great service to our customers and keeping our relationship strong. I'll talk about JobStack, JobStack as you know, has been a critical component of the PeopleReady business really helping us connect with our clients and associates through that digital experience operating in a tight labor market JobStack has allowed us to maintain constant contact with our associates. We've got 90% of our associates that are using the app and client adoption continues to increase as well. We've got about 30,000 clients engaged through the JobStack app at this point. So it's certainly helping us with the connection points. And it's also enabled us to achieve some of those cost efficiencies that Derrek talked about earlier in the dollars that we were able to remove from operations in 2020. And I want to echo everyone's comments and welcome Taryn, it's good to hear you on the call and looking forward to working with you going forward. I wanted to touch a little bit. We've talked - quite a bit about the trends. I was wondering if you talk a little bit about the cash flow and cash management prioritization. And certainly, it's nice to have a good balance sheet in complicated times. So I was wondering if could talk a little bit about maybe where your - thoughts are there for this year. And then I have a couple of follow-ups? Yes well, when it comes to our capital strategy, not a lot has changed, we are very glad we got such a strong balance sheet. Taking a look at where things might go economically, but we're well prepared for that. So that's not a concern of ours on the longevity of the business if we needed to do something with capital and pull it to support the business. So put a checkmark behind that one. When it comes to acquisitions, we're less interested in acquisitions in our staffing businesses. We think our biggest opportunity right now is to continue to digitalize this business increase our relevance with customers, increase our relevance with candidates and with - the workforce. And that's really our best return right now and we're really pleased with our progress acquiring into that we think would be a distraction and they're just not at any opportunity out there to pull another business into that. Opportunity wise that we can see can out rank what we're doing with our digital strategies maybe if there were some technology that would enhance that be a different story, but just going out and buying more staffing firms and testing them in - isn't really something we're particularly interested in. Now when it comes to the RPO business, that's a different story, with the RPO business there is areas like life sciences or technology that we'd be very interested in getting a bigger presence in. We have those, presence actually with many of our clients. They have technology positions and we're filling them. What we're talking about is adding more specialization and more street credibility from a logo perspective two technology firms or two life science firms and having that really helps us in - landing the deals. When it comes to stock repurchase that's something that we've continued to be interested in, and we do like to be opportunistic in our stock repurchase program. So that's all I'll say on that, but those are our three broad categories of where we want to spend our money, and nothing has really changed from those three. Okay, great. And then I was wondering if you can touch a little bit about the pricing environment and what you're seeing in the businesses and whether or not there's been any impact. I understand the client hesitancy, but maybe if you could talk a little bit about what we're seeing with rates and if there's, been any changes or anything noticeable there as well? Well, I think the standout from a pricing perspective, really is our PeopleReady business. In our PeopleReady business, these are smaller jobs oftentimes are supplemental their project. And so that's one dynamic we have going for us is we get to reprice this business all the time and our business units are really doing a great job on the audit. I just was looking before I came in here to the call. I was looking back and at some history on positive bill pay spreads. I had one that went back 10 years and - the positive bill pay spreads for the year here at PeopleReady has been 180 basis points. There was nothing that even came close to it. So, the business is really pricey and based on the value that we're contributing to the customers. We think that we're delivering a really good value. As far as the quality of what we're presenting and supply-demand imbalance are eating some of that. Our folks are, needing us even more than they've ever needed us before, and trying to find good candidates. The markets are tight. We know how to find that and it's coming through in the pricing. I don't know. I'll pass over to Taryn, maybe Taryn if you want to add anything to that and make any comments about PeopleManagement or PeopleScout. Yes, I just I'll echo your sentiment Derrek. We've just had great success making sure we're able to get the right pay rates to our associates, and then the bill rates to get the job built on their behalf. And that will end our question-and-answer session. So we may conclude today's conference. Thank you for your participation and have a wonderful evening.
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Hello, and welcome to the Kulicke & Soffa 2023 First Quarter Results Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Itâs now my pleasure to turn the call over to Joe Elgindy, Senior Director of Investor Relations. Please go ahead, Joe. Thank you. Welcome everyone, to Kulicke & Soffaâs fiscal first quarter 2023 conference call. Fusen Chen, President and Chief Executive Officer and Lester Wong, Chief Financial Officer are joining us on todayâs call. Non-GAAP metrics will be referenced throughout todayâs call. The non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, our GAAP financial information. Complete GAAP to non-GAAP reconciliation tables are available within our earnings release filed yesterday, as well as the earnings presentation, which may be found on the Investor Relations section of our website at investor.kns.com. In addition to historical statements, today's remarks will contain statements relating to future events and our future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a complete discussion of the risks associated with Kulicke & Soffa, that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10-K for the year ended October 1, 2022, and the 8-K filed yesterday. With that said, I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen. Thank you, Joe. Over the prior quarter we continued to execute on our development plans and the customer engagements supporting secular trends in the Automotive, Semiconductor and advanced display markets and also our tactical margin optimization and market share gain strategies within the higher volume wire bonding and also electronics assembly markets. I will discuss these specific opportunities in more details shortly. Over the same period, we have been monitoring and internally addressing the recent policy pivot on COVID within China. Over the last two months we experienced a rapid increase in internal COVID cases within our Suzhou facility. While this had little impact on our production capabilities during the quarters, this wave of COVID in China is broadly impacting the operational capacity of our customers within China. We currently anticipate this effect creates additional capacity uncertainty and will have a slight impact on our near-term outlook, although it will likely support a quicker rebound as China GDP forecasts have recently improved. We also anticipate this policy shift dramatically reduces the potential for regional lockdowns -- which have had both supply chain and demand implications for us over the prior years. In addition to the potential for a swifter macro recovery in China, the consumer electronics show, which took place last month helps to provide a glimpse into the future for existing and new applications such as electric vehicles, artificial intelligence, wearables and display technology. Our business continues to be very aligned with these long-term trends and we look forward to supporting them over the coming years. Collectively, our longer-term industry outlook remains consistent. We currently anticipate semiconductor unit growth, excluding LED, will return to a more normal growth rate in calendar 2023, and nearly 10%-unit growth in calendar 2024. In addition to a more normal level of growth for the non-LED semiconductor market, LED units are expected to grow at a 19% CAGR, roughly 300 billion units of production annually through calendar 2025, in support of new mini and micro-LED applications. Also of note, our book-to-bill ratio exceeded one for the first time since June of 2021. While near-term inventory digestion and the macro improvements are necessary to support industry growth, these data points provide additional confidence to our outlook. Turning to the December results, we generated $176.2 million of revenue, and $0.37 of non-GAAP EPS, coming in ahead of our projections from last quarter. Our total capital equipment revenue was $135.4 million in the December quarter, with the majority of softness stemming from General Semiconductor, as anticipated. While General Semiconductor is typically driven by capacity needs there are growing technology changes, which are providing additional strength. First, within our high-volume wire bonding market, assembly complexity continues to require more equipment capabilities. These capabilities allow us to enhance our margin profile. Lester will provide some additional information on our optimization focus shortly. The next is within the power semiconductor market, which is represented in General Semi and also our automotive and industrial end markets, continues to evolve with the growth in both traditional silicon and emerging compound semiconductor applications. These power semiconductor trends have supported multiple record revenue quarters for wedge bonding in fiscal 2022, and allowed us to reach a new record revenue during the December quarter. In addition to our dominant, long-established position within the traditional wedge bonder market, we also address power and compound semiconductor needs capabilities, including clip attach, larger bonding areas and laser-assisted bonding approaches. Emerging compound semi devices using Gallium Nitride and Silicon Carbide, support fast-growing applications such as high-speed vehicle charging, 5G base stations, alternative energy and high-powered servers. We will provide additional updates on these emerging opportunities over the coming quarters. Additionally, we are pleased to report that we continue to see very strong demand for our robust thermocompression solutions, which support advanced-logic applications and are very aligned with emerging Chiplet trends. Our efforts to engage with a broader group of fabless companies over recent quarters has been very beneficial and has positioned us for additional share gains in the logic market. At this point, we are increasingly optimistic on the future of thermocompression and are growing our engagements with key customers. Several new customers have requested systems, and although we remain very supply-chain limited over the near-term, our TCB team is working aggressively to support multiple customer engagements in parallel. Additionally, we have previously anticipated a 10-micron pitch limitation for TCB. We now see the potential to extend this technology to below a 10-micron pitch, which can materially expand the size and long-term potential of our competitive TCB portfolio. Finally regarding TCB, Iâm pleased to report that we have received customer acceptance on our first fluxless chip-to-substrate TCB system, and have shipped our first fluxless chip-to-wafer TCB system. This will be followed by an additional system shipment to a leading foundry customer. As we highlighted over the past several calls, we continue to expect the majority of heterogeneous assembly needs can be addressed with our growing portfolio of TCB solutions. Moving to the LED market, we remain engaged and are supporting multiple customers with multiple advanced display solutions. We continue to make progress across several different initiatives in advanced display. Iâm very pleased to highlight that we have recognized revenue of our first LUMINEX system. Over the coming quarters, we intend on shipping additional systems and earning additional purchase orders for LUMINEX, which support backlighting applications and large-format, direct-emissive applications. Additionally, we have received interest to utilize this high-throughput system in more traditional semiconductor assembly markets in addition to the growing advanced display opportunity. By the end of fiscal 2023, we also expect to receive acceptance on the next phase of the customer-specific advanced display solution, which we will refer to as PROJECT W going forward. Demand for this system is expected to accelerate into fiscal 2024. Within Automotive, the ongoing electrification and autonomous transitions will continue to benefit our business over the long-term. Power semiconductor and compound semi-trends are benefiting our automotive customers in addition to some general semiconductor customers. The consumer electronics show last month highlighted new electric vehicles from established and emerging automotive companies, which continue to drive innovation, bring down costs and broaden market adoption. We are currently preparing to launch our next battery bonder for larger-form factor using both ultrasonics and laser-interconnect solutions in addition to supporting the production ramp for vehicles and also for long-haul trucks. Memory remains soft over the near-term although we continue to anticipate a slight pickup in the second half. In addition to parallel customer engagements and development programs, we remain on track to close the pending dispense acquisition as planned. As a reminder, this strategic acquisition provides additional access to adjacent-dispense opportunities in both semiconductor and electronics assembly. Collectively, these two areas represent a $2 billion addressable market and provide a new set of long-term opportunities. In addition to continuing on a prudent M&A path, we are also very focused on scaling our own equipment manufacturing capabilities further in fiscal 2023. During our prior fiscal year, we increased our capital equipment manufacturing footprint by 148,000 square feet, or 44% to 485,000 square feet and remain very focused to build out this footprint through 2023. Overall, despite persistent macro and regional challenges over the past few years, we have consistently execute and have fundamentally expanded our long-term opportunities. There is no shortage of new opportunities and our global teams have remained very focused on supporting our customers by delivering new solutions and driving acceptance. While consumer-driven softness is anticipated to create an ongoing headwind for our high-volume product lines over the near-term. We remain very optimistic and continue to anticipate a seasonal recover in the second half followed by broader capacity and technology growth in fiscal 2024. With that said, I will now turn the call over to Lester who will discuss our financial performance and outlook, Lester? Thank you, Fusen. My remarks today will refer to GAAP results, unless noted. Outside of the recent and near-term expectations surrounding Chinaâs COVID policy pivot, our broad-demand expectations for the year, remain largely unchanged from last quarter. Our efforts are focused on driving customer acceptance of our growing portfolio of solutions and growing our manufacturing and development capabilities with our ongoing capital expenditure programs. During the December quarter, we generated $176.2 million of revenue, 50.3% gross margin and $0.37 of non-GAAP EPS. Gross margins were better-than-expected due to cost control efforts, product and feature mix, supplier rebates and lower depreciation due to Capital expenditure shifts from December into the March Quarter. As Fusen mentioned, we have taken a long-term and strategic view in optimizing the gross margins of our ball bonding business and remain focused on further enhancing our corporate gross margins over the long-term. Operating expenses came in slightly higher than anticipated, due to a foreign exchange loss. Finally, tax expense for the quarter came in at $3.8 million due to a higher mix of interest income in addition to the mandatory capitalization of R&D expenses under section 174, which began in our fiscal 2023 year. We anticipate maintaining a similar effective tax rate throughout the current fiscal year. Turning to the balance sheet, working capital days increased to 536 days in the December quarter, primarily due to a sequential reduction in revenue. In addition, net cash increased by $48 million, and inventory increased by $27 million sequentially to support our longer-lead time products over the coming quarters. We continued to deploy capital to shareholders via our opportunistic repurchase program, as well as our recently increased quarterly dividend payments. During the December quarter we deployed $45.4 million to repurchase just over 1 million shares. Looking ahead to the March quarter we anticipate revenue of approximately $170 million with gross margins of 46%. Gross margins are anticipated to gradually improve to a blended 47% for the fiscal year as we continue to ramp our capital expenditure programs. Non-GAAP operating expenses are anticipated to be approximately $68 million plus or minus 2%, due to ongoing expansion efforts, employee merit increases and inflation. We remain very focused on controlling and limiting any non-critical activities and have recently initiated a hiring freeze and placed limitations on non-essential travel and non-critical project expenses. Non-GAAP net income is expected to be approximately $14 million with non-GAAP earnings per share of approximately $0.25. It remains an exciting time at K&S as we continue to execute and increase our participation across several long-term fundamental trends within the semiconductor, advanced display, electronics assembly, and automotive markets. As we look into 2024, we remain optimistic on broader macro demand trends and remain extremely focused to support the technology needs of our customers. Certainly, we'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Krish Sankar from Cowen. Your line is now live. Yes. Hi, thanks for taking my question. I had a couple of them. Number one Fusen or Lester in the past you mentioned FY â23 could be roughly around $900 million in revenues. Can you underwrite that revenue expectation? And do you think March quarter is a trough from a quarterly standpoint? Okay. Actually, Krish see more precisely, I think the last cycle pick was a 2018 revenue $890 million. So that was the number you just mentioned and the current consensus for FY â23 revenue is at $840 million average of all the analyst. So there's a little bit change. Last December COVID situation in China created actually some additional softness in our FY â23, but you know same time same quarter we see our book to bill ratio over 1.0 and which point to potential trough in FY Q2. So, at this moment, we expect our second half will be better than the first half. So, overall, I think that at this moment we are comfortable at the consensus revenue of $840 million, due to China COVID situation that really have some softness in our â23, but it could impact us in Q2, and we expect maybe extend a little bit longer into Q3. So that's my answer. Got it, got it. No, that's very helpful, Fusen. And then I just had two other questions. On the book-to-bill improvement, I understand you're coming off a lower revenue base, but is that order improvement driven by one specific customer, one specific product or was it across the board. And then I have a follow-up for Lester. So the book-to-bill for the last couple of quarters have been about 0.8 right, now it's gone up to about 1.3, and I think it's a lot of our backlog actually is in ball bonder and most of it will be recognized within FY â23, close to 60% of it will be recognized FY â23. So it's not one specific customer, It is ball bonder, it's also advanced packaging and also wedge bonder. So I think the backlog is across several business units. Got it. Got it. And then, Lester just a quick follow-up. The days of inventory and the inventory days payables both are pretty high. So I'm kind of curious what's going on, is it just purely wire bonders that's kind of been accumulated or what's going on with that high number relative to the past. And what is your lead time today for wire bonders? Thank you. So the lead time today for wire bonders is about, for ball bonder is about eight to 12 weeks, for wedge bonder is about 16-weeks. As far as inventory is concerned, some of it is result of, again because of supply chain issues in the past, we actually bought a lot of items to make sure that we will not be short and we have no supply chain issue going forward. Plus we also increased inventory, because we actually did also buy some long lead items for POs that we see that's falling into the latter part of â23 and the beginning of â24 for example in advanced packaging as well as in wedge bonding. Yes, thanks for taking the questions and all the color so far, guys. So I wanted to follow-up on a few of Krish's points so. Lester, can you provide some additional color on order improvement. You gave us a good sense by products, but can you talk about what the order activity looked like on OSATs versus OEMs. And then any color on end markets would be helpful as well. So for Q1 actually, as I indicated in my remarks on gross margin. Actually, the majority of the ball bonders were actually purchased by IDMs rather than OSATs, which is unusual and has not happened for many, many quarters. And so, as far as, sorry, what was the second question? Yes, that was the OEM, OSAT. Yes, and then end markets, automotive end market actually improved significantly. It grew 41% quarter-by-quarter and as Fusen mentioned general semi fell significantly about 61% quarter-by-quarter and also memory to no one's surprise, also fell significantly about 80%. So for the quarter, automotive comprised about 40% of our capital equipment, which is very, very high and general semi is about 50%. And then lastly on the order line of inquiry Lester, what's happened quarter-to-date. Are you seeing that same level of strength that gave you the 1.3 book-to-bill in the prior quarter continues, had accelerated or what's going on, especially now that we're on the other side of Lunar New Year? Well, I think we continue to see a lot of inbound inquiries, particularly from China, as you put it from after the Lunar New Year, it's just obviously just a week after the Lunar New Year, we as Fusen indicated, we do anticipate a much stronger second half of FY '23. So we do see orders continue to come in. Yes. And that's very helpful. So I want to move on to gross margins. So the company's execution on gross margins have been really stellar over the last five quarters, I think they're averaging 50%. So can we just take a different look at the guidance for the current quarter, which I think you said was, was 46%? Why would gross margins be 400 basis points lower than the trailing four to five quarter average? And then, you mentioned capacity, I take it you're saying there is some incremental depreciation that's coming in, but given the strength, you've had in gross margin why wouldn't we see gross margins push above the 47% you mentioned as we move through the year. Well, I think as we move through the year, we're still aiming for overall gross margin around 47% for the fiscal year. But obviously, Craig as you know, quarter-to-quarter it changes, I mean, Q1 the gross margin was a huge benefit in terms of both customer mix as well as product mix. I mentioned IDMs was more than a majority of our ball bonding customers in Q1. We don't see that maybe continuing in terms of the customer mix. I think as you also, as you also mentioned we right now, we can continue to invest in some of our growth vectors products and particularly in advanced display and advanced packaging. So as Fusen mentioned in his remarks, we're expanding our manufacturing capacity by quite a lot. So, in addition to depreciation. I think also there's also operating cost of those facilities and right now, those facilities, those products for those facilities will really start to ramp in the second half of â23 and â24 not so much right now. So, that, those operating cost goes into the own cogs, which also affects the gross margin overall. That's real helpful and then lastly from me before I get back in the queue. Really helpful to get all the order color. The question is, this is, as we go back to Fusen comments that not specific guidance, but seemingly comfort around an $840 million revenue level this year. How does the company currently see linearity in the back half of the year? Do you see growth being fairly equal as represented by current consensus at around 30% per quarter or would the growth and the revenue levels be more either front-end or back-end loaded. Any color helpful there guys. Thank you very much. Yes. So I think Fusen already mentioned with the COVID pivot right, it does affect our Q2 and may affect a little bit in the Q3, right? However, the COVID pivot also may drive much stronger, I guess a quick recovery, but that probably more in Q4, so if I think to give some color, I would say that probably Q3 would be weaker than Q4. So in terms of what the consensus is, I don't think they'll be equal. I think Q3 will be maybe a little weaker than was thought before but Q4 will be stronger. Hey, thank you for taking my question. I have a few, Iâll be mindful of my airtime in case your answer takes longer. So really the -- going back to the question about your full-year outlook Q3, you said, it's a little bit weaker than you expected a quarter ago, but Q4 may be stronger, but that does still imply a quite a very strong uptick in Q4. I'm thinking if you're sticking to let's say $850 million for the full-year, let's say the June quarter maybe you're getting $200 million. But you have to make a $300 million quarterly revenue in Q4. Are you comfortable with that, kind of, trajectory into the second half of the year? That's my first question. Thank you. So Charles, I think it's really stronger to have a math calculation with you. So let's do this, I think $175 million for the first quarter, the second quarter $170 million, that would be $370 million, $345 million right, so $345 million. So it's I see -- we talked about FOT not FET, right. FOT right, so if FOT I think we're talking about $460 million right. So $460 million if we take even is $230 million so even, it's $200 million in Q3, we are talking about $260 million last year, right? I wish all my calculation is right. I don't have accurate one. So Charles. We believe that it's achievable in the second half, right. I mean it may slip a little bit either way, right. There's a push and pull right. But we think, we do see a path there particularly with the backlog as well as the increased order coming in. So we didn't say it will be $200 million in Q3, right. I just said it would be a little bit softer. But again, it is a little bit volatile out there, but we do feel comfortable with $840 million in terms of, for the year. Yes, yes. So let me ask the same question from a different angle. I think four years ago around the same time that was right at the beginning of 2019 downturn, you also expressed, sort of, like optimism about fiscal second half being higher than fiscal first half, but the actual result was actually your fiscal second half was lower in 2019 than your fiscal first half? I mean by many metrics so we look at 2023 downturn it's probably worse, not better than 2019 downturn. My question, maybe from a high level, what gives you the confidence that you're going to do a lot better in this downturn half-over-half perspective than 2019. I know this is the same question, but hopefully we can get some color from a different angle. Thank you. So Charles, I think the company have a lot of [Indiscernible] compared to 2019. Actually, I think the same we have compared to our previous cycle is about 50% larger. So if we look at it, I think advanced display, advanced packaging taken together I think, compared to previous cycle is about $200 million, the ball bonder, compared to previous cycle I think our gross margin improved about 3% to 4%, right? So not only that, I think our perspective trend really proven, for example this auto evolution transmission to autonomous and EV, I think is beneficial to us. We believe that advanced display is [Indiscernible] and compared to previous cycle we don't have it, but [Indiscernible] I think we have good traction to TCB, right? So in previous cycle, we actually -- no actually in past two years we -- our operation margin actually is higher than 30% with $1.5 billion, two years. We generated probably; I think maybe about $700 million to $800 million free cash. Then we buy back stock. So I think to compare to previous cycle we have a much bigger market, and I think will be [Indiscernible] than previous cycle. Yes. Thank you. We can discuss more on this offline. I really want to ask the next question on TCB. I think last year, there are quite a couple of products released by Apple AMD, for example, they are already at your target interconnect pitch somewhere around 25 micron to 35 micron. I believe the Apple M1 Ultra is already been package by TSMC with a flip chip technology at 25-micron pitch. AMD RDNA 3 GPU I believe is already packaging out 35-micron pitch with [Indiscernible] technology and I know AFC is probably developing 20-micron wafer level fan out really with our bonds and they are working on hybrid bonding that's their public technology roadmap? So where does the TCB technology fit in here. I worry, it's not quite on the technology roadmap of the two leading companies, could that end up being a Intel only technology or what gives you the confidence that there will be more adoption outside of Intel. Thank you. Okay, so I think our company you mentioned we actually in my script, I say we actually talk numerous famous company, all major player, I think we actually discuss it. So we actually are quite confident that TCB, I think is going to have a huge growth for the next couple of years. The company you mentioned, I think we also talked to them, and we should not have a surprise. So Charles let me, randomly answer with two more questions. We are not depending on one customer; I think there are numerous customers are very optimistic waiting to receive a system from us. I think we discussed in last quarter and I think we discussed since Q3 of â22, and we discussed in Q4, we discuss in Q1. I think our next couple quarters we think we'll continue to discuss it. Thanks. Fusen. Really want to ask my last question on micro-LED. So can you kind of quantify to us what's the TAM opportunity for project W, and when do you expect a volume ramp, because when I look at your mini-LED project PIXALUX, which is also a customer-specific project., The product came out in spring 2021, you saw the -- actually saw the volume ramp in the fall of 2020, which is roughly two quarters, two to three quarters ahead of the product release. So project W, if I guess it right, what that product and product is, it's probably a spring 2025 product release. You're probably going to see the volume ramping in the fall of 2024, am I thinking the timeline correctly, that's the question -- the second part of the question. So two questions: one is, how do you quantify the TAM size for project W and is full 2024 ramp about right from your perspective? Thank you. So Charles. We don't talk about specific TAMs of specific customer projects. We just don't comment on that, but we do think it will be material in terms of our advanced display revenue and as far as timing. You're right, I think it will be the latter part of â23 and then there'll be a significant ramp in â24 onwards. Sorry, I think, I'm thinking about volume ramp is probably latter part of â24, not â23, but you think it's a one year earlier than what I think is that⦠Yes, Lester thanks for the clarification. Lastly, we did a manufacturing investment you're making here if I understand correctly, your wire bonding manufacturing is largely outsourced to somebody else not exactly built internally. Can you give us some rationale or some sense why advanced display and advanced packaging you want to build internally and is that 44% capacity increase include, does that include the external capacitive wire bonders or that's a pure internal capacity? Thank you. That's my last question. Thank you. Charles, I think you're mistaken. We built all wire bonders internally here in Singapore both ball bonders and wedge bonders, so we don't outsource it. So as far as the additional capacity as we said, it's all for advanced packaging and advanced display. Yes. Thanks for taking my questions. I guess, the first one was, you mentioned in your prepared remarks about how you're continuing to see wire bonder intensity increase. And I was wondering if you could just comment, I think in the past you've said it's increased like 10% or 15%. Would you expect that intensity to continue to increase going forward? Well, I think intensity increase is average cycle, right? Yes, but we do believe complexity actually it's become more complex, we do expect intensity actually increase. Okay. And then regarding gross margins and wire bonders. I think in the past you've talked about how you improve the gross margins and on this call to how you've improved the gross margins at the core wire bonder business. And I think you have a new wire bonder that should come out with better margins in the roadmap. Is that going to hit in this fiscal year or when would be the timing of let's say a wire bonder that's got lower costs associated with it? Well, Dave. You're right, we constantly look at improving our margins in all products, particularly our core products, to our high-volume products like wire bonding, right? So we're continuing working on cost control. But I think as far as timing is concerned, I think we will be introducing a new suite of wire bonders. The latter part of FY â23 and the beginning FY â24. So we should see a margin jump around that point as well. Okay. And as far as the thermal compression bonding business. Could you just highlight again what size opportunity you think this can be for the overall market, and I think you're probably shooting for 50% market share or perhaps help us understand what your targets are there. Okay, so David, I think, if you remember I think Q3 â22 weâre talking about we have big lot of $80 million, so this $80 million majority of this $80 million will be shipped within the â23 and last quarter Q4 over â23, we mentioned that we identify for the next couple of years, we probably have opportunity until we move into TCB. So total of about $300 million up to â25. So this $300 million majority will be shipped in â24 and â25, right? So I think we expect probably when we exit â25, this TCB and in all dedicated AP probably will only will be about $20 million or higher. So I hope, I used a different kind of angle to answer your questions. And I'm sorry I didn't -- $20 million is that a quarterly run rate or. I didn't quite hear what you said there. Okay. And then a final question from me and I think maybe Charles was talking about that was talking about this, so you mentioned a new application for LUMINEX, and I'm assuming that's outside of mini or micro-LED or could you just elaborate a little bit about what the application is. So LUMINEX actually is advanced display is a laser based of our transfer technology. We actually participate both in mini and micro-LED and we also involved in both big lighting, big light and that direct emissive application. Yes. Thank you for taking my questions. First, I want to clarify the changes in terms of the FY â23 revenue and so, I hear we had some impact from China COVID, so now we're kind of comfortable with $840 million revenue versus $890 million last quarter. So the $50 million gap is that purely driven by just because of the COVID situation. I think the majority, you see our -- during COVID most of the people get sick, so they, may be other people go back to work, the capacity reduced, some projects being delayed. So we expect the impact in Q2 and then maybe partial over Q3. So the majority, actually was ball bonder related. Right, I think fair to say this COVID caused a short-term weakness, but in the long-term it's fair to say probably this won't be observed in â24. So this is like government, I think there is new forecast actually reduce â23, but actually they believe â24 is a bigger year. Got it. And then can you also elaborate more on the strength in the wedge bonding business and is the, how, I mean how did that perform so well. Does that come from the EV or just overall automotive market and how is that trending I mean in the near future, given, it seems like we have seen some weakness in the EV market demand right? I think EV is one of them and in general, I think wedge bonding is fall in high current devices, right? The ball bonder is low current, so thereâs rather related ball, semi grows and EV, I think is a big part of the contribution. So compared to like a previous cycle I think our wedge bonder, compared to previous cycle actually we reached a record high in 2022, and even up to â23 at this moment actually very strong. Okay, got it. And then the last one, just regarding the capacity for advanced display and packaging and we're going to add more, much more in â23. So just can you give me the color around how much revenue that the new capacity will support, and what's the implication to the gross margin and then, and also the OpEx after we're assuming we're going to have to put that labor in place, right. So just any color around the new capacity for advanced packaging and display. Well, Hans, I think as I indicated in an earlier response, the revenue that will be generated from this additional capacity in advanced packaging and advanced display will probably again be more significant in â24, right? And we are inquiring. But in order to prepare for that in â24 we are now expanding our production facilities, as well as getting ready the tooling, as well as training and running -- getting those facilities ready to ramp. So that has a negative impact in FY â23, because it doesn't match up with the revenue, but as the revenue comes in from those products, the margin will then obviously go back up. Okay. So our, gross margin of 47% for â23 that's already factored in the ramps in the new capacity for advanced packaging display, right? The 47% includes, yes, the manufacturing costs that I was talking about that's what brought the margin down, so margin will increase into â24. Thank you. We reached end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Thank you, Kevin. And thank you all for joining today's call. Over the coming months, we will be presenting at several investor conferences hosted by Susquehanna Financial Group, B. Riley Securities and Craig-Hallum. As always, please feel free to follow-up directly with any additional questions. Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
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Greetings, and welcome to the Matthews International Corporation First Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Wilson, Senior Director of Corporate Finance. Thank you, Bill. You may begin. Thank you, Paul. Good morning, everyone, and welcome to the Matthews International first quarter fiscal year 2023 results conference call. This is Bill Wilson, Senior Director of Corporate Development. With me today are Joe Bartolacci, President and Chief Executive Officer; and Steve Nicola, our Chief Financial Officer. Before we start, I would like to remind you that our earnings release was posted on our website, www.matw.com in the Investors section last night. The presentation for our call can also be accessed in the Investors section of the Web site. Any forward-looking statements in connection with this discussion are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Factors that could cause the company's results to differ from those discussed today are set forth in the company's annual report on Form 10-K and other periodic filings with the SEC. In addition, we'll be discussing non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully before you consider these metrics. In connection with any forward-looking statements and non-GAAP financial information, please read the disclaimer included in today's presentation materials located on our Web site. Thank you, Bill. Good morning. We are pleased with our fiscal '23 first quarter results. During the quarter, we add higher revenue, thanks to the particularly strong performance of our Industrial Technology segment. This segment is on track to have yet another strong year of growth, thanks to the addition not only of Olbrich Automotive and R+S, but most importantly, thanks to the recently announced $200 million plus in orders in the energy storage business. These orders cover client needs for new calendaring and coding equipment, spare parts, roller refurbishment and maintenance. Aside from our historical clients, our orders were received from leading battery customers like Automotive Cell Company, otherwise known as ACC, a consortium consisting of Mercedes, Chrysler, Jeep, Fiat, Peugeot, and Saft, a global advanced battery manufacturer and a subsidiary of TotalEnergies. These orders also include All-Electric [ph], an Indian e-mobility manufacturer with significant government backing with aspirations to be on the world stage. During the quarter, we also saw significant demand in orders from several hydrogen fuel cell component suppliers. These orders, although smaller, reflect the growing interest in our hydrogen fuel cell capabilities and give us confidence that in time this business will grow like our dry electrode battery technology has grown. Although we don't expect to announce $270 million of new orders every quarter, we will keep you apprised of significant orders as they are received. From fiscal 2020 to fiscal 2022, the energy business driven by our dry battery electrode technology has grown from $20 million to almost $100 million last year. This year, we are confident that our energy business, in total, will continue that strong growth. As for the entire technology segment, our total order intake during the first quarter was almost $270 million, record amount of orders for this segment. So that's the $200 million of previously announced orders in our energy business plus another $70 million in other businesses that comprise the Industrial Technology segment. The Industrial Technology segment reported roughly $230 million in revenue in fiscal 2020. But this year, it is on track to double those results. Warehouse automation and product identification had good order intake during the quarter as well, from customers like [indiscernible] Luxottica, Louisiana Pacific and [indiscernible]. As we've been saying for quite a while, this segment is comprised of our fastest growing businesses with unique selling propositions making our products and services must haves for the industries that we serve. Our expectation is that revenues for this segment will approach $500 million this year. Our memorialization business also delivered very good results despite the post-COVID substantial normalization of death rates. Even with the lower volumes, our revenues remain strong, thanks to good funeral home product mix, strong cemetery product sales and pricing throughout the business. Our margin in this business are beginning to normalize as some of the cost pressures that we have felt for the past year or so have begun to subside. This business has performed exceptionally well throughout the past several years, and is poised to maintain that success into 2023. We continue to see strong order rates in our cemetery products business, particularly our Bronze Cemetery business, which will help partially offset the lower casket sales that are expected. As I've said before, this segment has reset its normalized revenues to a level that is materially higher than just a few years ago. We currently expect EBITDA results to be relatively comparable to prior years, even with the lower volumes. In SGK, we continue to be challenged by the European market conditions and negative currency translation. Revenues reported for the quarter were $11 million lower due to negative currency translation. We have begun actions to reduce the size of our European business which we expect will help the coming quarters. Moreover, we still have one more quarter of difficult comparisons in this business, which we began -- which began to feel the impact of the Ukraine war and significant currency degradation at the end of our second quarter last year. As we look forward to the balance of 2023, we are expecting continued consolidated sales growth. As discussed above, our order rates in our fastest growing businesses remain high, which bodes well for the continued development of these businesses. Also, subsiding commodity costs in the memorialization business will benefit future quarters and allow us to return to more normal margins. Cost actions at SGK should make comparables more favorable starting in our third quarter. However, all of this positive news is offset by the economic uncertainties which we cannot predict. Therefore, with these factors in mind, we are reaffirming our previously announced fiscal 2023 EBITDA expectations to be between $215 million and $235 million. Although we have the orders in hand to potentially deliver towards the high-end of this range, we remain prudent at this time, given the yet to be determined timing of our deliveries in the energy business. We will continue to provide updates as we progress through the year. Thank you, Joe, and good morning. I'll begin with Slide 7. For the fiscal 2023 first quarter, we reported consolidated sales of $449.2 million, compared to $438.6 million for the first fiscal quarter last year, representing an increase of $10.6 million or 2.4%. Changes in currency rates continued to have a significant unfavorable impact on the reported sales compared to a year-ago. On a constant currency basis with last year, consolidated sales for the fiscal 2023 first quarter were $27.6 million or 6.3% higher than a year-ago. The increase primarily reflected higher sales for our Industrial Technology segment, which included the impact of the recent acquisitions of Olbrich GmbH and R+S Automotive GmbH. On a GAAP basis, the company's net income was $3.7 million, or $0.12 per share for the current quarter, compared to a loss of $19.8 million or $0.62 per share for the same quarter last year. The first quarter last year included a loss of approximately $31 million or $0.74 per share on the termination and settlement of the company's U.S principal pension plan. On a non-GAAP basis, consolidated adjusted EBITDA, which represents net income before interest expense, income taxes, depreciation and amortization and other adjustments was $49.3 million for the fiscal 2023 first quarter, compared to $53.3 million last year. Changes in currency rates had an unfavorable impact of $1.6 million on adjusted EBITDA compared to the same quarter last year. As I'll discuss further in a few minutes, the decrease reflected lower adjusted EBITDA for the memorialization and SGK Brand Solutions segments offset partially by an increase for the Industrial Technology segment. Adjusted earnings per share for the current quarter was $0.53 compared to $0.74 a year ago. The decline primarily resulted from lower adjusted EBITDA and an increase in interest expense for the current quarter. Please see the reconciliations of adjusted EBITDA, non-GAAP adjusted earnings per share and constant currency sales and adjusted EBITDA provided in our earnings release. Interest expense for the fiscal 2023 first quarter was $10.2 million, compared to $6.5 million a year-ago. The increase reflected higher interest rates compared to a year-ago and higher average debt levels. The company's consolidated income tax expense for the fiscal 2023 first quarter was $1.3 million, compared to a benefit of $6.6 million a year ago. The benefit last year primarily reflected the pre-tax loss on a GAAP basis. Please turn to Slide 8 to begin a review of our segment results. The Industrial Technology segment reported sales of $109.1 million for the current quarter compared to $74.3 million a year ago, representing an increase of 47%. The recent acquisitions of Olbrich and R+S were the significant contributors to the year-over-year increase. Energy storage solutions and product identification sales for the current quarter were also higher than a year ago. Warehouse automation sales were lower than a year-ago, reflecting a large low margin project completed in the first fiscal quarter last year. Changes in currency rates had an unfavorable impact of $4.8 million on the segment sales compared to the same quarter last year. Adjusted EBITDA for the Industrial Technology segment increased approximately 70% to $12.2 million for the fiscal 2023 first quarter, compared to $7.2 million a year ago. The increase primarily resulted from the segment sales increase and improved margins in the energy storage solutions and warehouse automation businesses. Changes in currency rates had an unfavorable impact of $1.1 million on the segment's adjusted EBITDA compared to the same quarter last year. Please turn to Slide 9. Memorialization sales were $206.5 million for the current quarter, compared to $210.7 million for the first quarter last year. Changes in currency rates had an unfavorable impact of $1.5 million on the segment sales compared to the same quarter last year. On a constant currency basis, memorialization sales are relatively steady compared to a year ago, declining only 1.3% despite lower death rates. Consistent with our fiscal 2022 fourth quarter, U.S deaths have substantially normalized from the higher pandemic levels. As a result, unit sales volumes for casket and bronze memorial products were lower than a year ago. However, these declines were largely mitigated by improved pricing and higher granite memorial product and U.S cremation equipment sales. Memorialization segment adjusted EBITDA for the fiscal 2023 first quarter was $39.1 million, compared to $43.4 million a year-ago. The decrease primarily reflected the impacts of lower sales and higher material costs compared to a year ago. In addition, the current quarter reflected increased labor and freight costs, higher project related costs and other inflation related costs increases. Please turn to Slide 10. Sales for the SGK Brand Solutions segment were $133.6 million for the quarter ended December 31, 2022 compared to $153.5 million a year ago. Currency rate changes had an unfavorable impact of $10.7 million on the segment sales for the current quarter compared to last year. In addition, sales in the segment's European markets were lower than a year ago, reflecting continued challenging market conditions. In addition, U.S sales were also lower. Fiscal 2023 first quarter adjusted EBITDA for the SGK Brand Solutions segment was $12.2 million compared to $15.4 million a year ago. Changes in currency rates had an unfavorable impact of $1 million on the segment's adjusted EBITDA compared to the same quarter last year. In addition, the decrease reflected the impact of the sales decline, lower margins for the European packaging business and other inflation related costs increases. Please turn to Slide 11. Cash flow used in operating activities for the fiscal 2023 first quarter was $36.2 million, compared to $27.2 million a year ago. Operating cash flow is typically slower in our first fiscal quarter reflecting seasonality of the businesses and payments on year end accruals, including performance based compensation. In addition, operating cash flow for the current quarter included final payout in connection with the termination and settlement of the company's supplemental retirement plans. Operating cash flow a year ago included contributions for the termination and settlement of the company's principal U.S retirement plans. As of December 31, 2022, the company's accrued pension liability was $13.8 million, compared with $149.8 million, a little over 2 years ago, September 30, 2020. Outstanding debt was $837 million at December 31, 2022, compared to $799 million at September 30, 2022. At December 31, 2000 -- I'm sorry, at December 31, 2022, the company's leverage ratio based on net debt, which represents outstanding debt, [technical difficulty] cash, and trailing 12 months adjusted EBITDA was 3.8. As we anticipated, our debt levels have recently increased primarily as a result of investments and our recent acquisitions, and the energy storage solutions business. Based on our projections for the remainder of the fiscal year, we expect these levels to decline as fiscal 2023 progresses. Approximately 30.4 million shares were outstanding at December 31, 2022. During the fiscal 2023 first quarter, the company purchased 89,000 shares at a cost of $2.5 million. The purchases were largely in connection with withholding tax obligations on equity compensation. At December 31, 2022, the company had remaining authorization of approximately 1.2 million shares under the repurchase program. Finally, the Board this week declared a quarterly dividend of $0.23 per share on the company's common stock. The dividend is payable February 20, 2023 to stockholders of record February 6, 2023. Start with energy storage. Appreciate the color. Can you give maybe a little more detail regarding the increased order intake? Specifically, roughly how much of the 200 million relates to lithium ion battery production versus emerging technologies like hydrogen fuel cells and any breakdown in terms of how much of it is from some of the new customers that you described versus existing customers that were previously beta testing? Yes, we're not going to break down between customers, but I can tell you as it relates to technologies, I would tell you about 90% of it is going to be related to the lithium side of our business between coatings, spare parts, calendaring, equipment and otherwise. But the balance is going to be into the new hydrogen fuel cell side of things that -- or something or things related to that. Does that answer your question. Very helpful. Yes, that's helpful. It just give a sense of where momentum is building. So -- and if we look at the midpoint of guidance, what roughly what percentage of those orders were actually the $270 million orders in total? How much of those are implied to be delivered to the remainder of '23 versus maybe '24? Dan, I mean, I know you're trying to get to a model. But with $200 million worth of orders in a matter of 3 months, if you recall when we made the acquisition of Olbrich, one of the things that we said is we were buying capacity. We have put on 160 engineers, 500,000 square feet of manufacturing capabilities, low cost production in the Czech Republic, all that just months before we landed these orders. So the timing of these deliveries is going to be really dependent on both our customers readiness to be able to accept the orders, which is not insignificant. And our ability to kind of [indiscernible] that very extensive portfolio of talent and space to be able to deliver it. So at this point in time, I can't give you modeling information, but suffice it to say, we have every expectation that we will maximize deliveries this year. Okay. Switching gears, maybe memorialization, just to clarify, it sounds like overall you expect profitability to be roughly flattish, just making sure I heard that right. And two, would you expect pricing to remain fairly sticky, even if input costs continue to decline? If I -- we never control everything, but as it relates to the businesses that we control, yes. As it relates to, for example, our funeral home business, we will watch what our competitors do, and be responsive to that. We expect to be able to manage pricing throughout the year to make sure that we delivers a consistent kind of performance at the bottom line level as commodities begin to drop a little early to say what's going to happen on the pricing side. As you know, Dan, from the time that commodities dropped to the time they hit our P&L, especially in the funeral home business from raw materials through the warehouses and distribution to the customer can be upwards of 3 to 6 months. So it takes a little time. We're seeing that subside, which will continue to improve our margins, how pricing will be reflected is not in my control. Okay. Maybe one more just from a capital allocation perspective. As you mentioned, leverage ticked a little higher. Where would you expect it to exit the year maybe arranged in terms of leverage? And is that pay your primary focus outside of internal investments? Or would you continue to buy back stock and look for M&A as well? Thanks. Sure. So as you heard in the commentary, we had a fairly significant uptick in our investments made in our -- principally, energy storage business with the acquisition and some build up in working capital associated with orders and other things of that nature. We expect that to be a timing issue. As we flow through the year, our current projections will get us closer to 3, 3.5 as we kind of work out based on what we see today. Obviously, in that mixes collections, it is a focus of ours. But we're also not dealing with mom and pop shops. When we talk about energy, we're dealing with very large organizations that are substantially larger than us. We do have some clout in that position, given what we are delivering, but at the same time, you can imagine what the auto industry is relative to mom and pop funeral homes. Joe, could you give us some sense, I mean, I know the revenues on factory warehouse automation were down year-over-year on the project delivery a year ago. But could you give us a sense of how the backlog is doing if we normalize for that order? That -- the backlog is strong. We -- I would tell you we have almost a full year booked out with orders continuing to come in. And that is part of that $70 million on top of the $200 plus million of orders that we receive. We gave you some color on who the clients are when we announced [indiscernible] and Luxottica, largely because I mean some of the feedback I have received as people think that we play in the smaller ranges. I wish I can only describe to you the larger customers that we do business with, but they are significant players in the retail and CPG world that are using our accounts and those come in fairly significant chunks when they come. Fair enough. And on SGK, Europe is obviously still weak. Are you seeing any stabilization there? I know you've had to do some adjustments on the expense side of the ledger. But are you seeing any kind of relief from what looks to be a tough market? What we are seeing relief is frankly, which is a little bit of surprising for us is in the U.K and other countries beyond the German speaking world. It's principally our German and Polish related businesses associated with that part of the world that are feeling the impact. But that is, as you noted, Liam, a significant part of our European presence. Our U.K team that -- which covers some of the other countries that manages the other countries, is feeling pretty bullish about the balance of the year. The cost actions, Liam, you recognize this is Europe. So we take charges as we have identified the plans to be able to take those actions. The ability to implement those require work comp -- works councils and other negotiations that go on. So it'll take a little bit of time throughout the balance within that quarter to get those benefits. That's why we said third and fourth should be a far more comparable from a standpoint of impermanence and seeing those flow through. Good, good. The first question would be around on energy storage related Industrial Technology orders. Should I see that $70 million or so is representing a book-to-bill modestly above one for the non-energy storage Industrial Technology businesses? Good question. Let me kind of do the math in my head. I really focused on it that way. I would tell you modestly above would probably be a fair way to look at it. But I will caution you, Justin, because it is a little lumpy. We can have -- I wouldn't say this was an extraordinary quarter by any stretch, either on downside or on the top side, but modestly higher as a fair way to look at it. Great. And then as you look at your annual EBITDA guide and the first quarter, would you characterize the first quarter revenue is coming in above your own management expectations? And if so, in which parts of the businesses? So, I would tell you our memorialization business came in slightly higher, not significantly, but slightly higher. The balance are pretty much in line with our expectations for the guidance. The issue, I think for us is the comparability with currency. If you recall what I said last earnings call, we finished last year, I believe it on to 218, Steve, if I'm looking at it -- here 218 on a full year basis for EBITDA. On a comparable basis, our guidance when we set it out was at 225 to 245. And what we're saying today is given the strength of our orders, only controlled by our ability to deliver we had hoped to be able to -- we have the orders in house towards that higher end. Okay, fantastic. And I know that you've highlighted a lot of the strength in the energy storage business. But is there anything you just want to point out in terms of what helped trigger that sort of acceleration in orders in that business in the first quarter? Sure. I mean, we've been saying for a long time, and I think the message is getting out loud and clear. What we deliver is a substantially more effective, cheaper, faster, better solution than current technology that's out there for what's called wet electrode. And what is happening is, there are other components to the process which are front ended, like material handling as well as the balance of it. What you -- what you're starting to see is significant accounts, realizing that they can get the benefits of our technology. If they can figure out those other pieces, I think the IRA, the Inflation Reduction Act has stimulated a lot of willingness to take that chance to move forward. We expect this kind of acceleration to continue. The market for dry battery electrode we believe over time is very significant. There is a lot of discussion in the market about what solid state is. Solid state batteries is the ultimate holy grail, I guess, a battery technology on the lithium side. This is a necessary step to get there. So this is -- we don't -- we think this is the beginning of a trend. Will it be as consistent as $200 million a quarter? Most likely not. But at the same time, do I think this trajectory is as where we're going? Absolutely. Thank you. There are no further questions at this time. I would like to turn the floor back over to Bill Wilson. Thank you, Paul, and thank you, everyone, for joining us today and for your interest in Matthews. For additional information about the company and our financial results, please contact me or visit our website. Thank you, and enjoy the rest of your day.
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EarningCall_828
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Good morning, everyone and thank you for dialing in today. With me on the call is Stephen Wells, our Chief Financial Officer; and Viren Hira, our General Manager of Business Development and Investor Relations. Today, Syrah released its December 2022 quarterly results, covering operations, market conditions, the Vidalia initial expansion and further expansion projects and the outlook for natural graphite, active anode material and their end-use markets. And we'll use the presentation we released today for this discussion. It's been an eventful period for the company and in some ways, that's indicative of the EV and battery market overall. On this front, there is a clear gap between the shorter lead time battery and EV developments versus the raw materials, downstream processing capacity and localizations required to facilitate them. Customers, investors and other public stakeholders are increasingly aware of what that means to supply and prices. Demand continues to grow very strongly and broader macroeconomic and geopolitical trends and making development and expansion, more complex and more expensive. Whilst we encountered some short-term challenges during the quarter, Syrah has a significant incumbency advantage and is advancing towards becoming a large-scale vertically integrated natural graphite anode material supplier. The favorable upstream market setting, for natural graphite is translating to high demand for Balama products. And we're now closer than ever to the market requiring Balama's full production capacity and beyond to satisfy demand. Our long-term vision is to grow Syrah's downstream business to become a leading supplier of our own material products globally. Capitalizing on the benefits of vertical integration with our world-class Balama graphite resource and operation. Summarizing the company's unique position and value proposition on Slides 3, 4 and 5 of the presentation. Syrah is a key participant in the global natural graphite market which is expected to grow by 4x and the lithium-ion battery anode material market which is expected to grow by 7x over the next 10 years. Syrah is the only vertically integrated natural graphite anode material supplier outside of China, that's producing qualified anode material and producing upstream natural graphite that sold into the Chinese market. In use today in lithium-ion batteries and electric vehicles. Our Balama natural graphite operation in Mozambique is unique with 350,000 tonnes per annum production capacity in a global natural graphite market of approximately 1.3 million tonnes per year currently and a more significant position in the natural graphite market for battery anode materials specifically. The EV and battery end-use markets underpin higher capacity utilization of Balama in coming years. Other ex-China projects with relevant potential production volume is still some way from production, especially where downstream integration is part of the development strategy. Balama at design capacity is based on reserves for a 50-year mine life and there is immense growth potential from a 1.4 billion tonne resource. Balama both our intended volumes and customer demand due to the unprecedented shipping constraints in 2022, Balama produced a record 163,000 tonnes last year, demonstrating its importance to global supply. Vidalia is the side of our downstream active anode material facility in Louisiana. We've been operating there since 2018, having recognized the market reliance on China before then, something that's now increasingly recognized in the critical minerals government policy agenda. Noting that natural graphite from Balama has been in use in EV batteries for a number of years. Vidalia material has been in qualification and testing with auto OEMs and battery manufacturers for the last 2 years. In the first phase of commercial expansion is well underway which will deliver 11.25 thousand tonnes of active anode material capacity for year. We're also nearing completion of the definitive feasibility study for expansion to 45,000 tonnes per annum, underpinned by market demand, significant customer uptake interest and U.S. domestic government policy tailwinds. And our plan is to accelerate development of this expansion subject to the necessary funding and customer commitments. We have a contract in place from December 2021 with Tesla for 8,000 tonnes per annum or 70% of the production from the first phase expansion of Vidalia. In December 2022, Tesla exercised an option to purchase a further 17,000 tonnes per annum for a combined 25,000 tonnes or 56% of the production capacity from an expanded Vidalia facility. And we have MOUs in place with Ford and SKO and LG Energy solution with Vidalia supply. We've also closed a US$102 million Department of Energy loan under the Advanced Technology Vehicles Manufacturing Program, for the first expansion and are negotiating a US$220 million grant from the DOE to fund a significant proportion of the further expansion at Vidalia to 45,000 tonnes per annum. We're making excellent progress with Vidalia's expansion projects and creating a differentiated downstream position that's not easily replicated. Syrah has developed a unique position, the fact that we are the first vertically integrated natural graphite anode material operation in the U.S. has resulted in extensive engagement with potential customers and government stakeholders. Our expected anode material OpEx cost position at Vidalia is competitive with China. CapEx is more expensive. However, there's no surprise in that CapEx challenge and we have planned for it. And with Balama in the upstream, the size of the asset is such that at full capacity will be a first quartile cost producer with significant expansion potential. Governments and industry participants recognize the key role of critical minerals, such as graphite in facilitating transport electrification and energy storage development, toward the objective of reducing global carbon emissions. Last year, the U.S. Senate passed the historic Inflation Reduction Act 2022 which will offer tax credits and financial support to end users of electric vehicles and material producers to mobilize the development of the domestic battery and battery raw material supply chain and to accelerate the adoption of EVs in the U.S. We expect that Vidalia products will qualify as a critical mineral processed in the U.S. for the EV tax credit under this act, underpinning demand and that our U.S. operating subsidiary will also qualify for direct tax credits. It's also apparent that this legislation is promoting significant investment allocation towards the U.S. EV and battery supply chain which will also benefit the Vidalia facility. Other consumer regions such as the EU are progressing policy to ensure similar significant investment allocation that's required for local battery supply chain development. Syrah has a great future opportunity with its combined position of Vidalia and the globally significant graphite resource and operation at Balama. Tesla's commitment to offtake additional active anode material volume, MOUs with Ford and SK and LG and broader customer interest for Syrah's products continue to highlight both the requirement of significant ex-China natural graphite supply to help bridge the imminent supply deficit, particularly in fines and the need for a localized supply of active anode material in both the U.S. and other markets outside of Asia. Syrah's engagement with the potential downstream customer base has highlighted broader concerns with the looming input material production capacity deficit and high dependency on imported anode material supply from Asia. We believe Syrah will have compelling natural graphite and active anode material costs and margins as the market evolves and production volumes increase. On Slide 6, our environmental, social and governance activities are fundamental to our company and every board that passes highlights the criticality of this focus and of our commitments. Given the illegal industrial Action at Balama which occurred in Q4, I want to comment on the work done to move ahead positively and capitalize on the strong relationship with our workforce and remind you of the approach and commitments in Mozambique, ensuring that our value to the local, provincial and national communities in the country is cleared. Our commitment to local employee development remains very strong. Of almost 1,500 direct and contractor employees, 98% are Mozambican nationals and 56% are from the local host communities around Balama. We have a localization focus and a demonstrated history of skills and career development. Our 2 general managers are in-country and many senior leaders in Mozambican and we've invested heavily in training and development since initial employment the operation started in 2015 and '16. We have an active union covering the majority of the Balama workforce and the company-level collective agreement ratified by the labor authorities covering employment conditions. And during the fourth quarter, we successfully completed the periodic renewal of the labor agreement with the designated representatives of our unionized workforce, leading to improvement in conditions for all employees that are covered by the CLA and there's been no issue with regard to industrial relations since October. Since Balama's inception, our total economic contribution to Mozambique has been over US$360 million and we're deeply committed to improving education, health and sustainable income generation in the district, through local development committed capital and development projects. Success of Balama comes hand-in-hand with our employees, community and government relationships. And given the very long-term nature of the asset, we will take the time to get them right. We've released a lot of further information on our ESG position today in our quarterly sustainability update which is available on our website. We'll now move to the highlights for the quarter and I'll hand over to Steve here to make some comments on the corporate position and some market context. Steve? I'm now on Slide 7. Our health safety environmental performance of Balama remains outstanding. The total recordable injury frequency rate or TRIFR Balama was 0.7 at quarter end has remained ever below 1 since late 2018. TRIFR at Vidalia was 10.5 at quarter end and there were no loss time injuries sustained through the quarter, with a significant increase in hours due to the ramp-up in construction activities at the Vidalia project. The medical treatment injury was sustained by a construction contract during November which resulted in Vidalia TRIFR increasing from the end at Q3. Shaun will provide the update on operational and project performance in fourth quarter 2022 shortly. Syrah finished the fourth quarter with a cash balance of $90 million, compared to $136 million at the end of Q3. Total quarter cash outflows were $46 million versus $33 million last year with approximately $38 million being related to investing activities. With the Vidalia project moving into more intensive construction, Vidalia cash outflows were $30 million in Q4 and the remaining investment capital represented the construction of the Balama TSF cell 2. Remaining $8 million cash outflow related to Balama working capital and corporate costs. Balama operating cash flows were impacted by the operational interruptions and relatively higher working capital at quarter end with natural graphite inventory positions increasing as production returned to higher volumes in December. As previously indicated, due to cost pressures experienced globally in the last 12 to 18 months. We withdrew our Balama C1 cost guidance which we first provided in late 2019. Given our expectations of a sustained increase in production volumes, we are now providing guidance at a 20,000 tonnes per month production rate and have revised that Balama C1 cash cost guidance to $430 to $480 per tonne at that 20,000 tonnes per month rate. There is still uncertainty around diesel prices, in particular which is reflected in the range provided with the top end of the range reflecting current fuel prices and also noting that the cost guidance reflects the implementation of the solar battery system operating at full capacity which is expected in the second half of the year. It also reflects updated labor costs associated with the renewal of the company level agreement or CLA. And as a result, Balama cost guidance may not align with current levels and also the dynamic backdrop, particularly in relation to diesel costs and certain imported consumables. Equally, however, Balama's cash costs are expected to reduce further as the production rate increases beyond 20,000 tonnes per month and its improvement initiatives continue to be embedded. Syrah is progressing funding processes with the U.S. DOE and DFC on funding requirements for Vidalia Phases 2 and 3 and Balama, respectively. In December, Syrah closed its ATVM loan facility of $102 million from the DOE to support financing of the Vidalia initial expansion project for 11.25 thousand tonnes per annum. The company and DOE are towing the first advance from the loan within the March 2023 quarter, aligned with the capital spending program for the Vidalia project. We also continue to work through negotiation with the DOE for an additional grant of approximately $220 million to fund a significant proportion of capital cost to expand Vidalia further to 45,000 tonnes capacity and we are targeting finalization of this within the June 2023 quarter. Our selection of the grant demonstrates the criticality of Vidalia to the U.S. battery supply chain. We have won 20 projects at our over 200 applications awarded a grant and were awarded the largest demand for materials processing project out of all successful applicants and 1 of 5 to receive a full 50% allocation towards estimated CapEx. We are also progressing a potential loan for Balama from the U.S. Development Finance Corporation with due diligence and commercial engagement through the quarter. DFC is currently preparing to publish an environmental and social impact assessment for public comment which is a critical step in their approval process. Moving to Slide 8 and current marketing conditions. 2022 was outstanding with strong momentum in EV production and sales globally. And with broad-based electrification of model ranges planned by major automakers this decade, the trend is likely to continue. To underpin the substantial energy transition underway, further large commitments are being made to develop battery manufacturing capacity across the globe, including in North America and regionalization of supply chain remains a major trend in the EV and battery markets. Positive momentum continued in our key leading indicator EV sales. Global EV sales grew 68% in the quarter, compared to the prior year to nearly 4 million units with record monthly sales in November and December. Global EV sales grew 64% in 2022 versus 2021, to nearly 11 million units. EV sales and battery demand growth drove demand for anode material with anode material production outpacing strong growth in global EV sales through 2022, reflecting industry expectations of continued growth momentum. We note, however, that in December, Chinese anode production did weaken from record high levels due to consumption of anode inventory positions and operational and logistics disruptions due to COVID-19. Slide 9 provides an updated perspective on regional battery manufacturing capacity pipeline forecast and announcement and the growth ahead for the industry is astonishing. Providing a very strong backdrop for the company to increase production capacity utilization at Balama and a great setting for Vidalia's various stages of expansion that are well supported by customers, the regulatory environment and potential funding options. Global OEM and battery participants have seen the opportunity of building significant production capacity in the United States, often across multiple states. This was recently announced a 100-year [indiscernible] for our expansion of its Nevada Gigafactory in addition to its development in Texas is an example of this. And with the combination of policy support cost and market evolution in the U.S.A. has proven to be the correct choice for Syrah's first AAM facility commenced back in 2018. Slide 10 outlines our long-term vision and pathway to growing Syrah's downstream business to become the leading supplier of anode products globally, capitalizing on the benefits of vertical integration with the Balama graphite operation. To succeed in this strategy, provision of production capacity in the key markets is needed to underpin resilient and localized supply chains to customers. In addition to the Vidalia project expansion, the 11.25 thousand tonne facility which I'll talk about shortly. The last quarter of 2022 saw Syrah make strong progress on the potential further expansion to -- of Vidalia to 45,000 tonnes on the feasibility study, customer interaction and funding fronts. And as part of the company's vision and given market fundamentals, Syrah is also progressing the evaluation of a large-scale anode material production facility in Europe. With the assessment of the strategic merits of such a development through a partnership and we're engaged with high-quality counterparties in this process. These downstream project opportunities are all possible given the tremendous Balama capacity available to support these expansions, as well as the clear market demand for a vertically integrated ex-China sourcing material. Moving to Slides 11 through 15 and an update on the key points of Balama's production, sales and logistics performance in Q4. Sales were 28,000 tonnes constrained by production at a higher weighted average basket price of US$716 per tonne. Production was 35,000 tonnes, impacted by the timing and sequence with operational interruptions. 19,000 tonnes of production in December with good operational performance in uninterrupted operations and logistics movements showed that the plant still operates well post the interruptions. C1 costs, FOB Nacala are of $709 a tonne included an aggregate $175 a tonne impact from fixed costs during operational interruptions and higher diesel costs compared to the end of Q1. Balama performance through Q4 was impacted by 2 interruptions in subsequent production ramp-ups. Illegal industrial action caused production to be suspended 26 days in October and the proportionary security measure resulted in a 1-week impact to production in November. Balama production in December with uninterrupted operations and logistics movements was strong, as I mentioned, at 19,000 tonnes with production rebuilding finished product inventory. Balama average and maximum daily production run-rates were 19,000 tonnes per month and 25,000 tonnes per month, respectively, during the campaign production runs over the quarter. Notwithstanding ore feed variability and processing and stability in the ramp-up of operations, Balama achieved stable grade and recovery compared with the September 2022 quarter. Plant recovery was 80% in December. Weâre focused on moving towards our 90% medium-term recovery target with the benefit of greater operational stability. Itâs also important to comment on security at Balama and the surrounding district. Since the interruption in November which saw us take a precautionary measure to remove stuff in site for 2 days. There has been a marked increase in the commitment with Mozambican and international security authorities to ensuring stability in the Southern District of Cabo Delgado, specifically but also across province more generally. Thereâs been no further disruption to Balama since that time with operations, people movements and logistics. Thanks, Shaun. Balama C1 costs were higher this quarter due to the unplanned operational interruptions, sustained high government set diesel prices for Balama power generation and higher cost of imported materials. We continue to evaluate and implement operational cost savings to offset these inflationary pressures and note that C1 costs should trend lower with recovery uplift and other improvement initiatives, including the solar and battery project. And most importantly, with increased production levels and shipping constraints fall away and we leverage our fixed cost base. I previously provided our updated view on C1 costs of between $430 to $480 per tonne at a 20,000 tonne per month production rate. The company has worked diligently and in good faith through the periodic review of the CLA and the successful renewal of the CLA provides several improvements to the conditions of employment for approximately 450 employees covered under this agreement and is expected to bring further stability to Balama. Moving to Slide 14 which contains further detail on the graphite sales and marketing side. We reported lower sales in Q4 of 28,000 tonnes due to the operational interruptions of Balama which impacted the availability of finished products for shipment with most inventory only available at port through December. Pleasingly, natural graphite sales were unconstrained by container availability for Balama shipments from Nacala with 10,000 tonnes shipped in December. No break bulk shipments were completed in the quarter due to the timing of inventory availability and we expect to recommence this activity in the first quarter. In short, we could have sold and shipped more product without significant interruptions to Balama operations. As you will be aware, the winter period represents a seasonal outage of Chinese domestic production. Natural graphite production in Heilongjiang province in China has declined due to major suppliers facing water supply issues and seasonal shutdowns for the winter outage. As a result and over the medium to long term, at expected EV demand levels in China and globally, Chinese natural graphite demand will require increasing imports. Nevertheless, due to the impacts of changing Chinese policy towards COVID-19 impacting immediate demand, forward demand in sales orders for Balama products in China and particularly in the anode market, have somewhat softened over year-end against historically high levels in 2022. In particular, there has been short-term destocking evident in the supply chain and operational and logistics disruptions due to COVID-19 reopening in China and also Chinese New Year closures. However, expected growth in EV and energy storage markets and the customers remain concerned about availability of Chinese natural graphite mines and the future of market balance. The weighted average sales price increased to $716 per tonne in the quarter, reflecting the stable and strong market conditions with funds accounting for 81% of product sales. Fines spot pricing was stable compared to last quarter, with strong downstream anode market demand and lower Chinese production. Course like prices ex-China remained strong and stable due to ongoing supply disruptions, including from the U.K. -- Ukraine and Russia. Sea freight volatility and surcharges remain evident through the quarter with Syrah's average container shipping unit costs in Q4 at 3x to 4x the long run average. However, the global container shipping market is improving, with growth in a vessel fleet, easing of port ingestion, improving scheduling reliability and weaker trade demand trends. Global container freight rates are almost 80% below recent peaks and approaching pre-COVID pandemic levels. East Africa vessel services and container availability improved in December 2022 and in 2023 already due to easing demand on major trade lanes. Freight rates for Syrahâs Nacala container and Pemba breakbulk cargoes have declined from 3x to 4x the long-term average through 2022 to less than 2x in the March 2023 quarter. The container -- the company will continue to use the Pemba export route for Balama products in addition to container shipments from Nacala, subject to overall shipping availability, cost and customer preference. The integration of breakbulk shipping from Pemba in combination with container shipping availability will support Balama's sales and production of at least 20,000 tonnes per month. Moving on now to Vidalia on Slides 16 and 17. We're making strong progress with the Vidalia expansion projects and in our strategy to become a vertically integrated natural graphite anode material supply alternatives, supply alternative for the ex-Asia markets. Syrah is a first mover in the integrated downstream anode market outside China and we've created a differentiated position at Vidalia which is not easily replicated. Our offtake agreement to supply anode material Tesla from the facility is supported the initial expansion. And in December, we agreed the final specification of Vidalia products fulfilling a key condition to Tesla's offtake obligation. As mentioned earlier, Tesla exercised its binding option for an additional 17,000 tonnes per annum or a combined offtake to 25,000 tonnes per annum from the potential expansion to 45,000 tonnes the production capacity at Vidalia. This key customer commitment for the Vidalia further expansion project represents a combined 56% of the planned production capacity for the operation. Syrah also announced a further nonbinding MOU with LG Energy Solutions for up to 10,000 tonnes per annum supply from Vidalia. We're advancing commercial negotiations towards offtake agreements with these Tier 1 customers with a focus on maximizing the value of Vidalia for shareholders. We're strongly advancing further commercial and technical engagement with other potential customers to provide future optionality in contracting volumes or spot sales. Qualification and iterative testing programs are progressing well. Following the announcement of a final investment decision on the initial expansion of Vidalia in February 2022, detailed engineering is effectively completed and equipment fabrication and deliveries and on-site construction activities are now intensively progressing. The project is being overseen by our own high-caliber team alongside the Worley Group. The effective completion of detailed engineering has enabled equipment fabrication and construction to progress in line with the planned schedule. Procurement for all key construction activities and equipment were advanced with contracts for US$150 million in total installed capital costs awarded. The project remains on budget after this procurement effort with an acceptable amount of project contingency remaining unallocated. All major mechanical, electrical and instrumentation and equipment work packages are proceeding now showing the photos in today's releases, concrete foundations and slabs have been completed and erection of permanent buildings has commenced. Building steels, pipe rack structural steel, tanks, cable spool reels and fabricated piping and being delivered to the site and erected. And all overseas fabrication of critical equipment is complete and delivery of this equipment commenced during December 2022 quarter and will continue into the March 2023 quarter. Construction activities in the March quarter will focus on steel erection, roofing and cladding for permanent buildings, structural steel and equipment installation in these buildings, structural steel levels, final mounting of the first power distribution center and taking delivery of the second power distribution center. Operational readiness for the Vidalia facility which includes preparing business and maintenance systems and operating teams to move from commissioning to operations, is on track for commencement of operations in the September 2023 quarter. The DFS on the expansion of Vidalia's production capacity to 45,000 tonnes of anode material inclusive of the 11.25 thousand [ph] tonne facility, is ongoing with Worley Group in nearing completion. And this will enable the Syrah Board to assess an investment decision in conjunction with customer and financing commitments. Diving Syrah's downstream business is underpinned by Balama and its resource reinforcing why we're so intent on continuing to develop both labor and community relations for long-term success at both operations. The opportunity to consume a significant proportion of Balama's production at Vidalia over time and to potentially expand Balama to supply third-party customers further are important factors in the overall upstream supply and demand balance globally. Even at an expanded 45,000 tonne facility at Vidalia only approximately 25% of Balama's current production capacity would be utilized internally. To conclude, on Slide 22. EV sales growth, a constructive demand environment for anode material and Chinese supply challenges are driving good demand and supportive pricing for Balama products. We're focused on increasing Balama production and sales to at least 20,000 tonnes per month and achieving a sustainable C1 cash cost position. Construction of Vidalia's initial expansion is progressing within schedule and budget with an accelerated pathway to 45,000 tonnes of Vidalia being derisked by feasibility, customer and funding work streams. DOE's loan and grants and DFC loan processes to fund the company's capital requirements are progressing well, helping to maintain liquidity, broaden the capital structure and being sized to ensure the balance sheet is prudently geared. The DOE and DFC commitments clearly highlight the strategic importance of Syrah's integrated operations to EV and battery supply chains. The current market and Syrah's progress demonstrates the unique position we occupy with the largest global integrated natural graphite operation at Balama and the forthcoming vertically integrated supply of natural graphite anode material outside Asian markets. We look forward to keeping you up to date with the company's progress in 2023, a year in which we anticipate the company will achieve many exciting milestones. Shaun, just a question on Vidalia regarding offtake. You previously had or youâve got the MOUs with Ford, the BlueOval SK JV and LG. I was just wondering, previously you targeted a deadline date to execute those, I think, by the end of calendar year 2022. I was just wondering, are those -- with those MOUs of AAM, have they got any deadlines that youâve got in mind and in terms of how theyâre progressing and why they sort of went over that sort of December 2022 end. Thanks, Mark. Yes. Obviously, that initial target was the end of the year. I think there was a good degree of optimism as we emphasized MOU and the level of engagement with those potential customers is very strong. And the addition of the LG MOU during the quarter indicates that, that commercial interest and commercial tension for potential offtake both for the balance of Phase 2 or what we call the initial expansion and Phase 3, the additional expansion to 45,000 tonnes remains very positive. So I think we're trying to balance the completion of the feasibility study, the funding progress and the right mix of commercial outcomes to support an investment decision. And clearly, we're targeting -- moving towards that investment decision in the coming months. So we don't have a hard deadline on it. Suffice to say that it is critical to the assessment of an FID for Vidalia. Right. And just one more from me. On the freight costs you mentioned, theyâre now down to less than 2x the historical average. I was just wondering can you sort of maybe quantify that in terms of dollars a tonne, what that might be? Yes. I mean we previously said that our long-term average prior to the unprecedented escalation in that market was around $50 a tonne across the book. As we said today, it's less than 2x that now and continuing to come down. If is significantly between different trade lanes but we expect that the freight market conditions will continue to normalize towards that long-term average over time. A couple from me, please. Just so if I havenât provided 2023 production guidance but did provide a forecast like cost forecast, $430 to $480 at 20,000 tonnes a month. Is that the rate we should expect throughout next year disruptions? Yes. Thanks, Alex. I mean as those who have been with us for some time know, we are quite careful about telecasting production forecast, given our significance in the overall market supply/demand balance. We've been clear in this that we are seeking to produce and sell around 20,000 tonnes per month but we will be guided by market conditions. And if market demand supports an increase from them, we set to increase from there but very much driven by how the supply demand balance evolves and ensuring that we remain very cognizant of our impact on the overall supply demand balance. Yes, makes sense. Understood. And next question on inventory, total inventory 20,000 tonnes there. Just wondering how much of that is already at Vidalia and whatâs the comfortable inventory level there for the Stage 1 set up? The inventory at Vidalia at the moment is low. The initial fields for that will be done through the course of this year. Obviously, the total consumption to the 11.25 thousand tonne anode material facility is only around 21,000 tonnes of Fines from Balama. So there's not a significant amount of that inventory yet required at Vidalia but that will happen through the course of this year. The vast majority of the inventory that we built up through the quarter is destined for the China market. Obviously, we fines primarily going into the anode market there. And as we said during the call, we took time to rebuild that inventory position. And consequently, we didn't quite get to a black box shipment in Q4 following the interruptions we had earlier in the quarter. Understood. So basically, now inventory has normalized and we should -- like going forward, we should [indiscernible] normalized operations like operations, production and logistics. Is that⦠Yes, I think that's absolutely a fair assessment all the way through 2022. We were constrained every single month by the ability to have container availability and vessel schedules meet our sales targets. As Steve mentioned earlier, nearly all of the constraints in the container market have released. And there's good availability of vessels from a breakbulk perspective. So we're very comfortable with the improvements in logistics as we head into 2023. Got it. Got it. And next one is on Vidalia stage offtake. Obviously, Tesla is taking the 70% but thereâs still 30% uncontracted. Just are you engaging with other customers on your qualification? Just trying to figure out how you can sell that remainder, 30% out of the stage line. Yes, absolutely, we are. And as we've said previously, we're very much focused on combining our thinking around the remaining volumes from the initial expansion with the planned volumes from the expansion -- potential expansion to 45,000 tonnes of capacity in our commercial arrangements. So much of our commercial discussion considers both the balance able from the first phase as well as potential volumes from the next phase. And our testing and qualification processes, both with the customers we have announced MOUs with as well as a number of other potential customers continue to progress. So basically, youâre saying the remaining volume has been like under test with SK Ford and LG. And just trying to -- just look at the presentation, Vidalia is expected to ramp up to full capacity in 18 months, right? So is that basically just running against the clock -- 18-month clock or 24-month clock or so for them to like succeed in qualification. Yes. I mean part of it is the qualification process. But equally, some of the timing around the commercial arrangements has been driven by our desire to ensure that we have the best view of market conditions and potential customers in the process. So the qualification process continues to progress well and we don't see that as a constraint in settling the balance of offtake from the first expansion and there are multiple examples, not just with us but with other commodities in the battery supply chain, commercial arrangements being finalized before qualification is complete with a contingent element on that qualification being achieved. Yes. Got it. Got it. And last one for me, just a bit on the medium to-long-term prospects in Europe. Could you give us a bit more color on the discussions, are you having any discussions with government on subsidies for financing and right now, what like -- whatâs your ideal approach to expect the footprint, I mean there? Are you thinking about a joint venture with downstream customers, or you going away, similar to Vidalia? Yes. We've been pretty clear that we believe that Europe would be best facilitated by some type of joint venture arrangement basically to accelerate the process and we're having gauged broadly across different industry and supply chain participants through that assessment process. As to scale in timing, I think certainly, we would see a facility similar size to an expanded by Vidalia facility being the best option for Europe, somewhere in the 40,000 tonne range. But that would very much be dependent on how the commercial assessment continues to evolve with potential partners. With regard to government funding options, certainly, in Europe, there are similar programs and there is a lot going on at the moment, looking at further development or potential funding of the supply chain expansion. We are focused first on the right partnering arrangements. And as part of that, we will certainly assess what funding arrangements are available. Thank you very much for the attendance today. Weâre looking forward to getting everyone up-to-date as we progress with both the Vidalia project and the Balama continuing capacity utilization growth through the course of the year. Thank you very much.
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EarningCall_829
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Ladies and gentlemen, welcome to the Fourth Quarter 2022 Badger Meter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. It is now my pleasure to turn the conference over to Karen Bauer, Vice President of Investor Relations, Corporate Strategy and Treasurer. Please go ahead, Ms. Bauer. Good morning, and thank you all for joining the Badger Meter fourth quarter and full year 2022 earnings conference call. On the call with me today are Ken Bockhorst, Chairman, President and Chief Executive Officer; and Bob Wrocklage, Chief Financial Officer. The earnings release and related slide presentation are available on our website. Quickly, I will cover the safe harbor, reminding you that any forward-looking statements made during this call are subject to various risks and uncertainties, the most important of which are outlined in our press release and SEC filings. On today's call, we will refer to certain non-GAAP financial metrics. Our earnings slides provide a reconciliation of the GAAP to non-GAAP financial metrics used. Thanks, Karen, and thank you for joining our fourth quarter earnings call. The Badger Meter team finished the year with another strong performance, delivering solid revenue growth while achieving yet another positive book-to-bill ratio. Despite persistent macro challenges with sustained inflation and sporadic component shortages throughout 2022, gross profit margins have consistently been within our tightened normalized range of 38% to 40% and we improved SEA expense leverage during the year. We generated robust cash flow in 2022 and utilize that growth capital to acquire Syrinix in early January 2023, adding to our comprehensive hardware enabled software offerings. I'll talk more about Syrinix provide a recap for the full year and discuss our outlook later in the call. Thanks, Ken, and good morning, everyone. Turning to Slide 4. Our total sales in the fourth quarter were $147.3 million, sequentially similar to last quarter's record level, and 8.5% higher than the $135.7 million in the same period last year. On a constant currency basis, excluding the impact of the stronger U.S. dollar, sales increased 10%. Total utility water product line sales increased 9% year-over-year against a difficult prior year comparison. Broadly, we experienced continued strong order demand, ongoing price realization and growing adoption of our cellular AMI solution with higher Orion cellular endpoint and Beacon Software as a Service sales. Additionally, we saw increased sales of meters, including E-Series ultrasonic meters. The strong demand environment resulted in another record utility water backlog exiting the year even with the strong top line sales performance. Sales for the flow instrumentation product line increased 8% year-over-year, led by solid growth in water related markets. The impact of the stronger U.S. dollar was most meaningful to this product line with constant currency growth of just over 10%. Order trends remained steady with water related applications outperforming the more general industrial end markets. While we are very excited about our growth expectations for both the near and long term, we do anticipate that the rate of quarterly sales growth in 2023 will moderate from 2022. Turning to margins. Gross profit as a percent of sales in the fourth quarter was 38.7%, consistent with the prior quarter and again, in the middle of our normalized range as anticipated. While favorable structural mix trends continued, the impact of inflation across various input costs remained a stubborn headwind. Case in point, pick up any copper price graph, and you can see an example of the type of volatility and unpredictability inherent in the inflation challenges facing nearly all industries. After peaking around $4.90 a pound last spring, copper settled back into the $3.50 per pound range over the past six months or so. However, we now are back to over $4.25. While we can't fully control these types of input costs, we are managing what is within our control, which includes continuing our value-based pricing rigor. We remain committed to our normalized gross margin range and are confident in the overall margin resiliency of our business model. SEA expenses in the fourth quarter were $34.5 million, an increase of approximately $2.5 million year-over-year due primarily to higher personnel and incentive compensation costs, research and development spend and travel. As a percent of sales, SCA was 23.4%, a 20 basis point improvement from 23.6% in the comparable prior year quarter. Sequentially, SCA leverage did worsen 70 basis points as our robust cash flow in the fourth quarter resulted in higher incentive compensation accruals at year end. We expect SCA spend in dollars for 2023 to increase as a result of inflation and ongoing growth investments, yet we continue to endeavor to improve SEA leverage as a percent of sales as just one of the levers for future margin enhancement. The income tax provision in the fourth quarter of 2022 was 23.4% compared to 24.5% in the comparable prior year quarter. In summary, consolidated EPS was $0.60 in the fourth quarter of 2022 compared to $0.59 in the prior year comparable quarter. Working capital as a percent of sales was 22.2% at year-end compared to 23.8% at the end of Q3 and down from 24.5% when we started the year. While inventory has increased in response to supply chain complexities, the corresponding payables increase, coupled with receivables collection quality resulted in the net overall improvement. Fourth quarter free cash flow of $28.5 million was higher than the prior year's $26.2 million, the result of our effective working capital management activities. For the full year, free cash flow was $76.6 million, and free cash flow conversion of net earnings was 115%. This represents the fifth consecutive year of greater than 100% conversion of net earnings. Thanks, Bob. Turning to Slide 5. I want to spend a few minutes on our recently announced acquisition of Syrinix and how we believe it expands the value of our smart water solutions portfolio. Syrinix brings additional capabilities to our industry-leading offerings in the form of pressure (ph) monitoring hardware and software. Their patent protected and innovative time synchronized high-frequency pressure monitoring and acoustic leak detection complements the existing pressure monitoring capabilities available in our E-Series ultrasonic meters. Syrinix has a history of success with network monitoring installations across a variety of utilities, most notably in the U.S. and U.K. Of keen interest to Badger Meter is their radar software, which adds to the scope of real time and actionable data and analytics for utilities to improve their operations. For example, time synchronized pressure data allows for proactive versus reactive strategies to address pipe burst and other leagues, saving precious time, money and water loss. Additionally, pressure and water quality sensors can work in tandem. For example, in situations where a cracked pipe is identified as a result of contaminant infiltration. In fact, Syrinix has worked closely with the ATI Water Quality team over the years. From a financial standpoint, this technology startup has seen steady growth, albeit from a very small base. Our acquired revenues are a few million dollars, and it will start up modestly dilutive to earnings, given the pre-profit position upon acquisition and future amortization of purchased intangibles. We believe over the long term, adding the Syrinix capabilities to our comprehensive and tailorable digital solutions will continue to competitively differentiate Badger Meter in the market. Taking a look back at fiscal 2022 and the past several years overall here on Slide 6, we have distinguished our performance by executing our strategies exceptionally well in the face of a multitude of macro challenges. As noted in the release and outlined here, in 2022, we delivered 12% overall sales growth and 14% utility water product line growth, grew orders in backlog to new record levels, generated nearly $34 million in software revenues, grew operating profit 11% in the face of unprecedented inflation and delivered 115% free cash flow conversion of net earnings. Looking at just a few of the longer term accomplishments relative to our strategic growth goals. We've grown our utility water business at an accelerating rate over the last three years. Increased software as a sales revenue at a 45% growth CAGR, reaching 6% of revenue in 2022, even with a sizable increase in product sales. We reduced our primary working capital as a percent of sales, freeing up capital by installing a focused continuous improvement mindset to working capital management, all of which enabled us to generate nearly $240 million in free cash flow over the past three years with an average free cash flow conversion of 137%. Of that cash, we deployed nearly $100 million inclusive of Syrinix, three strategic tuck-in acquisitions, adding water quality and pressure monitoring capabilities to our smart water solutions. We returned nearly 30% of that cash to shareholders in the form of dividends, achieving dividend aristocrat status with a track record of 30 years of consecutive annual dividend increases and we continue to invest in R&D and innovation to build on our leading portfolio of smart water solutions. I couldn't be more proud of the team's achievements. Finally, turning to our outlook. I remain excited about the opportunities ahead. At a macro level, Badger Meter is uniquely positioned with a broad and expanding portfolio of smart water offerings. This includes our industry-leading cellular communications, real-time water quality and pressure monitoring as well as tailorable software to enable customers to be more efficient, resilient and sustainable with their water systems. Our replacement driven demand macro AMI adoption drivers and growing proportion of stable SaaS revenue are supportive of durable multiyear growth against an uncertain economic backdrop. We continue to remain constructive on the bid funnel and order rates with record orders in the fourth quarter and a record backlog, which bodes well for future sales growth. I'm also encouraged by the current trajectory of supply chain easing. Coupled with some anticipated leveling off of input cost inflation and continued price realization, this should bode well for gradual gross improvement -- gross margin improvement in 2023. Our cash flow generation and debt-free balance sheet provide us with ample capacity to execute our capital allocation priorities, including an attractive funnel of organic and inorganic strategic growth investments. I want to again thank the entire Badger Meter team for their tremendous efforts and accomplishments in 2022, and I look forward to executing on the many opportunities ahead. I do like that Slide 6. I think the chart there of working capital to sales coming down and especially the free cash flow conversion over the last couple of years with all these supply chain challenges are pretty impressive. Maybe you could talk about -- a little bit more about the supply chain easing, what you're seeing there, what you're expecting to see there. No doubt all of this supply chain disruption has had a negative impact on the productivity within your facilities. Maybe talk a little bit about what that impact is being, what kind of margin expansion you might be able to see as you improve productivity with more reliable supply chains? Yeah. Thanks, Nathan. Yeah. So supply chain, as we've talked about, I think, in the last couple of quarters, it continued to improve again. I wouldn't say that we're completely out of the woods yet across the entire industrial space, still seeing some challenges with electronics here and there. But for the most part, definitely in a better position than we've been and expect that to continue to improve. You're right. The supply chain complexities certainly have added a lot of inefficiencies and other issues throughout our facilities, but we've handled it very well. And I expect to see some improvement there, but nothing that I think you can model as a huge improvement. Yes. I think the takeaway, Nathan, should be exactly what within the -- sorry, in the prepared remarks, which is with that supply chain easing continuing with the opportunity for greater efficiency, we're still staying resolute in our normalized margin range, but we would expect a modest improvement in 2023 versus 2022. And you talked about expectation some flattening inflation and some additional price reading through in 2023. Can you give us whatever color you're prepared to on price cost in '22? And then what your expectations are in '23? Should price/cost be better in '23 than it was '22, was the same? Yeah. So a lot of moving pieces there. As you know, when we talk about price cost, oftentimes, in addition to what people most traditionally think of, there's always a mix or an average sell price dynamic that plays into that. That said, I think the way we would look at 2023 simply versus '22 modestly better price/cost dynamics, 2023 versus 2022. We know we've had leading and lagging effects of price actions relative to cost. But that's why we're still staying resolute with that targeted comfort zone or margin profile of 38% to 40%. Thank you, Mr. Jones. Our next question comes from the line of Thomas Johnson with Morgan Stanley. Your line is now open. Hi. Thanks and congratulations on another strong quarter here. To start, it would be helpful if we could maybe get some incremental color on the demand outlook. Obviously, language on year-over-year comps. This is reasonably conservative, but constructive, although you did mention record fourth quarter exit ordering. And it's pretty clear that recent results have been delivered in the face of some pretty strong operational headwinds, which we kind of would assume are easing in 2023. So what are some of the underlying assumptions that are kind of causing that conservatism on the 2023 outlook just on a year-over-year basis? Well, I'll go first, and I can see Bob chomping at the bit here to get into. But if you -- I'll bring you back to Slide 6. And if you look at the upper right corner, we've got the chart there on utility growth remembering that utility is 85% of our revenue. And even in 2020, the COVID year, we grew 4%. Last year, we grew -- in '21, we grew 9%. This year, we grew 14%. So we are absolutely excited about the market. The market is great. We continue every single quarter to have record shipments and the backlog has increased every quarter. The bid funnel is strong. We're winning more than our fair share of AMI in this market. So we feel as great as ever about the utility market, which is the largest portion of our business. And we feel really good about our ability to grow 10% in flow instrumentation, that other 15%. So we don't feel challenged by markets. We're just saying perhaps maybe the rate of the percentage of growth may not be 14% again, right? So that's the clear takeaway should absolutely be here. Optimism about the outlook moving forward. But just incrementalizing on a year where you just delivered 12% growth to think that, that rate of change on a law of big numbers is going to be in excess of what we just delivered. The conservative comes from just anniversarying the increases of 2022. Still a very robust growth, but just not at the level of in excess of what we just delivered. Yeah. And to be very clear, I mean, we are very confident in 2023 and the longer term with what we see in the markets. Understand that. Thanks for the color. Just shifting to capital allocation here. Really helpful information on Slide 7. And clearly, you've put some capital to work in the first quarter of the year, but still sitting on pretty high levels of cash here. So just from an M&A perspective and maybe the pipeline of deals there. Post this recent acquisition, what other areas are you focusing on for inorganic growth here in the near term? Yes. We've built and have maintained a really interesting funnel of companies that are in the water quality space, software space, much like Syrinix, the recent acquisition. And anything that brings some sort of a global customer base and footprint with it is in that target zone. So we remain disciplined. We look for value. I think we certainly have found that with the three acquisitions we've done in the last 26 months. So we're not in the mode of just trying to get bigger because we can, but there's certainly a number of interesting opportunities out there for us that we continue to work. So the laneways Ken mentioned, are the same as they've been really for the last couple of years. And you can tell that those laneways are very core to where we play today. So this idea that perhaps with the available cash, we all of a sudden, stray far from the fairway in which we operate right now. That's most not likely. We're staying very core to where we play in those laneways are unwavering really over the last few years. Thank you, Mr. Johnson. Our next question comes from the line of Rob Mason with Baird. Your line is now open. Yes. Good morning, all. You mentioned the book-to-bill again over one. I'm just Ken, could you square -- or Bob, could you just square up where backlog sits at year-end relative to 12 months ago, year-end '21? The order of magnitude, I guess, increase is what I'm looking for. Yeah. So we don't specifically disclose backlog. And actually, in light of kind of the imbalance that's really been in the supply demand environment over the last 24 months. I think quite frankly, sizing it would be not all that relevant and actually might create more confusion. Obviously, if you take the last several quarters of book-to-bill in excess in one, you can obviously conclude that backlog is higher at the end of 2022 than it was in 2021. But yeah, we don't -- we aren't going to size that, and we haven't typically disclosed it because I think this isn't a traditional backlog business. Granted, we do have more line of sight to immediately actionable orders now than we have in years prior, but we think that's a temporary scenario. And so yes, we're not going to size it, Rob. And can you tell me if the backlog, the bookings book-to-bill over one in the flow measurement business also or how does that comparatively, how does it look? Just I guess remind me, of course, all that that's 15% of the business and not necessarily, we're very fragmented in those many markets, many small markets. So if you're trying to draw conclusions of that data point to other industries, challenging to do. Yeah. And to Bob's point, it is small. And remember that now we have more of a primary focus in that group on water related industry. So it's not if you're thinking back in time, our portfolio has gone from 70-30 utility flow instrumentation to now 85-15. And then even within that 15%, it's more water focused than it used to be in the other markets. So it's quite different than it used to be, I think, when people thought about recessionary times or other challenges. No. Understood. Understood. Ken, good color on Syrinix, but I'm curious if you could go a layer deeper looks like a very interesting business. And just help me understand how that product gets to market, maybe what the sales cycles would look like, what a typical deployment would look like just within that product category or how you envision it? Yeah. So the way that we view a lot of these small technology acquisitions is that with our strong brand name, with our sales coverage in North America, we can usually sell anything to our existing customer base to new customers and even utilities that might use a different metering manufacturer. So Syrinix can fit right into our direct sales channel, our utility distributors can sell it. They know the product. They have the right context. So in terms of being able to get some sales synergy in the U.S., we certainly feel that. And then we're excited about the fact that it also comes with the software component. So now when you think about our Beacon software that we've built out here really significantly over the last five, six years. It was primarily AMI data. Now we added scan ATI and now people can go to Beacon and get their water quality data. And now with the RADAR software that we'll incorporate into Beacon, a utility now can come get their quantity, quality pressure, acoustic leak detection all in one place. So we think we've got really good leverage and we can integrate it relatively easily into our sales force. And then on top of that, we're really excited about the -- again, small companies, similar like ATI, scan, except even smaller, but long-standing great relationships with people like Thames Water, even American Water. If you go to their website, you'll see some really good customer test cases. So I've said this before, technology deals for us. Obviously, with big deals are always flashy but no deal is too small with what we can do with our customer base. [Multiple Speakers] Sorry, Rob. So the one piece that maybe we didn't touch on there was you talked about how deployed can cover channels. But from a deployment standpoint, this largely becomes starts. I'm going to call it a pilot for a lack of a better term, maybe a focused effort on leak detection in a particular part of a defined distribution network. And once that's successful, then that model gets replicated in other areas is on. So basically, you have customers starting with a small footprint of technology, but that, that customer grows that installed base of both hardware and software over time. I see. To the extent that you noted it might be modestly dilutive this year. I'm just curious what would be the impact on the gross margin? At the gross margin line, this is above line average. But again, to size what we said in the commentary, we're talking about a couple of million dollars of sales at acquisition. Thank you, Mr. Mason. Our next question comes from the line of Tate Sullivan with Maxim Group. Your line is now open. Thank you. Good morning. On Syrinix following up, is it additive to the existing real-time water quality measurement businesses you have? Or is it the other way around? Can you [indiscernible] Yeah, Tate. It's really exciting in that we have known Syrinix for several years, but they've had a long-standing relationship with ATI. So this equipment works hand-in-hand a lot of times with the water quality equipment because, as I mentioned in the prepared comments, sometimes you can understand a leak because you can see the contaminants in the water first and vice versa. So they really help each other out, plus you can get it into the drinking distribution system. So it goes all the way across the portfolio. And on the real-time water quality opportunity, can you give an update there? Is most of the customers currently if you can't comment on industrial customers for that technology? And also, can you update on the process of integrating those software capability into the real-time water quality market, please? Sure. Yeah. So the water quality the water quality applications do have the wide-ranging effects of drinking water distribution, wastewater industrial processes. So yes, it fits all aspects of what we cover. And in terms of software, yes, it is available. It is online and customers are now ordering water quality sensing plus software. And then on the international opportunity, too, I mean U.S. was such good growth in 2022 and understanding the moderating percentage growth in '23. I mean, internationally, should we expect it to grow as a portion of revenue going forward, given, I mean, many of these acquisitions that on? Yeah. I'm getting a little bullish on percent of the portfolio because North America is growing so great that sometimes it gets hard to size something and say it's going to be x percent of revenue because we're doing so well right in the core. But yes, we do expect every year international growth. It can tend to be a little more uneven than the U.S. piece, but we remain just as interested and excited about global opportunities as we had previously. Thank you, Mr. Sullivan. There are no additional questions waiting at this time. [Operator Instructions] There are no additional questions waiting at this time. So I will pass the conference back over to Ms. Bauer for closing remarks. Great. Thank you all for joining our call today. For your planning purposes, our first quarter 2023 call is tentatively scheduled for April 20. I'll be around all day to answer any follow-up questions you may have. Have a great day.
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EarningCall_830
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Good afternoon. Thank you for attending todayâs Fourth Quarter 2022 Earnings Release Call for HomeStreet Bank. Joining us on this call is Mark Mason, CEO, President, and Chairman of the Board. Hello, and thank you for joining us for our 2022 fourth quarter earnings call. Before we begin, Iâd like to remind you that our detailed earnings release and an accompanying investor presentation were filed with the SEC on Form 8-K on Friday and are now available on our website at ir.homestreet.com under the News & Events link. In addition, a recording and a transcript of this call will be available at the same address following our call. Please note that during our call today, we will make certain predictive statements that reflect our current views and expectations about the companyâs performance and financial results. These are likely forward-looking statements that are made subject to the safe harbor statements included in Fridayâs earnings release, our investor deck, and the risk factors disclosed in our other public filings. Additionally, reconciliations to non-GAAP measures referred to on our call today can be found in our earnings release and investor deck available on our website. Joining me today is our Chief Financial Officer, John Michel, John will briefly discuss our financial results, and then Iâd like to give you an update on our results of operations and our outlook going forward. John? Thank you, Mark. Good morning to everyone, and thank you for joining us. In the fourth quarter of 2022, our net income was $8.5 million or $0.45 per share as compared to net income of $20.4 million or $1.08 per share in the third quarter of 2022. For the full year 2022, our net income was $67 million or $3.49 per share. In the fourth quarter of 2022, our annualized return on average tangible equity was 6.4%. Our annualized return on average assets was 36 basis points and our efficiency ratio was 76.2%. These results reflect the adverse impact of the significant increase in short-term interest rates on our business. For the full-year 2022, our return on average tangible equity was 11.5%. Our return on average assets was 79 basis points and our efficiency ratio was 72.4%. Our net interest income in the fourth quarter of 2022 was $7.3 million lower than the third quarter of 2022, due to a decrease in our net interest margin from 3% to 2.53%. The decrease in our net interest margin was due to a 90 basis point increase in the cost of interest bearing liabilities, which was partially offset by a 29 basis point increase in the yield on interest earning assets. Yields on interest earning assets increased as yields on adjustable rate loans were higher due to increases in the index and which their pricing is based. The increase in the cost of interest bearing liabilities was due to higher deposit costs, higher borrowing costs and an increase in the proportion of higher cost borrowings used as sources of funding. Our cost of borrowings increased 150 basis points during the fourth quarter, while the cost of deposits increased 58 basis points. Additionally, our average borrowings increased by $187 million. Our effective tax rate the fourth quarter and full-year for 2022 was 23.7% and 21.4% respectively. In 2023, our expected tax rate is expected to be approximately 23%. A $3.8 million provision for credit losses was recorded during the fourth quarter of 2022, compared to no provision in the third quarter of 2022. The provision recorded in the fourth quarter was primarily due to the growth in our loan portfolio and a $2.2 million increase in the collateral qualitative factor in our allowance for credit losses. This increase in the qualitative collateral risk is related to projection declines in future home prices. Going forward, we expect the ratio of our allowance for credit losses to our loans held for investment portfolio to remain relatively stable and provisioning in future periods to generally reflect changes in the balance of our loans held for investment, assuming our history of minimal charge-offs continues. Our ratio of non-performing assets to total assets remained low at 13 basis points, declining from 15 basis points last quarter. The decrease in non-interest income in the fourth quarter of 2022 as compared to the third quarter of 2022 was primarily due to a decrease in other income due to a $4.3 million gain on sale of five eastern Washington branches reported in the third quarter. The $0.5 million increase in non-interest expense in the fourth quarter of 2022 as compared to the third quarter of 2022 was primarily due to higher information services costs related to the maintenance and replacement of our ATMs, higher FDIC fees resulting from our larger deposit base, which were offset by lower medical benefit costs and lower commission and bonus expenses. Consistent with prior years, we expect seasonal increases in compensation and benefit costs to occur in the first quarter of 2023 related to wage increases and seasonal increases in benefit costs. Thank you, John. I'd like to start my remarks today by acknowledging the challenges presented by the significant increase in short-term interest rates this year. We along with certain other peers with similar lending, deposit, and funding structures have been more adversely impacted than other banks during this period. Nearly all banks, however, have seen deposit outflows and rising rates on interest bearing deposits. Our interest sensitive deposits declined as customers move funds to higher yielding products both at our bank and at other banks and brokerage firms. Attractive rates on treasury securities and non-bank money market funds have also created meaningful competition. We've also experienced this cyclical downturn in commercial real estate and single family mortgage loan volume, which fell to historically low levels in the fourth quarter. We have made significant improvements over the last several years in reducing the sensitivity of our company to cyclical interest rate cycles through downsizing our mortgage banking business in growing our non-interest bearing and other core deposits. Despite those changes, our revenues have been meaningfully impacted by the historically significant increase in interest rates by the Federal Reserve. We expect the current pressure on our revenues both on net interest income and non-interest income will be greatest during the first quarter of this year and then begin to ease as more of our mitigation actions fully take hold. These expectations assume among other things that; one, short-term interest rates begin to stabilize in early 2023 in-line with current market expectations; two, we continue to have success in growing deposits with promotional CDs and other products; and three, we complete our Southern California branch acquisition as anticipated this quarter. During the last six months, we have taken a number of steps to reduce the pressure on our funding base. Including significantly reducing our level of loan originations, introducing promotional price deposit products, which allow us to attract and retain deposits without repricing our existing interest-bearing deposit base and entering into $1 billion of fixed rate federal home loan bank advances in the fourth quarter. We extended the maturities of this $1 billion of FHLB advances to hedge the still unknown risk associated with increasing interest rates and an unknown terminal federal funds rate. These pressures on our funding base have resulted in reductions and our net interest margin, which are expected to continue the trough in the first quarter of 2023. We expect this to be the low point in our net interest margin assuming short-term interest rates stabilize in the first quarter and we complete our acquisition of three California branches among other things. In addition to the above, we have taken steps to reduce staffing levels in-line with our reduced loan production activity and reduce controllable expenses to the extent possible without damaging our business. In this regard, full-time equivalent employees ended the year at 913, down from 970 at the beginning of the year. Despite the above challenges, we believe we are positioned to resume growing our balance sheet and increasing our earnings once short-term rates stabilize and uncertainty is removed from the interest rate markets. In the fourth quarter, we recorded a $3.8 million addition to our allowance for credit losses. As John mentioned, this addition primarily relates portfolio growth and additions to a qualitative component of our ACL. Charge-offs in the quarter were only $300,000 approximately and non-performing assets fell as John mentioned, 2.13% of total assets. Credit quality remained strong and we currently do not see any meaningful credit challenges on the horizon. Our portfolio is well diversified with our highest concentration in Western States multifamily loans, one of the lowest risk loan types historically. Our delinquencies, non-performing assets, and classified assets remain at historically low levels. Our portfolio is conservatively underwritten with a very low expected loss potential. I remain very confident of HomeStreetâs credit quality. During the fourth quarter, we grew our loan portfolio by $209 million and year to date our loan portfolio has grown by $1.9 billion. This growth was accelerated by a historically low level of loan prepayments, particularly in our multifamily portfolio, the largest part of our portfolio today. Today, we are limiting loan portfolio growth. We are also experiencing [demand] [ph] for loans mostly due to uncertainty regarding the economy and the overall higher level of interest rates. Accordingly, we are anticipating only a modest increase at our overall loan portfolio in 2023. As I've discussed, due to core deposit outflow, we funded our loan growth last year initially with wholesale funding both FHLB advances and broker deposits. We have been replacing our wholesale funding with lower cost promotional deposit products, primarily certificates of deposit. As of 12/31/2022, we had raised $1.4 billion in our promotional deposit products. We are fortunate to have a valuable retail deposit franchise with customers who will invest in certificates of deposit and money market deposit accounts at rates well below brokerage money market funds, treasuries, and wholesale borrowing rates. Additionally, based on our experience, we expect many of these new promotional deposit customers will convert to full relationship, core deposit customers over time. In addition to our ongoing organic deposit gathering, we are acquiring three retail deposit branches from Union Bank, U.S. Bank. In Southern California they currently include approximately $450 million of deposits and $22 million in loans. 83% of the deposits are consumers, and 39% of the deposits are non-interest bearing. The weighted average rate today for the interest-bearing deposits is approximately 16 basis points. We are excited about this opportunity to expand our footprint in the Southern California market. We anticipate the closing to occur this quarter as we've stated. The single family mortgage industry remains in the midst of the most difficult stage of the mortgage banking cycle. While we in industry forecasts expected 2023 loan volume to be well below 2022, we do expect loan volume to recover somewhat from the extremely low levels of the second half of last year. While it's too early in the year to have much confidence in this year's forecast, we do know from history that the mortgage market does not stay at low origination volumes very long. This is due in-part to annual population growth in-part to the normalization of housing prices in relation to financing costs and in-part to the ongoing low levels of new and resale homes for sale in relation to demand. We also continue to benefit from the origination of home equity lines of credit for our loan portfolio, which today carry interest rates of between 7% and 9%. At December 31, 2022, our accumulated other comprehensive income balance, which is a component of our shareholders' equity was a negative $100 million. The change year to date represents a sizable $6.44 reduction to our tangible book value per share. As I'm sure all of you know by now, while this negative AOCI balance does impact the level of our tangible capital, it is not a permanent impairment in the value of our equity, it has no impact on our regulatory capital levels. We have reduced the impact of current and future additions to negative AOCI by taking opportunities to sell certain longer duration securities and by other shorter duration securities, increasing returns and reducing duration. Additionally, today we buy shorter duration, lower risk weighted securities when replacing portfolio runoff. The OCI related write-downs of our securities portfolio will be advertised back to us over time as the bonds mature or repay. And should interest rates decline in the future, securities valuations will improve and the OCI write-downs will reverse and restore our tangible capital. Given the earnings and cash flow of our bank, we don't anticipate needing to sell any of these securities to meet our cash needs. So, we don't anticipate realizing these temporary write-downs. While our lower level of profitability is less than adequate to us, it's been materially driven by the exogenous REIT's interest rate environment. Fortunately, current consensus expectations point to a light at the end of the tunnel as it relates to future rate increases. Indeed, after four straight 75 basis point rate hikes through November of last year, the Fed followed in December with a lower hike of 50 basis points. And market expectations are now centered on only a 25 basis point hike for the Fed meeting this Wednesday with potentially only one or possibly two additional 25 basis point hikes for March and May meetings. We look forward to what even in an environment of stable rates, whenever that comes, can provide for improved financial performance for our bank. On various earnings calls over the preceding quarters and years, I have shared certain profitability and efficiency targets, which we were both striving for and expecting to achieve based upon information available to us at the time. Of course, those financial targets always came with the customary caveats related to factors, related to cooperating interest rate and economic environments among other factors, which could impact our ability to achieve them. It should be very clear from our current results how we have been negatively affected by the current environment. The pace and magnitude of rate increases and the associated unpredictability on our funding composition and costs, as well as on certain of our revenue streams may continue to provide guidance on the timing, and levels of financial targets too difficult at this time. For now, we feel we need to defer providing any near term financial performance targets. We expect to return to such guidance after the current dramatic interest rate and economic volatilities have substantially subsided. Our long term goals to meet or exceed our peers with respect to financial performance remain. However, we must acknowledge the relative disadvantages of our existing model to an environment such as the one we are experiencing today. It is important to note that while this period of lower earnings is painful, and unexpected to a degree, our higher than expected earnings in both 2020 and 2021 was similarly great and unexpected. The current structure that makes our bank more sensitive to cyclical changes in interest rates allows us to over earn in declining rate environments. And while we have worked to reduce this cyclicality, it is important to acknowledge our through the cycle earnings. I share these thoughts not to excuse our current low level of earnings, but to put them in perspective. But again, clearly our work is not finished as the current level of earnings is not acceptable to us. With that, this concludes our prepared comments today and we appreciate your attention. John and I will be happy to answer any questions you have at this time. Just first one, around the margin outlook for the upcoming quarter at least to gain some visibility, do you happen to have the average margin in the month of December and the spot rate on deposits at the end of the year, either interest bearing or total? We don't separately disclose margin by month, sorry, Matt. You should assume it was lower than the average, right, given the December additional 50 basis point move by the Fed. And a full month impact of the November decline. Plus, in late November, that's the point at which we extended and fixed the maturities on that $1 billion of FHLB advances. So, all of that's going to have a full quarters impact in the first quarter. The ending deposit costs, can we disclose that, John or just the average? Okay. I can look it up. Thanks. And then just on the Union Bank transaction, [$450 million] [ph] that's down from $490 million, I guess what are you assuming for attrition, you know, from that [450 million] [ph] and then, you know, the cost sounds still pretty low. I guess what are your thoughts are on, kind of the cost increase there assuming there's some migration? It's hard to estimate what runoff we might experience. Our history with these acquisitions has been that we've experienced no material runoff. Now, this is a different time with respect to rates and with respect to alternative investments for folks, but when we first negotiated this transaction, the balances in these deposit accounts were approximately what they are today, and the deposits actually increased somewhat through the third quarter. So, they've, sort of normalized. I think everyone saw some runoff in the fourth quarter. We are hoping to have minimal runoff for a couple of reasons. One, we have historically not experienced much. But two, we're going to be giving these folks an opportunity to increase their rates. Many of these folks [will] [ph] transfer over to similar accounts with slightly higher rates, our rack rates, which are not our promotional rates, which are a little higher than their existing rates. And we have the promotional rate products available to them, which are at rates substantially higher than Union Bank today in nearly all cases. Additionally, the rates and terms on many of our basic check-in products are better, particularly better on the business side. Things like the analysis credit and so on. So, we don't have a lot of basis to make a really well informed estimate of potential runoff. We like our history. We like the feedback that we have gotten from the employees of these branches about their excitement to join HomeStreet as opposed to a much larger bank. They believe we fit well with their customer base. And we think they've been sharing that with their customers. And so, we have our fingers crossed here. Okay. And then just in terms of the use of those deposits, I mean, I thought previously you'd use them to pay down FHLB, but I think in your comments you mentioned that you locked in [a billion] [ph] or of FHLB for some period of time. Can you just update us there? Yes. Okay, okay. And then in terms of the incremental loan growth, I mean sub-5% going forward here, call it, let's just say 3% thatâs 50 million, 60 million of loan growth a quarter, is the plan just to match fund that with deposits or do you plan to grow deposits in excess of that? Well, our longer term plan is to eliminate borrowings, right. We felt it necessary to fix this $1 billion of FHLB advances for a term to ensure that we took off the table some substantially higher level of Fed funds. We do believe that we can grow promotional deposit products through this year say maybe the third quarter and eliminate or near eliminate our broker deposits. So, that's our plan. Of course, we continue to work to organically grow new customers. And we like others do add new customers consistently and we also have attrition steadily. Until this year, we've always had more growth organically than attrition, but with the liquidity coming out of the system, obviously, that's a lot more challenging as is the challenges from alternative investments. And so, our current plan is again to refund or replace substantially all of our broker deposits with retail deposits, primarily promotional products. Okay. And can you just update us on the amount of brokered deposits that you have at year-end and kind of related cost? Well, just had one follow-up on the branch purchase. I think last quarter you, kind of talked about it or sort of thought it would provide a day one benefit to the NIM of 25 basis points. Are you still thinking about it in the same way or is the forecast tough to tell at this point? The math is pretty straightforward still, right. You take $450 million of deposits and you can pick a rate they may settle in at, right. Maybe it won't be, sort of 10 basis points to 15 basis points, maybe they settle in over the next couple of quarters, a little higher because of opportunities for a little more, but even if that was a 25 basis points, our current broker deposit levels are [4 plus, 4 plus] [ph] maybe 4.25 roughly, right? So. if you consider maybe a 400 basis point benefit on 450 million, I think you can do the math there, right? Yes. Okay. And then I wanted to touch on staffing levels and you noted in your opening comments that they declined by about 6% since the beginning of the year. I mean were those reductions made, sort of throughout the year or were they used to the fourth [Technical Difficulty] or you can give there? Really throughout the year though, about a third and I'm just going to guess at that number without looking it up was in the fourth quarter due to layoffs. Yeah. All right. And then last for me, just given the dynamics of the branch purchase. I mean, do you think by year-end 2023, you're still playing the cross to $10 billion in asset threshold. I mean, I know the overall impact isn't that large for you guys, but just trying to think of the size of the balance sheet? No, we currently don't think that we will cross 10 billion until â well, because it's all about growth rates. It's unlikely in 2024 at this rate, right. It could be 2025 sometime. Now that's subject to a lot of uncertainty about the economy and what our opportunities might be farther out, but if we really slow growth to the extent we are currently anticipating for this year, it's going to be quite a while. [Operator Instructions] There are no additional questions waiting at this time. So, I'll pass the conference back to the management team for any closing remarks. We appreciate your attendance and your attention today. We look forward to speaking to you next quarter. Thank you for joining us.
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EarningCall_831
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Thank you for joining us today to discuss e.l.f. Beauty's third quarter fiscal '23 results. I'm KC Katten, Vice President of Corporate Development and Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. We encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at investor.elfbeauty.com. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. In addition, the company's presentation today includes information presented on a non-GAAP basis. Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure. Thank you, KC, and good afternoon, everyone. Today, we will discuss the drivers of our Q3 results and our raised outlook for fiscal '23. We delivered Q3 results well ahead of our expectations. We grew net sales by 49%, increased gross margin by 180 basis points and delivered $37 million in adjusted EBITDA, up 69%. Q3 marked our 16th consecutive quarter of net sales growth. Given our momentum, we're raising our full year guidance. We are encouraged by the continued strength we are seeing across the color cosmetics category. In Q3, category trends grew 8% versus a year ago. e.l.f. Cosmetics continued to significantly outperform the category, growing 36% in tracked channels. We grew our market share by 150 basis points and increased our rank to the #4 brand as compared to #5 a year ago. We continue to be the fastest-growing top five brand by a wide margin. In skin care, Q3 category trends grew 6% versus a year ago. e.l.f. SKIN also significantly outperformed the category, growing 34% in tracked channels. Before diving into our key growth drivers, I want to share a few highlights. In the last year, e.l.f. has been celebrated for the power of our company, brands and disruptive marketing engine. We are humbled by the recognition we continue to receive. In Q3, we were named Beauty Brand of the Year in the mass category by Womenswear Daily and recognized on Forbes' annual list of America's Best Midsized Companies. We continue to be recognized for our purpose and values as we strive to create a different kind of beauty company, one that is both purpose-led and results driven. With the appointment of Gal Tate to our Board of Directors, we are proud to be one of only four public companies out of nearly 4,200 with a Board that's at least two-thirds women and one-third diverse, underscoring our commitment to diversity and inclusion. The fundamental drivers of our business continue to fuel our results, our value proposition, powerhouse innovation and a disruptive marketing engine. Let me explain how each of these drivers underpinned our strength in Q3. First, we're known for our value proposition. We make the best of beauty accessible to every eye, lip, face and skin concern. We take inspiration from our community and the best products in prestige to deliver high-quality holy grails at extraordinary prices. We often get questions whether our growth can be attributed to trade down from prestige or trade within from mass. While we see benefits of each, we believe the more fundamental point is that our value proposition creates accessibility, driving category expansion. We have many examples where the accessibility of our holy grail innovation significantly expanded the number of consumers who participate in a particular category. I'll start with primers. A few years ago, a prestige brand introduced a new primer format at a $52 price point that quickly became a top primer in prestige. We took inspiration from this item, added our own unique e.l.f. Twist and launched Putty Primer. Our price point of $8 invited a much wider range of consumers into the space, significantly expanding the entire Putty Primer category. In fact, looking at data over the last year, we've sold over nine times the units of the Prestige primer and both e.l.f. and the Prestige item have continued to grow units at a double-digit pace. It's not just in primers where we see the benefits of e.l.f.'s ability to make the best of beauty accessible, we also expanded the concealer category with the launch of our CamoConcealer of $7, compared to the Prestige comparison at $31. Over the last year, we've sold nearly double the units of the Prestige comparison with both our Camo Concealers and the Prestige product growing units at a double-digit pace. In both cases, e.l.f. expanded the category by attracting new consumers who are looking for high-quality products at a great value. By making the best of beauty accessible, we are both expanding our share of the category and making the whole category bigger. The second driver of our performance is that we are in an innovation powerhouse. Our innovation engine has built category leadership over time. Our largest segments brushes, primers, setting sprays, brows, eye shadow, concealers and sponges collectively make up over half of e.l.f. Cosmetics sales. We continue to gain share in all seven segments while maintaining the #1 or #2 position within each. We know how to build winning franchises across categories. Our growing Putty Primer and Camo franchises are great examples of how our multiyear innovation is driving our share leadership in key segments. Our Power Grip franchise is a more recent example. We launched our recent Power Grip primer in late 2021 at an incredible value of $10, compared to the prestige item at $36. In 2022, Power group was our top selling SKU and the #2 SKU across the entire U.S. mass cosmetics market according to Nielsen. e.l.f.âs cosmetics Power Grip is also the #1 face primer SKU across the entire U.S. prestige market according to the NPD Group, coupled with our multi-year innovation in primers. e.l.f. now holds the #1 position in the face primer category in both the mass and prestige markets. We are building upon the success with our recent launch of our Power Grip Primer with 4% niacinamide. At the same $10 price point, this hybrid product delivers on our community's desire for makeup with skin care benefits. The sticky texture grips make up for a long-lasting wear while the 4% niacinamide helps even out in brighten skin. This item has proven to be highly incremental, further expanding our Power Group franchise. We are also innovating in areas where we currently under-index on share. Our spring 2023 launches include a few great examples. In mascara, we launched lash and roll Mascara, a mega curling mascara with a unique double-sided and cursed silicon brush to lift and separate lashes for an eye-opening effect. In lip, we launched our O Face Satin Lipstick that delivers a bold satiny color with a creamy long-lasting finish and is infused with hydrating squalane and jojoba esters for a super comfortable next to nothing feel. Skin Care, we launched our Youth Boosting Advanced Night Retinoid Serum, a powerful retinoid that reduces the appearance of fine lines and wrinkles over time to reveal rejuvenated, smooth and radiant skin. In skin care, we also launched our Suntouchable Whoa Glow SPF 30, a lightweight face sunscreen that doubles the makeup primer and leaves skin with a glowing finish. As compared to the approximately 7% share we have across the cosmetics category, we have a 1% share in mascara, lip and skin care. For context, mascara is a $900 million category and the largest segment within cosmetics, lip color is nearly $0.5 billion category and skin care is over a $5 billion category within mass. We have significant white space in these large segments of beauty and the innovation engine to conquest them. The third driver of our performance is our ability to attract and engage consumers with our disruptive marketing. We kicked off the holidays with a first-of-its-kind digital campaign informed by the insights from the weather channel and brought to life with Grammy award-winning Megan Trainer. Megan delivered a special Radiance report across social channels to break the news of an e.l.f.ing glow storm, celebrating the restock of our viral sensation Halo Glow Liquid Filter. The trifecta of e.l.f., the Weather Channel and Megan Trainer help us reach new audience and entertain our community. The campaign generated over five billion press impressions, exceeding last year's holiday campaign by a wide margin. Over the past three years, we've increased our marketing investment from 7% of net sales to 16% and continue to expect marketing near the high end of our17% to 19% range for fiscal '23. We recently completed our annual Nielsen marketing mix analysis and again saw exceptional ROI results, giving us further confidence that our marketing and digital initiatives are driving brand demand and delivering profitable growth. We expect these three drivers of our performance, our value proposition, powerhouse innovation and disruptive marketing engine to continue to fuel our results. Looking beyond fiscal '23, we believe we are still in the early innings of unlocking the full potential we see for the e.l.f. brand. Taking category share as one KPI, we see a lot of runway for growth. Nationally, we're the #4cosmetics brand with a 7% share. In Target, our longest-standing national retail partner, we're the #2 brand with a 13% share. The significance of our position and share at Target is that we entered Target in 2008, a number of years ahead of our other national retailers. We believe that our position at other major retailers could mirror that at target over time. And even at Target, we believe we still have opportunities to continue to take share and become the #1 brand. On our Q2 call, we discussed the space expansion we've earned with Target for spring 2023. As we continue to drive productivity and expand our footprint across customers, we see a significant opportunity for growth. We also see considerable white space internationally. We've recently expanded space at Shopper's Drug Mart in Canada and Superdrug in the UK. and there still is more room to grow. International represented approximately 13% of our e.l.f. Beauty sales in Q3, with the business growing nearly 80% year-over-year. We're seeing strong results behind our disciplined expansion strategy in Canada and the UK. As compared to our #4 position in the U.S., we're the #7 brand in Canada and the #8 brand in the UK. We recently hired a new GM of International and plan to build out that team to further penetrate international markets. Before I turn the call over to Mandy, I want to discuss our brand superpowers, which set the foundation for overall competitive advantage. With e.l.f., consumers can have premium quality beauty products at accessible price points with broad appeal that are cruelty free, vegan, clean and fair trade certified. While other beauty brands can try to replicate any one of these, we believe the unique combination of our expanding superpowers forms our competitive moat and fuels our ability to win in fiscal '23 and beyond. Thank you, Tarang. Our third quarter results were outstanding. Q3 net sales grew 49% year-over-year, driven by broad-based strength across national and international retailers, as well as digital commerce. Shipments exceeded consumption trends this quarter due to pipeline shipments related to our spring 2023 space gains in Walmart, Target, CVS and Shoppers Drug Mart, as well as increased shipments for the restock of our viral sensation Halo Glow Liquid Filter. Our digitally-led strategy continues to serve us well. Q3 digital consumption trends were up over 75% year-over-year. Digital channels drove 17% of our total consumption in Q3, as compared to 14% a year ago. We see opportunity to increase our digital penetration, particularly as we're able to further enhance our Beauty Squad loyalty program. Beauty Squad now has nearly 3.5 million members with enrollment growing over 25% year-over-year. Our loyalty members drive almost 70% of our sales on elfcosmetics.com have higher average order values, purchase more frequently, have stronger retention rates and are a rich source of first-party data. Gross margin of 67% was up approximately 180 basis points, compared to prior year. We saw gross margin benefits from the price increases implemented last March, margin accretive mix and cost savings. These gross margin benefits more than offset the impact of costs associated with space expansion and inventory adjustments realized in the quarter. On an adjusted basis, SG&A as a percentage of sales was 47%, compared to 50% last year. We drove leverage in our non-marketing SG&A expenses as a result of our better-than-expected top-line trends. Marketing and digital investment for the quarter was approximately 17% of net sales, as compared to 15% in Q3 last year. We continue to expect marketing and digital investment for the full year to be at the high end of our 17% to 19% range with Q4 expected well above that range. Q3 adjusted EBITDA was $37 million, up 69% versus last year and adjusted EBITDA margin was approximately 25% of net sales. Adjusted net income was $27 million or $0.48 per diluted share, compared to $13 million or $0.24 per diluted share a year ago. Moving to the balance sheet and cash flow. Our balance sheet remains strong and we believe positions us well to execute our long-term growth plans. We ended the quarter with $87 million in cash on hand compared to a cash balance of $33 million a year ago. Our ending inventory balance was $81 million, compared to $85million a year ago. Our average customer in-stock rates were over 95% in Q3 and we remain confident in our ability to meet the strong consumer demand we're seeing. I'm also pleased with the strong free cash flow generation we've seen year-to-date of approximately $67 million. As we previewed last quarter, we paid down approximately $25 million of our outstanding debt in Q3 in response to the rising interest rate environment. Given our strong cash position, we ended the quarter with less than 1x leverage on a net debt basis. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions. Now let's turn to our raised outlook for fiscal '23. For the full year, we now expect net sales growth of approximately 38% to 39% versus prior year, up from 22% to 24% previously. We expect adjusted EBITDA between $110.5 million to $112 million, up from $93.5 million to $95 million previously. We expect adjusted net income between $75.5 million to $77 million, up from $59 million to $60.5 million previously and adjusted EPS of $1.37 to $1.40 per diluted share, up from $1.07 to $1.10 previously. We expect our fiscal '23 adjusted tax rate to be approximately 19% as compared to 22% to 23% previously. Lastly, we continue to expect a fully diluted share count of approximately 56 million shares at year-end. Let me provide you with additional color on our planning assumptions for fiscal '23. Starting with top line, our raised outlook reflects our strong Q3 performance and ongoing business momentum. In Q4, our outlook implies approximately 42% to 46% net sales growth, reflecting the strong consumption trends we're seeing. Turning to gross margin. We now expect our gross margin to be up approximately 200 basis points year-over-year, as compared to our previous expectation for up 175 basis points. This is largely a result of our outperformance in Q3. In terms of the key puts and takes for the year, we expect gross margin improvement from the price increases implemented in March of last year, margin accretive mix and cost savings to more than offset the impact of higher transportation costs and cost associated with space gains relative to prior year. Turning now to adjusted EBITDA. Our outlook implies adjusted EBITDA growth of approximately 48% to 50% versus prior year, up from approximately 25% to 27% previously and on top of the strong 22% growth in fiscal'22. We expect our marketing and digital spend to be at the top end of our 17% to 19% range, up from 16% a year ago. Even with that increased investment, our outlook implies adjusted EBITDA margin leverage of approximately 150 basis points year-over-year as compared to approximately 50 basis points previously. The improved outlook is supported by the combination of our strong sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses. Overall, we are quite pleased to be in a position to meaningfully raise both our sales and profitability outlook in what continues to be a dynamic environment. In summary, we're pleased with our outstanding Q3 results and remain upbeat on our long-term growth potential. As Tarang discussed, we continue to see significant white space across cosmetics and skin care, both domestically and internationally to support our expected top-line growth. The easing cost environment gives me further confidence in our ability to continue to expand our adjusted EBITDA margins. Finally, we believe our solid balance sheet, low leverage and strong cash flow generation can continue to drive shareholder returns and support our overall growth. So clearly, very strong top-line growth in the quarter, which accelerated sequentially and your implied forward fiscal Q4 revenue growth guidance is also very robust, even though you're normally very conservative with forward guidance. So, I guess, can you just give us an update on what's driving the confidence in the much higher revenue growth range short term? And then longer term, similar question, obviously, very strong market share results. Can you just run through what you think the key drivers are there? And how sustainable they are as you look out the next year or two, maybe particularly focusing on e-com, which was obviously very strong in the quarter? Thanks. Sure. All right. So I'll start with your first question on the strong top-line growth and what gives us there. As we have gotten into now giving an outlook for the last quarter of the year, certainly, want to reflect the momentum that we're seeing. And as we talked on the call, the category has performed better, our innovation continues to resonate with our consumers and then just our ability to really engage our consumers. We talked about the activation that we did with Megan Trainer and Halo Glow and just really that combination of our innovation and marketing give us confidence as we head into Q4. And then on the longer term what gives us confidence, we talked about a number of white space opportunities ahead of us. I'll start with the example that Tarang gave with comparing our market share today broadly versus that â where we have a target and the opportunity that we have with our existing retailers to get them to that level. We also talked about international being a big white space opportunity for us. It was 13% of our sales in this quarter, but we know that there is much more potential than that on the road ahead. And then I would say, across the subcategories that we called out mascara, lips, skin care as a big opportunity as we talk about e.l.f. SKIN on the road ahead. So there is a number of things that give us confidence on the road ahead. And I'd add to that, to your question on digital, Dara. We're seeing real momentum in our digital business. It was up over 75% for the quarter, now 17% penetration relative to 14% last year and a lot of the investments we've been making in our digital business are definitely paying off. Our investment in Beauty Squad Loyalty Program now with 3.5 million members over 20% year-over-year really drives a lot of our e-commerce results as have a lot of our investments penetrating other digital channels. We have a very strong business with Amazon. We see real strength at retailer.com and so our hope is to continue to drive that digital penetration even further. Great. Thanks. First, congrats on a great quarter and outlook. You've obviously had a significant number of distribution wins of late. So my question is around how you have to run the business differently to support that. Does it require more lead times? To what extent that help you this quarter? Maybe if you could help us bridge the gap between your sales and scanner. And then any early insights you have on discussions around incremental shelf space later this year. If I could just sneak one more in, given the torrid pace of growth, my question is around production and ability to keep up since as much of your production is based in China and obviously, the COVID infection rates that we're seeing just have to be somewhat of a challenge. So what you're doing to sort of stay ahead of that as well? Thanks so much. Sure. Hi, Olivia, it's Tarang. So what I'd say is, we've had a pretty good and consistent track record of being able to pick up more space. If I take a look at the contribution of space gains over the last few years, it's been pretty consistent. So I'm highly confident of our ability to continue to not only pick up more space, but also optimize that space. Our first and foremost focus is always going to be on the productivity whether somebody gives us more space or not, that the key driver of our business. And I think we have a really good cadence in terms of how we're being able to do that. We have quite a few customers taking up space in the spring reset. Those are just starting now. So we'll have a better view of how those resets are doing when we have our May call. But between Target, Walmart, CVS, Shoppers, Drug, there is a lot that our team is executing right now. I've got a lot of confidence in our team's ability to execute that. And then in terms of incremental space opportunities, I think given the productivity of our brand, the innovation we have, the consumer profile, I think there will be other opportunities. We'll highlight those as we're able to achieve them into the future. But again, I feel really good about our track record over time. Particularly, in more recent years, our ability to optimize that space as we get it and then in terms of your production question, that's one area I'm particularly proud of the team. Our operations team has done a phenomenal job. If I go back all the way to the pandemic, all the supply chain disruptions, even lockdowns in China, we've been able to meet the strong consumer demand we've seen in the last quarter. Our in-stock levels remained above 95%, which I think speaks to even a 49% growth quarter, our ability to meet that demand. And so I feel really good about our overall production and capacity. Now there will be some out of stocks on certain viral sensations. We spent a lot of time this last year kind of chasing the success of Halo Glow. It seemed like every time we took that forecast up, we saw even greater sales. We talked about our Power Grip Primer, which is not only our #1 SKU, but the #2 SKU across the entire category. And then important to note, it's not only the #1 primer in mass, but it's also the #1 primer in prestige. So that's an item that I think we're going to also be chasing. So they will have some periodic new items that we'll be looking to chase, but overall, we remain highly confident in terms of our ability to meet the demand that we're seeing. Thank you. My question, Tarang, is exactly what you just described and how you're able to keep up with Power Grip and Halo Glow and even Poreless Putty Primer in the past. So in terms of like just â perhaps, giving us a little bit more of details on how the execution and your ability to have in-stocks going forward? And then related to that, you have a lot of white space, not only as you pointed out, the three subcategories, lip and mascaras and skin, so wondering like the cadence of that of that set up, can you give us an idea if most of these new shelf resets will carry those new products? And how the cadence as we go into fiscal '24 will shape? Thank you and congrats again on the numbers. Thanks, Andrea. I'd say on the first one in terms of bit more detail on how we are able to maintain such high in-stock levels. Again, it's a credit to our team and the penetration we have with each of our national retailers supply chains. Our ability to plan with them to highlight items that we feel are going to be kicking off and then be able to take a stronger inventory position on those items. It was a couple of years ago that we did take our inventory levels up in anticipation of some of the container imbalances and that strategy served us well. We have quite a bit of credibility with our customers in terms of when they place orders for us to tell them, really almost down to the store level at a SKU level, what they should be carrying. So I feel good about our ability to manage that. As I said, there will always be periods where we have given the viral nature of this brand items that we are chasing. But overall, I feel good about â and overall production plans feel really great about our ability to continue to execute upon those. And then in terms of the white space, I would say, I feel really good about the innovation we have in each of those white space categories. We mentioned in mascara, our lash and roll mascara, which is off to a great start. In Lip, our O Face Satin Lipstick is this phenomenal product at a great value. And then in skin care, already are Suntouchables Whoa Glow SPF 30, I think, is already our second best-selling skin care SKU just a few months out of the gate. And as I look forward, I also see quite a bit in our pipeline against not only our leadership segments, but also those categories were conquesting. So very high hopes about our innovation continue to be able to not only drive leadership in the segments we have, but also conquest these new categories. And if I can explore â this is super helpful and some of the data that you have in the Beauty Squad in particular because I understand that those would be 70% glow, I think, I understood from your presentation. Is there any metric you can say, listen, we are not only recruiting and keeping those consumers really engaged. And I think Kory had said that many times, but also recruiting new customers, right? And especially, these new premium products, you just immediately recruit people who are not even in the e.l.f. category. So, is there any metric you can help us understand if there is a new cohort that you're getting with the Beauty Squad or even your direct-to-consumer e-commerce platform that inform us on the potential for additional customers in your base? Sure. So on Beauty Squad, we continue to expand the base on Beauty Squad. I talked about the 20% growth in Beauty Squad members, and we see that growth coming obviously from new consumers. But probably, the biggest magnet we have to attract new consumers is a combination of our innovation and our marketing engine. Our innovation, all of those core innovations I just talked about, Halo Glow, Liquid Filter, Power Grip, all the new ones that I just talked about, all attract a significant number of new consumers to the franchise. And I think they see the viral buzz. They see other people talking about this prestige quality, these great prices and particularly, these days with platforms like TikTok, we get consumers kind of doing their own demonstrations and comparisons. And so, it's been a great source. The metric we specifically look at there is, what percent behind each product are we pulling in new users and it's often up more than 50%. And then the composition of those consumers is a combination of our strength amongst Gen Z, but increasingly also amongst millennials and Gen X as well. So I think the quality of these products at the prices we have and our ability to engage them really are attracting even more consumers to our franchise. Hi, thank you. Can you maybe just talk about your other brands, Alicia Keys and the W3LL PEOPLE, and how their share progress is coming in their respective areas? Sure. Hi, Linda, so we feel good about our progress on both W3LL PEOPLE and Keys Soulcare. As a reminder, they're both relatively new in our portfolio. Keys Soulcare, we only created two years ago. W3LL PEOPLE, we acquired a little less than four years ago. And our main focus is really building up the awareness and trial of both of these brands. During the quarter, we had a great hit on Keys Soulcare with our multi-benefit pestide serum. It's actually already out of stock. We're â it's another item that we're chasing to get more stock in. And so our consistent focus is building these brands for the long term and I feel good about the progress there. Thanks. And then can I just ask â I was a little surprised to hear that transportation costs are still up year-over-year. Can you just talk about kind of the cadence of how those comparisons flow in the next few quarters and when we'll start to see roughly the transportation cost being down year-over-year? Sure. So Linda, we did start to see transportation costs ease within the quarter, and we're really pleased with that. I'm sure hoping that that holds. As you know, it takes some time for our inventory to turn through those lower costs since we capitalize the freight with the inventory. And so, as we think about the coming quarters, it certainly should be a tailwind for us as we as we think about cost and gross margin. Hi, thank you and congratulations on the great results. Just given the benefits driven by price increases and product mix, I was wondering if you could share how much of the growth was driven by the expansion of e.l.f. SKIN with your added shelf space at major retailers? And then are you seeing an increase in older demographics purchasing e.l.f. SKIN outside of your more typical consumer in the millennial and Gen Z cohorts? And just overall in terms of the growth that you're seeing, how much of the benefit would you allocate to innovation in your products? Thanks. Yes. Hi, Anna. So, first, on the price increases and mix, we have talked about the price increases that we took last March and the benefit that, that's had to our overall top-line is about high single-digit impact. So that's kind of how you can size up the specific price increases that we took. Mix is playing a role in that, right? We've launched some innovation this year that is at that $10 or $12 range that is also playing a role. So, you'll see in our commentary in the Q how price and volume â price/mix and volume breakout across both net sales and gross margin. I would say, this quarter, a pretty healthy mix of both, which we are very pleased to see. From a skin care standpoint, we talked on the call about skin care being up 34% for us in Q3. Skin care consumption versus the category, up 6% and on the color side, seeing cosmetics up 36% versus the category up 8%. So very pleased with how our skin care is performing as well and certainly an opportunity for growth. Tarang just talked about our Whoa Glow. That will be a part of our shelf reset and a continued focus on making sure that skincare is a part of that shelf expansion as we go in. So we're very pleased with that. And then if I think about innovation, overall, innovation is a healthy contributor to our sales growth and has been pretty consistent over these last several years. So we feel great about the innovation that's coming. We highlighted the innovation in Mascara and lip and in skin care that we're really excited about. And so, as we think about balance of growth, really seeing it across all vectors from a channel standpoint, we talked about digital. We've talked about international and really pleased with the balance that we're seeing as well, across kind of core products and innovation. Hi, thanks for taking my question. Great job on the quarter. I wanted to ask a little bit about marketing. I'm curious if there is any thoughts or color you can give around just the increase in marketing and how much you think that has helped to drive the accelerated sales growth? And then also, I am curious if you have any early thoughts about how you're thinking about marketing for 2023 if this is going to be the new base level? Or do you think you'll increase it again? Susan, this is Tarang. We're not ready yet to give FY '24 guidance on marketing, but what I would tell you is, we're highly comfortable with the 17% to 19% range we have this year. And what gives us comfort there is, we recently got our Nielsen annual marketing ROI analysis back and it shows exceptionally high marketing ROI. I've been in the consumer space for 30 years. Typically, when you increase your marketing levels, you see a diminished returns. In our case, we've now had 3 consecutive years where we've taken our marketing levels up and have actually seen the marketing ROI go up. And I think it really speaks to the strength of the marketing engine that we do have. The support we have does â is not only effective, but it allows us to broaden the audiences by which we go after and test on new platforms and new things like the collaboration we talked about between the weather channel, Megan Trainer and us. So I feel really great about where we're marketing, and it's definitely driving profitable sales for us from our own analysis and what gives us confidence for this year. Great. And then if I can maybe just ask about the inventory. It looks pretty lean at the end of the quarter, down 5%. I guess how are you thinking about just replenishing as we go throughout the quarter? And then, would you expect that to be up higher at the end of the year? Yes, Susan. So, inventory for this quarter, a little bit lighter than we probably would have wanted just given the outperformance that we saw, but we feel great about our ability to service our customers. So we talked about having over 95% in-stock levels even with that inventory. And as we get towards year-end, we do expect that inventory level to go up and be higher as we seek to support the growth that we're seeing. So, feeling great about where we are right now. To Tarang's point, we may have onesie-twosie out of stocks on those items that really take off on innovation. But also, on the other hand, lead times have improved, and we're able to get behind and get products here faster than we have previously. So again, feeling great about where we are on an inventory standpoint. Couple quick ones. The guidance, I think, implies somewhat of a sequential decline in gross margin in the fourth quarter to 300 basis points. Perhaps, is that â am I thinking about that the right way? And what might be some of the drivers of that? Yes. So, I am really pleased with how our gross margin is positioned overall. We are outlooking gross margin up 200 basis points year-over-year in a rising cost environment, which is really fantastic to see. As we lookout to Q4, what you're observing is a little bit of natural seasonality that we see from Q3 into Q4 of a lower gross margin. And then I would say, the other thing layered on there are cost related â one-time costs really related to space gains that will flow through in Q4 as well. We picked up a little bit of that in Q3, but we'll have some in Q4 as well. And so that also is impacting gross margin, but overall, I feel great about where gross margin is positioned. Even in Q4, still above last year is what's implied in our outlook and again, 200 basis points higher on the year. That makes sense. Very helpful. Thanks, Mandy. And then again, I'm going to take a shot at this. I know you're not ready to talk about fiscal 2024 guidance, but I am just kind of thinking back to the long-term algorithm you've kind of communicated in the past mid- to upper single-digit revenue growth. Obviously, that's going to be different from year-to-year, but when you put it all together and you think about the color category tailwinds and the share gains for the e.l.f. brand and what seems like significant new shelf space this spring, a very robust innovation pipeline, high digital and marketing spending. Any thoughts on maybe kind of triangulating the '24 kind of drivers relative to kind of that long-term algorithm? It just feels like it could be another very strong year above kind of algorithm growth. Yes. So you're right, Jon. We're not giving fiscal '24 guidance today. You have to stay tuned for May for that, but we feel great about the white space that's ahead of us and opportunities that still lie before us. You called out a number of them, but certainly, would love to see growth continue at this level. But I've always taken a balanced approach with guidance, as you know. I feel like that has served us well, and so you'll have to wait until May, but we're feeling pretty good about where we're at right now. Hi, this is Sidney on for Ashley. Congrats on the quarter. So I just wanted to ask first about that kind of higher price tier of products. Are you seeing any difference in customer demographics between those who are shopping the more entry-level lower price point or versus like the higher price point products in your mix? Hi, Sidney, this is Tarang. We do see some difference. I would say, our strength is Gen Z into millennials and some Gen X and so we certainly do pick up more consumers from different age cohorts. But the biggest thing â because I often get asked this question, are you seeing trade down, are you seeing trade within mass. As we talked in our prepared remarks, I think the real secret sauce of e.l.f. is with these holy grail products, some of these higher-priced tier products. We're able to expand the entire category. So I gave the example on Poreless Putty Primer. It had an inspiration of a prestige item that was $52. By introducing Poreless Putty Primer, we've grown â I think we sell 9x more units on that prestige item and that prestige item is still growing. We've seen the same thing when it comes to our concealer business, where we've more than doubled the units on a pretty iconic set of prestige concealers. So, we definitely do pick up more new consumers, and because of that, you will see a broader range in terms of ages and their demographics. But I think the bigger concept and what really propels us is our ability to expand that entire category where it's no longer accessible just to a few who could afford a $50 item, but you can really bring anyone in when it saves you $10. Yes, that's helpful. And then my next question is a bit more long term and actually kind of about that next upcoming generation from Gen Z, Gen Alpha. It feels like they're kind of beginning to rise with the new buzzy generation and because of your price point and high level of innovation and you're always on trend, I think it seems like you guys make a great entry skincare or color cosmetics brands. So I was just curious if you're beginning to see any of those younger shoppers or if you have any thoughts on kind of beginning to consider them in your marketing approach? So Sidney, absolutely, we're definitely seeing early signs of resonance with Gen alpha. There is a lot of our marketing activities that frankly, appeal to Gen alpha just as much as they do to Gen Z, particularly if you look at the different platforms that we are on and the types of things that we're doing. So more to come on that, but you'll continue to see us be at the forefront on some of these new consumer demographics and there â and introducing them to the best of beauty and making it accessible. Got it. And then just one last one, just to dig in a little bit more on that marketing ROI. It's great to hear that, that keeps expanding, the more you invest. So I'm curious, are there any new channels or platforms that you're seeing especially strong traction on? That's the great thing about our marketing ROIs. We see strength across vehicles and channels. So certainly, we tend to look at our paid media, our owned and then also our earned media. We're seeing strength across all three of them. And then by vehicle, we see very strong ROIs on our digital advertising. We see strong ROIs and our influencer work on our PR is really off the charts. It's really almost every one of those buckets. And I'd say, the other thing about us is, we're not afraid to test and learn our new platforms. So we were one of the first beauty brands on TikTok. In the early days, it was hard to get attribution on TikTok. We now can see almost immediately when something goes viral on TikTok, the impact it has on our business and our ability to be able to attract that. So you'll continue to see that good balance between things that we have that are definitely proven and other things that we are testing for the future and we've got a great cadence going there. Good afternoon. Thanks for taking my question and also congrats on a great quarter. So I guess I wanted to ask just on the trends. So anything you can share in terms of the cadence of trends during the quarter and then maybe as well provide some color into January? Yes, so really strong trends throughout the quarter. I would say that we had a really strong Cyber Monday with our e-commerce business and we saw trends really strengthen as we got closer to the holiday period, it was great to see. Right now, what we're seeing in track channels a continuation acceleration of that year-over-year growth. And I think from about end of December through mid-February, you will see those indices continue to be really strong, given that in the base, there is the omicron that we're cycling in the base and so that suppressed some of our numbers last year and have really accelerated what you're seeing in tracked channels right now. And now that doesn't diminish our bullishness on our performance. I'll take you back to our guidance of 46% on the top end for the quarter really demonstrates how strongly we believe our business can perform right now. Okay. Great. And then, gross margins this year, you expect to expand around 200 basis points. What are the bigger opportunities do you see going forward to further expand margins in the coming years? Yes. So we talked a little bit about transportation cost easing and that â if those should sustain would be a tailwind for us as we head into fiscal '24. The other thing that we're looking at is on the FX side. We source a majority of our products from China, and as we've seen favorability there, that could be a tailwind for us as well from a gross margin standpoint. Great. Maybe one last question, as we look at -- look to the next fiscal year -- and I know you're not providing much guidance today, but is there anything you guys would caution us in terms of modeling for next year just from a comparison perspective? I mean it's hard for us to say right now because we're not providing FY '24 guidance. I think you've seen from this call a general bullishness on the business. Mandy said it well, she always takes a very balanced view and so I think we'll better be able to talk about that. But I don't see any big red flags at this moment in terms of the veins that we're particularly worried about, but we're always going to be balanced and I think, again, it's served us well in terms of taking in consideration all factors. Hi, thanks for taking my call. It's Tom on for Oliver. A question on pricing. How should we think about the potential for price increases going forward this year and the demand elasticity in that regard? And additionally, have you seen any slowdown in demand and so where might those pressure points be? Yes. So I'll take the question on pricing. We have used pricing very judiciously over the last several years. We really have only taken two major price increases: one back in 2019 related to tariffs, where we touch about a third of our portfolio from a pricing standpoint and then last March in response to the inflationary environment that we're all operating in where we took pricing on about two-thirds of our portfolio. Right now, pricing is not on the docket for us to take again. We take very seriously our ability to provide our consumers with an extraordinary value with exceptional quality and we'll continue to do that. So, right now, pricing not on the docket for us. And, go ahead. On your second question, Iâll pass it to Tarang. On the slowdown, yes. No, we've not seen any slowdown in demand. I know there's a lot of concerns out there on recessionary environment. What I'd tell you is, historically, mass color cosmetics, mass skin care has fared really well in inflationary environments, but â or recessionary environments, but even more importantly, we've long been bullish on the category. And this is a category that really did suffer during the pandemic when people were restricted from their normal behavior. So I've long felt there's a lot of pent-up consumer demand for the categories in which we compete, and we very much are seeing that. I mean for the quarter, as we said, overall mass color cosmetics is up 8% in track channels, masking care was up 6% and our growth is even stronger. So we're seeing an acceleration of consumer demand, not any slowdown and I feel, again, very bullish in terms of how the category shapes up as we continue to go forward. Great. Thanks and a quick follow-up on skin care. Can you just add some color on the main drivers of the recent success there and where you might be taking share? Yes. I mean we're still small in skin care. So I think less about where we're taking share and more about the fundamental drivers and the fundamental drivers are very similar to the fundamental drivers we have on the color business. We have an incredible value proposition, prestige quality at accessible price points. We have meaningful innovation that's resonating with the consumer. If I look at our Halo, holy hydration franchise, I look at our recent will launch and we know how to engage and attract consumers. It was only a couple of quarters ago that we've put our first dedicated support on skin care and we've seen good returns from there. So we're going to follow a similar formula in a different category with more education and more dedicated focus there. But I like the momentum we have in there and that momentum is now sustained for a number of quarters here and I feel like we have a huge opportunity there. Yeah, thanks and afternoon, everyone. One â just a follow-up question, one more broad question. In thinking about how to model the top-line, if you back away international back-away digital, the sales are sort of directionally in line with the scanner data. So, obviously, then a lot of what we're not seeing is what you referenced in terms of the strong digital and international growth. Anything there from not just a quarter standpoint, because you've obviously given us fourth quarter, but anything that we should be thinking about, both positives and negatives there in terms of how the business has fared over the last couple of quarters here that we should be modeling or thinking about as we model? You hit on it, Mark. I mean our digital and international growth and just growth in our untracked channels has been very strong this year. And so, I think that if you parse out what you're seeing in track channel and then it kind of take forward what you're seeing from an untrack standpoint, you probably get to the right place from a modeling view. Got it. So basically, keep the trend in 4Q and that's sort of how we bridge â bridge the gap. Okay. And then more just category related and somewhat following the last question, any thoughts not specific to your guidance, but how you think about category performance talking more broad beauty trends, if you have thoughts on 2023 and even just on the cycle, train your comment on coming out of the pandemic. The last time the beauty category had a cycle make up, in particular, it lasted, I think, five plus years. Are we kind of year two in a longer-term cycle? How are you thinking about all of that? Yes. I mean we're always going to be balanced. I am hopeful that we're in the start of a really good cycle here, both what â the comments I made on the broader economy more importantly, consumers wanting to express themselves. And then we're also seeing good things from a competitive standpoint. I've long been a believer that I actually wish really well for our larger global competitors because the more they do to bring interest to the category either through innovation or their own investment levels, I think it's good for the category, which in turn is really good for e.l.f. because our value proposition comes shining through. So I've been bullish for maybe times when I shouldn't have been bullish on the category, but I was bullish then. So I am certainly bullish now in terms of how the category continues to gain momentum. Well, I mean, I think if you look longer term, when I look at long arcs of this category looking over the last 30,40 years, this is a category that in the mass side was a consistent grower and kind of call it this low to mid-single digits. We're obviously seeing outsized growth right now in Q3. I would expect to see outsized growth, part of it in Q4 will be related to the compares to Omicron and the suppressed volume we saw there. But I am hopeful for lease back to historical ranges, if not a little bit higher in the coming year. This concludes our question-and-answer session. I would like to turn the conference back over to Tarang Amin for any closing remarks. Well, thank you for joining us today. As you can tell, I'm so proud of our incredible team at e.l.f. Beauty for delivering yet another quarter of outstanding results. We look forward to seeing some of you at our upcoming investor meetings since speaking with you in May when we'll discuss our fourth quarter and guidance for FY'24. Thank you and be well.
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Good day, everyone, and welcome to the Helmerich & Payne Fiscal First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call may be recorded and I'll be standing by should you need any assistance. Thank you, Nikki, and welcome everyone to Helmerich & Payneâs conference call and webcast for the first quarter of fiscal year 2023. With us today are John Lindsay, President and CEO; and Mark Smith, Senior Vice President and CFO. John and Mark will be sharing some comments with us, after which weâll open the call for questions. Before we begin our prepared remarks I'll remind everyone that this call will include forward-looking statements as defined under securities laws. Such statements are based on the current information and management's expectations as of this statement are not guarantees of future performance. Forward-looking statements involve certain risks uncertainties and assumptions that are difficult to predict. As such our actual outcomes and results could differ materially. You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings. You should not place undue reliance on forward-looking statements and we undertake no obligation to publicly update these forward-looking statements. We will also make reference to certain non-GAAP financial measures such as segment operating income, direct margin and other operating statistics. You'll find the GAAP reconciliation comments and calculations in yesterday's press release. Thank you, Dave, and good morning, everyone. We are very pleased with our quarterly results and remain optimistic about the year ahead. Our first fiscal quarter results of 2023 showed another strong sequential improvement in financial performance and a continuation of the momentum established in fiscal 2022. We remain focused on our three strategic objectives, which are North America Solutions pricing and margin cycle dynamics, H&P's international opportunities and our investments related to technology and sustainability. Almost a year has passed since we set into motion plans to achieve revenue per day in excess of $30,000 and direct margins of 50% in our North America Solutions segment. These financial guideposts were established as proxies for what is required to generate sustainable levels of economic return in this capital intensive business. This recent quarter marks a milestone in achieving that revenue per day goal as our average revenue per day was $33,000. Our per day direct margins were approximately 47%, very close to achieving our direct margin goal but still earning the highest margin level since 2014. This headway achieved in just a year generated significant value for shareholders. On our last earnings call in November and subsequent discussions with investors, we laid out our expectation for a moderation in activity growth for both H&P and the industry rig count during the December quarter relative to what we have seen over the last two years. That expectation is being realized and is largely attributable to the capital discipline exhibited by our customers and their desires to drive more consistent and sustainable shareholder returns. We've seen time and again that in a highly cyclical industry like oil and gas, losing sight of the long run can be fatal. So we believe that capital discipline contributes to the overall economic health of our company as well as our industry. Most of our large public customer budgets appear to be moderately higher in 2023 and we are planning ahead to manage this potential growth in an optimal fashion. Accordingly, we intend to maintain our plans for adding no more than 16 incremental rigs to our North America solutions rig count during fiscal 2023, dependent upon customer demand and would expect contractual churn to satisfy other points of rig demand. There has, however, been a change in the maximum number of rigs we can now achieve with 16 incremental rig adds. Previously that number was 192, but is now 191 rigs due to losing an active rig as a result of a rig fire during operations. Thankfully no H&P employees were injured during the incident. We were able to quickly respond and utilize one of the 16 incremental rigs as a replacement for the rig that was lost hence the maximum number of active rigs we could reach in fiscal 2023 is now reduced to 191. During our earnings call in mid-November, we mentioned having 11 of these 16 incremental rigs committed and today we have 12. 10 are currently working and the remaining two are contracted to begin work in February and March. The four uncommitted rigs will not reactivate without contracts, which include margins and term commitments that justify their deployment. To be clear if, we can't achieve those objectives our preference would be to allow rig churn and spot market pricing to satisfy incremental rig demand. In light of this here are three industry data points to keep in mind. First, utilization of the active super-spec fleet is currently over 80%, a level which is supporting current pricing. Second, the idle super-spec fleet has now been inactive for over three years making reactivation and expensive proposition. The third point is that there are roughly 520 super-spec rigs operating currently, which is effectively 100% utilization for those rigs that have worked some time in the last three years. Accordingly, we expect the current utilization of the active super-spec fleet to remain at very high levels. With our expected rig count we anticipate financial results in the second quarter to continue on an upward trajectory with direct margins per day moving closer towards our target level of 50%. While some may be concerned with the momentum of the current cycle, our experience over the past few decades is that we should expect to have moderate and choppy activity trends like today. An up cycle is rarely straight up and to the right. Another opportunity for us during the next few quarters is having more of our fleet with long-dated term contracts rollover to current market pricing. Bringing the pricing of those rigs in line with the rest of the fleet will have a positive impact on our pricing and margin objectives going forward. Regarding the International Solutions segment, the company's expansion efforts are centered around unconventional drilling where H&P has significant experience drilling unconventional wells given that our FlexRig fleet has drilled over 30,000 horizontal wells in the US over the past 10 years. This extensive experience can provide substantive value to customers with a complement of people, processes, rigs and technology. We are moving forward on several fronts to set the company on for future growth. Efforts to grow our Middle East presence continue with the pursuit of additional work in the region and our operational hub, which should be stood up during the last half of fiscal 2023. These international unconventional plays provide a great opportunity for H&P to locate super-spec FlexRigs in the Middle East and other unconventional growth areas without the need to build new rigs. These rigs and our capabilities provide great opportunity to utilize the idle FlexRig capacity and showcase our technology to grow our international footprint. Our offshore Gulf of Mexico segment remains a steady reliable contributor to the company's overall financial performance. That said, we are expecting some variability later in the year as we do have one rig contract that is set to expire during the fourth fiscal quarter. On the technology front, we continue to experience a growing appreciation for our technology solutions which are adding significant value for our customers through rig efficiencies and wellbore quality. Many of our technology products and automation solutions have become integral parts of the bid process and daily operational workflows. Our operational and technology teams are delivering outstanding results for customers. Longer laterals and more consistent target attainment continue to be key themes for our customers. To achieve both, we have seen increasing usage across our technology portfolio with automation driving consistent three-plus mile lateral delivery. This trend is not limited to one customer or one basin, but rather is becoming the way we work and deliver value. We believe this type of repeatable reliable performance will continue to drive the adoption of H&P technology by our customers, as well as expand our revenue growth. This keeps our teams excited about the future, a future where digital technology helps drive customer value, by providing safer more efficient and repeatable drilling operations. Maintaining a fiscally disciplined approach to our business is a key tenet of our long-term strategy and is a major driver behind the company's improving financial results. Mark will provide details in his comments regarding our capital allocation efforts to-date for 2023. But we are pleased with the execution to-date for our supplemental shareholder plan and opportunistic share repurchase efforts. In conclusion, we remain optimistic about the outlook for 2023 and the longer-term energy macro fundamentals. I've had meetings with some of our most active customers this quarter and I'm very pleased with what I have heard regarding the value proposition H&P provides, the pride of the H&P team and the differentiated results we helped to deliver. As a result of the hard work and dedication of our employees during this past year, we are positioned to respond effectively to healthier industry conditions and improve the profitability of the company. Working closely with customers to identify and then provide industry-leading drilling solutions, we are creating value for these customers and we're beginning to receive commensurate compensation for the value we help create. We will carry this mindset forward to the benefit of both customers and our shareholders. Thanks, John. Today, I will review our fiscal first quarter 2023 operating results, provide guidance for the second quarter, reiterate full fiscal year 2023 guidance as appropriate and comment on our financial position. Let me start with highlights for the recently completed first quarter ended December 31, 2022. The company generated quarterly results of -- quarterly revenues of $720 million versus $631 million from the previous quarter. As expected, the quarterly increase in revenue was due primarily to focused efforts to move our average North America fleet pricing toward recent leading edge rates. Total direct operating costs were $429 million for the first fiscal quarter versus $412 million for the previous quarter. The sequential increase is attributable to slightly higher average active rig count in North America and the full quarter of the labor-related increase discussed on our November call. General and administrative expenses were approximately $48 million for the first quarter, slightly lower than our expectations. During the first quarter, we recognized a loss of $15 million, primarily related to the fair market value of our ADNOC drilling investment, which is reported as a part of loss on investment securities and our consolidated statement of operations. We also decommissioned eight non-super-spec rigs in Argentina and incurred approximately $12 million in impairment charges primarily related to those Argentina rigs. Our Q1 effective tax rate was approximately 25%, which is within our previously guided range. To summarize this quarter's results, H&P earned a profit of $0.91 per diluted share versus $0.42 in the previous quarter. First quarter earnings per share were negatively impacted by a net $0.20 loss per share of select items, as highlighted in our press release, including the aforementioned loss on investment securities and impairment charges. Absent these select items adjusted diluted earnings per share was $1.11 in the first fiscal quarter versus an adjusted $0.45 during the fourth fiscal quarter. Capital expenditures for the first quarter of fiscal 2023 were $96 million. Similar to fiscal 2022, we expect the timing of our CapEx spend to vary from quarter-to-quarter. H&P generated approximately $185 million in operating cash flow during the first quarter of 2023, which was generally in line with our expectations. I will have additional comments about our cash and working capital later in these prepared remarks. Turning to our three segments, beginning with the North America Solutions segment. We averaged 180 contracted rigs during the first quarter, up from an average of 176 rigs in fiscal Q4. We exited the first fiscal quarter with 184 contracted rigs, which was in line with our guidance expectations. Revenues increased sequentially by $75 million due to higher average pricing, as mentioned earlier. Segment direct margin was $260 million at the midpoint of our November guidance and sequentially higher than the fourth quarter of fiscal 2022âs $204 million. In addition, reactivation costs of $8.6 million were incurred during Q1 compared to $7.5 million in the prior quarter. We had eight net reactivations in Q1, including a 9th reactivation that replaced a loss â the rig lost in the fire that John mentioned earlier. First quarter reactivation costs were related to the deployment of those nine rigs, as well as preparation costs incurred on rigs ready to being ready for deployment in the first few months of calendar 2023. Total segment per day expenses, including re-commissioning costs and excluding reimbursables excluding re-commissioning and excluding reimbursables increased to $16,800 in the first quarter from $16,500 per day in the fourth quarter. This is broadly in line with expectation, primarily due to the previously mentioned labor-related increase that commenced at the beginning of the fiscal year. Looking ahead to the second quarter of fiscal 2023 for North America Solutions. As I mentioned earlier, we ended Q1 at the midpoint of our exit guidance range. The activity level looks to continue to grow, albeit at a more moderate pace than the first quarter, driven in part by public company operators who are working to fulfill their calendar 2023 budget levels. As of today's call we have 185 rigs contracted and we expect to end the second fiscal quarter of 2023, with between 183 and 188 contracted rigs. Just to be clear in revisiting John's comments on our rig count, we have previously stated that, we could add up to 16 rigs and that would get us to a maximum of 192 rigs during the fiscal year, due to the loss of the one rig to a fire that maximum number is 191. So since fiscal year-end through today we have added 10 of the 16 for a net add of nine rigs, with another two slated to go to work over the next few months. Our current revenue backlog from our North America Solutions fleet is roughly $1.1 billion for rigs under term contract. As of today approximately 55% of the US active fleet is on a term contract. As mentioned on our last call, the leading-edge revenue per day was and still is approximately $40,000 inclusive of performance bonus opportunities and technology utilization. By comparison, our average spot revenue per day is currently in the high 30s compared to the Q1 overall average revenue per day of approximately 33,000. This provides us with a line of sight for further increases in average revenue per day over the next few quarters. In the North America Solutions segment, we expect direct margins in fiscal Q2 to range between $280 million to $300 million, inclusive of the effect of about $4 million in reactivation costs. As discussed on our November call, we increased field labor related rates to respond to market conditions at the beginning of fiscal 2023. Labor is approximately 75% of daily operating expenses. We have also experienced increases in maintenance expense, due to pricing inflation of consumable materials and supplies inventory. We believe that, our current labor and materials and supply as costs will be relatively stable for the balance of fiscal 2023, resulting in higher margin accretion as average pricing for the fleet is expected to continue to move towards leading edge. Regarding our International Solutions segment, International Solutions business activity increased by one rig to 13 active rigs at the end of the first fiscal quarter, we added a rig in Argentina as expected, which brings our working rig count to nine in that country. International results came in above guidance, primarily due to delayed timing for costs associated with developing our Middle East hub, including rig preparation and exportation costs. As we look toward the second quarter of fiscal 2023 for international, we will incur costs to reactivate a rig in Bahrain, which we expect to begin working in the middle of the quarter bringing us to two or three rigs working in that country. In the second quarter, we expect to earn $7 million to $10 million in direct margin aside from any foreign exchange impacts. Turning to our Offshore Gulf of Mexico segment, we still have four of our seven offshore platform rigs contracted, and we have active management contracts on three customer-owned rigs two of which are on active rate. Offshore generated a direct margin of $9.5 million during the quarter, which was in line with our estimate. As we look toward the second quarter of fiscal 2023 for the offshore segment, we expect that offshore will again generate between $8 million to $10 million of direct margin. Now, I look at activity in other. You might have noted the increase in our other line this quarter. This was primarily due to an adjustment in our captive insurance company. At the start of fiscal 2020, we elected to set up a wholly-owned insurance captive to finance the deductibles for our workers' compensation, general liability, automobile liability and medical stop-loss insurance programs beginning October 1, 2019 forward Our operating segments pay monthly premiums to the captive for the estimated losses based on external actuarial analysis of historical losses and operating trends. This results in a transfer of risk from our operating subsidiaries, to the captive for the deductibles, which mirrored our self-insurance retention. Insurance premiums are included in operating segment expenses and are included in intersegment sales in the other non-reportable segments. The intercompany premium revenues and expenses are eliminated in consolidation. For the three months ended December 31, 2022, the actuarial estimated underwriting expense was less than recent run rate, as revised developed claim losses were less than reserved. These were adjusted accordingly, creating a positive benefit in the first quarter in other segments. Now let me look forward to the second fiscal quarter, and update full fiscal year 2022 guidance as appropriate -- 2023 guidance, sorry. Capital expenditures for the full fiscal 2023 year, are still expected to range between $425 million to $475 million, with the remaining spend to be incurred over our last three fiscal quarters. Our expectations for general and administrative expenses, for the full fiscal year have not changed and remained at approximately $195 million. We are still estimating our annual effective tax rate to be in the range of 23% to 28%, with the variance above US statutory rate of 21%, contributed to permanent book-to-tax differences in stated foreign income taxes. We continue to project the fiscal year 2023 cash tax range of $190 million to $240 million, of which as mentioned in November, a portion relates to fiscal 2022 income taxes to be paid in this fiscal year. Now, looking at our financial position. Helmer Campaign, had cash and short-term investments of approximately $348 million at December 31 2022, versus an equivalent $350 million at September 30, 2022. Including availability under our revolving credit facility, our liquidity remains at approximately $1.1 billion. The sequential flat cash balance is largely attributable to our recent share repurchases and seasonal cash outlays, and working capital lockup, which was driven by higher revenue. Our planning shows cash generation and build in the second half of the fiscal year. As a reminder, our general preference is to maintain a minimum of approximately $200 million in cash and short-term investments. The cash and equivalents of $150 million above that minimum, plus the $100 million free cash flow we expect to generate after CapEx and after the base and supplemental dividend, as discussed on our November call, equals $250 million of flexibility for various capital allocation considerations including, accretive investments and returns to shareholders. During the latter half of the first fiscal quarter, we saw a combination of excess liquidity and an attractive opportunity to repurchase some of our shares at prices that we believe to be value accretive. Approximately, 844,000 shares were repurchased in December for approximately $39.1 million under our evergreen annual share repurchase authorization, of four million shares per calendar year. Note, that the Board authorized the repurchase of an additional one million shares in calendar 2023, bringing the total calendar 2023 authorization to five million shares. In calendar 2023, through January 27, we have repurchased approximately 434,000 shares for roughly $20.5 million. So fiscal 2023 repurchases have totaled approximately, 1.28 million shares thus far, for about $60 million and augment our long-standing base dividend and our fiscal 2023 supplemental dividend. Each of these items, stock repurchases and the base and supplemental dividends and encompass the new shareholder return model that we announced in October. These actions combined with our improving financial performance, demonstrate our focus to not only increase the financial returns to the company, such as return on invested capital, but also cash returns provided to shareholders. That concludes our prepared comments for the first fiscal quarter. John I'm curious if you could tell us what you've been hearing from customers in gassier basins, particularly -- especially the privates and how the prospect for potentially sustained to low US natural gas prices might factor into your expectations for the trajectory of the US rig count this year? Sure David. Well, I'll start with we've got about 15% of our fleet that's currently working that is in just natural gas basins and about half or a little over half of those 15% are on term contracts. From a customer perspective, we really haven't heard a lot in terms of rig activity. Obviously, they're not adding. There have been rigs that we've actually added recently both in the Haynesville and in the Northeast, but so far, we haven't heard really much discussion. Again I don't know what to expect at this point. Again our exposure is pretty low. I think the one of the things that's a benefit over time is the ability to move those rigs pretty easily from one basin to another. We have several of our customers that obviously have exposure in oily basins as well. So, they could just as easily move one of those rigs to an oil basin. And John I might just add a footnote there that our 185 active rigs they have around 28 that are drilling gas wells which is about 15% of the fleet and most of those 28 are actually on some form of terms. Great. I appreciate that. And then the follow-up if I could. You've shown strong leadership on pricing and capital discipline as the rig count increased and we're clearly seeing the benefits of our returns focused approach. I was hoping you could share some color on what the playbook for this returns-focused approach might suggest in this scenario if rig demand were to come down 5% or 10%. Yes. David it's interesting. First of all, we are focused on moving the margin. And we've said now for several months that our focus has been on getting the average closer to the leading edge more towards the high 30s because we're on the lower end of that now we want to continue to push on that and that's important. I think the other thing that I would mention about and I addressed a little bit of it in my prepared remarks as it relates to upcycles. I can't -- look as I think back and I look back on rig activity through the up cycles, it tends to be choppy. We've gone through -- I just -- if you just look at the last couple of decades look at the activity coming out of the financial crisis and the pickup in activity and then the choppiness and actually having 100 rigs in the or go down of course we had quite a bit more rigs running then but on a percentage basis it's very similar. And so I think as long as the rig choppiness if the rig releases are moderate and 20, 30, 40, 50 rigs I mean it's a very small percentage of the overall working fleet even if you're just looking at the super-spec fleet. I know at H&P our focus will be continuing to focus on pricing. And our teams, our sales force does a great job with rig churn and getting rigs put back to work sure doesn't make a lot of sense to get into a bidding more. So, that would be our approach is to continue to focus on the value creation that we're delivering for customers and getting paid a commensurate amount of money for that Hi. Thank you guys. John a quick follow-up if I may on the prior question, right? I'm not trying to put words into your mouth, right? But it seems to me what you are indicating is that some kind of a 20, 30, 40 rig decline is a relatively small number obviously, right? And in that kind of a scenario you would focus on pricing and you might be willing to lay down a few rigs. First, is that the right characterization? And did I put that correctly from an expectation standpoint? I know it's all hypothetical at this point. Well, yes. And again, I think, I would encourage you and others to look back on previous cycles and just look at how choppy the rig count is. And I look back and the pricing from 2011 through 2014, there was a lot of volatility with rig count and we were able to continue to maintain pricing. Obviously, we were continuing to build new rigs. There was a replacement cycle going on as well. But yes, there's no reason to adjust your pricing on 2%, or 3%, or 4% even 10% of the working fleet being idled, I mean, just historically, when you've got utilization levels above 80%, you've got pretty strong pricing power. I would just add Saurabh that we are not predicting a 20 to 40 rig decline. That's not what we're saying. What we're simply saying is, as John said in his prepared comments, 520 super-spec working and David's question was if you lost 5% or 10% of that, I mean, that's 26 to 52 rigs, but that's still 95% to 90% utilization of the super-spec fleet. And as John just mentioned, we've historically always had pricing power above an 80% utilization level. Yes, yes, no. Yes, yes, no, I get it. It's all hypothetical at this stage, right? But again, that's what investors are thinking about. So I wanted to make sure we understand how you're thinking about things. Okay. Perfect. Perfect. And then last quarter Mark, I think, you had this in your prepared remarks that for the next couple of quarters, you expect about a $1,500 increase in average contracted revenue per day. Just if you can quickly refresh us on that, because obviously the number of rigs under contract has gone up. So if you can refresh us on that how should we think about that number moving up over the next couple of quarters? Sure, Saurabh. I think it's as we said last quarter is going to be the same this quarter more or less. If you think about for us, our -- if you look at our term fleet, I think, our average day rate around the term fleet today is around $32,000 per day. And if we look at what we expect this quarter for our average spot revenue per day that's closer to 38.5%. And then if we look at the leading edge, as I mentioned, the revenue per day not just day rate, but revenue plus ancillary services, technology utilization that's just above 40%. Thank you for taking my questions. First of all, if you look at the DUCs inventory in the Permian, it's at a very low level right now. Are you seeing anything from your customers that they feel the DUCs inventory is low and they have to build up the drilling inventory? Good morning, Waqar. We don't get into a lot of discussion on DUC. But I think just generally speaking, I think we all recognize that we're at record lows and that there are some discussions related to being able to build that DUC count back up. But it's not a metric that we're following too terribly close. Dave, do you have any additional color on that? John, yes. John, I think you said that's not the thing we've tracked. But clearly, they're very, very low levels and I've heard various customers talk about building those up. Yes. Great. And then if you look at the capital spending budget of $425 million and $475 million that's a wide range. And what would drive the lower end? Is it just the US rigs that you don't get to about 16 or is it more international that gets you to move between the lower end and the upper end? Waqar, thanks for the question. A lot of that is timing. I mean think about the midpoint of the range $450 million, if you divide it by 4, you probably would have expected a higher number in the calendar Q1. I mean the fiscal Q1, calendar Q4, we just exited. But these things are lumpy. I mean there are some large purchases like drill pipe orders, et cetera. If delivery moves the wheat, you can move quarter-to-quarter and that really timing is what I'd say is kind of a primary factor there. Okay. And then just one final question. If I look at your rigs in the Haynesville, is there anything in terms of the capabilities, which would -- what requires them some kind of upgrades or anything like that before you can put them to work in the Permian or Eagle Ford? No Waqar, they're ready to go essentially have the same BOPs, same layout. Those rigs are consistent across the fleet. They would be able to go pretty seamlessly over to work in any oil basin, including the Permian. Good morning. One question just on the guidance just so I understand it a bit better. You mentioned the potential for a 7% to 15% improvement in daily margin. Kind of what drives the high-end versus the low-end? Is the high-end does that align with seeing the 188 rigs go to work? Do you just have more rigs at that more elevated spot rate versus the lower end or are there other factors that kind of drive the delta? Scott thanks for the question. But our margin accretion is just -- is the continual. We've talked about it just a question a minute ago, the moving up of the term rollover through time and that pricing spot continuing is not at leading edge either. We're very -- we have relationships with our customers. We don't just increase week-to-week. It's pad-to-pad or quarter-to-quarter some sort of periodicity. So we still have upward momentum in the spot towards leading edge as well. It's just that continual repricing all the while managing our expenses very closely so that we get the full pull, so that we get the full benefit to the bottom line of that pricing increase. And we're back up to what 42% I think of the fleet on performance contracts which helps to drive that revenue per day over headline day rates as well. Got you. Yes. I just didn't know -- I mean I know that there's a momentum to the margin expansion. I'm just trying to think about kind of what would drive the high-end versus the low-end. So maybe turning to the last point you made on the performance contracts. There does seem to be more appetite to kind of go along on rig contracts. Is that certainly in a sense late last year? Do you feel like there's good continued momentum or maybe even great momentum today on performance type contracts or is that evolution still pretty stay quarter-to-quarter? I think there is. I mean we're working very closely with the customer to deliver better outcomes at the end of the day. And the way you do that is work very closely with the customer, you look at the technologies that you have. You combine that with the types of wells that are being drilled, the challenges that they might be having in a particular area. You combine all that together and at the end of the day if we can deliver better performance versus whatever the benchmark is, then we share -- essentially we share in those savings. And so, it's a real win-win for the customer. Why wouldn't the customer want to pay us more when they're getting wells that are delivered more efficiently, more reliably and place better in the zone. So it's a huge win-win. And again, we have customers continue to adopt and our technology and automation solutions are really helping us to achieve that. Can I just ask just a term question or has the attitude of the E&Ps kind of ebbed or flowed in relation to term contracts or are they more willing to sign term today than they were six or nine months ago, given the utilization today or how has that kind of progressed through the year? Don, it really depends on a lot of factors. It's a very customer-specific, timing specific. How many rigs do they have running and how many of those they have on term versus how many are on spot, it's very â it's really kind of all over the board. From our perspective, our focus is historically 50% to 60% of our contracts are term. And again you've heard us talk about having 60 rigs rolling off over a two-quarter period. And so it's really dependent on the customer in many cases. Dave do you have anything? No. I agree. I mean I don't think there's been any change in what we've seen especially with the public company customers really having a preponderance for a year term that more or less mirrors their fiscal mostly calendar fiscal years. I appreciate that color. And just one more if I could. I just wanted to touch on the supply chain and kind of where it is today versus six months ago and more specifically, rolled steel prices have come down quite significantly over the past nine months or so. Are you seeing any of that kind of roll through to pipe pricing. Has any of that started to come down yet? I think our â Don I think our â we certainly noticed the steel price peak in 2022. And I think that that has resulted in a moderating of price increases. But if you think about the manufacturing the supplies just like we needed to increase our margins. I think our supplier base as needed to do the same in order to be able to reinvest in their capacity because the biggest issue for the industry going forward is scale access to capacity. So we've seen a moderation in price increases. I think they kind of are more steady, which I referenced in my prepared remarks about our expectations for example materials and supplies, costs being relatively stable this calendar year. So the good news for us at H&P though is about access because of our scale, our uniform fleet, we have direct access to our key suppliers and by way of example, as we've mentioned in previous calls, our drill pipe our OT oil country tubular goods if you will. We had purchase orders in place by September 30 to fully secure our calendar 2023 needs. So we have that access and I think that's a key for us in this tight supply chain environment. Hi, John. Hi, Mark. Your International Solutions margin came in better than guidance and you mentioned the drivers there but can you give us some color on how you expect this expense to trend over the next few quarters as you work on the Middle East hub? Sure, Ati. Thanks for the question. We have a rig that's mobilizing to Australia and that's going to happen. I think that it will commence in March. We could have sent it sooner. However, it would have been probably stuck at the port due to weather at the time of its arrival. So we elected to just delay. It's sending a little bit. It's still expected to spud in the back half of our fiscal year. I think the final quarter. And then, in particular, I think the bigger focus as I mentioned in the prepared remarks on the Middle East hub, we have a rig that was just delayed there from the first quarter to the second quarter in the setting of sales so that's when those mobilization expenses are incurred. And then as we have previously said, as we move through the end of our fiscal year we have those six walking rig conversions that will be happening essentially April through September, and those will be transited over to the Middle East is our expectation. And again, we wouldn't expect to see revenues from those until fiscal 2024. Having said all of that, our expectations for fiscal 2023 full year have not changed. It was just some timing from Q1 to Q2 and Q3 in terms of mobilization expenses. Got it. Appreciate that. And then, how do you view the appetite for M&A, whether it's for technology in North America or for expanding your footprint with maybe incumbents in the international markets? Well, on the technology side, I mean, we're always looking. We feel like we've got a really good portfolio. And there's not anything that I feel like is necessarily a gap. From an M&A perspective in the U.S. we've said often that we didn't feel like that made a lot of sense. There's really -- there's just really not a lot of opportunities out there that we can see on -- from our perspective. Just like John said, we're monitoring technology. We're monitoring international. And I think if we were going to have an accretive investment it'd probably be in international arena we haven't seen it yet but we're always monitoring especially with our focus on the Middle East. And then, what you're not going to see us do is, as we've said many times in the past is you're not going to see us consolidate the U.S. market further. It's already consolidated and we think it would not be a good use of capital but idle hire behind our own idle iron and especially dilutive to our uniform fleet in the U.S. I was curious for your performance-based contracts for the portion of the active fleet in the quarter that was working under performance-based agreements. Could you tell us what the average premium that fleet realized in the quarter was? And then, I know the premium has been trending around 1500. I think in some quarters it's gotten as high as 2000 a day. How would you expect it to evolve from here? Just how much more upside could we see for the performance-based fleet when it comes to that average premium? Well, I suffice it to say Tom that, it's still in that same ballpark you mentioned 1500 to 2000 uplift per day was included in our revenue per day numbers, that we've mentioned. And I think the upside is, as we continue to get potentially more of the fleet on performance contracts. If you look at us at H&P we have over 60 customers. We have two-thirds of our rigs with public companies. And correspondingly I think about two-thirds to 80% of our performance contracts are with public companies it also creates some stickiness if you will. And in some of those public companies we may have had a small percentage of their total fleet. And in a lot of those cases we now have the majority of the rigs operating in their fleet. And I think it's really helped with customer relationships. John. Yes. And in most cases if Mark may have said this, but in most cases we've got some of our technology involved in the performance contracts. And so you've got technology, you've got automation that we're working on downhole automation. And it's really becoming much more of a trend, and we're seeing more adoption from customers. And so, as you think about -- you've heard us talk about AutoSlide and that technology. We've recently rolled out a new advanced auto driller. We've got new failure prevention applications. We've got engine automation solutions to help with lowering emissions and improving fuel economy. So, as I've mentioned earlier, as you look at this from a shared savings perspective and a value creation, customers are more and more willing to share in those savings, which enables us to increase our revenues and really get paid for the value proposition or a portion of the value proposition that we're providing. Got it. And that's a nice segue into what was already going to be my next question which is, what's the current time line for reaching the next level in rig automation and just refresh us on what you consider that level to be John, using the Tesla five level full self-driving analogy. And then maybe, could you share some color on specific technology initiatives you have for this year? Well, if you think about, because automation on a rig is you're covering a lot of ground. A big portion of our automation has been focused on manually intensive type processes, something that using directional drilling as an example, where you've got somebody that's requiring a person 24/7 and being able to automate that and apply algorithms to that has delivered a lot. But there's all sorts of other things that are little automation pieces, that are helping the driller, helping the customer do more with less and be more reliable and not requiring a human to have to pay attention to it like I said 24/7. There are automation things that we're working on related to work around the rotary table, lowering exposures related to making connections. There's things like that that we're working on. I mean, this is a very, very long conversation to cover it all. But as far as pushing a button and the rig drilling the next well, we're probably not -- we're not at that point, although auto slide you push a button and you drill the next stand, but we're a long way from a fully autonomous rig. All right. Thank you, Nikki. Thanks to everybody for joining us today. I know there's a lot of earnings calls going on this week, so we appreciate your time. We spend a lot of time as a management team, looking at pricing dynamics, the sales force looking at pricing dynamics. We're holding the line on capital discipline. We're not chasing market share. We believe that, it's crucial to creating a healthy and sustainable company over the long term. Our focus is going to remain on top-tier performance, safety and reliability, and we're going to continue to focus on improving our margins and returns on capital. So, thank you, again for joining us today, and have a great day.
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EarningCall_833
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Thank you for standing by and welcome to the Harley-Davidson's Fourth Quarter and Year-End 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. Thank you. Good morning. This is Shawn Collins, the Director of Investor Relations at Harley-Davidson. You can access the slides supporting today's call on the Internet at the Harley-Davidson Investor Relations website. As you might expect, our comments will include forward-looking statements that are subject to business risks, that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest filings with the SEC. Joining me this morning are Harley-Davidson's Chief Executive Officer, Jochen Zeitz; in addition, Chief Financial Officer, Gina Goetter is with us, and also LiveWire President, Ryan Morrissey. Thank you, Shawn, and good morning, everyone. As we conclude the second year of the Hardwire, our five-year strategic plan to drive profitable growth, Harley-Davidson delivered a strong finish to the year. We are pleased with our performance for 2022 with the execution of our strategic pillars, driving an 8% increase in revenue and a 14.1% increase in total HDI net income. Through the foundational work of the Rewire and the execution of our Hardwire strategic plan, we have changed our overall approach and focus as a business from prioritizing unit growth at all costs to a more holistic view on profitable growth of motorcycles, parts and accessories, apparel and licensing and Harley-Davidson Financial Services. This strategy contributed significantly to the increase in our margin to 13.9% at HDMC excluding LiveWire, compared to 7.6% in 2019 with a three-point margin expansion and a much more effective and efficient allocation of our resources, leading to an EPS growth of 18% to $4.96 despite all the supply challenges that we had to face throughout the year. As you know, Harley-Davidson is on a transformational journey, and even though the economic environment continues to evolve, we remain optimistic about the significant potential of the Harley-Davidson business for 2023 and beyond. I will briefly address our six Hardwire strategic pillars and our delivery of them over the past year. Profit focus. We are committed to strengthening and growing our position in our strongest motorcycle segments in touring, large cruiser, and trike. Not only are these segments the most profitable in the market globally, but we also believe these segments offer potential to inspire more engagement, while compelling new customers and riders to choose Harley-Davidson. Our 2022 lineup revealed eight new models, each powered by the Milwaukee-8 117, the most powerful factory-installed engine ever offered by Harley-Davidson. With the Hardwire, we also made the commitment to introduce a series of motorcycles that align with our strategy to increase desirability and to drive the legacy of Harley-Davidson, namely through our Enthusiast and Icons offering. We're especially excited about the future of both collections within our product lineup as we enter the 120th anniversary of Harley-Davidson. Selective expansion and redefinition. Aligned to LiveWire, we are committed to expanding where we have the right product to win and where the profit profile is right. Delivering new-to-sport riders as part of our objective to attract new customers to the brand, in addition to expanding the garage of our existing riders. With this in mind, in April, we started a new chapter in Harley-Davidson sports history with the launch of Nightster. Building on the 65-year legacy of Sportster, we wanted to push both our performance and design capabilities while ensuring the bike was an entry point to Harley-Davidson motorcycling and our brand. We also grew our adventure touring retail sales globally by over 30% on the modular RevMax platform. We continue to execute our Hardwire priorities across markets and regions. In particular, we emphasize profitable growth in EMEA and LATAM with the latter region becoming profitable for the first time since becoming a stand-alone region. We're also encouraged by the early results of our focus on APAC expansion with Japan now is our second largest market, China had its highest volume ever, and with other sub-regions also delivering growth at attractive profitability levels. Over the course of 2022, we also finalized the launch of our new Riding Academy bikes, the 350RA. This bike will replace the sunsetted Street500 and will breathe new life into our Riding Academy program as we plan for its expansion and development in future years. This program and the concerted follow-up actions by our network of dealers represent a critical pipeline for new and returning riders. In our May Analyst and Investor Meeting, we set out our ambitions and our growth beyond bikes pillar with an increased focus on apparel and licensing as a new key driver of our Harley-Davidson Lifestyle. Since then, we've been building our core apparel and licensing competency, including creating a best-in-class team to deliver on this ambition long-term. Riding gear must be a core competency of the company and brand. We've been evolving our motor clothes offering, executing a seasonal forward-looking plan, strengthening and modernizing the way in which we design, develop and source our products, driving efficiencies through the business while growing our motocross offering. Harley-Davidson Lifestyle is where we see the overall apparel and licensing opportunity, especially as it relates to non-riders, but also existing and new brand aficionados. By creating a unique Harley-Davidson aesthetic, taking inspiration from the past and evolving it for today's consumer, we think we are able to bring more interest to people to the brand, leveraging the unique power of the Harley-Davidson Lifestyle. In '22, we saw a 19% increase in our apparel performance, a solid proof point that our strategy is working and that the investments we are making are starting to have a positive impact on our performance. And we have lots of exciting developments in the apparel and licensing that we'll be telling you about this year. Our parts and accessories business was negatively impacted in '22 due to supply chain challenges and lower retails, but still grew 7% on a per-bike basis and exceeded our 2019 results. Two main elements are driving our plan for future growth in P&A, customization, and service growth. Customization, which is at the heart of motor culture is an integral part of the overall Harley-Davidson Lifestyle. P&A allows us to have a truly personal relationship with our customers and their bikes. And service growth at the dealership with an emphasis on convenience, expertise, and value. Our Service Business Consulting program launched in 2022 has grown P&A revenue through service and participating dealers by 14%, well ahead of surrounding dealers. We also took the first steps toward redesigning the service journey with the launch of an online service schedule on hd.com. And lastly, we've changed the way we operate, integrating our P&A team into our motorcycle management function to continue to reduce complexity and focus the offering while fully aligning with our motorcycle lineup. We're also planning new developments in our online bike build and configurator integrated to the dealership to allow for improved customer inspiration and ease. Integrated customer experience. Delivering our growth ambitions requires us to provide experiences that exceed expectations for modern retail while leveraging digital and physical channels as part of our dealer network. This vision depends upon a modernized approach to inventory management, more digital enablement of the customer journey, and enhanced omnichannel capabilities, something that was not a competency of Harley-Davidson in the past. In 2022, we enhanced our reservations and preorder systems and piloted a new inventory management and distribution system, producing fulfillment time, allowing for better availability without expanding in dealership inventory. 2022 also saw the launch of our Project Fuel program, which will provide a much-needed redesign of our dealerships. This program is in full swing globally. And in North America, 15% of our network is already signed up. As we ramp up and expand Project Fuel, we are also embarking on an effort to redefine the Harley-Davidson customer experience that leads the footprint transformation with particular emphasis on our brand and marketing integration and critical customer journeys, but more on this as the program is established. Inclusive stakeholder management. At the last quarter, we hinted our plans to invest in our hometown Milwaukee and specifically our Juneau campus. Earlier this month, we announced a redevelopment at Juneau, which will start with the community part to serve the local community, the people of Milwaukee, and our employees. In partnering with the Harley-Davidson Foundation and internationally acclaimed designers Heatherwick Studio, we feel this project will deliver a big impact to our community. Take a look at the plans online if you haven't seen them already. And lead in electric. 2022 of the completion of our business combination between LiveWire and AEA-Bridges Impact Corp, with LiveWire becoming the first EV motorcycle company to list on the New York Stock Exchange. This is the first quarter of LiveWire reporting independently. I'm going to hand over to Ryan Morrissey, president of LiveWire to run through some more details about LiveWire's performance and about what is on the horizon. Thank you, Jochen. Good morning, everyone. 2022 was a banner year for LiveWire, many major milestones, including the completion of our listing on the New York Stock Exchange. LiveWire is building on the energy the September listing brought to our brand and our organization. Our teams continue to operate with the benefit of the full support of our strategic partners at Harley-Davidson and KYMCO. We finished 2022 above expectations, delivering 97 motorcycles over the planned 500 units. The LiveWire ONE continues to earn rave reviews as more and more riders are introduced to the LiveWire experience. As we move into 2023, investment into product development continues to be on the top of our priority list. Our engineering teams are laser-focused on advancing the technologies, platforms, and products that will further our position as pioneers of the industry. In 2023, we expect to see the introduction of LiveWire ONE to the European market and the launch of the S2 platform. Based on preproduction builds, we expect to begin selling Del Mar in the second half of 2023 behind our original plan for spring of this year. Given industry seasonality patterns, we expect this to have a meaningful impact on our originally planned 2023 units. On the commercial front, we continue to build and mature our retail partner network in the United States, with a physical location in 90% of the top 40 metro areas, all working as part of the omnichannel model designed to meet and exceed the expectations of our riders. The count of Del Mar reservations in the U.S. has continued to grow, building on the buzz created by our launch additions. The team is excited to bring LiveWire to Europe in 2023, led by a new vice president for Europe. Our retailers across France, the UK, Germany, the Netherlands, and Switzerland are readying to bring LiveWire to their markets as the riding season picks up. The powertrain facility in Wisconsin is tooling up and readying to produce the LiveWire S2 powertrains that will then be assembled into LiveWire motorcycles in Pennsylvania on the same line where we have been manufacturing LiveWire ONE. The support of Harley-Davidson supply chain and manufacturing capabilities continues to be a differentiating strategic asset. Finally, our STACYC brand continues to spread the electric experience to kids and delivered double-digit year-over-year revenue growth. 2022 saw the introduction of the new products the market has been demanding for older kids. The 18 and 20-inch bikes began retailing with a strong customer fund. And now I'll hand over to Gina Goetter to talk through the financial performance of Harley-Davidson and LiveWire in greater detail. Gina? Thank you, and good morning, everyone. As Jochen highlighted, we delivered a strong quarter in total fiscal year by staying focused on business fundamentals and executing on our Hardwire strategy. Q4 marks the first time we are reporting under our updated three-segment structure of HDMC, HDFS, and LiveWire. HDMC houses our Harley-Davidson branded motorcycle, parts and accessories, and our apparel and licensing businesses. HDFS provides motorcycle financing, insurance and other services to our dealers and retail customers. They will continue to provide services to both HDMC and LiveWire. LiveWire is the new segment, housing the design, marketing and sales of electric motorcycles and STACYC electric balance bikes. Harley-Davidson owns an 89% interest in LiveWire and will continue to consolidate their results in the Harley-Davidson Inc. Fourth quarter results closed out a strong year with significant year-over-year revenue and operating income increases. Pricing actions and cost productivity ultimately overcame the impact of the production suspension in Q2 resulting in three points of operating margin expansion versus prior year. Looking at our financial results in the fourth quarter, total consolidated revenue of $1.14 billion was 12% higher than last year, with growth within HDMC and HDFS, and a decline in the LiveWire segment. HDMC wholesale motorcycle units increased 18% year-over-year and HDMC revenue was up 14%, driven by the increase in shipments and continued strength in global pricing. Harley-Davidson financial services segment revenue was up 7%, largely due to higher finance receivables. And the LiveWire segment decline was primarily due to a strong comparison period in 2021 as the company built inventory across their expanded distribution network. Total consolidated operating income of $4 million was $11 million better than prior year. Total operating loss at HDMC of $32 million is a $50 million improvement versus prior year's losses. As a reminder, with the shift of the model year launched at the beginning of the calendar year, Q4 includes roughly 40% to 50% fewer wholesale units compared to the other quarters. HDFS operating income of $64 million declined by 32% as losses continue to normalize and higher interest rates resulted in a higher cost of funding. And finally, LiveWire operating loss of $29 million included a step-up in product development and people costs in line with expectations. Turning to full year 2022 results; total consolidated revenue of $5.8 billion was 8% higher compared to last year, and total operating income of $909 million was 10% higher. As Jochen mentioned, full year earnings per share was $4.96, compared to $4.19 for the same period last year. This 18% increase was driven by pricing and productivity offsetting the impact of the production suspension and cost inflation. We also had modest favorability in below-the-line items, which contributed to the accretion. Global retail sales of new motorcycles were flat in the seasonally smaller quarter, where we typically retail less than 20% of the year's volume. Total 2022 retail sales ended down 8% globally, largely impacted by the Q2 production suspension and the timing of inventory replenishment to our dealers. For the full year, the decline of 12% in North America was primarily attributed to the production suspension in Q2, which disrupted the flow of inventory to our North American dealers during peak riding season. APAC retail grew by 12% with double-digit growth in Japan and high single-digit growth in China, driven by our focused investments into the region. Steady production as we closed out the model year resulted in more steady inventory flows into the dealer network. On a sequential basis, average inventory was relatively flat compared to last quarter and we continue to run about 40% less in 2019. We ended the year in a healthier inventory position and are set up for a solid start to the riding season. Throughout 2022, we realized strong pricing dynamics for both new and used motorcycles. For the full year, U.S. new motorcycle transaction prices finished within our desirability threshold of plus or minus two percentage points of MSRP. Looking at revenue; total HDMC revenue increased 14% in Q4 and increased 9% for the full year. Focusing on the key drivers for the full year, three points of growth came from volume driven by wholesale unit growth, seven points of growth from pricing and lower incentives through both global MSRP increases and pricing across the parts and accessories and apparel businesses. Mix contributed one point of growth as we continue to prioritize our most profitable models and markets. And finally, three points of negative impact from foreign exchange as the dollar strengthened throughout the year. Focusing in on margins, annual gross margin for HDMC of 31.3%, compared to 28.8% in the prior year. Stronger volume and pricing more than offset supply chain cost inflation and the impact from the production suspension. Additionally, in 2022, we lapped the unfavorable impact from the unexpected EU tariffs, which provided about one point of margin tailwind. In total, we continue to see supply chain costs stabilize with total inflation at 3% in the quarter, lower than 5% inflation in the first half of the year and 10% in the back half of last year. The deceleration in inflation continued to be largely driven by logistics, including lower expedited shipping expenses, and, to a lesser extent, raw materials and the impact of metal markets declining from peak levels realized last year. Overall, annual supply chain cost inflation was approximately 4%, which was down one point versus last year. For the year, HDMC operating margin improved from 10.6% in 2021 to 13.9%. The improvement was driven primarily by the factors noted above. As referenced back to our 2022 original guidance, the combined operating margin for HDMC and LiveWire finished at 12%, which is the high end of our guidance range. HDFS operating income in Q4 was $64 million, down 32% compared to last year. And for the total year, operating income of $380 million was down 23% finishing in line with guidance expectations. The annual decline was driven by a higher provision for credit losses and an increase in borrowing costs. In Q4, HDFS's annualized retail credit loss ratio of 1.9%, compared to a ratio of 1.2% in Q4 of last year. Total retail loan origination in 2022 was up 8.5% behind strong growth in used bike origination. We did see new bike originations growth 3.9% in Q4 as dealer inventories were replenished. Total year-end financing receivables were $7.1 billion, which was up 8.6% versus prior year. Total 2022 interest expense was up $25 million or plus 13% versus prior year. The increase was driven by higher average debt outstanding and a higher cost of funding. In addition, the retail allowance for credit losses finished the year at 5.1%, up from 5% for the first three quarters of 2022, with a slight uptick incorporating the current outlook on the macro environment. LiveWire finished its first quarter as a public company in line with our expectations. Fourth quarter segment revenue decreased by 28% to $9 million and full year revenue of $47 million was 31% ahead of prior year. The annual increase was driven by higher unit sales of LiveWire ONE and favorable product mix on STACYC bikes. In total, LiveWire sold 597 units in the year, which is about 100 units more than initial guidance, and STACYC revenue growth was driven by innovation behind two new balance bike models and pricing. For the full year, the operating loss of $85 million, compared to a loss of $68 million in the prior year. The step-up in loss was attributed to increased investment behind product development associated with the S2 Del Mar platform and the advancement of its electric vehicle system as the company ready to launch of its second electric motorcycle slated for 2023. Additionally, 2022 includes investment in the build-out of the omnichannel retail network and planned expansion into Europe in 2023. Wrapping up with Harley-Davidson, Inc. financial results in full year 2022, we delivered $548 million of operating cash flow, which was down from $976 million in 2021. The decrease was driven by changes in working capital as well as higher net cash outflows related to wholesale finance receivables. Total cash and cash equivalents ended at $1.4 billion, which was $442 million lower than the end of 2021, this consolidated cash number includes $265 million from LiveWire. In line with our capital allocation priorities, in 2022, the company returned over $400 million to shareholders through dividends and share repurchases. As we look to our financial outlook for 2023, we expect HDMC revenue growth of 4% to 7%. The growth forecast incorporates approximately two points of unit growth, one to two points of mix, as we continue to focus on our profitable core business and one to two points of pricing as we offset a more moderated inflationary outlook. Furthermore, we continue to expect the parts and accessories, and apparel and licensing businesses to accelerate top-line growth in line with our Hardwire strategy. We expect HDMC operating income margin of 14.1% to 14.6%. We believe the anticipated positive impact from volume leverage, pricing, unit mix, and our productivity efforts within supply chain will offset expected cost inflation and currency headwinds. We expect HDFS operating income to decline by 20% to 25%. This decline is largely a result of the higher interest rate environment causing our borrowing cost to increase. Given the macro backdrop, we are also expecting loss rates to rise above 2022 and are planning for losses between 2% and 2.25%. For LiveWire, we are expecting a unit forecast between 750 and 2,000 units and an operating income loss range of $115 million to $125 million. This forecast incorporates the updated launch timing in the new Del Mar products. And lastly, for total HDI, we expect capital investments of $225 million to $250 million, as we continue to invest behind product development and capability enhancements. The step-up in investment is primarily driven by core product innovation, investments in manufacturing to automate and reduce costs as part of our productivity journey, as well as planned investments for LiveWire. In 2023, we are expecting more moderated inflation across the supply chain as logistics costs continue to stabilize. In aggregate, we expect about two to three points of inflation, compared to 4% in 2022 and over 5% in 2021, with labor costs as the primary driver of the increase this upcoming year. And while we're not back to completely smooth sailing in terms of supply chain efficiency, we are experiencing and expecting less volatility than the previous two years. One of our key initiatives identified as part of the Hardwire strategy is driving productivity to eliminate the $400 million of incremental supply chain costs incurred since 2020. In 2022, we delivered approximately $50 million toward that goal, and we are expecting another $140 million in 2023, with focused projects to increase production efficiency and eliminate complexity and waste. We also expect to continue to stabilize the supplier base and reduce expedited shipping costs. We continue to make good progress on improving the profit per bike with 2022 finishing at roughly $3,500 per unit. And with the initiatives in place for 2023 to drive mix and cost productivity, we believe that we will continue to make progress in getting back to historical levels of profitability. As we look to 2023 capital allocation, our priorities remain to fund growth of the Hardwire initiatives, which includes the capital expenditures mentioned previously, paying dividends, and executing discretionary share repurchases. In 2022, we bought back 8.4 million shares, and we have 9.9 million shares remaining on our current board authorization. Finally, we put in place a loan facility between Harley-Davidson and LiveWire given that the funds raised as part of the spin were less than expected. We do not expect LiveWire to draw on that facility in 2023. In summary, we are very pleased to have delivered our financial commitments in 2022 and are focused on achieving our targets in this upcoming year. And with that, I'll turn it back to Jochen to wrap up. Thank you, Gina. We continue to deliver on our Hardwire strategy, and in May we detailed our ambition to capitalize on the early success of our strategy, tuning the engine of our business for improved performance. We believe that by focusing on our six Hardwire pillars and related core initiatives and making bold moves in spaces where we can win, we can deliver not only further improvement in top, but also in bottom line performance in the long run. We continue to invest for long-term growth within our most profitable markets and categories where we see potential, and we are building capabilities that will allow us to expand our customer reach and experience, ultimately focusing on initiatives that create value for all our stakeholders. Lastly, 2023 is an important year at Harley-Davidson. Since 1903, Harley-Davidson has pioneered American motorcycle design, technology and performance. And this year, we'll be marking our 120th anniversary with a year-long celebration. We will talk more about our recent model year 2023 release of 120th anniversary of product at the next quarter, but we're excited about what is going to be an unforgettable milestone for the company, celebrating the history, culture, and community of Harley-Davidson with our riders and fans, reaching new customers, and bringing more people to the brand. We want to make -- we'll walk you the ultimate destination for motor culture in the world. And with this anniversary, we are making a commitment to our hometown, but also to our community. We hope to see you all there. Thank you. Good morning. Thank you for taking my question. I'm curious, how would you interpret the demand signals you are seeing across your spectrum, whether it's from subprime consumers to more affluent consumers, or if there's another way to suss out what the demand trend looks like, it's a pretty difficult macro right now to forecast? Yes. It's Jochen here. Thank you for the question. Demand segments are early, right? We haven't really entered the riding season yet. Overall, what I can say is that January has been performing in line with our expectations. But as season unfolds, obviously, we will know where demand sits. Right now, we feel comfortable overall with the inventory that we have. We feel comfortable with the demand signals that we are seeing, but time will tell. Overall, we expect a flat to slightly positive retail growth for the year with the positive -- when it shows up to mostly appear in the second and third quarter simply because we had our -- with our core riding seasons and quarters. So overall, we do expect a flat to positive retail growth, and that's our anticipation. And I hope that answers your question about demand signals. It's still early on in the year, but overall, we are quite positive. Craig, good morning. I was just going to give you some color on how you were asking about prime, subprime, and applications. So overall, as Jochen said, still early days in January performing in line with expectations. Overall from a retail environment, from a loan application standpoint, we are still seeing quite a bit of interest come in, frankly, across both prime and subprime. So our loan application volume in the month and really as even at the back half of last year has continued to stay strong. Hi. Thanks. I'm going to slip in just a quick follow-up and then one different question. Just a follow-up on the first question is, would -- do you guys expect retail in your shipments to sort of track in line in 2023? Or is there still some dealer fill in? And then just on the dealer network, maybe Jochen, could you kind of update us on how you're thinking about further consolidation of the dealers for 2023? And what dealer-focused initiatives you guys are most focused on for 2023? Sure, Robbie. In terms of your -- the question about retail. As Gina mentioned, we expect about a 2%-unit growth from motorcycles for the year. And that would include a slight pipeline lift in addition to the retail guidance that I've given. So positive retail guidance and small pipeline filling would equate to the 2%. So it's a combination for both at this point in time. And Gina -- sorry, Edel, do you want to talk about the network? Yes. Thank you, Jochen. Good morning, Robbie. A couple of initiatives that are critical for us in this year as we return to a stronger inventory position, and we face into the anniversary year. The first and Jochen referenced it in his comments is around Project Fuel, which is the upgrade of our facilities across the globe. This is a program that is incredibly important. We believe it is long overdue and it is proceeding at pace. It is a significant investment for our dealers, but it's one that we believe will pay off in terms of the opportunity for expanded growth and outreach to more diverse segments of riders. So that's one big priority for us. The second one is to continue to emphasize the balance of desirability and profitability. There are a couple of initiatives that we are pursuing. Obviously, we will find opportunities as the year goes along to continue to emphasize the message around affordability, but also restrained and very, very careful management of inventory for us is very important and some initiatives that we are driving in terms of an updated distribution system that allows for faster replenishment, but also a lot more control in terms of how much inventory is out there is an important part of a value story, which is relevant to us, to our dealers and to our consumers in terms of the product holding its value over time. And then the third initiative that I would highlight is, of course, this is our anniversary year. It is very important not only for the bikes, but also for the apparel, which is early indications would say, has been extremely well received, but also all of the activities around engagements and consumers that involve our dealerships as well as our headquarters and all of the activities that Jochen mentioned in Milwaukee. So those, I think, are three big pillars that we will be pushing forward this year. Hey, guys. Good morning. Thanks for the question. I was hoping you could just unpack the dealer inventory numbers that are in the slides. I know that you're still down pretty big versus 2019. But if we just look at that sequentially, it does look like it built and then you're obviously dealing with model year changeover as well. So, can you just sort of unpack where units are, where you saw that sequential build and sort of how we should think about that going forward? So we have 34,000 units in the network now. That's the dealer inventory level. That's 15,000 more than in 2022, which, as was an extremely low level of inventory at the time. If you look at this from a historic perspective, that level is 60% of 2019. So pre-pandemic, 60%. So it's still an extremely healthy level. Thankfully, we have more inventory in the network right now. And we are finally getting back to a better spot. So overall, I'd say, we are good in terms of inventory and that should help us to start the riding season in a healthier position than we have previous year. Thanks. Hey, guys. Good morning. I guess first question, I'll cut right to the chase. There's a lot of moving parts here. But if we look at your guidance this morning, I think it equates to roughly EBIT guide for 2023 of around $850 million to $875 million. So if you could clarify that for us, that would be great. And maybe secondly on LiveWire. The estimate coming into this year or at least what you gave us back in December of last year, 2021 was about 7,000 bikes. You're looking at about, call it, 2,000 bikes this year. Why the slow start? And how quickly or how willing would you be able to kind of pivot if you don't see demand start to materialize in that business? Thanks. Hey, Joe. Good morning. This is Gina. So on your first question here, you're in the right zone on overall EBITDA guidance when you kind of add up all three different segments. So, I would say you're thinking about that generally right. And I'll turn it over to Ryan for LiveWire. Yes. Thanks, Joe. On the LiveWire front, to your question on the units and the change in expectations there, the majority of the 2023 units were expected to come from Del March and as we talked about in the opening comments, we've changed the time line on that bike. So given the new time line, we're now expecting sales to ramp up in the second half of the year for that motorcycle. So, we brought the units down accordingly, taking the industry seasonality into account. So the bike continues to look amazing. We're laser-focused on getting it to market, but the change in the time line is what's driving that change in the units. Hey. Good morning. So, I wanted to hone in on that, I think you said flat to positive retail growth for the year. Maybe unpack how you're thinking about the industry -- the broader motorcycle industry, which I know you don't entirely compete in all those categories. So maybe touring and cruisers, how you're thinking about those segments sort of based on what you're seeing in the market right now and then sort of assumptions for market share, obviously? We don't know what your product pipeline is, but how you think about? How you're going to perform relative to the industry to get us to that flat-to-up retail number? Yes. Look, we are -- I'm not really looking at the industry at this point. I'm just looking at what we think we can achieve as a company, as a brand in 2023. So unpacking retail, if you look at our seasonality, as I said earlier, we would expect then in order to achieve a flat to slightly positive retail growth that to come in the core quarters of the second or the third quarter with the first and fourth being flat or slightly down. So that's how the year would unfold. But in terms of the industry, we're really focusing on our segments and we believe that we can -- we have an opportunity here to grow. That said, we want to absolutely make sure that the desirability of our product, the MSRP, in market is -- and the desirability is maintained. So whatever the demand will bring, we'll adjust accordingly to protect our profit margin. But overall, what we are seeing now is good demand, but it's very early. So any demand segments now cannot be taken as an indicative demand segment for the coming months? Hey, James. This is Gina. Just to provide a little bit more color there on the flat to positive. So as Jochen said, we don't really hone in and focus much on the share gains. I mean we are the categories when you think about Touring and Cruiser, we are the market. When you look at what we delivered, I think we had it in one of our slides, we did deliver share growth in those categories in 2022 within the U.S. Also keep in mind that we are comping as we get into Q2, Q3, the production suspension. So even though on the back end, we were able to make up from a wholesale shipment standpoint in 2022, we really missed out on key riding season. So as you think about our retail growth next year overall, Q1, Q4, probably more muted where you really see the benefit is going to be within Q2, Q3. Yes. Good morning everyone. I guess just a quick one for the model on free cash flow. I mean, you're coming off $548 million 2022, I noticed you haven't provided explicit guidance on free cash flow. But how should we be thinking about that in general terms? And what's achievable in terms of working capital give up as a contributor to that number? Good question. Good morning, David. This is Gina. So overall, I would say similar levels of cash flow as we head into 2023. So there's nothing atypical. Obviously, in 2022 we had the LiveWire investment that we were making. We will not have that as we move into 2023. So I'd say similar levels overall. From a working capital standpoint, one of our big focus areas as we move into next year is just keeping our eye on that inventory number and making sure that we're mindfully kind of reacting to and bringing that down as we move through the year. As we end the year, always keep in mind, right, we're building inventory on our balance sheet as we end the fiscal year. That starts to bleed out through the first part of the year, both in terms of finished products -- finished motorcycles as well as all of the apparel and licensing and P&A that go along with them. So even though it looks high at the end of the year, that bleeds itself down through the first half. Hi. Good morning. I had a couple of product questions. First, the 350 bike, you mentioned about populated Riding Academy. Is that something that will be available for graduates to purchase when they do complete the course? And then on the CVOs, I know you've got one out now. I think in the past, you kind of launched them all at the same time, and that seems like a rolling rollout of the CVOs. Can you just explain or talk about the strategy behind the CVO launches? Hey. Yes, Gerrick. So the 350 is not going to be available for purchase in North America. It's exclusively for Riding Academy. As I said in our launch video, we have a few things still up our sleeve. But obviously, we're very excited about the CVOs that we've already launched. If and what might be coming later in the year, we'd have to wait a bit longer for that. But overall, I think we have a very strong product and the reception for what we've launched has been very strong already. Not from today's perspective. We've seen a good destabilization in our supply chain. It's certainly not yet back to normal, but we feel confident that we are able to deliver the bikes at this point in time. Hi. Good morning. First, a clarification. You guys noted historical levels of profitability is what you're looking to get back to. I want to make sure that doesn't mean peak level of profitability. So maybe mid-teen operating -- motorcycle operating margins versus high-teen motorcycle operating margins? And then the other question I have is on LiveWire. I understand the issue with units being pushed back in 2023. But does that still keep you on that 2024 trajectory to deliver more than 15,000 units? And if not, does that derail your ability to eventually get to positive EBITDA in 2026, which was the initial outlook? Thanks. Good morning, Jaime. This is Gina. I'll take the first part of that. So in terms of historical levels of profitability, you're headed in the right direction when you say is it more of the mid-teens. We are laser-focused on getting back to what we committed to as part of our Investor Day in May of getting that margin back to that, call it, 15%. So that's where when we say historical, not peak. Hey, Jaime. On your question on LiveWire, a couple of thoughts there. Generally, the discussion on Del Mar in the event of 2023, don't have any impact on our vision or our long-term strategy, or our near-term priorities. We're continuing to see the long-term direction of the vehicle markets and continue to have the strongest position to lead into wheel with the help of our strategic partners. So we're focused on 2023 today, but safe to say, we're continuing to focus on innovating in the core EV systems, the product portfolio, and expanding our distribution. And we think if you continue to look at the long-term trajectory and the long-term goals that we've set for the company, they continue to be the right ones. There are no further questions at this time. This will conclude todayâs conference call. Thank you all for joining. You may now disconnect.
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EarningCall_834
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Hello and welcome to the Century Communities Fourth Quarter 2022 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] Please note, this event is being recorded. I would now like to turn the conference over to Senior Vice President of Investor Relations, Tyler Langton. Please go ahead. Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the fourth quarter and full year 2022. Before the call begins, I would like to remind everyone that certain statements made during this call may constitute forward-looking statements. These statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward-looking statements. Certain of these risks and uncertainties can be found under the heading Risk Factors in the company's latest 10-K as supplemented by our other SEC filings. We undertake no duty to update our forward-looking statements. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Hosting the call today are Dale Francescon, Chairman and Co-Chief Executive Officer; Rob Francescon, Co-Chief Executive Officer and President; and David Messenger, Chief Financial Officer. Following today's prepared remarks, we will open the line up for questions. Thank you, Tyler, and good afternoon, everyone. During the fourth quarter, we focused our sales efforts and incentives towards available homes with near-term deliveries to monetize these homes, even though they carried lower margins due to inflated direct construction costs, given their start dates earlier in the year. The goals behind this strategy included increasing our cash position, reducing leverage metrics, and positioning us to start new and lower cost homes. As a result of the efforts, we generated $382 million of operating cash flow during the fourth quarter and reduced our net debt to net capital ratio down to 23.5%, the lowest year-end level in our history as a public company. Our solid results this quarter also included $102 million in pre-tax income, net income of $79 million, diluted earnings per share of $2.47 and EBITDA of $121 million. In the fourth quarter, we delivered 2,903 homes, the second highest level of closings in our history, and only 12 homes off a record level of homes delivered in the fourth quarter of 2021. While supply chain pressures weighed on the pace at which we could deliver homes throughout most of 2022, these disruptions improved as the year progressed, helping us to achieve the strong level of closings in the fourth quarter. Revenues from home sales were $1.2 billion, the highest quarterly level in our history; while our average sales price increased by less than 1% on a year-over-year basis to $397,000 consistent with our goal of building affordable homes. Gross new contracts in the fourth quarter totaled 2,008 homes and net new contracts were 1,258, due to an elevated cancellation rate, mortgage rate volatility and overall economic uncertainty keeping many potential homebuyers on the sidelines. Our quarter end backlog consisted of 1,810 sold homes valued at $671 million. While we expect home sales will continue to be pressured in the near-term as buyers adjust to higher mortgage rates and uncertainty in the economy, we also believe that underlying demographics remain favorable. Additionally, we think buyers are beginning to return to the market now that rates are stabilizing at levels below recent highs. An indication of this is that both our net and gross new contracts in November and December were well above October levels, leading us to believe that the decline in mortgage rates that started in November, led to an improvement in sales. During January, we've experienced further improvement in home buyer activity. Similar to the past several quarters, homebuyers are continuing to look for homes that are closer to completion in order to lock in their interest rates. Consistent with our strategy, we intend to continue concentrating our sales efforts on homes with more near-term completions and are not focused at this point on building up a significant sold backlog of major term deliveries. Incentives on closed homes in the fourth quarter increased to about 900 basis points of average sales price from roughly 300 basis points in the third quarter. A significant amount of these incentives were in the form of forward commitments and rate buydowns that drove traffic and sales, especially when mortgage rates went above 7%. While we will continue to move inventory by finding the market clearing price on a community by community basis, we expect the average level of incentives that we're offering to moderate a bit, especially with the recent retrenchment in interest rates. In the fourth quarter, we generated adjusted gross margins of 20% with higher incentives being the largest driver of this expected decline compared to last quarter. These incentives applied not only to new sales with near-term closings, but also to many backlog homes that had been sold earlier in the year. Consistent with our strategy of prioritizing the sale of complete and completing inventory, we expect our margins in the first quarter of 2023 will be consistent with those of the fourth quarter of 2022 as the homes delivering will be burdened with similar elevated construction costs, given their start dates earlier last year and higher incentives than historical norms. Many of our planned starts in the second half of last year were postponed due to increased incentives and elevated input costs that had become commonplace in our industry. Our corporate, regional and divisional purchasing teams rose to the challenge, and have made great strides in reducing costs across the board. As a result, we began starting homes at a greater pace in November and December, which has accelerated into this year. Due to the improvement in direct construction costs, reduced incentives and shorter cycle times, these homes are expected to carry a higher margin profile as they begin to close. As a result, beginning in the second quarter of 2023, we expect homebuilding gross margins to trend positively on a sequential basis through the balance of the year as they return to more normalized levels. Before turning the call over to Rob, I wanted to briefly recap our record setting performance for the full year 2022. During the year, which was not only the company's 20th anniversary but the 20th consecutive year of profitability, we delivered 10,594 homes, the second highest level in our history. Gross margins and adjusted gross margins for the year averaged 25% and 26% respectively, both company records. Net income increased 5% year-over-year to a company record $525 million and earnings per diluted share increased 10% to $15.92 per share, also a company record. Finally, our book value per share at year end increased to a record level of $67.67, with our total stockholders' equity increasing to $2.2 billion, the highest in our history. We believe we have the right strategy to navigate the current headwinds in the housing market and one that positions us well as conditions normalize. Buyers are currently looking for affordably priced homes with near-term completions and we intend to meet this demand. We will find the market clearing price for our homes nearing completion, knowing that it may weigh on margins in the near-term. We are also confident that we will be able to redeploy capital and start new homes from our current lot supply that will earn both better margins and higher returns going forward, due to lower direct costs, improved cycle times and reduced levels of incentives. In closing, on behalf of the entire senior management team, I want to thank our employees across our national footprint. Our achievements this year would not have been possible without their hard work and dedication, and we greatly appreciate their commitment to both Century and our valued customers. Thank you, Dale, and good afternoon, everyone. Our strategy of concentrating sales efforts and incentives on inventory with near-term completions was very productive and enabled us to deliver 2,903 homes, representing 84% of beginning backlog, an approach we intend to continue. We have a strong presence within the affordable new home category with approximately 81% of fourth quarter deliveries coming from homes priced below FHA limits, allowing us to target the widest range of potential buyers in any given market. Additionally, back in December, the FHA announced higher loan limits for 2023. And with these higher limits, approximately 90% of our fourth quarter deliveries would have come from homes priced below FHA limits. Our homebuyers continue to have a healthy financial profile. Century Communities and Century Complete's homebuyers had respective average FICO scores of 737 and 711, consistent with levels experienced throughout the year. Our cancellation rate was 37% in the fourth quarter, with roughly equal rates at our Century Communities and Century Complete brands. Our cancellation rate declined as the quarter progress to a rate of 28% in December, with also roughly equal rates at both brands. The number of cancellations further declined in January. The homebuilding industry continues to be challenged by municipal and utility delays, supply chain issues and trade shortages. These pressures are starting to ease especially as housing starts have slowed and capacity has improved. We have seen improvements in our direct costs throughout the construction cycle, which declined by roughly 9% in the fourth quarter, versus the high watermark in the second quarter of the year, an average of approximately 16,000 per home. Looking forward, we expect our direct costs to continue to decline and our cycle times to improve as supply chain and trade shortages further subside. We ended the quarter with approximately 53,000 owned and controlled lots, with roughly 60% owned and 40% controlled. This total lot pipeline was down from roughly 63,000 lots at the end of the third quarter 2022 and 80,000 lots at the beginning of the year. This decline was almost entirely within our bucket of controlled lots, as our own lots have remained relatively unchanged compared to the last quarter and the beginning of the year. Our 32,000 owned lots provide approximately three years of deliveries based on 2022 volumes, which is consistent with past years. We continued to step away from land deals throughout the second half of 2022 that no longer met our investment standards and that were generally higher in price than our owned lots. Given the effectiveness of our land strategy, we were able in the fourth quarter to reduce our land pipeline by nearly 10,000 lots and our acquisition commitments by approximately $270 million, while incurring minimal abandonment costs of roughly $4 million. For the full year, we reduced our land pipeline by a total of nearly 27,000 lots and our acquisition commitments by over $650 million for only $12 million in abandonment costs. This strategy allows us to control significant amounts of land for future growth during periods of high sales absorptions for limited investment, and exit those positions at a reasonable cost in the event of a market downturn, all without adversely impacting our near-term need for lots on which to start homes. Looking forward, we expect the recent decreases in our controlled lots to start leveling off. Century's total community count at quarter end stood at 208, down from 217 in the previous quarter, but up from 202 in the year ago period. Our community count dropped sequentially in the fourth quarter due to closeout of various communities and our conscious decision to delay the opening of certain new communities in the second half of the year as market conditions deteriorated. Looking ahead, we expect to grow our community count at a measured pace as the recent declines in direct costs, moderation of incentives, and expected improvements in cycle times has given us increased confidence in our ability to generate solid margins and returns from the new communities we opened. Given the extent of our existing land pipeline, our year end 2023 community count could be in the range of 250 to 260 communities if we elect to open all communities that we expect to be available. In the face of numerous market challenges, we are very pleased with our performance this quarter and for the full year. Going forward, our strategy remains consistent: Continue to find market prices for completed and completed homes that were started earlier last year with elevated costs, manage land spend and generate operating cash flow that will be reinvested in new homes with improving margin profiles that will be started in the first half of 2023 and beyond. Thank you, Rob. We met our objectives and delivered healthy results this quarter, which resulted in the generation of strong operating cash flow and meaningful reductions in our gross and net homebuilding debt ratios. During the fourth quarter of 2022, net income was $79.5 million compared to $165 million in the prior year quarter or earnings per diluted share of $2.47 compared to $4.78 in the year ago period. Full year net income increased to $525.1 million, while earnings per diluted share increased to $15.92, both company records. Fourth quarter pre-tax income was $102.4 million. And our full year pre-tax income increased to $676.9 million, the highest in the company's history. Home sales revenues for the fourth quarter were $1.2 billion, slightly above last year's levels. Home deliveries of 2,903 homes were down less than 1% on a year-over-year basis, while our average sales price of $397,000 was up by less than 1%. Home sales revenues for the full year increased 9% to a company record of $4.4 billion driven by an 11% increase in our average sales price. Home deliveries of 10,594 homes were the second highest in our company history and nearly flat with last year's record levels of 10,805. In the fourth quarter, net new contracts across our footprint were 1,258. Similar to last quarter, this year-over-year decline was primarily due to elevated cancellation rates and the impact that the sharp increase in interest rates had on potential homebuyers. New contracts before cancellations totaled 2,008 homes. At quarter end, our backlog of sold homes was 1,810 valued at $671 million, with an average price that had decreased by 8% year-over-year. In the fourth quarter, adjusted homebuilding gross margin percentage was 19.8% compared to 27.3% in the prior year quarter. Homebuilding gross margin was 17.6% or 18.4% when excluding inventory impairments, compared to 25.9% for the same period last year. As we discussed on our last quarterly call, this reduction in margin percentage was expected and primarily resulted from our strategy of generating cash and reducing our leverage profile by focusing our sales efforts and incentives on near-term deliveries, even though they carried elevated construction costs due to their start dates earlier in the year. In the fourth quarter of 2022, we also recorded an inventory impairment charge of $10.1 million. For the full year, homebuilding gross margin percentage improved to 24.5% compared to 24.2% and adjusted homebuilding gross margin percentage improved to 26% from 25.9%. SG&A as a percent of home sales revenue was 9.5% in the fourth quarter compared to 9.3% in the prior year. This minor increase was a result of higher commission costs year-over-year due to market conditions with the balance of the costs below the prior year levels. For the full year, SG&A as a percent of home sales revenue was 9.8% compared to 9.7% in 2021. Pre-tax income margin for the quarter was 8.7% compared to 17.6% in the prior year. For the full year, pre-tax income margin was essentially flat at 15% versus 15.2% in 2021. We incurred $5.1 million of other expense in the fourth quarter, including $4.2 million of expense from the abandonment of certain deposits and feasibility costs. For the full year, we incurred $11.6 million of expenses from the abandonment of deposits and feasibility costs. As a reminder, our charge-off of these deposits and feasibility costs was a result of our deliberate decision to step away from land deals that no longer met our investment standards as a result of the market shift. During the fourth quarter, financial services captured 65% of the closings, generating $23.1 million in revenues compared to $31.2 million in the prior year quarter, primarily due to forward commitments entered into in prior quarters, fewer loan originations and increased competitive pressures. The business contributed $12 million in pre-tax income compared to $12.7 million in the prior year quarter, a significant accomplishment given the decline in revenues and volatility surrounding the mortgage market. During the quarter, we maintained our quarterly cash dividend of $0.20 per share and did not repurchase any shares of our common stock. As a reminder, in the first three quarters of this year, we invested [$120.6 million] in repurchasing 2.3 million of our common stock at an average share price of approximately $52.32 or a roughly 23% discount to our year end 2022 book value of $67.67 per share. These share repurchases in 2022 reduced our share count by approximately 7% with approximately 1.5 million shares remaining available for repurchase under our current authorization. As a result of executing on our objectives, we generated $382 million in operating cash flow in the fourth quarter. Our net homebuilding debt to net capital ratio declined significantly to 23.5% compared to third quarter 2022 levels of 32.5% and the lowest year end level in our history as a public company. Our homebuilding debt-to-capital ratio declined to 32% at quarter end compared to 36.3% as of the end of the third quarter of 2022. For the 12 months ending December 31, 2022, we generated a return on equity of 26.8%, which represented our seventh consecutive quarter with a return on equity above 25%. We ended the quarter with a strong financial position, including $2.2 billion in stockholders' equity, a 22% year-over-year increased, and $1.2 billion in total liquidity, including $353.3 million in cash. In the fourth quarter, we paid off the $165 million outstanding on our revolving credit facility and have no borrowings outstanding on the $800 million facility that does not mature until April 2026. Additionally, we have no senior debt maturities for five years, providing us ample flexibility with our leverage management. Now turning to guidance, the homebuilding industry last year was impacted with increasing interest rates, rising costs, declining ASPs, and deteriorating demand. We have begun to see mortgage rates stabilize and homebuyer traffic on sites increase. For the first and second quarters, we expect our deliveries to be below prior year levels. This expected decrease is due to the fact that we delayed community openings, started fewer homes in the second half of 2022 as the market softened and successfully executed in the fourth quarter on our strategy of prioritizing the sale of near-term deliveries, leaving us with a limited number of completed spec homes. As a result, we will simply have fewer homes available for delivery in the first two quarters of 2023, while we start new homes with lower input costs for delivery in the second half of 2023. For the full year 2023, we expect our deliveries to be in the range of 7,000 to 8,000 homes, and our home sales revenues to be in the range of $2.6 billion to $3.1 billion. In closing, we believe that our spec based model, dedicated focused on our own more affordable homes, geographic footprint and solid balance sheet, positions us well to navigate the current market, as well as thrive in improved economic environments. I wanted to ask a regional question. Southeast orders came down quite a bit I think 70% and the store count was flat. Just curious, with the performance there, can you talk a little bit about what happened there? And then following on to that, from a West and Mountain Region perspective, you've got a lot of lots, backlogs pinned up in the West. So is the focus, especially in the first half of the year going to be on working through lots and houses in the West? Hey, Carl. This is Dave. I'd say, the answer to your question on the Southeast community count was flat and sales were down, but that was really a function of the Southeast throughout the first half of the year was still strong on sales, leaving '21 and the '22 both strong on sales. We just didn't have any product and so we just didn't have enough near-term completing specs or completed specs really available in those markets for us to be selling in Q4. So we saw that drop off, even though we've got some open communities. On the West Coast, yes, the first half of this year, as sales have come down, you're going to see us work through some of that existing inventory that was started earlier last year. And that's something we started at higher direct costs, and we've seen those prices come down, and we'll work through that inventory here the first half of 2023. Thanks, Dave. So Southeast then is a function more of product availability as opposed to an excessively elevated can rate compared to the rest of the company? Correct, correct. We definitely still see the Southeast being a strong region. Itâs been just more a function of homes under construction. And then one -- when you talked a little bit about the trends continuing in January from the improvement as you saw through the quarter and 4Q, would you describe what you're seeing in January as better than what you'd expect seasonally, worse than or about what you'd expect seasonally? Thanks. Well, in terms of seasonal, I mean, we're certainly seeing an improvement in sales traffic and overall sales. And so, whether you call it seasonally or just an improvement because of the lower interest rates that are now in the market, it's hard to tell. But the easiest thing to say is, January is improving over December. And from what we can see, we expect that to continue as we go forward. Thanks for all the great info. A lot of interesting comments there. First, I'd love to drill in a little bit on some of your comments on pricing and incentives. It sounds like if I'm interpreting the comments correctly that you think that pricing or net pricing has effectively bottomed here, given that you're kind of guiding for incentives to decline as the year goes on. So first of all, I want to make sure I'm understanding that correctly. And as soon as I am, does that imply that you feel like among your cohort of buyers, that affordability is kind of where it needs to be to kind of generate volume growth in the business over obviously a longer time period? Alan in the fourth quarter, we were really addressing affordability across all subdivisions. And we had forward commitments, we had rate buydown programs available. We don't have any of those in place now. We obviously still help some of our buyers on a case by case basis, but has -- as rates have come down, we don't see the need that we have to do it across our entire portfolio. And to that point, have there been any offsets to that, that we should think about as far as pricing, like have there been base price adjustments or anything? I'm just trying to think like, obviously incentives is one way you attack the affordability equation. But home prices have gone up quite a bit over the last several years. So are you keeping the base price flat even as you're pulling back on those mortgage incentives that you had been offering? Well, typically in an existing community, we wonât be dropping base prices. But as we're opening new communities, it becomes far easier to adjust base prices. We don't have any backlog. And more importantly, we're bringing out homes that have lower input costs in them than something that would have been started quite some time ago. But in general, as we are seeing in our -- in the fourth quarter, our incentives went up pretty significantly over what we had in the third quarter and what we would normally see. And a significant component of that related to really the company-wide mortgage programs that we were offering. Okay. And I appreciate that. You brought up the input cost, which was kind of the second question I was going to throw at you guys. If I heard you correctly, I think you said that your direct costs are down about $16,000 from the peak. Correct me if I'm wrong on that. But, generally, I think your commentary, it sounds more bullish than I think a lot of other builders up to this point and a lot of them have been kind of highlighting their optimism that they will be able see some cost relief as '23 goes on. But I think you guys are probably the first to kind of highlight significant reductions. And I'm curious if you could kind of split that out a little bit, like how much of that is lumber versus other inputs or labor that you have actually seen some relief on? It's around two-thirds of it on lumber, and the balance on some of the other areas. And it depends too. And some of the back end areas we got released, but really a lot more on the front end where things have slowed down on starts across the board and people are not nearly as busy as they were. So we are getting that potential reduction there, where people are more readily available to come and perform their work at the pricing. So it's an ongoing focus of ours and not only in the division but regionally and then from the corporate team as well. And I think our team has done a really good job of getting the input costs down, because candidly, they were just way too high at the beginning and middle of last year. Got it. That's helpful. So that $16,000, if I just look at some rough math here, your average pricing backlog is about $370,000. So call it a 4% margin impact all else equal. Is that how we should think about your comments as far as once you get past the first half of the year, you see margins lifting sequentially. Is that 400 basis points kind of assuming all else equal pricing stays flat, everything else stays flat and what we should expect to see? Good afternoon. Just a couple of questions on the guidance for '23. If you average out the community count to around 225, 230, and then the closings -- the midpoint of the closings, it looks like you guys are expecting maybe less than three closings per month for fiscal '23 versus being anywhere between three and four really since fiscal '18. I guess it seems a bit cautious, a bit hesitant. Maybe talk us through why you are going to such a low closure -- what we perceive to be a relatively low closing guidance to start the year? Jay, I think a lot of that is just based on where we sit today with homes under construction. We significantly reduced the number of starts in the second half of the year. We started picking them up in November and December. And we've continued those into January. So when we look at it, part of it is we just need to build back up. And so in the first half the year, our deliveries will be down, and then they'll start increasing. And then as we look at that, we'll have at the end of the year, we'll have more houses under construction. And by that time, we'll be at a higher run rate. But as we just look at balancing out the first half and second half the year, that's where we see that we'll have the available homes to deliver. So basically just a timing issue, because you got to get communities open, and you got to get more specs up. I guess what were your total homes under construction at year-end and how many of those were spec? We don't disclose the number of homes that we have under construction at any given time, but nearly 100% of them are spec. That's always been our model. I guess the other question, just thinking about price, I mean, it looks like kind of a drift down through the year, I mean with these newer, smaller base prices, I mean are you guys thinking you'll have a drift somewhere down by like 5% to 10% by year-end? Or is it going to be something smaller than that? And I know that the midpoint of the guidance works out to 380,000. But if you've already started to put in some of these lower priced homes and lower price floor plans, just kind of wondering where average prices should end the year up? Well, I think part of it is and it's hard because of our two brands. And there's obviously a big pricing disparity between them. And when we look at it last year, our Century Complete brand really grew. And so we think that, that is well set up for the affordability challenges that we saw last year, and obviously as prices have gone up, continue to a certain extent. So there's -- some of that is a higher percentage of Century Complete, as well as we pivoted a number of our plans to smaller plans and subdivisions, and particularly on new communities where we've done that to get the overall price point down. So it's really a combination of those two things. Wanted to just circle back and make sure thinking about the gross margins correctly. And appreciate the additional color on question around the 400 basis point math. When originally though, when you describe that you're saying that you could think that you expect second quarter to improve, and eventually, I guess in the back half, the second half of the year, get back to more normalized levels, when you look at normal -- I mean I guess the question is, what do you consider normalized gross margin levels? Because just a quick look from 2016 to 2020, you averaged 18.3% including interest amortization -- after interest amortization. With the 400 basis point math that's putting you to like 22.5%. So just want to get a sense of, if indeed, that's what you're thinking, again, to get to that 22%, 23% range by year end? Is that's what you consider the new normal, or if there's other factors we should consider? Hey, Mike, it's Dave. We've talked about this on past calls in terms of how margins have been all over the board over the last year or two. They've obviously swung in our favor. And now they're a little bit against us being, probably 18.5 in Q4. As we talked about before, we think there's been a lot of improvements in our pricing, our scale, our plans, our efficiencies, our cycle times, and such that if we start getting all that back into a good rhythm in Q4, we ought to be building at a more normalized margin, which will be higher than what we had in the past. We are recording something in on 18% and 19% range. And now the new norm is hopefully going to be something in that low 20s range. But I think that's going to be a result of a lot of the stuff we've put in place over the past several years. Secondly -- appreciate that. Secondly, just kind of looking a little closer term on the first quarter. I guess you kind of said that expect gross margins, again, after or inclusive of interest to be similar to 4Qâs 18.24, can you give us any directional guidance on the closings? Obviously, you talked about 7,000 to 8,000 for the full year, you kind of talked to the issue that in the first half of the year, you'll be working off a very low backlogs and as a result of your strategic approach, has couple of quarters. How should we think about closings in terms of any type of range? Or perhaps first half, second half split? I think that would be pretty helpful just for modeling. Yes, I think that you're going to see Q1 be our lowest closing quarter of the year. And then they should grow sequentially as not only do we work through our backlog, when we start bringing online a lot of the homes that we've started construction on here in December, January, that we'd expect to start construction on through the balance of Q1 and Q2 that we could still deliver into Q3 and Q4. And so I think, it's going to be back end weighted to the third and fourth quarters, while we get back to a little bit more of a traditional trend for us where the first quarter is your lowest closing quarter, and then it begins to grow through the course of the year. One last one, if I could sneak it in, just around, how to think about SG&A? Obviously, you've had a lot of success over the years that you've grown significantly. This is going to be more challenging year, obviously. Anything in terms of just variable expense or any ways to think about the type of deleveraging that we should be expecting? Yes. I think next year, deleveraging gets a little bit more difficult just because you've got closings of revenue coming down, and we've got a fairly large national footprint across 18 different states that we're managing. We've been running about a 65-35 split on a fixed versus variable basis. I think we probably continue that split over the course of full year. And as we've been prone to act quickly in the past, whether it's staffing adjustments, division adjustments, whatever the case is, we will look for any opportunity we have to find that deleveraging opportunity within the SG&A categories, and put more to the bottom-line. But we acknowledge that next year it gets a little more difficult with lower revenue line. Thank you, gentlemen. I wanted to see if you guys could talk about improvement in build times. How much did the build times get extended out to last year and where do you feel they are today and where do you think they'll be, I don't know, six months from now? So it's basically a mixed bag, Alex, looking back over the past 12 months. And depending on the particular market, the particular plan and all, the cycle times vary quite significantly with the supply chain challenges, the labor challenges and all. Going forward though, that's a real focus to reduce that down. As I mentioned earlier in the prepared remarks, the supply chain is easing. We are seeing more availability of labor and everything else. So all of that are great. As we look at our new templates going forward on homes that we are starting now versus homes that we are started, let's say, at the peak pricing six months ago, we are looking at a 57 day reduction on cycle times on average. There is variations from that, but on average. We are also shooting for a maximum as a round number of a six month build time. In some areas, we can do much better than that; other areas, it's still elongated. But we are getting great traction on getting our cycle times reduced. Where we are going to be at the end of this year? I think it's going to be back to a more normalized basis on what pre-pandemic cycle times were. It's going to be closer that type of a scenario. But it's getting... Great, great. Good to hear. And then on the subject of costs, obviously, at the beginning of last year or first half of last year, everybody was up, up and away in terms of home prices and home costs. And so I imagine a lot of those specs that were started had high cost and as you are mentioning, you are now starting to achieve lower cost on the new stuff. But I'm just kind of curious, how far along do you guys think you are through flushing out the high cost inventory, such that you don't need to focus so much selling that, but can focus more on selling the lower cost stuff going forward? If we have homes listed for sale, we are focused on selling them. I think that you are going to see in the first quarter, we are still going to have some of those older homes that we started last year at higher direct costs. You are going to see those coming through and that's what's weighing on our gross margin, such that we think that Q1 is going to be in a similar range compared to what Q4 was. And so we will get through a lot of them probably in Q1. But I think you are going to see them bleed into Q2. It's just going to take us some time to work through all of that inventory. But we are definitely focusing on building new homes that have better costs, affordable, better pricing and will produce better margins for us in the latter half of the year. And if I could ask one last one. So you guys mentioned that pretty much all the homes, new starter, specs, that cycle times are going to be down I think I just heard you say, close to 60 days or something on the new stuff. So what about the ranging of those houses or the average? What about the average price or the average size of those of that inventory that you're creating? Is that generally speaking, smaller, cheaper houses? Or is it the same type of stuff as before? Generally, it would be smaller or similar, but generally just a little bit smaller. And how we are doing that is, in our plan library, we may not be building the largest plan in a particular series or whatever to get it down from the square footage standpoint, affordability standpoint. So as a trend, it would be smaller homes at a lower price point. Just wanted to get any more granular sense, if you're able to provide it on the level of improvement that you saw in terms of describing November in December well above October and further improvement in January. If it could be either on a year-over-year, what the year-over-year declines have done, or even sales pace? Any additional color would be helpful there. Mike, some of it is just anecdotal, from a standpoint of where our focus is. And, as weâve made it very clear, our focus is on completing, completing homes. And if something is further downstream in terms of delivery, we've not been incentivizing those homes. So it's -- when we look at it, it's really more a function of have we been able to sell all the homes that we've prioritized for sale. And that's how we're really quantifying it, that and really the traffic and the amount of incentives that we have to provide. And so as we've said, as the quarter progressed, things improved, which means that we were selling more of the near-term delivery houses, and we were doing it with less incentives. Same thing has continued into January. So from our standpoint, it's not really a focus on the number of houses that we're selling, but it's making sure that we're selling the proper homes. I guess, secondly, you're saying that you expect incentives to moderate a bit. Any way to how to think about that from a quantification standpoint? I mean, you talked about incentives reaching 900 basis points as part of your 4Q deliveries, so up 600 basis points sequentially. Is that expectation for incentives moderating a bit, something that you've already seen in your January orders? And moderating a bit, would that be a couple of hundred basis points or something a little more than that, or less than that? As we said, our historical norm has been around 300 basis points. It spiked to 900 basis points in Q4. And a significant component of that were the forward commitments that we were purchasing really across our entire company. So when we look at it, we've taken that away. And so, that's probably somewhere that impacted our margins somewhere between 1.5 points and 2 points. So, we don't expect to get back to 300 basis points of incentives overnight, but we're moving in that direction. So to say we're down a couple of hundred basis points is probably where we are. This concludes our question-and-answer session. I would like to turn the conference back over to Dale Francescon for any closing remarks. Thank you, operator. I'd like to take this opportunity to once again thank all of our team members for their incredible work and continued dedication to our valued homebuyers. I'd also like to thank our investors for their time today. We appreciate your continued support and investment and look forward to speaking to you again next quarter.
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Greetings, and welcome to the Columbus McKinnon Corporation Third Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for CMCO. Thank you, Ms. Pawlowski. Please go ahead. Thank you, Donna, and good morning, everyone. We certainly appreciate your time today and your interest in Columbus McKinnon. Joining me here for the quarterly conference call are David Wilson, our President and CEO; and Greg Rustowicz, our Chief Financial Officer. You should have a copy of the third quarter fiscal '23 financial results, which we released earlier this morning, and if not, you can access the release as well as the slides that will accompany our conversation today on our Website at investors.columbusmckinnon.com. David and Greg will provide their formal remarks, after which we will open the line for questions. If you will turn to Slide 2 in the deck, I will review the Safe Harbor statement. You should be aware that we may make some forward-looking statements during the formal discussions, as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the company with the Securities and Exchange Commission. You can find those documents on our Website or at sec.gov. During todayâs call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany todayâs release and slides. Thanks, Deb, and good morning, everyone. Our results for the quarter demonstrate the steady progress we are making as we execute our plan to transform Columbus McKinnon into a higher margin, higher growth business. There were several highlights in the quarter. Sales were up a 11% on a constant currency basis as we captured price, increased volume to meet demand and the team successfully reduced past due backlog. Past due backlog was reduced by $16 million or 28% as we continued efforts to improve our customers experience. We expanded operating margins by 170 basis points on a GAAP basis and 70 basis points on an adjusted basis. Q3 daily order rates increased 3% sequentially, and order rates in January through last Friday are up nearly 6%. Finally, we are seeing project activity that had stalled in Q3 begin to advance this month. We remain bullish on megatrends that we expect will continue to drive opportunities for us even against the softening economic backdrop. Global shifts, or I should say geopolitical shifts, transportation and logistics challenges, insufficient supply and the limitations of available labor are driving investment decisions that support automation, the reshoring of manufacturing, facility upgrades and expanded operational investment. We continue to strengthen our balance sheet and improve our financial flexibility to execute our strategy. We paid down $30 million in debt through the first 9 months of our fiscal year and have brought our net debt leverage ratio to 2.7x. We also repurchased approximately 31,000 shares at an average price of $32.17 in the quarter. On Slide 4, I will update you on our strategic progress. As mentioned earlier, growth in the quarter on a constant currency basis was 11%. I believe our new regional leader teams -- leadership team structure contributed to this success. In fact, sales in EMEA were up nearly 12% excluding the impact of FX driven by both pricing and volume. We also continue to innovate to drive growth, and we introduced three new products in the quarter, a new medium duty belted conveyor that fills the gap between our current flagship products and capacity and capabilities. The new line includes many features that provide competitive advantages including flow accuracy tracking, and slim profile; a new 4.5 tonnes hand chain hoist for the general industrial markets and we pre-launched the next generation wire rope hoist with available frequency drive controlled motion for better speed and position control. This solution offers an easy upgrade path to a digitally connected footprint for diagnostics and remote monitoring. Our NPD N-3 revenue, which we use to measure vitality was 5% of total revenue on a year-to-date basis and remains ahead of plan. Our most immediate opportunity is improving our customer experience in North America to gain market share and to grow our customer base. We have improved our performance relative to internal customer service metrics, including call wait times, quotation lead times, order entry times, engineer drawing lead times, lead time accuracy, delivery status update accuracy, and past due backlog reduction. We are laser focused on reducing delivery lead times and have created plans for each product that will reduce lead times to competitively advantaged levels. While we are making progress on these initiatives, we are not yet satisfied with the results. I should also mention that in December, we successfully launched and went live with our new ERP system in Mexico. This is consistent with our digital initiatives roadmap and is expected to improve efficiency and enable our teams to be more effectively -- to be more effective as they address both internal and external customer needs. This also provides the foundation for future enterprise simplification efforts. Despite supply chain headwinds and related production impacts, we continue to expand margins. We have now extracted $7.2 million in annualized costs through the business realignment efforts we initiated earlier this fiscal year. We realized $4.7 million of these savings in fiscal year '23 and expect the balance to help offset further inflationary pressures in fiscal '24. Rest assured, we're also taking actions to identify additional costs that we can take action on in fiscal '24. We generated $6.5 million in free cash flow in the quarter and are expecting a significant increase in cash from operations in the fourth quarter, as we reduce inventory and improve working capital. Slide 5 depicts our adjusted gross margin progression over the last several years. Since fiscal '18, we have improved gross margin by 310 basis points, and we believe we are on track to achieve our fiscal '27 objectives. As you can see on this slide, there are several levers we will address to achieve our targeted level of approximately 40%. I want to remind you on Slide 6, that we were heading and why. We're transforming Columbus McKinnon into a leading motion control enterprise for material handling by leveraging our product portfolio and expanding into secular growth markets. We expect our strategy to shift our mix of business into our product platforms that command higher margins and have greater growth potential. By organizing around these platforms, we are also identifying larger addressable markets, creating more opportunities for us to grow and succeed. Thank you, David. Good morning, everyone. Slide 7, net sales in the third quarter were $230.4 million, up 10.5% from the prior year period on a constant currency basis, and above the midpoint of the guidance we provided last quarter. As you know, the third quarter is impacted the most from a seasonality perspective as we had four less workdays in most geographies around the world compared with the previous quarter. Overall, we are pleased that we were able to reduce past due backlog by $16 million despite persistent supply chain challenges for motors, drives and other components that we purchase. We also had delays in certain rail projects for various reasons that impacted revenue by about $4 million in Q3. This revenue is expected to be recognized in Q4. Looking at our sales bridge, pricing gains of $11.9 million or 5.5% accelerated as we converted orders to revenue at more current prices. This was up 60 basis points from our Q2 level. Volume increased by 2.7% or 5.9 million, which we will cover in the regional update. Acquisition revenue represents 2 months of sales from the Garvey acquisition, which closed on December 1st of 2021. This provided $4.9 million of incremental growth in the quarter. Foreign currency translation reduced sales by $8.4 million or 3.9% of sales. Let me provide a little color on sales by region. For the third quarter, the 9.9% growth we saw in the U.S was driven by a 5.8% improvement in pricing. Acquired revenue from Garvey added 3.5% growth in the U.S. Sales volume was up .6%. Outside of the U.S., sales grew 11.4% on a constant currency basis. Pricing improved by 5.1% and sales volume increased by 5.9%. We were encouraged with the volume increases we saw, which were approximately 12% in Latin America, 9% in Asia, 5% in Europe, the Middle East and Africa or EMEA and 3% in Canada. We are especially encouraged by the volume gains in EMEA, which represents 25% of our business. The region has proven to be resilient in the face of the war in the Ukraine and an energy crisis. Both our project business and short cycle business in Europe saw meaningful volume growth. On Slide 8, gross margin of 35.6% was up 90 basis points from the prior year. On an adjusted basis, gross margin was lower by 110 basis points compared with the prior year. Last year's third quarter was unusually strong because we didn't see our typical seasonal dip of roughly 100 basis points in gross margin. In the prior year, we benefited from a strong month from the Garvey acquisition, as they delivered an exceptionally strong margin on a large project they shipped right after we acquired them. This quarter we saw a more normal sequential dip in margins. Third quarter gross profit increased $6.9 million compared with the prior year and was driven by several factors which you can see in the table. Let me comment on a few highlights on our gross profit bridge. Pricing net of material inflation added $5.9 million of gross profit, which includes $6 million of material inflation in the quarter. We see material inflation decelerating as we enter Q4. We also had an unusual product liability settlement last year that did not repeat. The two incremental months in the quarter from the Garvey acquisition provided $1.9 million of gross profit and $4.9 million of revenue. Offsetting these items was foreign currency translation, which reduced gross profit by $2.8 million and lower factory productivity compared with the prior year of $3.7 million. The lower factory productivity was primarily at our Künzelsau facility, as volume picked up for engineered to order production activity as our mix shifted to more ETL product which is more complex than standard product. This disrupted our planning and execution processes. This has been addressed as we had a new planning tool to increase the efficiency of this process. Moving to Slide 9, our SG&A expense was $55.4 million in the quarter or 24.1% of sales. This includes a purchase accounting item for $1.2 million related to contingent consideration paid to the owners of Garvey. The acquisition was structured with an earn out provision based on delivering certain levels of EBITDA in the first year, which was achieved this quarter. The $1.2 million represents the excess of what was estimated during purchase accounting. The total earn out of $2 million was placed in escrow when the deal closed, so there will not be a cash impact when it is paid in Q1 of next fiscal year. In addition, the sequential increase in our SG&A included $500,000 of incremental business realignment and headquarters relocation costs. The remainder of the sequential increase was due to adjustments to our annual incentive plan accruals and stock compensation. Compared with the prior year, our SG&A costs were higher by $1.9 million which includes the $1.2 million of contingent consideration for the Garvey acquisition, which I just discussed. We also incurred $1.1 million of incremental business realignment costs related to our commercial reorganization, and the incremental 2 months of the Garvey acquisition added $900,000 to our SG&A cost as well. Offsetting these increases were foreign currency translation, which reduced our cost by $1.8 million. For the fiscal fourth quarter, we expect our SG&A expense to approximate $54 million. We are assessing further cost reduction opportunities as we plan for fiscal '24. Turning to Slide 10, operating income in the quarter increased 32% to $20.2 million and adjusted operating income was $23.5 million. Operating margin expanded 170 basis points reflecting pricing, acquisition performance and higher volumes. Adjusted operating margin was 10.2% of sales, a 70 basis point increase over the prior year. As you can see on Slide 11, we recorded GAAP earnings per diluted share for the quarter of $0.42, up $0.08 versus the prior year. Our tax rate on a GAAP basis was 28% in the quarter. For the full year, the tax rate is expected to be between 30% and 32%, which reflects a 6 percentage point impact from the two discrete items that we discussed in our Q1 earnings call. Adjusted earnings per diluted share of $0.72 was up $0.12 from the prior year. While EPS was negatively impacted by $0.08 per share from higher interest expense versus the prior year, we had favorable impact from FX gains as well as mark-to-market investment gains, which together favorably impacted EPS by $0.12 per share year-over-year. Even though we are 60% hedged to interest rate exposure, interest expense is expected to increase to $7.6 million in the fourth quarter. Weighted average diluted shares outstanding will approximate $29 million and our pro forma tax rate is 22% for calculating non-GAAP adjusted earnings per share. On Slide 12, our trailing 12-month adjusted EBITDA margin is 15.7%. We are making steady progress towards our target of $1.5 billion in revenue with a 21% EBITDA margin in fiscal '27. A return on invested capital of 6.9% was impacted by the Garvey acquisition. ROIC is a key metric in our long-term incentive plan and we expect to see this improve over time. We continue to advance our efforts to reduce overhead, improve productivity and simplify both our product lines and factories. We will also drive the top line as well. These are the key elements to delivering on our growth and profit goals. Moving to Slide 13, we had positive free cash flow of $6.5 million in the third quarter. This includes cash inflows from operating activities of $10.8 million and CapEx of $4.2 million. Third quarter cash flow was impacted by approximately $15 million of higher cash interest and cash tax payments compared to the prior year. As we turn to the fiscal fourth quarter, we expect strong free cash flow as we drive earnings and reduce working capital investments. Full year capital expenditures are expected to be in the range of $13 million to $15 million, or between $3.5 million to $5.5 million of CapEx in the fourth quarter. Turning to Slide 14, we have a strong and flexible capital structure comprised of the term loan B, which requires $5.3 million of the annual principal payments as well as an excess cash flow sweep depending on our total leverage ratio. We have been actively paying down our borrowings and made another $10 million payment in the quarter, bringing the total debt payments year-to-date to $30 million. We expect to pay an additional $10 million in the fourth quarter. The term loan B is 60% hedged with interest rate swaps that blend to a swap rate of approximately 2.08%. As of December 31, our net debt leverage ratio was 2.7x. We have prioritized debt repayment in the current environment and expect to see our leverage ratio dropped to under 2.5x next quarter. As David noted, we took advantage of market conditions to repurchase about a $1 million of stock in the quarter. Finally, our liquidity which includes our cash on hand and revolver availability remains strong and was approximately $166 million at the end of December. Thanks, Greg. As I mentioned earlier, daily order rates improved 3% sequentially in Q3. On a year-over-year basis, there were two major impacts that affected our Q3 order levels. First, FX had a $9 million negative impact in the period. Additionally, there was a $9 million impact to orders resulting from the curtailment in new warehouse investment by a large e-commerce customer. Year-to-date, orders for this customer are down approximately $25 million. While current order activity with this customer is paused, we are highly engaged with them on other promising and innovative new projects. I should also highlight that we're excited about additional e-commerce applications that we are winning. We are working with several integrators that are serving end users who are looking for increased production efficiencies within their intra logistics systems. Our backlog remained stable at $329 million in the quarter, and was more current given the 28% reduction in past due orders we achieved in the period. Let me wrap up on Slide 16 with some thoughts regarding our outlook. First, looking to the fourth quarter, we expect to deliver quarterly revenue of about $240 million to $250 million. This implies fiscal '23 growth of 6% for the full year on a constant currency basis, which is in line with our strategic plan. As I mentioned earlier, we are planning for a measurable improvement in cash generation in the quarter through a reduction in working capital. We are encouraged with the developing view of fiscal '24 as well. We anticipate that we can deliver growth on the order of low to mid-single digits for the year. While quotation to order conversion timing has been extended customer activity and quotation levels have held up well and we are not seeing indications of an industrial recession. We also think that a stabilizing environment will help advance projects that have been held up in decision making processes. There's actually quite a lot of [technical difficulty] number of our markets. For example, we see continued strength in the EV market, whether it be for vehicle or battery production. Energy and utilities around the world are also very active. From water treatment, wastewater management and waste to energy power facilities to active oil production in the Middle East. Utilities are adding new plants and upgrading older facilities to drive improved efficiencies. Defense has also been active with missile elevation devices and chain hoists to erect mobile [ph] tents. In Life sciences, we're providing automated pharmaceutical packaging and delivery systems for prescription fulfillment. Finally, I'd be remiss if I didn't mention that demand for our entertainment solutions continues to be solid. We are hyper focused on improving our customers experience and are executing plans to do so. This will enable improved market share and expanding addressable markets. We also look -- as we look beyond fiscal '23, given the activity we're seeing in our markets, our efforts to improve customer experience and our strong backlog, we expect to continue to grow even as the economy moderates. We are committed to achieving our longer term goals and expect to deliver additional steady proof points as we advance. Thanks for taking my question. The first thing that I was curious about is as we head into fiscal year 2024, I was curious about how you're thinking about pricing entering that year, considering that in fiscal '23 to date, it's been especially strong. And I'm curious as to how you're approaching that equation as we head into the next periods here? Okay. Yes, thanks, Will. Obviously, we've made a lot of pricing moves over the past 12 months as we've managed through inflation and tried to stay positive as it relates to price cost. As we look into the new year, and as we think about our bridge, looking at this year versus next year, we're thinking there might be another 3% to 4% that might translate as we look at where inflation rates might be our cost position and where we think we've got leverage with our portfolio. Understood. Okay. And then Greg, I had a follow-up question for you from prepared remarks. It sounded like during the quarter, if I interpreted correctly, you are able to actually net recover some of the sales that had been pushed out in prior periods as a result of supply chain. And I was just curious if we could get a bit better understanding about what enabled that? Yes. So Will, what we've actually saw was that supply chain constraints were about at the same level. It was better in certain components categories and worse than others. So net-net, we still had roughly a $24 million impact, which I think was maybe a $1 million better than it was in the second fiscal quarter. So was there something else in the prepared remarks that led you to a different conclusion? Yes. So Will, this is David, I'll jump in a little bit. So yes, we did reduce past due backlog by about $16 million sequentially in the quarter. That was a 28% reduction in total past due backlog. We are able to make progress as it related to supply chain delays as it relates to those particular items. And our backlog is becoming more current. Greg's comment related to opportunities to even do better than what we did, given the items that were left on the dock, if you will. But we are continuing to make progress there and I think we are seeing some loosening in the supply chain. There are spot challenges that we're addressing every single hour. But we are making progress there and expect to continue to make progress as we head through this quarter. Good morning, David. Good morning, Greg. Appreciate all the info on the call this morning. Couple of things I want to check in on. Greg, you explained a little bit the year-over-year gross margin decline. I think you alluded to a big Garvey order at the end of 4Q a year ago. But I'm just trying to make sure that's -- most of the change, particularly because your revenue was essentially flat sequentially where we saw the gross margin decline. I'm just trying to get a sense of gross margin trends. Yes. So great question. Thanks for that, Steve. So a year ago, our gross margins were, I believe, 37.2% in the quarter. And they actually were the same level as they were in the fiscal second quarter. So we didn't see our historical drop. And what I was mentioning is that a large driver of why we didn't see our historical 100 basis point drop that we would typically see because of less workdays is that we had -- we own Garvey for 1 month, but they had a tremendous month of December with some meaningful revenue to one large customer that had almost 60% gross margin. So it was very, very accretive, and that's why we didn't see the typical drop. Now this year, we saw a drop a little bit more than 100 basis points. I believe it was the 160 basis points from Q2. And what I talked about on the call was that we actually -- about a 100 of that would -- we would normally expect with just less working days. There were only 60 working days versus 64 in the September quarter. But in addition, we did have lower productivity, which is seeing our bridge largely driven by our [indiscernible] factory, which is our largest, most complex, most highly engineered factory. And we've had -- we've seen more of a mix shift where we have more engineered to order product, and less standard product, which is more complex, takes more time. And also we had no issues just with the planning of these large projects. And so that impacted us as well in the quarter. And we are, Steve, introducing a solution for that challenge as we speak, and are going live with a new production planning module for that facility that augments or supplements what we have in place today with our SAP solution to take that to a next level. And we expect to see benefits for that, that will phase in our Q1 of next year time period. So as we think about our Q4 gross margin, Steve, we would expect normally around a 37% gross margin. We're kind of in that zip code, especially with the additional workdays. However, we are going to see roughly an 80 basis point mix, negative mix impact from some rail projects that are going to ship in the quarter and our rail business has typically -- it's about a $10 million of revenue. And it typically is -- gross margins are much lower than the overall corporate average. So that is going to have about an 80 basis point -- 80 to 100 basis point impact. Steve, those are projects that have been -- sorry, Steve, those are the projects that have been delayed, given those supply chain issues we've talked about. And so there's been some pricing impacts, cost impacts that are phasing through on those. A lot of electrical component and price adjustments and controls, and that's the impact of the lower margins. And typical volume in that business in a quarter is about 3x less than what we're shipping. And so that drives this mix shift and the margin impact, Greg, is talking about 80 basis points. So when we think about this moving forward, even past this quarter, generally mix shift has been helping you because Dorner and Garvey have been growing at a faster rate and at higher margin. You mentioned the e-commerce customer. How were you thinking about mix shift over the next multiple quarters in terms of what you're seeing from orders, et cetera? Yes, Steve, we think we can continue to drive accretive margins in the business over the mid to long-term. We have this issue that Greg just referred to in the period which is driven by the shipment of this very large volume of legacy orders that are -- that we need to get through the system. But we anticipate that the volume increases we would expect to see continuing to come from those faster growing segments as well as our own work around 80-20 productivity improvements driven by a more stable and an improving supply chain will allow us to drive expanding margins. Hi, good morning. Thanks for taking my questions. David, I was wondering if there just comes a little bit more on the visibility now and in the rest of 2024? Are you actively planning for a soft landing at this point or something different [indiscernible] you expect? Any significant weakening from here? Or does your crystal ball tell you that things are going to stay pretty healthy at this point? Right. We have a pretty good deed on certain current activity. And as we look to the quotation and customer discussion activity, we see no signs of an industrial recession as we were talking about earlier, in the prepared remarks. Obviously, our crystal ball doesn't go out years and years, and obviously things can change. At this point, we're planning on a relatively soft landing. And the way that we're thinking about the way the year develops, and if there is an impact, it's an impact that would come later in our period. But we're anticipating that we can deliver low to mid single-digit growth next year. Given the current environment, the activity we're seeing in the marketplace, our improvement initiatives around shared gains and customer additions as well as the backlog that we have, which is still pretty robust. Yes, and just to add on, Jon, we typically lagged by a quarter or so. And as David mentioned, our backlog is very healthy currently. And that will, I think, buffer us, even if there is a bit of a slowdown or recession later in our fiscal year. Got it. That's very helpful and encouraging to hear. Greg, I think I got the message on the longer term margins from what you said, expanding, but did you give me directional thoughts on gross margins in the current quarter? I know it's usually a little bit better [indiscernible] on volume, but are there any other plus and takes that we should [technical difficulty]? Yes. Hey -- so, Jon, that was really what we talked about with Steve, a few minutes ago, where normally we'd expect roughly the 37% gross margins roughly in the fourth quarter, and they'd be expanded from our current levels, or we're going to have this negative mix impact from a rail business that we think is roughly about an 80 basis point negative impact. [Technical difficulty] that was the past quarter, I got it. Okay. And then last of all, just in terms of the cash flow that you're expecting to [indiscernible] in the near future, I assume that's working capital improvement. Is supply improving to the point where you can do that, or is there something else that we should be thinking about? Yes. No, it is largely going to be driven by working capital improvement. As you know we're carrying almost $32 million more inventory than we started the year with. And we've been working on this and we expect to see meaningful improvement in our working capital utilization in the fourth quarter, and we'll see a really strong free cash flow timeframe for us. I just wanted to follow-up on the productivity system that you're putting in the ERP, is that started going in? And I just want to get an idea of what the size of that manufacturing location, maybe as a percentage of square footage or whatever? But are you expecting or could we see some disruptions similar to what we saw with that ERP ramp? No. Now while we have a 600% roughly manufacturing facility over in Künzelsau, Germany, it's our largest manufacturing facility. We -- it's the STAHL acquisition effectively. We implemented SAP went live, had good success in the wake of that implementation as we continue to ramp volume and mix shift that Greg referenced to a more engineered order. Balance of production had an impact on planning activities, somewhat impacted by supply chain challenges as well. And that created a level of disruption in the period that lead to productivity losses. We are implementing a -- an adjustment to the planning module for that system. It's an additional tool that we're confident will enable our ETL, highly complex ETL business to have a much more efficient planning and execution process. And don't anticipate that'll have a disruptive impact on the business and we're implementing that as we speak, and that will continue into the first quarter of next fiscal year when we'll start to see some benefits begin to be realized. Okay, great. And then, Greg, during the -- thanks for that, David. You talked about that $3.7 million productivity issue. I'm sorry, could you just provide the details of that again? Yes. So that -- so the negative productivity is largely due to this issue that we're talking about, with the mix shift at our Künzelsau factory. And remember, the STAHL business is the highly engineered explosion protected products, and they have very, very complex bombs that are more than -- that are much more than SAP can handle. So we'd have to add an additional system onto it that will help us from a planning perspective and it will increase -- it really will improve our production planning as well as improve our capacity utilization, which is really where the productivity factor comes into play. So that was the lion's share of the negative productivity that we had. Okay, great. Okay. Okay. And then I wanted to ask about the -- there was a comment, David, I think that you made about lower quote to order turns. When they asked about last quarter, and the second quarter, you called out that there was a lot of quoting activity. Was there something that changed in the last 3 months that where there's delays in some of these quote to order times? Yes, so quote activity, Walt, actually is remaining very robust. We're in great conversations with customers, there's high levels of demand around quotation activity. The conversion on those quotes to orders has taken longer, and what we saw was that that began to take effect in Q2, and we talked about that in the last call, that's what you're referring to, I believe. And as we progress through this quarter, we saw that continue. But we are seeing many projects that had been stuck in that cycle start to break loose as we've come into January. And that's very encouraging. I don't know, in all cases, what all the drivers are, but I would say, we're seeing a new capital budget as people enter their new fiscal periods. And we're seeing a better view on stabilization around economic activity, perhaps or a later cycle recession, if there's a view, there is a recession. And so people are moving forward with investments that they were pausing on, as we saw them pause through the last couple of quarters. So the quotation activity, if I miscommunicated, that is not an issue. Demand, visibility looks good. It's more the conversion and the timing on those projects and how they're coming through. Okay, great. Great. Thanks for that clarification. That sounds very good. And maybe just a last one for me. On the gross margin conversation you guys have that 40% target, which is great. And it sounds like there's a little bit of a headwind this quarter. How are you thinking -- once you get through that rail, gross margin issue, how do you -- are you looking for more step change, if you had in 2023 and 2024 is going to be more incremental? Yes, I'll take that. Walt, it's really going to be a continuous improvement process that we're going to step up, in essence we'll be exiting this year at roughly the 37% gross margin level. And over the next four plus years, we really would need about 300 basis points to get to the 40% gross margin in fiscal '27. So we think it's going to be more of a steady level. I think it's going to be steady and progressive. We're going to try to put more proof points on the board each time we report and [indiscernible] to how we're climbing that hill. But if you think about it on an linearize basis, you might be thinking it's a 75 basis point kind of climb per year to get to that 40%. And there will be some lumps and there with some larger initiatives that we have planned that maybe a more year plus out in terms of timing and impact, but the progression through productivity improvements [indiscernible] 20 work, the work that we're doing around better management in the supply chain and the visibility to our planning will enable us I think, to show steady and consistent progress. Good morning. A quick one. Just mechanically on the backlog just with book-to-bill below one in the quarter. How was it -- how did it hold up sable sequentially? Or like was -- like, what are kind of the moving parts there? That then than anything else, if you think about the move and FX in the period, we saw book-to-bill that was less than one we shipped 230, we booked 215. And the gap is really the FX adjustment in the period. It's all FX, Pat. So the backlog is mark to the U.S dollars as of December 31. So -- and as you know, [indiscernible] moved quite a bit from basically being below one in -- at the end of September to roughly I think today, it's around 109 would have been around one away, roughly at the end of December. Okay. Understood. And on the orders, dynamics, I think you said 6% growth in January, which I think you said is sequential versus maybe the third quarter? That's right. Sequential versus the third quarter up about 6% on a period to date basis through Friday of last week. Got it? Yes. So you'd kind of be up -- into kind of close to 230. Maybe if that continued, through the quarter from the 215 number. My question is, assuming your supply chain eases so you can work down the backlog to more normal levels. What absolute level of orders do you think you needed to support in outlook for low to mid single-digit growth in revenue in 2024? Yes, we're forecasting that we see demand continue at current levels that were -- we are seeing a relatively stable base of activity through the period. And we can support the level of outcome that we talked about with a stable base of demand. And so it's not, overly aggressive or ambitious as it relates to increasing water activity, nor is it assuming any material declines in demand. And we're obviously working on initiatives that will help us to grow and to gain access to more opportunities. And so if things do improve, we'll certainly be seeking to capitalize on them. But we think that with a basic, stable, continuous performance that we'd like -- we've been having we can we can execute to those levels. What is kind of, I think you've said this in the past, what's the normal backlog level? Like what's kind of a more normalized level than the 330, you're at right now? Yes. So if you look at the legacy business, we have about $125 million more backlog than historical levels. And so that means we're roughly at -- we used to run, say, roughly $160 million of backlog. So that will take you to 285. And the difference between 329 and 285 is the [indiscernible] conveyance backlog for Garvey and Dorner. Got it. Okay, that's helpful. And just one quick one on the Irish G&A side. The commentary around, in the slides and I think on the intro around, working to find more cost reductions, like what's -- can you give some color around, the actions you're taking there. And that may be actions you've already taken as well. How we should think about the run rate of our SG&A into next year. Okay, yes. So. Pat, we were not satisfied with our SG&A's percentage of sales. And as we plan for next year, and we think about the volume that we have in the business, given the moderate growth that we were talking about, we think that there's, a need for us to be more proactive as it relates to the cost base. Clearly, what we've said in previous discussions is that we are going to get benefit from scale. And that's very true. And as we execute on our strategy and grow the business, there are opportunities for us to get good scale on the investments that we have in place, but we're also taking a proactive approach to the new structure that we put in place that enables us to unlock we think some more value as it relates to that cost structure. And so we're taking a hard look at that in the period. We're not giving a specific guide at this point. But, you know, we'll probably be more prepared to talk about that as we enter Q1 and finish up this year. Yes. So, Pat' overall as we think about our long-term target of the 21% EBITDA margin, we're looking at roughly 40% gross margins, SG&A as a percent of sales of roughly 21%. And then there's, .5 half add back for depreciation. So, getting to 21% is a combination of being really efficient with our spend, but also scaling, as David mentioned. Got it. Okay. So in a year in which maybe the growth isn't as high as you would want in the long-term plan. You would look to be more efficient, I guess, on your spend, sounds like. Yes, and look at structural cost, instructional costs, and we will benefit from a lot of the IT investments that we've made in digital investments over the past year, including, a couple of SAP implementations this past year. [Indiscernible] Künzelsau was [indiscernible] Mexico. Thank you. [Operator Instructions] The next question is coming from Jon Tanwanteng of CJS Securities. Please proceed with your follow-up question. Hi, guys. Just a follow-up on the large customer that currently paused in e-commerce? Do you expect them to come back and then determine any point and would be at a similar level of scale or something different? I assume their push for automation is going to decrease at all. So just wondering what your thoughts are? It's a great question, Jon and we are very actively engaged in dialogue with them as a customer and working with them and many other customers in the space and excited about the opportunities that exist there. Obviously, it's a pretty material impact to absorbed in a, nine month period. But we really proud of the team really excited about the investments we've made in the space. And think that the longer term opportunities there are really great. And so when you look at what will happen over time, and the CapEx that will be spent in automating delivery and execution, as people think about e-commerce or e-delivery. We think we're going to really see some nice developments there, both with this customer and others. And so the discussions that we're having involve project opportunities that are every bit as large as what we've experienced in the past, and could be even more significant. But obviously, that depends on timing and how things develop and the pace at which they do but when you look more broadly, at the market in general. And you think about the distribution and execution of order fulfillment, and the automation needs in that environment. And our focus on being very relevant there. I think there's a nice opportunity. Got it. Thank you. And then just coming back to the improvement in cash flow. I know you're planning to pay down $10 million in debt, what what's the plan for the excess at this point? I know you've been repurchasing some shares. Are you planning to keep that powder dry? Or is that is a potential use of the capital? Yes, so we will be pushing the entire quarter on the cash front to reduce inventory and collect more receivables, et cetera. And a lot of times, the last couple of weeks of the quarter is when you see a pretty significant spike. As we're putting the full court press on and so we'll probably end up with the cash on the balance sheet. Thank you. At this time, we're showing no additional questions in queue. At this time. I'd like to turn the floor back over to management for any additional or closing comments. Great, thank you, Donna. We appreciate everyone's interest in Columbus McKinnon. In closing Q3 representative another proof point along the path to delivering on our strategic objectives. We had double-digit growth on a constant currency basis, a 32% increase in operating income. We made progress towards improving customer experience and we further reduce debt. We are excited about our future and we look forward to updating you again after we close out the fiscal year. Have a great day everyone. Ladies and gentlemen, this concludes today's event. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.
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EarningCall_836
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Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Thank you, Amanda. Good afternoon and welcome to NETGEAR's Fourth Quarter and Full Year 2022 Financial Results Conference Call. Joining us from the Company are Mr. Patrick Lo, Chairman and CEO; and Mr. Bryan Murray, CFO. The format of the call will start with a review of the financials for the fourth quarter and full year provided by Bryan, followed by details and commentary on the business provided by Patrick and finish with the first quarter of 2023 guidance provided by Bryan. We will then have time for any questions. If you have not received a copy of today's press release, please visit NETGEAR's Investor Relations website at www.netgear.com. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, operating margins, tax rates, expenses and future business outlook. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in NETGEAR's periodic filings with the SEC, including the most recent Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today. And NETGEAR undertakes no obligation to update these statements as a result of new information or future events. In addition, several non-GAAP financial measures will be mentioned on this call. Reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website. Net revenue for the quarter ended December 31, 2022 was $249.1 million which came in at the high end of our guidance range flat on a sequential basis and down 0.8% year-over-year. NETGEAR's innovative highly differentiated premium products, namely our ProAV managed switches, 5G mobile hotspots, and 10 gig Tri and Quad-band WiFi mesh products continue to experience strong demand. In the fourth quarter, the team executed well to overcome supply challenges for these in-demand products, and this effort resulted in another record quarter of revenue for SMB business led by ProAV and strong growth of our 5G mobile hotspots with our service provider partners. Our non-GAAP operating margin was negative 1.6% in the middle of our guidance range. For the full year of 2022, NETGEAR net revenues were $932.5 million down 20.2% compared to the year-ended December 31, 2021. While 2022 was a difficult year due to challenges from the supply chain, foreign exchange and high transportation costs, I'm proud of the progress we've made in executing on our strategy to grow our SMB business and transition our CHP business to the premium higher margin segments of the market, where we enjoy considerable competitive differentiation. While the broader U.S. consumer retail market decreased approximately 25% for the full year, our premium products materially outperformed the market, up double digits for the full year. A clear validation of our core long-term strategy to focus on the premium segment. We expect that the trends for both businesses that we discussed at our Analyst Day will continue to expand the available market opportunity for NETGEAR. These higher margin products are the key to delivering growth and increasing profitability in the long term. As we look to the first quarter, broad-based inflationary pressures and the uncertain macroeconomic environment remain top of mind for many retail channel partners. Consequently, while we made progress in destocking in the fourth quarter, our retail partners continue to right size the inventory levels and we continue to expect that to carry into 2023. While this will dampen CHP retail results in the first half of 2023, we expect to see material improvement as we move into the back half of the year. In the fourth quarter, we delivered non-GAAP operating loss of $3.9 million and non-GAAP operating margin of negative 1.6%. This declined 230 basis points as compared to the prior quarter due to our strength in U.S. dollar, higher freight costs when the inventory was purchased, and the seasonally more promotional environment. Although our SMB revenue for the full year outperformed the expectations we had at the beginning of the year, the U.S. consumer networking market contracted further than expected which led to lost topline leverage overall. In conjunction with a challenging supply chain environment throughout the year, unfavorable foreign exchange conditions also reduced the profitability and led to full year non-GAAP operating loss of $15.6 million and non-GAAP operating margin of negative 1.7%. For the fourth quarter 2022, net revenue for the Americas was $159.2 million, flat year-over-year and a decrease of 6% on a sequential basis. EMEA net revenue was $52.7 million which is up 5.4% year-over-year and up 17.6% quarter-over-quarter. Our APAC net revenue was $37.2 million, which is down 10.8% from the prior-year comparable period and up 5.1% sequentially. Our SMB business saw strong year-over-year growth across all three regions as we made progress securing additional supply for SMB products. However, in general the strengthening of the U.S. dollar over the past year had a meaningful negative impact on our international revenue and our profitability. On a constant currency basis year-over-year, our EMEA revenue would have grown 21% and our APAC revenue would have only declined 5%. For the fourth quarter of 2022, we shipped a total of approximately 2.2 million units, including 1.4 million nodes of wireless products. Shipments of our wired and wireless routers and gateways combined were about 674,000 units for the fourth quarter 2022. The net revenue split between home and business products was about 60% and 40% respectively. The net revenue split between wireless and wired products was about 57% and 43% respectively. Products introduced in the last 15 months constituted about 28% of our fourth quarter shipments. While products introduced in the last 12 months, contributed about 25% of our fourth quarter shipments. From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today. Non-GAAP gross margin in the fourth quarter of 2022 was 24.9% which is down 510 basis points as compared to 30% in the prior-year comparable period, and down 270 basis points compared to 27.6% in the third quarter of 2022. As compared to the prior year, the strength in U.S. dollar was a significant driver of the decrease. Total Q4 non-GAAP operating expenses came in at $66.1 million, which is down 3.5% year-over-year and down 1.6% sequentially. Our headcount was 691 as of the end of the quarter down from 731 in Q3. We evaluate our business priorities on a regular basis and make structural adjustments accordingly in areas that are not aligned with our strategic focus. We will continue to strategically invest in our business and higher key areas, we believe will deliver future growth and profitability such as ProAV managed switches, premium Orbi WiFi Mesh systems, 5G mobile products and subscription services. Our non-GAAP R&D expense for the fourth quarter was 7.7% of net revenue as compared to 8.7% of net revenue in the prior year comparable period, and 8.5% of net revenues in the third quarter of 2022. To continue our technology and subscription service leadership, we are committed to continued investment in R&D. Our non-GAAP tax saw a benefit of $1 million in the fourth quarter of 2022. Looking at the bottom line for Q4, we reported non-GAAP net loss of $0.9 million and non-GAAP diluted net loss per share of $0.03. Turning to the balance sheet, we ended the fourth quarter of 2022 with $227.4 million in cash and short-term investments down $5.8 million from the prior quarter. During the quarter, $4.9 million of cash was used by operations, which brings our total cash used by operations over the trailing 12 months to $13.7 million. We used $1.6 million in purchases of property and equipment during the quarter, which brings our total cash used for capital expenditures over the trailing 12 months to $5.8 million. Now turning to the fourth quarter results for our product segments, the Connected Home segment, which includes our industry-leading Orbi, Nighthawk, Nighthawk Pro Gaming, Armor and Meural Brands generated net revenue of $149 million during the quarter, down 14.4% on a year-over-year basis and 1% sequentially. We experienced a year-over-year decline in the retail side as the year-ago period was still experiencing relatively elevated demand. Despite a year-over-year double-digit decline in the consumer networking market overall in Q4, the premium WiFi mesh category and leading-edge 5G mobile hotspots outperformed the market in that same period, giving us confidence that focusing on these innovative premium products is a key to returning to growth and profitability. I'm excited to share that SMB generated a third consecutive quarter of record net revenue coming in at $100.1 million for the fourth quarter. The team executed well and made tremendous progress in navigating the supply chain challenges, driving growth of 29.9% on a year-over-year basis and 1.1% sequentially. Encouragingly, we continue to see strong year-over-year growth across all geographies despite - considerable FX headwinds. On a constant currency basis, our SMB top line would have grown in even more impressive 39% year-over-year. The store of our SMB business continues to be our managed switch products which grew 65% for the full year. Further validating the strategic investments, we've made in the nascent yet rapidly growing ProAV market. I'll now the call over to Patrick for his commentary, after which I'll provide guidance for the first quarter of 2023. 2022 was a year of transition for NETGEAR as we drove our premium strategy while navigating headwinds from the supply environment, foreign exchange and elevated transportation costs. We made significant strides in executing on our strategy to focus on the growing higher margin premium segment of the market, voice [ph] during our confidence in NETGEAR's long-term growth potential. In both sides of our businesses, the growth areas we discussed at our current Analyst Day, namely our premium WiFi mesh systems, 5G mobile hotspots and ProAV managed switches saw continued momentum even in the phase of macroeconomic headwinds and supply chain challenges. For the full year, we delivered revenue of $932.5 million, a decline of 20% year-over-year, a reflection of - in a saturating SMB business and a steady service provider business, but offset by the retail CHP business coming off of pandemic buying levels. I'm thrilled to share that our SMB business spearheaded by our ProAV line continued its strong upward momentum. And we delivered a third consecutive quarter of record revenue to set a record for full year revenue up 19%. This impressive result was enabled by our team's effort to secure additional supply to meet continued strong demand. Strategic development of our managed Ethernet switch products specifically tailored for the commercial AV industry have set NETGEAR apart from the competition and allowed us to steadily grow our ProAV manufacturers and integrator partnerships. It's a testament to the strength of our SMB business that we have seen considerable top and bottom line improvement since the beginning of the pandemic. While demand continues to grow even in the face of unprecedented supply chain, geopolitical, and economic challenges to build on the impressive SMB momentum. As we mentioned at our recent Analyst Day, we are turning our attention to the residential custom integration market to further propel our AV over IP business to new market. In addition, we're investing R&D resources in developing unique AV over IP products that will transform the TV broadcast industry to unlock and even greater available market opportunity going forward. On the CHP side demand for our super premium Orbi 8 and Orbi 9 WiFi mesh products and 5G mobile hotspots remains strong. Our premium mesh products well suited for the connectivity needs of affluent residential customers with large properties a multitude of connected devices and a desire for value-added services and cybersecurity peace of mind, have propelled us to our leading position in the premium market. We believe there are more than 2.5 million households in this category worldwide and we are only reaching a small portion of them today. This further substantiates our core long-term strategy to focus primarily on the premium higher margin segments of the market where consumers are also more price insensitive. As Bryan mentioned despite the broader U.S. consumer retail market declining double-digits year-over-year, we saw our premium products grow for the full year dramatically outperforming the broader market. This outstanding reception to our best-selling flagship Orbi products does not come as a surprise. NETGEAR pioneered the tri-band mesh in 2016 introduced quad-band in 2021 and with WiFi 7 coming this year, we are poised to spearhead the completing new penta-band WiFi mesh market with the introduction of the Orbi 10. NETGEAR's competitive advantage in this market is rooted in deep technological differentiation unmatched by any other company bolstering our confidence in the long-term growth and margin opportunity for our CHP business. These best-selling flagship Orbi WiFi mesh products will enable further penetration into the premium market, while also driving up units sold, ASP's, profitability and service attach rates. We succeeded in building up supply for our 5G mobile hotspots the Nighthawk M6 and M6 Pro which are continuing to experience strong demand in double-digit growth year-over-year. This quarter we achieved service provider revenue of $56.5 million, our highest level since the third quarter of 2020. To further build out our CHP momentum, we also recently unveiled our unlocked M6 Pro 5G mobile hotspots, which, delivers speeds of up to 3.6 gigabits per second. We believe the performance of this product distinguishes itself in the market and we're thrilled to hear folks, call it the Rolls-Royce of Mobile Hotspot Routers. This unlocked mobile hotspots offers customers the ultimate flexibility and portable high-speed Internet connectivity regardless of carrier. Over 19 million Americans give lack access to fixed mobile up to fixed broadband service at thresholds speeds of only 25 megabits per second making unlocked mobile hotspots the perfect options for customers who will want a reliable primary Internet connection. With the ability to sell customers across multiple carriers, we expect the M6 Pro will greatly expand our addressable market beyond the service provider channel, further improving ASP's, unit growth and uplifting margins over time. The Premium WiFi mesh resolution is undoubtedly a robust segment of the market. One the NETGEAR already leads and we intend to capture its full market potential. As we shared at our recent Analyst Day, we have begun to execute on our new marketing strategy for accelerating new customer acquisition and expanding the premium segment. This strategy begins with implementing extremely optimized highly targeted performance media campaigns to help capture net new customers, direct them to our netgear.com online stores, lead them through a seamless purchase journey and help drive up average order value. Finally, through loyalty, referral, upgrade and concierge other membership programs, we plan to leverage our satisfied customer base to influence their connections. This focused marketing strategy is designed around trends and insights we have gathered over the past year on new customer acquisition and conversion and we're confident in this approach. We're also laser focused on expanding our service revenue, which ended the fourth quarter at $8.9 million up 23.9% year-over-year and up 5.3% sequentially. I'm pleased to share that in the case of - contracting retail consumer market, our paid subscriber count reached 747,000 for growth of 27.9% year-over-year. As we further expand the premium segment of the market, we anticipate that our subscriber base will grow in tandem and remain confident in our ability to reach 875,000 paid subscribers by the end of 2023. To that end, we are proactively focusing on highly value added services areas, namely security, privacy, and support. Privacy breaches and phishing attacks are making headlines constantly these days. And homeowners who invest in our high-end premium products are also more likely to own connected devices. NETGEAR Armor is the only solution that is built into the router, giving our customers unparalleled peace of mind, IOT cyber-attacks are becoming more and more common and this is growing the interest in our value-added services. To further expand our funnel of Armor trial activations, we are offering select channels a one year trial of our armed service - Armor service. And most importantly are working to bring the service to our rapidly growing mobile hotspots. In addition, we are planning to enhance our Armor service with additional privacy capabilities, which we expect will drive even higher conversion and retention rates while also increasing ASP's. As we execute on this strategy, we expect services revenue will continue to expand both our top and bottom line in the medium and long-term. Industry analysts and experts are once again acknowledging the incredible innovation and technological differentiation behind our market leading premium products. And I'm pleased to share that at this year's CES Awards three of our offerings are named a 2023 Innovation Award Honorees. One award was garnered by our new Orbi 860 Series, 10 gigabit tri-band WiFi 6 mesh system, the recently released update while best-selling Orbi 8 series. The second award went to our Orbi quad-band WiFi 6E router. A standalone router built from the quad-band mesh WiFi 6E system, they won the same award just last year. And on the SMB side, our Insight Managed WiFi 6E Tri-Band Access Point was named the final Innovation Award Honoree. With the upcoming WiFi 7 upgrade cycle on the way, continued momentum behind our paid subscriber additions and a rapidly accelerating transition from analog to digital IP-based over Ethernet connections for AV, we remain confident that demand for our three high-end categories, ProAV, super premium Orbi 8 and 9 and 5G mobile hotspots in conjunction with an improved supply position set us up for growth in 2023. Our best-in-class premium portfolio of award-winning products and services is resonating with customers and we believe relentless innovation is integral to our long-term growth and margin expansion. And with that, I would like to turn it over to Bryan, to comment on our opportunities and obstacles in the coming quarter and year. We expect to continue to experience strong underlying demand in the SMB business and the premium portion of our CHP product portfolio. However, on the retail portion of CHP, we expect a normal seasonal decline coming off the holiday period. And we will continue to work with our retail channel partners to optimize their inventory levels. This should lead to improving results in CHP as we progress through the year. Given the strong performance in the fourth quarter, which allowed our service provider customers to improve their supply positions, we expect first quarter revenue from the service provider channel to decrease to approximately $25 million. Together, these factors lead us to expect our first quarter net revenue to be in the range of $185 million to $200 million. We expect the SMB business to continue to see improving supply, which should allow us to lower reliance on higher cost air freight spend. This should offset the impact of reduced top line leverage relative to our recently completed fourth quarter. Accordingly, our GAAP operating margin for the first quarter is expected to be in the range of negative 4.7% to negative 3.7% and non-GAAP operating margin is expected to be in the range of negative 2% to negative 1%. Our GAAP tax rate is expected to be approximately 30% and our non-GAAP tax rate is expected to be 5% for the first quarter of 2023. While we are confident in our ability to provide guidance at this time, we do so with the caveat that considerable uncertainty remains in the market due to the COVID-19 pandemic and supply chain conditions continuing to remain challenged. And should unforeseen events occur in particular challenges related to the closure of our manufacturing partners operations, increased transportation delays into any of our regional distribution centers or greater than expected freight or component costs, our actual results could differ from the foregoing guidance. [Operator Instructions] Your first question today comes from the line of Hamed Khorsand with BWS Financial. Your line is now open. Hi, could you just talk about what's going on with your cash flow. You're doing a great job reducing inventory in the channel, but that's not really translating into cash coming in your DSOs now 100. Yes, sure, Hamed. So a couple of things there. I would say the cash flow impacts of the inventory would be more tied to our own inventory, which has been pretty stable. The channel inventory is obviously that, if the customers we're helping them optimize but from a cash flow standpoint impact to NETGEAR, it would be the inventory owned by NETGEAR which has had been relatively stable. Underlying there is that we've actually been working down CHP inventory and as we've said a couple of times today, we are getting into a healthier place on the SMB side, which will allow us to reduce our reliance on air freight spend. From an AR standpoint and the DSOs in Q4, you may recall we typically offer seasonal dating programs with some of our bigger retail partners, were tied to the holiday season, they will extend our payment terms and will participate in those programs. So it's not unusual to see an elevated Q4 DSO. That said, I do -- we did say this at the Analyst Day, we do expect that we'll generate free cash flow at a rate of about 200% of non-GAAP net income for 2023. I do expect that Q1 will start to see some cash flow converting largely because of where the AR position ends in Q4 with those dating programs. So we still feel confident about our ability to generate cash going forward. And then as far as your SMB is concerned, how fixed are you to supply chains as of this moment because your commentary saying less air freight. So does that imply that SMB is going to increase sequentially from here. Do you have that kind of visibility? There is still shortage here and there, but it's not as prevalent as before. I mean I would say before we have to spend air freight on almost every single thing we need. Right now, we are much less than that, but then there is still some popular items that are in high demand. We still have the air freight and then sometimes we're short of them. So it's hard to say, I mean we will still see how the supply situation is going forward to be sure that we'll continue the sequential uptick, every quarter, of course, that's what the market demand is like, but unfortunately we're limited still by supplies. Okay. And the last question is on the CHP side, is it going to be more of a profound decline than what is seasonally normal for you as far as Q1 versus Q4. And this number if I back out, service provider has declined quite a bit from '21 levels. How much more can it decline? It is hard to say, if we look at it, the Q4 of 2022 versus Q1 or Q4 of 2021 the market declined a whopping 20% to 25% in that range, would you want to be the same? We hope that it probably is, but it could be worse. I mean, given all the layoffs and given all the inflation situation. Now, the good thing is at the premium end is not affected because we're still seeing growth. However, I see good portion of our revenue is depending on the mid to low end, which is significantly affected by the general economic situation. So, if you see that big whopping decline so is because of two factors, one is this huge year-on-year decline. Second one is, we continue to have work to do to reduce channel inventory because when there is a decline in the end-market sales then the channel wants to decrease that channel inventory further. So that's why combining these two, you will see a more pronounced step down in revenue on the CHP side, yes. Hi, I was just hoping to get a little more color on the cadence of improvement in supply chains in SMB that can be maybe more of a first half '23 back half and then further sort of with China reopening, is there any expectations of supply chain improvement in the CHP side of the business, maybe in the first half of '23? You're right, with the China reopening is certainly would help, now even though our manufacturing and most of our components have already moved out of China, there is still few key components that no other countries would be either capable or willing to do. One obvious one is the power supply, because the dual power supplies, you have to wind all those dual transformers that not many people want to do outside of China. And that is the most sticking point of supply to our switches, especially for ProAV related switches. And we think with the reopening of China that will really help, unfortunately, the freight line especially air freight coming out of China has not really increased much and we depend on those to fly those components to our factories in Vietnam, in Thailand, and in Indonesia. We do expect things will get back to normal, probably in the second half of this year. So we don't have to worry about it. We will have unfettered supply of our ProAV switches in the second half of this year, that's what we are looking forward to. But in the first half, we still have to deal with that situation unfortunately. Jake, if I may just to add more near term focus there. We do expect a slight improvement in Q2 as Patrick said the improvement really happen in the back half, but it will build through the year. And so from a Q2 standpoint, I think there's two factors that the SMB supply will improve slightly. And I think we're expecting at this point the level of destocking with our retail partners will start to mute. I think those two things will drive non-carrier revenues excluding service provider to something like 5% to 10% sequential increase in Q2. Again the destocking will further drop-off in the second half of the year and service router side will likely stay -- Q2 will stay around the $25 million mark. But we do still think the full-year will land about $140 million. I was just curious if you could walk us through some of the puts and takes for gross margin in 4Q '22 specifically about 300 bps to 200 bps decline. From a sequential standpoint, I think there are really three factors. I think one be the strengthening U.S. dollar relative to Q3. It was probably net 60 basis point to 70 basis point range. We're also - as you see in our inventory levels, we're sitting on about six months of inventory. So a lot of that has been CHP inventory. So we're working through that, if you can imagine, six months ago we weren't kind of near the peak of freight costs coming in. So we're dealing with that burden as well. We do think that we're turning the corner on that and should be at a much more optimized level as we go into the second half of 2023. So those are the primary drivers. Thank you very much. And then I just have one follow-up. Relative to the guidance you provided at your Analyst Day on quarterly topline movement. Your new guidance for Q1 is a little bit lower than that and I'm curious if you could provide maybe an update on the service provider revenue. Sure, sure. I think the biggest difference between what we said at Analyst Day in the Q1 guide that we gave right now is the service provider revenue level. You may recall the comments back in December, we expected $140 million in service provider for the year. At that point in time, we thought it would be a little bit more linear, but given our ability to execute and bring in supply in Q4, at this point we think it's going to be a little bit on the lower side in the first half of the year about $25 million a quarter for the first half. Still reaching its full potential of $140 million for the full year. It's just the timing impact. So that's probably the primary difference from the December discussion. Great, thank you. Thanks everyone for joining us today. In 2022, we laid the foundation with our innovative best-in-class portfolio of products and services to propel NETGEAR towards a long-term profitable growth. Although the CHP channel inventory reduction will continue into 2023, our highly differentiated Orbi 8 or 9 and soon Orbi 10 Mesh systems and our 5G mobile hotspots M6 and M6 Pro continue to outperform the market. And give us the confidence in our long-term high margin growth transitory. On the SMB side, we are the market leader of the ProAV market transition and we'll continue to make inroads in expanding our presence in the market, while simultaneously open up adjacent ones like the TV broadcast and production industry, as well as the integrated high end fully automated homes segment. I look forward to sharing, an update on our progress on all of these fronts at our next earnings call. Look forward to talking to you all in April. Thank you.
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EarningCall_837
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Your host for this morning's call is Byron Pope. I will turn the call over to Mr. Pope, you may begin. Thank you. Good morning everyone. With me today are Soma Somasundaran, President and CEO of ChampionX, and Ken Fisher, our Executive Vice President and CFO. During todayâs call, Soma will share some our companyâs highlights. Ken will then discuss our fourth quarter results and the first quarter outlook, before turning the call back to Soma for some summary thoughts. We will then open the call for Q&A. During todayâs call, we will be referring to the slides posted on our website. Let me remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause material difference in our results from those projected in these statements. Therefore, I refer you to our latest 10-K filings and our other SEC filings for a discussion of some of the factors that could cause actual results to differ materially. Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our fourth quarter press release, which is available on our website. Thank you, Byron. Good morning everyone. I would like to welcome our shareholders, employees and analysts to our fourth quarter 2022 earnings call. Thanks for joining us today. Let me start by saying that 2022 was a year of strong momentum for ChampionX as we delivered robust performance on each of our key metrics, including revenue growth, adjusted EBITDA margin expansion, free cash flow generation, and capital return to our shareholders. I am grateful to all our employees for their focus and tireless dedication for delivering value to our customers day in and day out. Before I touch on our fourth quarter performance on Slide #4, we always begin our earnings call with our corporate purpose and operating philosophy, because we are passionate about improving the lives of our customers, our employees, our shareholders, and our community. At the heart of our operating philosophy is being relentless advocates for our customers. So on Slide #5, I could not be prouder of our company for recently being selected as the very first recipient of ExxonMobilâs Global Supplier of the Year award. This annual award program recognizes suppliers that achieve a high performance standard to meet ExxonMobilâs business needs and nominees are evaluated on a variety of criteria, including on time delivery, safety, responsiveness, service quality, innovation capability, and commitment to sustainability and diversity. We are incredibly humbled by this recognition and I want to thank our teams for their continued hard work and commitment to our customers success. Now, regarding the fourth quarter, our solid results reflect the positive momentum in financial performance that our company is committed to deliver for our shareholders as this energy up-cycle unfolds this year and beyond. Ken will take you through the details of our fourth quarter financial results shortly. But let me first touch on three key business highlights, which are shown on Slide #6. First, EBITDA margin expansion. Despite experiencing a slight sequential revenue decline in the fourth quarter, which was driven by a normal seasonal slowdown in sales in our North America onshore businesses into the yearend holidays, our Q4 adjusted EBITDA margin improved by approximately 190 basis points versus the third quarter on continued pricing realization and favorable mix. We delivered on our targeted exit 2022 adjusted EBITDA margin of 18%, and we remain confident that Champion X will achieve our near-term goal of an EBITDA margin of at least 20%. Second free cash flow. On our last earnings call, we stated that we expected another strong free cash flow quarter to end the year, and we delivered. Our four quarter free cash flow of $169 million represented 94% of our adjusted EBITDA. For the full year 2022 we generated free cash flow of $329 million, which represented 54% of our adjusted EBITDA. This demonstrates the best-in-class cash flow generating capability of our capital light portfolio of businesses, and illustrates our high degree of confidence of generating 50% to 60% of free cash flow to EBITDA conversion through the cycle. Third, returning capital to shareholders. We have previously shared with our -- with you our disciplined capital allocation framework, and in the fourth quarter, we once again delivered on our commitment to return excess cash to our shareholders. In the fourth quarter, between our regular cash dividend of $15 million and $80 million of share repurchases, we returned 56% of our free cash flow to our shareholders. For the full year 2022, we returned $226 million or 69% of our free cash flow to our shareholders. We remain committed to return at least 60% of free cash flow to our shareholders through the cycle. Before I turn the call over to Ken, I want to give you some more details around our Q4 market activity as seen on Slide #7. In the fourth quarter, we experienced normal seasonality in North America with the yearend holidays and some weather related impact, particularly in Bakken and Rockies, which resulted in sequentially lower sales in North America. International activity was strong, excluding Russia and cross sales to Ecolab, our international revenues grew modestly on the back of a strong 21% growth recorded on in Q3. Growth in Middle East and Latin America were offset by decline in Russia and Asia Pacific. In Production Chemical Technologies, we recorded 4% sequential growth in Middle East. In Production Automation Technologies ESP recorded 10% sequential growth followed by 9% growth in digital offset by weather related weakness in rod lift and plunger lift. PAT or Production Automation Technologies' international revenues grew 3% sequentially. Drilling Technologies international sequential growth was 11%. It was more than offset by the temporary destocking from our North American customers as they focused on year end working capital management. We have already seen order rates rebounding in Q1, and we expect solid sequential growth in drilling technologies. We have experienced similar phenomena in drilling technologies in the past. Thank you, Soma. Good morning and thank you for joining us today. I will be commenting on adjusted EBITDA for sequential and year-over-year comparisons. We believe this metric best reflects the business performance of continuing operations. Our fourth quarter 2022 revenue was $986 million, up 20% year-over-year, and 3% lower than our robust third quarter revenues. Our two largest businesses, Production Chemical Technologies and Production Automation Technologies were relatively flat versus third quarter. Geographically, year-over-year, North American revenues grew 10% and International revenues were up 37% in 2022. Included in our fourth quarter revenues were $26 million of cross supply sales to Ecolab. These sales were down 24% sequentially from the third quarter. As we have previously communicated, we do not recognize EBITDA margin on these sales and the associated revenue is allocated to corporate and other in our financial statements. Fourth quarter GAAP net income for the company was $68 million or $0.33 per diluted share versus $23 million in the third quarter and $43 million in the fourth quarter of 2021. Fourth quarter net income included a $40 million goodwill impairment charge for the Reservoir Chemical Technologies business segment reflecting the results of our annual goodwill screening test. This was partially offset by a reduction in restructuring reserves related to our Garyville facility contract exit. As seen on Slide 11, ChampionX consolidated adjusted EBITDA in the fourth quarter was $179 million, up 8% versus the previous quarter at an increase of 30% versus the prior year period. In the fourth quarter as expected ChampionX delivered consolidated adjusted EBITDA margin of 18.1%. This was up 188 basis points sequentially and an increase of 195 basis points over the fourth quarter of 2021. Our fourth quarter free cash flow of $169 million reflected strong cash flow from operations and continued focus on working capital management. Cash from operating activities was $195 million, and capital investment was $26 million net of proceeds from asset sales. Turning to our business segments, Production Chemical Technologies generated fourth quarter revenue of $637 million, down 1% from the third quarter and up 29% year-over-year. Segment adjusted EBITDA was $121 million, up 18% sequentially and 47% higher than the fourth quarter of 2021. Volume growth and selling price increases drove the sequential and year-over-year improvements. Segment adjusted EBITDA margin was 19%, up 304 basis points sequentially and up 239 basis points from the prior year's period. Our pricing and productivity actions during the year helped us deliver above our targeted 2022 adjusted EBITDA margin exit rate of 18% in the fourth quarter. Production and Automation Technologies fourth quarter segment revenue was $244 million, a 1% decrease sequentially. Year-over-year revenue was up 20% driven by both activity and selling price increases. Digital revenue was up 9% sequentially in the quarter and up 23% year-over-year. We continue to see increasing customer focus on implementing digital technologies to reduce emissions and drive operational improvements and cost efficiencies. We expect our future revenues to continue to benefit from this industry trend. PAT fourth quarter segment adjusted EBITDA was $51 million, down 3% sequentially and up 29% year-over-year. Segment adjusted EBITDA margin was 21%, down 30 basis points versus the third quarter and up 134 basis points from the prior year, again due to higher volumes and pricing. Drilling Technology segment revenue was $54 million in the fourth quarter, down 12% sequentially and up 7% year-over-year. We experienced the decline in order in sales in the fourth quarter as some of our customers acted to manage their working capital and free cash flow for year end. As the New Year started, we have seen orders return to more normal levels. Drilling Technologies delivered segment adjusted EBITDA of $11 million during the fourth quarter, down $6 million sequentially and down $2 million compared to the fourth quarter 2021 level. Segment margin was 20% in the quarter, a 666 basis point decline, driven by the aforementioned sales decline, higher tooling costs and product mix. We expect the drilling technology margins to improve progressively through the first half of this year to more normalized margins for the second half of 2023. Reservoir Chemical Technologies revenue for the fourth quarter was $26 million, which is a decrease of 28% sequentially and 35% down year-over-year. As discussed in our third quarter earnings call, we expected our fourth quarter revenue to decline given the exit of certain RCT product lines and the typical year end industry activity slowdown. This product line exit resulted in lower revenues, but a significant improvement in the margin profile of the business. The segment posted adjusted EBITDA of $3 million during the fourth quarter, flat compared to the third quarter, and to the corresponding prior year period. Segment margin was 13% in the quarter, a 595 basis point sequential improvement and a 666 basis point improvement versus the prior year period. This again was driven by the product line exit and related restructuring actions. Moving to our balance sheet as shown on Slide 12, we ended the fourth quarter in very strong position with record liquidity of $889 million, including available revolver capacity and cash on hand. This was an increase in liquidity of $78 million versus the prior quarter. We also continued to pay down debt with $20 million in revolver debt repaid in the fourth quarter. At December 31st, our leverage ratio was 0.6 times net debt to adjusted EBITDA. In alignment with our capital allocation framework we remained committed to the return of surplus capital to our shareholders. During the fourth quarter we returned 56% of our free cash flow to shareholders in the form of our $15 million regular quarterly dividend and $80 million of share repurchases. For the full year 2022 we returned $226 million or 69% of our free cash flow to shareholders. We remain laser focused on disciplined capital allocation, delivery of operating and free cash flow, effective working capital management, and maintaining our strong liquidity and financial position. Turning to Slide 13 and our forward outlook, we expect 2023 to be another year of solid revenue growth and improving adjusted EBITDA margin rate. Specific to the first quarter, we expect revenue including Ecolab cross sales in the range of $952 million to $982 million. At the midpoint this represents a 12% increase versus the first quarter of 2022. The first quarter sequential change in revenue is primarily driven by the traditional seasonal declines in our chemical sales, primarily internationally and please see Slide 16 in the appendix for the historic trends. In North America, we expect the rebound in our North American land business, particularly in Drilling Technologies coming off the seasonal slowdown at year end. For adjusted EBITDA, we expect a range of $164 million to $172 million. This guidance includes a $5 million impact from a one-time employee inflation assistance program, as well as increased investment in our digital and emissions platform. At the midpoint, this represents a 35% increase over the first quarter of 2022, and again at the midpoint, this represents a 300 basis points improvement year-over-year in the company adjusted EBITDA margin rate. From the seasonally low starting point of 1Q we expect our adjusted EBITDA margin to improve healthily throughout the year, targeting an exit 2023 adjusted EBITDA margin rate of 20%, up approximately 200 basis points on the 2022 exit rate. On this slide, we have also provided some additional specifics related to our forward outlook. We continue to expect annual capital investment to remain in the range of 3% to 3.5% of revenues during 2023. While in periods of revenue growth, we will see the need for working capital investment we remain confident in our 50% to 60% free cash flow to adjusted EBITDA conversion ratio guidance through the cycle. We expect strong free cash flow delivery again in 2023 with a free cash flow to adjusted EBITDA conversion ratio of at least 50%. As a reminder, our free cash flow is generally weighted to the back half of the year. Thank you, Ken. Before we open the call to questions, I would like to update you on few key items. First on revenue synergies. We are now more than two years into our merger, and the cultural alignment is even stronger today than it was on day one. Our pipeline of production oriented joint sell opportunities have continued to expand, both in North America and internationally. As a reminder, our teams delivered $30 million of new customer wins in 2021, $24 million in North America and $6 million internationally driven by our revenue synergy efforts. In 2022, we generated $45 million of new customer wins, representing a 50% increase year-over-year with $37 million of these wins in North America and $8 million internationally. In addition, the total pipeline of identified potential opportunities has grown 47% at the end of 2022 compared to prior year, setting up continued momentum in our revenue synergy realization in the coming years. I want to acknowledge our global sales team as they have worked collaboratively and thoughtfully in executing these revenue synergies. We are encouraged by customer receptivity to our production solutions approach, and we expect our revenue synergy opportunities will continue to grow this year and beyond. Next on digital and emissions, we will continue to invest actively in talent and capabilities in this area in 2023. We experienced 36% growth in our digital revenues, including emissions in 2022. We expect another solid year of growth in 2023. Finally, we continue to see favorable demand tailwinds in our businesses that support a constructive multi-year outlook for our sector. We remain focused on delivering solid earnings growth, margin expansion, and strong cash generation. We are committed to creating value for our shareholders through our disciplined capital allocation framework with clear priorities of our capital, including high return investments and returning cash to shareholders. With that, let me thank all of our 7,300 ChampionX employees around the world for their tireless dedication to our purpose of improving the lives of our customers, our employees, our shareholders, and our communities. You inspire me daily. Lastly, we look forward to seeing many of you at our first Investor Day as ChampionX on March 7th in New York City. I was wondering maybe we could start on the offshore markets and how you see that impacting your PCT business this year and what's in the guidance? I believe it's around 40% of your segment and we're seeing this resurgence across the offshore markets. So, I guess the question is, when does that kind of turn into increased chemical demand and start to hit the top line? Yes Dave, we are excited about the offshore market and particularly our positioning in in the market and we saw the benefit of the offshore market growth as we moved into the second half of the year. You made a call. We had well over 25% international growth in the third quarter in in our PCT business. And yes, a big part of that was driven by the offshore markets. And if we look at that Q4, we saw we relatively stayed flat at that higher level, and so we expect in 2023 that offshore market to be, continue to be a positive tailwind for us. Okay. And then maybe if I could shift over to the your PAT business, could you maybe breakout the North America market, how you think the ESP business versus the rod lift is going to play out this year? I think you said, if I heard you right on sequentially, the ESP are up 9, I think 10%, but rod lift and the rest were down sequentially. How does that kind of play out? I mean, we're starting to see the recounts maybe starting to peak here, so can you talk about how you see those two businesses moving? Yes, so the Q4 phenomenon, what we saw in rod lift, so ESP grew 10% sequentially, digital grew 9% sequentially. The rod lift and plunger lift weakness is primarily driven by two factors. One is the seasonal slowdown. As you know, rod lift is driven by daily serve activity and so we normally see a seasonal slowdown in the fourth quarter with rod lift and then the other factor which impacted was the weather and particularly in Bakken and Rockies area. So those two items impacted the Q4. Now as we move into Q1, you will see sequential improvement in all of the artificial lift product line, including rod lift and plunger lift. So when I look at 2023, I think given the very constructive market environment, we expect ESP to continue to grow, and then we expect rod lift and plunger lift to also grow. And particularly with the rod lift, production spending continues to stay strong and the conversion things continue to come through, so we saw a nice growth in 2022 in rod lift, and we expect to see a nice growth in 2023. So yes, so just to kick us off here, so I was wondering if you could provide any updates or additional color on your methane detection business, and I guess just how we should think about growth and income statement impact in 2023 and 2024? Yes, as you know Alec, that this is a business which is in its infancy and with regulatory changes and our customer's commitment to continue to reduce particularly methane emissions. So we play primarily today in the methane emissions area. And if you look at today, this business is growing nicely and we got into the space in July of 2021. And if you look at from that point onwards to now, we have today well over 1600 sites, where our continuous monitoring equipment is installed and working. So customer adoption in this continues to improve, so we expect 2023 to be another year of solid growth. And that's why in the prepared comments, we talked about the continued investments in this area because we believe this market will continue to grow for many years to come. As there are different types of emission detection technology, the aerial technology, the drone-based technology, the satellite based technology, and then the ground-based continuous monitoring technology. And we offer all of the technologies except the satellite. But we believe the biggest growth opportunity will come in -- is more in the continuous monitoring ground-based monitoring technology, because as you can imagine, the rest of the technologies are very episodic. Whereas if you are -- if you want to continuously monitor and quantify technologies, you have to make sure that you install continuous monitoring technologies. So we are investing nicely in this, and we will continue to invest in people, talent, organizational capabilities. So I expect 2023 to see a nice growth in this from everything we can see, today we have the leading position in the upstream oil and gas markets when it comes to continuous monitoring. Great. That's excellent color. I appreciate it. And just one more, if I could squeeze one in. Just, I was wondering if you could have any additional comments on some of the raw material costs for your PCT business and just how we should think about that in 2023 and if, pricing is caught up to a level where you feel comfortable with margins going forward? Yes, as you know Alec that, we have talked about this before, that raw material prices, particularly in 2022, has been really difficult to predict, right? And so the forecast and those have been in 2022 has been somewhat difficult to predict. But what we saw in fourth quarter, we did see some favorability in our raw material. And so going forward, what we have is, we do believe that raw material prices at a minimum stabilized and possibly well may show, our current view is possibly may show some relief. So what we have built into our guidance and our forecast here is the raw material favorability what we saw in Q4, we have built into our forecast and guidance. And I think that we believe is a very reasonable assumption because we have seen stabilization in the raw material prices and so we have built that into our forecast, so that's what I would say. Hi, good morning, Soma and Ken. Just sticking to Production Chemicals first. Soma, I think on the last quarterly call we were talking about the top line in PCT growing at multiples of all volume growth, right? And you walked through all the reasons why it would be multiples of all volume growth, right? But just looking back at 2022, I think you grew PCT top line 7.5 to 8 times all volume growth, and we know there's a lot of pricing dynamic going on both gross and net, right? So how should we think about, how much of a multiple we should see in the PCT top line in 2023? Yes, Saurabh, I think this is one of those things we will detail out more in the upcoming investor day. So, but we do expect 2023 to be another year of solid growth, right? Because we believe, production spending, production volume will also increase. So we do expect it to be a solid growth. And we talked about in the call, how much was pricing, how much was actual volume growth. So I don't expect our pricing to grow like it did in 2022. So if you look at it, it should be another good multiple of growth. We are not necessarily saying what it is. Can it be a low double-digit growth? It possibly can be going forward, but again, this is a short cycle business. Right? It's really hard to predict what happens in Q3 or Q4, but we do believe it will be a solid growth year going forward. And one thing I want to remind Saurabh is, as you know, Russia is still part of this business. Right? So that will be depending on what happens with Russia in the year, that will be a, that can impact the top line. Yes. Okay. Perfect. Soma I got one on Drilling Technologies, but before that, just a quick follow up on Production Chemicals. It seems like with your 20% exit rate margin guidance, first thing is it fair to resume 20% for PCT as well? Because I know that was your intermediate term target. Is it fair to resume 20% for PCT by folks you, and then just on that 20% number, right, how should we think about that 20% margin being a peak margin, being a mid-cycle or normalized margin? How should we think about that? We don't have enough history on the Production Chemicals front, so just give us a little context on how should we think about that number for peak versus normalized? Yes, I mean, I think the, if you -- again, if you go back in the history of Production Chemicals and the historical numbers, obviously when they are part of Ecolab it's, the cost structure at Ecolab and, being part of a bigger company, I think I'm not quite sure that's fully representative. It's a guidance, but I don't, I'm not sure it's fully representative of the margin potential of this portfolio. Right? Especially of our Production Chemical business. So going forward, right to answer your first question on Q4, no we do expect PCT to exit at that target rate of 20% in Q4, and we do feel there is more opportunities for us to build on it, right? Our teams have done really great job in working through the pricing, working through the productivity. We are laser focused on driving productivity and network optimization, operational excellence. So I do believe that there is more opportunities to go beyond 20, but right now we are focused on making sure that we exit at the 20% margin rate in Q4. Okay, Soma perfect. No, that's a good answer. A quick follow-up on the Drilling Technologies side of things, I know you said in your prepared remarks, you are seeing a solid recovery in January and customers are coming back and ordering more cutters. Just so that I appreciate the magnitude of the recovery, how should we think about, do you get back to third quarter revenue run rate in the first quarter, in the second quarter? And then just related to that on the margin front, I know absorption does move the margins pretty quickly in this business, right? How should we think about margins going forward in Drilling Technologies? And I know the mix has been shifting between cutters and bearings, right? So keeping all that in mind, how quickly should we expect a recovery in the top line and how should we think about margin trajectory through 2023? Yes. So Saurabh, on the top line, again I wanted to, first what we saw was that temporary destocking, and we have seen this before, we have seen this before. What I mean by that is even in a constructive environment, sometimes you find in Q4 particularly in Drilling Technologies, you will see this type of an impact sometimes because customers are focused on some yearend working capital management items. So I would rather back in the deck, as you know, we have that chart where we show the destocking, restocking. In that chart I think it's on page 17, if I remember and if you look at the couple of quarters if you want to have a reference point, you go back and look at Q4 2011 and Q4 2013, and then look at the rebound in Q1 of 2012 and Q1 of 2014, the subsequent quarters, you will see the similar phenomena. And what we are experiencing is that similar phenomena, even in a constructive market environment, you see this type of phenomena. So we are not concerned about that because we have seen in January, so what you would see is a solid sequential growth, and we are seeing that. Now coming to margins, so as Ken mentioned in the prepared remarks, so we are experiencing some higher tooling costs. So if you look at our Q4 margins, the reason the margin is down to 20% is because one is the volume, but the other issue is we are experiencing higher tooling costs in particularly in our high pressure new products. So our teams are working on it. So we are very focused on delivering the products. So that's happening, but we are experiencing higher tooling cost. So the teams are working on it, and we have already seen in January that we are starting to see some improvement in it, but it's going to take us couple of quarters to get to the normalized margin. So going forward, when you put this together along with the mix issue of bearings, and I think what you should do is what you should see in the second half of 2023 is we are returning back to that 30% level of margin, and then we can grow from there. So that's what I would say. Hi Soma, good morning. I just wanted to touch on guidance for 1Q. What are the drivers of the low and high end of the revenue and EBITDA guidance? How should we think about the moving parts? Is it just a function of the degree of seasonality or are there other elements across the segments that we can think about? Yes, it's a primarily a function of seasonality, so and that's primarily in our Chemical Technologies business. So say it the other way that you will see the seasonal, seasonality and seasonal Q4 to Q1, our PAT business starting to grow, as our North American land business starting to get back and you will see our Drilling Technologies, as we already talked about. Right? So it's primarily a Chemical Technologies business and primarily an International phenomena. And that's why we provided the historical perspective in the chart going back several years. So this is something we normally see. So in terms of high -- guidance range, so what can make it better? Obviously the activity level in Q1 is better than we anticipate, and it can be better. Right? And that's what I would say. So I think it's just a seasonal aspect, so -- and we are seeing the trend in January in our PAT and Drilling Technologies and all that rebounding from the seasonal slowdown in Q4. So as we get into Q2, you will see our Production Chemical business continues to pick up its growth. Okay. Thanks for the color there. And then you mentioned one area of focus for the Investor Day, but can you help understand what your primary areas of focus will be across the business? What should we be looking for in March? Yes, so Ati, I'm glad you asked. We are excited about the upcoming, the March Investor Day, right? And you know, this is our first Investor Day since we had the transformational merger in 2020. So this is our first Investor Day as ChampionX. So, what we want to accomplish in this Investor Day is first and foremost, we want to make sure that we provide a deeper understanding of our portfolio, particularly our Chemical Technologies business, because I think the Chemical Technologies business is new in our portfolio since 2020, and it's our largest business today. So we really want to provide a deeper understanding of our Chemical Technologies business, including why is the Production Chemicals, why is it attractive? What are the key drivers of growth? What are the key drivers of cost? And make sure that we provide a good understanding of our portfolio, particularly our Chemical Technologies business. Second is we want to show our positioning of the business portfolio of ChampionX. And why is it attractive in the emerging world of oil and gas? So we really want to show the attractiveness of the portfolio for the future in oil and gas. Third is, we want to detail out our high impact organic growth opportunities, because we have talked about some of this before, the intensity of Production Chemistry is increasing, the requirement of artificial lift. One of the emerging discussions is about well productivity, and particularly in places like Permian. We want to talk about how does our portfolio, particularly Production Chemicals and artificial lift, how does that help customers deal with these well productivity issues? Because those are all, I would say attractive factors for our Production Chemistry and artificial lift businesses. So we really want to detail out those high impact growth. The other aspect I would mention is, in Production Chemicals, we sometimes talk a lot about the production volume growth and particularly oil volume growth. But we will also demonstrate it is not just dependent on oil volume growth; it's also dependent on total fluids produced, because as these wells start producing more water, there is more chemistry required as well to treat those water. Right? So we really want to detail out the high impact organic growth opportunities, and then we want to highlight and show a view of the new development of technologies, new emerging technologies, particularly in emissions and digital as well as the new technologies we are focused on in our artificial lift and Production Chemicals, which helps customers produce efficiently and reduce their carbon footprint. Right? So that's kind of what I would say that in a -- what the crux of our Investor Day would be. Thank you. There are no further questions at this time. I'll turn the call back to Mr. Pope for closing remarks. So thank you everyone again for your continued interest in ChampionX, and we look forward to seeing you on our March 7th Investor Day in New York. Thank you and have a great day. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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EarningCall_838
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Thank you indeed for your precious time. Let us now get start the TDK FY 2023 ending March 31. This is going to be the explanation for the results and for the third quarter. We have Mr. Tetsuji Yamanishi, Executive Vice President; and also Executive Officer, Mr. Fumio Sashida; Executive Officer, Taro Ikushima; and Executive Officer, Takao Tsutsui. They are the participants for this meeting. Thank you. This is Tetsuji Yamanishi, Executive Vice President. We do appreciate your precious time despite your busy schedule to attend our financial results briefing for the third quarter FY March 2023. We are so happy to have so many of you. First, key points for the earnings for Q3 and FY March 2023. The global economy has become increasingly stagnant and as a result of the continued price hikes in energy and certain materials due to the heightened geopolitical risks, including Russia's prolonged invasion of Ukraine, as well as higher interest rates due to the policy rate hikes in the U.S. and European countries, aiming at quelling the inflation. As a result, the financial demand remained sluggish in the electronics market as well. But supported by the demand for EVs, such as xEV and automobiles, sales increased 17.5% year-on-year basis and operating profit rose 14.5% year-on-year basis. In addition to the first half results, the third quarter was also firm, resulting in the record sales and operating profit on a cumulative 9-month basis. In the ICT market, demand for the PCs and tablets, which have been rather strong due to the corona, the pandemic, declined further. And the sales of HDD-related components fell sharply, as demand for the data centers remained sluggish. In the automotive market, despite the ongoing supply chain constraints such as semiconductor supply shortage, a gradual recovery was seen in overall and the sales of passive components and the sensors expanded as a result of continued strong demand for the components, especially with an increasing ratio of xEVs and in shifting to ADAS. The rising of geopolitical risks have caused the energy supply instability and price hikes worldwide, and the demand for renewable energy, energy-saving equipment and energy storage systems for home use has continued to grow. I'm so happy to be able to report these positive points. Next, I will give an overview of our business performance. First, the 9-month cumulative result shows an increase in net sales of ¥251.4 billion and an increase in operating profit of approximately ¥60.9 billion due to exchange rate fluctuations against the U.S. dollar, in particular. Net sales amounted to ¥1.709 trillion, up ¥315.1 billion or 22.6% year-on-year, and operating profit amounted to ¥188.7 billion, up ¥47.4 billion or 33.5% year-on-year with profit before tax, totaling ¥188.7 billion. As for the sensitivity to exchange rates, we estimated that as the last time, 1 annual change in the yen-dollar exchange rate would result in annual change of accumulated ¥2 billion, and 1 change in the yen-euro exchange rate would result in an annual change of approximately [ ¥6 billion ]. Next, the third quarter results, including the impact of exchange rate fluctuations, net sales increased ¥87.3 billion or 17.5% year-on-year to ¥587 billion. Operating profit increased ¥8.7 billion or 14.5% year-on-year to ¥68.4 billion. Profit before tax was ¥68.2 billion. Net profit was ¥49.9 billion, and net income was ¥49.9 billion, down 1.7% from the same period last year. Profit before tax was ¥68.2 billion, net profit was ¥49.9 billion, and earnings per share was ¥131.64. The following is an overview of the third quarter results by segment. Sales of Passive Components was ¥144.6 billion, up 11.2% from the same period last year. Demand for the components for the automotive market, especially for the xEVs and ADAS, remained strong, and demand for the capacitors and inductive devices for the industrial equipment market remained rather strong as the demand for the capacitors for renewable energy and production equipment. On the other hand, High-Frequency Components, of which account for a large proportion of sales for the smartphones, suffered a large decrease in both sales and profit due to a decline in the demand for smartphones, while the Piezoelectric market components and Circuit Protection Components offer a decrease in the profits due to decline in the sales volume for smartphones and home appliances. Next, the Sensor Application Products business. Net sales was ¥45.6 billion, a significant increase of 26.3% year-on-year. And operating profit increased 1.8x due to a significant improvement in profitability, partly reflecting the effect of increased sales, and the operating income margin reached double digits for the first time. Sales of Temperature and Pressure Sensors increased for automotive applications. Hall Sensors for automotive applications and new products for smartphone applications expanded. And the TMR Sensors for automotive applications remained rather strong, while sales for the smartphone applications expanded due to the increase in adoption. Profitability has also improved. In the MEMS Sensors, sales to the ICT market where demand has been rather sluggish declined, but sales to the automotive industry expanded, and the sales to drone and game consoles also grow steadily, showing an increase in revenue. Next, as for the Magnetic Application Products. Net sales was ¥47.5 billion, down 25.8% year-on-year, and operating profit was a loss of ¥13.9 billion. And the HDD Heads and HDD Suspension Assemblies. Sales volume of both HDD Heads and Suspension for the PCs and the nearline HDDs dropped by more than 40% year-on-year basis, due to a further decline in overall demand for HDDs from the second quarter as a result of the lower data center investment due to the economic slowdown and HDD inventory adjustment, in addition to the impact of the PC market. As a result, the sales volumes of the both Heads and Suspensions for HDDs fell by more than 1/2 year-on-year basis, resulting in a significant decrease in sales and posting a loss. In addition that it will take some time for overall HDD demand to recover. Structural reform of HDD Heads has was implemented in the third quarter, resulting in about expense of about ¥1 billion. Sales of Magnets increased due to the higher sales for xEVs, but earnings declined due to the soaring material costs and delay in the productivity improvement. This is the last in the business, the Energy Application Products, and which reported net sales of ¥331.4 billion and operating income of ¥59.8 billion, up by 29.4% and 53.4%, respectively, on a year-on-year basis. In Rechargeable Batteries, sales volume for mobile applications such as smartphones, tablets and notebook PCs in China declined. But the sales for the new smartphone models increased and sales of medium-sized batteries, mainly for home energy storage systems, also expanded steadily, resulting in a year-on-year sales growth in real terms, excluding the effect of exchange rates. Operating income was also up year-on-year in real terms, excluding the impact of foreign exchange rates due to a turnaround in mix, improved the efficiency and overall cost including SG&A expenses and improved the profitability of medium-sized batteries, despite the negative impact of a decrease in the volumes of small batteries. Sales and profits of Power Supplies for industrial equipment increased. It's increased due to steady demand for industrial equipment such as semiconductor manufacturing equipment and medical equipment. Next, I will explain the factors behind the increase and decrease in the sales and operating income by segment from the second quarter to the third quarter of the current fiscal year, Q-on-Q basis. The first, in the Passive Components segment, sales decreased by ¥8 billion or 5.3% from the Q2, and operating income declined by ¥3.6 billion or 12.1%. In addition to a decline in the sales to the ICT market, mainly for the smartphones, sales to the industrial equipment markets, consumer electronics and sales to distributors also declined, resulting in lower sales in all businesses. Sales of capacitors for which sales to the xEV market have been strong increased, while other businesses saw a decrease in profit due to the impact of lower sales. In Sensor Application Products, sales remained almost flat, while operating income increased by ¥1.2 billion or 27.5%. Sales and profits of Temperature and Pressure Sensors decreased due to seasonal factors such as Christmas vacations in the automotive industry and lower sales in the consumer electronic industry was another negative factor. For Magnetic Sensors, both TMR Sensors and Hall Sensors saw sales and profit increased due to the peak season demand for new models from the major customer. Sales and income of MEMS Sensors decreased due to a decline of the motion sensors for the smartphones in China and decreased in the sales of microphones. Next, for the Magnetic Application Products segment, sales decreased by ¥7.2 billion or 13.2% and operating income declined by ¥12.1 billion. Sales fell sharply with a 29% decline in HDD Head sales volume and a 17% drop in the Suspension sales volume, mainly as a result of a further decline in overall demand for nearline HDDs. And operational losses also had a significant impact, resulting in a sharp decline in the profits and recognized the loss. In consideration of future demands trends after this, we have decided to implement structural reforms under the post process of HDD Head with ¥1 billion recognized in Q3. Sales of Magnets increased due to higher sales for the xEVs. Next, the Energy Application Products. The sales decreased by ¥10.9 billion or 3.2%, while the operating income increased by ¥6.3 billion or 11.7%. Sales and volume of rechargeable batteries for ICT applications increased for new models from the major customer, while overall sales of a smaller batteries for ICT applications decreased due to lower sales for mobile applications, such as PCs and tablets. And the sales of medium-sized batteries remained almost flat, mainly for home use energy storage systems, and the sales for the rechargeable batteries as a whole declined. Although operating income was affected by price discounting due to lower material prices, we secured an increase in operating income by improving overall costs, including SG&A, in addition to improving the profitability of medium-sized batteries. Profitability of industrial Power Supplies has also improved due to increase in sales. Next, breakdown of operating income changes of ¥8.7 billion. This change shows a significant decrease of ¥28.6 billion due to the decrease in the sales volume of HDD Heads and Suspensions and the rechargeable batteries, which are significantly affected by decline in demand in the ICT market. However, ¥24 billion, of which was offset by the incremental income due to the effect of yen depreciation. And in addition, we improved the profits by approximately -- and from the [¥15 billion] from the previous year by promoting rationalization and cost reduction, mainly in rechargeable batteries and passive components, as well as by streamlining SG&A expenses. So this is about -- we have improvements by [ ¥15 billion]. So we can secure that the positive growth. We also implemented the selective reform in the third quarter of this fiscal year in consideration of the drastically-changing demand environment for HDD Heads, and recognized approximately ¥1 billion as expense for these efforts. Finally, I'll go to explain the outlook for the consolidated business results for the full fiscal year basis ending March 2023. As I mentioned earlier, the global economy has been suffering from a growing sense of stagnations triggered by continued price hikes in energy and materials caused by geopolitical risks and rising interest rates caused by policy rate hikes in Europe and the United States to COVID inflation, and the demand and the production volume for major devices related to our businesses are also expected to decline from the previous forecast announcement. Given these are the demand environments, we have -- and including the -- based on the results through the third quarter and the current order status, now we have revised the focus downward to ¥2.170 trillion in sales and ¥185 billion in operating income, ¥185 billion in income before income taxes and ¥132 billion in net income. This is downward revision. So in light of the current pressure on the demand, we decided to revise the forecast downwardly with approximately ¥20 billion to be recognized for the onetime restructuring cost, aiming at improving asset efficiency. So this is a major reason for this, the downward revision, but on the other hand, we expect the business environment to be difficult to forecast due to the lack of growth in sales volumes. Therefore, we will do utmost to improve profitability by streamlining fixed costs and improve the cash flow by reducing inventories and the like. And so consequently, we expect the free cash flow at the end of current fiscal year to be higher than initially projected. The exchange rates assumed in the forecast are ¥130 to dollar in Q4 and ¥135 for the full year. When it comes euro, ¥137 to euro in Q4 and ¥140 for the full year. We plan to pay a year-end dividend of ¥53 per share or ¥106 per share for the full year as we planned at the beginning of the fiscal year. And the capital expenditures, depreciation and R&D expenses remain unchanged from the previous forecast.
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Good morning and welcome to the Byline Bancorp's Fourth Quarter 2022 Earnings Call. My name is Forem and I will be your conference operator today. [Operator Instructions] Please note the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp to begin the conference call. Thank you, Forem. Good morning, everyone and thank you for joining us today for the Byline Bancorp Fourth Quarter and Full Year 2022 Earnings Call. In accordance with Regulation FD, this call is being recorded and is available via webcast on our Investor Relations website along with our earnings release and the corresponding presentation slides. Management would like to remind everyone that certain statements made on today's call involve projections or other forward-looking statements regarding future events or the future financial performance of the Company. We caution that such statements are subject to certain risks, uncertainties and other forward factors that could cause actual results to differ materially from those discussed. The Company's risk factors are disclosed and discussed in its SEC filings. In addition, certain slides contain and we may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures, reconciliation for these numbers can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statements and non-GAAP financial measures disclosures in the earnings release. Please note the company adopted the current expected credit loss standard also refer to as CECL during the fourth quarter. Results for reporting periods beginning after September 30, 2022 are presented under the new standard, while prior quarters previously reported have been recast as if the new standard had been applied since January 1, 2022. Please refer to Appendix A in the earnings release for recast prior quarter financial information as a result of the adoption of the new standard. Thank you, Brooks. Good morning, everyone. And thank you for joining the call to review our fourth quarter and yearend results. You can find the presentation that we will be referencing on our website, please refer to disclaimer at the front. Joining me on the call this morning are our Chairman and CEO, Roberto Herencia; our CFO and Treasurer, Tom Bell; and our Chief Credit Officer, Mark Fucinato. As usual, I'll walk you through the highlights for the full year and quarter and then pass the call over to Tom, who will provide you with more detail on our results. Following that I'll come back with some comments and our merger with Inland Bancorp and provide some closing remarks before opening the call up for questions. Starting on page 3 of the deck, since becoming a public company in the summer of 2017, our focus has been centered on executing our commercial banking strategy, improving our efficiency and investing in people and technology to grow customers and produce consistent results for our shareholders. This past quarter and year proved to be no exception as we delivered strong financial results. For the year, we reported net income of $88 million or $2.34 per share on revenue of $322.6. Profitability remained solid across the board while our diversified model delivered consistently strong loan and deposit growth throughout the year. Our capital position remains strong which allowed us to return $30.8 8 million in capital shareholders in the form of dividends and buybacks. Turning to slide 4, results for the fourth quarter remained strong with net income of $24.4 million or $0.65 per share, which was up $0.10 from the prior quarter. This translated to strong pretax pre-provision income of $37.6 million, up 8% quarter-over-quarter, pretax pre-provision ROA of 205 basis points, ROA of 133 basis points an ROTCE of 17.2% We had one significant item this quarter, which was the adoption of CECL. Tom will cover the financial impact in a moment. But related to that we added slides 13 and 14 on the deck to give you additional detail on the adoption and provide you with more disclosure on the allocation of the allowance. Moving on to the income statement, total revenue came in at $88 million, a record for the company and up 9% quarter-over-quarter, the increase in revenue was driven by higher net interest income, which was up 12% linked quarter reflective of growth in earning assets along with an expanding net interest margin, which was up 36 basis points to a strong 4.4%. Noninterest income was slightly softer than last quarter driven by as expected flat gain on sale income. From a balance sheet perspective, we saw continued growth in both loans and deposits during the quarter. Loans increased by $160 million or 12% annualized and stood at $5.5 billion as of quarter end. This was the seventh consecutive quarter of solid growth which contributed to loans growing by $867 million, or 19% year-over-year. Net of loans sold we have quarterly originations of $269 million, primarily from our C&I and leasing businesses. Notwithstanding, overall business activity was solid across all lending units. Our government guaranteed lending business had solid production with $121 million in close loans, which, as expected was slower than the third quarter. Pay off activity moderated as anticipated and line utilization remained flat quarter-over-quarter at 55.8%. Moving on to liabilities, we saw continued, we continue to actively manage our deposit base. The key is striking the right balance between doing right by the customer. Deposit retention, growth, competitive pressures and costs. For the quarter and the full year we did a good job. Total deposits grew by $83 million or 6% annualized and stood at %5.7 billion as of quarter end. On a year-over-year deposits grew by $540 million or 10.5%, which was excellent considering the rapid rise in rates, changes in customer preferences and lower liquidity in the system stemming from quantitative tightening. Regarding deposit costs, they came in at 73 basis points, an increase of 30 basis points from the prior quarter. Cycle to date betas for both total deposits and interest-bearing deposits at 15% and 25% respectively, are here through for slightly better than expectations. Going forward, our outlook for rates follows the forward curve. If we combine the hike in the summer, the hikes expected here at the start of the year, and cuts expected later in the year it should present a favorable backdrop for us. Offsetting that is the impact of deposit repricing which has our best estimate of where things go from here. At this juncture in the cycle given our assets sensitive position, we expect earning asset yields will continue to exceed the change in the cost of liabilities. On the expense side, the management of expenses remains an area of focus. Our efficiency ratio remained steady over the course of the year and ended flat for the quarter at 55%. That said on an adjusted basis our efficiency improved by about one percentage point on a year-over-year basis. Asset quality remains stable with both MPLs and MPAs declining from the third quarter and net charges increased from very low levels last quarter to $3.2 million or 23 basis points. Overall credit costs for the quarter measured by the provision were $5.4 million and reflect that charge-offs reserve build driven by growth in the portfolio and changes to our macroeconomic outlook. The allowance for credit losses now under CECL stood at $81.9 million or 151 basis points of loans as of December 31. Capital levels remain strong, with a CET1 ratio of 10.2%, total capital of 13% and TCE of 8.4% as of quarter end, consistent with our targeted TCE range of 8% to 9%. Given our announced merger of within Inland Bancorp, we did not repurchase shares during the fourth quarter, however, our board approved a new stock repurchase program that authorizes the company to repurchase up to 1.25 million shares of the Company's outstanding common stock. With that, I'd like to turn over the call to Tom who will provide you with more detail on our results. Thank you, Alberto. And good morning, everyone. I will start with some additional information on our pretax pre-provision net income. Slide 5 highlights earnings power of the franchise, which has consistently improved over the years. Pretax pre-provision net income ended the year at $139 million, a record level for the company, which is over 80% higher than the average full year pre- pandemic level. We remain committed to our long track record of managing positive operating leverage even as we continue to invest in the business. Turning to slide 6. During the fourth quarter, we had solid loan growth as total loans and leases were $5.5 billion on December 31 and increased from the end of the prior quarter. Of note excluding loan sales we originated $1.3 billion or 40% in new loan for 2022. Payoff were lower than we expected in the fourth quarter and came in at $174 million compared to $216 million in the third quarter. Looking ahead to this year, we believe loan growth will be in the mid to high single digits. Turning to slide 7, touching on our government-guaranteed lending business. At December 31, the on-balance sheet SBA 7(a) exposure was $479 million, down $2.6 million from the prior quarter, with approximately $100 million being guaranteed by the SBA. The USDA on balance sheet exposure was $63 million, up $2 million from the end of the prior quarter of which $22 million is guaranteed. Our allowance for credit losses as a percentage of unguaranteed loan balances increased to just under 9% compared to 8% Q3 CECL recap, the increase is driven by qualitative factors to the allowance to counter economic uncertainty. Turning to slide 8, loan total deposits stood at $5.7 billion increasing by 6% annualized at the end of the prior quarter. Noninterest-bearing DDA represents 38% of total deposits, demonstrating our core deposit strength. In addition, we had good deposit growth from CD campaigns that we ran in the fourth quarter to support balance sheet growth. We also saw some seasonal commercial outflows at the end of the quarter that we expect to return in Q1. Overall, we are pleased with our deposit gathering efforts for the full year while managing our total deposit costs of 73 basis points for the quarter. Our deposit betas and increase in deposit costs to date are better than our expectations. For the current cycle to date, our beta and total cost of deposits was 15%. The beta on our interest-bearing deposits is approximately 25%. We expect deposit rates continue to trend higher from here and track with our previous guidance of 40% for the cycle. Turning to slide 9, we reported another quarter of sequential expansion of both net interest income and net interest margin. Our net income increased to a quarterly record of $77 million, an increase of 12% from the prior quarter, primarily due to loan and lease growth, higher rates, which more than offset the impact of higher interest expense on deposits and other borrowings. Net interest income on a year-over-year basis increased 24% driven by a combination of net interest margin expansion and strong organic loan growth and remains in the top quartile for peer banks. On a GAAP basis, our net interest margin was 4.39%, up 36 basis points from the prior quarter. Accretion income on acquired loans contributed two basis points to the net interest margin, down six basis points from the prior quarter. Earning assets yields increased to healthy 70 basis points driven by an increase of 79 basis points and loan yields to 6.31%. The NIM performed better than expected in Q4 as the margin expansion was primarily driven by higher rates and a well-managed cost of funds. With rates rising, we continue to see margin benefit. Looking forward assuming higher short-term rate, we believe the net interest margin will expand in the first half of the year. Turning to noninterest income on slide 10, noninterest income decreased from the prior quarter primarily due to a negative $3.5 million loan servicing asset revaluation expense due to higher discount rate and lower premiums on government-guaranteed loan sales. We sold $86 million in government-guaranteed loans in the fourth quarter, compared to $75 million during the third quarter. The net average premium was approximately 8% for Q4 lower than the third quarter as expected. Our pipeline and fully funded government-guaranteed loans forecast to be consistent with Q4 results. We expect gain on sale premiums in Q1 to be consistent with Q4. Turning to noninterest expense trends on slide 11. Our noninterest expense was $50.5 million in the fourth quarter, an increase from the prior quarter. The increase was attributed to several factors. First, we saw an increase a $2.2 million in salary, salary and employee benefits, mainly due to higher incentive compensation and lower loan deferral costs due to lower originations during the quarter. Second, we saw an increase of $1.2 million in other noninterest expense, which includes the disposition of leasehold improvements. Third, we saw an increase in loan and lease related expenses. And lastly, we saw costs related to the Inland Bancorp merger. We continue to remain disciplined on our expense management and maintain our guidance of $49 million to $51 million consistent with last quarter. Turning to slide 12, we take a closer look at credit quality. Overall asset quality remains solid and continues to reflect Bylineâs diverse loan and lease portfolios. Our nonperforming assets to total assets declined to 55 basis points inQq4 from 64 basis points in Q3. Net charge-offs were $3.2 million in the fourth quarter, and total delinquencies were $15.4 million on December 31, a $9.6 million increased linked quarter. We remain focused on our capital discipline, and monitoring our portfolio. Turning the slide 13. The allowance for credit losses at the end of the quarter under CECL were $81.9 million, compared to $55 million at the close of the previous year. The chart on the top left of the page shows the ACL component built a majority of which was CECL related. Provision for credit losses on loans for Q4 was $5.4 million driven by portfolio growth and increased allocation for economic uncertainty. Of note, we elected to apply the three-year regulatory capital Basel approach. Turning to slide 14, our coverage ratio on loans under CECL was 1.51% in Q4 flat when compared to Q3. Our allowance compared with our disciplined approach to credit through the cycle underpins the overall strength of our balance sheets. Turning to slide 15, which recaps our strong capital liquidity position. For the fourth quarter, capital ratios were stable to up slightly and remain appropriate given our risk profile. We continue to deliver on our plan to drive shareholder value. We returned approximately 35% of earnings to stockholders through the common stock dividend and our share repurchase program for 2022. Thanks Tom. Turning over to slide 16. I want to spend a few minutes talking about our outlook and strategic priorities for the coming year. We ended 2022 strongly and carries good momentum at the start of the year. Our strategy and priorities are and remain consistent over time. Looking ahead, we're cautiously optimistic about 2023. We expect loan growth to continue, albeit not at the rate we experienced in 2022 and expect to organically grow the franchise, add additional banking talent and complete the merger with Inland. That said we're cognizant that current sentiment reflects concerns about a potential recession and therefore remain vigilant in our credit underwriting and portfolio monitoring activities to identify any credit weaknesses early if the economy turns for the worse. With respect to our pending merger with Inland, we're excited about the opportunities this brings and the potential to further enhance the value of the franchise. Inland gives us access to attractive markets in the Chicago metro area with little to no overlap that improve our market coverage. It also gives us approximately $1 billion in core deposits as well as attractive synergy opportunities. We're making excellent progress and moving the merger forward and have begun executing our integration playbook. All regulatory applications have been submitted and we will be filing the S-4 four in connection with the merger in short order. We expect the closing to occur during the second quarter and completing the integration. And ensuring a smooth transition for customers and colleagues is a top priority for this year. In closing, I'd like to thank and give a huge shout out to our employees as well as those Inland and soon to be Byline employees for their hard work, commitment and dedication to serving customers this past year. We remain well position as we enter 2023 and look forward to delivering another year of strong results. With that Forem, let's open the call up for questions. Good morning. I know in the guidance you guy gave, I think you said continued margin expansion for the next six months or so. Obviously, the loan growth is going to be a little bit slower as you take a more measured approach. When you think, I don't know operationally, you guys have had loan growth that exceeding your own expectations. So if we were to do that, again, how do you manage the margin or NII assuming that you need to go-to-market for deposits. And you have a good deposit base. Are you willing to tap the brakes intentionally to defend the margin or just to grow NII, I am curious how you guys are looking at that growth? So Ben, a couple of things on that. So let's just on bracket into two questions. One is really kind of the latter part of your question, which is kind of how we view opportunities on the market. And I think, provided we are seeing attractive opportunities to grow the business to add relationships, long-term relationships, in particular, I think the opportunity is going to drive that first and foremost, over and above any type of short-term margin consideration. So it's, we have an opportunity to add a high-quality relationship that's likely to be in the bank long term, there's going to be a cost to acquire that opportunity. And that is going to drive that decision over and above any type of short-term kind of margin management implication. On the first part of your questions, it relates to the margin and protecting the margin, I think I would start with saying our mark, we're fortunate that our margin is very, very strong. We have good diversity in our business. Each one of our businesses has different margin implications to it. But we're also realistic and knowing that at the margin, to the degree that we see good opportunities that fit the credit profile of the things that we want to do at the margin rates are obviously much higher than our cost of funds would indicate. So I think in summary, I think what we're saying there is first opportunities really drive us in terms of what we think is attractive business long term, and we will manage the margin accordingly. Got you. That's fair. And you earlier said, there's different pockets within the bank have different yields. Have you seen competitive banks, pulling back on any certain pockets that might give you an opportunity to garner even more market share? Or just kind of thinking holistically here, when you think of the areas to expect growth, especially at a risk adjusted yield for kind of the economic outlook? Where do you think the growth could happen or potentially new lender adds, what kind of silos within lending do you think would be adding to? I would say, so do I could, you ask the question if from a competitive standpoint first so I don't know that we're seeing anything out of the ordinary from a competitive standpoint. The one comment we would make is in terms of the current rate environment, in terms of which business is impacted, at least initially, much quicker, I think I would say would be real estate, both from the standpoint of new originations as well as payoffs, certainly rising interest rates causes new projects, there's, I think the market is still adjusting to that higher cap rates, higher equity requirements, the cost of equity going up so you throw in there also for new construction, higher input costs that have just now started to subside. So I think that's impacting originations and certainly on the back end in terms of payoff and velocity in terms of projects being completed, and people immediately selling those projects, I think the market is still adjusting. So I would say, probably in real estate is where we're seeing more of a market dynamic as opposed to any particular competitive lending matter. So hopefully, that gives you some clarity on your question. Got you. And if I could sneak one more in, you guys have always been technology focused and leaning into that. Not to say bleeding edge, but your better technology than most banks of your size. So when you think the Inland deal gets you closer to $10 billion, but not there, if someone were to just walk up to your door and give you hit the bump, in terms of loans and deposits to get you over $10 billion on an organic basis? Are you ready to cross that threshold? Or is there more investment needed? I think we've always run -- ran the business in the context of thinking that at some point, we would get to the, this kind of $10 billion level and go beyond it. And we've been building the company over time to be able to accomplish that. I don't know that I would tell you that we want to be a bank that's hovering between $9.9 billion and $10.1 billion. But we are also not particularly that concerned about crossing that barrier. Certainly the example that you give if there was the perfect situation where you could cross it and cross it with some heft in terms of assets and liabilities coming with it. That would be terrific. But if it's not, and we just simply cross it on the basis of organic growth, I think we're certainly prepared to do that. HI. Good morning, everyone. First off, thanks for I guess slide 14 and all the CECL adoption data, particularly that table on the bottom left. And I guess my question is just to help us ask smarter questions in the future as it relates to CECL. Could you just talk about kind of who are you using for the economic assumptions? You've got that, your Midwest core business, but you've also had some national businesses. And maybe just from a high level, what are -- what is your economic outlook with CECL now? We're using Moody's Analytics for our forecasting, Terry. And obviously, given the economic uncertainty out there right now. It's appropriate to be concerned about slower growth and potential risk of recession. So, I mean, we're just really using their forecasts based on the inputs from the economists there. Okay. And I appreciate the commentary on the NIM performance in the first half of this year. Based on your outlook for loans on a standalone basis, do you think NII continues to grow in the second half of the year? Or does their trajectory on NII mimic that of the margin? Well, I mean, we expect NII to grow as well because we do expect loan growth throughout the year. So that will be some offset to potentially lower rates in the second half. And then maybe one last question that sponsor finance portfolio which I don't think was in the presentation but it's kind of a caught $450 million. Could you just talk about how those borrowers perform when rates were rising? And how do you manage the risk in that portfolio should the economy soften here or as the economy softens here? Yes, Iâd say the sponsor finance portfolios, who's performing pretty well. We review that portfolio every single month. So keep in good touch with our sponsors our companies. And so we know what they're going through. The rates have not been a problem for them so far in terms of managing. We have to keep an eye on some of the macro effects that are going on in their particular niche. But I'm satisfied with what they're doing. And again, we keep a very close eye on that portfolio given our, the nature of our reviews with them every month. Thanks for taking the questions. And good morning, everyone. Maybe just two kinds of think about the trajectory of the margins in the first half of this year, I know there's a number of dynamics at play, including continuing accelerate upward deposit costs, pressures and perhaps slowing loan growth as well. But Tom, is it fair to expect that the margin, pace of expansion is going to slow as you alluded to, but we can still maybe expect the margin to get north of 460, maybe 465 by 2Q? Yes, thanks for the question, Nate. I think yes, you'll see margin expansion. But remember, as Alberto pointed out in my comments, we are still in the top quartile for margin, our margin relative to peers. So we don't give guidance on actual margins. Sorry about that. But I think in general, you'd expect some growth in the margin, again, subject to rates, subject to competition in the marketplace. I think just to add a little bit to Tomâs caller, I think what Tom is saying is, look, we have a pretty healthy margin, we're likely to see some additional expansion here, given the outlook on rates and the factors now with deposit costs certainly I think, everybody in the market waking up to the fact that rates are much higher with liquidity draining, I think you've seen all the other banks now realizing that we can only hold back deposit pricing only so much. I think that's now I think you're seeing kind of more normal competitive dynamics relative to what you had seen in the past. And we're likely to see the margin here expand during the first half. But I think we're giving you our best guess at this point given the outlook and obviously, given what we think is likely to happen here with deposit pricing. Got it, it's helpful. And if we kind of think about the back half margin, assuming the Fed is on pause, do you see that as maybe resulting in more of a static or stable margin assuming funding costs continue to creep higher. But you also have some lagging asset repricing as well, which I imagine would be a tailwind to loan yields even under that scenario. Hopefully, the one caveat is, and you heard it in our comments, sentiment certainly for some type of slowdown, potentially a recession latter, kind of second half of the year seems to be the consensus. So with that caveat, I think your comments are accurate, I mean, at some point, we'll expect to see some stability in the margin, hopefully a little bit higher than where it is today. And then even in situations where we would see a decline in the margin, two things, one, the margin is still very, very healthy, and two, hopefully, we can push continue to push net interest income higher as a result of higher growth in earning assets. Okay, got it. And, Tom, can you just remind us how much cash flow you have coming off the securities book, each quarter over the course of 2023 sale for loan growth? Yes. It's roughly about $10 million or so a quarter, Nate, I mean, it's just -- it's subject to obviously, rates have rallied a little bit. So it's picking up a little bit, but it's in that range unless we buy some short-term T-bills or something like that, obviously, that would change. Got you. So it sounds like the focus just given maybe a more measured loan growth approach for 2023 is to really kind of step up on the deposit gathering efforts. I know, you guys have always been focused on deposits since the recap back in 2013. But I imagine we can still expect some organic deposit gathering to help on that loan growth trajectory into 2023. Correct, Nate. And I would say, that's always going to be the case, really, irrespective of the rate environment. I think you've known us long enough to know that we think that the key just philosophically from a business standpoint, our ability to continue to grow consistently deposits over time is really, really important. So I think that's still is and will be the case going forward. And then secondly, I would also add into -- add to that the, hopefully the closing of the merger with Inland here in the second half, really adding more to our core deposit base. Yes, definitely. And if I could just ask one more on kind of the Chicago land deposit pricing environment. we've heard from another Chicago bank, that new pricing competition is less this cycle than what we saw last cycle, just in the wake of all the consolidation that we've seen. Are you guys seeing that as well, to some degree? Because I believe you made a comment earlier that your deposit beta thus far this cycle is running maybe a little bit below what you anticipated going into it. I think the rational, I would have, the way I would probably answer that question, Nate, would be the market is more rational from a pricing standpoint. So I would maybe break up your question in two points. One is the market today, do we find it more rational because of the fact that there's been consolidation, because of the fact that there's been less new entrants in the form of the no walls and smaller community banks into the market. I think that's a fair statement. The second point, which is really the competitive dynamics today, with regards -- regarding the deposit pricing in the market putting aside everybody wants to price deposit rationally, but how are the competitive dynamics evolving? I think we've always been of the belief that loan to deposit ratios, particularly when the market participants are publicly stating that they want to have their loan growth be funded by core deposits, that's really important driver to determine kind of the level of competition in the market, just observing some of our competitors and some of the other players in the market, I think you're seeing loan to deposit ratios entire as they basically shed perhaps some excess liquidity that they were carrying. And I think, correspondingly with that, I think you're seeing the competitive pressures now being reflected on everybody's results. So that's, I think that's our two senses on that. Okay, that's great perspective. Appreciate that. And I apologize, one last one, excluding the impact of Inland which I imagined should bring down your loan deposit ratio, remind us kind of what your comfort level is, in terms of the upper bound on that ratio? Guidance has been in the high 80s to low 90s. That's where we'd like to be long run. And again, there's ebbs and flows. So in our goal is to be closer to 90. Hey, good morning, guys. Maybe can you just comment a little bit, either, I guess, I'm not sure who just done the outlook on deposits. I mean, you guys have done a great job with the deposit mix and maintaining that and obviously the core strength, just as you as we kind of get, what's the rate environment changing here and people, you said Alberto waking up to where rates are, is your expectation that, it sounds like you can fund the loan growth with deposits. But as far as maintaining the mix that you've seen improved in recent years? How much change do you expect in that mix as you kind of go through the year and next year, just in general, as you look forward? I think that's a really good question, Brian. And I think our sense is that there'll be some degree, particularly at the margin, there'll be some degree of change in the mix for the reasons that you just stated, and I think that's consistent with what I think as an industry we're seeing, meaning it's consumers, businesses you could buy one month bills or three month's bills that probably with a handle in the 4% range, and if you want to maintain deposits and if you want to attract deposits, you have to, you're going to have to be competitive with that. So at the margin, I do think that there's likely to be some changes in the mix. I don't think that's an unreasonable expectation to have. Got you. Okay. And as far as just the government-guaranteed business, I guess, given where the average premiums are today, I mean, you guys have talked about finding that line of where you maintain them on the balance sheet versus selling, just sounds like next quarter is pretty stable, but just in general, how should we think about that business in â23, just as you guys kind of look at the world and what your expectations may be, as far as we see growth wise, more revenue perspective in that business? Is that something -- is that the expectation or just maybe frame up just how you're thinking about â23 and from the government-guarantee business would be helpful? Yes, I think for now, I think I would say that's the expectation, I would with this past quarter, we saw, I would say a little bit of premium improvement from last quarter. And also, I should comment premiums are still attractive, I think we are, we view premiums, kind of where they are today is still attractive, certainly they're not as attractive as they were call it a year and a half ago, and certainly before that for they are very, I mean, completely different rate environment and very different dynamics at that point in time. But I would call that period, probably the exception rather than the norm. It just so happens that we've benefited from being in that period seems to be for an extended period of time. Okay, so I guess the, just in general, a more favorable outlook in terms of revenue year-over-year, if we look at kind of full year in that business, despite the premiums kind of maybe where they're at if they settle in so? Yes, the one caveat again, though, is if we do see a slowdown in the economy, if we do see the economy go into perhaps a mild recession that obviously hopefully, you would, what you would see is going to be probably a slowdown in the -- in aggregate. So I think we'll just wait and see what kind of what transpires in that regard, Brian. Got you. Okay, that's helpful, Alberto. Maybe this last one, just, I think Tom talked about the ability to improve operating leverage, even with investing in the bank. I mean I guess, given where you're at today, and the expectation, it sounds as though that's even with the NII trajectory, kind of trending up each quarter in â23. The expectation would be that that you'd be able to improve full year operating leverage or efficiency as you get into â23, over â22. Is that kind of the expectation today? Got you. Okay. And then maybe the last one just was on the buyback, given you didn't do much in the fourth quarter Inland being real closing in the capital levels where they are, I mean, would your expectation be a bit more assertive going forward based or maybe not assertive, but more opportunistic based on depending on where the pricings at. Itâs always a consideration, and it's just one of the, call it the tools in the toolbox, Brian, so we tend to look at capital management in the context of certainly dividends, buybacks, and then opportunities for growth organically and through acquisition. So it's something that we revisit frequently, given what's in front of us, and I think the plan is to continue to doing that going forward. This concludes our question-and-answer session for today's call. I will now pass back to Mr. Paracchini for closing remarks. Thank you. So thank you, Forem. So that concludes our call this morning. On behalf of all of us here, thank you for your time today and your interest in Byline. And we look forward to speaking to you next quarter. Goodbye.
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Welcome to MACOMâs First Fiscal Quarter 2023 Conference Call. This call is being recorded today, Thursday, February 2, 2023. At this time, all participants are in a listen-only mode. I will now turn the call to Mr. Steve Ferranti, MACOMâs Vice President of Strategic Initiatives and Investor Relations. Mr. Ferranti, please go ahead. Thank you, Olivia. Good morning, and welcome to our call to discuss MACOMâs financial results for the first fiscal quarter of 2023. I would like to remind everyone that our discussion today will contain forward-looking statements, which are subject to certain risks and uncertainties as defined in the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to MACOMâs filings with the SEC. Managementâs statements during this call will also include discussion of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results are provided in the companyâs press release and related Form 8-K, which was filed with the SEC today. Thank you, and good morning. I will begin todayâs call with a general company update. After that, Jack Kober, our Chief Financial Officer will provide a more in-depth review of our financial results for the first quarter of fiscal 2023. When Jack is finished, I will provide revenue and earnings guidance for our second fiscal quarter, and then we will be happy to take some questions. Revenue for our first fiscal quarter of 2023 was $180.1 million and adjusted EPS was $0.81 per diluted share. Our financial performance translated to strong cash flow from operations of $38 million, and we ended the quarter with $595 million in cash and short-term investments on our balance sheet. Our book-to-bill ratio for Q1 was 0.9. This was the first time in eight quarters that our book-to-bill was less than 1. Our turns business or revenue booked and shipped within the quarter was approximately 13% of our total revenue. Overall, our sales team executed well in Q1, albeit in a challenging market environment. On our last earnings call, we highlighted that demand was weakening in our three end markets. Today, I can report that the business environment has not improved. For this reason, we expect our Q2 book-to-bill ratio to be less than 1. Weakness is most prevalent at our largest 5G telecommunications and broadband access infrastructure customers as well as many of our data center customers. Generally speaking, our major customers in these markets are slowing orders, and they are focused on reducing inventory levels. Beyond our main customers, broadly speaking, demand is also weak. However, one bright spot is that our Industrial and Defense end market continues to perform well, and demand for our products is strong. Additionally, our backlog entering fiscal Q2 remains at historically high levels despite the current softness in bookings. I think itâs important to emphasize that we balance our short-term financial goals with a long-term perspective. And despite the current slowdown, we remain confident in our strategic plan and our future growth prospects. MACOM is positioned to capitalize on a number of secular trends across our end markets related to growing bandwidth needs and increasing data rates, which in turn drive the need for higher power levels and higher frequency transmission signals. Our customer systems are more complicated than ever before and they need specialized suppliers like MACOM to provide high performance solutions. Many of our products have long life cycles and produce revenue for years after theyâve been introduced with the potential to generate best-in-class financial returns. We view the diversity of our technologies, products and end markets as an inherent strength of our company, helping to provide financial stability. And finally, the quality of competitiveness of our products released to the market over the past few years is outstanding, and it continues to improve. Turning to our end markets for fiscal Q1. Industrial and Defense revenue was $77.2 million, down 1.8% sequentially, Telecom was $61.5 million, down 0.8% sequentially and Data Center was $41.5 million up 10.2% sequentially. The sequential growth in Data Center was driven by a combination of increased shipments of our Crosspoint switches and networking products, both of which had been supply constrained during much of FY2022, along with a modest increase in our high performance analog portfolio. While we see softness in current large production programs, we remain engaged in a wide range of exciting new opportunities, which we believe will drive MACOMâs future success. I would like to highlight a few recent engagements to illustrate the breadth of our customer base and applications. All of these wins have multi-million dollar revenue potential. Our diode team continues to be a leader in the market for discrete control products in diode circuits, including high power switching and high power limiters. We have secured a new high power limiter socket on an Aegis shipborne radar platform. The team has also won new sockets on automatic toll detection platforms and achieved two design wins on an automotive wireless communication system. Our high performance analog, or HPA team, continues to diversify their revenue and has successfully penetrated a Tier 1 U.S. defense OEM with custom IC design wins. The application is a mobile Manpack high power radio. They also secured a large IC development contract from a major customer to support next-generation and DDR memory test infrastructure. Our MMIC team is actively supporting various U.S.-based radar and satellite system requirements that utilize our trusted foundry and gallium arsenide technologies. Specifically, our MMIC team has won close to $10 million in development contracts across a wide range of customers, functions and solutions. Our metro long haul design team is supporting data center customers that are designing next-generation coherent light or ZR light systems, and we have won an 8x 200G driver in TIA socket to support a major U.S. Internet service provider with production ramping this fiscal year. These wins validate that our products and solutions are compelling and that MACOM is a trusted partner to support critical or long-term programs. These examples also illustrate we are gaining market share in our core markets. Most of these wins are coming from new products, and we believe a portion of our future growth will come from our most recently introduced products, which everyone knows takes time to ramp up. As an example, we are excited to be sampling our new 10G XGS PON laser and customers have confirmed the product meets their system requirements. This market is a high volume market. And while today, we have no laser sales in the 10G XGS PON, we expect that to change over the next 12 months. In addition, our Lightwave team continues to successfully engage with customers on 25G DFB design wins. More and more of our customers are completing their requisite 5,000-hour module HTL [ph] qualifications, which is required by the ISP or network end users. These wins will support future revenue beyond Q2. I would like to review a few key activities across the business. First, our engineers, sales and applications team will be attending the Optical Fiber Conference, or OFC, in March, where we will be highlighting our latest products to our customers in hosting eight live product demonstrations at our booth, including we will demonstrate a 200G per lane solution to support 1.6 terabit OSFP module designs. Our chipset solution includes MACOMâs industry-leading coherent drivers and transimpedance amplifiers along with a new photodetector offering. 200G per lane applications are the leading edge of high-speed data throughput in the industry today. We will also demonstrate MACOMâs PURE DRIVE solution for optical connectivity in conjunction with switch hardware from a leading U.S. ASIC supplier. Our PURE DRIVE solution comprises of a linear driver in transimpedance amplifier designed specifically for single mode and multimode PAM4 architectures that operate up to 800G. Our innovative chipset has been designed to support broad dynamic ranges, linear equalization and low noise amplification to enable direct connection to switch and server ASICs. This solution represents industry-leading low power, low latency solutions for 100G per lane optical communications. As previously announced, approximately two years ago, we established a company priority to transfer a 0.14 micron GaN on silicon carbide MMIC process from the Air Force Research Labs to our wafer fab in Massachusetts with the goal to commercialize the technology and make products for our aerospace, defense and commercial customers. Iâm happy to announce that the process is being released to production this month. We are excited to now offer our customers a state-of-the-art GaN on silicon carbide technology with industry-leading power density. In parallel with the transfer activities, our IC design engineers have been designing products on the process and we will begin introducing these products later this month. Our flagship mimic product from this process, which is available for sampling in sale today is the MAPCMP003, a Ka-band power amplifier designed for satellite uplink applications. This MMIC amplifier provides 10 watts of output power and delivers power-added efficiency or PAE performance, which is comparable with the best products in the market today. This process will support MMICs that operate up to about 40 gigahertz including power amplifiers, low noise amplifiers, high-power switches and transmit receive ICs as well as beam-forming ICs. We are very excited about achieving this production release and product launch milestone, and I congratulate the entire team for getting it done on schedule and on budget. We believe this process opens a $300 million segment of the high-frequency GaN on silicon carbide MMIC market. As you may have seen in a press release issued earlier today, I am pleased to announce MACOM has entered into a definitive agreement to acquire the assets and operations of OMMIC SAS, a semiconductor manufacturer located near Paris, France. OMMIC has a 40-plus-year heritage in three, five materials and specializes in gallium arsenide and gallium nitride, epitaxy, wafer processing and integrated circuit design. The OMMIC team comprises of approximately 100 employees, including process engineers, skilled IC designers and technicians and wafer production staff. Today, the company has a small portfolio of differentiated products and compelling compound semiconductor processes suitable for microwave and millimeter wave applications in telecommunications, aerospace and defense. This acquisition provides numerous strategic benefits to MACOM. First, OMMICâs high-frequency processes and products expand and strengthen MACOMâs portfolio so we can better address our target markets. OMMICâs team have spent years developing and refining their proprietary 100-nanometer and 16-nanometer MMIC processes, and we plan to build upon their expertise. Today, they offer very high-frequency products including true time delay, radar core chips, high-power amplifiers as well as low-noise amplifiers that have industry-leading performance. Simply put, OMMIC produces products that typically operate at higher frequencies than MACOMâs. Second, OMMICs material and epitaxial growth expertise is world-class, and we believe strengthening our material science expertise in epi growth knowledge and manufacturing capabilities is strategic, increasing our in-sourcing of epi growth across our entire business has the potential to simplify our supply chain, increase our gross margins on certain products and improve our productsâ performance all of which improve our competitive advantage. Third, OMMIC represents a significant revenue growth opportunity. Historically, OMMIC has serviced a small customer base, many of whom were foundry customers. We believe we can grow their customer base and associated revenues significantly. Revenue growth will also come by leveraging MACOMâs larger IC design team onto their processes to accelerate expansion of their standard products portfolio and by emphasizing custom chip development work at major OEMs. We are also confident our larger global sales force can gain market share with their existing products. Iâll note several of OMMICâs processes and products are already qualified by the European Space Agency or ESA for satellite use. Fourth, we see an opportunity to fully utilize their idle 6-inch wafer manufacturing capability to improve gross margins and profitability on both OMMIC and MACOM products. While they have purchased and installed a 6-inch wafer production line, they have not yet transitioned their production to the 6-inch line. Today, OMMIC runs all production on their 3-inch line and notably, MACOMâs Massachusetts fab is a 4-inch fab. And finally, this acquisition significantly expands MACOMâs European presence, which will enable us to better serve European-based customers, which is a strategic focus for us. Having an engineering and manufacturing operation inside the EU will enable us to better access a wide range of customers in aerospace, telecommunications, industrial and automotive markets. We have a strategic goal to increase our European business to offset any potential future geopolitical headwinds from other regions. The acquisition is structured as an asset purchase for consideration of approximately â¬38.5 million. MACOM will purchase OMMICâs assets and operations using existing cash on hand. The purchase includes OMMICâs existing business operations, intellectual property, real estate and facilities. We expect the transaction to close during MACOMâs second fiscal quarter. However, I would like to highlight that the transaction is subject to regulatory approvals and customary closing conditions. Thanks, Steve, and good morning, everyone. The first quarter of fiscal 2023 was in line with our expectations with sequential improvements in revenue as well as record operating margin and earnings per share. Revenue for the first quarter was $180.1 million, up 1% quarter-over-quarter. The sequential increase was driven by a modest increase in data center revenue. On a geographic basis, sales to domestic U.S. customers represented approximately 49% of our fiscal Q1 results compared to 50% in the fourth fiscal quarter of 2022. Q1 sales to China customers represented approximately 23% compared to approximately 26% for both our Q4 and full year fiscal 2022. I would also like to highlight that sale to European customers over the past four quarters has been approximately 6%. And as Steve highlighted, focusing on growing revenue in this region is a strategic priority for us. Adjusted gross profit was $112.7 million, or 62.6% of revenue flat sequentially. As weâve discussed in the past, MACOM utilizes a flexible manufacturing model leveraging our Lowell and Ann Arbor fabs, as well as third-party foundries. This allows us to access a portfolio of proprietary leading process technologies and also provides financial leverage as business cycles change. Adjusted operating income in fiscal Q1 was $58.8 million, up from $56.9 million in fiscal Q4. Adjusted operating margin was a record 32.7% for fiscal Q1 sequentially up from 32% in Q4. We are closely managing our operating expenses as we balance investments in the business while maintaining profitability. Over the longer term, we see leverage in our operating model as we introduce new products and they contribute to future revenue growth. Depreciation expense for fiscal Q1 was $6 million and adjusted EBITDA was $64.9 million. Trailing 12 months, adjusted EBITDA was $244.7 million as compared to $234.8 million in Q4 fiscal 2022. Adjusted net interest income for fiscal Q1 was $1 million, up from $40,000 in fiscal Q4. The higher returns on our growing portfolio of short-term marketable securities more than offset the increased interest expense associated with our floating rate term loan. Our adjusted non-GAAP income tax rate in fiscal Q1 remained at 3% and resulted in an expense of approximately $1.8 million. Our cash tax payments were $300,000 for the first quarter, down slightly from fiscal Q4 2022. We expect our adjusted income tax rate to remain at 3% for the remainder of fiscal year 2023 and into fiscal year 2024. Fiscal Q1 adjusted net income was $58 million compared to $55.1 million in fiscal Q4. Adjusted earnings per fully diluted share was $0.81, utilizing a share count of 71.4 million shares compared to $0.77 of adjusted earnings per share in fiscal Q4. Now moving on to balance sheet and cash flow items. Our Q1 accounts receivable balance was $112 million, up from $101.6 million in fiscal Q4. As a result, day sales outstanding were 57 days compared to 52 days in the prior quarter. Our accounts receivable balance reflects an increase over prior periods due primarily to the increase in sales and the timing of shipments in the quarter. Inventories were $121.3 million at quarter end, up by $6.4 million sequentially. We had a modest increase in certain finished goods due to customer requested delivery postponements occurring during the quarter. Inventory turns were 2.2 times in Q1, down slightly on a sequential basis from 2.3 times in the prior quarter. The quality of our inventory remained strong and based on lower customer orders and shortening lead times, we expect to reduce our net inventory balance as we progress through fiscal year 2023. Fiscal Q1 cash flow from operations was approximately $38.3 million. As weâve noted on our prior call, we experienced a sizable increase in cash flow from operations during our September quarter due to the timing of working capital items and our current fiscal Q1 figure represents a moderated operating cash flow level. Capital expenditures totaled $9.6 million for fiscal Q1, up from $7.7 million in the prior quarter. We plan to continue to make CapEx investments to expand our fab capacity and expand technical process capabilities over the next few quarters. We still expect fiscal 2023 CapEx to be in the range of $40 million. As weâve done in the past, we will continue to carefully manage our capital spending, balancing investments in new technologies, process development capabilities and efficiency programs with the overall profitability of the business. In addition to pursuing CHIPS Act funding, I would also like to highlight that we expect the CHIPS Act to provide an advanced manufacturing investment tax credit of 25% for certain of our capital expenditures placed into service after January 1, 2023. This tax credit will apply to certain qualifying capital items, and we do not expect the associated cash from these credits to be received until fiscal year 2024. We expect these tax credits will be recognized as an offset to depreciation expense over time. And as such, we do not anticipate this tax credit to have a material impact on our financials for fiscal year 2023. Cash, cash equivalents and short-term investments for the fiscal first quarter were $594.7 million, up from $586.5 million in fiscal Q4 2022. Our first quarter gross leverage is down to less than 2.5, and our net debt is now less than $10 million. I would also like to highlight that during the quarter, the MACOM team has engaged in our annual stockholder outreach to better understand and discuss governance items with our top stockholders as we approach our annual meeting on March 2, 2023. Before turning it back to Steve, Iâd like to note a few items. First, our Q2 guidance includes plans to manage our discretionary spending down by approximately 10%, including reduced variable compensation, outside service fees and supplies expense to name a few. Through these efforts, we expect to support healthy margins and remain cash flow positive over the course of these business cycles. Second, MACOM is excited to acquire OMMICâs valuable European-based operation. Itâs new and differentiated technology, as well as a dedicated and talented workforce at what we believe to be a favorable valuation. In the short term from a financial perspective, OMMIC should not have a meaningful impact on our revenue or EPS. However, longer term as we invest in the business, we expect that it will provide growth and profitability opportunities, which will drive additional stockholder value. I look forward to 2023 and the continued investments MACOM plans to make in our people, plant and processes, and also to welcome the OMMIC team to MACOM. Thank you, Jack. MACOM expects revenue in fiscal Q2 ending March 31, 2023 to be in the range of $166 million to $170 million. Adjusted gross margin is expected to be in the range of 61.5% to 63.5%. And adjusted earnings per share is expected to be between $0.76 and $0.80 based on 71.5 million fully diluted shares. This guidance does not include any revenue contributions or financial impact from the plant OMMIC acquisition. In Q2, we expect our sequential Industrial and Defense and Data Center revenues to be down slightly in the balance coming from weakness in our Telecommunications business. As I have noted, we maintain a long-term perspective on executing our strategy. We are confident that we can continue to improve our financials and take market share in the months and years ahead. Our product portfolio is stronger than it was one year ago, and we are confident we can meet or exceed our targets. Hey guys. Congratulations on the strong 2022 results. I guess as we look into the first part of 2023, obviously, youâre guiding down for March on weakness and demand and some inventory correction. But do you have a sense, how long do you think the inventory correction across your end markets you will last? Do you think thatâs largely a first half of the calendar year event and you see recovery and revenue as you look into the second half of the year? Or can you give us any sort of senses how you think the revenue pattern may look this year? Yes, good morning, Quinn. So itâs really difficult for us to be giving guidance on customers inventory trends. So I think thatâs something that we would struggle to give an accurate answer on. When we â so thatâs the sort of the first part of your question. And then when we look at the balance of our fiscal 2023 and we look at the markets and our backlog and make projections what weâre thinking is at least two of our three markets will be up. We believe I&D, Industrial and Defense, will continue to grow during the course of the year. And we also believe that our data center will continue to do well and should certainly grow on a year-over-year basis. The one area that weâre probably most concerned about is the telecom. As everybody knows, we had a very, very strong FY 2022 with 30% growth. And so this year we do see that weakening. As I mentioned on my prepared remarks, 5G and the broadband markets are weak at the moment, and itâs difficult for us to understand when those might turn. And the other point Iâll make is generally speaking, there is a macro overhang on many of the â our markets. And so itâs difficult for us to make these longer-term projections. I hope that answers your question, Quinn? It does. Thank you, Steve. And then I guess, either for Steve or Jack, I guess as you look at the OMMIC acquisition, it sounds like they maintained manufacturing operations with the fixed expense of operating the three-inch fab plus having an idle six-inch fab. And so I guess, can you just walk us through sort of the impact as you close that transaction? It sounds like thereâs enough revenue through that fab that largely offset any fixed expenses of maintaining those operations. Is that the right way to think about it? I think thatâs right. I think you should think of their overall revenue run rate at sort of that 1% to 2% of our total revenue. So itâs a very low number today. And so our plan is as we talked about to not only build out the product line, market the product line globally, but also begin to migrate their products to the six-inch line. And in doing all of that, we think that the business has tremendous potential for growth. And let me just maybe highlight if I could. This is the first acquisition that the MACOM, new management team has done. And I just like to say that the rationale for this acquisition I think are important for investors to understand. OMMIC brings to MACOM an expertise that we donât currently have today. As everybody knows, we just launched to production our 0.14 or 140 nanometer process. OMMIC is working on 100 nanometer and 60 nanometer and even 40 nanometers. So thatâs â they are further along in developing and producing those products, which would take MACOM years to do. So tremendous amount of time spent or saved by bringing OMMIC into the MACOM portfolio. Second, they have a tremendous barriers of entry. They have an incredible epitaxial growth capability which is quite unique. They have developed some very interesting metal contact technology to improve high frequency performance which will very much complement the work that weâre doing. This business is also not a commodity business. These products will have high margins, high ASPs, and will be targeting medium to â small to medium niches. And when we look at the market opportunity, we size that to be about a $100 million SAM. So our goal is to take this business today that arguably is hovering just below breakeven, and we want to drive it to be a growing profitable part of our business. That will take time, but we think when weâre successful, we will be in a leadership position at the millimeter wave frequencies. And we look forward to that position. Thank you. One moment please for our next question. Our next question coming from the line of Tom OâMalley with Barclays. Your line is open. Hey guys. Thanks for taking my question. So, when I look out into the year, youâre talking about relative strength in the Industrial and Defense business. I would expect youâve heard some others of your peers talk about some weakening on the Industrial side. Could you just talk about if youâre seeing any changes in ordering patterns there? And then secondly, as you look into the out quarter, clear, thereâs a big reduction in OpEx to kind of get to the midpoint of your guide. Could you talk about where thatâs coming from? Itâs pretty substantial. You guys have been good at that in the past, but just want to understand how itâs declining so quickly? Thank you very much. Thank you, Tom. So Iâll take the first part of that question, then Jack can handle the second piece. As you know, last year for MACOM, Industrial and Defense was a record year. And I believe Q4 may have even been Q4 FY 2022 was a record quarter, and weâre seeing continued opportunities to grow. Most of this is coming from gaining market share not only in Defense, but also Industrial. And weâve talked over the last year or two that we believed over the long term, I&D would continue to be a strong end market for us. So we think weâre doing a lot of good things in this market. We actually are projecting that market will grow low single digits for the full year. In terms of the industrial ordering pattern, I think there are pockets of weakness for sure. But generally speaking, what we see is the larger companies are burning down their inventories, while the medium and smaller companies are continuing to order on a regular sort of more normal basis. And then before I turn it over to Jack about the OpEx, Iâll just highlight that. As we mentioned in the script, we focus very much on short-term financial performance as well as long-term financial performance. And the team here at MACOM has done a super jaw dealing with that day when Huawei went on the entity list, when we had to deal with COVID shutdowns. And then while we had to deal with now the macro global issues and the softness in the industry. So we have a very talented team that is ready to address issues as they come and try to get in front of them. And thatâs a little bit of what youâre seeing as we think about Q2 and throttling back some of our spending. So we were ready for this. We were not surprised by sort of the current environment and weâre taking actions to address those and Jack can add some detail to that. Yes, and I guess just to build upon that, and then to address your question spending, Tom, itâs really maintaining that continuous improvement and maintaining the profitability of the business. Those have been key attributes of the business, and that ripples through to all levels of the organization. But with regard to some of the discretionary spending items that I was referring to that flows into the operating expense line. It also flows into some of the things weâre doing from a cost of goods perspective as we look at our guide going into Q2. I touched upon a couple of things in my prepared remarks, including outside services and variable compensation and things like supplies. But thereâs a number of different things that weâre doing across the organization obviously, with our top line coming down a bit. Thereâs things like commissions which will be coming down. So thereâs a series of items that are contributing to that. And I think one other thing is weâve looked at the business, weâre continually looking to assess the way the organization comes together. We did have a â what I would call a minor staffing reduction including the consolidation of a small design center that we had. So some of those items are also contributing to the OpEx savings that you were referring to. Thank you. One moment for our next question. And our next question coming from the line of Vivek Arya with Bank of America. Your line is open. Hi, this is Blake Friedman on for Vivek. Thanks for taking my question. Iâm just focusing on revenue from a geography perspective. Based on your comments and seems like sales to China customers were down about 10% sequentially in the quarter. Can you quantify the potential headwind heading into Q2? Or in general, can you provide any commentary on demand trends by geography? Thanks. Yes, this is Jack, Blake. With regard to the China revenues, I think we had mentioned that China represented 23% of our total revenue compared to 26% back in Q4 and for our full fiscal year. So not down quite as steep as what you were referring to. But itâs an area that we thought was worth noting. [Indiscernible] Yes, Iâll just add to that comment. So China continues to be a strategic market for MACOM. We see a lot of growth opportunities, not only with our high performance analog products, our laser and light wave products but also a lot of the RF and microwave components that we sell into the industrial markets there. They also have some emerging markets including green energy and electric vehicles. And so weâre constantly looking for opportunities to break into those applications with our technology. And then since you brought up the issue of geography, I just wanted to sort of highlight again that we believe that thereâs tremendous growth opportunities in Europe in setting up a manufacturing facility and a wafer fab in the backyard of some major OEMs inside of the European Union will help us take our European-based revenue, which is about 6% up into the double digits. Got it. Understood. Thank you. And then just as a quick follow-up. On past calls, I believe you mentioned a $1 billion revenue target. I think we believe it was fiscal 2025. Just given the weaker macro â weakening macro today, just curious if thereâs any adjustment to that target? Well, weâre not changing the target of $1 billion. Weâre still confident we can hit that. And as weâve talked about in the past, that is an aspirational goal. I think whatâs changed here in the last number of months is really the time line associated with that given the current claimant. I think itâs reasonable to assume that weâll be shifting the timing of that $1 billion of revenue out in time. And so we havenât fully reviewed that. Iâll highlight that. Our targets come through a very detailed bottom-up analysis, which typically is aligned with our strategic planning process. And so I would suspect in the July and August time frame when we complete that cycle, weâll be evaluating where we think weâll be in fiscal 2025 and fiscal 2026. But itâs fair to â I think, to your point, itâs fair to assume that the environments are providing a headwind, which one would conclude would push that out in time. Thank you. [Operator Instructions] And our next question coming from the line of Harsh Kumar with Piper Sandler. Your line is open. Yes. Hey, thanks, guys. Appreciate you guys are clamping on OpEx to maintain profitability as investors we do appreciate that very much. Jack and Steve, I wanted to ask about gross margins. They were steadily going up for a while and now for the last couple of quarters, youâve been kind of stuck in the 62%, 62.5% kind of range. But I know you have plans and aspirations to be higher than that. So I was curious, just mid-term to long-term, what would be some of the things that might make that margin go up to maybe the mid-60%s if potentially thatâs your goal? And then I have a follow-up. Sure. So Iâll take the first part of that question and maybe Jack can add on. So we are â I think the gross margins that weâre delivering today really represent the business and the portfolio that exists today. And the way weâre going to drive our margins from the low-60s to the high-60s is through new product development and products that can come in to higher price. Examples would be the entire OMMIC portfolio where these are the highest frequency products in the market, leading cutting-edge performance. That portfolio would be an example of a business that we would expect to come into our portfolio that would drive margins often be accretive. Second, our 140-nanometer GaN process that we just announced, as we talked about, thatâs a $300 million SAM that weâll be addressing. And we believe that our latest products coming from that process will drive margins up. So our theme here at MACOM is the highest frequency, highest power and highest data rate. And if we stay on that edge, within the markets and the technologies that we develop, we will be successful driving the margins up. And so that is thematically how we will do it. Iâm not sure weâre going to be driving margins up by operational and executional issues. Maybe thereâs additional potential there. But moving to the next phase is about the technology and the strength of your differentiated products. And just to add to that, Harsh, in terms of our gross margins as we work before, weâve been pleased with some of the progress weâve made over the past number of quarters. I think if you look back over, I think, itâs seven or eight quarters, weâve been above that 60% number and have made sequential improvements. And with our flexible manufacturing model that we have with certain of our products being fab internally and certain of them also going out to third parties, that provides us with some protection over the varying different business cycles that allows us to ramp as well. So that kind of protects our overall gross margins. From a gross margin point of view, from as we look at our operations and all the contributions that the teams have been making over the past couple of years, we feel like weâre in a much stronger place and those improvements that weâve made will continue as we go forward. Thanks, guys. And for my follow-up, I wanted to go back to a question that Tom OâMalley asked earlier. So maybe phrase the question a little bit differently. In the core industrial space, the hard core industrial space where you play, there are not too many companies that are calling out any weakness in that. Theyâre all â most of the other sort of industrial players are calling out weakness in consumer. So I wanted to understand if maybe itâs a function of the growth you had last year or youâre actually starting to see some issues with one or two customers or if itâs broader based than that, where maybe we should put our blinders on and start focusing on that area as something of interest, but just curious if you could provide some more color around that. Yes. And I think it really comes down to MACOM specific industrial business, which may be different than some of the bellwethers that service that industry with microcontrollers or large ASICs. So we have â so that would be the first point. I think youâre seeing MACOM specific performance. We sell, for example, into door openers, sensors, medical equipment and test and measurement. So I would say that those markets have been performing well for MACOM, and we expect that to continue. But we donât consider ourselves really a bellwether. So I wouldnât read a lot into our trend the fact that weâre maybe deviating from industry trends. Hey, good morning. Thanks for the question and congrats on the execution here. I wanted to ask, maybe first just kind of about China and some of the demand, and there was a question on this earlier, but thinking more about the demand environment as we head into the second quarter, maybe into the back half of the year, it feels like the freedom of movement there. And once we kind of get through some of this COVID impact, that feels like a market that could rebound fairly quickly. And just kind of curious how youâre seeing that if thatâs a possibility and if that could potentially be an upside that we can look forward to? Yes. Thank you for the question. So we think it is possible, and there could be some upside. But with that said, we are taking probably a little bit more of a conservative view just coming off of Chinese New Year. We havenât really â people are sort of getting back to work. We have been monitoring the inventory levels within the channel in China, and weâre seeing some positive trends there. But quite frankly, we think itâs way too early to call which way China is going to go over the next three months to six months. But I do think thereâs the potential of it improving. Thereâs also the potential that things will remain at a muted pace. So the way weâre going to counter that is weâre going to continue to introduce products. Obviously, weâre going to focus on North America and Europe. But also when China really starts to open up and we can send more and more of our staff into China to engage with customers, we think that will be the activity that really ignites better growth and stronger revenue for MACOM. The COVID overhang has really slowdown and hampered our ability to engage customers directly. Today, MACOM has about just under 100 employees in China. We operate in four different cities. These are typically sales and application centers that are visiting customers, and theyâve been doing a great job keeping MACOM in front of customers, but we also feel like we need to rotate our business development folks and application engineers and to drive that growth. So if that happens towards the middle of the calendar year, we think good things will fall from that. Great color. Thanks so much for that. And then maybe for my follow-up is just around the data center and any areas of particular weakness or maybe strength that youâre seeing and maybe anything from a customer or even areas that are better or worse. So weâre just kind of color there would be helpful, I think. Yes. So just one point I want to make about the data center in our revenues this year because we are hearing a lot of â and seeing a lot of negative trends inside the data center. But our â we actually think our revenue will be reasonably strong this year because a lot of the products we couldnât ship last fiscal year will roll into this fiscal year. And so that will provide a growth opportunity for MACOM. And that includes many of our Crosspoint switches that had complex packaging or substrate materials included in the product. So supply chain is improving. Thatâs helping our revenue this year for the data center. Outside of that, I would say, generally speaking, the short-reach, NRZ platforms that weâre on, whether itâs AOCs, like SR4 AOCs or CWDM4, these markets or these applications have been relatively weak. That has been offset by an increase in our PAM4 activity in business. So for example, weâre seeing reasonable growth in DR1 and SR4 for PAM4 applications. So itâs â I would say thereâs a mix. It really depends on the customer, where weâre positioned at that customer. For example, we had a very large platform we were in last year, a DR4 application that we know that revenue wonât be in our forecast of this year. So things are constantly moving depending on the market environment and which of our customers are winning business. And then the last thing Iâll point out is that we do feel like, in general, there is a significant amount of inventory at our customers and at our customersâ customers. And so this will also provide a bit of a headwind for a lot of our electronic devices, CDRs, drivers, TIAs, things of that nature. Yes. Thank you and good morning. Steve, I was hoping you could talk a little bit more about OMMIC and where the revenues are today. So I mean it sounds like maybe itâs a $10 million business. Should I assume that thatâs primarily in satellite today? And as you obviously grow this business, will satellite still be sort of the main segment? Or are there other areas where you intend to introduce the technology as well? Right. So I just want to be a little careful about talking too specifically about their business, given we havenât closed the deal yet. So what I â thereâs a tremendous amount of information on their website. I would encourage everybody to visit ommic.com. They actually list some of their legacy customers. And what youâll see based on that public information is really a blend of satellite manufacturers, some North American and European defense OEMs. So because theyâve been operating on a 3-inch line, they have typically been targeting satellites, satellite manufacturers as well as defense applications. And so as we think about the business in the future, we want to bring them into the high-volume commercial worlds, including many different markets that MACOM today is already in, but not at the higher frequencies. Remember, their products can operate up to W band. So itâs just â provides the company a great opportunity to grow. But youâre thinking about it the right way. Generally speaking, theyâre in satellite and defense applications today. Thatâs very helpful. And perhaps a question on sort of business dynamics. So you mentioned you turned about 30% this quarter. I know thereâs been nothing normal the last few years in the semiconductor industry. But is sort of 15% to 20% terms where you expect the business to run it going forward? And maybe you can even comment on how much turns you need to get to the midpoint of your guidance for the March quarter? So we have seen an increase in the turns business. Last quarter, I believe it was 10% â or the quarter before Q1. And then in Q1, it was 13%. So we do see a trend of increasing turns business. We think this is coming from the fact that lead times are coming down, cycle times are coming down. Many customers are now waiting and buying, knowing that suppliers like MACOM have inventory. So weâre on the other side of that curve where people are not placing long lead orders, theyâre actually returning to, letâs say, a more normal dynamic in performance. We canât really comment on what percent were booked to meet our current targets. I would say that weâre following the same methodology that we have in the past in terms of looking at our backlog, making assumptions on what we think will book and ship within the quarter. So â but we are seeing that trend of book-to-bill increase, and we think thatâs a good thing. And Iâll just highlight that one â I think an important point here, which is we had a tremendous booking performance last fiscal year. We had a 1.1:1 book-to-bill for our fiscal 2022. And everybody knows in Q4, we had a book-to-bill of 1 and then last quarter, 0.9. So we are in a very strong position regarding our backlog. We donât have consumer exposure. Our top 10 is about 30% of our total revenue and no big 10% customers, and no one product is more than 2% of our revenue. So we truly have a very diversified business. And so I think thatâs important to note. Hey, good morning guys. This is Sean OâLoughlin on for Matt. And thanks for taking the question. Congrats on a nice quarter. I wanted to ask and dig a bit deeper on the GaN on SiC process that you mentioned. And first, congrats for getting that across the finish line. But on the $300 million long-term opportunity there. I know that thatâs sort of the long-term addressable market. But if you could just maybe scale initial expectations in terms of time to revenue and then sort of ramp into that opportunity, that would be helpful. Sure. So that $300 million SAM that weâre identifying is primarily defense-related, aerospace and defense, as well as maybe the second key market we want to address is satellite communications, whether itâs uplink, downlink or satellite to satellite. So these are the markets that we will focus on. The defense market, as you know, is a slow-moving market. So it will take time to get the design wins and turn the technology into product revenue. As I think about this year and we do some modeling so weâre just announcing today, weâre starting to sample this month. I would expect to see a non-material amount of revenue probably starting to appear in Q4 of this fiscal year and rolling into the beginning of fiscal 2024. So no material contribution this year. This is really a growth opportunity for fiscal 2024 and 2025. And in terms of what those numbers might be, I think itâs way too early to tell. Yes, makes sense. Super helpful. And then maybe a different part of the GaN world. I wanted to ask a broader long-term question on telco. It sounds like 2023 is going to be a difficult year, but one of your peers had commented that the GaN transition in RF power specifically was maybe accelerating and gaining more traction over LDMOS. And I was wondering if youâre seeing similar trends and how may that impact your opportunity set going forward. Thanks. Right. If thatâs true, then that would certainly support MACOM strategy, we, today do not sell LDMOS. We focus on gallium arsenide HBT, pHEMT, and, of course, GaN. So to the extent that different market segments are focusing on again, I would consider that a good thing for MACOM. I would also highlight that when we look at the overall GaN opportunity, you have the commercial and communications sector and you have industrial and defense. And we believe that those markets are about equal in size, but the profit is on the defense side of the line, and we are very focused on that. Yes, good morning. I was hoping you could speak a little bit to kind of cyclical metrics. I guess as you think about the three different businesses and perhaps the sub-segments within each, how are you thinking about kind of normalization of lead times backlog? And I guess, what normal visibility will look like once we kind of get through inventory correction and whatever kind of potential shortages that remain? Great. Thanks for the question. So itâs hard to summarize that in aggregate because of our diverse portfolio as well as the technologies. As you know, weâre building in manufacturing two terminal diodes all the way up to PAM-4 DSP. So the manufacturing cycle, the test time, the back end time, all of these are very different across the portfolio and our customers know that. So depending on where weâre selling our products, our customers have very different ordering patterns. And so when we think about normalized â a normalized environment, I just think itâs hard to parse that here. So Iâm not sure I can really answer your question specifically. I guess, what Iâm trying to get at is how much of your, I guess, relative optimistic view for 2023 is based on kind of current backlog versus not? So I would say that itâs not necessarily based on backlog. Itâs based on looking at the markets because we still need to book a significant amount of business to achieve the goals that we need to. So weâre making assumptions based on a bottoms-up sales forecast where we identify customers and programs and part numbers and in speaking with customers, getting an understanding of their future demands. And so when we talk about the fiscal year, we â thatâs the data weâre looking at, not specifically in only our backlog. And so as you go out in time, as you can imagine, thereâs more risk, and thatâs one of the reasons why we generally donât give full year guidance. Clearly, in this environment, I think it would be even more difficult to give full year guidance. Well, thanks guys for taking my question. Maybe one digging into the telecom side of the business, Steve, Iâm checking my notes, and hopefully, I got them correctly here, calling out the areas of weakness here with 5G and broadband. I just want to confirm that youâre not seeing in other areas within telecom specifically coherent. And then within those two weaker segments, 5G and broadband, are you seeing different dynamics here either by differences in customer activity levels of inventory or expectations of when those businesses return to more normal patterns. Right. So I would say that if I heard you correctly, are we seeing weakness in coherent? Was that your question? Yes. I would say that we are definitely seeing a bit of weakness primarily due to inventory adjustments. And then when we look at the weakness in 5G and broadband, there are very different dynamics there, very different markets, particularly in broadband, we have large CATV customers that we believe have a significant amount of inventory, and thatâs really the back story with broadband. And then on 5G, we think thereâs inventory burn down from our major customers primarily on the RF side, so front end â things like front end modules or amplifiers. Okay. Perfect. Thatâs great. And then following up on the topic of OpEx, I may have missed the kind of team here, but you talked about some reductions here going into the March quarter here. They sound mostly structural in nature. So just want to make sure thatâs the case here. And then is there a pattern we should see from an absolute dollar basis going through the rest of the year. Yes. And Richard, this is Jack. I would say a majority of the items are not structural. There is some of that in there in our guide going into Q1, but itâs more on the discretionary side as you look to what weâre doing from an OpEx standpoint. So having said that, as you look a little bit further out, there will be some rebounding as some of those discretionary items are pushed out into future periods. But amongst all the things that we do here, we want to make sure weâre maintaining an appropriate level of profitability. So we will be judicious with all of our spending as we go forward. Thank you. And Iâm showing no further questions at this time. I would now like to turn the call back over to Mr. Steve Daly for any closing remarks. Thank you. In closing, I would like to thank our employees for their contributions this past quarter. We look forward to closing the acquisition and welcoming the OMMIC team to MACOM. Have a nice day.
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EarningCall_841
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Hello, everyone, and welcome to the Q3 FY 2023 Vista Outdoor Earnings Conference Call. My name is Nadia and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host Tyler Lindwall, Vice President Corporate Development and Treasury and Interim Vice President Investor Relations to begin. Tyler, please go ahead. Thank you, operator, and good morning to everyone joining us for our third quarter fiscal year 2023 earnings call. With me this morning is Gary McArthur, Interim Chief Executive Officer; Jason Vanderbrink, President, Sporting Products; and Andy Keegan, Vice President and Interim Chief Financial Officer. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Vista Outdoor and industries in which we operate. We encourage you to review today's press release and Vista Outdoor's SEC filings for more information on these risk factors and uncertainties. Please also note that we have posted presentation materials on our website at investors.vistaoutdoor.com which supplement our comments this morning and include a reconciliation of non-GAAP financial measures. Thank you, Tyler. We appreciate all of you joining us this morning. Before we discuss our third quarter results, I would like to take a moment to address the CEO transition that we announced today. Chris Metz has agreed to resign as CEO and as a Director at the request of the Board and I have been appointed to serve as interim CEO effective immediately. Chris' resignation was based on the Board's loss of confidence in his leadership for reasons not involving financial reporting or internal controls. On behalf of the entire Board, I appreciate Chris's many contributions to Vista Outdoor and wish him well in his next endeavor. We've entered into an agreement with Chris to ensure access to his institutional knowledge and I look forward to working with him to ensure a seamless transition. By the way of a brief introduction, I have served as a member of Vista Outdoor's Board of Directors since 2015. Previously, I served as CFO of CH2M Hill from 2014 to 2017 and before that, spent more than 15 years at Harris Corporation, including serving as its CFO for eight years. Together with my fellow directors, I have been deeply involved in the oversight and execution of Vista Outdoor strategy, including the planned separation of our Outdoor and Sporting Products segments. I look forward to serving as interim CEO at this pivotal time in Vista Outdoor's history. We have a clear strategic path and remain on track to complete the separation in calendar year 2023, which I'll cover in more detail later in my remarks. I am confident that we will continue to capitalize on our strong momentum with Vista Outdoor's unmatched portfolio of iconic brands, resilient operating model and strong balance sheet. We are very well positioned to create compelling value for our shareholders. With that, I will now turn to discussing our third quarter results. First and foremost, I would like to thank all Vista Outdoor employees for their hard work during the quarter. The period included two major holidays, Thanksgiving and Christmas, meaning that many of our employees spend time away from families to help support our teams and our customers. The entire leadership team can't thank you enough for all you did to help Vista Outdoor achieve solid results again this quarter. I'd like for you to walk away from our call today with four key takeaways. We are operating from a position of strength, our separation is on track and we are reaffirming expectations for the spin to be completed in calendar year 2023. Our long-term outlook is encouraging and we're growing our own share of wallet via operating discipline and brand strength. We maintain a strong and healthy balance sheet because of our robust free cash flow generation, prudent use of cash and disciplined inventory management practices. Moving to the quarter. We again delivered solid results in a challenging environment. Total sales were $755 million down $40 million from the prior year period and up 78% over the same period in fiscal year 2020, which was pre-pandemic. Our Outdoor Products segment posted record sales of $353 million up 5% over the prior year period and up 59% over the same period in fiscal year 2020. Sporting product sales were $402 million down 13% over the prior year period and consistent with previous guidance. The quarter's performance was up 98% over the same period in fiscal year 2020. Our adjusted EBITDA margins were 18.1%, which is approximately 1,000 basis points higher than the same period in fiscal year 2020 and roughly 300 basis points above our long-term target of 15%. We generated $109 million in free cash flow for the quarter bringing our year-to-date total to a record $304 million up 44% over the prior year period and 556% higher in the same period of fiscal year 2020. Lastly, our adjusted earnings per share was $1.30 which is approximately 520% higher in the same period in fiscal year 2020. These results continue to prove that we are operating from a position of strength. Through our transformation and execution of our long-term strategy, we have built a diversified portfolio of 41 iconic brands allowing us to leverage shared resources across our portfolio and achieve levels of excellence in financial performance that would be out of reach for any one brand on its own. Leading brands are not created overnight. We now have a stable of 12 power brands that generate more than $100 million in annual revenue that we have grown either organically or purchase through acquisition. This is a testament to the strong operators and talented executives who are in place at each of our businesses. To that end, I want to provide a brief update on the integration of Fox Racing and our Action Sports business unit. We have captured a number of quick synergies and have also identified additional synergies above our initial business case. We're also doing more to leverage the strength of our multi-brand cycling snow and power sports provisions. I am pleased to announce current Fox Racing President, Jeff McGuane will become the new President of the combined platform and guide the seven brands to new heights. Jeff's role is present will be focused on building a shared scalable platform for operational state synergies and margin expansion, while enabling each branch prioritize individuality, creativity and ingenuity. Congratulations to Jeff on this exciting accomplishment. I would also like to thank Ric Kern, the former President of Bell/Giro. Ric led an incredible recovery over the last few years and leaves the business significantly stronger than when he took the ranks. We have instilled a founder's mentality across our corporate and brand cultures, expanded profitability initiatives and created shared resources to bolster supply chain, distribution and digital commerce capabilities. We have closed and successfully integrated eight acquisitions of leading brands that have increased our total addressable market, broadened and deepened our categories and further diversified our portfolio to serve outdoor consumers across a variety of activities. Taken together, we've added some of the most revered and well-known brands in the outdoor space, while also improving our growth and margin profile a win-win against our strategy. This execution is a result of a dedicated and resilient team and demonstrates that we are well-positioned for the road ahead. Our strong position in the industry lays the foundation for our plan separation and is our second key takeaway. We are reaffirming the expectation for our separation to be completed in calendar year 2023. The separation announced last May will create two independent publicly traded and soon to be named companies of nearly equal size by revenue. Following the separation our Outdoor Products segment will be an industry-leading portfolio of outdoor brands including Bell, Bushnell, Bushnell Golf, CamelBak, Camp Chef, Foresight Sports, Fox Racing, Giro. QuietKat, Simms Fishing and Stone Glacier. Sporting products will continue to focus on ammunition categories through its renowned brands including CCI, Federal, HEVI-Shot, Remington and Speer. As independent companies both Outdoor Products and Sporting Products will have enhanced strategic focus with supporting resources, tailored capital allocation priorities, a strength and ability to attract and retain top talent, compelling value for shareholders and expanded strategic opportunities. As we stated last quarter, we filed the confidential Form 10 with the SEC and have been diligently working with them to address any questions they may have. We are confident in our ability to complete the spin in calendar year 2023. We also plan to share details about management teams, members of the Board and names for each company in the coming months. So stay tuned. Our third key takeaway to leave you with is that we believe our long-term outlook is encouraging and our brands are resilient and well positioned to drive shareholder returns. Taking a step back to look at the broader market, we continue to see macroeconomic pressures impacting consumer purchasing behavior in response to high inflation and higher interest rates. We still see consumer purchasing patterns tightening in some categories and many are seeking to buy discounted or promotional items. Overall, retailer inventory levels remain high. We are seeing positive signs emerging and we expect retailers to return to more normalized purchasing in the coming quarters compared to the continuous restocking that we saw in the prior year period. In addition some of our categories are at the retailer shelves and retailers have been conscious to reorder and add additional inventory. We are continuing to monitor the situation in China related to COVID-19 case counts and the changing guidance related to lockdown. We have a large team in China that has allowed us to react quickly to issues and adjust as necessary. Even with these headwinds we are still seeing positive industry data and demand for our brands. Our Outdoor Products DTC sales are up, specifically a good leading indicator that consumers are still demanding our products and are continuing to recreate in outdoors. We believe that the pull-through of demand will start appearing as retailers work through their accessory inventory and resume their normal line purchasing patterns in the coming quarters. Given some of our success with targeted price reductions in certain categories such as 9-millimeter, for example, we believe demand is normalizing at a higher level than pre-pandemic. According to the latest government data the outdoor recreation economy generates $862 billion in economic output, 1.9% of national GDP and 4.5 million jobs. In addition to these promising figures, we continue to see strong participation numbers across the outdoor industry and more specifically in many of the categories that our brands serve. In the broader outdoor recreation industry more than 20 million net new participants have entered over the past five years. And the data further suggests that participation is sticky. Once someone begins to participate in our outdoor activities. To demonstrate the resiliency of this industry, I want to share a few market highlights in certain categories that we compete, including golf, snow and e-bikes. Now, National Golf Foundation Research found that the combination of on and off-course golfers topped 40 million Americans in 2022, the highest number ever recorded. Based on this data, it comes as no surprise that our Golf business posted record year-to-date sales with much of the success attributed to the launch of new products, combined with strong holiday performance, as Bushnell reported in history at roughly 61 million. These trends are continuing this year. We have seen a direct benefit from this strong snow season, coupled with the launch of the new Tor and Tenaya helmets. Giro snow sales were up more than 30% year-to-date versus the comparable prior year period. According to the latest research for people for bikes, e-bike sales were up 15% year-to-date through November. This growth is powered by stronger consumer adoption and also government and corporate incentives that are becoming more popular. For example, in Denver, an e-bike rebate program was so popular, the city plans to expand it and QuietKat just secured a major agreement with a Fortune 100 company to provide QuietKat e-bikes as part of an employee engagement program. In our Sporting Products business, we continue to see a growing diversity in hunting and shooting sports with females representing 27% of participants in the industry, up from 16% only a decade ago. Additionally, NICS checks indicator of health of the shooting sports industry remained strong in 2022 growing 24% from pre-pandemic growth. Jason will elaborate further on the Sporting Products business in a few moments. Although not exhausted, these data points provide a snapshot on how our business is continuing to expand our reach and capture new participants, while still serving the strong existing base of consumers who are recreating in record numbers. Even in our more challenged categories, our brands still continue to deliver strong results through brand strength new products and work. Camp Chef is a great example. The our door cooking market has been pressured by excess channel inventory and discounting. That said, Camp Chef's successful launch of the premium Woodwind Pro shows that demand exists for compelling products. The same is true for our channel partners and we are excited to share that Camp Chef is earning entry into loads on the strength of innovation and its brand. Stone Glacier also had an excellent third quarter. Revenue was up over the same period last year with December accounting for triple-digit year-over-year growth. One unique attribute to Stone Glacier is the strength of the brand. Their third quarter performance and specifically Black Friday and Cyber Money -- Monday happened with zero of discounting or promotions, even while competitors are discounting aggressively. Additionally, Simms Fishing our most recent acquisition delivered over 25% growth during the quarter, compared to the prior year, driven by excellent DTC sales, which were up 65% in the quarter and exhibits the power of Vista's investments in premium brands with strong digital customer acquisition capabilities. Our last theme is the health of our balance sheet. Our balance sheet is a pillar of strength and continues to be a competitive advantage and provides us with flexibility to invest in long-term growth even in challenging times. Our free cash flow continues to remain robust. And in the first nine months of our fiscal year 2023, we have generated a record $304 million, up 44% year-over-year. This is a testament to our inventory management practices, prudent use of cash and rigorous monitoring of our customer and vendor terms. These actions have allowed us to continue debt paydown, maintain our net debt-to-EBITDA leverage ratio of 1.7 times, within our targeted range of one to two times and significantly below the fiscal year 2020 year-end value of 4.3 times. This stability supported investment in new product research and development, which is the lifeblood of our company. This sustained by our year-to-date R&D spend increasing by 59% year-over-year. During the quarter, we also paid down approximately $90 million in debt, and we will continue to focus on debt pay-down ahead of our plan on separation of our Outdoor Products and Sporting Products. Before I hand it over to Jason, I want to reiterate that, I am proud of this company, we are operating from a position of strength. The outdoor industry is robust, we're navigating challenging economic positions and maintaining our share of wallet. And our resilient operating model focused on strong brands and a clean balance sheet position this company favorably, to thrive in all phases of the economic cycle. Thank you, Gary, and good morning, everyone. Sporting Products is stronger today in terms of brands, operations and share of wallet than we've ever been. There are six key themes that demonstrate this strength. Number one, the industry is very healthy. During 2022, the NICS background check system processed more than one million checks every single month for a total yearly increase of 24% over 2019. Number two, our operational footprint across four factories is driving cost downward, while enabling a culture of ingenuity, collaboration and self-determination. We are doing this while also improving our mix, to help offset higher input costs. Number three, our dynamic and balanced portfolio. The acquisition of Remington in 2020 brought two of the largest American ammunition brands under the same company, which has improved the market stability even during times of intense competition from imports. Number four, our new product pipeline is robust with collaboration across brands that provides high-quality performance ammunition to our dedicated consumers, law enforcement and the military. Number five, our customers are rationalizing vendors and selecting us to fulfill their needs, which provides us with more share of the shelf. Number six, while the market continues to normalize in a few categories we are delivering at near-record profit levels. Moving to the quarter, we have not been immune from the macro pressures Gary outlined. For the quarter, sales for the segment were down 13% driven by market normalization and 9-millimeter and our planned exit from the Lake City Army ammunition contract. In addition, rising costs, higher interest rates and declining macro consumer confidence have affected history sales. We also know the ammunition market is cyclical, and that the elevated patterns seen during the pandemic would not last ever. Even with these pressures, we have demonstrated that our strategy, multi-brand offerings and business transformations made us much more resilient and adaptable in this dynamic environment. I'd like to now highlight areas that continue to demonstrate our ability to deliver on earnings through a normalized ammo cycle, and how we are positioned to build on our momentum. A key indicator insight into the health of the industry has adjusted NICS checks. 2022 ended with 16.4 million checks placing a third historically behind the two pandemic years of 2021 and 2020. Another sign of a healthy consumer base is the volume of new users that have entered the shooting and hunting sports. Estimates of new shooters gained since the pandemic began show more than 16 million new consumers have entered the industry and one of the fastest-growing segments is huge shooting sports leagues in high schools across the country. Our Federal CCI and Remington brands are deeply rooted in the shooting sports. For the hunting side, the field to table movement is spurring more days in the field. All of this signals a healthy baseline of consumers a promise of the next generation of shooting sports enthusiasts and increased engagement. Operational excellence. We have the world's best workforce within all of our factories and we continue to gain efficiencies. We are maintaining a lean cost structure by not adding overhead and our teams have been more efficient in all areas of our operations to help protect margins. Containing costs will increase profitability with overhead structures that match demand, while never sacrificing quality. We will be disciplined in the deployment of our capital and SG&A. To that point, our initiatives will focus on the innovative products that drive higher margins and the research and development pipeline, a humongous competitive advantage we see as a sales driver. Since adding Hevi-Shot to the portfolio, the brand well-known for waterfowl, turkey and predator hunting, the positive impact to our overall business has exceeded expectations. The brand brings strength to our portfolio and the alternative metal base of Hevi-Shot products solidifies our company's leadership position in the shotshell category, whether it be hunting sports shooting or personal protection. We will continue to leverage the Hevi-Shot brand in the out years with plans for product extension. Pricing. To offset increased cost of raw materials, labor and freight, we've taken recent price increases in select categories that have been widely accepted by the market, contributing to our profitability. Very limited 9-millimeter pricing actions resulted in substantial pull-through at retail and distribution and signaled a healthy consumer buying pattern and preference of our brands. Other industry conditions favorable to ammunition are the promotional activities we are seeing to reduce channel inventory of firearms. Lastly, we have a healthy backward position, especially in our higher-margin premium centerfire rifle category, where we expect consumer demand to remain strong. Modernization and innovation. We've completed our pistol factory modernization in Anoka and increased our use of core technologies across each of our major plants to reduce cost and risk. This includes the implementation of copper plating for pistol bullets, nickel plating for premium handgun offerings and shared best-in-class resources and processes to lower costs and increase synergies. In addition, our dedicated centerfire rifle expansion is nearing completion. In quarter four, we expect to ramp up the modernization of the Remington primer facility in Lonoke. Across all facilities, we have installed Blitz teams, which are cross-location teams that deliver faster path to manufacturing solutions. At the recent shot show, we introduced more than 30 new products and line extensions that build on an already superior lineup of product offerings. One of the innovations that is capturing considerable attention is Remington's new 360 Buckhammer. This revolutionary new caliber is optimized for lever-action rifles and greatly improves the performance and accuracy of straight-wall cartridges. Brand Power. When it comes to innovation and brand power, there is no peer in the ammunition market that matches Federal, Remington, Hevi-Shot, CCI, Speer and Estate and their longest award-winning products. Out brands are sought after in the marketplace because of our innovation, reliability and performance. Guns & Ammo magazine awarded its prestigious designation of Ammo of the Year for Federal's new 30 Super Carry. Other accolades for the 30 Super Carry include Ballistics best designation for best hand gun ammo and shooting illustrated golden bull's-eye for ammunition product of the year. American Rifleman recognized Remington's new core lock tip as its choice for a Golden bull's eye for ammunition product of the year. These innovations are paying off. In a recent purchasing survey, Federal and CCI were the leading brands bought by consumers in every category of ammunition in the third quarter of 2022. In closing, we are in the middle of our calendar year 2023 booking season and are beating all of our expectations across the portfolio. I want to emphasize that we are solidly positioned to continue to take market share in all product categories because of our product portfolio is balanced, rational pricing has been restored in the marketplace and we maintain a very healthy backlog in profitable ammunition categories. Our lean operations continue to drive efficiencies and synergies across our plants, as we further integrate our four domestic manufacturing plants into a cohesive, nimble operating unit. Before concluding my remarks, I want to thank each of our employees and the management team across the sporting products segment. I'm proud of the work our world-class dedicated team does every day 365 days a year to build the best ammunition right here in America. Thank you. Andy? Thank you Jason and hello everyone. My comments today will focus on adjusted results compared to the prior year period unless otherwise noted. Both as reported and adjusted results are included in our earnings release and website and can be found on our website. Turning to slide 15. We posted another solid quarter of sales including record Outdoor Product sales and Sporting Product sales that were consistent with our guidance of approximately $400 million per quarter. Q3 margins were impacted by lower volumes in the organic business increased promotional activity, unfavorable mix and higher input costs including freight and commodities. Overall as Gary said, we are operating from a position of strength. We are holding our share of wallet and seeing strong industry participation trends. Our balance sheet is healthy and our quarterly results are in line with what we expected. For the third quarter, total sales were $755 million, down 5% driven by a double-digit decline in organic sales across several categories, partially offset by our Golf business and recent acquisition. Compared with Q3 FY 2020 total sales are up 78%. Recall that our FY 2020 represents the most recent pre-pandemic year at our fiscal year-end in March. Throughout the quarter, we've been methodical with our approach to promotional activity having walked away from opportunities to sell discounted products to retailers. Some sales may have been left on the table, but the decision otherwise kept a healthier margin profile and protected our brand images without exasperating the higher retail inventory levels. Gross profit decreased 14%, $244 million and gross margin contracted 327 basis points to 32.3%, primarily due to increased promotional activity, mix shifts and higher input costs including freight and commodities. EBITDA decreased 26% to approximately $137 million. EBITDA margin decreased 522 basis points to 18.1%, which remains very strong. Compared with Q3 FY 2020 margin of 8.1% this represents margin expansion of approximately 1,000 basis points. Q3 EPS decreased 38% to $1.30, driven by lower gross profit as well as higher SG&A and interest expense. This was slightly offset by a lower tax rate and a 2.1% decline in outstanding shares. We generated robust free cash flow of $109 million in the quarter and year-to-date free cash flow climbed to $304 million, up 44% over the prior year period. Our balance sheet positions are favorably given the current macroeconomic environment and demonstrates our financial discipline and effective operating model. We were able to generate these solid cash flows in the quarter despite the increase in our inventory sequentially. The increase as a result of our Sporting Products business securing raw materials at advantageous prices. Our Outdoor Products segment saw a decrease in inventory sequentially as we began to monetize our inventory position with shorter term of the time and targeted promotions to move through areas of elevated inventory. We are monitoring inventory levels and strategically leveraging promotions across all our channels to reduce inventory while also remaining competitive, protecting our brands, our margins and our market share for the long-term. Turning to slide 16. Our balance sheet remains strong. Net debt increased from fiscal year-end 2022 to $1.15 billion, largely driven by acquisitions. Within the quarter we paid down approximately $90 million in debt and at 1.7 times leverage we are still within our target net leverage ratio of one to two times. Our immediate liquidity is $187 million as of quarter end. Looking forward, we are expecting to continue to generate robust free cash flow and deliver on our commitment to pay down debt. As we noted last quarter, our capital allocation strategy is focused on primarily on debt repayment and we are pausing our M&A until we expand, which we anticipate to occur in calendar year 2023. Our long-term capital allocation strategy is focused on investments that we expect will drive the highest return for our shareholders. Our business model allows us to continually invest in our brands in any economic cycle given we play in a multitude of consumer demographics. Our strong financial discipline over the past four years has resulted in a strong balance sheet, record free cash flow and sustainable financial performance. Now let's turn to our Q3 segment results on slide 17. Within Outdoor Products as mentioned we posted a record sales of $353 million an increase of 5% driven by acquired businesses and golf partially offset by declines in other organic businesses, primarily due to reduced purchasing from international, big box and other wholesale channels. In comparison, Outdoor Product's third quarter sales were up 23% compared to Q3 2021 and up 59% compared to Q3 of 2020. The decline in the organic sales was primarily driven by outdoor accessories and the organic Action Sports business, due to POS exceeding sell-in which we expect will carry into Q4. Gross profit decreased 2% to $102 million, driven primarily by organic business volume declines, increased amortization cost from acquired businesses, unfavorable mix and higher promotional activity in Outdoor Products associated with holiday season, partially offset by volumes from acquired businesses. Gross margin declined 225 basis points to 29%. EBITDA was $32 million down 41%. The EBITDA margin decreased 709 basis points to 9%, primarily driven by lower gross profit in the organic businesses as well as higher SG&A related to acquire business. Turning to Sporting Products, sales were $402 million down 13% in line with our guidance and driven primarily by lower shipments of pistol ammunition as channel inventories has normalized, the timing of shotshell shipments as well as the previously announced termination of the Lake City contract at the beginning of the quarter. Gross profit was $141 million down 20.6% due mainly to lower volume, unfavorable mix and increased commodity and freight costs partially offset by pricing. EBITDA was $124 million. EBITDA margin decreased 302 basis points to 30.9%. Sporting product profitability remains much stronger than the pre-pandemic levels, due to a more disciplined pricing environment and a broader and more profitable product mix as a result of the acquisition of Remington and the strategic decision to shift away from the less profitable and more vital ammunition product categories purchased from the Lake City Army Ammunition Plant. Let's turn to slide 18, for our revised fiscal year 2023 outlook. Inflation and rising interest rates continue to influence consumer spending, while high-levels of retailer inventory contributed to additional promotional activity. Retailers have been cautious and slow to reorder for the sake of adding additional inventory. We are also experiencing pressures in the international markets due to the strength of the U.S. dollar. We are taking several actions to mitigate risk by managing inventory and closely controlling costs. On a positive note, we expect retailer purchasing to normalize in the coming quarters as retailers sell through their inventory positions. And we continue to see strong demand for our brands and products as demonstrated in our strong DTC performance which is a leading indicator for overall demand. Moving to guidance, we have adjusted the low and high-end of our guidance ranges. For the full fiscal year we expect sales of $3.06 billion to $3.08 billion down 1% year-over-year at the midpoint. Sporting Product sales in the range of $1.73 billion to $1.74 billion and Outdoor Products in the range of $1.33 billion to $1.34 billion, the midpoint of adjusted EBITDA margins remains the same with the new estimate at 19.85% to 20.15%. Interest expense in the range of $56 million to $59 million, effective and adjusted tax rate of approximately 22%, adjusted EPS between $6.05 to $6.30 and free cash flow between $320 million to $350 million. As Gary stated, we are reaffirming that we will complete our planned separation in calendar year 2023. Let me briefly touch on the debt we hold on both Sporting Products and Outdoor Product businesses relative to the separation. As part of the separation, we are currently in discussions with our banks to refinance our existing credit facility, which includes the asset-backed loan and the fixed asset term loans and established a new credit facility for the Outdoor Product SpinCo. These conversations have been well-received thus far and we are continuing to actively meet with potential lenders. We currently expect our $500 million of senior notes will stay with RemainCo, our Sporting Products business in their current state after we complete our plant separation. We currently expect our Sporting Products business will add approximately $1 billion to $1.1 billion in debt including the senior notes after separation and maintain a long-term leverage ratio of approximately one to two times. We believe that the robust free cash flow generated by Sporting Products business will support this debt and is paid down while also providing a dividend payout ratio that investors will find attractive. Our Outdoor Products business is expected to have minimal debt at the completion of our planned separation, at which time we will be able to pursue accretive acquisitions and maintain a reputation as the acquirer of choice in the industry. In closing, we continue to demonstrate our ability to drive solid financial results and robust free cash flow. Our balance sheet remains strong and we maintain flexibility given our low leverage level. We have a resilient and operationally strong team with the expertise to execute our strategy wisely during these challenging macroeconomics and geopolitical times. We are taking proactive measures on factors within our control to further mitigate this risk. We are confident in our future and through our transformation over the past four years, we have positioned the company well to drive long-term shareholder value. The purpose of today's call is to discuss the company's third quarter results. As we hope you can appreciate we will not be discussing the leadership transition beyond what we have announced and we kindly request that you focus your questions on our operational and financial results and outlook. [Operator Instructions] And our first question today go to Eric Wold of B. Riley Securities. Eric, please go ahead, your line is open. Thank you. Good morning. Two questions one for each of the two segments. I guess first off you mentioned that you did increase prices on some of the ammo categories in response to some inflationary pressures. I guess in general can you talk about the current ammo pricing environment at retail and how sustainable you think those higher prices are kind of heading through 2023 and 2024 kind of what are the long-term gross margin expectations for the segment given those pricing expectations? Eric, good morning. This is Jason. What we're seeing on retail pricing is we are -- it depends on the category. We mentioned 9-millimeter small rifle. You're obviously seeing the retail prices come down in the market. We took pricing action on some categories where we thought we could offset some margin pressures due to the commodities. Those pricing actions have stuck and we expect those to stick all year long. As far as the overall pricing category at retail we're pretty confident with what we see as input costs continue to go up. I think what we see at the shelf today is going to hold for 2023 given anything that we see right now tells us that we certainly don't expect it to go down any. As we laid out at our Investor Day, we're still bullish on mid-20 EBITDA margins. We think that's going to be the normalization of -- the market normalizing it's still going to be in the mid-20 EBITDA for Sporting Products. Got it. And then just a quick question on the Outdoor Product side. Can you talk about kind of what you're seeing with the point of sale -- the POS patterns at retail and then maybe within your own e-commerce platform that gives you some indication of kind of the health and consumer where the consumer is. Just trying to get a sense of if you are started -- as you do start shipping more product into retailers kind of towards a more normalized restocking? Just trying to get a sense of how do you think that inventory would sell through in this environment? Yes. I appreciate that, Eric. This is Andy. So what we're seeing in this is that the POS is down year-over-year at retailers right now. But the sell-in is down further than the POS. And we feel the demand is strong in our Outdoor Products. As we mentioned our actual -- our site are actually up over that time period. And so we're -- we do see that demand is there. We're seeing stock out on shelves in our Outdoor Products. So, as retailers do start to normalize their purchasing which we expect over the coming quarters that they are going to do that, that we'll see that POS start to increase as we are missing some of the stock-outs in our sell-in will certainly go up as well. So we're bullish on the -- what will happen once retailers are starting to repurchase. Thank you. And the next question goes to Mark Smith of Lake Street. Mark, please go ahead. Your line is open. Hi, guys. First off I just wanted to ask a question on the ammo side of the business. I don't know if you guys can quantify or talk about maybe the impact in the quarter from back and away from some of the Lake City Ammo. Mark, good morning. This is Jason. We don't quantify Lake City. I think we've released publicly previous fiscal years sales peaked at around $180 million a year when we had that contract years ago. So that as far as we're going to quantify Lake City. Okay. And then looking at the other side of the business, I'm just curious any other insights you can give us on Action Sports business and in particular the Fox business, is that hitting internal expectations some of the slowdown that we've seen in Action Sports is that impacting Fox as well, any additional insights there would be great. Yes Mark. It's a great question. So we -- in the quarter sales for Fox were $67 million. They are experiencing some of the pressures that the Action Sports business is. They do have a fairly large international presence, which is being affected as well from the US currency adjustments that we're seeing. But that being said, I'd say we have optimism with the synergies that we're already experiencing between Fox and Bell they're meeting our EBITDA expectations and we see actually additional opportunities in those arenas that we've identified. So we are very pleased with the current results given some of the macroeconomic pressures. The sales are little bit lower along with the similar Action Sports but not to the same extent as their demographic and who they sell to, is not that opening price point. So they're not nearly at the reduction that you're seeing given our mass business that we have in the Bell area. Hi. Good morning. Thanks for taking my question. On the Outdoor Products business, thanks for quantifying the Fox Racing, but could you quantify overall the impact from acquisitions on sales and EBITDA? Yes, I can't give you the exact amount. What I can say is that the organic decline was in line with what we expected from last quarter which was in that 20-ish percent range. So it was in line with what we had expected it to come in at overall. Got it. And then I appreciate the need for some promotions as the channel is cleared, particularly in the Outdoor Products business. I guess when are you expecting to get to more of a normalized promotional environment in those end markets? Anna, this is Gary. Let me speak to that. I mean I think as most of the world. we're expecting a tougher first half of the year and with expectations that we'll see a better environment that retailers looking into the second half. Maybe Andy could add a little more to that. I think you're exactly right that, we -- certainly, as we go through Q4, we do expect that the promotional environment is going to continue and you'll start to see it ease, but still be elevated as we start clearing into the Q1 and then we'll start to clear up. It aligns with that kind of clearing the retailer inventories through those that same period. As we said in the coming quarters, we expect that to ease and that will help us facilitate less promotional activity. What I can say on that is that, we are working with the SEC to clear our -- any questions and concerns that they have. At the end of the quarter, we will be providing the SEC nine-month performance that couldn't be provided until the quarter ended. We would then be working with them on any questions or comments related to that. But I just assure you, we're working through this as quickly as we can. I can't give you a definite time, but it is top of mind for sure and we're working through it. Thank you. And the next question go to Matt Koranda of ROTH MKM. Matt, please go ahead. Your line is open. Hey, guys. Good morning. Just on the Sporting Products segment, any way to quantify or think about the volume price split and the 13% decline within the quarter? I would assume on a blended pricing basis you were up. So does that imply volume down more than the 13%, then how does that feed into sort of the full year outlook that you provided. It looks like maybe a little bit more deterioration in top line in the fourth quarter. But how should we think about volume versus price there? Hey, Matt. Good morning. As far as the question directly, it was mostly volume driven, due to what we had talked about in the opening remarks. And then as far as the guidance that we had given you last quarter, $400 million for the third quarter, $400 million for the fourth quarter, we're pretty comfortable with that guidance range. Well, I think, net-net price was actually up for the -- there are certain categories that -- as we talked about that pricing has been under pressure. But versus last year, net-net, price was actually up. So the decline was volume offset by price going up. Now, there's mix in there that drive some price, some pressure on that. But, overall, I would say, price is up. Okay, great. And then on the Outdoor Product side, can you just highlight more specifically where you've seen strength in the DTC performance? You guys have mentioned that a couple of times both in the prepared remarks and the Q&A. And clarify also, if you've seen some positive pockets as well, if you could call out any of those on a year-over-year basis. Yes. I can touch on it. Obviously, we've seen a lot of good DTC experience at Simms. We've had pockets of great performance in snow as well. Maybe, Andy, you can add some more details, but -- Yes. In general, I would say, across the board, the majority of the sites did experience better results. There were ones that are under pressure, but they align somewhat with what we're seeing in the POS that you're talking to the hunt/shoot category which is down the most overall. That one did experience continued pressures. But what I think is a highlight is, it's less than what we're seeing in our wholesale and the retail channels themselves. So, though it is down, it's down less, which, for us, gives us indications, as I said earlier, that the demand is there and that we'll see it come back as we continue to move through some of the pressures we're seeing in our wholesale channels. Thank you. And our final question today goes you to Ryan Sundby of William Blair. Ryan, please go ahead. Your line is open. Yes. Hey. Good morning. Thanks for the questions. Gary, Andy, I think, you both mentioned retailer inventories, it's high in total, but then you've had some other categories that are showing stock-outs. Could you give us a rough breakdown of what percentage of the portfolio is over inventory versus correct, versus under, at retail? And then, I think, you mentioned resellers taking in the next couple of quarters to normalize their ordering patterns. Is that across the board, or is that really just for a couple of specific categories? Yeah. Ryan, it's a great question. I'm glad we can help clarify here. So first thing I would say is, in general, we actually feel our inventories are actually in fairly good shape. There is pockets that are a little bit over inventory, but not on the whole it's actually fairly good shape. When we say retailer inventory, we're talking about their total inventory not just our products, but all inventory they're carrying. And what we see is, and it might be by category that if they're heavy in all in the category of a total they may not be purchasing anything in that category. And so we're seeing that happening right now. And so we're trying to work through that with them. Just as we said, we had stock out in certain areas. And they're just saying well others aren't stocked out. So until we can clear through that that is causing some pressure on us. So our inventories -- where we are heavy is some of the areas that we've talked about. We look at outdoor cooking has a little bit heavier inventory right now. But on the total, it's actually in fairly good shape. And we just think that the retailers are going to move through these inventories. And as they get through their fiscal year-end, we'll start seeing those -- them be able to move and reorder at a more consistent basis. Got it. That's really helpful. And then, just on the like we are seeking out either more discounts or promotions. Can you talk a little more about, how widespread you're seeing that? Again, is that across the portfolio? Is it in specific categories? And maybe how does that look for your premium items versus your opening price points? That -- so on the premium I think it is split fairly well is that our premium items, aren't seeing the same level discount. We talked about Stone Glacier not having through the holiday season. They didn't -- they weren't seeing any discounts. So, some of our top end products aren't seeing the same levels of discounting. The heavy -- what we were talking about is during the holiday season what we did note and we noted this on our sites and in the channels is, -- the -- without a discount on kind of the mid-to-low-price point items, you weren't seeing the activity. The buyers would look, but they wouldn't purchase. They -- as we go forward, that is something that we're monitoring. We do think that promotions will be necessary especially in the retail channels to move through the inventories maybe less so on our DTC sites to try to move through that. But it is going to continue. We are -- but it is more so, on the lower end price points versus the upper. Okay. Let me make a few comments. As you're aware this is a great company and we're going to be laser focused on making it even better. We have great employees, who work really hard. I am very fortunate to be surrounded by a deep talented and experienced management team, several of which will be included in the search for the Vista Outdoor, CEO position. We have 41 iconic brands that we are going to work hard to even better leverage. We had a solid quarter, but we're aware there's work to be done. We are 100% committed to completing the spin in this calendar year. And we'll be working hard towards that. And I just want to leave with you that we are very optimistic about the future. It's bright. We're ensuring you that we'll be shareholder rewarding. And look forward to talking to you further. Thanks for your time today on the call.
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Hello, and welcome to today's Unum Group Fourth Quarter 2020 Earnings Results and Conference Call. My name is Bailey, and I'll be the moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Matt Royals, Senior Vice President, Investor Relations. Please go ahead. Great. Thank you, Bailey. Good morning, and welcome to the fourth quarter 2022 earnings for Unum Group. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results may differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission, and are also located in the section titled cautionary statement regarding forward-looking statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2021, and our subsequent quarterly reports on Form 10-Q. Our SEC filings can be found in the Investors section of our website at www.unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website in the Investors section. Yesterday afternoon, Unum reported fourth quarter 2022 net income of $279.6 million or $1.39 per diluted common share, an increase from $159 million â $159.7 million or $0.78 per diluted common share in the fourth quarter of 2021. Net income for the fourth quarter of 2022 included the after-tax amortization of the cost of reinsurance of $12 million or $0.06 per diluted common share and a net after-tax investment gain on the company's investment portfolio of $4.9 million or $0.02 per diluted common share. Net income in the fourth quarter of 2021 included the after-tax amortization of the cost of reinsurance of $15.5 million or $0.08 per diluted common share and a net after-tax investment loss on the company's investment portfolio of $6.8 million or $0.03 per diluted common share. Excluding these items, after-tax adjusted operating income in the fourth quarter of 2022 was $286.7 million or $1.43 per diluted common share, an increase from $182 million or $0.89 per diluted common share in the year ago quarter. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel; Chief Operating Officer, Mike Simonds; as well as Mark Till, who heads our Unum International business; and Tim Arnold, who heads our Colonial Life and Voluntary Benefit Lines. Thank you, Matt. And good morning, everyone. As we head into 2023, we couldn't be more pleased with the performance and trends of our company throughout 2022. Our team of more than 10,000 dedicated employees are delivering on our purpose of helping and protecting the working world. These record results have been tremendous, highlighted by an accelerated recovery to pre-pandemic operating levels. The strength of our industry-leading employee benefits franchise is driven by a singular focus on serving employers and their employees. It is driven by a combination of our longevity and expertise in managing this business, along with innovation that recognizes the needs of a changing workforce. The fourth quarter was a good continuation of this progress. We built on the momentum from the first nine months of the year with a total annual growth on adjusted operating earnings per share of 43%. After-tax operating earnings were $287 million in the fourth quarter and a record $1.25 billion for the full year. This is an increase of 41% over full year 2021. Looking at the top line, our premiums in our core businesses grew at a rate of nearly 4% on a constant currency basis for the fourth quarter. This is trending to our long-term expectations of 4% to 6% per year. Persistency of our in-force business was healthy across all products and strong sales performance further aided the top line growth and premium momentum. For the full year, consolidated sales grew at a rate of 16%, again, on a constant currency basis, driven by Unum US and Unum International. We are also encouraged to see Colonial Life's growth with 6% sales growth in 2022 as they get back to high single-digit growth rates. Our margins remain healthy across our lines of business, prudent underwriting and customer-oriented management of our claims; have kept our benefit ratios at very good levels. And despite some expense pressure from the inflationary environment, our core businesses all finished the year earning mid-teen to low 20% ROEs. Combined ROE for the core businesses was 17% for the full year 2022, up from 10% in 2021. These results from top line growth to bottom line management would not be possible without relentless attention on our customers in every aspect. How we connect with and serve our customers are critical in building our leading market positions. A couple of examples include services that have been in the market for several years, like HR Connect, and more recently, Unum Total Leave. They are excellent examples of how we have continually improved our service to both the employer and employees. With Total Leave, which we rolled out at the beginning of 2022, employees and employers utilize a modern digital platform to help better manage all aspects of employee leads, a benefit that has taken root in importance with employees. It is also important part of the overall value proposition to employers as they look at the broader benefits package. While our core operations are running well, we continue to execute actions, which effectively manage the financial risks of the Closed Block. For long-term care, we have been very pleased with the continuation of our interest rate hedging program, which we began earlier in 2022 and continue to build upon. These are actions which reduce exposure to future rate changes. We have also stayed focused on working with regulators on achieving appropriate premium rate increase approvals. The pace of approvals remains on our expectations, and we have received multiple approvals throughout 2022 and even into 2023. Steve will provide additional details of recent activity on both the hedging program and premium rate increase approvals in just a moment. The many positive operating trends that helped drive our GAAP earnings improvement also helped drive strong statutory income, which on a run rate basis is back to our pre-pandemic level of close to $1 billion a year. This is another reflection of our business model's resiliency and its cash generation capabilities. A strong core business and prudent Closed Block management have also created an outstanding capital position, which continued to strengthen in the fourth quarter. Risk-based capital for our U.S. traditional insurance companies increased to approximately 420% at the end of the fourth quarter, and our holding company liquidity of $1.6 billion is some of the highest levels we've seen. Both remain well in excess of our targeted levels. Combined with leverage below 25%, the strength of our balance sheet gives us tremendous flexibility to pursue our strategy and continue to return capital to shareholders through dividends and share repurchase. To summarize, our purpose-driven, profitable, industry-leading employee benefits business is building momentum as we come out of 2022. Coupled with a favorable operating environment, strong capital position and prudent risk management, we are in position to continue advancing on our leading market positions as we head into 2023. We look forward to taking you through more depth on our business and why we are optimistic at our upcoming investor meeting at the end of February. Great. Thank you, Rick. And good morning, everyone. We are very encouraged by our strong fundamental performance in the fourth quarter and financial strength, which provides solid momentum headed into 2023. As expected, strong group disability loss trends continued in the fourth quarter with the group disability loss ratio remaining in the mid-60s, a trend we expect to continue into 2023. We also achieved strong consolidated sales growth of 16.8% on a constant currency basis and maintain steady persistency across all product lines, while advancing our renewal pricing programs. Externally, the favorable operating environment continues to aid results. Natural growth, which comes from increase in employment levels and rising wages, continues to support top line growth for our group lines. As Rick mentioned, we ended the year with an after-tax adjusted operating EPS growth rate of 42.8% over full year 2021. This includes after-tax adjusted operating income in the fourth quarter of $286.7 million or $1.43 per diluted common share. Given foreign tax dynamics, our corporate effective tax rate was 22.4% for the fourth quarter. The difference between our effective tax rate and the expected rate of 21% equates to approximately $0.03 of after-tax EPS. For the full year, our effective tax rate was 19.4%. Included in our results was also the impact of a critical illness reinsurance treaty recapture, which added $8.2 million to operating expenses. Earnings in future periods will benefit from this action, providing an attractive rate of return. Regarding operating expenses, the full year 2022 adjusted operating expense ratio was 21.3% or 150 basis points above 2021. Excluding the reinsurance recapture, the 2022 result would have been closer to the low end of our estimated range. As I review adjusted operating results, I will primarily focus on analyzing our fourth quarter results compared to the third quarter of 2022. This will allow me to describe how our business lines have been progressing. For items, such as premium and sales growth, I will continue to focus more on year-over-year comparisons. I expect to return to focusing on year-over-year results for business line performance with our first quarter 2023 results, given the continued endemic progression of the COVID-19 pandemic. I'll begin my review of our operating performance with the Unum US segment. Adjusted operating income decreased to $228.7 million in the fourth quarter of 2022 compared to $275 million in the third quarter. This was driven primarily by lower earnings in the supplemental and voluntary lines, despite very strong levels of operating income from the group disability line. The group disability line reported another strong quarter with adjusted operating income of $114.6 million in the fourth quarter of 2022 compared to $129.8 million in the third quarter. Favorable claim recoveries continue to drive earnings and a benefit ratio of 64.1% for the fourth quarter. For the full year of 2022, our adjusted benefit ratio was 66.7% compared to 76.7% in 2021. We are very pleased with how this block is performing. And given improved incidence trends, we expect the group disability benefit ratio will continue in the mid-60% range in 2023 given our stable staffing levels and supportive return to work environment. Results for Unum US Group Life and AD&D declined modestly from last quarter, with adjusted operating income of $29.3 million for the fourth quarter of 2022 compared to $30.9 million in the third quarter. The adjusted benefit ratio increased slightly to 78.2% compared to 78% in the third quarter as overall mortality continued to pressure results with average claim size remaining on the higher end of our long-term expectation. We estimate that COVID related impacts were close to our expectation of approximately $10 million per quarter. Adjusted operating earnings for the Unum U.S. supplemental and voluntary line in the fourth quarter were $84.8 million, a significant decrease from the result of $114.3 million in the third quarter. As mentioned, this result was driven by the recapture of a critical illness reinsurance treaty of $8.2 million as well as the change in estimate within the individual disability unearned premium reserve of $9 million. Results for the dental and vision line were slightly above third quarter results as the benefit ratio decreased to 65.9% compared to 74.5% in the third quarter and 65.6% in the same period a year ago. Turning now to premium trends and drivers, as we saw the strong momentum experience in the first nine months of the year for Unum U.S. continuing. Growth in premium income in the fourth quarter was 4% on a year-over-year basis, adjusted for the change in estimate within the individual disability unearned premium reserve with particularly strong performance in the group disability business. Natural growth, a tailwind for our group products helps support year-over-year premium growth in group disability of 7.3% in the fourth quarter compared to 7.4% in the third quarter. Sales growth for Unum U.S. was solid with an increase of 23.7% year-over-year in the fourth quarter and 18.4% for the full year. Persistency continued to remain generally stable with only minor variation by line of business with our total group block at 89.6% for the fourth quarter. So moving on the Unum International segment experienced exceptional results with adjusted operating income for the fourth quarter increasing to $45 million from $29.9 million in the third quarter. Adjusted operating income for Unum UK improved in the fourth quarter to £37.7 million compared to £23.6 million in the third quarter. The reported benefit ratio for Unum UK lowered to 76% in the fourth quarter compared to 78.6% in the third quarter. As has happened in the past few quarters, the high levels of inflation experienced in the UK distorted the reported benefit ratio this quarter. As a reminder, a significant portion of our policies in the UK have an inflation rider, which are backed by inflation-linked gilts. The inflation-linked benefits are capped, but the income we receive from the link gilts is not which benefits earnings levels in periods of very high inflation. When removing the direct inflationary impact, the Unum UK adjusted operating income was closer to our long-term target of £20 million per quarter. For the first quarter of 2023 we're expecting a muted inflationary impact in the Unum UK. Premium income for our Unum International business segment increased slightly on a year-over-year basis, dampened by exchange rate movements. Premiums continue to show strong growth on a local currency basis. Unum UK generated premium growth of 15.4% on a year-over-year basis in the fourth quarter while our Poland operation grew 13.6%. Both businesses continue to generate positive levels of annual year-over-year sales growth with Unum UK up 43.5% and Unum Poland up 26.3% in local currency. Next, adjusted operating income for the Colonial Life segment increased to $93 million compared to $90.4 million in the third quarter. The increase was driven by a benefit ratio of 45% in the fourth quarter compared to 46.8% in the third quarter. For Colonial Life's top line we have previously indicated it will take premium growth a couple of years to return to pre-pandemic levels. This quarter's result trended slightly downward with premium income 0.7% lower than prior year. However, full year premium income did grow by 0.7%. Sales in the fourth quarter were 2.3% higher compared to the prior year quarter and 5.9% higher for the full year 2022 compared to 2021. We continue to feel very good with the progress we've made to build-back premium income to pre-pandemic levels for this business with full year 2022 premium levels, now 1% higher than in 2019. In the Closed Block segment adjusted operating income excluding the amortization of cost of reinsurance related to the Closed Block individual disability reinsurance transaction was $40.4 million compared to $34.1 million in the third quarter, driven by favorable benefits experience in individual disability within our all other product line. This quarter, we also saw lower miscellaneous investment income, which includes earnings from alternative investments and bond call premiums of $12.2 million compared to $14.8 million in the third quarter. I will speak more to our investment portfolio in a few moments. For benefits experience, long-term care remains stable with the interest-adjusted loss ratio at 86.3% compared to 85.7% in the third quarter and 82% on a 12-month rolling basis. The level of performance for LTC this quarter is consistent with our long-term expectations of an interest-adjusted loss ratio between 85% to 90%, while our rolling 12-month ratio remains below the range due to pandemic-related claim of mortality in early 2022. I would also like to take a moment and provide an update on our long-term care premium rate increase program. We continue to make good progress with our regulators in achieving actuarially justified rate increases for long-term care. In 2022, our total rate increase approvals totaled just over $100 million of net present value. And since the start of 2023 we received approval for another significant increase in a single state worth roughly $200 million of net present value. This program is an important tool in managing the risk of this block, and we are very pleased with the progress we are making. So wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $37.5 million compared to $49.5 million in the third quarter, primarily driven by higher investment income on shorter duration corporate owned assets and lower interest and debt expense. Moving now to investments; we continue to see a good environment for new money yields and risk management. Purchases made in the quarter continue to be at levels above our portfolio yield, and we experienced an overall increase in portfolio yield in the fourth quarter. In addition, we are pleased with the ongoing progress with our interest rate hedge program for long-term care. Since the start of 2023, we continued to expand the program and entered into an additional $200 million of treasury hedges, bringing the program to approximately 25% of near-term estimated investable cash flows in Unum America. We expect to continue expanding the hedging program over the coming quarters. We will provide additional details on our interest rate risk management strategy at our outlook meeting. Miscellaneous investment income decreased in the fourth quarter to $13.9 million compared to $18 million in the third quarter. Last quarter, we set expectations for alternative income to moderate below our longer-term expectation of $20 million to $25 million due to market volatility. Despite this volatility, income from our portfolio remained positive, posting $11.5 million of earnings as our diversified portfolio of real assets, credit and equity demonstrated its resiliency. So looking ahead, alternative asset income will remain directionally correlated with market performance. For the first quarter of 2023, we estimate alternative asset income of $10 million to $15 million. Likewise, traditional bond call activity and the resulting miscellaneous investment income reduced with the rapid rise in interest rates in 2022, while lower bond calls pressure net investment income in the short term maintaining higher-yielding securities is beneficial to our portfolio yields in the long run. As discussion continues around the likelihood of a recession, I wanted to take a few moments to again highlight the strength of our investment portfolio and management. Our investment portfolio is well positioned if we move into a weaker economic period, and we have a long history of outperforming the benchmarks through cycles. Stress testing is performed at the individual issuer level and the modeled impact of a mild-to-moderate recession is not material. Further, we experienced net upgrades of over $500 million in the fourth quarter and estimate net neutral rating actions in 2023 within our portfolio. Also, as mentioned last quarter, since the end of 2020 we greatly decreased our exposure to below investment-grade securities from just under 9% of fixed maturity investments at amortized cost to under 6% at the end of 2022. As expected, our capital levels are well in excess of our targets and operational needs, offering tremendous flexibility. The weighted average risk-based capital ratio for our traditional U.S. insurance companies remain robust at approximately 420% and holding company liquidity was $1.6 billion at the end of the fourth quarter compared to 415% and $1.1 billion, respectively, at the end of the third quarter. The increases were primarily attributable to the C2 mortality factor changes, which added approximately 25 points of RBC and strong dividends from our subsidiaries. Specifically, we made dividends from First Unum for the second straight year in the amount of $39 million. Dividends paid from our Unum UK business were $37 million in the fourth quarter and totaled $66 million for the full year. Our capital metrics have benefited from the rebound we saw in our statutory earnings this year. Statutory after-tax operating income was $240.4 million for the fourth quarter and nearly $1 billion for the full year. Looking at capital deployment in the fourth quarter, we paid $65.8 million in common stock dividends and repurchased $62.6 million of our shares this quarter. For the full year, we paid $255.3 million in dividends and purchased $200 million of our stock. Capital contributions into the Fairwind subsidiary were $50 million in the fourth quarter, which brings the total for the year to $515 million, which is below our original expectations of $550 million to $600 million coming into the year. Looking ahead, we plan to provide our views across the business on 2023 during our outlook meeting on February 23rd. Next year's results and outlook will be the first under the new long-duration targeted improvement accounting pronouncement. As we've described in the past, this applies only to GAAP basis financial statements and has no economic statutory accounting or cash flow impacts to the business. While we will discuss in more detail, the meeting I'll provide two reminders about LDTI's impact to Unum. First, there will be an adjustment to accumulated other comprehensive income and adoption, which we have estimated in previous filings, based on the difference in our investment portfolio and a single A rated bond yield as of reporting â as of the reporting period date. Second, based on recasting prior year financials, 2021 and 2022 will see higher earnings under LDTI, and we expect a favorable earnings relationship to continue based on our current forecasts. In closing, I wanted to reflect on the incredible year Unum has had in 2022. Our 42.8% growth in after-tax adjusted EPS vastly exceeded the initial expectations we laid out at last year's Investor Day of 47% [ph]. Our capital metrics ended the year at historically strong levels, and we took the opportunity to reduce risk in LTC through our hedging program, which narrows the range of outcomes for that block. Execution of these items help drive a sector-leading total shareholder return of 74%. Great. Thank you, Steve, and I do appreciate everyone taking the time to join us this morning. Let me put out one more advertisement for our outlook meeting scheduled for later this month. At that meeting, we will dive deeper into a discussion of our business strategy. What our updated capital plans look like for the year and provide additional outlook for the entire exciting year ahead. Thank you. [Operator Instructions] The first question today comes from the line of Wilma Burdis from Raymond James. Please go ahead. Your line is now open. Good morning. You just got strong LTC premium rate increases and my question is; are there more opportunities in the pipeline? And do regulators seem more open to improving rate increases due to inflation? Great. Thanks Wilma. It's Steve, I'll take that question. And probably the first thing I'll do is just step back and just talk about our expectations for rate increase programs. If you go back to 2020 when we reset our reserve assumptions for GAAP basis behind LTC, we had set an estimate of right at $800 million of net present value for that program. If you carry that forward then through the end of 2022, including the year 2022 the $100 million that we achieved during that year that I mentioned, we're at around 44% achievement against that estimate. If you carry that forward to then the approval that we received in the first month of this year that added another 20% to 25% of achievement of that. So we, we feel really good about where we are. I'll tell you throughout the pandemic, we've seen good responsiveness. We haven't really seen a change in the tone for regulators. There was a period of time operationally that they were dealing with COVID. But philosophically, they are still [indiscernible] for approving actuarially justified rate increases. And we really haven't seen that change with the change in interest rate. Many states actually prescribe the interest rate that you use for those calculations, and so it has probably less of an impact in those states and how states view those. But we feel very good about where we are. We still have a ways to go, and there's quite a few states that approve these and phased in amounts, and so we'll keep working those. It will continue to take us a few years to work through the rest of the program, but a very good â feel very good about where we are today. It's not. Well, it's not to inflation risk. Obviously, we work with new money rates that we put into portfolio. But when it comes to cost to care itself, 98% of our block is indemnity. And so the benefits are contractual on a daily basis. And so we're not really subject to what the cost of care actually is in inflationary periods. So we feel pretty good about that. It just really eliminates the variables as we think about our cost of claims going forward. Thank you. Our next question today comes from the line of Erik Bass from Autonomous Research. Please go ahead. Your line is now open. Hi. Thank you. I was hoping you could talk a little bit more about what's giving you the confidence to project the group disability benefits ratio remaining in the mid-60% range for 2023. Is this being driven by structural factors that you expect to persist over time? Or do you expect some upward pressure on the ratio in the future as pricing adjusts and the labor market benefits normalize? Great. Thanks Erik. It's Rick. Just an overview and we'll kick it over to Mike. I think you highlight an important part of our franchise and our group disability line. And so we saw very good results over the course of the year. And as we've talked about today, and we see some of those factors certainly can persisting into 2023 as well. Sure. Thanks. Good morning Erik. Just to maybe go one quick down the incidence that we saw elevate a bit around those environmentally sensitive claims through the COVID period have just continued to abate. And where we see them today is really where they were pre-COVID on a pretty sustained basis. So that gives us a little bit of confidence that that's a good point estimate for us going forward on new claims coming in. And then recoveries have been really strong, third straight quarter that those have outperformed our expectations. And at this point, we really feel like it has stabilized at the levels that we're currently achieving and believe that that's something that is likely to recur in the coming quarters. So the combination of those two things lands us in the mid-60s. We think that's good point estimate as we can come up with for the next several quarters. And you said a little bit in your question, Erik, but over time our target for the group disability segment would be kind of in that high-60s to low-70s range. And as experience comes through at the client level at renewal time, we would expect that to moderate to that kind of a level over the next two, three years or so. We do find ourselves like in a good spot from a growth point of view. It's a healthy book of business. So sort of where we are relative to competition in market, we think we're in a good spot to be able to tell our story about some of those capabilities that Rick highlighted at the outset. Great. Thank you. And then maybe switching to the LTC hedging; I was just hoping you could talk a little bit more about the tangible benefits for the company. And is this just protecting NII in the event that rates decline in the future? Do you also get some benefits in your reserve calculations and sort of how you think about the level of capital you might need in a stress scenario, i.e., this give you more confidence to deploy some of the current excess capital that you have? Erik, this is Steve. I can take that one. If you pull it down to the real purpose of a hedging program like this, it's risk management. We want to reduce uncertainty with the new money yields that we're able to get in the future, specifically around long-term care. So it's a risk management tool that we think is very important. Now if you think about how that's been placed through to some of our reserving constructs for First Unum, it was more clear that, that did have benefit upfront because we were able to incorporate that into some of the scenarios that they have with pop down rates and those types of things. So that was kind of an immediate benefit to how we thought about our asset adequacy testing reserve there. With the premium deficiency reserve, it really just protects us from downside scenarios. As you know, our new money rate assumption works off of a trailing three-year treasury rate experience. And so we're able to really take those hedges and get more certainty around what our new money rate assumption is for those portions of the cash flows coming off of that block. So I would view that as downside protection. One of the things that we want to do as part of Investor Day is really quantify that a little bit more for the market to really show what the impact of that is under different scenarios, different interest rate paths. And I think that will give you a better idea of really what the benefit is. But again, fundamentally we're doing this for risk management purposes. Perfect. Thank you. If I can just squeeze one more; and is there a target for how much you want the hedge program to build to. So I think you said you've done about 25% of cash flows for the next, I think, five years or so. Is there a level that you can see that building to? Yes. I would say that's something that we're just planning on expanding over time. I'm not trying to set a bright line target. We can talk a little bit more about how we're thinking about that later in February, but really don't want to get locked down to specific number. We're just happy with where we are today, and we do think we can continue to expand. Thank you. The next question today comes from the line of Jimmy Bhullar from J.P. Morgan. Please go ahead. Your line is now open. Hey. Good morning. So first on a question just on competition in the disability market. So your results obviously have been very good and so have most of your peers. Did you see any of that reflected in renewals for one-one? Did you see any indication of prices going down a little bit just given the strong margin? And what did you do with your prices in your own book? Hey Jimmy, it's Mike. I'll take that one. And we talked a little bit about it last quarter because we sort of have a good line of sight on those January 1 renewals. But it was a successful program year, both in terms of placing the desired increases that we need to put through as you're just kind of actively managing that block and having persistency rates that were at or above where our expectations. So we see sort of aggregate pricing levels in the market as being pretty rational and in line with sort of how we would have an outlook on the major costs that make up the prices that we set. In terms of the outlook for the coming year, we â looking at our pipeline of new business, I feel like we're in a pretty good position to continue to sort of build on the momentum that we established here in 2022 from a new sales standpoint. We try not to make dramatic changes to our pricing stance. We think our clients really value consistency in their budgeting processes year-to-year. So any changes that we make will be more so at the margin versus wholesale. Okay. And then just on the labor market. Obviously, it's been a big deal win for results across a number of your product lines. There have been like more signs of layoffs or unemployment picking up a little bit. And I realize that is not a big part of your business mix, but are you seeing â should we assume that the tailwind from the labor market has, or the benefit on your results has already peaked? Or are you still viewing it as a tailwind into 2023? Yes. Jimmy, it's Rick. I think you have to step back and think about it holistically in terms of what the forecast looks like. If you look at what we've seen in the news and the particular layoffs, I don't think I'd isolate any of those things. You think about the broader base of employees that we have at ranges in all sizes from the very small case with 10 employees all the way up to the very large case. And that's what you're hearing about more are some of the large cases. And so we haven't felt that impact today, but we're also very thoughtful about what may be coming over the horizon. And when you think about the talk certainly of recession and what that looks like to our overall premium growth, we have benefited over the last â certainly, over the last 12 months, last 18 months from an increasing amount in the labor markets from both wages as well as from good employment, so that may wane. But I'll take you back to; we are fundamentally an underwriting business. And so although you'll see that on the margins, we still feel very good about our opportunities to grow and work through that and maintain good premium levels, good persistency, and so we â some of our cognizant of, but nothing that we pay too much attention to in any daily type of announcement that we see. Thank you. The next question today comes from the line of Tom Gallagher from Evercore ISI. Please go ahead. Your line is now open. Good morning. The first question I have was on group life. The higher average claim size, would you say that's â is that at all a function of wage inflation, meaning your insurance face amount of coverage per life has gone up? Or is it actually coming in worse if you do that kind of analysis to look at whatever the natural inflationary coverage you have in that block looks like? Yes, Tom, it's Steve. I can take that one. I wouldn't attribute it to inflation necessarily. I would just attribute it to normal volatility in the average size. We tend to see some volatility there. And when you think about how those products are structured, we charge for higher salaries because a lot of those benefits are indexed to salaries themselves. And so we're getting paid for it. So it shouldn't really affect our loss ratio necessarily. So I just attribute to normal volatility, and the loss ratio this period was up around 78%. If you take out the impact of that, we think something in the mid-70s is probably more realistic. And then, I guess, pandemic endemic wears off, hopefully, over time, we do ultimately think that, that loss ratio would be down more in the low-70s, but it will take probably a bit longer to do that. I mentioned in my remarks we still had $10 million of life claims in Group Life, I think just under 200 deaths in that block. So that is still attributing to our performance, but hopefully that will wane over time. Got you. And then in international, I just want to make sure I understand the way this is likely to play out. There was a big spike in earnings related to inflation I heard those comments. Did you say you expected it to revert back to £20 in Q1? Or would you expect that inflation benefit to last a bit longer into early 2023? Yes, I appreciate that question, Tom. I'm going to turn it over to Mark Till, who runs our international operations. Mark? Yes. Thank you, Rick. The way I would think about it is, firstly, we've got a strong underlying performance in the business. Secondly, in the UK, we have had very high inflation building through the course of 2022. In the UK, the inflation benchmark we used has peaked at 14.2% in October because we cap our benefits where they are inflation-linked at 5%; it creates a margin for us. We expect that to decline during the course of 2023 as the inflation rate starts to trend downwards. We have a government stance of halving inflation in the UK. So therefore, you should start to see it coming off during the â probably during the first half of 2023. And we think our long-term position with this business should be generating something in the low-20 millions. Got you. And just related to that, Till, would you expect some level of favorability to persist into the earlier part of 2023? Yes. In the early part of 2023, as it starts it trend down from what's now 13 and a bit towards a more long-term average. We'll get that benefit probably in the first half of the year. Got you. Thanks. And then if I could just sneak one more in. The 100, I thought the rate increase comments on long-term care were interesting. I guess I was a little surprised you only got 100 million of NPV of rate increases in 2022, which then makes your January success of 200 million for one state, a very big number, certainly in proportion. But can you just give a little bit about what's going on there? Was there a big backlog? Would you expect other meaningful increases? Or do you think this is the big one for most of 2022? 2023, yes. This is the big one. We have a lot of outstanding requests in a lot of states that are meaningful, but in most of those states their annual approvals that are phased in over time. And so they really approve portions of it on a year-to-year basis. And that's mostly what we have left, and so we were very happy with the 100 million in 2022. That's just kind of where we are with the program that what we're down to, it's going to take multiple years to get it through the process. But what I would say is that they are getting through the process, states are approving them. We continue to make progress and so we have no reason to believe that our best estimate is not a good estimate ultimately. Thank you. The next question today comes from the line of Mark Hughes from Truist. Please go ahead. Your line is now open. Yes. Thank you and good morning. You mentioned natural growth a few times. Could you give a specific number for that in the fourth quarter? It's Mike. Good question. Sort of ranges a bit by product line, but you placing it somewhere in the 5% to 6% range for group insurance is a pretty good number for us. Pretty evenly split, Mark, in terms of new employees coming on as well as the wage increases that are coming through. I think it's important, Mark, to realize that is, as Mike mentioned, that is the group line. So we have premiums coming through all of our voluntary lines, et cetera, which just don't feel that immediate benefit like we do get to see on the group side. Yes, exactly. And then the â could you talk about the benefit ratio in Colonial Life? Obviously some improvement here through the year. So what's the â what should we expect 2023 or what's the normal run rate? Yes. I would say a normal run rate for that business is anywhere between 45% and 50% benefit ratio. That's pretty consistent with what our estimates would be. It's performed very well over the last few quarters. And I'd say it's been broad-based. There hasn't been one product lying that's significantly over performed. It's just that all of them are running pretty well right now. But longer term, but more closer to 50%, I think, would be our expectation. But feel great about how they've been performing over the last few quarters. I just kind of step back and you think about over the last three years, the Colonial business has been extremely stable from a profitability perspective and has really aided us and provided stability both in our statutory earnings as well as our GAAP earnings. So I just feel really good about that business. And then the sales within Colonial that accident [indiscernible] visibility, the core product this quarter down a point, a little bit softer than what we saw earlier in the year. Anything to that? Yes, thanks, Rick, and Mark, I appreciate the question. Let me step back and first I'll start talking about the market opportunity. We still see very strong interest in voluntary business products for employers. They are dealing with wage pressure and still trying to attract talent. And I appreciate the question earlier about the job market and whether unemployment is a factor, we're not seeing that yet at all. In fact, we're still seeing employers having a good peak more talent and as wage pressure is an issue for them, they turn benefits. A recent Ernst & Young survey said 58% of employers benefits to being very, very important in terms of attracting the employees and pretty voluntary benefits. And when you think about employees, that same survey said 47% of millennials who are our largest customer segment at the moment, view the benefits available at work as being more important than they were before the pandemic. But they also want education around their benefits and employee [ph] wise pretty uniquely position provide that education across the benefit portfolio, including products that we do offer. There have been some headwinds coming out of pandemic small businesses were significantly impacted by the pandemic, and they represent about 75% of Colonial Life. Customer base going into the pandemic, nearly 100% of our sales occurred physically face-to-face. Thankfully, we have the tools and technology to enable people to enroll digitally, and through telephone and other means, and so now that number is actually down to about 40% that are digital, 60% face-to-face. So we've been able to deal with it for the most part. As was pointed out earlier on the Colonial Life side, you don't really get the benefit of natural growth, and there have been some recruiting headwinds. But let me pivot talk about why we're excited about the future. We have a number of technology solutions currently being introduced, including modern enrollment and benefits administration platform that we're seeing really strong excitement in our field force around that. We introduced the opportunity in certain market segments. We're [indiscernible] agents to begin marketing group employer paid products, which we think is a significant advantage in the marketplace. A number of years ago, we introduced an agent productivity tools, we've invested in significant enhancements to that tool, and we see strong adoption and utilization of it. So we ended the year with 6% sales growth a little bit below our long-term expectations. But given everything that we just talked about, we're excited about the future. We're really pleased, as Steve pointed out earlier, that we're about a point ahead in total premium of where we were going in to pandemic. I hope that gets to your question, Mark. Thank you. Thank you. The next question comes from the line of Ryan Krueger from KBW. Please go ahead, your line is now open. Hi, thanks. Good morning. I had a question on expenses. When you think about 2023, do you view the full year expense ratio for 2022 as a reasonable starting point? Or do we think more about the more elevated level in the fourth quarter? Yes. It's Steve. I'll take that one and then maybe kick it over to Mike for a little bit more detail. So just stepping back, when we came into 2022, we set the expectation that our expense ratio is going to be anywhere between 125 and 175 basis points higher than what we saw in 2021. That was mostly driven by getting the full employment and starting back up with travel and different things that we do to engage with our customer. And so we had expected that. And then as we got into the year, we just feel really good about being able to have a sustainable, stable workforce and really rewarding those employees because it's just so important for us to be able to serve our customers. So we ended up pretty much in the middle of that range as far as what we saw on the expense ratio grow to. I'd tell you that we expect that to pretty much be at a high point, peak a little bit more maybe in 2023 as we have full year of some of those compensation increases. But then definitely, I think, beyond that, we're going to be able to work that back down like we always do through adoption of digital tools, productivity, and so that would be our expectation. But maybe Mike can talk a little bit more specifically about where we're investing. Yes. Thanks, Ryan, for the question. And just again, going down under what Steve says, would like the results we're seeing in the business and the momentum we've built with the investments that we're making. I think Steve appropriately highlighted our team. So we're the most biased you're going to find, but we feel we've got the best talent in the benefits industry. And you see that in things like 16% growth across of our core operation and sales. That's really strong sales client management and underwriting teams. You see that in our benefits organization and the recoveries we talked about, just exceptional team in terms of helping people get back to our product is lifestyle and back to work. And so making sure that we are fully staffed and appropriately rewarding folks is really important to us. And the second item that's driving OEs is the technology investment. And so Tim just mentioned our new Colonial Life enrollment and engagement platform, we are very excited about what that's going to mean for our small business clients and what it's going to mean for growth. Rick at the outset mentioned total leads, our HR Connect capability and the way we're winning on Workday on ADP Workforce now and UKG platforms. We replatformed our dental business, and we're very encouraged with the growth that's helping us drive here, and you saw that in sales in the fourth quarter. And that's probably the last thing I'd say, Ryan, is as you think about those investments in technology and as we have success with those in market, they have a dual benefit. The first is on the growth side. It's helping us differentiate and drive high levels of client satisfaction. But importantly, these are more efficient ways of doing business. And so like Steve said, as these take hold and more and more of our transactional volumes are coming digitally and through self-serve, we would expect that OE ratio to start coming down in the second half of next year, and that's both because our expenses will be growing at a slower rate, and we see that acceleration back into that 4% to 7% long-term growth rate that we have for the top line. Great, thanks. And then just on the supplemental and voluntary, do you still expect quarterly earnings more in that $110 million to $115 million range going forward? Yes, that's probably a decent marker, Ryan. I would say if you take out the two onetime items that we had in the quarter that are nonrecurring, I think, it's around $105 million would have been the earnings. And so there is still a little bit of unfavorable benefits results that are embedded in there, specifically with probably [indiscernible] but that's probably somewhere in that range is probably a decent planning estimate. Thank you. The next question today comes from the line of Alex Scott from Goldman Sachs. Please go ahead, your line is now open. This is Marley [ph] for Alex. I was wondering if you guys could provide an update on your capital deployment priorities on a go-forward basis. Yes. Thanks, Marley. Good talking to you this morning. Let's talk a little bit about capital. I just start with the capital generation that we saw and the recovery we saw post-pandemic. I think it's tremendous to see the $1 billion statutory earnings as that comes in. You saw that flow all the way through our RBC ratios and our capital at the holding company are at current heights, we haven't seen the levels like this before. And so I think when you think about how we're going to put that money to work, first of all, great conversation around the investments that we're making in the franchise. We're going to continue to put it back behind our business where we think there is still good growth opportunities. That's where it's going to go first. Sometimes, we can enhance that with some acquisitions. And so think about capabilities that are growth-oriented, who are the types of businesses out there that can help us to accelerate that path. And so we want to put money back there. And that's the growth trajectory where we want to put our capital today. Now at the same time, we're certainly responsive to our shareholders watching our dividends grow. We've increased it at a pretty steady clip over the last several years. We will expect to continue to do that. And then buybacks. I think we had $60 million, $60 million plus in the quarter on a $200 million annual run rate. So those are two ways of response to shareholders. And then in the background, I'd also talk about the PDR that we have, the premium deficiency reserve. We want to get that funded and behind us. And so I think that's an important use of our capital as we look forward. So all those things in balance, we feel really good about our capital position. We've got great flexibility to attack on all those fronts, and we'll see how we do that in 2023, and we'll talk about that a lot more here at the end of this month. That sounds good. And then I have one follow-up. It looks like you guys had some pretty strong sales in the U.S. and growth. I was wondering if you guys could just go into a little bit of what is driving that. Yes, thanks for the question, it's Mike. And so it's pretty broad-based for us. And we talked a little bit about the capabilities. We are definitely seeing for the Unum brand in the mid and large employer markets, the need for a really strong both leave and administrative solutions. So again, our total leave platform, we had set them pretty big goals for this year as our first year in a national rollout phase, and we significantly exceeded those goals. And as a reminder, we offer leave only in combination with insured products, when you see the really strong short-term and long-term disability growth, for instance, a good amount of that in the mid and large cases coming through on a packaged basis, a good amount is coming on those platforms that I referenced earlier. In the smaller end of the market, we look to provide an administratively easy bundle for the small employers. So the strength of the dental offering, which is a really important benefit, particularly in that small employer market and our Unum administrative platform that has really started to take off. And so as we have success in dental, that's pulling other lines with us as well. And then in the self-involved category, good continued strength in our individual disability business that is often a buy-up to the group long-term disability. So again, as we have a really strong, I would argue, the premier disability and leave franchise in the industry, that's very often bringing buy-up opportunities for that very steady and profitable individual disability business. I think as you look forward, it's taking a little bit longer, but as our voluntary lines like Tim talked about under both the Unum and Colonial Life brands, we're seeing really strong underlying strength in the distribution of pipeline. And so that bodes well as we sort of think, again, about 2023 sales growth and then again getting back into a top line 4% to 7% range over the next couple of years. Thank you. The next question today comes from the line of Mike Ward from Citi. Please go ahead, your line is now open. Thank you, guys. Good morning. Maybe just a quick clarification, Rick. So no change to the $200 million run rate for buybacks into 2023? Yes, we'll talk about that at our upcoming meeting. I think we were looking backwards more talking about the $200 million we've done over the last 18 months or so, at least on pace for that. So, I feel good about that. We'll talk about different types of flexibility we have going into 2023 at our outlook meeting here in a few weeks. Awesome, thanks. And then maybe just curious about the commentary around credit. I'm wondering if you guys could expand on the commentary for net neutral rating activity in the investment portfolio. Yes, Mike, this is Steve. I can take that one. Just stepping back a little bit, and we haven't really talked about recessionary pressures specifically, but we do a lot of work around our credit just around sensitivity testing, scenario planning. And as we look forward and we think about kind of a moderate recessionary scenario of GDP down low single digits, and we run that through our portfolio, we feel really good about the fact that we don't see any material impairments within the portfolio. We do think that for the positions we have, the net neutral is a pretty good planning estimate for us. But clearly, we have a lot of capital flexibility to manage in most scenarios. The other thing that I'd say is we have over the pandemic, I had in my remarks, we've reduced our high-yield portfolio quite a bit during the pandemic. It's gone from just under 9% to just under 6%. And we took the opportunity to redeploy a lot of that money, obviously, in other asset classes, but specifically into our alternative investment class. And that's performed very well throughout the pandemic. That was a great move that we made. We do not think, though, going forward, we're going to need to make significant shifts in how we think about our asset strategy and our investment strategy and just feel really good. We're a credit shop. This is what we do. We've, I think, proved through a lot of different recessionary actual experience that we managed this portfolio well and can really mitigate impacts on our portfolio. So we show very good against benchmarks as you go through those types of scenarios. Thank you. Our final question today comes from the line of Suneet Kamath from Jefferies. Please go ahead, your line is now open. Great. Thanks for sticking me in here. So just wanted to talk about the disability claims. As I think back to the industry's experience, it does seem like when we head into periods of economic weakness, disability claims tend to pick up a little bit. So just curious if that's something that you guys or who you agree with, A? And then B, kind of how are you thinking about that as we kind of move through 2023, particularly given your kind of guidance on the benefit ratio? Hey Suneet, this is Mike. Thanks. Really good question, opportunity [ph]. And I guess where I would start is you do see a linkage when you think about disability. The first thing I'd say is it varies a little bit recession to recession. But on average, it's usually with a four- to six-quarter lag, so you do have lead time between the turn in some of the macroeconomic employment and any impact on disability. So that lag, I think, is important. The second is where that impact gets built. You can sort of see the brightest line when you look at social security disability. And the private industry tends to be a bit muted, but it is there. And our experience, at least in the last three recessions that Unum has done a bit muted still. So not that it's inconsequential, but it's not terribly, terribly significant. And I think for us, we sort of look at it and say, certainly with respect to 2023, you do have a little bit of line of sight given that short-term disability tends to be integrated with LTV with a high level of frequency. You can sort of see some of those incidence trends come through early. As you play out the next, again, four to six quarters, could there be some pressure that emerges? Yes, I think there could be. I just kind of go back to where this most recent recession that we've come through, even with some of those environmentally sensitive diagnosis coming through recoveries really were quite strong and a really strong offset to it. So what it looks like in 2023, again, I think the mid-60s is a pretty reasonable estimate. Where it ends in 2024, as you think about different scenarios, economically. It's a little bit more uncertain. But again, based on our experience that through the last three recessions, we feel like we've got a pretty resilient franchise there. Got it. And then maybe just one quick follow-up. As interest rates declined, you guys were taking action on that new claims discount rate by kind of lowering it. Have you started to increase that now that rates have risen? And how do you think about that vis-a-vis pricing? Yes. I would say we did increase it, I forgot what the percent was, but we did increase it over the past year when rates go up. But what's really interesting is when we get into the new LDTI accounting basis, those discount rates are going to be based more on the locked-in kind of market rates that you see. And so it's going to be a little bit more prescribed. And so that will create a bit of a different dynamic going forward with how we think about discount rates. I'm not sure it's going to really change how we philosophically think about pricing and what we want to earn on our portfolio, but there is going to be kind of that difference with how the GAAP accounting takes place. Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference back over to Rick McKenney for any closing remarks. Please go ahead. Great. Thank you, Bailey. Thanks, everybody, for joining us today. Appreciate it. Unum had some very good results over the course of 2022. We're very happy about the momentum we carry into 2023, and we look forward to taking you through some of the details around that as we look out over the next year and several years at our upcoming Investor Day meeting. I look forward to hearing from you then.
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EarningCall_843
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Thank you very much for your attendance. Let's begin the presentation of financial results for Q3 FY, March 2023 that was released today. Topics are listed here. Firstly, summary of Q3 FY March 2023. Page 5, please. Key financial indicators are shown here. Revenue for the three month period of Q3 increased by 14.1% and adjusted operating profit rose by JPY18.4 billion year-on-year. Likewise, against the nine month period of FY March 2022, revenue went up by 8.2% and adjusted operating profit increased by JPY7.5 billion. I will elaborate on the factors contributing to the changes in adjusted operating profit later. Page 6, results by segment. All segments trended favorably during the three month period of Q3, resulting in an increase in both revenue and profit. Consequently, nine months adjusted operating profit rose in all segments except network services. Page 7, factors driving changes in adjusted operating profit. Let's start from the nine month figure of FY March 2022, which is JPY76 billion. While posting a one-time profit of JPY8 billion in asset sales in FY March 2022 that of FY March 2023 was JPY11 billion. The impact of changes in the macroeconomic environment were one, a positive JPY11.5 billion, attributable to currency fluctuations and two, a positive JPY3 billion, resulting from the mitigation of component shortages from the previous year. Marginal profit and others were negative JPY24.6 billion, mainly due to the deterioration of network service. Details of this impact are shown on the next page. We recorded JPY14.5 billion in IP income in Q3, following that of Q4 FY March 2022. IP income can be regarded as a part of the operational improvement, but since we have booked multiple [year worth] [ph] of IP income in a lump sum, its impact to our performance was significant. We therefore carved out IP income as a separate line item. We will continue focusing on monetizing our IP to enhance our base profit level. Putting all these factors together, adjusted operating profit for the nine month period FY March 2023 amounted to JPY 83.4 billion. Page 8, network services business details. Nine month revenue totaled JPY361 billion, up 3.1% year-on-year, mainly due to the increase of global 5G revenue and the posting of JPY10 billion IP income. Details of the year-on-year changes in adjusted operating profit/loss are shown on the right with FY March 2022 as its basis. The nine-month impact of the macroeconomic environment was negative JPY2 billion, its breakdown being JPY1.5 billion attributable to FX fluctuations and JPY0.5 billion to the component shortages. Next, the breakdown of changes in business operation related matters. In addition to the JPY7.5 billion in expenses for the global 5G strategic project recorded in the first half of FY March 2023, JPY5 billion was posted in Q3 as the expense for streamlining assets, including inventory valuation. Strategic expense for the expansion of 5G business is planned to be flat against FY March 2022, so the expense level for Q3 remained the same year-on-year. Other operational expense was negative JPY7.4 billion, attributable to the changes in product mix and other factors. Since IP was posted in lump sum for multiple years in Q3, IP income contributed JPY10 billion to adjusted OP. Putting all these factors together, adjusted operating profit was negative JPY600 million, a decrease of JPY16.4 billion year-on-year. Page 9 shows the order trends. I would like to explain placing emphasis on Q3. Both Q3 and the nine months period exceeded the previous year and total for the entire company was an increase of 14%, excluding largely fluctuating summary systems. In the area of IT services, ample demand for companies led by enterprise continued and was an increase of 10% for the nine months period. Breakdown by segment was as follows: favorable trends continued for urban infrastructure and SMEs, resulting in a 15% increase. Public Infrastructure experienced a large satellite project last fiscal year and was an 8% increase for the nine months period. If we exclude this large project, the growth was positive 18%. Enterprise enjoyed a positive push backed by strong IT demand and was an 11% increase for the nine months period. On top of 5G expansion for network services, intellectual property income was acknowledged resulting in a 7% increase. Even with income from IP excluded, the increase was 4%. Global, excluding some resistance, enjoyed a strong increase led by large projects for net cracker. Allow me to move on to financial forecasts. Page 11 shows the full-year financial forecast. In accordance with share buybacks, there has been a change in the adjusted EPS. However, for the remaining indices they stay unchanged from our outlook presented on October 28. Page 12 is a full-year outlook by segment. This reflects amendments to the financial outlook for Japan Aviation Electronics announced on January 27. This downward revision is offset by the entire company and thus there is no change to the October 28 announced adjusted operating profit of JPY185 billion. On Page 13, I will explain the summary of our financial forecasts. Domestic IT services continue to see strong IT service demand and orders are steady up to Q3. Based on this order backdrop, we believe that we are in a positive position to improve our yearly forecast. Network services starting with global 5G. Since revenue tends to be stronger in Q4, we foresee an expansion in the domestic market and forecast for the full-year will be fulfilled. Needing the annual adjusted operating profit see some uncertainties due to the one-time costs and strategic expense increase, but we aim to achieve the forecast through expansion in Japan and abroad. With the open ground market, we foresee some time needed to fully commence and are currently considering realization of an optimal cost structure in preparation for next fiscal year through specific initiatives. Aside from global 5G, there is some impact from the IP income of JPY5 billion [acknowledged] [ph] in Q4 of last fiscal year, as well as negative factors up to Q3. However, we estimate that this can be offset with IP income for this year. We are on track for the entire company progress for the nine months period. Although some risks remain with global 5G recovery to attain the full-year forecast, we will capture the strong IT services upside to cover for this and aim to meet the adjusted operating profit of [JPY185 billion] [ph]. Lastly, on Page 14, our Reform of the Management Foundation. As of today's BOD meeting, pursuant to the approval at the ordinary general meeting scheduled in June, we will transition from a company with an auditor committee to a company with a nominated committee. The composite of the BOD will be out of the 12 members, 7 independent external directors, a majority strengthening the oversight function. By transitioning to a company with a nomination committee, management and oversight functions can be segregated, transferring authority to the executive officers and speeding the pace of management. As noted on the right side, this organizational reform will make possible to clarify responsibilities in growth areas in-light of attaining our mid-term management plan. It will also aim to strengthen our approach to platform offerings underpinning DX, the expanding market of government digitalization, as well as national security areas. Since April of 2022, we have been integrating departments, minimizing management layers, and implementing an agenda oriented organization and this transformation will complete the optimizations needed to attain our mid-term management plan. We will strive to enhance our mid-to-long term corporate value. This will conclude my presentation. Thank you for your attention.
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EarningCall_844
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Thank you for standing by, and welcome to the Harley-Davidsonâs Fourth Quarter and Year-end 2022 Earnings Conference Call. Please be advised that todayâs conference is being recorded. Thank you. Good morning. This is Shawn Collins, the Director of Investor Relations at Harley-Davidson. You can access the slides supporting todayâs call on the Internet at the Harley-Davidson Investor Relations website. As you might expect, our comments will include forward-looking statements that are subject to business risks, that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest filings with the SEC. Joining me this morning are Harley-Davidsonâs Chief Executive Officer, Jochen Zeitz; in addition, Chief Financial Officer, Gina Goetter is with us and also LiveWire President, Ryan Morrissey. In addition, Harley-Davidsonâs Chief Commercial Officer, Edel OâSullivan will join for the Q&A portion of todayâs call. Thank you, Shawn, and good morning, everyone. As we conclude the second year of the Hardwire, our five-year strategic plan to drive profitable growth, Harley-Davidson delivered a strong finish to the year. We are pleased with our performance for 2022 with the execution of our strategic pillars, driving an 8% increase in revenue and a 14.1% increase in total HDI net income. Through the foundational work of the Rewire and the execution of our Hardwire strategic plan, we have changed our overall approach and focus as a business from prioritizing unit growth at all costs, to a more holistic view on profitable growth of motorcycles, parts and accessories, apparel and licensing and Harley-Davidson Financial Services. This strategy contributed significantly to the increase in our margin to 13.9% at HDMC excluding LiveWire, compared to 7.6% in 2019 with a three-point margin expansion and a much more effective and efficient allocation of our resources, leading to an EPS growth of 18% to $4.96 despite all the supply challenges that we had to face throughout the year. As you know, Harley-Davidson is on a transformational journey, and even though the economic environment continues to evolve, we remain optimistic about the significant potential of the Harley-Davidson business for 2023 and beyond. I will briefly address our six Hardwire strategic pillars and our delivery of them over the past year. Profit focus. We are committed to strengthening and growing our position in our strongest motorcycle segments in Touring, large Cruiser and Trike. Not only are these segments the most profitable in the market globally, but we also believe these segments offer potential to inspire more engagement, while compelling new customers and riders to choose Harley-Davidson. Our 2022 lineup revealed eight new models, each powered by the Milwaukee-8 117, the most powerful factory installed engine ever offered by Harley-Davidson. With the Hardwire, we also made the commitment to introduce a series of motorcycles that align with our strategy to increase desirability and to drive the legacy of Harley-Davidson, namely through our Enthusiast and Icons offering. Weâre especially excited about the future of both collections within our product lineup as we enter the 120th anniversary of Harley-Davidson. Selective expansion and redefinition. Aligned to Hardwire, we are committed to expanding where we have the right product to win and where the profit profile is right. Delivering new-to-sport riders as part of our objective to attract new customers to the brand, in addition to expanding the garage of our existing riders. With this in mind, in April, we started a new chapter in Harley-Davidson sports history with the launch of Nightster. Building on the 65-year legacy of Sportster, we wanted to push both our performance and design capabilities while ensuring the bike was an entry point to Harley-Davidson motorcycling and our brand. We also grew our adventure touring retail sales globally by over 30% on the modular RevMax platform. We continue to execute our Hardwire priorities across markets and regions. In particular, we emphasize profitable growth in EMEA and LATAM with the latter region becoming profitable for the first time since becoming a stand-alone region. Weâre also encouraged by the early results of our focus on APAC expansion with Japan now is our second largest market, China had its highest volume ever and with other sub-regions also delivering growth at attractive profitability levels. Over the course of 2022, we also finalized the launch of our new Riding Academy bikes, the 350RA. This bike will replace the sunsetted Street500 and will breathe new life into our Riding Academy program as we plan for its expansion and development in future years. This program and the concerted follow-up actions by our network of dealers represent a critical pipeline for new and returning riders. In our May Analyst and Investor Meeting, we set out our ambitions and our growth beyond bikes pillar with an increased focus on apparel and licensing as a new key driver of our Harley-Davidson Lifestyle. Since then, weâve been building our core apparel and licensing competency, including creating a best-in-class team to deliver on this ambition long-term. Riding gear must be a core competency of the company and brand. Weâve been evolving our motor clothes offering, executing a seasonal forward-looking plan, strengthening and modernizing the way in which we design, develop and source our products, driving efficiencies through the business while growing our motocross offering. Harley-Davidson Lifestyle is where we see the overall apparel and licensing opportunity, especially as it relates to non-riders, but also existing and new brand aficionados. By creating a unique Harley-Davidson aesthetic, taking inspiration from the past and evolving it for todayâs consumer, we think we are able to bring more interest to people to the brand, leveraging the unique power of the Harley-Davidson Lifestyle. In 2022, we saw a 19% increase in our apparel performance, a solid proof point that our strategy is working and that the investments we are making are starting to have a positive impact on our performance. And we have lots of exciting developments in the apparel and licensing that weâll be telling you about this year. Our parts and accessories business was negatively impacted in 2022 due to supply chain challenges and lower retails, but still grew 7% on a per bike basis and exceeded our 2019 results. Two main elements are driving our plan for future growth in P&A, customization and service growth. Customization, which is at the heart of motor culture is an integral part of the overall Harley-Davidson Lifestyle. P&A allows us to have a truly personal relationship with our customers and their bikes. And service growth at the dealership with an emphasis on convenience, expertise and value. Our Service Business Consulting program launched in 2022 has grown P&A revenue through service and participating dealers by 14%, well ahead of surrounding dealers. We also took the first steps towards redesigning the service journey with the launch of an online service schedule on hd.com. And lastly, weâve changed the way we operate, integrating our P&A team into our motorcycle management function to continue to reduce complexity and focus the offering while fully aligning with our motorcycle lineup. Weâre also planning new developments in our online bike build and configurator integrated to the dealership to allow for improved customer inspiration and ease. Integrated customer experience. Delivering our growth ambitions requires us to provide experiences that exceed expectations for modern retail while leveraging digital and physical channels as part of our dealer network. This vision depends upon a modernized approach to inventory management, more digital enablement of the customer journey and enhanced omnichannel capabilities, something that was not a competency of Harley-Davidson in the past. In 2022, we enhanced our reservations and preorder systems and piloted a new inventory management and distribution system, producing fulfillment time, allowing for better availability without expanding in dealership inventory. 2022 also saw the launch of our Project Fuel program, which will provide a much-needed redesign of our dealerships. This program is in full swing globally. And in North America, 15% of our network is already signed up. As we ramp up and expand Project Fuel, we are also embarking on an effort to redefine the Harley-Davidson customer experience that leads the footprint transformation with particular emphasis on our brand and marketing integration and critical customer journeys, but more on this as the program is established. Inclusive stakeholder management. At the last quarter, we hinted our plans to invest in our hometown Milwaukee and specifically our Juneau campus. Earlier this month, we announced a redevelopment at Juneau, which will start with the community part to serve the local community, the people of Milwaukee and our employees. In partnering with the Harley-Davidson Foundation and internationally acclaimed designers Heatherwick Studio, we feel this project will deliver a big impact to our community. Take a look at the plans online if you havenât seen them already. And lead in electric. 2022 of the completion of our business combination between LiveWire and AEA-Bridges Impact Corp with LiveWire becoming the first EV motorcycle company to list on the New York Stock Exchange. This is the first quarter of LiveWire reporting independently. Iâm going to hand over to Ryan Morrissey, President of LiveWire to run through some more details about LiveWireâs performance and about what is on the horizon. Thank you, Jochen. Good morning, everyone. 2022 was a banner year for LiveWire, many major milestones, including the completion of our listing on the New York Stock Exchange. LiveWire is building on the energy the September listing brought to our brand and our organization. Our teams continue to operate with the benefit of the full support of our strategic partners at Harley-Davidson and KYMCO. We finished 2022 above expectations, delivering 97 motorcycles over the planned 500 units. The LiveWire ONE continues to earn rave reviews as more and more riders are introduced to the LiveWire experience. As we move into 2023, investment into product development continues to be on the top of our priority list. Our engineering teams are laser-focused on advancing the technologies, platforms and products that will further our position as pioneers of the industry. In 2023, we expect to see the introduction of LiveWire ONE to the European market and the launch of the S2 platform. Based on preproduction builds, we expect to begin selling Del Mar in the second half of 2023 behind our original plan for spring of this year. Given industry seasonality patterns, we expect this to have a meaningful impact on our originally planned 2023 units. On the commercial front, we continue to build and mature our retail partner network in the United States, with a physical location in 90% of the top 40 metro areas, all working as part of the omnichannel model designed to meet and exceed the expectations of our riders. The count of Del Mar reservations in the U.S. has continued to grow, building on the buzz created by our launch additions. The team is excited to bring LiveWire to Europe in 2023, led by a new Vice President for Europe. Our retailers across France, the UK, Germany, the Netherlands and Switzerland are readying to bring LiveWire to their markets as the riding season picks up. The powertrain facility in Wisconsin is tooling up and readying to produce the LiveWire S2 powertrains that will then be assembled into LiveWire motorcycles in Pennsylvania on the same line where we have been manufacturing LiveWire ONE. The support of Harley-Davidson supply chain and manufacturing capabilities continues to be a differentiating strategic asset. Finally, our STACYC brand continues to spread the electric experience to kids and delivered double-digit year-over-year revenue growth. 2022 saw the introduction of the new products the market has been demanding for older kids. The 18- and 20-inch bikes began retailing with a strong customer fund. And now Iâll hand over to Gina Goetter to talk through the financial performance of Harley-Davidson and LiveWire in greater detail. Gina? Thank you, and good morning, everyone. As Jochen highlighted, we delivered a strong quarter in total fiscal year by staying focused on business fundamentals and executing on our Hardwire strategy. Q4 marks the first time we are reporting under our updated three-segment structure of HDMC, HDFS and LiveWire. HDMC houses our Harley-Davidson branded motorcycle, parts and accessories, and our apparel and licensing businesses. HDFS provides motorcycle financing, insurance and other services to our dealers and retail customers. They will continue to provide services to both HDMC and LiveWire. LiveWire is the new segment, housing the design, marketing and sales of electric motorcycles and STACYC electric balance bikes. Harley-Davidson owns an 89% interest in LiveWire and will continue to consolidate their results in the Harley-Davidson Inc. Fourth quarter results closed out a strong year with significant year-over-year revenue and operating income increases. Pricing actions and cost productivity ultimately overcame the impact of the production suspension in Q2 resulting in three points of operating margin expansion versus prior year. Looking at our financial results in the fourth quarter, total consolidated revenue of $1.14 billion was 12% higher than last year, with growth within HDMC and HDFS, and a decline in the LiveWire segment. HDMC wholesale motorcycle units increased 18% year-over-year and HDMC revenue was up 14%, driven by the increase in shipments and continued strength in global pricing. Harley-Davidson Financial Services segment revenue was up 7%, largely due to higher finance receivables. And the LiveWire segment decline was primarily due to a strong comparison period in 2021 as the company built inventory across their expanded distribution network. Total consolidated operating income of $4 million was $11 million better than prior year. Total operating loss at HDMC of $32 million is a $50 million improvement versus prior yearâs losses. As a reminder, with the shift of the model year launched at the beginning of the calendar year, Q4 includes roughly 40% to 50% fewer wholesale units compared to the other quarters. HDFS operating income of $64 million declined by 32% as losses continue to normalize and higher interest rates resulted in a higher cost of funding. And finally, LiveWire operating loss of $29 million included a step-up in product development and people costs in line with expectations. Turning to full year 2022 results; total consolidated revenue of $5.8 billion was 8% higher compared to last year, and total operating income of $909 million was 10% higher. As Jochen mentioned, full year earnings per share was $4.96 compared to $4.19 for the same period last year. This 18% increase was driven by pricing and productivity offsetting the impact of the production suspension and cost inflation. We also had modest favorability in below-the-line items, which contributed to the accretion. Global retail sales of new motorcycles were flat in the seasonally smaller quarter, where we typically retail less than 20% of the yearâs volume. Total 2022 retail sales ended down 8% globally, largely impacted by the Q2 production suspension and the timing of inventory replenishment to our dealers. For the full year, the decline of 12% in North America was primarily attributed to the production suspension in Q2, which disrupted the flow of inventory to our North American dealers during peak riding season. APAC retail grew by 12% with double-digit growth in Japan and high single-digit growth in China, driven by our focused investments into the region. Steady production as we closed out the model year resulted in more steady inventory flows into the dealer network. On a sequential basis, average inventory was relatively flat compared to last quarter and we continue to run about 40% less in 2019. We ended the year in a healthier inventory position and are set up for a solid start to the riding season. Throughout 2022, we realized strong pricing dynamics for both new and used motorcycles. For the full year, U.S. new motorcycle transaction prices finished within our desirability threshold of plus or minus 2 percentage points of MSRP. Looking at revenue; total HDMC revenue increased 14% in Q4 and increased 9% for the full year. Focusing on the key drivers for the full year, three points of growth came from volume driven by wholesale unit growth, 7 points of growth from pricing and lower incentives through both global MSRP increases and pricing across the parts and accessories and apparel businesses. Mix contributed 1 point of growth as we continue to prioritize our most profitable models and markets. And finally, 3 points of negative impact from foreign exchange as the dollar strengthened throughout the year. Focusing in on margins, annual gross margin for HDMC of 31.3% compared to 28.8% in the prior year. Stronger volume and pricing more than offset supply chain cost inflation and the impact from the production suspension. Additionally, in 2022, we lapped the unfavorable impact from the unexpected EU tariffs, which provided about 1 point of margin tailwind. In total, we continue to see supply chain costs stabilize with total inflation at 3% in the quarter, lower than 5% inflation in the first half of the year and 10% in the back half of last year. The deceleration in inflation continued to be largely driven by logistics, including lower expedited shipping expenses, and, to a lesser extent, raw materials and the impact of metal markets declining from peak levels realized last year. Overall, annual supply chain cost inflation was approximately 4%, which was down 1 point versus last year. For the year, HDMC operating margin improved from 10.6% in 2021 to 13.9%. The improvement was driven primarily by the factors noted above. As referenced back to our 2022 original guidance, the combined operating margin for HDMC and LiveWire finished at 12%, which is the high end of our guidance range. HDFS operating income in Q4 was $64 million, down 32% compared to last year. And for the total year, operating income of $380 million was down 23% finishing in line with guidance expectations. The annual decline was driven by a higher provision for credit losses and an increase in borrowing costs. In Q4, HDFSâs annualized retail credit loss ratio of 1.9% compared to a ratio of 1.2% in Q4 of last year. Total retail loan origination in 2022 was up 8.5% behind strong growth in used bike origination. We did see new bike originations growth 3.9% in Q4 as dealer inventories were replenished. Total year-end financing receivables were $7.1 billion, which was up 8.6% versus prior year. Total 2022 interest expense was up $25 million or plus 13% versus prior year. The increase was driven by higher average debt outstanding and a higher cost of funding. In addition, the retail allowance for credit losses finished the year at 5.1%, up from 5% for the first three quarters of 2022, with a slight uptick incorporating the current outlook on the macro environment. LiveWire finished its first quarter as a public company in line with our expectations. Fourth quarter segment revenue decreased by 28% to $9 million and full year revenue of $47 million was 31% ahead of prior year. The annual increase was driven by higher unit sales of LiveWire ONE and favorable product mix on STACYC bikes. In total, LiveWire sold 597 units in the year, which is about 100 units more than initial guidance, and STACYC revenue growth was driven by innovation behind two new balance bike models and pricing. For the full year, the operating loss of $85 million compared to a loss of $68 million in the prior year. The step-up in loss was attributed to increased investment behind product development associated with the S2 Del Mar platform and the advancement of its electric vehicle system as the company ready to launch of its second electric motorcycle slated for 2023. Additionally, 2022 includes investment in the build-out of the omnichannel retail network and planned expansion into Europe in 2023. Wrapping up with Harley-Davidson, Inc. financial results in full year 2022, we delivered $548 million of operating cash flow, which was down from $976 million in 2021. The decrease was driven by changes in working capital as well as higher net cash outflows related to wholesale finance receivables. Total cash and cash equivalents ended at $1.4 billion, which was $442 million lower than the end of 2021, this consolidated cash number includes $265 million from LiveWire. In line with our capital allocation priorities, in 2022, the company returned over $400 million to shareholders through dividends and share repurchases. As we look to our financial outlook for 2023, we expect HDMC revenue growth of 4% to 7%. The growth forecast incorporates approximately 2 points of unit growth, 1 to 2 points of mix, as we continue to focus on our profitable core business, and 1 to 2 points of pricing as we offset a more moderated inflationary outlook. Furthermore, we continue to expect the parts and accessories, and apparel and licensing businesses to accelerate top line growth in line with our Hardwire strategy. We expect HDMC operating income margin of 14.1% to 14.6%. We believe the anticipated positive impact from volume leverage, pricing, unit mix, and our productivity efforts within supply chain will offset expected cost inflation and currency headwinds. We expect HDFS operating income to decline by 20% to 25%. This decline is largely a result of the higher interest rate environment causing our borrowing cost to increase. Given the macro backdrop, we are also expecting loss rates to rise above 2022 and are planning for losses between 2% and 2.25%. For LiveWire, we are expecting a unit forecast between 750 and 2,000 units and an operating income loss range of $115 million to $125 million. This forecast incorporates the updated launch timing in the new Del Mar products. And lastly, for total HDI, we expect capital investments of $225 million to $250 million, as we continue to invest behind product development and capability enhancements. The step-up in investment is primarily driven by core product innovation, investments in manufacturing to automate and reduce costs as part of our productivity journey, as well as planned investments for LiveWire. In 2023, we are expecting more moderated inflation across the supply chain as logistics costs continue to stabilize. In aggregate, we expect about 2 to 3 points of inflation compared to 4% in 2022 and over 5% in 2021, with labor costs as the primary driver of the increase this upcoming year. And while weâre not back to completely smooth sailing in terms of supply chain efficiency, we are experiencing and expecting less volatility than the previous two years. One of our key initiatives identified as part of the Hardwire strategy is driving productivity to eliminate the $400 million of incremental supply chain costs incurred since 2020. In 2022, we delivered approximately $50 million towards that goal, and we are expecting another $140 million in 2023, with focused projects to increase production efficiency and eliminate complexity and waste. We also expect to continue to stabilize the supplier base and reduce expedited shipping costs. We continue to make good progress on improving the profit per bike with 2022 finishing at roughly $3,500 per unit. And with the initiatives in place for 2023 to drive mix and cost productivity, we believe that we will continue to make progress in getting back to historical levels of profitability. As we look to 2023 capital allocation, our priorities remain to fund growth of the Hardwire initiatives, which includes the capital expenditures mentioned previously, paying dividends and executing discretionary share repurchases. In 2022, we bought back 8.4 million shares, and we have 9.9 million shares remaining on our current Board authorization. Finally, we put in place a loan facility between Harley-Davidson and LiveWire given that the funds raised as part of the spin were less than expected. We do not expect LiveWire to draw on that facility in 2023. In summary, we are very pleased to have delivered our financial commitments in 2022 and are focused on achieving our targets in this upcoming year. We continue to deliver on our Hardwire strategy, and in May we detailed our ambition to capitalize on the early success of our strategy, tuning the engine of our business for improved performance. We believe that by focusing on our six Hardwire pillars and related core initiatives and making bold moves in spaces where we can win, we can deliver not only further improvement in top, but also in bottom line performance in the long run. We continue to invest for long-term growth within our most profitable markets and categories where we see potential, and we are building capabilities that will allow us to expand our customer reach and experience, ultimately focusing on initiatives that create value for all our stakeholders. Lastly, 2023 is an important year at Harley-Davidson. Since 1903, Harley-Davidson has pioneered American motorcycle design, technology and performance. And this year, weâll be marking our 120th anniversary with a year-long celebration. We will talk more about our recent model year 2023 release of 120th anniversary of product at the next quarter, but weâre excited about what is going to be an unforgettable milestone for the company, celebrating the history, culture and community of Harley-Davidson with our riders and fans, reaching new customers and bringing more people to the brand. We want to make â weâll walk you the ultimate destination for motor culture in the world. And with this anniversary, we are making a commitment to our hometown, but also to our community. We hope to see you all there. Good morning. Thank you for taking my question. Iâm curious, how would you interpret the demand signals you are seeing across your spectrum, whether itâs from subprime consumers to more affluent consumers, or if thereâs another way to suss out what the demand trend looks like, itâs a pretty difficult macro right now to forecast? Yes, itâs Jochen here. Thank you for the question. Demand segments are early, right? We havenât really entered the riding season yet. Overall, what I can say is that January has been performing in line with our expectations. But as season unfolds, obviously, we will know where demand sits. Right now, we feel comfortable overall with the inventory that we have. We feel comfortable with the demand signals that we are seeing, but time will tell. Overall, we expect a flat to slightly positive retail growth for the year with the positive â when it shows up to mostly appear in the second and third quarter simply because we had our â with our core riding seasons and quarters. So overall, we do expect a flat to positive retail growth, and thatâs our anticipation. And I hope that answers your question about demand signals. Itâs still early on in the year, but overall, we are quite positive. Craig, good morning. I was just going to give you some color on how you were asking about prime, subprime and applications. So overall, as Jochen said, still early days in January performing in line with expectations. Overall from a retail environment, from a loan application standpoint, we are still seeing quite a bit of interest come in, frankly, across both prime and subprime. So our loan application volume in the month and really as even at the back half of last year has continued to stay strong. Hi, thanks. Iâm going to slip in just a quick follow-up and then one different question. Just a follow-up on the first question is, would â do you guys expect retail in your shipments to sort of track in line in 2023? Or is there still some dealer fill in? And then just on the dealer network, maybe Jochen, could you kind of update us on how youâre thinking about further consolidation of the dealers for 2023? And what dealer-focused initiatives you guys are most focused on for 2023? Sure, Robbie. In terms of your â the question about retail. As Gina mentioned, we expect about a 2% unit growth from motorcycles for the year. And that would include a slight pipeline lift in addition to the retail guidance that Iâve given. So positive retail guidance and small pipeline filling would equate to the 2%. So itâs a combination for both at this point in time. And Gina â sorry, Edel, do you want to talk about the network? Yes. Thank you, Jochen. Good morning, Robbie. A couple of initiatives that are critical for us in this year as we return to a stronger inventory position, and we face into the anniversary year. The first and Jochen referenced it in his comments is around Project Fuel, which is the upgrade of our facilities across the globe. This is a program that is incredibly important. We believe it is long overdue and it is proceeding at pace. It is a significant investment for our dealers, but itâs one that we believe will pay off in terms of the opportunity for expanded growth and outreach to more diverse segments of riders. So thatâs one big priority for us. The second one is to continue to emphasize the balance of desirability and profitability. There are a couple of initiatives that we are pursuing. Obviously, we will find opportunities as the year goes along to continue to emphasize the message around affordability, but also restrained and very, very careful management of inventory for us is very important and some initiatives that we are driving in terms of an updated distribution system that allows for faster replenishment, but also a lot more control in terms of how much inventory is out there is an important part of a value story, which is relevant to us, to our dealers and to our consumers in terms of the product holding its value over time. And then the third initiative that I would highlight is, of course, this is our anniversary year. It is very important not only for the bikes, but also for the apparel, which is early indications would say, has been extremely well received, but also all of the activities around engagements and consumers that involve our dealerships as well as our headquarters and all of the activities that Jochen mentioned in Milwaukee. So those, I think, are three big pillars that we will be pushing forward this year. Hey guys. Good morning. Thanks for the question. I was hoping you could just unpack the dealer inventory numbers that are in the slides. I know that youâre still down pretty big versus 2019. But if we just look at that sequentially, it does look like it built and then youâre obviously dealing with model year changeover as well. So, can you just sort of unpack where units are, where you saw that sequential build and sort of how we should think about that going forward? So, we have 34,000 units in the network now. Thatâs the dealer inventory level. Thatâs 15,000 more than in 2022, which, as was an extremely low level of inventory at the time. If you look at this from a historic perspective, that level is 60% of 2019. So pre-pandemic, 60%. So itâs still an extremely healthy level. Thankfully, we have more inventory in the network right now. And we are finally getting back to a better spot. So overall, Iâd say, we are good in terms of inventory and that should help us to start the riding season in a healthier position than we have previous year. Thanks. Hey guys. Good morning. I guess first question, Iâll cut right to the chase. Thereâs a lot of moving parts here. But if we look at your guidance this morning, I think it equates to roughly EBIT guide for 2023 of around $850 million to $875 million. So if you could clarify that for us, that would be great. And maybe secondly on LiveWire. The estimate coming into this year or at least what you gave us back in December of last year, 2021 was about 7,000 bikes. Youâre looking at about, call it, 2,000 bikes this year. Why the slow start? And how quickly or how willing would you be able to kind of pivot if you donât see demand start to materialize in that business? Thanks. Hey, Joe. Good morning. This is Gina. So on your first question here, youâre in the right zone on overall EBITDA guidance when you kind of add up all the three different segments. So, I would say youâre thinking about that generally right. And Iâll turn it over to Ryan for LiveWire. Yes. Thanks, Joe. On the LiveWire front, to your question on the units and the change in expectations there, the majority of the 2023 units were expected to come from Del Mar. And as we talked about in the opening comments, weâve changed the time line on that bike. So given the new time line, weâre now expecting sales to ramp up in the second half of the year for that motorcycle. So, we brought the units down accordingly, taking the industry seasonality into account. So the bike continues to look amazing. Weâre laser-focused on getting it to market, but the change in the time line is whatâs driving that change in the units. Hey, good morning. So, I wanted to hone in on that, I think you said flat to positive retail growth for the year. Maybe unpack how youâre thinking about the industry â the broader motorcycle industry, which I know you donât entirely compete in all those categories. So maybe Touring and Cruisers, how youâre thinking about those segments sort of based on what youâre seeing in the market right now and then sort of assumptions for market share, obviously? We donât know what your product pipeline is, but how you think about? How youâre going to perform relative to the industry to get us to that flat to up retail number? Yes. Look, we are â Iâm not really looking at the industry at this point. Iâm just looking at what we think we can achieve as a company, as a brand in 2023. So unpacking retail, if you look at our seasonality, as I said earlier, we would expect then in order to achieve a flat to slightly positive retail growth that to come in the core quarters of the second or the third quarter with the first and fourth being flat or slightly down. So thatâs how the year would unfold. But in terms of the industry, weâre really focusing on our segments and we believe that we can â we have an opportunity here to grow. That said, we want to absolutely make sure that the desirability of our product, the MSRP, in market is â and the desirability is maintained. So whatever the demand will bring, weâll adjust accordingly to protect our profit margin. But overall, what we are seeing now is good demand, but itâs very early. So any demand segments now cannot be taken as an indicative demand segment for the coming months? Hey James, this is Gina. Just to provide a little bit more color there on the flat to positive. So as Jochen said, we donât really hone in and focus much on the share gains. I mean we are the categories when you think about Touring and Cruiser, we are the market. When you look at what we delivered, I think we had it in one of our slides, we did deliver share growth in those categories in 2022 within the U.S. Also keep in mind that we are comping as we get into Q2, Q3, the production suspension. So even though on the back end, we were able to make up from a wholesale shipment standpoint in 2022, we really missed out on key riding season. So as you think about our retail growth next year overall, Q1, Q4, probably more muted where you really see the benefit is going to be within Q2, Q3. Yes. Good morning everyone. I guess just a quick one for the model on free cash flow. I mean, youâre coming off $548 million 2022, I noticed you havenât provided explicit guidance on free cash flow. But how should we be thinking about that in general terms? And whatâs achievable in terms of working capital give up as a contributor to that number? Good question. Good morning, David. This is Gina. So overall, I would say similar levels of cash flow as we head into 2023. So thereâs nothing atypical. Obviously, in 2022 we had the LiveWire investment that we were making. We will not have that as we move into 2023. So Iâd say similar levels overall. From a working capital standpoint, one of our big focus areas as we move into next year is just keeping our eye on that inventory number and making sure that weâre mindfully kind of reacting to and bringing that down as we move through the year. As we end the year, always keep in mind, right, weâre building inventory on our balance sheet as we end the fiscal year. That starts to bleed out through the first part of the year, both in terms of finished products â finished motorcycles as well as all of the apparel and licensing and P&A that go along with them. So even though it looks high at the end of the year, that bleeds itself down through the first half. Hey, good morning. I had a couple of product questions. First, the 350 bike, you mentioned about populated Riding Academy. Is that something that will be available for graduates to purchase when they do complete the course? And then on the CVOs [ph], I know youâve got one out now. I think in the past, you kind of launched them all at the same time, and that seems like a rolling rollout of the CVOs. Can you just explain or talk about the strategy behind the CVO launches? Yes, Gerrick. So the 350 is not going to be available for purchase in North America. Itâs exclusively for Riding Academy. As I said in our launch video, we have a few things still up our sleeve. But obviously, weâre very excited about the CVOs that weâve already launched. If and what might be coming later in the year, weâd have to wait a bit longer for that. But overall, I think we have a very strong product and the reception for what weâve launched has been very strong already. Not from todayâs perspective. Weâve seen a good destabilization in our supply chain. Itâs certainly not yet back to normal, but we feel confident that we are able to deliver the bikes at this point in time. Hi, good morning. First, a clarification. You guys noted historical levels of profitability is what youâre looking to get back to. I want to make sure that doesnât mean peak level of profitability. So maybe mid-teen operating â motorcycle operating margins versus high-teen motorcycle operating margins? And then the other question I have is on LiveWire. I understand the issue with units being pushed back in 2023. But does that still keep you on that 2024 trajectory to deliver more than 15,000 units? And if not, does that derail your ability to eventually get to positive EBITDA in 2026, which was the initial outlook? Thanks. Good morning, Jamie. This is Gina. Iâll take the first part of that. So in terms of historical levels of profitability, youâre headed in the right direction when you say is it more of the mid-teens. We are laser-focused on getting back to what we committed to as part of our Investor Day in May of getting that margin back to that, call it, 15%. So thatâs where when we say historical, not peak. Hey Jamie, on your question on LiveWire, a couple of thoughts there. Generally, the discussion on Del Mar in the event of 2023, donât have any impact on our vision or our long-term strategy or our near-term priorities. Weâre continuing to see the long-term direction of the vehicle markets and continue to have the strongest position to lead into wheel with the help of our strategic partners. So weâre focused on 2023 today, but safe to say, weâre continuing to focus on innovating in the core EV systems, the product portfolio and expanding our distribution. And we think if you continue to look at the long-term trajectory and the long-term goals that weâve set for the company, they continue to be the right ones. There are no further questions at this time. And this will conclude todayâs conference call. Thank you all for joining. You may now disconnect.
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EarningCall_845
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Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2023 Second Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini. Hello. On today's call are Fabrizio Freda, President and Chief Executive Officer; and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes an noncomparable impacts of acquisitions, divestitures, brand closures and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. [Operator Instructions] Thank you, Rainey, and hello to everyone. It is good to be with you today. Turning to results. For the second quarter of fiscal year 2023, organic sales fell 11% and which was within our outlook despite the incremental pressure of COVID-19 resurgence in China. Many developed and emerging markets globally outperformed our expectations to offset the COVID-related impacts of significantly reduced retail traffic as well as limited staffing in beauty adviser, in domestic China and Travel Retail in Hainan in November and December. Adjusted EPS fell 45%. While its deep decline, this was meaningfully better than our outlook, driven by both disciplined expense management and moderation of the stronger U.S. dollars. Importantly, we continue to prudently invest for growth, launching thought after innovation and increasing A&P as a percentage of sales. For fiscal year 2023, we are lowering our outlook for organic sales growth and adjusted diluted EPS primarily for 2 reasons. First, inventory levels in Hainan remains somewhat more elevated than we expected due to the disruptions in travel and in-store staffing levels in November and December. Second, the recently announced potential rollback of COVID related supportive measures in Korea Duty Free are creating a near-term transitory pressure to our business with our courier duty-free retailers. In the third quarter, it is more than offsetting the initial positive impact from the resumption of international travel by Chinese consumers as well as favorable trends in our second quarter, including outstanding performance across many developed markets in Western Europe and Asia Pacific as well as many emerging markets globally and a better-than-expected currency environment. All told, our return to growth has shifted from the third quarter to the fourth quarter, which Tracey will discuss in greater detail. We remain focused on investing in our brands including for innovation, advertising, strategic entry into new countries and expanded consumer reach to fuel our multiple engines of growth strategy. Our growth engines in the second quarter were many among categories, regions and channels, and we anticipate the gradual return of more growth engines across the second half of fiscal year 2023. Beginning with categories. Fragrance extended its long-running double-digit organic sales growth streak in the second quarter, rising 12%. We are inspired by the growth prospects still ahead for the luxury and artisanal segment of the category. As consumer [indiscernible] unique distinct and long lasting sense of the highest quality. Many of today, consumers seek to build an occasion-based collection to express on sell differently across seasons, time of the day or events. Our portfolios of Jo Malone London, Tom Ford Beauty, Le Labo, KILIAN PARIS, Editions de Parfums Frederic Malle is ideally positioned for this accelerating fundamental shift. As demand increases globally, we are excited about our plans to bring these brands to new markets and channels in the coming quarters. Innovation will also continue to be a key growth pillar. For example, Tom Ford Beauty outstanding loans or [indiscernible] in the first half will be followed by the cherry collection in the second half, building on the success of regional hero last cherry. Makeup grew organically in the Americas as well as the domestic markets EMEA in across southeast Asia in the second quarter. Our brands are indeed realized in the promise of the category [indiscernible] as professional and personal use education feed on point innovation, alluring marketing campaigns on new platforms and I think artist. MAC was a standout success. The brand growth engines were many, freestanding doors excelled, welcoming consumers with expert services delivering double-digit organic sales growth globally. Across channels, blockbuster innovation, hero products and holiday merchandise proved highly sort. Clinic further fueled makeup across subcategories led by list as the brand has created a hero franchise with [indiscernible] almost lipstick in black honey. Estee Lauder Double Wear foundation had exceptional success with Its My Shade, My Story campaign in Western Europe. Virality on TikTok drove strong new consumer acquisition and the franchise strengthened its #1 ranking foundation with prestige beauty share gains. Looking ahead, we are excited for the launch of Estee Lauder Pure Color lipstick in the second half. The brand reinvented its iconic franchise to capitalize on lipstick revival and integrate skin care benefits for lips. -- designed to flatter all skin tones across mat, cream and luster finishes the line packaging peso edge to the brand original lipstick from the 1960s. In hair care, our brands extended the category organic sales growth streak to 8 consecutive quarters. for the second half, did launch last July in Mainland China will be complemented by the brand recent entry into Travel Retail in Haina. -- as we continue investing for the vibrant growth opportunity of prestige hair care with the Chinese consumers. Moreover, Avida became a certified B Corporation, joining Le Labo in our portfolio in achieving these important third-party validation as the brand deepened its decades-long commitment to social and environmental responsibility. Skin Care organic sales fell sharply in the second quarter. There were a few headwinds with the biggest challenge being COVID-19 in travel retail in Asia and with the Chinese consumer, given the category's exposure. Amin, the top landscape for skin care, the ordinary was a striking success. Its organic sales growth accelerated from high single digit in the first quarter to strong double digits in the second quarter. The brand's hero product excelled as did the blockbuster innovation of multiple tail lash and brow serum, while the ordinary also realized outstanding performance in the specialty multichannel again, momentum for its exciting launch in India in the fourth quarter of last year. We are focused on returning skin care to growth globally with sequentially improving trends from the third quarter to the fourth quarter as a transitory pressure from travel retail abate. To that end, we have an incredibly rich innovation pipeline primed to launch. Here a few among them. Already out from MAC is its new hyper-real franchise as the brand leverage its expertise to create an artist approved skin care line of products which are purposely designed to perform also with makeup. La Air revamped motorizing soft cream arrived this month with powerful new clinical results to reverse and receive visible signs of aging. Thereafter, Clinique will bring most Sud SPS to market. extend its popular hero product to meet consumer desire for hydration and some protection with a lightweight texture that has made MotorSerge100 age and Icon. With these launches, we aim to reach new consumers demographic tapped into high-growth subsegment. Let me now turn to geographies. While the U.S. and domestic China were challenged in the second quarter with sales falling single digit organically in each market, we believe both will be growth engines in the second half. For the U.S., we are optimistic for a return to growth given sequentially improving monthly trend in each of organic sales and retail sales performance throughout the second quarter. Building on this momentum, the market is equipped with numerous growth drivers, including an exceptional innovation pipeline across brands roll out of new Clinique counters to select doors after a successful pilot of Clinique lab in [indiscernible] and launch of exclusive products by many brands in specialty-multi. We are also progressively modernizing numerous freestanding store as they are primed to be an important contributor to growth following rationalization of the footprint. Moreover, our enhanced omnichannel capabilities are also primed to contribute to growth in the U.S. as consumers who engage with our brands online and in store drive consistently higher value from upsell and cross-sell. This was especially true during holidays in the second quarter. For domestic China, we are confident in a vibrant recovery for our business following the relaxing of cove restriction. -- as the economy is well positioned to rebound and Chinese consumers are passion for prestige beauty. We entered this phase with momentum having expanded our market share of prestige but in China during the second quarter, driven by gains on all of skin care, makeup, fragrance and hair care demonstrating that this ability of our aspirational brand portfolio and the excellent go-to-market strategies of our local team. While the third quarter is set to be more variable, because of the high level of covet cases, we now anticipate even stronger organic sales growth as of the fourth quarter as recovery evolves. We expect online to continue its strengths and anticipate a gradual return to more fulsome brick-and-mortar traffic by the end of the fiscal year. Online organic sales rose single digit in the second quarter, fueled by many brands led by La Mer double-digit growth. We achieved excellent results for 11 as the Estee Lauder brand realized top ranks across platforms. Moreover, our retail sales growth in online channel meaningfully outpaced the industry in the quarter for strong prestige beauty share gains. Beyond the U.S. and China, we realized outstanding organic sales growth in many large developed and emerging markets around the world. Our local team has been executing with excellence to deliver broad-based sales gains. Western Europe, led by the U.K. prospered, while Japan and Australia contributed strongly in Asia Pacific. India, Brazil, Turkey and Malaysia are among the stars of our emerging markets with each posting strong double-digit organic sales growth led by India, rising nearly 50%. We are very encouraged with the excellent performance we are delivering in emerging markets. As these emerging markets evolve in recovery from the pandemic, we foresee compelling long-term growth opportunity arising from the expanding middle class trading up into prestige beauty. We entered this important phase of recovery from a position of strength as we hold leading prestige beauty share in many of these markets. For example, in India, Mexico, South Africa, we are the #1 rent company in both prestige makeup and skincare, while we lead in prestige makeup in Malaysia, Thailand and Turkey. Let me now turn to the strategic deal we announced in November to acquire Tom 4. This transformational luxury acquisition will make Tumor an own brand of stellate companies. enabling us to manage the brand's intellectual property and equity. Staying true to our focus as a pure play in prestige beauty. We have also reached agreements with luxury companies, ZenyaGroup and Marcolin to license the brand fashion and eyewear businesses, respectively. We first partnered with Tom Ford over 15 years ago, and a singular vision of model luxury is beyond compare. Together, we have elevated to for beauty into the top echelon of high-growth luxury beauty impressively. TolfBeauty is expected to achieve $1 billion in net sales annually over the next couple of years, and we are promising profitable growth opportunities ahead. Before I close, I want to recognize the start of black Easter month in the U.S. and thank our employees to have created an engaging calendar of events for colleagues and consumers to celebrate and honor the black experience. while we continue to focus on accelerating our commitment to raise our equity and the collective accomplishment of our equity goals year-round. In closing, while we are lowering our fiscal year 2023 outlook to reflect the additional transitory pressures affecting our Travel Retail business, -- we are encouraged by both the strong underlying trends in many other areas of our business and improving macro trends. Inflation has stabilized in many markets globally the strength of the U.S. dollar has moderated. And the return to mobility domestically and international travel is happening earlier than expected. Moreover, in the first half of fiscal year 2023, we made exciting progress on several strategic initiatives to drive growth and resiliency in our business. We significantly strengthened our capabilities in innovation, manufacturing and distribution have opened the China innovation labs our first plant in Asia Pacific, our new DC in China, while we also announced our brand portfolio with Tom Ford and Balmain Beauty. All told, we have great confidence that we will emerge from this volatile transitional year, even better positioned to realize the long-term growth opportunity of global prestige beauty to our employees, our future is bright because of your creativity, passion and wisdom. I extend my deepest gratitude for your significant contribution to our long-term success. Thank you, Fabrizio, and hello, everyone. As Fabrizio mentioned, our business in the second quarter continued to be pressured by the external headwinds of COVID-related impacts, including the rising number of COVID cases in China, lower shipments of replenishment orders in the U.S. and the stronger U.S. dollar. Our second quarter organic net sales declined 11% and earnings per share decreased 49% to $1.54. We tighter expense management and a slightly improved currency impact contributed to our better-than-expected EPS results. From a geographic standpoint, organic net sales in the Americas declined 3%. The -- we saw healthy demand for our holiday offerings as consumers gravitated to our in-store and online promotions. However, we also experienced lower shipments of replenishment orders due to both retailer inventory tightening as we anticipated, and a later improvement in retail trends post-Christmas. In Latin America, organic net sales rose double digits, reflecting continued growth in nearly all markets, the evolution of recovery and makeup as consumers return to stores, and the strength of our fragrance portfolio. Organic net sales in our Europe, the Middle East and Africa region declined 17%, including the negative impact from foreign currency transactions and key international travel retail locations of 3%. The decline was driven by travel retail as expected, while growth from nearly every market in the rest of the region was strong. Our global travel retail sales were significantly pressured by the ongoing COVID-related impacts. Despite stores being opened throughout the quarter, travel to Hainan remain largely curtailed, and as a result, shipments of replenishment inventory remained low. Elsewhere, we experienced strong sales growth in Travel Retail, reflecting increased international tourism as travel restrictions in many countries lifted from the prior year. The ongoing pressures in Asia travel retail more than offset the growth we experienced in the rest of the EMEA region, including both developed and emerging markets such as the United Kingdom, France, India and Turkey. We continue to see various stages of recovery across the region that coupled with the strong resumption of tourism fueled brick-and-mortar growth during the quarter. Organic net sales in our Asia Pacific region fell 7%, primarily due to the ongoing COVID-related impacts in Greater China. This affected brick-and-mortar sales in Greater China and Dr. Jart Travel Retail in Korea. Online sales continued to grow in Mainland China due in part to the expansion of our online presence with the recent launches on JD and Joyn as well as solid performance during the 11.11 Shopping Festival. Most of the other markets in the region continued to progress in recovery as the return of brick-and-mortar traffic led to high single-digit or double-digit growth in Japan, Australia, Malaysia and the Philippines. From a category standpoint, fragrance continued to lead growth with organic net sales rising 12%. Strong holiday demand for our beautiful line of fragrances from Estee Lauder and double-digit growth from both La La bond Tom Ford Beauty propelled the category's growth in every region during the quarter. Organic net sales in hair care rose 4% and declined 3% in makeup, the latter driven primarily by the COVID restrictions in China as solid performance from both MAC and Clinique drove growth in both the Americas and in domestic markets in EMEA. Organic net sales in skin care declined 20%. This category continues to be the most affected by the COVID restrictions in China, particularly in Asia travel retail and Mainland China, where skin care accounts for a large majority of our business. Our gross margin declined 430 basis points compared to last year. The positive impacts from strategic pricing in this quarter were more than offset by inflationary pressures in our supply chain, region and category mix, and higher costs due to promotional items. Operating expenses increased 500 basis points as a percent of sales, driven primarily by the reduction in sales. This also reflects our investments in areas such as advertising, promotional activities and innovation, which increased 150 basis points compared to last year. Operating income declined 46% to $768 million, and our operating margin contracted 930 basis points to 16.6% in the quarter. During the quarter, we recorded $207 million of impairment charges related to the 3 brands, primarily reflecting lower-than-expected growth in key geographic regions and channels given the pressure on consumer demand from the impacts of COVID. Diluted EPS of $1.54 decreased 49% compared to last year. The impact from foreign currency translation and foreign currency transactions in key travel retail locations negatively impacted diluted EPS and by 5% and 4%, respectively. During the quarter, we generated $751 million in net cash flows from operating activities compared to $1.8 billion last year. The decline from last year reflects lower net income and the negative impact from changes in working capital, primarily due to the timing of payments. We invested $419 million in capital expenditures, and we returned $708 million in cash to stockholders through both dividends and share repurchases. As we expected, our first half performance was pressured by ongoing external headwinds. Let me now turn to our outlook for the remainder of fiscal 2023. For the second half of fiscal 2023, we are encouraged by the easing of COVID restrictions in China and the expected return of travelers throughout Asia and around the world once more stabilization occurs with outbound flights and visas as well as cover entry and testing requirements. In Hainan, we are starting to see increased positive signs already. as traffic level declines have moderated in recent months. However, retailer inventory levels are still somewhat elevated, reflecting the impact of the lengthy store closures as well as the rapid reduction in traffic and in-store staffing levels in November and December. And in Korea travel retail, an incremental headwind has emerged since the last outlook we provided in November. The recently announced potential rollback of COVID-related supportive measures in Korea Duty Free is creating a near-term transitory pressure to our business with our Korean duty-free retailers, which is pressuring our third quarter outlook. We now also expect more moderate net sales growth near term in our China business as the rise of Cove cases in November and December slowed expected brick-and-mortar retail traffic and social usage occasions. -- which continued in January during the pre-Lunar New Year shopping time frame. Collectively, we expect these impacts to create greater headwinds in the third quarter than we originally anticipated. As a result, we are updating our outlook to reflect a shift in the start of the travel retail recovery in Asia from the third to the fourth quarter of fiscal 2023 due to the normalization of inventory levels in Hainan, the uncertain pace of recovery of travel retail traffic in Korea and a more moderate acceleration of growth in China. The momentum from our other developed and emerging markets in EMEA and Asia Pacific in the first half is expected to continue as those markets progressively evolve in recovery. We are also cautiously optimistic and expect our North America net sales performance to improve as our retail growth trend in the region has already increased, particularly in January. -- and we have a supportive innovation pipeline planned for the second half, as Fabrizio mentioned. As it relates to our operating income, while these external headwinds have introduced a high level of volatility and that has had a meaningful impact on our financial results this fiscal year. We remain confident in the ongoing strength of prestige beauty, our business strategy and our ability to reaccelerate long-term profitable growth. We, therefore, plan to sustain the strategic investments imperative to that growth, including innovation, advertising and continued geographic expansion for many of our brands. These investments also support the continued strengthening of our multiple engines of growth as we invest in emerging markets and faster growth channels that are already progressing well in their recovery. As a result, we expect to see pressure on our operating income in the third quarter with an accelerated improvement in the fourth quarter as the sales recovery in travel retail, Mainland China, and skin care start to materialize more meaningfully. The negative impacts from foreign currency that we anticipated in our previous guidance have improved due to the recent weakening of the U.S. dollar. However, currency is still expected to be a meaningful drag our reported sales and diluted EPS growth for the third quarter and full year. Our outlook is now based on December 30 spot rates of 1.067 for the euro, 1.207 for the pound, 6.964 for the Chinese yuan and 12.63 for the Korean yuan. So with that backdrop, our guidance is as follows: we expect organic sales for our third quarter to decline 10% to 8%, primarily reflecting the pressures to our Travel Retail business that I mentioned previously. Currency translation is expected to be dilutive to reported net sales by 3 points and the impact of certain foreign currency transactions in key international travel locations is not expected to be material. The impact of sales from certain designer fragrance license exits are expected to dilute reported growth by approximately 1 point. We expect third quarter adjusted EPS of $0.37 to $0.47 for a decline between 81% to 75%. Currency translation is expected to be dilutive to EPS by $0.04, such that constant currency adjusted EPS is expected to decline between 79% to 73%. This includes the negative impact from certain foreign currency transactions and key international travel retail locations of approximately 1 percentage point. For the full year, SP27916451 assuming a reacceleration of Travel Retail [indiscernible] in the full range between down 2% to flat. Currency translation is expected to dilute reported sales growth for the full fiscal year by 4 percentage points and we expect an additional 1 point of dilution from the impact of certain foreign currency transactions in key international travel retail locations. The impact of sales from certain designer license exits are expected to dilute reported growth by approximately 1 point. We expect full year operating margin to be approximately 15.1%, a 460 basis point contraction from the prior year period primarily due to the geographical and category mix of sales and foreign currency impacts as well as the sustained investments to support recovery as previously mentioned. We now expect our full year effective tax rate to be approximately 25.5%, reflecting in part the change in our estimated geographical mix of earnings. Diluted EPS is expected to range between $4.87 and 502 before restructuring and other charges. This includes approximately $0.29 of dilution from currency translation. In constant currency, we expect EPS to fall between 29% and 27%, which includes a negative impact from foreign currency transactions and key international travel retail locations, of approximately 4 percentage points. Regarding the Tom Ford brand acquisition, we expect to complete this transaction in the fourth quarter and to fund it through a combination of cash, debt and deferred payments. In anticipation of closing this transaction, in January, we increased our commercial paper program by $2 billion. We also estimate a slight EPS dilution to the full year outlook that I just provided due to the final purchase accounting inclusive of transaction costs. While this year has undoubtedly been a perfect storm of unforeseen macro pressures on our business, and the transition to accelerated recovery has indeed been longer than we anticipated, we have navigated through the challenging environment and strengthened the company in the process, thanks to our amazing employees, our company values and our multiple engines of growth strategy. We are encouraged by the many signs of improvement in the overall environment and the progress our incredible teams have made in preparing us for a strong recovery. Our fundamentals are solid and intact, reinforced by the actions we have taken over the past few years. From the acquisition of the majority interest in [indiscernible] in fiscal 2021 to the recent announcement of our agreement to acquire the Tom Ford brand and the Balmain license agreement. We are expanding our brand portfolio at both the entry and luxury levels of prestige beauty. We've taken strategic actions to enhance our go-to-market capabilities, supply chain agility and local relevance through our new innovation, production and distribution facilities in Asia. We've enhanced our digital marketing capabilities and continue to progress on our ESG initiatives. These actions and many more demonstrate that we remain confident in the long-term sustainable profitable growth of our business. And that concludes our prepared remarks. I was hoping -- and this is probably more for you, Tracey. If you could walk through with us how you're I guess, the length of the supply chain works for supplying both Hainan and Mainland China currently, knowing it's shifting. Because as we think through the change forecast in demand and knowing what I believe is a pretty lengthy supply chain, how you're managing production versus shipments and if that's sort of informing why there's so much visibility seemingly on 4Q. And I guess we should see inventory spike up on your balance sheet in 3Q. Is that right? Yes. You're correct, Lauren, that we do expect that we will -- two things. One, inventory levels are still coming down in Hainan. They are almost at the level that we would expect sales to accelerate. So yes, you should start to see an inventory build related to the shipments that we expect to see in Q4. In Korea, again, the pace is a little bit more uncertain given the transitory nature of what's going on right now. So we do anticipate, as I mentioned in the prepared remarks that we will start to see resumption of travel in Korea. And depending on the pace of that resumption that will depend on the amount of shipments that we have in the quarter. But we have taken obviously an assumption there. We are sitting on a decent amount of inventory even in our own warehouses to supply the sales that we expect to see in the fourth quarter. So just sort of extend that question a little bit, right? We have a lot of quarterly volatility in terms of Q3 versus Q4. Q2, there's a difference in shipments versus underlying retail sales. Obviously, COVID impacts in China. So it's hard to get a great underlying sense of retail sales here and how the business is doing. So a ratio, maybe you can just give us a little bit of an update on retail sales by region I'm particularly interested in category growth and any macro impacts in the U.S. and Europe? And then how you're thinking about Asia Pac and China versus the rest of the region. Let's so -- on near-term results here, but more how results came into the quarter versus what you originally expected and that might inform the revenue trajectory as you look out over the next couple of years and how you think about it? I think you touched on a lot of aspects of that, but it would be helpful to get a general overview. Yes. No. Absolutely, with pleasure. Let me start with China, first of all. And so China, the results in the quarter where pretty good. We built significant market share. So the overall market in China was negative double digit. Our net sales were and our retail was negative single digits, and we built market share in every single category. So in most arises, we build market share in makeup in fragrance, in health care in every aspect. Now this, for us, is a very important sign that the -- our brands are really working the aspirational value of our brands remains very, very strong, which in the moment of reopening is a very strong position to be. So excellent performance relatively to market. Though some of our brands were shining, La Mer in skin care was the brand that was gaining the best market share on for beauty in makeup and Jo Malone London in fragrance was really leading the share gain. The other important reading of China is that during 11/11, our net sales were up 10.9%, and our retail sales were up 11.9% and holding the #1 ranking across various categories. and there was a lot of great success on the brand creative activity in live streaming on innovation. And so the way when the consumers are back in this very difficult volatile period like a situation like 11.11, where there is obviously high traffic our brands respond enormously. And obviously, when the consumers are not back or don't travel or our site is when, obviously, we have seen some issues. So in total, China is developing the way we planned. And from a market share standpoint, recovering also and is definitely going in the right direction. In terms of the future, the potential of China, we continue to see now the opening to create a gain traffic in Mainland, in brick-and-mortar, we see the continuation of the line success. And we see the -- obviously, the reopening of Hainan. And so the Chinese consumer on all fronts. Also, we see the fact that the Chinese consumer is starting to travel internationally. [indiscernible] and this will gradually increase as the governments will agree theses and models of growth. In this moment, there are parts of the world we already opened, others we will open soon Japan, we understand it's been an agreement, but it's not yet open, we'll be in soon. Korea is the 1 where the agreement is not yet finalized, but we are optimistic that in the future, this also would be resolved. So that's another very important trend. This will have a positive impact, obviously, in our retail channel, but also in the countries of destination, like it's always been historically happened. In terms of categories in China, obviously, the most important thing that will happen as the China accelerate on all fronts will be the skin care will accelerate for us. And so the acceleration of Travel Retail Asia, the Aleris China, the acceleration of international travel of Chinese, which we had in front of us in part in quarter 4, but in part in -- fiscal year 2024. This will will generate a substantial improvement of our skin care trends that, in turn, will have a positive impact on our margin mix. So that's obviously an important element of the program. Then other regions of the world. As I commented in my prepared remarks, has been very strong in Europe where we built market share. in most of the European markets. Very strong in the rest of Asia, particularly strong gains in Japan and Australia, as I commented already. And in Korea, excluding the travel retail impacts, that are particularly heavy on our Dejar brand, which has a big percentage in Travel Retail, excluding that also Korea started progressing very well. So good progress in all the other regions. Then North America. Now in North America, obviously, we also continue to lose share in the quarter. And overall, we would like to accelerate our plan of share recovery. But the good news is there's been very strong progress in quarter 2. Every single month, October, November and then December, there was progress in top line sales acceleration. First of all, in retail, the quarter in the U.S. ended plus 2%, so on the positive. But December was plus 6.5%, 7%. So in line with our goals of acceleration. So we see the U.S. progressing. Now the next 6 months, there is an even stronger plan. In the U.S., we have a strong acceleration of innovation. I mentioned already some in the in the prepared remarks like Estee Lauder Pachorolistic, Moreso Sudo Clinique, Hyperion Marc, soft cream on La Mer, cherry collection to Ford. So -- and then we have some important distribution improvement. We are deploying more distribution in department store of our high-end fragrances in Macy's in dealers the ordinary is entering some doors and strands. We are deploying in Ulta and in Sephora new, incremental [indiscernible] and incremental expansion of our key brands in these doors. And we are renovating 100 free stand store opening 8 new freshen stores and continue to improve our omnichannel capabilities on all fronts. So we see an acceleration of our progress also in the U.S. So in summary, when I should add what Tracey also underline that at the same time, we have improved our capability behind this program. Our digital marketing is strong. Our supply chain is shortened and faster. Obviously, we have done progress in our factory in Japan, our R&D has opened our R&D center in China that will increase the amount of local relevant innovations in Asia in an important way in the next fiscal year -- starting this fiscal year in a significant way. And we have opened a new distribution on the serves travel retail in Switzerland and on the service, obviously, China, within China, as we discussed also in the last call. So there are all these investments and progresses in capabilities that make us ready the reacceleration in the future. And so this fiscal year, in summary, has been a year where, really, we suffered about the COVID lockdowns, particularly in Asia. And then the high level of infections during the reopening and the impact of the strength of the U.S. dollar that was particularly big in our high profit, high important channels like travel retail, like China, travel retails because on core and China, the dollar was particularly impactful. So it was really a perfect storm kind of situation. But all the rest, apart from these 3 areas really progressed and in some cases, very successful in market share gaining. So that's my overview. I hope to answer your question that having an overview of the situation. but I would say is very, very encouraging for the recovery period. So Tracey, I wanted to ask about the implied outlook for organic revenue growth in the fourth quarter, which is quite strong and better than expected. And I know we're still a few months away from fiscal '24 here. But is the implied exit rate in the 4Q guidance a fair way to kind of think about the potential top line recovery looking out to next year? Or are there kind of the timing-related impact given what you're forecasting in 3Q that could be driving them a stronger growth So look, we are expecting a stronger fourth quarter than probably you anticipated and us as well, given a few months back. And part of that, as we said in our prepared remarks, is because of the shift of recovery expectation, certainly in terms of some of Travel Retail, I would just remind you that -- and I know you're well aware of this, we're also anniversarying last year's some pretty significant shutdowns. So this volatility that we're speaking about actually started at the end of our fiscal 2022 in the fourth quarter. And we're coming up on the anniversary of that. So the numbers look particularly large from a from a growth standpoint because we are anniversarying some lockdowns in China and in travel retail in Hainan in particular, which was the start of some of the problems that we have anticipated on this call today. I think we are anticipating for fiscal '24, we're not giving fiscal '24 guidance right now. But given that in the fourth quarter, all markets are anticipated to be open and remain open and traveling will gradually resume and again, uncertain about the pace of that resumption, but we've certainly seen encouraging signs in many of our markets. that fiscal '24 will be a strong year for us. So I wouldn't take the the Q4 implied growth and apply it to fiscal '24. Peter, if that's what you're getting at. But certainly, we expect that we -- many of -- there will still be volatility in fiscal '24, but the volatility related to the pandemic and some of the things that we've experienced this year should be much moderate than certainly what we've experienced this year. Tracey, maybe I could just dovetail on that a little bit. you told us a few quarters back that 20% margin was a North Star. As you think out to next year and many of the moving parts of your business finally start to come back online? Is that -- is there any -- I don't know there may be some pull-forward revenue that leaks into the first half of the year. I don't know, obviously, you gave us the fourth quarter here. But as you look out to next year, is 20% in appropriate North Star for next year given the revenue drivers back online? And then I guess, Fabrizio, can you help us size the travel business a little better since it's such a big swing factor in the model here going forward. I think it was about 15% of sales pre-COVID, half of it China. You spoke a little bit about the shape of it at a conference in December that the pre-COVID that Chinese business -- the Chinese traveler was largely a Tier 1 international traveler. I think you said Hainan only has completely replaced that, but it's a different customer, maybe a lower-tier customer. just because this moves the model around so much, can you help us just think about how big that business is today in the non-China markets, Hainan -- non-Hainan China to help us think about the model. So let me just -- and Fabrizio will pick up on your questions on Travel Retail. But Travel Retail actually was larger. You're remembering, Michael, our online business was pandemic. Travel Retail was more like 26% pre-pandemic. But in terms of the operating margin for fiscal '24, as you can imagine, with some of the more recent events, we are still going through what our expectations are for fiscal '24, and we'll certainly provide guidance as we normally do in the August time frame. I think 20% is a little ambitious right now for fiscal '24 based on what we're seeing. But some of that has to do with how currency moves, which was my previous comment in terms of if you have projections on currency, let me know. But certainly, in terms of the business fundamentals, the growth, we would expect obviously more margin expansion that is in our normal algorithm for fiscal '24 because of the recovery of volume. And obviously, when you're down in volume as we are this year, as much as we protect the strategic investments, but also make choiceful discretionary investments as well. Volume solves a lot of sins. And so we would expect more leverage on our expense base next year, certainly than we're able to get this year. practically because of the volume trends and as well as the shocks in terms of those hits have occurred and how fast we can react to them. So again, we are expecting a certainly progressive fiscal '24. And with all of the things that we spoke about in the prepared remarks as it relates to the investments that we made that will come online, we'll have a new factory operational in Asia that will make our time to market shorter, will have the new innovation center, which will start to contribute to the development of product for us in the future, et cetera. So all of those things that we said in the prepared marks should also support the acceleration of growth in fiscal '24. Now for your travel -- or more on your travel retail question, I'll turn it to Fabrizio. Yes. Thank you, Tracey. Also, I want to add on the margin thing is the first step of normalization of our margin that Tracey is describing on top of volume is also -- will depend on which volume. Because, obviously, if you assume that the normalization of business would be in travel retail in China, then you are assuming that the normalization will be in skin care that tend to be higher margin. So there will be a moment of recovery and normalization. And then from there, we will restart our normal algorithm. And obviously, we will see how the normalization trends evolve and how long they will take. But that will be the way we will move back -- in terms of the travel retail question, stress clarified before and then even more during coded. But the -- you are asking about the -- what are the key dynamics in that retail. So the dynamics in fiber details will be, first of all, Hainan is now established. And yes, I said that when the international travel of the Chinese consumers will restart, Heinen will not be cannibalized in a big way is Hainan is now well-established vacation place for Chinese, for internal travel is, yes, there are different target groups. The high-end travel is obviously more affordable, easy does require visa doesn't require a passport, by the way. Keep in mind that at least before COVID, I do not have the last information now that everything is changing on the Visa model. But before Covis less than 20% of Chinese had a passport. And so there is anyway 80% of Chinese debt will go to Hainan and they will not travel internationally in this model. So Hainan will continue and will continue to develop. The addition will be the international charter, which is coming back. in an important way. And then obviously, the Korea and rest of Asia, so Korea has always been a very big business. But as you know, Hong Kong, Macau, Japan were all very important travel retail businesses that now will improve. And so there will be different levels of growth, obviously, in all of this. Now in term of categories, the -- because of the prevalence of Chinese consumer Asia travelers in general, as percentage of the total global travel retail, skin care is a very important category. So the travel retail acceleration in the future will carry, as I was saying before, skin care. And so this will be a double positive impact on marginality and profitability is that combination is powerful. And then by category, we see in Travel Retail a strong acceleration of the fragrance category, particularly the high-end fragrance category, which is, again, profitable and very interesting category for the consumers in this moment. We observed many travel retail partners around the world, making more space for the high-end fragrance development in the future of travel retail. So that's another important positive. And then the last point I want to make is keep in mind that the travel retail is driven by increased traffic and by increased conversion. The numbers that were available before covered in a normalized way in 2019 were depending which part of the world, the travelers to buy as conversion was between 10% and 15%. And -- we know also that when there is retail like in China and Korea, so where people can buy online before they go to the airport, this conversion number increased substantially -- and there is a lot of retail business that has developed very well in Asia, particularly linked to Hainan. And so the amount of conversion of these travelers is increasing -- and last thing I want to say is that the comeback of Chinese consumers in international travel is very good news because the Chinese consumer, when they travel used to have much more purchase per person than the average travelers from different regions. So the increase in mix of Chinese travelers is very good news for global travel retail as well. So in the post corded world, when will be really postal I think we are going to see some years of exciting opportunity globally in the travel retail development. Yes, I wanted to ask about the sustainability of growth in some of these categories, which benefited from reopening like fragrances makeup and expectations for skin care improvement, it sounds like youâre obviously talking to improving skin care trends globally, obviously, China as well. And then I wanted to ask the same question around China. So should we expect a similar reopening trajectory? Or are you expecting a similar reopening trajectory in China that weâve seen around the rest of the world in terms of growth and in terms of the categories which benefit. SP-2 So the reopening of China is in China today, the level of sales online is the biggest percentage of the world. So to be clear, the reopening on China will mainly impact the reopening of brick-and-mortar. So will impact 50% of the business in China about will be very positively impacted by the reopening. Obviously, during the period, like the 1 we just lived many since mid-November to mid-January, where the level of infections in China, so COVID were super high. 80% of families had somebody with the virus, et cetera. So the implications were normal. In this period, you see also a reduced consumption. Everything, reduce consumption online, reduce interest for sure it make up in other categories. So, but thatâs temporary, obviously. So your question is more what happened when all this is regular. The only thing I want to clarify that has to be regular, not only the ability to purchase in stores, but also, frankly, to be free of COVID, really free of COVID [indiscernible] consumption come back. So when people will be free of COVID as a disease. When they will go back to the brick-and-mortar, we will see at least half of the business in China increasing dramatically on traffic, and we will see a continuous acceleration, a gradual continuous accusation of the online, which is already very strong. There are many new platforms online that have been opened in China as we speak, which are promising, which are doing success. In our case, our success on JD to win has been very, very strong. Itâs one of the reasons behind the market share growth and the success of the amazing Tmall events, particularly 11.11 or June 18 have been extraordinary. So there are a lot of good potential levers of growth. That will be activated by the comeback of consumers. Then you are asking about the categories that will be a. First of all, skin care will be the biggest beneficial for the simple reason that skin care is the biggest percentage of beauty business in China. To be clear, thatâs not the case in Europe or in U.S., where there are other categories which are a bigger percentage of the total business. So this is a unique profile of the Chinese consumer, where skin care will be the biggest benefit benefiting the biggest from the normalization of the consumption patterns and of the purchase partners of the consumer. Second, fragrance is on a roll in China. Fragrance was already growing before COVID, has been growing during the period where Chinese at lower COVID levels than the rest of the world. And will continue to grow with a reopening because there is a clear passionate development of this category. In China, the fragrance category is developing bigger percentage at the high end where we are focused â so the high-end fragrance is actually a much bigger percentage of the total market than in the rest of the world, which is grains for the development of this category. Makeup would also makeup is the cutter which is most affected by carbon situation. So now itâs the most affected. By the way, itâs been the most affected everywhere in the world by the COVID situation, not only in China. And so the resurgence of makeup that we are seeing in this moment in U.S., in Europe and some of our brands, particularly Mac, is benefiting from this very well. Will happen also in China when COVID will normalize. And last, we have launched a data in China for a reason that we have seen the clear signs of development of luxury haircare. Obviously, hair care is a category super well developed among the Chinese consumers, but itâs mainly developed in mass is the beginning of the journey of the development of a luxury hair care sustainable hair care part. And so thatâs really also exciting and is in front of us for the future development. And in terms of fragrance [indiscernible] continue to expand our fragrance portfolio. Weâre certainly seeing a pickup and expecting a pickup in travel retail as it relates to fragrance, and fragrance is still a growing category in Asia. So certainly, during the recovery, we expect that fragrance trends will continue to grow, particularly in the markets that are reopening now. That concludes today's question-and-answer session. If you were unable to join for the entire call, a playback will be available at 1:00 p.m. Eastern Time today through February 16. To hear a recording of the call, please dial (877) 344-7529 and use passcode 6947935. That concludes today's Estee Lauder conference call. I would like to like to thank you for your participation and wish you all a good day.
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EarningCall_846
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Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's Financial Results for the Fourth Quarter and Full Year ended December 31, 2022. Joining us today from Sterling's management team are Tom OâBrien, Chairman, CEO and President; and Karen Knott, Chief Financial Officer and Treasurer. Tom will discuss the fourth quarter results and then we'll open the call to your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Sterling Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These two factors are discussed in the company's SEC filings, which are available on the company's Web site. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the Web site contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. Good morning. Thanks, Joe. Welcome again to another quarterly call for Sterling Bank. We're happy to have those of you on the call that could join us. The quarter, not an awful lot of note going on to spend a lot of time on. We had a small loss in the quarter that came out to $0.00 per share. But as I mentioned in the press release, a lot of the issues that have dogged the bank for the last two years continue to be present in a lot of our own financial results. So we'll kind of go through those highlights a little bit here and then take some questions. But as I said, the loss was $200,000 in the quarter. For the year, we made 4 million. The margin at 3.09% in the quarter, obviously better than it was earlier in the year. I think higher rates have helped us on the liquidity return side. And with the adjustable rate nature of most of the Bank's loans, the subordinated debt at the holding company level is a precedent on the consolidated margin to the tune of probably a drag of 25 basis points or so. We can't do much to address the subordinated debt until we finish with the governmental investigation. So we'll unfortunately just have to tolerate that as we go along. We did back some loans during the quarter, not a huge amount, but $31 million. And Karen will kind of go through the interest expense breakdown. But you'll see we still carry a pretty significant expense relative to these investigations. Asset quality also continues to be pretty good. And I should note too that we continue to have a low loss ratio on the legacy Advantage loans notwithstanding all of their other issues that have been the source of the investigations and the internal control issues that existed at the Bank previously. We try to keep the balance sheet fairly stable, maintain a high capital ratio just to protect the company and its shareholders as we deal with these uncertainties. I'm sure the big question on everybody's mind is going to be where we are with the Department of Justice? And as I said in the quote there, we don't have a lot of visibility into it. We continue to cooperate. It would appear to us that the investigation focus at their end is heavily on individuals. And I think with respect to the Bank, we believe they have all the information they need. And as I said, we continue to cooperate completely. I was hoping to have a little more to say at this point in time. But I don't. And can't say that there's anything in the way of hints or direction or guidance that they might give us that would help you understand where it's going. We just -- as I said, we have no visibility into that other than we'll get some expression of appreciation for the cooperation and the information we continue to provide. We do think collectively that it's going to be resolved or at least the beginnings of a resolution sometime this quarter, but it's -- again, it's very hard to predict and they don't necessarily hold to my timeline by any stretch of the imagination. But we certainly have a strong sense of urgency on pushing that forward and do everything I can to respond quickly and completely 20 questions. And as I said, we just make the case known that we need and would like resolution as quickly as possible. And hopefully, we get it. But I just can't predict at this point. So with that, the Bank itself, we continue to just I guess I'd say watch the time evaporate here. We're trying to find opportunities where we can to maintain the margin and control costs. But it's obviously a challenge. Fortunately, as you know from the last quarter call, we're done with the OCC issues and we've completed all that, signed the consent order and paid the fine. And I would say in terms of all of the agencies that have taken an interest in the Bank, we continue to provide transparency and cooperation wherever it's needed. So on that part, you should have no concerns with respect to that. And I guess just going back to the DoJ is just to try to understand too that this was a multiyear problem. And as the frauds were uncovered early in 2020 and continuing, it was a multiyear. It wasn't an incident. It wasn't a single person who misbehaved. It was much more substantial than that as you all know, and there's just an awful lot of records to look at and understand and ask questions about. I'm going to ask Karen to just go through a couple of highlights on the financial condition, and then I'll get back on. So Karen, if you would. Sure. So I was just going to talk a little bit about the non-interest expense for the quarter. We did see a reduction of 13% even though we still continue to see elevated professional fees. So that professional fee number of 5.9 million consists both of legal expenses and other professional fees to help us become compliant with all the stuff that's going on. So I guess if we look at that number and try to normalize it, probably two thirds of it is due to these investigations. And then the other third is more normal stuff of being a public company and just general operations. Same thing in the salary and benefits line, 8.9 million, that's not a bad run rate for the Bank. Although again, we have a lot of people there for BSA work, other work that a bank of our size might not normally have. In terms of the allowance, we didn't have a big recap shore this month. There wasn't a huge reduction in the loan book as it had been in prior quarters. And as Tom noted, we did purchase a pool of high balance, conforming or jumbo residential loans. In terms of CECL, which I'm sure is on everyone's mind, we've worked through most of that process and really now that we need to be [indiscernible] controls validated by our internal/external auditors, and then we'll be prepared to implement that as required. Tom noted the non-performing assets. They were down slightly quarter-over-quarter at 38.3 million. And just to remind everyone similar to prior quarters, over half of that are loans that are paying, a lot of them are current even, and we just want to see six months of consistent payments before we go ahead and upgrade those and put them back on accrual status. The balance sheet was relatively stable quarter-over-quarter, just a $3 million reduction. We were able to stabilize deposits. But as you can see on the NIM, it came at a little bit of a price as the deposit book increased. Tom? Okay. So I'll probably just add a couple of comments here in terms of more general industry commentary. But with the increase in rates and the flow of deposits, I think we're back to a period where deposits and liquidity have a relatively high value where not so long ago in 2022, the industry was flushed with deposits, but higher rates we've seen more and more institutions experience price pressures. As I noted in my quote in the press release, consumers had suppression in their interest rates earned with the ultra low rates for a couple of years. So there's obviously some pent-up demand for yield. And certainly several banks that I follow had significant increases in their cost of funds. I think we've held reasonably well. As I said, the subordinated debt is a real thorn in our side in terms of the cost structure there, but it's something we have to deal with. And speaking of dealing with things, I think the benefits of the derisking that we did during the course of '22 will continue to show its wisdom as we get into '23. The pressure on commercial real estate and anything in the way of construction, income producing property type credit, we had a very significant exposure in the time I joined the Bank and some what I would characterize as pretty high risk credit. We tackled that pretty aggressively. And for the last several quarters in terms of the commercial book, there have been no delinquencies, no foreclosures, really a very clean credit book there and a handful of criticized loans, but nothing too serious there. And I think we get out of those at really very attractive prices. And our credit department worked with several, especially on the construction side, and got our exposure there down to much more manageable levels and much better properties than were there at the beginning. And if you recall, the total bank criticized and classified portfolio not so long ago was over $200 million. So I think -- as I said, I feel -- when I initially arrived at the Bank, I was very concerned from the credit perspective on the commercial exposure that we had. I think the improving market earlier in '20, late '21 and early '22 lifted some boats, and we took advantage of that and got out. And so the concerns I expressed back then are I think pretty well satisfied at this point. We will now begin the question-and-answer session. [Operator Instructions]. And our first question here is going to come from Ben Gerlinger from Hovde. Please go ahead. Just had a quick question more so for Karen on the expense, kind of the breakdown. So professional fees, like you said was about two thirds was the ongoing investigation and then there was some in the regular salaries for BSA. I was wondering if you could kind of clarify a little more. So the professional fees seems like that will fall rather precipitously once the DoJ is completed. But now that the BSA is also done, I was curious, can that wane down? And then -- go ahead? Yes. For a bank of our size, right, we have a pretty hefty BSA department. However, we still do have a large book of those Advantage loans on our system. So while I think eventually that will wane down, it's going to take some time for that to happen, right, as long as we still have that book of business on our balance sheet. Can you quantify or are you not at that -- you don't want -- like at the level to just say how much is the BSA where it could potentially run off to get like a true core, core number? Yes, I'd be hesitant to say at this time. I haven't prepared an answer for that. I can tell you there's 40 roughly people in our BSA department currently. So it gives you a sense on a $2.5 billion bank what that looks like. Sure. Yes, it's quite a bit. And then whoever wants to answer, Tom or Karen, when you think about just the liquidity today, I know Tom you referenced deposits have more value. And then I think this fourth quarter earnings really proved that. But when you think about it, a lot of the banks in the industry have been struggling because they need to find a fund to loan growth, whereas you guys are kind of shrinking a bit still. I was just kind of curious on your appetite for the CD and money market type, the expense of deposits relative to your kind of -- you're still in shrink mode on the balance sheet. Just kind of curious, are you kind of studying the market or are you giving what the market takes you so you don't lose clients, or just your approach to the overall funding costs? Yes, I can handle that, Ben. So we're -- I think the last two quarters I'd say we've pretty much kept the balance sheet flat. And that's pretty much our goal here. We had to run off a large group of higher than market rate CDs that the bank had utilized historically to fund the Advantage loan growth that the bank had. So the goal right now is pretty much status quo and in and around the market. We're not chasing anything. But I would say pretty much in and around the market rates that are out there. The challenge is that the bank historically operated as an old line thrift. And so didn't really have a demand deposit book and obviously no corporate accounts or business DDAs, things like that. So, the bank was pretty much a money market or CD deposit. We have over the last I'd say six months, Ben, developed and then we started marketing a demand product and on a relative basis, starting with zero, we've had some pretty good success with that, but there's a long way to go. But as I said, I do think we're at a period where liquidity certainly has more value. Wholesale funding is very expensive. And I guess the other thing you've seen in the industry is pretty significant, the TCE diminution from the higher rates on what were in some cases relatively long duration securities at lower rates. So those are the things that I've noticed. I don't think a huge issue here, but we've obviously experienced some of that, but our duration is a little over two years. Got you. Good. Then lastly, it was more of a clarification. So you have 9 million still reserved for legal or the investigations. Odds are it's not going to be exactly 9 million, because that's just not how life works. But it's -- assuming that it's under as a balance sheet adjustment, or I'd say over or under, i.e. I'm asking, it won't flow through the income statement, correct? No, I'm sorry. It won't flow through whether you over reserved or under reserved, the net change will not have a tax adjustment is what I'm really getting at. No, there's no tax adjustment, because fines and penalties are not deductible. So that's just gross and net are the same, whatever comes to be. I mean 9 million is the most I can get in there. So that's why it's 9 million. But I don't know more than that. I want to follow up with that last question about the reserve. How do you work your CECL, given you have this possible pending liability with the government to sort of make that CECL adjustment as of the first quarter? I guess the CECL looks like historical defaults or delinquencies and you have sort of this, who the hell knows what the number is going to end up being. But how do you realistically make a CECL adjustment as of the first quarter? Well, CECL when fully implemented, as you know, just a debit or credit to the equity accounts, I think it's probably safe to say we have no significant concerns with the effect of the impact. Obviously, it has nothing to do with the reserve we have for -- the remaining reserve we have for penalties. And the allowance that we have is we think appropriate and probably I think I can say plus or minus fairly insignificant amounts. I don't think we expect anything significant out of the CECL full implementation. Okay. And just a follow-up question about the margin. Every bank is sort of coming in and saying, hey, deposits are ratcheting up much quicker than we ever expected. If we do see another 50 or 75 basis points over the next six to nine months, how do you see that affecting your margin and your spread given how quickly everything else, all the deposits have jumped up in the last couple of quarters? Yes. Well, it's funny because you probably watch a lot of the same banks that I do. But for all of us, obviously, the increases were fast and furious and there was the typical lag in liability repricing, but the magnitude was greater. So a lot of institutions felt that more than others. Honestly, I think in our case, Ross, we had been building liquidity as painful as it was in '21 and '22 for obviously a variety of reasons that are unique to Sterling. But in any case, liquidity did build and we reduced credit risk. So I think there's at least some dividend for us being proactive at this point in time. Another couple of increases, our liability costs will gallop along the way everybody else's do, I guess, but we have a very heavily arm weighted loan portfolio and between primary and secondary liquidity on the balance sheet, it's, I don't know, Karen, you can correct me if I'm off here, but it's about 1.5 billion out of 2.5 billion. The Advantage loan portfolio, I think when I joined the bank was about, I think a little over 2 billion, it's around 800 million now. So at different states, but it continues to pay down. But the bulk of those have been -- were originated as adjustables. We haven't looked at too, Ross, I should also mention we've done some -- we continue to do some analysis with respect to payment shocks. But to date, we haven't seen any significant credit issues, especially on the residential side with higher rates as the loans adjust. We haven't written an Advantage loan since I'm going to say around the third quarter of 2019. So they're all pretty well seasoned. And obviously, the equity levels, even if the markets give back some, are very, very significant so that if they could to from a credit perspective behave the same way and every one that pays off is one less we have to deal with. Long answer, sorry. No, I appreciate that. How are you -- just specifically, how are you dealing with -- unless you've got a couple of large multimillion dollar depositors and when they come in, I don't know what you're paying them on a money market today, I don't know, 110, 120-ish. They come in and they say I can get 4 plus in markets or 4 something on a two year, what are you going to do for me? Are you adjusting those guys immediately and to what level? Well, fortunately, we had several of those when I joined the bank. And I viewed those as I guess higher maintenance costs, right. And so in several cases, we've nurtured those down to more modest levels. I don't even -- I can't tell you the largest that we have now. But they're all pretty manageable. There's no one that would be noticeable to anybody just looking at margins were it to reprice. They're all pretty much what you'd expect in a California-based retail deposit gathering system, but there were several before. Okay. I think that's about it. Okay. Thank you very much. Let's see how things develop over the next months and quarters, I suppose, hopefully, months and quarters. [Operator Instructions]. And with no remaining questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Tom OâBrien for any closing remarks. Okay. Just quickly, obviously, happy 2023 to everybody, and thank you for joining us. As I mentioned earlier, I can assure you we spend significant time, energy and resources to bring all of the issues with respect to the bank to a close as quickly as possible. We will continue to do that. And look forward to our first quarter '23 earnings call in April. Have a good day. Thank you.
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EarningCall_847
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Ladies and gentlemen, welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. My name is Glenn and I will be the moderator for todayâs call. [Operator Instructions] I will now hand you over to your host, Lora Daves to begin. Laura, please go ahead. Thank you, Glenn. Good morning, everyone. This is Lora Daves, CFO with Southern Missouri Bancorp. Thank you for joining us. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, January 30, 2023 and to take your questions. We may make certain forward-looking statements during todayâs call and we refer you to our cautionary statement regarding forward-looking statements contained in the press release. I am joined on the call today by Greg Steffens, our Chairman and CEO and Matt Funke, President and Chief Administrative Officer. Matt will lead off our conversation today with some highlights from our most recent quarter and fiscal year. Thanks, Lora and good morning, everyone. This is Matt Funke. Thanks for joining us. We are pleased to report this morning that the December quarter, which is the second quarter of our fiscal year, provided continued growth for Southern Missouri. Shortly after quarter end, we closed our merger with Citizens Bancshares. We will talk more about the merger after reviewing results. Growth this quarter primarily reflected an increase in net loans receivable partially offset by a decrease in other assets. We earned $1.26 diluted per share in the December quarter, thatâs up $0.22 from the linked September quarter and down $0.09 from the December 2021 quarter. Net interest margin for the quarter was 3.45% as compared to 3.77% reported for the year ago period and 3.65% reported for the first quarter of fiscal â23, the linked quarter. Net interest income resulting from accelerated accretion of deferred origination fees on PPP loans was significantly reduced as compared to the year ago period, adding less than 1 basis point during the current quarter as compared to 13 basis points in the year ago period. There wasnât a material impact in the linked quarter from PPP origination fees either. We viewed our core margin is down about 19 basis points, both quarter-over-quarter and year-over-year. Average interest earning cash and cash equivalent balances decreased compared to the linked quarter and year ago periods as loan growth outpaced deposit growth. Net interest income for the quarter was $28.3 million, an increase of $3.2 million or 12.7% as compared to the same period of the prior fiscal year. The increase was attributable to a 23.2% increase in the average balance of interest-earning assets partially offset by the decrease noted in net interest margin. On the balance sheet, gross loan balances increased $18 million during the second quarter. Compared to a year ago at December 31, â21, gross balances are up $604 million or 25%. Fortune â our Fortune merger in February of 2022 added $201 million over the trailing 12-month period. So net of that, our adjusted annual rate of growth for the year would be a little under 17%. The investment portfolio was down about $4 million over the quarter, while cash and equivalents increased just a little more than $5 million. Deposit balances increased by almost $155 million in the second quarter and increased by $454 million compared to December 31 of the prior year. The year-over-year increase was attributable in part to the Fortune merger, which provided $218 million in deposits at fair value. We also had more than $28 million we picked up in a branch acquisition â no, thatâs not accurate, that was actually just before our 12/31 â21 period end. FHLB borrowings decreased $163 million compared to the linked quarter end, with the reduction consisting primarily of overnight balances. The company utilized significant brokered CD funding in the current quarter to reduce its overnight position. Thanks, Matt and good morning, everyone. Iâd like to open by noting that on January 20, we announced the completion of the merger with Citizens Bancshares Company, which is the parent company of Citizens Bank & Trust with 14 branch locations serving customers in the Kansas City metro area, St. Jos, Chillicothe, Maryville, and several other communities in Northern and Central Missouri. Citizens Bank & Trust is now a subsidiary of Southern Missouri with plans to merge into Southern Bank at the time of our data conversion, which is scheduled for late February. Citizensâ locations will complement Southern Bankâs existing footprint, improve our market share in Missouri and provide potential opportunities for enhanced revenue. Due to their asset-sensitive nature of their balance sheet and their high levels of liquidity, we will hope to mitigate mortgaging compression in our current rising rate environment. As of 12/31, citizens had assets of $973 million, including loans net of $463 million, cash of $224 million, of which $184 million was in overnight Fed Funds, securities of $225 million, many of which are floating rate and deposits of $838 million. Citizens has maintained a great core deposit funding base over its history and will provide an opportunity for us to significantly improve our funding mix. Turning to credit, we did see some uptick in delinquencies, classifications and non-performers this quarter, but continue to feel good about our overall credit profile and borrower performance. Adversely classified loans were $38 million or 1.25% of total loans at 12/31 compared to $28 million at September 30. Watch and special mention credits totaled a combined $29 million at 12/31, down a bit as compared to $31 million at September 30, reflecting migration from the special mention category to substandard on one 9 million relationship. This one of the hotel loans that we have been monitoring very closely since the pandemic and with the expiration of the payment modification we had allowed. Itâs not necessarily a situation where the performance is degraded where we have any new concerns. But the special mention status was intended to be a short-term transitional classification and we ultimately felt it needed to be classified as substandard. The other hotel loan we have been watching was already classified as substandard. Both of these loan relationships are on P&I payments with amortizations of less than 20 years and our current and continue to exhibit strong guarantor support. Non-performing loans were just under $5 million or 0.16% of gross loans at 12/31, up 3 basis points as compared to September 30 the linked quarter and up 9 basis points from the period 1 year ago. The increase in non-performing loans was attributable to an increase in residential real estate and commercial non-performing loans. Loans past due 30 days or more were up slightly at 30 basis points on average loans, but remain at very manageable levels. There was an increase of 9 basis points from September 30, the linked quarter and almost 16 basis points compared to the very low levels of 1 year ago. Turning to our ag portfolio, ag production and other loans to farmers were down $27 million in the quarter as we saw expected seasonal pay-downs, but up almost $9 million compared to the same period of last year. Ag real estate balances were up $5 million over the quarter and up $10 million compared to December of last year. Our agricultural customers finished calendar year 2022 in a very strong position and the dry fall weather allowed them to complete the harvest, market grain, close out their books and work through the annual renewals at a faster pace than normal. We expect no issues on renewals with the vast majority of our ag borrowers. Also when we spoke a quarter ago, there was some concern that very low river levels would prevent some of our farmers from marketing their grain in a timely manner. But at this point, a wet winter has brought river levels back higher and deliveries are more or less caught up to what we consider normal for January. Going into calendar 2023, cotton and corn acreage look set to trend a little bit higher in our loan book. Soybeans will move down a little bit and rise should be steady. Chemical and fertilizer input costs generally follow the cost of oil. And so we saw a downward trend in the second half of the last year, but they have now stabilized and have begun to move a little higher. A number of borrowers have already locked in these costs and with farm commodities generally priced similar to what we saw in the second half of last year, many of our farmers have contracted a reasonable percentage of their expected crop as well taking some price volatility off the table for the new year. Lora, would you provide some additional details on our financial performance, please? Thank you, Greg. Might hit on some key financial items already, but I wanted to share a few more details on the margin. Matt noted that PPP origination fee recognition has declined to the point that it had no real effect quarter-over-quarter, although a year ago, it was more meaningful. Iâd add that this quarterâs 3.45% margin included about 6 basis points of contribution from fair value discount accretion on acquired loan portfolios and premium amortization on assumed deposits, or $493,000 in dollar terms. In the linked September quarter, when we reported a margin of 3.65%, it included a similar benefit from fair value discount accretion of 7 basis points and a year ago when the margin was 3.77%, and we had 13 basis points of PPP origination fee recognition the benefit from discount accretion on acquired loans was 6 basis points. Compared to the September quarter, we viewed our core asset yield as increasing 27 basis points resulting from higher loan yields and lower average cash and cash equivalents, while our cost of funds was up 49 basis points. Non-interest income was up $171,000 or 3.2% as compared to the year ago period, attributable to increases in other loan fees, bank card interchange income, deposit account service charges, loan servicing fees and other income, which were partially offset by a decrease in gains realized on the sale of residential loans originated for that purpose. The increase in other income was attributable to a gain on the sale of fixed assets of $317,000 as the company sold properties not currently in use that we had picked up in older acquisitions. This partially offset the fact that the year ago results included gains on our exit from a renewable energy tax credit partnership. While origination of residential real estate loans, for sale on the secondary market was down, we had some offset from gains of sale on and servicing of the guaranteed portion of government guaranteed loans. Compared to the linked quarter, non-interest income was down 1.1%, with the December gain on sale of fixed assets, mostly offsetting a decline in loan-related fees. Non-interest expense was up $2.6 million compared to the year ago quarter, including $608,000 in charges related to M&A this quarter. as compared to $205,000 in the year ago quarter. In addition to the M&A costs, the increase was attributable primarily to health inflation and benefits, occupancy expenses data processing expenses and other non-interest expenses and were partially offset by decreases in foreclosed property expense and advertising. The increase in compensation and benefits reflected continuing year-over-year increases in compensation levels, increased headcount resulting from the Fortune merger and a trend increase in legacy employee head count. Occupancy expenses increased primarily due to facilities added in the Fortune merger and other equipment of purchases. Compared to the linked quarter, non-interest expense was up a little more than $700,000 and merger-related charges made up much of that increase. The company did see an uptick in net charge-offs during the quarter, but still at a very manageable level with the 300,000 total approximating an annualized 4 basis points on average loan balances. Our trailing 12-month figure is just under $400,000, which rounds to 1 basis point. The company recorded a provision for credit losses or PCL of $1.1 million in the 3-month period ended December 31 as compared to no provision in the same period for the prior fiscal year. Our allowance or ACL at December 31 was $37.5 million or 1.25% of gross loans and 783% of non-performing loans as compared to an ACL of $37.4 million or 1.26% of gross loans and 960% of non-performing loans at the September 30, 2022, or linked quarter. The required PCL this quarter was driven in large part by an increase in available lines on construction and ag operating loans, requiring a larger allowance for off-balance sheet credit exposures, but it decreased from the $5.1 million PCL in the linked September quarter when a significant increase in outstanding loan balances required us to increase the dollar amount of our ACL. Our tangible common equity ratio increased 31 basis points during the quarter as capital grew faster than assets due to the slowdown in loan growth, earnings retention and a modest reduction in accumulated other comprehensive law. Matt, do you have other comments? Thanks, Lora. Just want to highlight that our loan growth of more than $18 million for the quarter resulted mostly from multi and single-family residential real estate, commercial real estate and a modest contribution from consumer loans partially offset by seasonal pay downs of the ag portion of our commercial loan book. Our West region centered in Springfield, Missouri continues to have loan growth quarter-over-quarter and year-over-year. As expected, our East region, which includes much of our ag activity declined in loan balances this quarter, but it only trails our West region in year-over-year loan growth. We expect organic growth to remain modest in the coming quarter with our pipeline for loans to fund in 90 days at $122 million at December 31, down from $230 million a quarter earlier and down from $158 million reported at this time last year. Our non-owner CRE concentration was approximately 330% of regulatory capital at December 31, down by 14 percentage points as compared to September 30 and as compared to 288% a year ago. Our volume of loan originations was approximately $281 million in the December quarter, down from $436 million in the September quarter. And in the December quarter a year ago, we originated $335 million. The leading categories this quarter were commercial real estate, single and multifamily residential real estate and construction loans but several of those are also the categories that showed the most slowing this quarter. We mentioned that CD growth was attributable in large part to the use of brokered CDs to fund asset growth, it accounted for $89 million of the $140 million growth in CD balances. Public unit funds were a little changed over the last quarter, but they are up $100 million from 12 months prior. Deposit growth in the fiscal year-to-date came from our East, West and South regions and it was enhanced by relationships with several new public unit depositors in different communities across our footprint. Our cash balances remain lower as compared to the unusually high balances for much of the last few years, and we ended the quarter in an overnight borrowing position but it was much reduced from September 30 due mostly to our use of brokered funding. On a stand-alone basis, we would have continued to expect competition for deposits to pressure our cost of funds and margin going forward. Although weâd be optimistic but the slowdown in the pace of increases by the Fed would provide some chance for the loan book to begin to catch up. As Greg mentioned earlier, our merger with Citizens should be a benefit to our liquidity, our management of our cost of funds and it should help to offset some margin pressure as well. Greg, closing thoughts. Yes. Thanks, Matt. In addition to the immediate benefits from combining Citizens balance sheet and ours, we are really looking forward to the long-term opportunities that these markets represent both in the Metro Kansas City and St. Joseph markets as well as the more rural markets as well. We are going to be concentrating on integration and meeting customer expectations in the merger process. And we are really looking forward to the opportunity to grow a good franchise. With that being said, we expect to have plenty on our plate for the time being, and we would expect to not be looking for new M&A opportunities for the near-term. Lora? Thank you, Greg. At this time, Glenn, we are ready to take questions from our participants. So, if you would, please remind folks how they make queue for questions at this time. Thanks everyone. Good morning. Question now with the deal done, how we should look at that, look at the construct of the balance sheet, obviously, came in with a lot of cash. Is that going to be used to pay-down some brokered funding right away or allow to put less of an emphasis on deposit growth right now, especially in higher cost accounts? How should we look at that cash balances? I think it will be some mix of that with the brokered funding. We did a little bit of a ladder. So, we will have some that rolls off. It wonât be just real significant immediately. We did have some options to call some of our longer term brokered CDs that we issued as well. So, we will want to think about what the rate environment looks like and where that is. Some of it, we would expect to war chest a little bit as liquidity for future loan growth as well. Got it. And then just looking at the loan-to-deposit ratio now is going to be down towards 90%. Is there a much emphasis on growing deposits out of the legacy franchise at this point? We definitely want to continue to grow our non-maturity deposits. I would expect that we would not feel pressured to be quite as aggressive on pricing going forward. Got it. And then just on the expenses going forward, when do you expect to have all the cost saves in the run rate? I think July 1, we should be pretty much all the way there as far as the cost saves. We will have a fair amount of it achieved within the June quarter. Hi. Thanks so much for the question. Maybe I would start on loan growth and kind of you mentioned a slowdown of some sort. Just wondering on kind of what you are anticipating for loan growth as we look forward. And if there is any categories that you see having better risk-adjusted returns at this point in the cycle, interested in your thoughts on the outlook for growth in demand as well as the categories that are most attractive to you at this point? We do anticipate having modest loan growth during the March quarter. And then historically, we have quite a bit more growth in the June quarter as our ag lines begin really drawing up in earnest again. So, part of the seasonality that we have historically had, we would expect some of that same seasonality for our 2023 calendar year. As far as categories of loan growth, now by and large, we are looking for a lot of our growth to continue patterns that we have had historically. We would anticipate a little bit more in owner-occupied CRE and some C&I than what we have historically had, but we are still going to continue to have growth in our non-owner occupied CRE buckets, and we will continue to have some growth in our residential lending portfolios. Overall, our growth rate for â23, we would expect to be slower than what we had in calendar year 2022. But we do expect growth to continue. Understood. Thanks so much. So, just on a high level, your Citizens transaction gets you into Kansas City. Just wondering, I know itâs early and you are still working in the month ahead to convert and merge banks subs. But wondering how you are feeling about the Kansas City market, if there is â you see this as a good jumping off point to add there as well as kind of any other markets where you may be looking to add? I know Greg, in your prepared remarks, M&A is slower right now, but I am not sure if de novos is something you would be interested in as well, or that would be primarily through M&A in the future, but just interested in some high-level thoughts there. We are very excited about the Kansas City market. We have hired a market president that is based in the Kansas City market that we have added to what would have been Citizens locations. We are also looking forward to the opportunity to add some personnel in some of the rural markets as citizens operated in. And we feel like our product mix and the addition of several products that Citizens did not have will result in some real opportunities for some loan growth in those market footprints. We are probably not anticipating much in the March quarter just from standpoint of integration and the change. But as we bring those personnel online, we would anticipate it to enhance our long-term growth opportunities. And I think organic or de novo branching will be something that will be pretty limited in nature. And we might add a facility at some point in time, but itâs not our primary focus. And we will be changing some of where Citizens operated out of. It wouldnât surprise me if we wouldnât relocate an office. But I really wouldnât consider that as much de novo branching is just relocation. And that will take a period of time for that to occur as well. Thank you, Kelly. [Operator Instructions] We have no further questions on the line. I will now hand back to Lora for closing remarks. Thank you, Glenn. We just want to say thank you to everyone who has participated and look forward to future calls. Greg or Matt, do you have anything to add?
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EarningCall_848
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Welcome to Sysco's Second Quarter Fiscal Year 2023 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would now like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead. Good morning, everyone, and welcome to Sysco's Second Quarter Fiscal Year 2023 Earnings Call. On today's call, we have Kevin Hourican, our President and Chief Executive Officer; and Neil Russell, our Interim Chief Financial Officer and SVP of Corporate Affairs. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended July 2, 2022, subsequent SEC filings and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can be found in the Investors section of our website. To ensure that we have sufficient time to answer all questions, we'd like to ask each participant to limit their time today to one question. If you have a follow-up question, we ask that you reenter the queue. At this time, I'd like to turn the call over to Kevin Hourican. Hello, everyone. Thank you for joining our call this morning. Our reported Q2 results, as displayed on Slide number 6, include positive case volume growth, continued share gains, strong double-digit sales and earnings growth year-over-year. This included operating income growth across each of our segments, including SYGMA and International. Importantly, gross profit growth this quarter outpaced operating expense, an important milestone that we expect to continue into the remainder of the year as we make progress in further improving our supply chain productivity. In addition, we continue to advance forward our Recipe for Growth strategy with continued progress in our digital tools, supply chain investments in sales and merchandising initiatives. The progress that we are making will enable Sysco to better serve our customers and grow profitably for years to come. As you can see on Chart number 7, we continue to succeed versus the overall industry growing1.35x the market in the first half of 2023. I'll break down the sales momentum versus the market further in a moment. Strong top and bottom line growth was delivered for the quarter with adjusted EPS in Q2 of $0.80. I'd like to provide you with some details on select items that impacted our results for the quarter. The first callout is within case volumes. We leveraged a third party to help with macro forecast of the industry's growth. For the second quarter, the projection was that the industry in total, would realize nearly 5% case growth year-over-year. In Q2, the actual industry case growth rate was only 1%, excluding Sysco. This 400 basis points of case volume variance was significant, especially within the local segment. A contributor to the softer volume result was the reality that the Omicron overlap did not lift the market growth rate in November and December as had been anticipated. With that said, it is important to note that we are seeing stronger volume growth in January. Additionally, a labor dispute that impacted three of our operating sites in the second quarter negatively impacted sales and case volumes during the October and November time frame. To be clear, the overall market growth rate is an industry-wide issue, while the labor dispute was a Sysco-specific challenge. The latter of the two issues is now firmly in the rearview mirror. We will monitor the second half of the year case volume trends very closely and we are taking specific actions to accelerate new customer acquisition in the local segment for the second half of this fiscal year given the softer overall market. In addition to explaining the case volume dynamic, I would like to provide an update on operating expenses. As I mentioned, we are making solid progress with improving operating efficiency and we grew GP at a faster rate than expenses in the quarter, a sign of progress and a trend we expect to continue. We are making progress on improving supply chain productivity and I will discuss that further in a few minutes. With that said, the aforementioned labor dispute had a meaningful impact on our Q2 expenses. During this disruption we prioritized deliveries for essential customers, especially in the healthcare and education segments. As a result, we took the actions required to ensure that we could continue operations in these three sites, including leveraging third-party resources when necessary. These customer service measures pressured our expenses for the quarter, negatively impacting operating income. Again, this challenge is in the rearview mirror. On the positive side of the ledger, our contract bid business is exceeding plan on the top and bottom line for the year. Our sales teams are doing an excellent job with customer retention, customer acquisition and profitability management within bid contracts. In addition for our total business, our gross profit per case was strong for the quarter. Our sales and merchandizing teams are doing a solid job with inflation management and strategic sourcing. Additionally, our Sysco brand merchandizing team continues to do good work as we increased Sysco brand case penetration by 65 basis points in the quarter versus the prior year. As you know, each additional Sysco case adds to our profit rate and also positively impacts customer retention. From a sales and margin perspective, we continue to succeed by introducing higher-margin specialty products to our customers and we are winning new business in the higher growth produce segment. The success that we are having in GP per case is expected to continue into the second half of the year and that progress will help offset portions of the market volume softness. Lastly, we are doing a good job of managing expenses at our Global Support Center or corporate expenses putting measures into place mid-Q2 to lower spending in these GSE cost centers. Those measures will stay in place for the remainder of the fiscal year to offset the lower marketplace growth and to mitigate a potential future recession. Turning to the second half, we remain resolute on continuing to drive profitable share gains and drive supply chain operations efficiency improvements. On the operating side of the business, we are making progress on improving our productivity. We are delivering improved retention rates and as a result, lower hiring rates. By hiring fewer people, we have been able to lower recruitment expenses, lower training expenses, and we are seeing increased productivity across warehouse and transportation roles. These improvements will accelerate into the second half of the year. We are fully staffed domestically and internationally and we have detailed work in place to ensure our staffing levels match our daily, weekly and monthly volumes. Q3 is typically the softest volume quarter of the year. and we are improving our flexibility in managing staff levels to lower volume periods, all while preparing for the highest volume quarter of the year,Q4. These staffing planning efforts are built into our year-to-go forecast. There are four factors that influence our full year guidance. Number one, softer than originally budgeted market volumes in the local segment, partially offset by Sysco growing 1.35 times faster than the market in total; number two, higher than originally planned operating expenses, while steadily improving; number three, favorable GP per case and strong margin management; number four, favorable GSE or corporate expenses. Given that we are now at the midpoint of the year and based upon the factors I just covered, we are adjusting our full year guidance. The full year is now guided to be a $0.15 range from $4 to $4.15, which represents year-over-year growth of approximately 23% to 28%, lapping the 126% growth from fiscal 2022. The midpoint of 407 represents a 15% growth rate versus 2019 levels. As is my custom on these calls, I plan to share a bit more color on a few key Sysco initiatives that are driving performance. First, let me start with sales growth. For the first half of the year, Sysco grew 1.35 times the industry and we are on track to deliver our sales growth goal for the year. Our Recipe for Growth strategy is winning in the marketplace. We are seeing solid growth in national restaurants, healthcare and our education segments. At the local level, we are winning business through our specialty programs: Produce, protein and Italian and through our customer growth initiatives, Sysco Your Way and Perks. Altogether, these sales wins are delivering compelling share gains. In the most recent quarter, we advanced dozens of additional Sysco Your Way neighborhoods, introduced Sysco Perks to thousands of customers and began the integration of our latest Italian acquisition in Southern California. The Italian distributor we acquired in Los Angeles, Concord Foods will be converted to the Greco business model shortly. We are planning for compelling sales and profit growth from that acquisition located in the second largest Italian markets in the country. We will continue to expand the Greco platform across the country through a combination of both organic and inorganic activities. Topic two for today I'd like to discuss the state of our supply chain and highlight the status of some important work. I'll start by discussing our core operations environment and then I will highlight some of our strategic initiatives. During the first quarter of 2023, we achieved fully staffed status across our network. During the second quarter, we were able to focus on colleague training, productivity and retention. I am pleased to report and shown on Chart 9 that we are making progress on retention and as a result, we will need to hire far fewer colleagues in the second half of this year. We are seeing the green shoots of progress that come from the reality of less hiring, like lower recruitment costs, lower hiring costs, lower training expenses and lower overtime percentages. We are also experiencing improved levels of productivity from our colleagues as they become more skilled in their roles. Our colleague workforce is still inexperienced versus our historical standards and therefore, productivity is still below historical standards. However, we are making solid progress. We expect to make even more progress in the second half, enabling better flow-through from the top to the bottom line. Importantly, we grew gross profit dollars in Q2 at a faster rate than our expenses grew, creating a favorable leverage ratio. We expect to make even more progress in the second half of the fiscal year. From a supply chain strategic initiatives perspective, we continued on our journey to enable profitable sales growth, improved service levels to customers and to be the most efficient distributor within the food service industry. Our omni-channel initiative is now live in our first test region. We are able to share inventory across two Sysco houses and we have enabled the ability to proactively leverage stocking strategies to improve service levels while lowering our overall level of working capital within the region. As I have mentioned previously, this project will help us lower transportation expenses by ensuring that the last mile distribution to a customer comes from the most proximate DC location agnostic of where the inventory is staged or warehoused. Equally importantly, we continue to make progress with six day deliveries. We have moved meaningful business through Saturday delivery, enabling effective day balancing, increased flexibility and increased capacity utilization across each of our now six full shipping days. The progress of this initiative will position us well for the upcoming peak fourth quarter shipping volume and will enable us to continue winning net new business at the national and local levels. We are pleased to have the implementation in the rearview mirror and we are now focused on efficiency leverage and customer acquisition. These two projects are perfect examples of how Sysco is transforming supply chain management within food service distribution. Our supply chain will enable us to grow profitably for years to come. Thank you, Kevin, and hello, everyone. It's good to be with all of you, and I look forward to our ongoing discussions while I am in this interim role. During the second quarter, we delivered solid growth in both top and bottom line results and continued our balanced approach to capital allocation. All important elements of our Recipe for Growth as we further enhance competitive advantages for Sysco. I'll start with a summary of our second quarter results. Sales grew 13.9% with U.S. food service growing at13.7% and continued positive momentum for our International segment, which grew at 17%. Volumes for the U.S. foodservice segment, which includes our Broadline, FreshPoint U.S. produce, U.S. Italian and other specialty businesses, grew 5.2% and local case volumes increased 3.2%. Gross profit for the second quarter increased 15.9% to $3.3 billion versus last year with gross margin improving 29 basis points to 18%. Gross profit dollars per case grew in all four segments versus prior year marking the sixth consecutive quarter of such growth. Our gross profit and margin improvement during the second quarter reflected our ability to continue to effectively manage product inflation, which moderated to 8.3%, down sequentially from 9.7% during the first quarter at the total enterprise level. The improvement in gross profit per case was also driven by incremental progress from our strategic sourcing efforts as we continue to partner with our suppliers. Overall adjusted operating expenses were $2.7 billion for the quarter or 14.3% of sales, a 33 basis point improvement as a percentage of sales over the same quarter in the prior year. This quarter included transformation investments of $55 million and new colleague-related productivity costs of $22 million. This is an improvement compared to $63 million of transformational investments and $41 million of productivity costs in the first quarter. Snapback costs were reduced all the way down to zero during the second quarter. We are pleased with the sequential improvement we experienced in both snapback and productivity during the quarter. All four operating segments again showed increases in profitability year-over-year during our second quarter. As seen on Slide 15, adjusted operating income for the enterprise increased by 37.6% versus last year to $682 million. This is the highest adjusted operating income result for the second quarter in Sysco's history. Just a few years ago, our operating income was about one-third of the amount we achieved this year, an important signal of the progress being made at Sysco via our Recipe for Growth. It is worth noting that adjusted operating income for the quarter was generally in line with external expectations. Importantly, as Kevin shared in his introduction, this quarter marked an important milestone as gross profit dollar growth outpaced operating expense growth, illustrating the beginning of the anticipated leverage with more progress expected going forward. For the quarter, we grew adjusted EBITDA by 23.9% to $831 million. We are pleased with the continued top-line growth in the second quarter. Gross profit dollar growth outpaced operating expense growth and each of our segments generated substantial operating income growth. Our results this quarter were also impacted by three items, including: One, the impact of the labor dispute during the quarter at Sysco. We estimate this impacted our results by approximately $26 million during the second quarter. Second, as just mentioned, a continuation of productivity cost of $22 million directly related to the higher volume of new colleagues we hired over the past couple of quarters. The first two items are included in adjusted operating income. The third item was below the operating income line in other income and expense, which showed adjusted expenses up $26 million over the prior year. This increase in expense was primarily due to increased pension expenses, which were a result of higher interest rates. Regarding pension, we also completed a transfer of a portion of our pension liabilities in the second quarter, decreasing Sysco's plan size, risk and overall administrative costs while protecting retirees as they will now be in the hands of an A-rated insurance company. This transaction resulted in a non-cash charge in the second quarter of $315 million. In regard to the balance sheet, our strong investment-grade rated balance sheet remains a competitive advantage for Sysco, and we ended the quarter at three times net debt to adjusted EBITDA. In the first half of the year, we returned $268 million to shareholders in the form of share repurchases and paid our increased quarterly dividend, in total, returning $766 million to shareholders. As a reminder, specific to our debt, we remain well positioned in the current rising interest rate environment with approximately 95% of Sysco's debt being fixed rate at attractive rates. Let's turn to cash. Year-to-date, cash flow from operations for the quarter was $503 million, a $126 million improvement over the prior year. Net CapEx increased to $284 million as we continue to invest in our Recipe for Growth, particularly with respect to our planned investments in fleet and distribution facilities. Free cash flow increased to $219 million for the quarter. Working capital was a modest use of cash. We continue to monitor our inventory balances, as well as our accounts receivable given the economic environment. We ended the quarter with approximately $500 million in cash on hand and over $3 billion in total liquidity. Lastly, looking ahead to the remainder of the year and beyond, as Kevin mentioned earlier, we are adjusting our full year EPS guidance range to $4 to $4.15 per share for fiscal year 2023. The midpoint of this range reflects our current business plan, including the three items I described earlier. The low end represents a further macroeconomic softness and potential subsequent reduction in food-away-from-home volume demand. The high end of the range represents an improved macro environment or outside Sysco performance. As we look toward the remainder of the fiscal year, we expect further improvements in productivity costs as the prior wave of new hires continues to ramp up in their roles. We also expect the second half of fiscal 2023 to reflect a similar trend of gross profit dollar growth outpacing operating expense growth. Now I would like to provide a brief update on the status of our sustainability and diversity, equity and inclusion work at Sysco. We issued our 2022 sustainability report and our DEI report in November. Sustainability is a key ingredient to our recipe for growth strategy to help ensure that we are growing responsibly and purposefully while leading our industry toward a more sustainable future. We are proud of the actions we continue to take to build a more sustainable future for Sysco and for our industry. It is through these actions that during the second quarter, our MSCI ESG rating was upgraded from BBB to A in their latest ratings assessment. This is a reflection of our ongoing work in sustainability across Sysco's three pillars of ESG: People, product and planet. Furthermore, Sysco aspires to create a global culture that is decidedly diverse, equitable and inclusive, one where we foster belonging as we care for one another and connect the world through food and trusted partnerships. Our recently issued DEI report takes a deeper look into our strategic approach to diversity, equity and inclusion at Sysco and our commitment to caring for people. Since accelerating our DEI efforts in early 2020, we've developed a three year road map to guide our DEI journey, as we embed our strategic priorities throughout the business and achieve our DEI goals. Importantly, we recently achieved our current 2025 workforce representation goal and have now established a cross-functional task force to develop new workforce representation goals as we move forward. All of these efforts are consistent with our purpose of connecting the world to share food and care for one another. Both of these reports can be found on sysco.com. The focus on sustainability and DEI is not only the right thing to do, it will also be good for business in the long term. Thank you, Neil. I appreciate all that you are doing for Sysco. As we conclude, I'd like to provide a brief summary on Slide 20. The following are our key takeaways from today's call: Our first half financial performance with a 15% increase in sales and a 26% increase in adjusted EPS displays the progress Sysco is making to win in the marketplace while we are transforming our business for the future. Our profit leverage improved in the second quarter and we expect that ratio to improve further in the second half of this fiscal year. We communicated today several factors that impacted Q2 profit results. Importantly, the labor dispute is behind us and we are making solid progress on improving our operating expenses. On the sales and volume side of the ledger, our core growth initiatives are working as designed and we will focus on winning more new local customers in the second half of the year. Sysco has proven that we can win share when we make it a priority for our sales teams. Encouragingly, January volume growth is off to a strong start. Lastly, Sysco remains deeply committed to our strong and stable balance sheet, disciplined capital allocation and delivering continued returns to our shareholders. Our status as a dividend aristocrat remains a priority and we are proud to carry that distinction going into our 54th year. We look forward to keeping you posted on our progress as a company and look forward to highlighting more about our longer-term initiatives at the CAGNY conference in a few short weeks. Lastly, I'd like to provide a brief update on the status of our CFO search. We are making solid progress. The interest level from highly qualified candidates has been very strong. We have a very compelling pool of talent to choose from and we are progressing along in the evaluation and selection process. I would like to thank Neil for the outstanding job he is doing as our interim CFO. He is a trusted partner and I greatly appreciate his leadership. Hi, good morning. This is Kelly Bania. Thanks for taking our question. I was wondering if we could just talk a little bit more about the plan for the second half. It sounds like the labor dispute is clearly isolated to the quarter, but the other factors that you called out as contributing to the guidance update. Maybe can you just help us understand what is in the plan for the second half as it relates to these factors, whether it's the below-the-line pension, the productivity, the local growth and maybe just a little more color in general on the local growth, what you think impacted that customer base? What you attribute this to? And what you're expecting in terms of market-based growth from independents in the back half? Thank you. Good morning, Kelly. Thank you for the questions. It's Kevin. I'll start with comments about the updated revised guidance. I'll talk about the local growth specific question and then I'll toss to Neil for the below the line components of your question. It's a good question and a lot to it. So we'll take it into each of those three parts. The forecast that we revised today is what we would call a middle-of-the-road, center of the fairway forecast. It's our updated view given the conditions that we are operating within and the data that we have available to us. I'd like to start with the comment on overall market growth. We do leverage a third-party firm to provide us guidance on what the overall market will be and as I said on my prepared remarks, the expectation was that for the quarter that disclosed that the market in total will be up five and the market in total, excluding Sysco was up one. Now we budgeted for and are delivering more growth than the market. So we layer on top of the market growth 1.35 times from Sysco's specific performance. The good news is we are achieving that particular outcome. We are, in fact, delivering performance results greater than the market. It's the reality that the market itself is performing softer or lower than what had been expected. I'll come back to that in a minute to answer the second part of your question. So that needed to be adjusted for the full year, which we have done. I'm not going to quote a specific local case volume growth for the second half, just to point you to our total guidance includes our updated view on the second half of the year. Operating expenses, we've updated for the year to reflect the current rates of productivity, which are lower than what we had originally budgeted, but as I called out in my prepared remarks, we're making steady progress, green shoots of improvement. I call your attention to Slide 9 in our prepared slides, showing you the specific data that are the leading indicators of what will become cost per piece improvements and cost per piece reductions and we are making meaningful progress in supply chain productivity. So we updated point two, which was our cost per piece shipped for the year to go. And then the labor dispute happened already, but it needed to be incorporated into our full year because the guide we provided today is a full year. And it was a $26 million operating income hit for the quarter, that's now closed. It is in the rearview mirror. It is behind us, and that will not be repeated in the second half of the year. And the other income component, I'm going to toss to Neil in just a moment for him to explain its portion impact on the full year. Let me just address the softer growth rates, kind of what are the drivers of that? Why is it transpiring and then toss over to Neil. I think it's a couple of factors, Kelly. Number one is 2022 actually ended up being stronger than what the third-party modeling component had expected. So my belief there is that some of the over delivery, if you will, on snapback of COVID recovery in 2022 soften some of the recovery in 2023. That's point number one. Point number two is inflation as many of the restaurant names reported at ICR a couple of weeks ago. They are delivering strong top line results, but to put traffic in their own case volume metric, if you will, is flat to down nominally. And that, I believe, is reflective in the overall volume component, the impact of inflation. Number three, consumer sentiment, mindset relative to everything that's being written in the newspapers, et cetera, and how that impacts consumer behavior. Last but not least, and I mentioned this in my prepared remarks, is Omicron we had expected and anticipated a bump in November and December tied to that rolling over last year's headwind and we didn't see that bump in November and December. It is reported on my call earlier this morning, though, that we are seeing strong year-over-year performance in January and that is a positive. So when we put all of those things together, the best predictor of future outcomes are current outcomes, and we essentially took our current trends modeled them forward for the second half of the year, applied what we call center of the fairway view, loaded in our own views of risks and opportunities and the things that we can do to manage our business performance and therefore, updated our guidance and provide that clarity today. Hey, Kelly, good morning. Good to hear from you. Just a couple of points from me here. First of all, talking about some of the operating expenses we had, as I alluded to in my prepared comments, first of all, snapback costs, which we've talked about for the past several quarters to remind you going back, we are originally about $35 million then they were reduced to $29 million then to $10 million and now very pleased for the second quarter to be down to zero in that. And similarly, for the productivity cost that we've talked about over the last few quarters, we had $41 million and then $41 million again and now down to $22 million for the second quarter. So we are seeing the reductions in both of those lines that we had previously alluded to and we feel like we're very much at a turning point for some of these operating costs and we would expect that momentum to continue into the second half of the year. Addressing the below-the-line item specifically, what you saw in the second quarter, which was expense of about $15 million, I think is a fair representation of what we should expect per quarter for the remainder of the fiscal year. That's largely driven by pension expense, which has been influenced by interest rates. And we feel like that's going to be a fairly stable number because, as you know, we transferred liabilities as part of a transfer plan that we did during the quarter. And as a result of doing that, we had to remeasure the plant and so because we remeasured the plan, we feel like that's going to be a fairly stable number for us. We won't remeasure the plan again until we get to the end of the year. So thanks very much for the question. Hopefully, that helps. Good morning. Thanks so much for taking the question. So, I wanted to dig in a bit more on market share. You noted that you grew at 1.35x the market in 1H, which was a bit of a slowdown from last quarter's 1.4x pace. What in your view was most impactful in driving the slowdown relative to the market? Was it mainly competitors having more access to supply? Do the labor issues have much of an impact and what gives you the most confidence that share trends can accelerate again in the back half of the year? Thanks. Mark, thank you for the question. In aggregate, again, we're on track for the first half of the year. Our stated goal for the year is to grow 1.35 for the year and at the halfway point to be able to deliver that goal. You're right to point out that Q1 was stronger than Q2. The honest straight talk there is the labor disruption, which impacted three of Sysco's operating sites did, in fact, caused a disruption in the period of October and November from a market share perspective. We have cleared that hurdle. We have moved on from that hurdle and we are confident in our ability in the second half of the year to grow 1.35x the market. So that is the reason for Q2 versus Q1, just being direct and straight about it. We are winning at the total level. We're winning on the what we call contract bid business and our initiatives within the local segment are working. And those initiatives are the Italian platform that we are expanding, our growth in our specialty categories and that our customer-specific platforms of Sysco Your Way and Perks major initiatives are delivering the impact that we expect them to deliver and we're very focused on them. As it relates to the second half of the year, what gives us confidence in our ability to deliver the full year. We've got the best trained sales associates in the industry, 5,000-plus strong in the U.S. alone, and they're very focused on penetrating lines with existing customers, and we're going to make new customer acquisition, a bigger priority for our sales reps in the second half of the year given the overall market conditions as we're seeing them. And our sales force is very responsive to their compensation program. And I believe I've shared on prior calls how that program works, the base plus bonus and the bonus is configurable by us. We can tweak it, and we can adjust it and we can make modifications to it. And one of those adjustments for the second half of the year will be to increase the weight on focusing on what we call prospecting or new customer penetration. So I answer the Q2, and we have confidence in our ability to win versus the marketplace. And in aggregate, what we're looking for in the revised guidance â we provided today, the midpoint of 4.07%, just to keep in perspective is a 25% growth over prior year and it's a 15% growth over 2019, which is the peak profitability year of the company. So, all in, in aggregate, really strong year from Sysco in total. Hi guys. Good morning. I wanted to follow up on the cost side and what's embedded in the guidance again. I know when you set your initial guidance this year, there â the low-end incorporated some risk of a, I guess, modest recession. Obviously, the definition of that is debatable. But it does seem like the revision has a lot more to do with the cost side. And my question for you is, how much improvement is embedded from here from a cost perspective? And how much visibility do you have on achieving that improvement, which, ultimately, sort of relates to how confidence in your guidance at this point with this adjustment. And then, as a follow-up to that, how does what's happening in 2023 reflect the goal of 462 plus in fiscal 2024 from an EPS standpoint? Thank you. Ed, good morning. Thank you for the question. As it relates to OpEx I repeat a couple of the numbers that Neil communicated and then provide a little more color on why we have confidence in our ability to drive the improvement in the second half of the year. Toss to Neil for any additional color or comments about the overall confidence that we have in the forecast for the year. Snap back has been taken to 0, and that was a material number a year ago and big progress has been made. We're no longer needing to do things like hiring bonuses and referral bonuses and the marketing spend that we were doing to create awareness of jobs. So Snapback has gone to zero. The productivity piece, and that's specifically measured as excess over time, if you will, has gone from $41 million in Q1 to $22 million in Q2 and we expect for that to continue. I point you to Slide 9, Ed, and I put that chart in there on purpose to show you the progress in the collective community, the progress we're making on retention improvement and how that retention improvement will, therefore drive transportation, as well as warehouse operations metrics. We have finite data, real-time data, weekly data, I host a weekly call, talking about our productivity at the site level that all of our key leaders attend and we have a firm understanding of where we are and where we need to be week-over-week, month-over-month, quarter-over-quarter to hit the full year. So we updated our guidance today to reflect the fact that, yes, our operating costs in the second half of the year will be higher than what we originally budgeted, but an improvement from where we stand here today at the end of Q2 and we're seeing the progress that needs to be made in order for us to be able to deliver the full year and it has my personal full attention and the full attention of all of our leaders Neil will toss to you for any additional comments. Thanks, Kevin. Hey, Ed, good morning. Two things, Ed. First of all, on the FY 2023 portion of your question, we completely rebuilt the forecast as part of the process here and gratitude to the finance team for all the good work over the last several weeks to do that. As I alluded to, we feel very good about a few things that we rebuilt and are in there. As Kevin alluded to in his comments, the labor activity expense impact of $26 million is in the rearview mirror, but obviously, that factored into the adjustment that we did. The pension expense that I just spoke about, we remeasured the plans, we have high confidence and what we think those numbers will be going forward. I also mentioned things like the productivity and snapback cost that Kevin just alluded to that we feel very good about the turning point, if you will, that we see on those types of cost items. So we looked at the market, we looked at everything we have, and we have pretty high confidence in the numbers in which we're offering to you for the rest of this year. As it pertains to the second part of your question for next year, fiscal 2024, we're at the halfway point here in FY 2023. We feel really good about the progress we're making across the enterprise. We continue to gain share as we've talked about. We're driving really compelling returns through the Recipe for Growth initiatives including a lot of really good operating efficiency. That's part of the slide Kevin referred you to and our long-term plans reflect double-digit growth in both top and bottom line and along the way, we're returning a lot of value to shareholders through the dividend, share repurchase and of course, the profit growth. So we would typically update the next year during the summer as we look at the end of year results for us and that will be our plan for now. So we'll take a look at fiscal 2024 numbers when were port our end of year 2023 numbers. Thank you very much. Just following up on the most recent softening you mentioned. I know there was some talk about how operating expenses have perhaps surprised you to the upside. I was hoping the shift to the market volume softness you mentioned. Just wondering how much of that you think is unique to Sysco or perhaps unique to specific product lines or geographies? I know you mentioned that you're still outpacing the industry, but it doesn't seem like the restaurants or other customers that we hear from are really talking about as lowdown and in fact, we're talking about a little bit of a benefit from the Omicron lapse. I am just wondering if you can offer some detail on where you think the the softness came from and then whether your guidance assumes softness continues. I know you said January is looking better. I wasn't sure whether you're extrapolating that better January trend in the back half of the year assumption. Thank you. Hey Jeff, thanks, it's Kevin. I'll start with your question. Just as it relates to Sysco versus the market, I'll just point to the most important of facts, which is that we grew in the most recent quarter, 1.35 times the market. So it is â Sysco is outperforming versus the market and that outperforming is coming from across the board, business health. We are winning meaningfully in the CMU segments: Education, healthcare, contract bid within the restaurant sector and the gross profit rate and that sector has also been strong and has been ahead of where we expected it to be. At the local level, our business performance in total is being driven by our core growth initiatives within local that I referenced earlier. So this is not a Sysco-specific situation. It is a macro and we're actually pleased with our performance relative to the market. The only thing in the most recent quarter that was specific to Sysco was the labor dispute in three of our sites, which meaningfully pressured our operating expenses. We've size that for the investment community today to communicate. That was a $26 million operating income hit for the quarter, which was a combination of expenses and also sales and therefore, flow through to margin impact from the three markets that were impacted by that labor disruption. So as it was called out by one of the other questions earlier on this call, our Q2 growth versus the market was a little bits lower than our Q1 growth, but we still grew meaningfully versus the industry. As it relates to the second half of the year and then I'll toss to Neil if he has anything additional. We have been thoughtful about the full year volume. As Neil said, we took a big step back at the midway point, turned over every rock, looked at every component of our build of the full year budget and compared it to the trends of the business performance and we applied for the second half of the year, the trends of our business with known trend vendors that we - Sysco can positively impact, the operating expense that Ed just asked about is a projected improvement in the second half of the year. But we've been thoughtful about volumes looking at the second half. And no, the January strength I referenced was not contemplated at the time that we built that second half. The Omicron tailwind will abate here quickly in February. As you know, things began to reopen in the middle of February to the tail end of February and the forecast adjustment that we provided today is our best view of the full year center of the fairway, as I mentioned. Neil, over to you for any additional comments. Yes. Thanks, Kevin. Hey, Jeff, good to hear from you, as well. Just a couple of points from me. To answer your question, yes, we have factored in current performance to the year-to-go guide. One additional item I would point out to you is we've had improvement in our Sysco brand penetration, which we're very pleased with. That team has been doing a very good job, further penetrating both current accounts and new accounts with our Sysco brand product, which, of course, is a higher-margin product. So we see that momentum we're factoring that into our guide as well. So we do have good confidence in the year to go look that we have in the numbers we offered and just a reminder for those, the guide, the midpoint that we offered today is a 25% year-over-year growth and a 15% growth over 2019. So we like what we see there and we have really high confidence in that guidance. Hey, Kevin, a couple of things. On the local business, what are you seeing with drop size and profitability per stop right? What are the trends there? What's the thought on the your way rollout, right? How quickly can you roll that out? I know the target was to get to $1 billion of incremental revenue, how quickly can that be done? And then just lastly, the contract bid. I know that's very lumpy. Do you think that is abnormally â the opportunity abnormally large over the next year or pretty much in line with what it had been? Hey, good morning, John. Thank you for the questions. I'll take them in order. On the local business, drop size, I think just as evidenced by the data that we've shared has been a bit softer than what we had expected on a cases per operator perspective. Now there is work we can do about that. We have the ability to target our sales reps to win back lost cases or introduced new categories through a customer that has not purchased them before, like produce and protein, and we call that team-based selling, and we're getting better and better at doing that type of work. Profitability per customer, we're actually pleased with those metrics and where we are. We've done a nice job managing the inflation path through our Sysco brand win that Neil talked about is notable and significant and that meaningfully helps on profit per customer and we've done quality work with transportation routing over the last 45 days to make sure we're being as efficient as possible on our routes, especially for smaller customers and that has provided us with benefit as well. All of those variables that I just described have been built into the full year forecast that we submitted today. Those are my comments on local. For Sysco Your Way, we couldn't be more pleased with the performance of Sysco Your Way. Each individual neighborhood that we add to the program continues to perform like the initial markets did. That's one of my worries as we scale this thing as we add it to more neighborhoods. There's a halt or effect when you have a pilot program where the performance is outstanding. But when you go to scale, it cannot replicate. We're definitively proving that we can replicate that performance. It is material and significant. And how fast can we go? We're going as fast as prudent, John. There is work that has to be done at the operating site to prepare that site to support a very lead late in the evening, ordering cut-off twice per day delivery, a dedicated consistent driver, dedicated consistent sales reps. So there is customer remapping that has to occur. And we're going at the fastest pace that's prudent because what we can't do is compromise the service experience because what's making this program work the step change level of service that we're providing to those customers and it's not an incremental operating cost for Sysco because these are such dense neighborhoods that are in reasonable close proximity to our warehouses. So â and it's expanded internationally. We're now live in Toronto. We're live in Dublin. We're live in London, and soon, we will be launching in Stockholm. So it just shows you the breadth of this program is not just domestic U.S. It's working everywhere. We have launched it, and we couldn't be more pleased. We're also very pleased with Sysco Perks. Remember, Sysco Perks is not about restaurant dense neighborhoods, is Sysco Perks is a VIP program. It's an invitation-only program for our best of customers, and we provide them Sysco Your Way like benefits, but they're unique to that one specific customer. So that's the first customer who's not inside a Sysco Your Way neighborhood and we're seeing significant lift in profitability and top line growth with customers that are invited into that program and we have meaningfully expanded the rollout of Sysco Your Way â excuse me, Sysco Perks over the last quarter. The last of your three questions was in contract bid. I'm really pleased with our team, both in sales and supply chain in this segment. We've got a great sales leadership team. They've done excellent work with customer retention, customer prospecting. We are winning outsized business. We stopped reporting the number, but the last time I quoted it, we were at net $2 billion worth of incremental business, and we've continued to win net new business in the health care, education and national restaurant space. You asked me a specific question, you see outsized growth coming from that sector. We plan for growth across all of our sectors. And one of the reasons we converted to a 6-day delivery model is so that we have the ability to support that growth without having to make building expansions or building investments. We real feel increased our throughput capacity by 15% across Sysco by converting to a full six day delivery model. So really pleased with our success rate and contract bid. I expect for that success to continue in the forward-facing years. I am going to talk to Neil. He wants to add one more point. Sorry, John, I step down you I'm going to toss it to Neil for one more point. Hey John, I just want to put a proof point out there to wrap up what Kevin was talking about. I'll bring you back to the slide presentation in Page 9. In looking at our U.S. Broadline business sequentially, second quarter versus prior first quarter, our delivery pieces per hour for our driver universe 500 basis point improvement and then in the warehouse, in the selector position, a 600 basis point improvement in what we're seeing there. So all these initiatives wrap together are really driving good momentum across both top line and bottom line and how we're managing it. I think it's a really good proof point. A lot of the initiatives Kevin was just walking you through. Thank you, very much. I wanted to ask a quick follow-up on the EPS and then ask a question. But I understand there's a few moving pieces in the second quarter. Looking at the second half of the year, I guess what's driving the reduction in the guide relative to what you expected in the beginning of the year? I just want to have a better understanding of that. And then, Kevin, I know you mentioned engaging in specific actions to accelerate local case growth in the second half of the year. I guess, one, what are those actions? And the genesis of the question is, just given the softness that you've talked about in the environment, do you expect the category to get more promotional or competitive in the back half of the year as everyone tries to sort of grow market share? Thank you. Hey, Lauren, it's Neil. I'll start and then I'll pass to Kevin. Let me talk about the EPS and the guidance first. There are a few factors that came into play for our adjustment. As I mentioned, we totally and completely rebuilt the forecast based on a few different things. First of all, the market environment that Kevin referenced in his prepared comments and having a clean, good view to where we think the market is right now and headed for the next couple of quarters. On the cost side of the equation, as we talked about the impact of the labor dispute, putting that into the numbers looking at the pension expense, now that we've remeasured the plan at the midpoint of the year, knowing that that will continue forward as I mentioned, that about $15 million of expense that you saw down below the line, carrying forward again in Q3 and again in Q4. And even though improvement, we still have some of those productivity costs that we are carrying and our best view on that. So taking all those factors into consideration, the market environment, some of these expenses, that is what went into the updated guidance and therefore, our confidence that we feel very good about that new number. And then Kevin, over to you. Sure. Lauren, thank you for the question. I do want to be very clear that we are growing volume and we posted a performance result in the most recent quarter. Our total volume growth was plus 5.2. Local volume growth was plus 3.2. What the facts are, we are growing faster than the market. The reality is that the overall market was expected to be mid-single digits and then we would have been in the high single digits with our growth on top of that. It's now the total market is low single digits. We're growing in mid-single digits. So it's meaningful growth. It's just not the growth that we had budgeted essentially this time, a year ago, leveraging third-party data. So again, growing, and this is a very large business, $350 billion business. We have 17% market share. We are meaningfully confident in our ability to grow versus the market to take share and to deliver compounded growth on an annual basis on the top line and bottom line. We'll talk more about that in August as Neil said. What are the types of actions that we can take? And then you asked a very specific question, are we worried about deep discounting? I am not worried about deep discounting. That is not the recipe for success in this industry. Leading with price is not sticky, leading with price is able to be copied by others. We're going to lead with service differentiation through Sysco Your Way, through Perks, through our Italian platform expansion and we are going to be very clear on allocating our sales reps time to spend more time with new customer prospecting, but that does not imply that price is the lever. It's calling upon a customer that you've not served before. It's bringing in a specialty produce expert to penetrate produce in a category that hasn't purchased it before. It's introducing one of our Buckhead Meats premium protein specialist to a customer who's not buying premium protein, but yet we offer the best product in the industry, et cetera. So it's about in the second half of the year, leveraging our growth initiatives, they're working and we can accelerate those initiatives of Perks, Sysco Your Way, Italian and allocation of time and our sales reps can spend more of their time with prospecting new and penetrating further with existing and we're getting better and better at that. I've net spoken a lot about digital tools today, but we've enhanced our website to make it more clear to customers who have not purchased a product from us before. We're providing them even better suggestions on you might also consider the following that technology gets easier to use and better over time. We are now able to push promotional e-mails to our customer, articulating to them products that would be compelling to them and providing them a short-term discount in order to make it interesting to them to give that product to try, but those are levers that are new-ish to Sysco, leveraging e-mail, leveraging techs, leveraging our digital tools and the capability of targeting our sales reps to the right customer prospects with a preapproved deal that's compelling to the customer, but underwritten by Sysco Finance as compelling and profitable for us. . All right. Thank you. Good morning. Just wondering how the opportunity for additional cost out actions gets reflected in the new outlook. If you could comment on the pace of these opportunities maybe beyond the [Indiscernible] or so realized to-date? Hey, Alex, good morning. It's Neil. I'll take that one. As you alluded to, we are well north of the original goal of $750 million of cost out, which we feel very good about and we continue to make progress in that area. Largely speaking, these cost-out initiatives are helping to fund our investments for future growth and we feel very good about the long-term capabilities through some of the digital tools that Kevin just referenced for us to be able to have a good long-term platform for sustainable growth. We're well north of the $750 million. We're working on what the next iteration of that will be, and we look forward to sharing what future cost out numbers can be on top of the $750 million that we've already exceeded. Go ahead, Kevin. Yes. So Neil, just did a good job talking about structural cost out and what I want to talk about is just operational cost. The biggest focus in the second half of the year has brought out through a couple of prior questions is the ability to continue to make progress in improving productivity. I haven't spoken about the strategic initiative side of those efforts during Q&A. I just want to reinforce the importance of our driver academy. It's now nationwide and all hired drivers now go through the Sysco Driver Academy. If they don't have a CDL, they can become CDL certified. If they have a CDL, they get expert training and Sysco work practices and safety programs. So that training program is meaningfully working. The retention and therefore lack of turnover for the people that are going through that program is meaningful. And as time goes on, the percentage of our associate population that has gone through that training program increases and then the retention value from that will grow over time. So we're very, very pleased with the improvement in retention from our driver program and that will result in higher productivity into the future, because we're really good at training our associates when they're going through that program and also when they're with us and the more tenured they are, the more productive they are, the more safe they work and that is a positive to our forward-facing outcomes. And we're building new muscle in regards to staffing that I talked about earlier. We're doing a better job of forward-facing planning on peak window periods, lower volume window periods and having more staffing flexibility so that we can be more nimble for the business up and down trends so that our cost per piece can improve over time tied to that improved staffing level and we're getting much better at that. Ladies and gentlemen, at this time, we have reached the allotted time for today's conference. We would like to thank everybody for participating and ask that you kindly disconnect your lines.
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EarningCall_849
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At this time, I'll now turn the conference over to Hooper Stevens, Senior Vice President of Investor Relations and Finance. Mr. Stevens, you may now begin. Thank you, and good morning, everyone. Welcome to SiriusXM's Fourth Quarter and Full Year 2022 Earnings Conference Call. Today, we will have prepared remarks from Jennifer Witz, our Chief Executive Officer; and Sean Sullivan, our Chief Financial Officer. Scott Greenstein, our President and Chief Content Officer, will join Jennifer and Sean to take your questions. I would like to remind everyone that certain statements made during the call might be forward-looking statements as the term is defined in the Private Securities Litigation Reform Act of 1995. These and all forward-looking statements are based upon management's current beliefs and expectations and necessarily depend upon assumptions, data or methods that may be incorrect or imprecise. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For more information about those risks and uncertainties, please view SiriusXM's SEC filings and today's earnings release. We advise listeners to not rely unduly on forward-looking statements and disclaim any intent or obligation to update them. As we begin, I'd like to remind our listeners that today's call will include discussions about both actual results and adjusted results. All discussions of adjusted operating results exclude the effects of stock-based compensation. Thanks, Hooper, and good morning, everyone. Thank you for joining us. SiriusXM achieved strong 2022 subscriber and financial results, reaching record high EBITDA at more than $2.8 billion and revenue of $9 billion and delivering 348,000 Self-Pay net additions with a growing base of streaming subscribers. The business has proven resilient, and I'm pleased to report we met financial guidance set for the year. We made significant progress on our strategic growth objectives, including maintaining our dominant position in car, expanding streaming engagement and continuing our leadership position in digital ad-supported audio. I'm also proud to share that we delivered record high ARPU and record low churn in 2022, a reflection of subscribers' high satisfaction with the premium listening experience we continue to evolve and enhance. Today, we announced new financial guidance that reflects continued strong operating performance and significant cash generation even as we face a challenging economic environment and meaningfully step up investments in our technology infrastructure. Once again, we have endeavored to set financial guidance that takes into account our current view of the business and broader industry trends, particularly in the advertising market, where we see substantial uncertainty. As a result, we broadly anticipate a softer first half in terms of revenue, EBITDA and subscriber growth as compared to the back half of the year. We are not issuing subscriber guidance at this time, although we anticipate we'll see modestly negative Self-Pay net adds for the year as economic and demand uncertainty persists, auto sales remain soft, and we moderate marketing spend for our streaming service early in the year ahead of planned product improvements late in 2023. During the fourth quarter, SiriusXM's new and used car trial starts were down 3% and 7% sequentially as auto industry sales remained soft and vehicle prices remain at near record highs. Used car prices are now falling but remain at elevated levels and affordability is further challenged by higher interest rates and the flow-through to payment. New and used car sales drive our primary trial funnels and are an important part of how we subsequently add Self-Pay subscribers. In 2022, auto sales were the lowest they have been in 11 years. And for this year, analysts now expect new car sales to be up modestly by about 6%, but used car sales are expected to again fall slightly. We are closely monitoring consumer health. While we've seen signs of slowing inflation in the last month, we are watching personal savings rates, consumer confidence, auto loan defaults and the other key metrics to monitor the strength of the American consumer and how that could impact our business in areas like nonpay churn and general subscription demand. The advertising market continues to face headwinds with economic and business uncertainties causing many major advertisers to be cautious in their marketing spend. We began to see this shift in the back half of 2022 and are continuing to feel its impact early in 2023. Podcasting is not immune to these forces, but does remain a bright spot for the business, which I'll speak to in a few minutes. Given these macro factors, we are focused on increasing productivity and effectiveness as we realign resources to invest in growth opportunities for the business. This means building a culture that's more agile as we focus efforts this year on developing an updated SiriusXM streaming experience, which we expect to launch in the fourth quarter. As you heard me talk about on our prior earnings call, we have implemented measures to control our discretionary spending, and we will remain disciplined and look even more broadly for cost savings in every area of our business. To give just one example, we began to reduce marketing spend last quarter and we'll continue to reduce spend for most of this year as we moderate ahead of the expected relaunch of our streaming experience in the fourth quarter. While this is the right decision for our business, we expect this more conservative approach to marketing spend in the first half to contribute to lower net subscriber additions near term. We all know that consumers now have more options than ever when it comes to listening to content in the car and on the go. Today, we hold the largest share of ear in the car outside of combined terrestrial radio. And as we look to attract new audiences to our platform, we are becoming more and more agnostic, not just how they come in the front door, but also how they choose to interact with our service. Our updated SiriusXM experiences on CarPlay and Android Auto that launched late last year reflect our commitment to make it easier and better for new audiences to use this way of listening in car, should they choose. And in the year ahead, we will continue to evolve our business by leaning into our in-car advantage and modernizing the SiriusXM technology platform, delivering an improved streaming experience with the relaunch of our SXM app. Our in-car evolution should be viewed in parallel with how autos have evolved over the years, going from push buttons and dials to massive touch screens and multiple entertainment zones. Car entertainment systems look radically different than they did just a few years ago, and we are committed to our own radical evolution with future-focused consumer-first in-car experiences. Fully utilizing Lucid's massive touchscreen interface with our beta launch last quarter is a prime example of how we are working with automotive companies to evolve and enhance the SiriusXM experience. We look forward to the broader rollout with Lucid later this year and are continuing to innovate with a variety of other automakers as well. Our state-of-the-art 360L platform is quickly becoming the new standard for SiriusXM and is now available in 20 OEM brands with the additions of Jaguar, Land Rover, Lamborghini and Nissan vehicles in 2022. We finished the year with over 7 million 360L-enabled cars on the road and the percentage of new SiriusXM-enabled vehicles with 360L increased to 27% in 2022, a number that should meaningfully rise this year as we expand into several additional automotive brands. Our total new and used vehicle penetration rates were 83% and 53%, respectively, and our enabled fleet stands at over 150 million vehicles. Last quarter, I shared the progress we made personalizing the 360L experience in select vehicles, including the introduction of data-driven music and talk recommendations on for your screens. I'm happy to report a continued double-digit lift in engagement. Our goal is to seamlessly tie together the in-car and out-of-car SiriusXM experience to better serve our listeners, getting them content they want to hear faster, no matter where they are listening. We are also seeing improved conversion in 360L tied directly to consumers using these enhanced features, including the ability to create personalized Pandora stations and access to more on-demand programming and extra channels. At SiriusXM, our premium live curated programming sets us apart in audio entertainment and create habitual listening. While most listening remains live across all subscriber audiences, we are seeing interesting trends on the type of content or different subscriber cohorts engage with. For example, streaming-only subscribers who are generally younger and more diverse than our in-car subscribers gravitate towards our original streaming content with high interest in our music shows available on demand and our extra channels. We are also seeing this group stream non-music content at a higher rate than in-car subscribers who stream, and we see higher retention with both groups when they engage with non-music content. As part of our efforts to go deeper here, in 2022, we expanded our relationship with the NFL to make SiriusXM the exclusive third-party home to all NFL games. And recently, we agreed to a multiyear extension with the NHL that will see SiriusXM continue to deliver to fans access to every NHL game throughout the regular season and Stanley Cup playoffs. In fact, sports programming hit a three-year record high in listener reach in 2022. And this past November, as part of our extension agreement with Andy Cohen, we expanded Radio Andy into the official destination home for all things pop culture by moving content like tank shows over to the channel. The fourth quarter also saw launches of several new tent pole and pop-up channels, including the launch of our latest 24/7 original comedy channel Team Coco Radio, which is executive produced by Conan O'Brien and features exclusive audio content. We also went live with the Selena Gomez Radio Channel and launched a streaming-only full-time channel with country music superstar Eric Church. Although we will remain disciplined in our content spend this year, you will see us continuing to pursue opportunities to create more original on-demand content to complement our linear offering with more streaming first talk, music and video content as we look to continue to attract and convert younger, more diverse audiences. As always, we continue to use the power of our platform to spotlight important moments. And this month, we celebrate Black History Month on Pandora and SiriusXM with specialty programming across music, comedy, talk and sports. This includes the launch of the Apollo Theater channel, a limited run in channel that will spotlight SiriusXM's Apollo shows as well as music and stories from many of the amazing artists who performed at the historic theater. Coming off, of two incredible nights with Drake at the Apollo, which will air exclusively on his SiriusXM channel Sound42 in the near future, we are excited to bring our ongoing relationship with the Apollo to life in new ways for our listeners to enjoy. In a challenging ad market, podcast continue to be a growth opportunity for us. This past quarter, we expanded our podcast offerings while doubling down on the shows that have proven most successful with five of the top 20 shows in Edison Research's top 50 podcast rankings, the most of any network with Crime Junkie, Office Ladies, Dateline NBC, Pod Save America and Conan O'Brien Needs a Friend, we feel very good about our current podcast late and will continue to be purposeful in how and when we invest in programming to best align with our business priorities. Q4 and full year total advertising revenue were essentially flat year-over-year, with Q4 down 3% and full year up 2%, respectively. Yet podcast continue to be a bright spot for the industry overall and us, in particular, driving a 34% increase in 2022 in our Off-Platform business, which includes podcasting. In particular, our audience-based podcast products, including Podcast Everywhere and Podcast Select as well as Programmatic Podcasts are up 153% year-over-year. This part of our offering provides greater efficiency through automation, which is still nascent in podcasting, making it a fantastic opportunity for us as we continue to grow this area of our business. As we enter 2023, we continue to face the same headwinds that began in the second half of 2022. However, we remain confident in our ability to monetize our ad-supported portfolio and offer brands effective and innovative ways to reach their target customers in audio. In closing, I'm pleased with our strong operating and financial performance in 2022. And the business continues to prove resilient. Our high-quality business model continues to produce some of the best margins in media. And while we anticipate softness in the year ahead, we are redoubling our efforts to invest in our product, enhance the SiriusXM's experience for our customers and ensure we are well positioned in an ever-evolving audio entertainment landscape. Thank you, Jennifer, and good morning, everyone. As Jennifer noted, we closed last year with strong financial and subscriber results meeting all of our guidance, a real accomplishment in a tough year. In 2022, total revenue increased 4% from $8.7 billion to $9 billion, led by subscription revenue growth and modestly higher ad revenue, although ad revenue did begin to soften later in the year. Adjusted EBITDA grew 2% from $2.77 billion to $2.83 billion. Free cash flow came in at $1.55 billion as cash taxes climbed by $157 million in 2022. And recall, 2021 had benefited from a onetime satellite insurance recovery. During the fourth quarter, revenue remained roughly flat at $2.28 billion with subscription revenue climbing while advertising revenue declined 3% to $480 million. Adjusted EBITDA during the quarter climbed 10% to $742 million as we began to see benefits from cost reductions. Net income for the quarter rose 15% to $365 million or $0.09 per diluted share and free cash flow reached $529 million, up 10% from the same period last year. Looking at our operating segments. At SiriusXM, total revenue climbed 4.2% to $6.9 billion in 2022, boosted by 6% ARPU growth, partially offset by reduced revenue from a smaller base of paid promotional subscribers. Gross profit in the SiriusXM segment grew to nearly $4.3 billion, up 6% and produced a margin of 62%, up one point from 2021. We added 348,000 Self-Pay subscribers for the year and 162,000 during the fourth quarter. In the Pandora and Off-Platform segment, we generated $2.1 billion of total revenue, up 1% over 2021, with a 2% increase in the segment's advertising revenue. MAUs declined by 9% in 2022 to $47.6 million, while average hours per ad-supported active user climbed 4% to 20.6 hours per month. Gross profit in the Pandora and Off-Platform segment was $655 million, down 12%, representing a gross margin of 31%. This decline in gross profit was driven by our investments in podcasting, a corner of the audio entertainment market that we expect will yield greater monetization opportunities over time as the business evolves. At a high level, our non-Pandora ad revenue across the business climbed 24% in 2022 to $672 million, representing 38% of our total ad business in 2022, compared to 31% of our odd business in 2021, with podcasting revenue driving most of this growth. Turning to capital allocation. In 2022, we returned approximately $2 billion to stockholders, with approximately $1 billion via a special dividend in February, $350 million in recurring dividends, up 31% from 2021 and $639 million in share repurchases. We slowed share repurchases throughout the year and in particular, late in 2022 to prudently maintain leverage within our target range in the low to mid-3s, ending the year at 3.3 times net debt to EBITDA. We expect to continue a conservative stance on capital returns in 2023, given the macro backdrop, particularly in the first half of the year. Our balance sheet is extremely well positioned and gives us tremendous flexibility. This morning, we issued 2023 guidance that anticipates approximately $9 billion of revenue, adjusted EBITDA of approximately $2.7 billion and free cash flow of approximately $1.05 billion. As Jennifer mentioned, we are not providing subscriber guidance today. However, we do expect to deliver modestly negative Self-Pay net subscriber adds for the year. Our more cautious approach to spending on subscriber growth will keep our business focused on profitable rational outcomes from prudent marketing and investment decisions, which we continuously reevaluate throughout the year. We are beginning to see the benefits from cost efforts started last year in reducing our real estate footprint and reduced hiring. This year, we expect to implement broader cost reductions across every element of our business with an eye on making all of our work processes more efficient. Currently, we expect the results in the second half of 2023 will outpace results in the first half of the year. Given the soft ad market entering 2023 and our plans to increase marketing spending later in the year on streaming, we expect year-over-year trends in subscriber growth and EBITDA to be more favorable in the back half of 2023 than in the first half, with declines in Self-Pay subscribers and EBITDA sharpest in the first quarter and then moderating to reversing later in the year. Similarly, because of the normal seasonality of our business in terms of receipts versus expenditures, combined with the timing of capital expenditures, we would expect a meaningful portion of 2023's free cash flow to come late in the year. Our 2023 guidance also incorporates nearly $100 million of increased music royalties as a result of the expiration of agreements relating to pre-1972 music rights and the 9% CPI inflator that the Copyright Royalty Board announced for webcasting performance rights. This year, we expect satellite CapEx to rise by just over $200 million as production for the recently announced SXM 11 and 12 satellites begin to ramp. The production of these satellites will run concurrent with the multiyear build of SXM 9 and 10 already in the development pipeline. SXM 11 and 12 represent our commitment to maintaining premium services, improving our service area and quality and providing options to create new revenue streams in the SiriusXM low band over the long term. Non-SAT CapEx will also modestly increase with other strategic long-term investments in product, engineering and IT as we replatform our commerce and identity systems to reduce consumer friction in using and subscribing to our products and as we push forward advances in our consumer-facing in-car and streaming services. Finally, also incorporated into our free cash flow guidance, a further roughly $170 million increase to our cash taxes this year. As we look from 2022 to 2023, we're seeing a step-up to essentially full cash taxes. And on the CapEx side, it's important to remember that 2023 essentially begins an investment bubble with several satellites under construction at once combined with a re-architecting of some of our foundational commerce, identity and technology stacks. So, you won't see these negative deltas in future years on cash taxes and CapEx. And in fact, satellite CapEx will begin to moderate late in 2024 before exiting 2027 near zero and staying there for many years. With these investments, we'll be ensuring more robust consumer-facing products delivered with lower friction and continued long-term service continuity and optionality with our broadcast network in the years to come. I'm proud of the strong finish in 2022 and our team's hard work to set us up for success in 2023 and beyond. Good morning, and thanks for taking my question. I wanted to ask about SiriusXM Self-Pay net adds. The results were pretty solid in the quarter. And I think the expectations were modest declines in '23 are perhaps not too surprising. I know visibility remains low and this might be a bit unfair to ask in this environment. But how do you think about the path to getting closer to more historical levels of annual net adds or at least getting back to positive net adds. I think we're all aware of the headwinds but you have a lot of positives going on, too, in terms of the content slate, the in-vehicle experience is only getting better. You continue to be on streaming. I think you're being a little bit more targeted with certain consumer segments as well. So, I know you're not going to guide to net adds for next year today, but maybe you could talk a little bit about your confidence level in getting closer to step function improvement in 2024. And Sean, if I could ask on free cash flow. Things are bridging the path from '22 to 2023. But as we think about 2024, a lot of the items that you called out in terms of cash taxes and CapEx. I know CapEx were kind of in a bubble right now, but it doesn't seem like that's going to go away next year necessarily. So, is this a more appropriate level of free cash flow on an annualized basis for the next few years? Thank you. Thank you, Kutgun, for the questions. So, I'll start on subs and Sean can take free cash flow. The -- in '22, clearly, the dynamics were somewhat similar to what we think we're going to see going into '23. So, auto sales in '22 on new and used were both really at about 10-year lows with used coming down 10% off of a record high in 2021. And that really impacted our automotive funnel going into and throughout 2022. On the streaming side, we saw really nice results in driving trials and getting people into our streaming experience and we are being more cautious as we continue to approach us in '23 because the churn profile of our streaming subs is very different than our in-car subs. And we've talked a little bit before earlier on the call about the investments we're going to make in our technology infrastructure to improve our capabilities that will help us focus on retention there. But just turning to '23 in subs in general, I'd say our expectations for the automotive funnel look pretty similar to last year. I would think that our trial starts for the first nine months of the year, which are obviously the important ones to drive Self-Pay net adds. Across new and used will actually be pretty flat in the first nine months of this year relative to the first nine months of last year. As we look at the third-party estimates for SAAR for this year, it's a similar dynamic as to what we thought was going to happen last year, where it's very back-half weighted. In fact, most of the estimates would have us returning to something like $16 million in the fourth quarter. We're really not seeing the ramp up too much prior to then. On streaming, again, I think we're going to be cautious on where we spend there until we get more product improvements in the market. On churn, look, I am very pleased with where we are on churn and our performance. If you just look at fourth quarter, we were down, I think, 20 basis points year-over-year, and that was across all areas of churn, so non-pay voluntary and vehicle related. Of course, as auto sales increase, we would expect to see some churn increase there from vehicle related. And we still are cautious about the dynamics in the economic environment and how that might play out in non-pay and voluntary churn as it relates to cancel demand. And then just on -- we made a couple of comments related to demand in the call or in the comments earlier. And I'd say that really is related to two areas. We have conversion rates on our first-time trialers who tend to be younger and less affluent and our win-back efforts much more impacted by these price-sensitive segments of our funnel. And we're just being cautious as we see how those dynamics play out this year. This year, I would expect our conversion rates on the new car side to be in sort of the low 30s and on the used car side in the low 20s. So those are some of the dynamics that set us up for this year. And we're certainly hopeful as we get through this year, we get a new product in market. We have the benefits that you actually highlighted in terms of content and our product experience and we start to see a recovery in auto sales that things look a little different as we go into 2024. On the free cash flow point, again, in my script, I tried to bridge. I think CapEx to start there, probably a high point here in 2023. Again, we're in a huge cycle with the satellites, as I said, roughly $200 million increase. We talked about the investments we're making in some of the core platforms around identity and commerce. So that is creating some incremental spend in '23 as well. Taxes, I guess, we're getting to -- with the full utilization in some of the sunsetting of R&D. For example, we're getting to a more effective cash tax given the utilization of most of our tax attributes at this point. So again, as you look through in the future, I'm not going to guide to '24, '25 and beyond. But clearly, our expectation is this free cash flow is a low point. And as we get through this bubble, we'll start to see real positive benefits relative to where we're going to be in '23 and where we guided but I'll leave it at that. Thanks. Good morning. Just one clarification. Does your Self-Pay churn number include churn related to your streaming-only subscribers? And then I was curious if Jennifer, if you could talk a little bit about kind of the economic sensitivity in the business in your subscriber base today relative to prior cycles. I tend to think of your customer base is skewing a bit more higher income, which may be wrong, especially all the success you've had in used cars over the years. And obviously, this interest rate environment is just different than we've had in really a long time. So, it would be helpful to hear how you're thinking about those puts and takes heading into '23. And then I think Scott is on the call, I believe. And I was just wondering, having now spent some time selling into the podcast -- selling podcast advertising for a few years and scaling that business up. Can you talk a little bit about the opportunity in podcast advertising? When you think about the budgets you may be going after? Is this a radio -- broadcast radio opportunity? Is it digital opportunity, direct response brand? Just help us think about where this could go in a three to five-year view. Thank you so much. Okay. So, thanks, Ben. Your first question about Self-Pay churn. What we report is in car or satellite only, the streaming subs still aren't a material part of our subscriber base, and we tend to look at those on a net add basis. But the churn profile, as I mentioned, earlier is higher on our streaming subs relative to our satellite subs. In terms of economic sensitivity. I'd say the last cycle was just so different for us as we were building penetration rates, we were so much earlier in our maturity. So, it is tough to provide comparisons to that. I do believe our subscriber base is largely more affluent. Our headline price is $17.99 for our most popular package. And so, we attract a more affluent consumer base for sure. But we have expanded that, as you know, with our increased penetration in used cars, and that was really nascent years ago when we faced this last sort of cycle. And I guess, I would also say our churn dynamics, again, continue to remain impressive over the last 18 months to two years. And the fourth quarter was the lowest fourth quarter we've ever had, was just above 1.5%. So, I think that sets us up really well going into the cycle, no matter how it actually evolves. Sure. Sure. So first, podcasting has some similarities to the early growth of SiriusXM. We had to get to a place when we acquired Stitcher and then built it with deals to get luckily to the number one network, and we have five of the top 20. However, no different than those early Sirius and XM bidding wars, the economics on podcasting got a little out of hand to say the least. And as you can see, the pullback is going on right now. And yet it's a robust source in some ways, uniquely for us. And to get to the point on the advertising. We look at it as whether you look at Team Coco or Cricket or a few others where it's going to be a combined audio cell ultimately of radio at serious podcasting through Stitcher. And also podcasting has a nascent but growing event business, merchandise business and all of that. So, it's going to have to find it [indiscernible] in general. But with us, we feel pretty good. We're going to be selective, obviously, and we're going to be very, very disciplined, especially given where we are right now in our slate on the economic model. But I'm confident advertising gaps of demos and uniqueness in what podcast cover will certainly allow advertisers windows in that don't exist anywhere else and, in some cases, don't exist at Sirius, that the podcasting market services that. So, I feel pretty good that when advertising picks up and it gets a little more micro-focused, there's going to be unique assets, certainly what we'll have, and then the combination of overlaying our whole service with all three brands with Pandora also. So, I feel pretty good where it will go once it goes back, hopefully, to normal. I'd just add that I do believe we have a great network of podcast, as Scott highlighted. We represent major networks and across the top three categories. So, news and comedy and true crime. And this, the cross-selling that Scott highlighted is really unique opportunity that we can provide across live, broadcast, music streaming on and off platform and podcast as well as marketplace and tech fees. So, we're really well positioned here. There are a number of podcast products that we launched last year. Podcast Everywhere, Podcast Select and some programmatic capabilities. The Podcast Everywhere and Select are still direct sales enabled but allow a lot more targeting on an audience basis, but also content filtering and leveraging our predictive audiences tools to provide better insights as to where the listeners are in terms of life stage or purchase consideration and others. And you'll see us do more and more here going forward. This is just -- as Scott said, it's nascent, there's are a lot of investments needed, I think, across the industry to provide better tech solutions for advertisers, and we're just getting started. I expect the monetization to continue to improve. Thanks. Good morning. So maybe just first, Jennifer, I think you said conversion expectations for the year is low 30s on new and low 20s on used. If my memory serves me correctly, that's a little below where you've been historically. So, I was wondering if you could just talk about is that some expected just consumer weakness on the economy? Is that the new mix that you have due to some of the higher penetration you have in inventory? So, I'd just love to get your latest thoughts on conversion rates. And then on the streaming launch that you talked about, can you provide any more detail about what sort of new functionality or features are going to be in this? And will this be a combined product between Pandora and SiriusXM? Or is this really a revamp of the SiriusXM one? And then I got a quick follow-up for Sean. Okay. Thanks, Steven. On the conversion rate side, I guess I'd start by saying that over the long term, we've really focused on optimizing our yield, which is really the net of both penetration rates and conversion rates across both new and used. And while we've done this, we've also materially reduced our investment per new car for new enabled vehicle with our [indiscernible] install down something like 70% over the last 10 years or so. And so -- but of course, as you look at these metrics separately, as [indiscernible] rates have risen, overall conversion rates have declined, as we have entered lower-end trends and models purchased by younger and less affluent buyers. And that's where we are today in terms of the rates that we're expecting this year. We've seen the lower conversion rates materialize among younger audiences in part because they're looking for more personalization and more control over their listening experiences, and this is why we've been building out our 360L capabilities and investing in our apps where we can provide a significantly better and customized listener experience. And of course, I would love the 360L rollouts to move faster. We are subject to the typical automotive product cycles, but we continue to see increases every quarter in our 360L pen rates. And we know through our research surveys and data coming back that one of the most impactful features of 360L is actually just the recommendations. And these help guide listeners into our nonlinear content. We absolutely see higher conversion rates when listeners engage with this content, especially those who are newer to our service and may find it more challenging to navigate in terms of our in-car integrations. But it is -- we are also expecting to really address some of this with our streaming product enhancements, which will come later this year. We will have more to say about that in the coming calls. But there are sort of two aspects. We are fundamentally changing the underlying technology architecture to enable better commerce, better identity and better market capabilities. And then we will also layer on top a brand-new consumer-facing experience with enhance search recommendations and other features. So, I think that what we want to do here is be agnostic as to how listeners may want to experience our service, whether it is in the car through car plan and red auto, applications, whether it's outside of the car or using our integrated experiences. And everything we do on the streaming experience will ultimately benefit 360L as well. And then I think just a bit of your streaming watch question. Today, it is SiriusXM only. That is the focus for the fourth quarter and improving that product experience. Yes. And then so for Sean, you talked about a more conservative stance on capital returns. I think the buyback in Q4 was certainly more conservative. I'm just wondering if you would intend to run leverage a little lower in 2023, given some of the cash items affecting free cash flow that you talked about. As you can surmise, I'm just trying to kind of back into what kind of buyback we might expect for '23 and exactly what's in that kind of conservative stand statement? So, thanks a lot. Yes, no problem. So again, exited at 3.3 times. I think we'll continue to operate in that range. I think in my comments, Steven, we talked about the first half of the year. And that's not only a comment about the macro environment we're operating in and the uncertainty that exists and not only in the overall economic environment, but with consumers and the advertising market specifically. So I think a cautious approach in the first half of the year. And then I think as we always do every quarter, we'll reevaluate and assess as we get into the year and see how business performance is, how the macro environment is. So -- again, as you know, we've got a number of levers that we've utilized in the past. We've got a great balance sheet, and we'll be opportunistic in terms of how we utilize our capital return opportunities. So not much more to say. Okay, thank you. I have an advertising question and then some content questions. On advertising in first quarter, you sound very cautious. Could you give any specificity, can get that word out, what you're seeing -- what you're actually seeing in the first quarter? And how much visibility do you have beyond the first quarter? Can you give us any color on your demographics? And who do you compete with in advertising? Is it just audio? And then I'll give my content questions after. Yes, Jessica, this is Sean. I'll start. I think that we are seeing a choppy marketplace, not dissimilar to how we exited Q4 in the month of January. Obviously, the competitive landscape over the last week or so has reinforced that as others have reported and provided their outlook. I do think that podcasts, as we just talked about, continues to be a bright spot. I think we've got a fair amount of inventory, and we have people that are interested in putting dollars there. So in the context of a difficult market, I think that continues to provide some benefit to us. I think there are certain categories that are strong in terms of consumer goods and autos and some food service companies. So we're pleased. I mean, we've got obviously a unified sales force that's selling multi-platform, a good mix of brand and direct-to-consumer advertising. The visibility is probably less than it used to be historically. I think people are putting their dollars to work closer to the time that the ads are run. So that does create some challenge in terms of predictability. I think Sean largely addressed this, but we're facing competition, growing competition from other streaming digital streaming audio companies that are coming into the market more aggressive. And of course, the dominant player being AM FM and I think there's been some pricing pressure as a result. We built the digital audio market on the music side with Pandora, and we have a lot of great relationships, as Sean said, across brands there and on the satellite side, while the number is smaller, we have a lot of great relationships on the DR side and podcasting is a mix of that. I also say we bring some really unique selling propositions relative to the competition in terms of the cross-platform selling like we talked about, the broad relationships with advertisers, the fact that the podcasts we represent are distributed broadly across all listening platforms. We've done a number of really unique custom integrations, which advertisers love. It's a high-touch sales process, but it really gives advertisers a connection with listeners like what Conan did with his Clueless Gamer, sponsorship with Samsung and promoting their gaming hub. And then the live events we do that Scott touched on earlier. And we've got a lot of great examples of that, and I would expect those to be important for our business this year. Yes. So actually, 1 of the questions is on live events. Can you talk about the impact on your overall business from doing this? You had some humongous stores in '22. So could you talk about plans for '23? And then you noted in the press release and actually in the comments that you renewed NFL and NHL. Can you talk about the cost of the renewals? I don't know that you're really bidding against anyone for those? And what's coming up in the year ahead? Yes. So thanks, Jessica. So on the live events, we've always used them in two ways strategically to enhance the content experience because live has always been a big audio experience in any way you get it. In addition, our subscribers, unlike a lot of other audio services, we have regular live events all over the country, some big, some small, and they're very popular as part of what the subscribers like about the service. So it's always been that. In addition, as I know you're well aware, they generated a great deal of awareness, both for the individual channels or content we're highlighting, but also the corporate brand as a whole. And the Apollo shows are obviously the sort of the pinnacle of that. But we cover all 50 states and regularly do things in addition to a lot of our live sports coverage, there's ancillary side events to that and all of that. So it's always going to be part of it. But again, they're judiciously done often with none or little cost other than the bigger ones, obviously, we would expect that. But we're going to be always having that as part of it. It's just going to be strategic. As far as the NFL and the NHL and all that. The NFL, as you know from our announcement, we added additional rights and a number of things on that. And the NHL was a very straightforward extension. So I feel really comfortable on the economics on that. But what that did secure, which I think can't go unnoticed is, as in particular, in video, sports rights are all over the place. They're in multiple entities in multiple places, and you have to bounce around a little to get everything you want. What we have under one roof from the NFL, NBA, NHL MLB, Formula 1 NASCAR. We had every World Cup game. There's nothing in sports we don't have and our subscribers, as Jennifer mentioned, are increasing their sports listening. And so we feel really comfortable that for the near future, we have all of this under one roof. So those renewals were important to us. No, I don't believe -- certainly nothing in the first half of the year. I'd have to get back to you on the latter part. Thank you. Our next and final question will be coming from the line of Jason Bazinet with Citi. Please proceed with your question. I just had one follow-up question on the relaunch of the streaming experience in the fourth quarter of this year. You mentioned a lot that's going to be in that MarTech, ID, better user interface, recommendation engine. I guess my question is if this goes well, what metric that you disclosed do you expect the most improvement in '24 and '25? Is it more of a higher conversion rate? Is it an ARPU? Is it both? I'd just be curious. Yes. I -- so great question, Jason. The first thing we're going to be looking at is how do we retain more of our streaming trialers, right? And these are fundamental capabilities that will enable us to get better insights as to what the listeners during trial are listening to so that we can serve better recommendations either in the product or through marketing to improve engagement over time. So we watch a lot of metrics. And we brought in Joe and Derello and a number of members of his team are new that are really well versed in this area from the video side and other parts of the streaming industry. And the metrics we're watching on streaming are early engagement in trial, number of days, length of time, breadth of content, all the things that you would expect. Those are early indicators, obviously, of who will roll over and ultimately stay with us. And I would expect improvements over the course of this year as we make enhancements to our in-market apps, but we're largely focused on rebuilding this architecture. We have not been well positioned here, frankly, right? We have an infrastructure that was built to serve our in-car subscribers and by rebuilding the tech stack for streaming, it's going to support streaming subscriptions. But as you mentioned, it will also help with conversion of our in-car trialers, both because we have a better out-of-car experience and because we can bring these capabilities to bear in the IP delivery of our service through 360L. So we'll be watching a lot of those metrics after the launch. This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.
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Greetings, and welcome to the Edwards Lifesciences Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]Please note, this conference is being recorded. I will now turn the conference over to our host, Mark Wilterding, Senior Vice President of Investor Relations and Treasurer. Thank you. You may begin. Thank you very much, Diego, and good afternoon, and thank you all for joining us today. With me on today's call are Mike Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, our Chief Financial Officer. Also joining us for the Q&A portion of the call are Bernard Zovighian, President of Edwards Life Sciences; Larry Wood, our Global Leader of TAVR and Surgical Structural Heart; Daveen Chopra, our Global Leader of TMTT and Katie Zimon, our Global Leader of Critical Care. Just after the close of regular trading, Edwards Lifesciences released fourth quarter 2022 financial results. During today's call, management will discuss those results included in the press release and the accompanying financial statements and then use the remaining time for Q&A. Please note that management will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include, but aren't limited to, financial guidance and expectations for longer-term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters and foreign currency fluctuations. These statements speak only as of the date on which they were made, and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences and important product safety information may be found in the press release our 2021 annual report on Form 10-K and Edwards' other SEC filings, all of which are available on the company's website at edwards.com. Finally, a quick reminder that when using the terms constant currency, underlying and adjusted, management is referring to non-GAAP financial measures. Otherwise, they are referring to GAAP results. Reconciliations between GAAP and non-GAAP numbers mentioned during the call are included in today's press release. Thank you, Mark. During 2022, our company stayed focused on the long term, making meaningful progress on strategic milestones with the potential of transforming patient care. While the challenging environment negatively impacted sales, we still grew 8%. Looking forward, we remain optimistic that the health care environment will gradually improve and we expect 9% to 12% sales growth in 2023. We didn't pull back on investing in innovation because of the pandemic, and we didn't pull back because sales fell a little short. We continue to aggressively invest during this challenging period, which positions the company for sustained leadership in a new era of structural heart and critical care innovation. Looking back at 2022, in TAVR, we made important strides in executing our long-term strategy. We received approval and launched the innovative SAPIEN 3 Ultra RESILIA valve. In TMTT, each of our platforms demonstrated promising clinical performance, and we received approval for PASCAL Precision in the U.S. and Europe. In Surgical Structural Heart, we extended our leadership position through the launch of MITRIS in the U.S. And in Critical Care, we continue to drive adoption of our transformative smart recovery technologies. Although our initial sales expectations for 2022 anticipated a better environment, we delivered balanced contributions across each of our product groups and regions. We achieved 12% growth in adjusted earnings per share while maintaining R&D at more than 17% of sales, which reflects our commitment to driving durable organic sales growth. Consistent with our cash deployment strategy, we opportunistically repurchased stock at an accelerated level in 2022. We continue to invest in our production capacity in anticipation of future growth. and we made a series of external investments in promising early-stage technologies. Turning to our fourth quarter financial results. Consistent with our guidance, total company sales grew 7% on a constant currency basis to $1.3 billion. Our broad portfolio of innovative therapies drove this growth despite the health care disruptions in a number of our key geographies. In TAVR, full year 2022 global TAVR sales of $3.5 billion increased 7% on a constant currency basis, building on nearly 20% growth in the year ago period. Sales were below our original guidance of $3.7 billion to $4.0 billion due to foreign exchange headwinds and Covet induced health care challenges in key countries. In 2022, we announced the approval of SAPIEN 3 Ultra RESILIA in the U.S. Separately, we continue to advance enrollment in our PROGRESS pivotal trial for moderate AS patients and gained significant learnings from our alliance pivotal trial to study the next-generation TAVR technology, SAPIEN X4. These transformative developments reinforce our long-term confidence in the strong growth of transcatheter-based aortic valve interventions. In the fourth quarter, our global TAVR procedures were comparable with Edwards growth. Our global -- I should say, global TAVR procedures were comparable with Edwards growth. Our global TAVR sales of $868 million increased 5% year-over-year on a constant currency basis, consistent with our expectations. Sales were up slightly over Q3 in dollars and on a constant currency basis and local selling prices were stable. In the U.S., Edwards fourth quarter TAVR procedures grew in the mid-single-digit range. As expected, our fourth quarter U.S. TAVR procedure volumes were impacted by the U.S. hospital staffing constraints and the holiday season slowdown. We estimate that our share of procedures was stable. Growth in the U.S. was higher in larger volume centers and in states with fewer COVID restrictions as measured by the Daxferns Containment and Health Index. We're encouraged by recent hiring trends, which suggests that hospital employment is rebounding. As we mentioned, we began the introduction of SAPIEN 3 Ultra RESILIA in the U.S. the Resilient issues anti-calcification technology addresses one of the primary causes of reintervention following heart valve replacement and is demonstrating a strong track record of performance in Edwards Surgical house. As of now, this newest valve has been introduced in approximately 10% of U.S. TAVR centers and physician feedback has been encouraging. Outside of the U.S., in the fourth quarter, Edwards TAVR procedures also grew in the mid-single digits, and we estimate total procedure growth was comparable. In Q4, geographies outside of Europe and Japan grew even faster in the quarter. Long term, we see excellent opportunities for growth as we believe international adoption of TAVR remains quite low. In Europe, fourth quarter procedures grew in line with the global rate. Market growth continued to be impacted by a bump in the COVID cases and staffing shortages, which reduced hospital capacity, particularly in larger countries such as Germany. And even though there are a broad range of competitors, our leadership position and local selling prices remained stable throughout the year. Importantly, a cost-effectiveness study published earlier this month demonstrated that TAVR with SAPIEN three was economically beneficial when compared to surgical aortic valve replacement in treating German patients with low surgical risk. The data suggests that TAVR enhances quality of life and offers a cost-effective option over the long term. These findings are consistent with the cost-effective outcomes for the use of SAPIEN 3 in France, Italy and Spain. In Japan, fourth quarter procedure growth was much slower than expected due to an extended COVID wave and continued restrictions, which limited hospital staffing and capacity. We expect these factors to diminish substantially over the course of 2023 and look forward to launching SAPIEN 3 Ultra RESILIA in Japan later this year. We remain focused on expanding the availability of TAVR therapy driven by the fact that AS remains a significantly undertreated disease amongst this large elderly population. In summary, our outlook assumes COVID-related challenges improved during 2023 as hospital resource constraints decrease. We remain positive in our outlook for 2023 underlying TAVR sales growth of 9% to 12%, consistent with the range we shared at our December investor conference. We remain confident in this large global opportunity that will double to $10 billion by 2028, which implies a compounded annual growth rate in the low double-digit range. Turning to TMTT. Since launch, we have proudly treated more than 10,000 patients with the PASCAL repair system. We achieved significant milestones in 2022 and made meaningful progress toward achieving our vision to transform care for patients with mitral and tricuspid disease. Following the Class II presentation at TCT and FDA approval in Q3, we initiated the introduction of the PASCAL Precision system in the U.S. Initial feedback from clinicians has been positive, and we're pleased with the patient outcomes to date. Class IID full cohort of 300 patients with 1-year follow-up will be presented in the second half of 2023. In Europe, the PASCAL Precision launch is ongoing with a focus on bringing this latest advancement to our existing centers as well as expanding into new centers. Also aligned with our commitment to generate high-quality scientific evidence we continue to advance enrollment in our Class IIF pivotal trial for patients with functional mitral regurgitation. In mitral replacement, we're making good progress on the enrollment of the ENCIRCLE pivotal trial for SAPIEN M3 and expect to complete enrollment of the main cohort around the end of 2023. The sub French transfemoral valve leverages the SAPIEN 3 platform with a recapturable repositionable dock. Separately, we've completed enrollment in the MISCEND early feasibility study with the Eos valve and are incorporating the learnings from this early experience into our next generation. We believe the Eos platform has the potential to be an excellent option for mitral patients, who have a poor prognosis and limited treatment options. Shifting to tricuspid and our strategy of advancing the body of clinical evidence, we are currently enrolling two pivotal trials studying both tricuspid replacement and repair, TRISCEND II and the Class II TR. We prioritized enrollment in our TRISCEND II study, that study trial that's studying EVOQUE as it addresses the large population of patients who are suffering from debilitating systems and have few treatment options. TRISCEND II is on track for completion of enrollment in the first half of 2023, and we expect Evoke CE mark by the end of this year and U.S. approval around the end of '24. We're very pleased with the recent tricuspid data presented at PCR London Valves meeting which we reported favorable results from both our TRISCEND study of EVOQUE and the TriCLASP post-market clinical follow-up for PASCAL. In Europe, clinicians are very positive about the performance of our differentiated PASCAL Precision system in their tricuspid patients, and we're looking forward to bringing this therapy to patients in the U.S. following the Class II TR trial. Turning to the sales performance of TMTT. Fourth quarter sales of $32 million were consistent with our latest guidance and driven by the continued adoption of PASCAL in Europe supported by the early initiation of PASCAL Precision in the U.S. Full year global sales were $116 million, up nearly 50% on a constant currency basis versus the prior year. In 2023, we expect TMTT sales of $160 million to $200 million. We look forward to advancing our vision to transform the lives of patients with mitral and tricuspid valve disease through the milestones outlined in our recent investor conference. We remain committed to bringing this differentiated portfolio of therapies to patients with these life-threatening diseases and believe our strategy positions us well for leadership. In Surgical Structural Heart, full year global sales were $893 million, up 6% on a constant currency basis versus the prior year. Fourth quarter 2022 global sales of $224 million increased 8% on a constant currency basis over the prior year. We are encouraged to see strong global growth driven by the increased penetration of our premium RESILIA products despite COVID challenges in certain regions. Although hospital staffing shortages continue to be a concern, we believe that heart valve surgery was prioritized. We have seen strong momentum of the RESILIA portfolio globally. We believe that surgeons value the features and benefits of this advanced tissue technology for both aortic and mitral surgical valve replacement procedures. We saw adoption of the MITRIS RESILIA valve in the U.S. increased in the fourth quarter. And built upon previous generations of proven mitral valve technology, MITRIS offers greater ease of use and is designed to facilitate potential future transcatheter interventions. We are growing the large body of RESILIA evidence with our new Momentis clinical study to demonstrate the durability of this tissue in the mitral position. Enrollment in this study was initiated earlier this month. In summary, we remain confident that our full year 2023 underlying sales growth will be in the mid-single digits for Surgical Structural Heart, driven by the adoption of our most advanced technologies and growth of overall heart valve surgeries. Turning to Critical Care. Full year global sales of $855 million increased 7% on a constant currency basis versus the prior year. Fourth quarter Critical Care sales of $225 million increased 13% on a constant currency basis over the prior year. Growth was driven by contributions from all product lines and regions led by HemoSphere and Smart Recovery. In our Smart Recovery portfolio, adoption of FloTrac and ClearSight sensors featuring our unique hypotension prediction index algorithm RECONNECT remains strong. Demand for our pressure monitoring devices used in the ICU due to elevated hospitalizations in the U.S. As discussed at our recent investor conference, sales growth in 2023. We remain enthusiastic about our pipeline of critical care innovations, highlighted by smart recovery technologies designed to help clinicians make better decisions and get patients home to their families faster. Thanks a lot, Mike. Today, I will provide a wrap-up of 2022, including detailed results for the fourth quarter as well as provide guidance for the first quarter and full year of 2023. So as Mike mentioned, our sales of $1.3 billion in the fourth quarter grew 7% on a constant currency basis, despite the health care disruptions in a number of our key geographies. Our gross profit margin was healthy, even excluding the temporarily inflated rate due to FX. Combined with sales growth and disciplined spending, this resulted in adjusted earnings per share growth of 25% to $0.64. GAAP earnings per share was $0.65. Obviously, we were disappointed with our stock performance last year. The only upside to the poor stock price performance was that it provided an opportunistic time to repurchase shares more aggressively. During the fourth quarter, we repurchased $750 million of stock through an accelerated share repurchase program. And in total, we repurchased $1.7 billion of stock last year. Average shares outstanding during the fourth quarter fell to $616 million. We have approximately $900 million remaining under our current share repurchase authorization. For the full year 2022, sales increased 8% over the prior year on a constant currency basis to $5.4 billion. Adjusted earnings per share grew 12% and we generated nearly $1 billion of free cash flow. We expect our sales growth rate to expand in 2023 with a gradual improvement in hospital staffing. Although still early in the year, we saw encouraging signals during Q4 and a good start so far in Q1, which reinforces our confidence about the 9% to 12% full year range. We are maintaining all of our previous sales guidance ranges for 2023. Absent big moves in FX, we expect total company sales of $5.6 billion to $6 billion, TAVR sales of $3.6 billion to $4 billion, TMTT sales of $160 million to $200 million, Surgical Structural Heart sales of $870 million to $970 million and critical care sales of $840 million to $940 million. For the first quarter, we're projecting sales of $1.37 billion to $1.45 billion, and adjusted earnings per share of $0.58 to $0.64. Now I'll cover details of our results. Our adjusted gross profit margin in the fourth quarter was 81% compared to 76.8% in the same period last year. This improvement was driven by the expected positive impact from our FX program which includes hedge contract gains and natural hedges that offset the negative sales impact from the weakening of the euro and the yen against the dollar. At current foreign exchange rates, we continue to expect our full year 2023 adjusted gross profit margin to be between 76% and 78%. At current exchange rates, the reduction in this year's forecasted gross profit margin versus 2022 reflects 250 to 300 basis points of reduced benefit from FX plus some incremental inflation. SG&A expenses in the fourth quarter decreased 3% over the prior year to $411 million or 30.5% of sales, primarily due to the weakening of the euro and the yen against the dollar and partially offset by continued investments in the ongoing build-out of the U.S. TMTT commercial team and our high-touch model for TAVR. We continue to expect full year 2023 SG&A expenses as a percent of sales to be between 29% and 30%. Research and development expenses in the quarter were consistent with the prior year at $232 million, or 17.2% of sales. We continue to expect R&D expenses in 2023 to be between 17% and 18% of sales as we invest in developing new technologies and generating evidence to support TAVR and TMTT growth. Turning to taxes. Our reported tax rate this quarter was 13.3% and or 14%, excluding the impact of special items. We continue to expect our 2023 tax rate, excluding special items, to be 13% to 17%. Foreign exchange rates decreased fourth quarter reported sales growth by six percentage points or $73 million compared to the prior year. At current rates, we now expect approximately flat year-over-year impact from foreign exchange to full year 2023 sales. Foreign exchange rates positively impacted our fourth quarter gross margin by 230 basis points compared to the prior year. Relative to our October guidance, FX rates had a minimal impact on fourth quarter earnings per share. Finally, before turning the call back over to Mike, I'll finish with an update on our balance sheet and cash flow. We continue to maintain a strong and flexible balance sheet with approximately $1.2 billion in cash, cash equivalents and short-term investments as of the end of the year. Free cash flow for the fourth quarter was $214 million, defined as cash flow from operating activities of $283 million, less capital spending of $69 million. In 2023, we expect free cash flow to grow to $1.0 billion to $1.4 billion. Thank you, Scott. [indiscernible] informational therapies covering solid financial performance. We expect higher growth and meaningful in 2023 with a gradual improvement in hospital. We believe to serve our patients -- we're confident that our patient-focused innovation strategy can transform care and bring value to patients and health care systems worldwide. And at this time, we will conduct our question-and-answer session. [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Great. And before I ask, Mike, we couldn't hear your closing remarks before. So I don't know if you're a little far away from a microphone or not. If you like, I'd be happy to give you the conclusion, why don't I give that for a second. Thanks, Robbie, and we'll she'll be first in line here. I just said, in conclusion, we're proud of the significant progress we made in advancing 2022 and the new transformational therapies for patients and delivering solid financial performance. We expect higher growth and meaningful progress in '23 with a gradual improvement in hospital staffing and growth across all major regions. And as the global population ages and cardiovascular disease remains the largest health burden, we believe that the opportunity to serve our patients will nearly double between now and 2028, and we're confident that our patient-focused innovation strategy can transform care and bring value to patients and health care systems worldwide. Thanks, Robbie. You're back up. Great. Maybe to start, you talked about improving trends in TAVR and what you're seeing so far in first quarter. Maybe you could spend a little more time and give us detail on exactly what some of those improvements were throughout the quarter, how the quarter trended and what gives you confidence in the 2023 TAVR guide based on what you've seen so far? Yes. I'm not going to get really deep into the quarter. As Scott mentioned, we had some really positive times during the quarter, where we saw some weeks were really strong. We had the normal seasonality that we see in a quarter where things get soft around the holidays. But if I just elevate, I think what's on the mind of some of our investors that we had a few quarters of single-digit growth, but that certainly does not dampen our enthusiasm for our strategy. COVID just wasn't kind to structural heart patients. And we know that there are many consequences of COVID affected global growth companies, including Edwards. So if we just replay, 2020, COVID drove pretty much flat sales growth for us. In 2021, it was a big growth year. Edwards grew 18%. And in '22, although we experienced the lingering impact of COVID, tough comparisons and all that we still grew 8% and more importantly, in '23, we remain confident that sales are going to grow 9% to 12%. So we just think the environment is going to improve. We feel strongly that COVID's impact is transient and that treating these structural heart patients is going to again become a priority. Great. And maybe as a follow-up, you're a couple of months into the PASCAL launch in the U.S. I'd love to get the initial feedback of what you're hearing from implanters from hospitals and how the first quarter has gone for you so far? Yes. Sure, Robbie. This is Daveen. I'll take that question. So far at a high level, feedback from physicians in the Pascal precision launch has been really positive, right? I think people love the ease of use, the navigation improvements of this new system and we know that we received early approval in the U.S. and Europe. So we're ramping the inventory to kind of improve these launches. And I think really in the U.S., our mantra is all about patient outcomes. And so we are really focused on our high-touch model. We're really focused on getting great clinical outcomes, gradual introduction have a really strong training program. So, so far to date, we've been really impressed with that. And finally, I'll say, I think we've got great Class IID data that came out, obviously, at TCT. And we're convinced that they'll have a positive impact in the tier market overall, and we think that more and more physicians would be interested in using the PASCAL Precision system. I wanted to start with a high-level question. Obviously, there's a lot of concerns on the U.S. TAVR market, Mike, as you mentioned earlier, among investors. I wanted to ask about actually next year '24, because it looks like you have three major trials being presented potentially early TAVR for asymptomatic, the unload trial for moderate AS, TRISCEND II with EVOQUE for tricuspid. How do you guys rank these opportunities? And do you expect these three trials to accelerate your growth? And I have one follow-up. This is Larry. Related to early TAVR, just as a reminder, that trial has a 2-year endpoint. So we just completed the 1-year follow-up at the end of last year. So we haven't -- these patients have another year to go. So that data wouldn't be available really until 2024. Unload is an IAS study, so that's really kind of out of our hands. We provide funding for that, but that's really up to the investigators in terms of when they present that data. And maybe I'll turn it over to Daveen for TRISCEND, or Bernard. Yes, I'll just make a comment on TRISCEND. So for the TRISCEND II study, we expect obviously release the information in the second half of the year and release the information in the second half of the year. So we're excited about the data we think to help it. But as you pull up here, I think this all helps us make us feel good about this year and then driving into 2024. Yes. And I'll just add -- this is Mike again, Larry. Yes, we're feeling positive about 2024. It's a long way off. So it's too soon to give guidance at this point. But when we look at the road ahead, we really think as the system learns to deal with COVID and it fades back into the rearview mirror that structural heart patients are going to get prioritized again. And we think that they're going to be anxious to treat these patients. We love our lineup of technologies, our lineup of clinical trials that are pointed in indication expansion. And so we see -- that's why we feel confident in that 2028 outlook. Yes. And just to add on to that, we did see, as Mike mentioned, we saw some weeks in Q4 that were really strong. And I think it's just evidence that staffing is gradually improving, maybe not as fast as we want. And we certainly saw some impact, especially around the holiday period, but we still have the SAPIEN 3 UR launch. We have other things that we're really excited about, and we feel very good about next year -- or this year, sorry. That's helpful. Just a quick follow-up. I didn't hear anything -- sorry if I missed it on the Alliance trial in Safety and X4, is there an update there? Yes. No, we don't have any update there. I think what we said at the investor conference is we expect to be back in clinic this year, and we still anticipate that. But we don't have anything new to add. I think for the first question, Mike, on the TAVR trends, I think U.S. was up mid-singles overall TAVR up mid-singles, implies international was mid-single. So maybe talk was there any China impact or would happen in international. And I think on the last call, you noted half the centers in the U.S. were up double digits, half then were flattish. Was that a trend that you saw this quarter as well? Or how are you thinking about TAVR progression here? Yes. I'll talk a little bit about OUS and then Larry can get a little deeper in the U.S. So outside the U.S., procedures grew in the mid-single digits. And as we mentioned, outside of Europe and Japan, it grew even faster. In Q4, we experienced some challenges that resulted in sort of, if you will, the U.S. and Europe in mid-single digit as expected, Japan was worse than we thought, and the rest of the world was better than we thought. So that's sort of the way that things kind of netted out. We expect contributions from all the regions to be better in '23 as we are projecting that 9% to 12% growth rate. Your other question was trying to differentiate what was different in the U.S? Sorry, half the centers were up double digits, I think, last quarter. Was there a trend that you saw this quarter as well? Yes. We saw significant variation on a site-to-site basis. Clearly, some centers, and I think it maybe reflects kind of localized COVID restrictions. Some centers certainly did better than other centers. And gradually, we see that improving over time. But larger centers probably did a little bit better than the smaller centers. You had a question on China as well. China was certainly impacted, but for our TAVR business, it's such a small base. It's not a huge driver one way or the other. That's helpful, Larry. And Scott, maybe a quick 1 for you. I think Q1 guidance here at the midpoint almost, I think it's hinting at 10% organic, close to high single, low double organic -- what's driving the sequential acceleration from the high singles organic we saw in Q4? Has the visibility improved? Or just talk about assumptions around Q1? Well, it ties to what we've been talking about so far on the call, our guidance for Q1 is $1,350 to $1,450 million, so call it $1.410 billion in sales at the midpoint of the range. Which is if you just sort of think about how the year is going to play out at the lower end of the 9% to 12% underlying growth rate guidance that we've given for sales. So your question is what happened between Q4 and Q1 and it ties back to we're just seeing generally a favorable environment, hospital staffing levels and health care disruptions gradually getting a little bit better. And it's really very similar to what we talked about at our investor conference and reinforces our confidence about the 9% to 12% growth rate that we can achieve for the full year in 2023. Our next question comes from Matt Taylor with Jefferies. We'll move on to the next question. Our next question comes from Matt Miksic with Barclays. So I'll keep it to one question. Just on some of the comments that you talked about, Scott, I think in your comments around starting to see some encouraging trends early this year, gradual improvements maybe towards the end of Q4. Given the sort of many things that have been talked about as potentially having this sort of slowing impact on U.S. TAVR trends around staffing availability of nurses and the confusion around some centers being double digits and some being slower. Can you maybe talk about a few things that you are seeing that sort of bring you to sort of point out this encouraging trend. Which of these things you're getting better? What gives you that encouragement? Well, it's a good question. It's tough to isolate all the elements that are going into just the first couple of weeks of the year. But generally speaking, overall, it seems like the trends are favorable. And this is what we expected to happen in 2023 with hospital staffing constraints abating with overall disruptions in the health care system, getting a little bit better in the U.S. and outside of the U.S. And just the multiple different signals that we see and anecdotes that we hear give us confidence that we're on the right track. And again, looking to the 9% to 12% growth rate guidance for 2023. January, it's pretty early to say, but obviously, we wouldn't the signals that we've seen in January are reflected in the guidance that we've given in that $13.70 to $14.50 sales range for the first quarter. I have two quick ones. It looks like you have 81% gross margin in the fourth quarter, your guide for '23 is the reversal of your FX hedges. Can you walk us through sort of -- should we just straight line it down over the next couple of quarters, how we should think about that? And then the second question, it sounds like things are getting better. Are you seeing wait lists cropping up in different places? Why don't I take the first piece, and then I'll let somebody else jump in on the wait list question. Just in terms of gross margin, it's pretty simple. I mean there are a bunch of little moving pieces. We always get a little bit of benefit from mix. We get a little bit of benefit from all of the activities we have to improve efficiency in global supply chain. But really, the difference between the gross margin in the fourth quarter of 2022 and the full year 2022 versus the guidance we've given for 2023 and is all FX. And FX hits us with both hedge contracts that we have as well as inventory valuations outside of the U.S. that's really the source of the decline from 2022 to 2023 gross margins. And on the backlog question, Joanne, as we've mentioned before, we don't have great analytics on backlogs. And so a lot of it we just hear anecdotally from customers. But what we do here say, yes, indeed, there is backlog that's spotty and across the U.S. and other countries for that matter. Mike, I wanted to go back to the COVID-related headwinds in the U.S. and one hypothesis that I think concerns investors what you guys really haven't talked much about is the idea that excess mortality in your patient population could have depleted your pool and that, that might take longer to normalize than something that's a little bit simpler like hospital staffing. Do you see that as a significant factor? Or do you still view it as a bottom of the funnel issue with capacity? Yes. Just at the highest level, sadly, for these patients, it's true. There has to be some mortality that goes on. They just don't wait well. And we know that, that's a very serious consequence of the environment that we're in. Having said that, this isn't a small pool. It's a really, really big pool. And so even the sad mortality that comes from this is not close to really putting a dent in the number of patients that could legitimately use help through having their severe AS treated. Okay. That's helpful. And then just one on mitral. Any line of sight into Class I and T completing enrollment of those studies have been going on for a while and I don't think you guys have provided a time line there. Yes. So this is Daveen. So I'll follow up a little bit on Class II TR first and I'll talk about IIF separately. So first, on Class II TRs, you remember, we think that in our prioritization, while we think tier for tricuspid is really important, we actually believe that EVOQUE has the potential to be more important to tricuspid patients. But we know that this is a large and diverse population of people. So we've got to have a portfolio of options. So we were committed to running two different pivotal studies, obviously, the TRISCEND II for EVOQUE as well as the Class II TR for PASCAL. And many of these sites are actually -- many of our clinical sites, especially in the U.S. actually have both trials at that site. So what we did is we actually ask sites to prioritize TRISCEND II enrollment and actually drive that fastest. And so that's on track to kind of complete enrollment here in the first half of 2023, as we've kind of talked about before. So now as that finishes up, we're asking kind of sites to kind of drive enrollment in Class II TR hopefully, we'll then see enrollment in that trial then pick up. And moving on to Class IIF, right, our functional kind of trial a randomized trial. We haven't yet kind of shared expectation for kind of approval or commercialization yet on that. That trial is enrolling right now. It's a really important trial for us. And again, a lot of the sites that were actually in Class IID again, the other mitral, were also sites that are also in Class IIF. And as you imagine, we initially said, "Hey, guys, let's really drive enrollment in Class IID and which the sites did really well," they helped drive our approval. And now we've again asked them to kind of switch their prioritization to Class IIF. So we see kind of the enrollment in that trial, which is again, it's a larger trial, a 450-person trial kind of enrolling right now. So that's kind of an update on those two trials. I wanted to ask just a follow-up question on TAVR in Japan. How you're thinking about a cadence in '23 following a bit more pressure. It sounded like in -- and then just as you think about the impact from low-risk patients, additional patients coming into the funnel there as well as RESILIA rollout, if you could talk to us about your strategy and pricing strategy there, too? Maybe I'll start out with Japan and then turn it over to Larry for the others that he can sort of complete the thought. Japan had been a real lift to our growth rate for the past few years and even earlier this year. But when that wave of COVID came through in Q3, it really was a setback for that health care system. And the way that the Japanese system deals with it is to implement a lot of restrictions. And so that really had some pretty big impact in Q3, and that continued into Q4. It was even more dramatic in Q4 than we expected. The situation is much better in Japan. And so we see a very solid, substantial improvement during the course of 2023. So we expect Japan to be a real contributor to growth going forward. Larry? Okay. So the -- there's a lot of things to be excited about in Japan. In addition to the recovery that Mike talked about more broadly, we do have S3 Ultra RESILIA that's coming probably right before the -- probably in Q2, then we'll begin rolling that out. Low-risk approval is also a big thing. We recently got approval for TAVR-in-TAVR, which is a big thing for Japan. So we're really looking for them to recover and get back to more of the historic growth rates. Great. And if I could follow up to just RESILIA in the U.S., you talked about 10% center penetration at this point, but can you speak to just your strategy adoption interest in Q1 and how you think about at this point, the cadence of converting centers over the next few quarters? Sure. Yes. So we're really pleased with how the launch has gone so far. Remember, this approval came earlier than we anticipated. So it felt like we had built up a ton of inventory, and so we had to build up that inventory as we roll it out. So we're pretty much right I think, where we plan to be, and we expect the rollout to continue through the entire year. But we're happy with outcome so far. The physician feedback has been positive. And we think it's good for us. We're also going for a price increase, which is the first price increase that we've done in -- since launch, which has been over 10 years. It's pretty modest. It's less than 5%, but we think it reflects the innovation and the value that we bring with the RESILIA technology. A quick clarification and was on FX. I think the revenue guidance stayed the same, but FX was $100 million better. Just wanted to make sure I understood the moving parts on that? And then the question was also on U.S. TAVR. It's hard to tell exactly, but it looks like U.S. TAVR was down versus Q3. So I don't know if there's anything to call specific headwinds in Q4 that maybe weren't in Q3 and if it was actually down in Q3 versus Q4? And then how to think about Q1 in the U.S., can that still be up sequentially and grow kind of year-over-year in that 9% to 12% range? Sure. So on the first question about FX, yes, you're right. We originally anticipated about $100 million headwind to sales based upon recent currency moves, we now think it's about flat. We do think there will be a headwind to sales in the first half. There will be a tailwind to the sales in second half of 2023, but it averages out to flat for the full year. At the current rate. Regarding TAVR, no, there was actual growth in TAVR in the U.S. over Q3, and we're expecting more growth in Q1 over Q4. So we're seeing sequential growth and year-over-year growth expansion in U.S. TAVR and global TAVR. Okay. Great. I'll recheck the model on that. And then on SAPIEN 3 RESILIA. You mentioned a little bit of color on the launch. Curious how it's gone like price uplift versus volume discounts, you're actually getting all the price? Because I think the guidance is assuming stable pricing. So I just want to make sure I'm clear on how to think about pricing impact this year and maybe the pricing comes more in 2024? Yes. So we are going for a price increase and we're going for a price increase across the board. What ends up happening with pricing is as volume goes up, we have rebates and those were built in, whether it was SAPIEN 3 pricing or whether it's SAPIEN 3 UR pricing but we are going for a net increase on every SAPIEN 3 UR valve that we have. Again, it's about $1,500 less than 5%, but we are going for that across the board. I want to just start with a question on the surgical valve business. It grew at a higher clip than the TAVR franchise in the fourth quarter. And just wanted to maybe get some -- a better understanding on this prioritization of heart surgeries that you called out. Do you expect that to continue and maybe be beneficial to understand price versus volume growth for the surgical valve business in 4Q? And then I just have 1 follow-up. Sure. Well, I'll start and then if I have rent trouble on call my buddy to mean to help me out here. But overall, the thing with surgical patients is they don't require the same amount of work up as a TAVR patients. So they can move through the system faster because they don't require things such as the CT for valve sizing where that's been intraprocedural for the surgeon and so there's just much workup that has to be done for those patients. So maybe it's a little less impacted. I think there's also a mindset that when a patient needs open heart surgery, that, that just is more urgency in the system and those patients can move through a little bit quicker. We'll see how that continues over time. But we continue to drive RESILIA on the surgical side as well. We have the MITRIS launch, which is going, and we continue to advance RESILIA on the aortic side as well with INSPIRIS and those continue. I don't know if you have anything to add, Daveen. Yes. The only other comment I'll make is we talk about heart valve surgery being prioritized within hospitals. We see a bit that, as Larry said, in the food chain of kind of surgeries, we see that people generally if they're short in cardiac surgery resources help start moving resources to these really high acuity really important patients from other parts, other surgery departments. So you actually see a little bit of resource moving, which I think has helped cardiac surgery keep its volumes overall. That being said, the macro picture, right, we always expect that TAVR is going to increase in aortic valve replacement. But we also expect, at the same time, the AVR market is going to continue to grow, and there'll always be these patients with complex disease that need surgery. And just a follow-up on the early TAVR results are not in the very near term, but thinking about the asymptomatic severe aortic stenosis bucket and just the percentage of total severe aortic stenosis patients in the United States. You guys have any new kind of estimates in terms of is that a 30% of total, 40% of total or lower? I just wanted to better understand what early TAVR could unlock? Yes, it's a difficult question because the literature is all over the place on this topic, and there's not great studies on this in terms of how it gets looked at. There's a lot of studies out there that say for every asymptomatic -- or for every symptomatic patient, there's an asymptomatic patient, so that's probably on probably the higher end. There's other studies that says that it's a little bit lower. But I think regardless, it's significant, but I think the bigger issue here is it impacts how patients flow through the system because patients come and the doctor says, how are you feeling? And maybe that day the patient feels fine, but two weeks ago, they were struggling and that doesn't necessarily get picked up. I think if we could take the symptom assertation just out of the equation for patients and if your echo says that you have severe AS, you move directly to therapy. I think it would just be a game changer for how patients flow through the system. And it's one of the reasons we took on EARLY TAVR is we think we need to have the definitive data that shows what happens when you really stress echo these people, what happens when you really follow patients that are asymptomatic, and that's really the purpose of the trial, but we think it's a significant opportunity to change how aortic stenosis is treated. The first question is on ACC, which is coming up in a couple of weeks. I'm wondering if there's anything that you'd call out from an Edwards standpoint in terms of notable clinical data. And then there's a competitor study in the tricuspid space with TRILUMINATE. Do you think that study could potentially catalyze the transcatheter tricuspid market, both repair and replacement? And then I had one follow-up. Yes, this is Daveen. I'll hit a little bit on the -- obviously, the tricuspid trial, specifically the TRILUMINATE study. We actually wouldn't be surprised if TRILUMINATE shows positive results and gets approved by ACC or around ACC. To me, this would be an amazing opportunity and great opportunity for patients to continue to get more data and have better patient treatment. But that being said, we see actually in Europe right now that clinicians are actually very positive about the performance of our differentiated PASCAL Precision device there and seem to really like it for tricuspid patients. So we look forward to that to obviously bring that technology to the U.S. in the future. But we think for the therapy overall, obviously, more data is helping patient care. And then a high level, we'll be at ACC in full force. It's a chance for us to be close to customers. But we don't have any real groundbreaking trials that are going to be introduced at that time. Okay. And then just for a quick follow-up. One actually on capital. allocation. And clearly, you're going to remain focused within structural heart. But I also think you've talked recently about having interest in a potential new adjacency. And I think referring to heart failure, you have an internal atrial shunt program, and you also have some investments in external assets. So when should we expect to learn more here about these initiatives and just the broader path forward? Yes. Thanks for that, Adam. We don't end up talking about these until some of the risk has been taken out. At these early stages, these are big transformative therapies that have big potential, but they also have pretty big risk at the early stage of the program. And we feel like it's more appropriate to share it with investors when we have more uncertainty. So for example, like we're already in human trials. So we're not likely to talk about this for competitive reasons, but it is something that's very much a priority for our company. We think the kind of skill sets that Edwards has could be applied really, really well to this big group of patients that's the #1 health care burden and cost and mortality both. And thank you for the color on the quarter-over-quarter growth, U.S. TAVR expectation in 1Q. But I'm hoping to just parse out the expectation around cadence for improvement U.S. versus international in three seems like international, a little bit more kind of COVID surge impacted maybe a little more visibility into the turning of the tide there. U.S. more hospital staffing it feels more gradual. A, is that correct? And do you think it's right for us to be modeling a little bit faster recovery and acceleration perhaps in 1Q and the first part of the year internationally and then maybe a little bit more of an acceleration for the U.S. in the back half and keep it more gradual in the first half? Is that a good way to think about it? And do we have the pieces right around your visibility? So Rick, first, on the sequential growth. I want to go back to something Travis asked about before. Q3 to Q4 and 2022, there are sequential growth globally. I said U.S., it was true globally. Q4 through Q1 and 2023, sequential growth in the U.S. and globally. As it relates to the full year 2023 I'll start and then others chime in. We're expecting contributions both in the U.S. and outside of the U.S. It's tough to pin down exactly which regions are going to grow what rates. But we think that we're going to get contributions from all of our major regions to that 9% to 12% underlying growth in '23. That's right. I mean if we just look at what's happened here in the recent past, whether it's the U.S. or Europe or Japan, our three biggest regions, they've been lower than what they should be based on the struggles that they've had with the aftermath of COVID, and we expect that to improve throughout 2023. Okay. I guess -- but it's not like you have better visibility into the two factors. The COVID surge impacts in your challenge areas in Germany and Japan, better visibility there versus hospital staffing. It feels like you're saying you expect all of them to move more or less together? Yes. I would say we have similar visibility on all of them. We're very close to our customers, very close to our centers. and we feel like we know what's happening on a center-by-center basis. And we just feel that the environment has and will continue to improve. Okay. And just following up to BJ's question. are half of your centers still doing double-digit growth in the U.S. I know it's variant, but do you still see that level of growth from at least a cohort or half of your centers? Yes. I don't know if I could pin it down exactly to a percentage. But certainly, we see a large portion or a large section of our centers that are still doing double-digit growth. And again, I think it's not so much COVID, but it's the COVID restrictions that happen. And I think the parts of the country where those restrictions have been release sooner. I think we see those centers doing better. But we expect the rest to come along. I mean if you look broadly, those restrictions are easing really across the globe, and I think that's what is one of the things that helps us in 2023. Yes. And Larry, you might add that you saw some weeks during Q4 where there was some significant volume, though and made us feel good about the fact that there must be some capacity out there, right? Yes. We had some of the biggest weeks that we've had in our history in Q4. So a week doesn't make a year, but the fact that they were able to do it for several weeks indicates that staffing is getting better and capacity is coming back into the system, and it's one of the things that gives us confidence in our guidance for 2023. Okay. Well, thanks all for your continued interest in Edwards. Scott, Mark and I welcome any additional questions by telephone. And with that, thanks for participating.
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Good afternoon. Thank you for attending todayâs KRC 4Q, 2022 Earnings Conference Call. My name is Tamia, and I will be the moderator for todayâs call. All lines will be muted during the presentation portion of the call with an opportunity to questions-and-answers at the end. [Operator Instructions] It is now my pleasure to pass the conference over to our host, Bill Hutcheson, Investor Relations and Capital Markets. Please proceed. Thank you, Tamia. Good morning, everyone. And thank you for joining us. On the call with me today are John Kilroy, our Chairman and CEO; Tyler Rose, President; Justin Smart, our incoming President and current President of Development and Construction Service; Rob Paratte, our Chief Leasing Officer and Senior Advisor to the Chairman and Eliott Trencher, our CIO and CFO. At the outset, I need to say that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next eight days both by phone and over the Internet. Our earnings release and supplemental package have been filed on a Form 8-K with SEC and both are also available on our website. John will start the call with third quarter highlights, and Eliott will discuss our financial results and provide you with our 2023 earnings guidance. Then we will be happy to take your questions. John? Hey thanks, Bill. And hello, everybody. Thanks for joining us. 2022 was the year of transition, as evidenced by substantial increases in interest rates that impacted the economy and the capital markets. But as we enter 2023 there are signs of inflation cooling, the flat fed slowing down the pace of interest rate hikes, and a resilient consumer. Kilroy is focused on things we can control. Our portfolio is top notch. Our balance sheet is strong and we are patiently waiting for opportunities to allocate capital. That theme of transition can also be seen in the office market as more companies are adjusting to post pandemic life, and many are reestablishing in office policies. Disney, Paramount Netflix, First republic, Sales force, Starbucks and Twitter are among some of the most recent to mandate to return to the office several days a week. This follows Microsoft and Apple who have been leaders among such tech companies and returning to in person work, and a recent conversation about remote work. Tim Cook, the CEO of Apple stated you collaborate with one another because we believe that one plus one equals three. We have all heard the recent announcements regarding corporate layoff. While layoffs are not, are never a good thing for office companies we believe that they have and will continue to drive an increase in physical office occupancy. For many of the biggest technology companies, headcount exploded during the pandemic, growing upwards of 50%, while office flip grew only 10% according to JLL. The recent layoffs are only a small fraction of those hired during the last few years, and seem to consist of many folks that never went into an office nor had any office space dedicated to them. The well reported flight to quality trend continues to get more pronounced, with trophy rents generally holding and commodity rent softening. According to JLL newer buildings generated 60% premium in rents compared to commodity properties. The endless premium has the potential to grow even larger, with the vacancy rate for older space in markets like Seattle and Silicon Valley nearly twice as high as the vacancy rate on newer buildings. In addition, there is and will continue to be a scarcity factor that exists with quality space. As new supplies flowing for JLL square footage under construction fell by 7.5% quarter-over-quarter and 15% year-over-year and we suspect the new construction in 2023 will fall even further. Over multiple cycles Kilroy has strategically assembled a portfolio and premier markets that have the talent base and infrastructure to continuously pursue innovation. And innovation is alive and well. As an example, in San Francisco and Seattle there have been compelling breakthroughs in artificial intelligence and machine learning, punctuated by the recently reported Microsoft cumulative investment of $14 billion in the ChatGPT a local San Francisco company. The Bay Area remains the largest market for venture capital and represented over 30% of U.S. funding in 2022. As this or other innovations translates into demand, we believe our portfolio is well-positioned to capitalize on this growing technology sector. As we highlighted at our investor event in November, our portfolio is young, well-located, amenitized and attractive to many of the best companies in the world. A flight to quality dynamic has never been more pronounced and should drive outsized market share for Kilroy in the years to come. Turning to recent highlights. We signed approximately 460,000 square feet of leases since the end of the third quarter with an average term of approximately seven and a half years. Some highlights include a five year 65,000 square foot lease with MediaTek, USA, a semiconductor company in San Diego, a five and a half year 50,000 square foot lease with Redhat, a technology company in San Francisco, a seven and a half 35,000 square foot renewal in San Francisco with NBC Universal, a premier broadcasting company, and over 70,000 square feet of leasing and indeed tower in Austin, with Paige Sutherland and HNTB Corporation bringing the project to 71% lease. This year, we anticipate some challenges in office leasing. As you likely saw in our earnings release, our occupancy will be lower in large part due to a move out at our West 8 property in the Denny re-grade sub market of Seattle. We plan to this possibility when we bought the building in 2021 and began implementing our plan to recanted the project and roll up the rents to market. We believe West 8 is very well positioned in the market. It occupies nearly a full city block in a centralized location. And itâs surrounded by lots of amenities making it appealing to many types of companies. Turning to life science, which now makes up over 15% of our NOI demand continues to be resilient. We have multiple prospects interested in Kilroy Oyster center phase two, towards Oyster Point phase two which consists of three buildings totaling 875,000 square feet. Upon delivery of this project, our project, our life science NOI will grow to more than 20% of the company total. And over time, we expect this number to grow to over 30% as we deliver future life science projects currently in our pipeline. Our retail and residential portfolio which comprises approximately 5% of our NOI has been steady. Residential occupancy is approximately 94% with rents increasing meaningfully compared to last year and limited new supply expected to deliver in our sub markets. The investment market remains spotting and we continue to be patient and discipline. We have yet to see meaningful opportunities of interest to that end in 2022 we pause the start of new speculative developments, thereby reducing our near term future commitments by over a billion dollars. However, there will be a time to play offense and having substantial liquidity will be key. In summary, our strategy is based upon three key tenants; best in class real estate, disciplined capital allocation, and a fortress balance sheet. The simple but effective approach is cycled tested and proven to work in various environments. On the people front in December, we announced the Tyler Rose will be leaving at the end of this month. I want to thank Tyler for his 25 years of service, and I know all of the Kilroy team joins me in wishing him the very best. Justin Smart nearly 30 year veteran in Kilroy and currently president of development and construction will be assuming the role of president effective March 1. We know all of us, I know all of us are excited to work with Justin in his expanded role. I would also like to acknowledge Rob Paratteâs expanded role of Chief Leasing Officer and Senior Adviser to the Chairman. Rob has been with Kilroy for nine years and is not just an excellent deal maker but also a leader within the company and a trusted adviser. As Bill mentioned in his introduction, Eliott Trencher has been serving as our interim CFO for nearly a year and named our full time CFO effective as of yesterday. Iâm delighted to have Eliott be our permanent CFO. The Kilroy ventures deep and talented and cycle tested. In conclusion, I want to congratulate Justin Rob and Elliot on their added responsibilities. And I also want to thank the entire Kilroy team for its hard work and dedication. And for all of our listeners, we at Kilroy are back in the office. Thank you, John. FFO was $1.17 per share in the fourth quarter similar to the third quarter. On the same store bases fourth quarter cash NOI was down roughly 1%. There were several onetime items in the prior period from termination fees, tenant catch up payments and real estate tax true ups. Excluding non-recurring items same store would have grown roughly 2.5%. For the full year cash same store NOI was up 7% ahead of our increased guidance of 5.5% to 6.5%. At the end of the quarter, our stabilized portfolio was roughly 91.5% occupied slightly ahead of our full year guidance. The portfolio remained roughly 93% leased. Toward the end of the quarter we commenced revenue recognition for indeed lease in Austin. As a reminder, this lease began in the third quarter of 2021, and we have been receiving cash rent since the first quarter of 2022. For modeling purposes, it is important to note that the space put into service this quarter also stopped capitalizing interest. At the end of the quarter, we came to a resolution with DirecTV and El Segundo. As part of the agreement we took back approximately 150,000 square feet effective at the beginning of the year, and DirecTV continues to lease approximately 530,000 square feet. We are pleased with this outcome as it more closely aligns with the terms of DirecTVâs original contraction, right. However, there will be an impact to occupancy and FFO in 2023. During the quarter, we moved a roughly 45,000 square foot building at our Mineral Park campus into redevelopment in order to add Life Science infrastructure. The location is appealing to life science tenants and we already have several life science companies in other buildings throughout that complex. Looking at the balance sheet, we enhanced our liquidity during the quarter with our previously announced $400 million unsecured term loan. Post quarter end, we exercise the $100 million accordion at the same terms of adjusted SOFR plus 95 basis points, increasing the total term loan facility to $500 million. Net debt the fourth quarter annualized EBITDA remains about six times. And we have no debt maturities until December of 2024 and limited interest rate exposure with all of our debt fixed or subject to cap. Now letâs discuss the 2023 guidance. To begin, let me remind you that we approach our near term performance forecasting with a high degree of caution given all the uncertainties in todayâs economy. Our current guidance reflects information and market intelligence as we know it today. Any the COVID related impact is significant shifts in the economy are markets and in demand construction costs and new supply going forward could have a meaningful impact on our results in ways not currently reflected in our analysis. Projected revenue recognition data subject to several factors that we canât control including the timing of tenant occupancy. With those caveats, our assumptions for 2023 are as follows. As always, no acquisitions are forecasted, and we expect dispositions to be between 0 and 200 million weighted toward the end of the year. Similar to 2022, we do not have an immediate need for capital. So we will pursue dispositions if we believe they are beneficial to shareholders. 9514 Town Center Drive and the balance of Indeed tower are scheduled to come into service in the fourth quarter of 2023. The balance of our life science redevelopment at 4690 Executive Drive is scheduled to commence revenue recognition by the third quarter of 2023. We anticipate drawing down the remaining $300 million from our term loan throughout the first three quarters of the year. Development spends for the full year is expected to be $450 million to $550 million, mainly driven by KOP phase two. We have capacity to fund our 2023 spend through cash on hand and proceeds to be drawn from the term loan. As a reminder, we have $1.1 billion line of credit that remains fully available if needed. We expect occupancy for the full year to average between 86.5% and 88% a 400 basis point decline from the fourth quarter. Most of this decline can be attributed to the Amazon and DirecTV move outs which occur in the first half of the year. Same store cash NOI is expected to grow between 0% and 2%. The decline from 2022 is driven by the lower portfolio occupancy from the move outs previously discussed. G&A is estimated to range between $82 million and $90 million. Putting this all together 2023 FFO guidance is projected to range between $4.40 and $4.60 per share with a midpoint of $4.50 per share. To provide further clarity annualizing our fourth quarter number translates to $4.68 per share. To get to our 450 midpoint we subtract the net $0.10 per share due to the lower 2023 occupancy which factors in our move out, move in and development contributions. We then subtract $0.08 for various other items most notably higher interest expense from our term loan and the plan dispositions. In terms of sequencing throughout the year, the second half of 2023 is expected to be lower than the first half due to the West state move out at the beginning of the second quarter, and the full draw down of the term loan by the end of the third quarter. That completes my remarks now we will be happy to take your questions. Tamia? We will now begin the question and answer session. [Operator Instructions] The first question comes from Nick Yulico with Scotiabank. You may proceed. Thanks. Hi, everyone. So maybe first question is on the occupancy guidance. Eliott did provide some color around that on the move outs. But can you maybe give us a feel for what, as well, youâre thinking about what that factors in on a retention ratio. And as weâre thinking about a new leasing volume this year, maybe in perspective to recent years. Yes, sure. So the retention is obviously going to be on the low end relative to our history. Historically weâre plus or minus in the 50% range. Weâre going to be quite a bit below that and it gets skewed because we have a few of the large move-outs that we referenced. As far as new leasing, we do expect some. But as far as the translation to occupancy, it's not going to be that meaningful because when you just think about the sequencing of it all, the timing for new leasing to happen and occupancy to actually take effect, it's going to be weighted towards the back half of the year. Okay. Thanks. And then I guess second question is, as we think about big tech and the impact on the West Coast or it's sort of hitting the leasing market right now, not as much activity I guess what do you think changes that? Because it does feel like there is a, in some ways, a slow return to the office happening increasingly out there, yet it's not really translating into leasing activity. So, any thoughts on that would be helpful. And congrats on the promotion to everyone as well. Thanks Nick. Yes, sure. This is Rob Paratte. Let me make five points that I think address your comment. We could get more specific, if you want. But the first one I'd make is, as you've heard John say frequently in the past, there's a time to act and a time to pause and tenants are basically in a pause mode right now. And as a result, that's affected demand. The second point I'd make is that demand today is primarily driven by lease expirations and also the flight to quality, which you've all read about. Another point I'd make is that the great resignation that everyone was talking about after the pandemic or kind of during the pandemic, has now given the way to the great rebalancing; layoffs are changing the dynamic between employer and employee with leverage moving in favor of the landlord. And we're seeing, I think, tangible evidence of that as national occupancy of office continues to increase. Hybrid work is clearly the dominant model going forward. Most employers today are now requiring three to four days back to the office. And some are even mandating four days to the office. So, we expect that trend to continue. And the last point I'd make, and this goes to some of John's comments, there's haves and have nots in every market. And with respect to obsolete office product, it's going to struggle in the leasing environment, whether it's tech or fire category tenants. The bottom-line is, right now, we're in an amenities arms race and as tenants seek the best space as they can in order to lure their employees back to work and also retain the employees they want to keep, they're making investments in their suites themselves, with different design elements and that sort of thing. And landlords are also making investments in amenities. And I think that last point really plays well into the Kilroy hand because of our young portfolio and the passion we've had for over a decade of really highly amenitizing our buildings with nicer lobbies, hospitality-type feel, outdoor terraces, and that sort of thing. Does that answer -- I hope that answers your question. Hi. Following up on the previous occupancy question, I think you mentioned new leasing would be more meaningful towards the back half of the year. So, can you speak to the occupancy trend over the next few quarters. Are you expecting it to improve in the back half? So, the way to think about it is we're going to see occupancy dip in the first half of the year because that's where the majority of the large move-outs happen and then we think it will stabilize towards the back half of the year. And then the other piece to remember when thinking about the sequencing of occupancy is that our indeed tower project starts coming into the numbers in the fourth quarter of 2023 as we mentioned. So, that is factored into our occupancy projection. Helpful. And can you speak a bit more about what you're seeing in the financing environment? And what further financing activity, if any, apart from the outstanding term loan is reflected in your guidance, just given your capital needs this year? So, there's nothing else factored into our guidance on the financing side other than what we've laid out to the term loan and then the dispositions. As far as the sources and uses go, we don't need to sell those assets in order to fulfill our funding plan. We can do all of that with the cash on hand and the proceeds from our term loan. And as far as the financing environment, I think we have thought the most effective source of capital has been the term loan market, which is why we've pursued that and to be able to get debt at SOFR plus 95, we think is pretty attractive. We know others may take a different approach and everyone's got to do what works best for them. It does seem like the markets are opening up the financing markets, at least early this year, have opened up a little bit more relative to last year. but we're pretty comfortable where we sit. Great. Thanks. Good morning out there. John, there's a slide on capital allocation and your typical investor presentation deck that goes through your net investment decisions during economic contractions and expansions. And really shows that you guys have been countercyclical investing in contractions and selling into strength. Like you said, 2022 was a relatively light year for acquisitions, dispositions and development starts, but as you look into 2023 and even into 2024, how do you think you guys are kind of positioned to take advantage of the weak market from a capital allocation perspective? Well, it's a good question, and it's one that will play out over time. That slide that you mentioned, I think everybody on this call has seen it knows it's one of my favorites because it does show there are times when you want to buy aggressively, times when you want to sell, times you want to develop and times when you want to just prepare for what's next. We're prepared. We are starting to see some assets that are coming to market or rumor to be coming to market. I don't know whether they'll transact, whether there's still price exploration, there's so few data points, that for quality assets that it's a little hard to know when it's going to open up. I think the comment that Elliot just made that the financing markets are beginning to open up for quality deals and quality borrowers. That will help stabilize things with the Fed backing off, reducing the rate of increase, that's a positive sign. So, at some point, we'll get to a more stabilized market where there are more buyers that are able to transact and probably more sellers are willing to transact. But that's a ways off. So, we're prepared. We're very active in knowing what's coming to market as people start thinking about it. But we don't have any specific assets that we're looking at buying right now, we're looking. Okay, great. That's helpful. Second question, can you just talk about leasing progress at Indeed Tower. You guys increased the lease rate there to 71%, but you're facing some additional competitive space being delivered or subleased in the market in the near term. I guess, is there any sense of urgency to get leases done there before some of that new space is delivered? Hi Blaine, this is Rob. First of all, as you said, we're 71% today at Indeed, and we have a robust pipeline. I don't want to predict when things will sign, but we expect that percentage lease to increase and Austin in general, is still a pretty active market more so than most of the country. As companies continue to seek space in Austin and the employees and talent that are there. One comment I'd make on the whether they're not rumors, whether or not sublease space that comes on the market is that oftentimes, especially if it's a larger space, it takes the sub-lessor quite a bit of time to really understand the metrics and how to make that sublease space viable. It's not their primary business. I guess, it's a simple way to say it, whereas owner developers like us do this every day. So, I guess what I'm saying is I don't -- although there's been press about sublease space coming on the market, I don't see it as particularly imminent because a lot of those companies have other bigger fish to fry. Great. Thanks John, I think you started off in your prepared remarks, talking about a more concerted effort from business leaders to bring their employees back. And I'm just curious, in your conversations that you're having, how much could we really expect this utilization rate to increase? Is there a chance that it ever at some point gets back to that pre-COVID utilization rate? Or are we going to be stuck in this, call it, low to mid-50% range. Any additional color there would be great. Yes. Well, I happen to be in San Diego today, and San Diego, at least in our properties, the utilization rate is back up in most cases to what it was pre-pandemic. We're seeing that in Austin as well. We've seen -- I made comments back at our Investor Day in November preceding NAREIT that in San Francisco alone more than doubled at Labor Day, and it's increased since then, similarly in Seattle. L.A., we're seeing more and more people back to work. Rob can give you what the numbers are there. We've had some vacancy in Hollywood near El Centro building that's, I don't know, 70-or-so thousand feet. Don't hold me to that number, but Robert, I can give you the exact and we have quite a bit of interest from a multitude companies. So, it's happening. It's not uniformly happening in each and every market, but it's happening. And I'm optimistic that we're going to see some big improvements over the course of this year. Like anything, nothing ever happens -- good stuff generally takes longer tough stuff generally as everybody thinks about more quickly, it's more present in our minds. But I'm optimistic based upon what we're seeing. And we see it in our garage revenue. We've talked about that in prior calls. It's way up over the last couple of years. So, more would be seen, but -- and does it get to your point, does it get back to pre-pandemic? The new occupancy is going to be a little bit different. There's a lot more open space and common area space and so forth, a lot less in the way of the work tables and whatnot. So, the actual occupancy in the same square footage of people, even when fully occupied is likely to be fewer people per square foot, if that makes any sense. So, that's kind of the trends we're seeing. Great. That's certainly some helpful color. And then maybe real quickly on life science, particularly the redevelopment announced at Menlo Park. I guess why does this make sense now? And then could you give us a sense if you've identified any other buildings that could be candidates for a possible redevelopment like this? Let me start with just the candidates. We always look at our buildings, whether they should be converted, whether they should be renovated, whether they should be some way repositioned, and we that's a normal course of our business. In 2021, we announced three renovations to our conversions on life science down in San Diego that were all leased and Menlo Park is a complex where we have a lot of life science. So, we know what the demand is there. And Rob, if you want to give a little bit more detail, go right ahead. Sure. Mike, the way I'd look at it is that by doing this life science conversion, we're effectively doubling the number of prospects that we can engage with. There's a number of office tenants that are in the market, but there's also pretty much an equal number of life science tenants in and around Menlo Park, Redwood Shores, and Redwood City. And so we looked at the overall market demand from both office and life science and this project, given its design and being multiple buildings, we can answer to both needs, and we already have life science in the project. So, it just made a lot of sense. Yes. Thanks. Elliot, I appreciate all the detail you went through on the occupancy. I guess I'm just a little bit confused in the sense that you're saying in deep towers paying rent, but yet the building and the occupancy stats don't kind of fully flow into your numbers until the end of the year. Am I sort of hearing you correctly or am I missing something? No, you're hearing us correctly. I think typically, and we've done this in other instances, most notably with 333 Dexter, right? There's a difference between when revenue commences on a portion of the building and when the building has qualified for going into service, and so in the case of Indeed Tower, we are starting to get rent from Indeed, that starts the 12-month clock by which we can complete the lease-up. And after the 12-monthclock, it has fully finished being a development project and it goes into service for occupancy calculation. So, that's something that we've done in many other projects. Okay. So, if I take kind of the move-outs that you described, DIRECTV and some other move-outs in January plus the Amazon move out that's coming in April. If I do my math right, that kind of gets you to around the high end of your occupancy of about 88%. And you're sort of talking about a low end of being 86.5%. Is that kind of geared to anything specific? Or is that just sort of cautiousness or just uncertainty in the marketplace and giving yourselves some wiggle room on retention and slow new leasing? I think that there are a lot of puts and takes when we think about how to get to a number, and we try to highlight the major factors, I think in two quarters ago, we referenced the Pac-12 move-out, which happens in 2023 as well. So, there are obviously a lot of moving pieces there, but we got a -- we think we're pretty comfortable between 86.5% and 88%. Okay. And then, John, just on the KOP leasing. I mean it sounds like the last couple of quarters, you felt like there's been good demand, but you haven't been able to kind of get anybody to the finish line. I'm just wondering if the rally in the biotech stocks and pickup in pharma has sort of accelerated those discussions? Or do you feel like you're getting closer with certain tenants? Or what do you think it takes to get things over the finish line here? Is it stock prices or just getting the building closer to finish? Well, Rob can give you the specifics on the market and what we've got going there. But I always go back to this, Steve, that all these companies have a lot of new products that they're dealing with. They've got to figure out where their energy is going to be spent and whether it's life science or others. Everybody is trying to figure out what their new footprint is going to be. And with that, Rob, if you don't mind going through just kind of drilling down -- the responses or comments to the questions. Sure. I think a little more into what John was saying, Steve, is that life science has traditionally been and continues to be a little more thought, I guess, slower in their uptake of space, given a lot of the factors John said, whether it's pending patents, whether it's other new innovations they're working on, and they just are a slower tenant in terms of -- they're more like a fire category tenant, honestly, in terms of their uptake of space. And you hit on -- the second part of your question was valid, which is that the buildings right now have steel up or topped out they're more visible and we've noticed an increase in activity actually. We still have large users looking, but we've noticed a marked increase in single floor or double floor users. So, as the buildings continue to progress, we expect that visibility to translate into more tours and demand. So, we're kind of still in the early stages, but now that we have steel up, things are moving forward. And I guess the last thing I'd say is no industry is immune from the uncertainty in the economy we're in. So, as I said earlier, when I was answering Nick's question, tenants are moving slower due to uncertainty. Thanks, and good morning, everybody. Elliot, sorry to keep drilling on occupancy here, but just some still not lining up for me. I understand the move out is very helpful. But when we look at the difference between leased and occupancy right now, it implies maybe a little over 200,000 square feet of leases that haven't yet commenced. Is the expectation that those take longer to come online, that's later in the year, which drags down average occupancy? Or is it seems like that would push you up even above the top end of the range that you have now? How are you factoring that into guidance? Yes. It's mainly a weighting thing, I think, that you're the missing piece there. The move-outs that we talked about are January, April, kind of the first half of the year and the bulk of the move-ins are in the back half of the year. So, you're right, that square footage is coming in but in terms of the waiting for the total year, it doesn't have a full year impact, whereas the move-outs have much more closer to a full year impact. Got it. Got it. Thanks Eliott. And then, Rob, just wanted to loop back on your commentary about sublease space, I think you were referring primarily to Austin there. But in general, we've seen an uptick across your markets in the fourth quarter. It looks like some of it, at least in your portfolio, has been resolved recently. But what are your thoughts on that competitive set in your market? How is it impacting kind of lease negotiations? And do you expect any near-term change on that? Sure. Well, as we've said before, there's different segments of sublease space or increments of it. Some of it's just obsolete space that is going to be very difficult to move. I think what you're seeing, particularly in San Francisco, but other markets also, is that some sublease space is converting to direct space. And again, you can't generalize about that. Some of it will be very good space, Class A, and some of it will be not so good and so you have that kind of convergence there of sublease becoming direct. Sublease space is always a factor in a negotiation or in a market. But again, if you're really looking at flight to quality, the sublease space that is available using San Francisco, as an example, more than half of that is space that we wouldn't consider competitive to premium product and assets like we have. Another statistic kind of going off what John said in his remarks, 70% of the deals done in San Francisco in the fourth quarter of 2022, we're going to a space that was basically 2010 or newer space. And so whether that's sublease or whether that's direct, the rates are going to be higher than they would be in just kind of Tier 2 space or Class B, B plus. And that's universal. I mean that's going to be whether you're talking Manhattan or wherever, that's just a fact. Hey everyone. Tyler, congratulations on the retirement. It's been good to work with you all these years, and congrats to everybody else. John, maybe on investment. Blain asked the question earlier, but with respect to development versus acquisitions, I'm kind of curious on your thoughts, if we're talking only the top 10% or 15% of assets now in any particular market are super attractive from a tenant perspective, I mean, do you really anticipate to see a number of opportunities that come as distressed opportunities in that 10% to 15% subset. Are you really interested in those opportunities, knowing that you're facing kind of a next-generation rollout? Or would you rather just build? I guess, I'm curious about how much distress really is attractive for you and the REITs overall versus wooing a tenant away and building them a new building? Yes, it's a really perceptive question. And I don't recall, Dave, whether you were at our Investor Day, but I comment on that, then the target list of buildings that meet our locational and our sort of the quality, not only quality in terms of finishes and all that sort of stuff, but the floor plates, et cetera, that are attractive -- would-be attractive to us, then have to be trading at a price that makes sense to us. So, I think it's going to be harder to find quality assets across our markets than it has been. But having said that, we're pretty innovative people. If we find something that's in the right market, that can be made to be the kind of building that we know people want, we have the skill set to accomplish that. And there's a lot -- there's been a lot of times, a lot of buildings and so forth in periods where we were less optimistic than we ended up that our actions dictated. So, you just have to be out there, it's like a fisherman. You have to be out there fishing, and you throw a lot of them back, maybe a bad analogy because I'm not even a fisherman. But on the development side, if you're quite perceptive again, development, you're not going to do it unless you're pretty confident you're going to get the kind of return that makes sense. You've got best-in-class product with long life ahead of it and so forth. And we, of course, are pretty good developers and have a good development pipeline. So, we just -- we're going to keep us when we started buying in San Francisco in 2010, we caught the market by surprise. We bought aggressively good product that had the physicality we wanted. We positioned ourselves for development. We moved into that quickly. Every cycle has a little bit different execution, but you got to be nimble, and we are, and you got to have a great team and we do. And in the context of development, sites, they are pretty difficult to find in our markets, and we control a number of them that are entitled. So, more to come. And then maybe just a follow-up. You talked at NAREIT John, about potentially looking at other markets. Does this environment to these opportunities make you more or less interested in adding another dot on the map or does that not really matter? We're not looking at -- to use your terminology, we're not in serious pursuit of any other dot on the map at this point. We do have a strategy for the greater Austin area, and we're excited about that. We're not executing anymore, we don't have any land sites or anything that we're looking at buying at this point. I think that may be an area where we find some opportunity to do course. Again, we have nothing that we're looking at. But there are some folks that have approached us where they thought they were going to be able to entitle things and then move it into a sale category. But obviously, there's a lot less appetite for risk, the interest rates and the economy and so forth has given a lot of people's hope. So, there may be some opportunities at some point in that area. But we're not looking at seriously for any near-term execution in other markets. Hi, thank you for taking my question. I know you just touched a little bit on Austin. But I'm just curious, what would make the team slow or accelerating investments in the Austin? And has your view of the Austin market change in any way? Yes, I was just curious what would make the team slow or accelerate investments into Austin? And has your view of the Austin market change in any way? Yes. Well, our view has not changed with regard to the long-term. Our view in the short-term is, as is always the case when you're in a downturn there generally will be opportunities. We're not pursuing anything specifically at this point. Also in downturns, you want to be more cautious with regard to what you do. But there's nothing that's changed in the long term. And in terms of slowing down, I mean, you saw last year, we bought hardly anything, and we bought one site. And we haven't -- we're not in negotiations right now to buy anything building or land. And it's sort of a time to be a little bit more cautious. It's for us to be compelling for us, something has to be terrific at this point. Great, that's helpful. And just my second question. I guess, what are you monitoring as you think about timing of capital deployment? Yes, I can handle that. We're kind of looking at all the things we would typically look at, which is what are the market conditions out there? What are we seeing on the leasing side? What are our tenants telling us and then where values? And when we see an alignment of leasing conditions that we think are going to be strong and values that are attractive, then that is something that would cause us to increase the amount of capital that we deploy and vice versa. So, we're just going to be at a different point in the cycle, depending on the year, but the process is pretty similar. Yes. Good morning out there. Again, Tyler, all the best, Eliott and the rest of the crew Congratulations. A little bit of focus on Eliott, I think your comment about the earnings cadence this year was that first half was going to be stronger than the second half, so you're going to see a gradual slowdown. I'm just wondering if we should kind of think about second half really as the bottom or the inflection point earnings-wise as we start to look kind of beyond 2023? Or if there's still -- first one again, you have Indeed Tower coming on board, you have Kilroy Phase 2 coming on board. Or should we kind of still be thinking about things a little bit differently about earnings cadence, even beyond back half of 2023. Hey Tayo, so we obviously are talking about 2023 guidance. We don't have 2024 guidance yet, which is, I think, sort of where you're going. As you think about some of the drivers in those out years, you're right, we will have full years from indeed in 2024. We'll have a full year from the two San Diego projects that are coming in, in 2023. And then just the big question is what happens to the core portfolio in 2024. So, I think those are some of the major drivers. And as we kind of progress throughout the year, we'll have better clarity on how those are going to play out in 2024. Hey guys. Thanks for taking the question. I guess just curious, how are you guys thinking about the portfolio in terms of market concentration from a longer term perspective? Are there certain markets where you see yourself expanding or contracting more so than others? Yes. This is John, Dylan. That's a good question. It's one we ask ourselves quite a bit. In others -- we're -- three or four different products and with regard to life science of San Diego and San Francisco are two pretty key areas. So, we think we'll continue to grow in those markets. We don't have any plans at this point to be in any other markets with life science with regard to office concentrations. Over time -- and it takes a long, long time, we're likely to be more active on the buy or the buy -- the acquisition side in the Austin and beyond just because of the balance issue, but things never work out exactly as you might plan. On the development side, we have some pretty big development opportunities within the markets we're in today, and that is really in all four areas, five areas. And those will play out over time. Will we add significant development again over time as it's appropriate in the Greater Austin market probably. It's a very intellectual question, and I appreciate you asking it. I wish I could be a little bit more intellectual in answering it because at the end of the day, we don't have some internal formula about have this much here, not much there. To me, you've got to keep your eye on a lot of different factors and the factor that that's first and foremost in my mind, that should be in everybody's mind is where is innovation growing and what kind -- what's the supply or barrier to entry equation. In the comments I made in my earlier comments about artificial intelligence. I think this is going to be the biggest thing in tech that it's been, I guess, invented, if you will, in decades. It has massive, massive legs. And we're right in main in main on that. I appreciate that. Thank you. And then I guess just 1 follow-up. It looked like Riot Games expanded their square footage you guys portfolio? And then there was a footnote added that they have some square footage expiring in sometime this year. I guess can you kind of update us on your renewal talks there? or not is kind of indicating that they're likely to move out of that space? Hi, this is Rob. I really don't want to -- yes, I really don't want to comment on active discussions we're having especially in an environment like this. I just -- all I can say is we're engaged and more to come. Yes. Thank you. I just wanted to ask, you have Salesforce as the top tenant. I know your leases are mostly in its average nine or 10-year term remaining. But just curious, have you had any conversations with them, just given the restructuring plans they announced and the possible office footprint reduction as to kind of what their plans are if that relates to any of the buildings you have them in. John, I can -- yes. In markets like this, we really in touch with all of our clients even more so now, but we -- as a regular practice do, but now we doubled down on it. So, we talk to Salesforce quite a bit. They successfully sublet space in 350 Mission, which is our building, but we're not having any discussions with them in any way about any changes beyond that and they're happy in the building. Some of the space they have in the market is building their own and much older product. So, hard to say. I think it's notable that Salesforce, which had their work from anywhere policy is one of the companies that's come back pretty quickly to three to four days of work in the office for most employees. So, I think a lot will change in the next year or so in terms of just, again, how many people are back to work, how companies are using space and demand will eventually play out. I mean we're in a cycle, right? And certain cycles are like 2019, where everything is great and other cycles we've worked through. I mean one of the best things about our management team and the basic team we have in every region is that we cycle tested and have been through these before, whether it's dot-com or the financial crisis or when. So, that's the best way I can answer it. Great. Thank you and congratulations everyone on the promotions and good luck, Tyler with your next chapter. We'll miss you in [Indiscernible] land, that's for sure. I guess just kind of big picture here. So, we've certainly seen layoff announcements in your markets. Can you just give more color about what's happening on the ground? I know you had mentioned that jobs are still above levels of less of kind of pre-pandemic or the last three years. But just kind of what is really shifting that's noticeable? And maybe if you fast forward a year from now, how do you think your markets look versus today? And does that change at all the type of assets you want to own or maybe the size of the location or submarkets you want to be in? Well, it's a -- that's a compound question, Jamie. Good job. We'll take it one at a time. Rob, do you want to take the first part? Sure. Jamie, good to hear your voice. It's been a while. So, with respect to layoffs and what we're seeing in our markets, there's the headlines that all the media publishes. But then to your point, you get into the specifics. And when you look at some of the big tech layoffs, a lot of them have been in what I would call the softer sides of the business where they had multitudes of event planners or very robust HR departments because they were ultimately doubling their workforce over a short period of time. So, that's where we're seeing a lot of the focus, and that's not unusual, right? It's usually things like whether it's marketing, events, some HR and basically sort of headquarters type functions. What we are seeing, and this is happening in the Bay Area quite a bit is -- and there's a statistic out there that the typical tech worker that's been laid off, whether it's from whatever company you can think of basically has a new job in three to four months. And that's from ZipRecruiter. So, I think it's a very dynamic situation in terms of layoffs and where things go. And the one thing that we've always loved about the West Coast is the talent pool that's here in the universities that keep graduating this high-tech talent that everybody wants. So, although we're in a low now, we will get through this and the cycle will turn. I'd make the -- this point, Jamie. Just sort of broadly speaking, this flight to quality is massive, and we think we're really well positioned. And as Rob pointed out, is of earlier remarks, a lot of what we're seeing, although not entirely because there was quite a bit of the recent lease we've done where there are new deals and where companies are expanding. The fact is that the predominant thing we see right now is the flight to quality. So, people are moving out of a building, an older building into a newer building, be it ours or somebody else's. So that's not showing positive growth in most markets. But when that collides with growth, you're going to have a flight to quality and growth in quality. And then you look at the delivery of quality space it's way off, and I think it's going to be a lot less under construction this year and possibly next. The dynamics can change for the premium space very, very quickly. And -- so I think that's a dynamic to be aware of, and I think we'll be an early recipient of that. In terms of -- I think part of your question was what we might see in a year? And how does that translate into our planning. Was that the last couple of parts of your question? Yes, I guess you guys are just -- you're obviously much closer to it than we are based on what you've seen layoffs and companies. Yes, how do you think it feels a year--? Yes, I don't know. I mean there's so many factors. You've heard me speak a lot, and we've talked a lot over the years that we can -- the things that we can control, we do a pretty good job on, the things that we can't control the macro factors, we have to adapt to and react to and we always I have talked about how we built the balance sheet and the team to be able to try to withstand the downturn and take advantage of the upturns. As far as we adapted our product quality and so forth to that model as well, I can't -- one of the things -- I don't know that I'm ultra-optimistic but I'm optimistic about what I'm beginning to see in here about interest rate increase really slowing down at some point that's going to get stabilized. When it does, I think the debt market stabilized, and that not only affects real estate with regard to transactions, dispositions, acquisitions, development, et cetera, but I think it also just more broadly, economic clarity will give companies and decision-makers in other industries who are our tenants a lot more ability to see the future and see the growth model. But there's a lot of forces around the world right now that everybody is getting pounded -- you turn on the news, and you don't see and hear a lot of good things. Sometimes it's sort of overblown. It's just going to take a little bit of a dynamic change, people getting back to decision makers being able to see a more stable environment. And so I don't know when that happens. I think it's starting to happen from when I talk with various tens of ours and various friends that run different kinds of companies and so forth, they've been in the reactive mode of how you deal with what could be a more prolonged downturn, whatever, they've been in that mode, and that obviously rattles into real estate and real estate decisions and a slowdown in decisions even when people want to move forward. And generally, as things improve, it takes a little while to get going again. But I think -- I'm hearing more people feel like, hey, maybe the downturn isn't going to be as bad as we thought. But again, if I knew the answer to your questions, I'd be I'd be a wealthy person. I'd be picking stocks, I guess. I'd Warren Buffet or Junior Warren Buffet, and I'm certainly not that. All right. That's a fair answer. Our team came across a tweet today from the CEO of ChatGPT at San Francisco, talking about the tug of war between the negligence of the San Francisco government and the power of being the center of the AI revolution. San Francisco remains super relevant for the next decade. When we saw you at NAREIT, Blaine and I were just discussing, there was some optimism about the direction of San Francisco on the political side. So, is there anything that you can refer to that gives you more optimism here or makes you feel better about what's to come and have a -- has -- what's happened on the lay op side, motivated the government at all to make even more aggressive changes on to the positive? Well, I think there's a number of things. Some of them are government, some of them are individual companies and so forth. People have been frustrated rightfully so, people have all walks of life, all political spectrums, companies, et cetera, with the -- I think it's basically negligence to allow things to get deteriorated to the point they did. And of course, they recalled the District Attorney and District Attorney Jenkins was then elected recently to a full term. The school board thinks that everybody is aware of that happened before that. There are a bunch of organizations that have become incubators for next generations of leaders. And they are more responsible than some of the folks that were making decisions before, there's some new Board supervisor people. There's -- I think there's a trend that's positive. But it took a long time to end up with some of the things that we've ended up with, and it's going to take a long time to change it around. What I think is really positive is now with companies beginning to really come back to work and Rob mentioned how Salesforce had a Work from Anywhere. And now let's get back to the office as just one example of a company that has changed. As more and more people come back, there are more and more people that -- and more and more companies that are putting pressure on the city to make better decisions. So, I think that's a really positive thing. We're obviously active in all of that and so I'm optimistic. But I would say I'm cautiously optimistic because these things do take time. And we have a real issue that is a health crisis with people on the street that requires thoughtful consideration of how we get them off the street. And more and more people are dealing with that -- more and more organizations. And there's a group down here in San Diego, where they don't have any more year, the level of homelessness that they have in San Francisco because it's not concentrated in one area, but a group that's working with the federal government to make federal land available to create a responsible, healthy environment for folks and get them off the street. So, you didn't hear any talk like that six months or 12 months ago, at least I didn't. So, I think there are a lot of positive forces. The fact is, California has great schools, it's been the cradle of innovation for the Western world, it's not the entire world. There's more innovation coming that's growing and stuff people are starting to take much more seriously and become much more active as individuals and companies and putting pressure on government. There's a lot of before -- hey, everything is going kind of okay. Yes, I don't like this. It's sort of like any kind of decay, you need to remove it. Because it's going to grow. And for a long time, it was allowed to grow, unchecked. So, I hope those comments help. But I'm, as I say, cautiously optimistic and I think better -- much better days are ahead. Hi, everyone. Hi, John, thank you. In the opening remarks, you talked about 2022 being a transition year. As we looked at the setup to 2023, we felt this would also be a continuation of that transition. But I thought it was interesting that you talked about a potential shift to offence. So, what would you need to see in order to be able to shift to offense. And what would that shift to offense, John, mean for Kilroy? What direction do you think you -- if you had your way, what would you pursue? Well, I think Mike, I was pretty specific in my opening comments that we anticipate another challenging year for office. And I think that's -- I stand by that. I think it will be challenging. It will be different in each market. It always is. To be offensive, it would require for us some -- obviously some confidence that we're buying buildings that they've obviously got to be the right -- buildings from a -- the kind of buildings we like in the locations we like and so forth, then they have to be buildings we can make money on. So, there's going to be need to be a real value-creating proposition for us to be active in acquisitions. Obviously, we worked really hard and we will continue to work very hard on making sure that we have plenty of liquidity. So, there's always that to consider what our needs are, and we don't want to get to a point where we're side of things. So that has to feel good. And then with regard to development, I don't see us starting any spec development until there's a real need. But the point I made to some other person's questions earlier about the lack of new construction, the flight to quality at some point there will be a pretty obvious inflection point of a shortage that's looming based upon what is forecasted demand. So, when I say I'm optimistic, I'm optimistic it's going to happen. I'm optimistic about some of the things that I'm hearing some of the changes I've seen. But like a locomotive, if it's going from right to left, it's going to stop before it goes from left to right. And I haven't seen that phenomenon happen yet. What I'm seeing now is it's getting less worse, in some cases. And that generally is a foreshadow to getting better. But I make no pretense about having some magic insight, obviously, and when that's going to occur. Yes. No, timing is always certainly tough. And let's just end it there. That's it for me, John. Thanks a lot guys. Congrats on the promotion. Thank you. There are no further questions at this time. I will now pass it back to Bill Hutchison for closing remarks. Great. Well, thank you, Tania and thank you, everyone, for joining us today. We appreciate your continued interest in Kilroy. Have a great day.
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Thank you for standing by, and welcome to Nickel Industries Limited December Quarter Results Webcast. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer section. [Operator Instructions] Thank you for joining me on the December quarterly results presentation. Slide person, could you move to Slide #2, please. I'm very pleased again to report another record quarter in excess of 23,000 tonnes of nickel metal produced. Apologies, Slide #3, so the next slide, please, which is up considerably on the 20,000 tonnes that was produced in the September quarter. And that's really - we're seeing that from the contribution from ANI. Pleasingly, we also saw very good production in our nickel matte and very strong margins from our nickel matte, as a result, RKEF EBITDA of US$90 million. As I mentioned, the margins on our nickel matte almost $6,000 a tonne and over $4,000 a tonne for Angel Nickel. So you can clearly see the results of having the integrated power plant that we have at Angel Nickel. And now with Oracle coming online, expect that 23,000 tonnes to continue to grow significantly. At the mine, also another record, 2.7 million tonnes of ore was mined and the mine delivered an EBITDA of US$16.1 million, which is up over 58% on the last quarter. So underlying cash generation from operations of close to US$100 million for the quarter. And as I said, the transition to nickel matte has proven very successful, and we are currently enjoying very, very strong margins there. Finally, as I mentioned, Oracle, two lines of commissioning. Another two over the coming weeks will commission, and we will start to see the result and impact of additional profitable nickel units coming through with the Oracle commissioning. If we could move to the next slide, please. The table here just summarizes those numbers that I've been through, as I said, 23,000 tonnes in excess, a record. The RKEF sales, RKEF EBITDA, Hengjaya mine production all records as well. If we could just move to Slide 4, please. You can see here quite clearly the impact of Angel Nickel and what that's had on our nickel units, you can see it's continued to grow from quarter-to-quarter, and we expect to see a similar profile for Oracle nickel. So that 23,000 tonnes for the quarter will probably likely grow by another sort of 10,000 to 12,000 tonnes per quarter. If we could just go to the next slide, please. Slide 5. You can see here the margins. And pleasingly, we've seen a double in EBIT - doubling in EBITDA from the September quarter and also almost a doubling of our EBITDA per tonne. Margins back to sort of the more historical levels that we've enjoyed. If we could just go to the next slide, please, #6. I mentioned record quarter for the Hengjaya mine, 2.7 million tonnes. You could see both the Saprolite business and the Limonite business currently making very strong margins, almost $20 a tonne on our Saprolite and more than $10 a tonne on our Limonite. Pleasingly, the haul road, which will link up our Hengjaya Mine to IMIP is progressing very well, and we hope to be able to commission and start using that haul road by the end of the second quarter. And then just finally, the Hengjaya Mine was awarded a Green PROPER rating from the Indonesian Environmental Authority, one of only two mines to receive that award. And so we're very proud of that. The other mine is Vale Inco. And it's in recognition of not just meeting, but exceeding environmental and ESG standards. So as I said, it's a tremendous achievement given that we are one of only two mines in Indonesia to have been awarded that rating. If we could just move to the next slide, please. Just to refresh, we did update the JORC Resource. In the September quarter and again, on this slide here, if you could just go to Slide 7, please. You can see 3.7 million tonnes of contained nickel metal. We still have probably another 500 hectares that is prospective. So that number potentially could continue to grow. And you can see there that puts us amongst the top 10 global known nickel resources. And we mentioned in the recent raising that new mine acquisitions, and we are working on those, and we will look to grow from that 3.7 million tonnes of contained nickel metal. Ideally, we would like to sort of situate ourselves right at the very top of that curve in terms of known nickel resources that NIC would have control of. If we could just move to Slide 8, please. Post the quarter, in fact, only sort of one to two weeks ago, we finalized the electric vehicle battery supply chain, strategic framework agreement with our largest shareholder, Shanghai Decent. There's a number of elements to it, but it really is a transformational transaction for the company and that will diversify us into the Class 1 nickel space and could eventually see sort of two-thirds of NIC's production being Class 1 EV, suitable nickel and cobalt battery metals. The elements to the agreement, there is a 10% acquisition of the Huayue Nickel Cobalt, HPAL, which was - is for US$270 million, and they've elected to take that in NIC shares, obviously, subject to shareholder and further approval. The HNC HPAL project is the world's lowest capital intensity, fastest build, fastest ramp-up and has very low carbon intensity less than 10 tonnes of carbon per tonne of nickel. In fact, it sits at around 7. How they achieved that is it has the world's largest sulfuric acid plant, which generates a lot of heat, which is obviously then turned into power. So the first element of that agreement is the acquisition of 10% in that HNC project. Importantly, it gives us access to 10% of the MHP that's produced, so we will have marketable MHP of about 6,000 tonnes per annum. And so it allows investors to get a see-through into what a successful H power plant looks like and how it operates. It sits at the very bottom end of the cost curve and has enjoyed margins up to in excess of US$10,000 a tonne. So it is a very profitable business. We are also acquiring another 10% in Oracle nickel for US$75 million. That is the same price that we paid almost 14 months ago and is certainly cheaper than some of the more recent transactions that have been done in the market. The other elements of the framework agreement are two options. The first one is $25 million for the construction of a H power plant, where NIC would have the opportunity to take a majority. And that plant will actually go further than just producing MHP, it will go right down to nickel sulfate or nickel cathodes to allow more of the margin capture. And then the second option, a US$15 million to construct a low-grade to high-grade nickel matte converter for Oracle nickel. And you've seen this quarter the very strong margins $5,950 a tonne from the nickel matte business. The transaction was funded by a recent capital raise, which was fully underwritten and very heavily oversubscribed. We had very good support from existing and new shareholders. And we have now just launched a share purchase plan for retail shareholders to also participate in what we see as a very exciting transaction for the company. And as I said earlier in the call, something that will set us up to be a significant producer of Class 1 nickel, but also make us the only diversified nickel producer. So a number of nickel products, NPI, nickel matte, MHP and potentially in the future nickel sulfate or nickel cathode. Good morning, Justin. Thanks for the presentation and congratulations on a really real strong December quarter result. We're starting to show the benefits of some of your strategic decisions. So just - and on that, the benefit of going down the nickel matte path has been shown. What kind of - with that diversified production that you just sort of pointed out, you guys have been the only sort of producer with that different product exposure. How do you see the margins - the outlook for the margins in those different markets over the next sort of 6 to 12 months, how much visibility on that? Obviously good margin, nickel matte at the moment, but just sort of see improved margins in the NPI market. How do you - what's your outlook for those different markets in the next 6 to 12 months, do you think? Yes. Look, thanks, Coates. We've certainly seen an improvement in NPI pricing. And look we - that's probably predominantly driven by China opening up, which was always going to happen. So look, I think we're expecting stable NPI pricing moving forward. And obviously, the decision to, as I said, integrate and have that power, you can see the difference, RNI margins at sort of $2,000 a tonne. Angel Nickel margins are over $4,000 a tonne. So there's a clear advantage in having that integrated power. But coming back to question, NPI, we see as stable. Nickel matte is obviously very strong. And the margins that based on the analysis that we've done, that we're seeing in MHP also look very strong. Whilst MHP sort of payabilities have perhaps been coming down, I think it's just probably important to remember that the price - the net price received is sort of still around $20,000 a tonne. So if your OpEx is 10,000 and less, that's where those strong margins come from. So look, we - the next 6 to 12 months, we're looking forward to sort of stable pricing across - across NPI and even LME and SHFE. Excellent. And just another question on the diversified - with the diversified products, are you guys looking to diversify your customer base as well and sort of sell direct to other customers yourself? Or will you largely sort of continue to sell through the sort of SBR/Tsingshan [ph] existing customer base and through them? Yes. Look, we have the opportunity at the end of March to seek other buyers for our nickel matte, as - and so we're sort of in the process of doing that. And then for our MHP and the acquisition of 10% of HNC, we also have the freedom there to market that to whoever we choose. So look, there's a number of discussions and dialogue has already commenced with potential off-takers. So you're right, it will diversify our customer base. Look, we don't see Tsingshan as a risk, but our - the ratings agencies, people like that see single customer exposure is a risk. So it certainly will give us diversification. Thank you. There are no further questions at this time. I'll now hand back to Mr. Werner for some closing remarks. Okay. Look, just to close, again, very pleasingly another record quarter. I can't talk enough about achieving the Green PROPER rating. It's a tremendous achievement and I think reflective of the fact that our Hengjaya Mine has now become a showpiece for sustainable and responsible mining. It is very important, particularly as we now make this transition into the Class 1 and EV battery space. All investors are taking a very keen interest upstream and what is happening where the ore is sourced from and how it's mined. And so we see that as a tremendous achievement. And we're also very excited by the most recent transaction, which, as I said, has been well received by the market. And we'll see NIC further diversify and also look to reduce our carbon footprint given the very low carbon intensity of an HPAL. And again, with the HPAL deal, as with all of our deals with Tsingshan, it comes with a CapEx guarantee. And I can't overstate how important that is as well, particularly if you look around the market recently, the number of CapEx flow outs that have been announced by several major companies in the battery materials space have been significant. Some of them have been in the order of 100% or doubling of the original forecast CapEx. So to have that guarantee, we also see as extremely valuable one. And so we look forward to another strong quarter for the March quarter. And thank you all again for your time.
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Hello and welcome to the Evoqua Water Technologies First Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] As a reminder, 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. Thank you, Todd. Thanks everyone for joining us for todayâs call to review our first quarter 2023 financial results. Participating on todayâs call are Ron Keating, President and Chief Executive Officer; and Ben Stas, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will open the call to questions. This conference call includes forward-looking statements, including our full fiscal year 2023 expectations, long-term financial targets, statements relating to our pending merger with Xylem, statements relating to demand outlook in our end markets, growth opportunities, our order pipeline, order conversion, cash generation, our acquisition strategy and pipeline, integration and performance â future performance of our recent acquisitions, supply chain challenges, inflation, labor shortages and general macroeconomic conditions. Actual results may differ materially from our expectations. For additional information on Evoqua, please refer to the companyâs SEC filings, including the risk factors described therein. On this conference call, we will also discuss certain non-GAAP financial measures. Information with respect to such non-GAAP financial measures is included in the appendix of the presentation slides for this call, which can be obtained at Evoquaâs Investor Relations website. Unless otherwise specified, references on this call to full year measures or to a year refer to our fiscal year, which ends on September 30. Means to access this conference call via webcast were disclosed in the press release, which was posted on our Investor Relations website. Replays of this conference call will be archived and available for the next 60 days. Thank you, Dan and thank you for joining us. Before we present our results, I am once again pleased to announce that on January 23, we entered into a definitive agreement for Xylem to acquire Evoqua in an all-stock transaction at a 30% premium to our closing price on the Friday before signing. Joining forces with Xylem is an exciting development for the market and an exciting opportunity for our team members. The combination provides a platform to leverage our combined strengths and we look forward to increasing our collective impact as we address increasingly complex global water challenges. As a company, we remain focused on executing our plan until the deal closes. We will operate as business as usual until the combination is approved by regulatory agencies and both sets of company shareholders. I am pleased to provide insight into our prior quarter results and we will appreciate you limiting your Q&A to our results and not to the combination or transaction. Please turn to Slide 3. We are very pleased with our start to fiscal 2023. Our first quarter revenues were up 19% over the prior year period, with organic growth contributing 9.1%. We are pleased to report strong revenue growth across both segments. ISS organic revenue growth was nearly 8% and APT organic revenue growth was more than 12% year-over-year. We had strong sales across all regions and most end markets with price realization and volume both contributing to growth. FX continues to be a headwind, primarily for APT as the dollar weakened throughout the quarter from its late peak in September. Adjusted EBITDA was up approximately 34% and margin expanded 190 basis points over the prior year quarter. We are very pleased that our LTM-adjusted EBITDA margin grew 40 basis points to 17.5%. We continue to see broad-based demand across our key end markets, particularly in life sciences and food and beverage. Our order flow remained healthy as well, with our book-to-bill ratio again over 1.0 and our pipeline remains robust. Given the first quarter performance and the order momentum, we are confident in delivering on the yearâs commitments made in our Q4 earnings call. Net working capital increased in the quarter as we intentionally built inventory to support our order activity. Operating cash flow was in turn impacted, though we still expect to exceed our 100% adjusted free cash flow conversion target for the fiscal year. We are able to reduce our net debt leverage ratio to 2.5x and our balance sheet is healthy and flexible and remains a top priority in this rising interest environment. Please turn to Slide 4. Water is essential for daily life, whether for human consumption, industrial production or commercial purposes. Manufacturers are requiring more stringent levels of ultra-pure water while wastewater reuse has become vital in protecting, diminishing water supplies and reducing the strain on municipalities. Water is becoming increasingly complex and Evoqua is an essential treatment provider making clean water more accessible. The long-term market trends are very favorable and we expect our business to be resilient through normal market cycles. This slide highlights key financial metrics that demonstrate our resilient business model driven in part by our recurring revenue streams with service and aftermarket making up approximately 60% of our revenue. Digitally connected outsourced water, strong and growing end markets and our industry-leading service are just a few drivers for organic growth in favorable and unfavorable market conditions. As stated previously, cash flow was down for the quarter, but we continue to target adjusted free cash flow conversion of 100% and have achieved that level for several years. Our management team is focused on driving strong and consistent cash generation that is supported by our base of stable, profitable and recurring revenues. We are making strategic decisions on working capital and we will see opportunities for improvement as supply chain performance becomes consistent. Please turn to Slide 5. This chart represents our second quarter expected order activity by end market compared to the prior year second quarter. We continue to expect strong orders across most end markets, particularly life sciences, food and beverage and aquatics. Microelectronics has been very strong in the prior year period and we expect similar results in the quarter. Microelectronics remains on a long-term upcycle, though timing on â timing and project schedules could create some volatility in this key end market. Overall, we expect to see stable growing order demand across most of our end markets for the remainder of fiscal 2023. And as I previously commented, our inventory investments have us well positioned to convert our backlog effectively and to achieve a higher rate of on-time customer delivery. We have seen some project delays related to permitting issues and customer schedule management, but cancellations remain immaterial. Please turn to Slide 6. We look at our environmental impact through our own footprint on the environment, but also through the products and services we provide to our customers. We are pleased to highlight two recent handprint wins which are expected to positively impact our customersâ water conservation and reuse initiatives while generating an attractive return on investment. Our first highlight showcases the potential impact of the Infrastructure Law with an industrial chemical manufacturing partnering with a regional municipal wastewater facility in Virginia. Evoqua was selected for the pilot to design, source and assemble a wastewater treatment system that combine ultrafiltration and RO technologies in a mobile platform. The pilot will test the treatment of wastewater for recycling and providing high-quality feed water for plant use. The goal of the pilot is to determine the potential for a full-scale system with support from the new Infrastructure Bill. A full-scale system would be designed to reduce the demand on the water treatment facility by 3,000 gallons per minute and to open additional drinking water capacity that could serve more than 14,000 homes in the region. We also helped the supermarket chain divert high-strength organic waste using our anaerobic membrane bioreactor. The biological process converts the waste into biogas that is then converted into renewable energy. This system will treat up to 230,000 tons of food waste annually, reducing the landfill burden while producing 1,400 million BTUs of biogas per day which is the average daily use of approximately 7,000 U.S. homes. Please turn to Slide 7. While helping our customers improve their sustainability with our solutions, we are still addressing our own operations to minimize our footprint. We are very pleased to announce that we were recently selected as 1 of only 19 companies to receive The Terra Carta Seal. The Terra Carta Seal was launched at the COP26 Conference by King Charles III when he was the c. It recognizes global companies that are driving innovation and demonstrating their commitment to the creation of genuinely sustainable markets. The Terra Carta was awarded to companies with ambitions aligned with the recovery plan for nature, people and the planet, which was launched in January of 2021. We are also privileged to have ranked sixth this year on the Corporate Knightsâ list of the 100 most sustainable companies in the world. It is the second year that Evoqua has been included in the top 100 rankings and an improvement from our 19th position in 2021. We are honored to be recognized as a sustainability leader, enabling our customers to become more sustainable through our solutions and with our services. Last but not least, we received the Frost & Sullivan 2022 Global Company of the Year Award in the Water Technology category. The company was honored for our visionary innovation, market-leading performance and unmatched customer service. We thank Frost & Sullivan for recognizing us at the forefront of innovation and growth in our industry. Our team has worked tirelessly to achieve these great awards and I am thankful for their efforts and the progress that we continue to make. Thank you, Ron. Please turn to Slide 8. For the first quarter, reported revenues were up 19% to approximately $436 million. Organic revenue growth contributed approximately 9%, driven by broad-based price realization and volume growth. We saw organic revenue growth in aftermarket services and capital as well as across all regions and most product lines versus the prior year. First quarter adjusted EBITDA increased approximately 34% over the prior year period to $72.7 million for an overall margin of 16.7%. Favorable price realization, mix and higher sales volume were primary drivers of improved profitability. Adjusted EBITDA margins increased approximately 190 basis points over the prior year period. We were pleased that price/cost was positive and accretive to margins for the quarter. Please turn to Slide 9. Our Integrated Solutions and Services segmentâs first quarter revenues were up approximately 25% to $305 million. Light and General and Life Sciences saw strong growth. Organic revenues growth contributed nearly 8%, driven primarily by price realization. Service and aftermarket revenues were strong across most end markets. Our capital projects and outsourced water pipeline is strong and growing. Digitally enabled revenues were up over 20% versus the prior year quarter. Adjusted EBITDA increased approximately 29% to $69 million due to favorable price and the consolidation of Mar Corâs operations, partly offset by material inflation and productivity. Adjusted EBITDA margin for the quarter was 22.6%, up 80 basis points from the prior year. Please turn to Slide 10. We continue to see strong year-over-year growth in ISS backlog. First quarter backlog was up approximately $162 million or 21% on over the prior year quarter and up 3% versus Q4 of last year. Our pipeline continues to be robust with opportunities across multiple end markets. We expect to see our book-to-bill ratio remain above one in the fiscal year. Please turn to Slide 11. Applied Product Technologies first quarter revenues were approximately $130 million, up more than 7%. Organic revenue growth contributed $14.8 million or approximately 12%, driven by strong volume growth and price realization with revenue growth across all regions and most product lines. Microelectronics, especially in APAC, saw strong growth. As Ron mentioned, foreign currency translation unfavorably impacted revenues. Adjusted EBITDA for the first quarter increased nearly 12% to approximately $25 million and adjusted EBITDA margins saw a 70 basis points improvement to 18.8%, driven by favorable price realization, higher sales volume and mix, partly offset by inflationary impacts, productivity and FX. Please turn to Slide 12. Capital spending, primarily for outsourced water orders, was approximately $23 million for the quarter or approximately 5.2% of revenues. First quarter net working capital grew to 60% of LTM sales to facilitate strong order rate growth. As previously stated, higher inventory levels and accounts receivable collection timing in the quarter, primarily drove the increase in net working capital. Specifically, we built stock for certain raw materials such as resin and membranes. Due to limited supply and extended international shipping times, another portion of the inventory increase was work in process needed to support strong forecasted demand. We anticipate this will be utilized in the coming months as backlog is converted. We expect to reach our target of 100% plus adjusted free cash flow conversion for the fiscal year. Please turn to Slide 13. We had a strong quarter of revenues and profitability, which allowed us to build on our balance sheet health. Debt reduction remains a priority. And as Ron mentioned, our net leverage ratio is now at 2.5x just 1 year after the Mar Cor action. Thank you, Ben. Please turn to Slide 14. We had a strong quarter with outstanding results across most key financial metrics. In particular, adjusted EBITDA margin for the first quarter of 16.7% and LTM EBITDA margin of 17.5% are the highest margins we have reported since becoming a public company. Market demand remains strong, and we are pleased to deliver broad-based organic growth across both segments, all regions and most product lines. Our pipeline remains robust and our backlog continues to grow. We continue to manage with rising costs and supply chain uncertainties, and weâre pleased to once again be price/cost positive for the quarter. Customers continue to see the value of outsourced water which continues to contribute to ISSâs growth and recurring revenue model. Digitally connected sales were again up double digits. Heading into the second quarter, we are focused on sales and operational execution to convert our strong backlog. Price realization is expected to be positive as inflation abates in some pockets and overall labor and material availability show signs of improvement as well. We continue to monitor the timing of customer purchase orders and shipment requests as supply chain and regulatory uncertainties could create timing challenges. Given our backlog and order activity, we are confident in delivering our commitments for FY â23. However, given the pending transaction, we are not giving official forward guidance. I will now open the call for your questions and remind you to please focus on Evoqua performance and not the outlook for the pending transaction. If we can start with the ISS pipeline, could you just take us through what kind of rank or the end markets, where are you seeing the most interest? And could you talk about any kind of reverse inquiries that youâre getting from customers that potentially either within these verticals, but also geographically, are you getting any inbound questions from potential customers in Europe and Asia? Yes. Thanks, Deane. As you look at Slide 5, we continue just to see strength across the majority of the end markets as weâve highlighted. Life Sciences very robust. Chemical processing continues to be very strong. And the one that we had always pointed out is the canary in the coal mine that weâd be concerned about keeping an eye on, on was light and general industry and that continues to be a street green. So we feel really good about it. I highlighted in the comments, actually, weâre seeing strong activity from power and renewables as well, and weâre certainly seeing that. So you kind of look at those markets, they are all very good. As we think about microelectronics and we show it is neutral. Last year, this quarter was just fantastic, and we anticipate it will be flat with last year. So weâre feeling very good about the end markets that weâre seeing right now. Reverse inquiries. Weâre really not hearing a lot right now, but we are hearing customers kind of come out and say, obviously, we know who youâre partnering with. The outlook for the combination is fantastic. We have got zero concerns coming out of customers. But I think if anything, it will be stronger as we start to make headway and weâre planning. Obviously, right now, weâre only in the planning phase, and we can only plan until the deal closes. And â but international with APT is pretty much a great opportunity out of the gate. Thatâs great to hear. And a follow-up for Ben on whatâs the expected free cash flow conversion timing for the year? Some of this, you said there was some accounts receivable collection timing, so that would suggest more near-term conversion, but just kind of the pace of free cash flow conversion for the year. Yes. We expect to continue to improve as we go through the year. In Q4, $10 to be our strongest free cash conversion quarter, Deane. but we took the opportunity looking at our demand and looking at our outlook to make sure we secure the ability to meet that demand and secured some of the areas, in particular, for the service organization like resins and membranes to make sure we had the stock. And then APT on their end, they certainly are building the work in process to be delivered on that â on the shipments that are coming. So we naturally expect free cash flow to improve as we head through the year. And then as you know, weâre â at September year-end, and the calendar year-end, you typically see companies that at times, particularly with uncertain times hold on payables a bit, and we did see some of that in December, but receivables are looking fine as we go and we expect them to continue to look fine collection. Iâm going to start with a bit of a follow-up to Deaneâs second question now on free cash flow and maybe a bit more on the inventory build. I think you guys have been expecting kind of a higher mix of capital versus outsourced kind of projects relatively speaking in â23. Some of these inventory build related to what are more near-term deliveries on those capital kinds of projects. And with this in the plan when we were coming into 2023, this building inventory or has it been because youâre seeing better orders on the capital burn? We are seeing strong orders on the capital front. Across the board, weâre seeing strong orders than we anticipated. And so as we saw those orders coming in as we went through the quarter, we decided â and the activity order rates, we decided to make sure that we secured our stock to make sure we can be on those orders. So from a plan perspective, obviously, itâs â things are developing stronger than planned. And we definitely want to â the good thing about this business is we have visibility and it gives us time to respond. So obviously, weâre responding accordingly. Thanks for that. My second question was around a comment you made in your prepared remarks that price/cost was actually positive to margins in the quarter. Can you provide a bit more color around that and what the expectation is for price/cost maybe as we move through the year? Do you expect it to actually be positive to margins rather than just dollar positive? So certainly, cannot provide a lot of outlook. But I will tell you, we had $9 million positive on price/cost in the course. It was strong. And we did the math. It was certainly a nice healthy part of that margin expansion. The wildcard there is always what happens to inflationary impacts. But holistically, we seem to be seeing things so down and we are certainly seeing the benefits of the price realization actions that we have been taking. Yes. Nathan, I think that was a tremendous benefit for us in the quarter as Ben highlighted. And we have been waiting for these. I mean we have been out in front of the cost curves with pricing actions, and they take a little bit to come into play and they just continue to flow-through. I know you guys have been implementing strategic pricing increases as far back as 2021, that got a bit covered up by inflation over the last couple of years, is it your intention to be able to hold pricing if you see actual declines in your costs? Yes. I mean as I have highlighted in prior calls, when we have talked about those, our pricing is very sticky. So, once we go with the price increase, it is â it takes a bit to pull that back. Itâs a sticky price that we feel confident in. Kind of holding in on the ISS margins really quickly. You saw the 80 bps improvement sequentially. And previously, you had mentioned the onboarding of new service tech. Could you give us some color on how they are onboarding at this time? Yes. We feel very good about it. I mean itâs taken a little bit of time. And we actually commented on our last call that the onboarding has happened through the year. We were back to our normal run rate of openings at the end of the fourth quarter of last fiscal year. So, what you are seeing is you are seeing the fall-through of more efficiency as we would normally expect to see. And we have got great confidence that that will continue on. Awesome. I have the second question. So, I have seen states like Maine, New York, California and Colorado seem to be getting more restrictive when it comes to PFAS. Have you seen a bump in your PFAS-related work as a result of these recently passed restrictions? Yes, itâs a great question. Itâs interesting. And one of the things we have talked about is the states and municipalities that were out ahead of it, already we are putting projects in. So, we have already been operating in those specific areas that you are highlighting with PFAS treatment. It speaks to that $100 million pipeline that we talk about typically on every call, and we are still winning about a third of those. I think the big movement that everyone is waiting on is the MCL, the maximum contaminant limits actually to be passed and to be set. That was supposed to happen at the end of â by the end of calendar â22, it did not occur. We are hearing itâs pending very soon. But I would say, until that happens, you are kind of going to see that PFAS market be flat. And so your color on light industry, in general, been doing well sequentially. That was surprising. I mean just in the early earnings we are hearing across our coverage, that is absolutely not the commentary of other companies within those markets. So, maybe if there is like some distinction you can point to between maybe what some of your customers are facing from their own demand and then what they are demanding from you? Yes. So, Joe, as you look at our end market exposure, it continues to give us pretty high confidence. I mean we are very heavily concentrated in North America, as you know, the near-shoring and on-shoring have continued to carry a pretty good order activity for us and a fairly robust pipeline. And the other thing that we speak about with regularity, the scarcity of water, the challenges on treating water to a level that is more difficult, and then people trying to do and companies trying to do whatâs right around ESG metrics with recycle, reuse minimizing their water footprint feeds, it really aligns very well with the Evoquaâs offering, our solutions we take into the marketplace. So, we are seeing â and one thing we talk about is how our pipeline has shifted very heavily from just processed water to wastewater for recycling and reuse. That continues and you are even seeing that across light and general industry as well. Great. And then just, Ben, if you could just clarify on the organic growth this quarter, how much of that was price versus volume? We certainly have a lot of price in there. With ISS, it was heavy on the price side. With APT, it was relatively proportional price to volume. Hi. Good morning. Thanks for taking my question. Quick question on â you mentioned a couple of different times around customer schedule management, I think. And you talked about thatâs being felt most, if specific end markets. Because you also mentioned lumpiness, I think in microelectronics, maybe thatâs what you are talking about, just⦠Just looking for incremental color around kind of the scattered comments you made in your commentary around project delays, lumpiness in kind of projects, that sort of thing. Yes. So, actually as you think about our project outlays, and this is one of the difficulties we have had through the entire supply chain difficulty is, we are working, we are aligned we are ready to deliver. It is customer sites being prepared for us to deliver to. So, the larger and the more complex the system that we are selling, the more challenging that is for them to be on time because they are having to coordinate multiple other subcontractors, multiple other supply chains to be ready for our system to go in. Again, when our system goes in, itâs towards the end because they are getting ready to turn on the water. The system goes in, it gets delivered. And then until they turn it on and start the operation, it delays our billing around our operating and maintenance or build on operate top contracts. So, thatâs â you kind of think about when you look at Page 5, the more complex, the larger systems like the microelectronics that I highlighted, would be the ones that would be a little more lumpy on customer timing and customer delays against the remainder of the projects. And thatâs something that you had previously embedded in your outlook. I think you are saying. So, thatâs not something that is a surprise to you. Itâs just something that you are highlighting as yes, okay. We have been dealing this with this from the, I would say, the supply chain challenge. We deal with it always, but certainly, the supply chain difficulty has exacerbated that issue, and we have been managing this for the past 2 years. Thanks for those comments. And then can you comment on how Mar Cor performed in the quarter and how that business is kind of performing versus expectations? Yes. I would say itâs right on track. We feel very good about Mar Cor, where it is. Itâs right on track. We still have an expectation for our SAP rollout in the month of February, and things are lined up exactly as we anticipated. Quick question for you. Obviously, the margin performance was pretty exceptional and a healthy amount of price helping there on the price/cost side of things. Could you maybe talk about the margins embedded in the expanding backlog, particularly given the current mix and just the sustainability of margin performance? Yes. I mean we feel good about it. We look at the margins in the backlog with regularity. And again, one thing that we highlighted as our pricing goes out. Itâs very sticky. It stays. Our backlog is already priced against price increases. And we feel good around the way that we are managing the business and able to manage the supply chain. And then a bit of a clarifying question. I believe I heard something about some permitting hang-ups. Just a quick clarification, is that a broader comment on changing the permitting environment, or is that â I suspect thatâs more of a one-off comment associated with a subset of projects? Itâs a few specific projects in certain market areas. And again, that really goes to the question I had previously around how we are dealing with delays on a customer site. When they are dealing with delays around permitting, around getting their supply chain, the rest of the infrastructure in place for us to be able to deliver is something that we manage against with regularity. Sometimes â it creates some lumpiness in the recognition of revenue against backlog on occasion. But itâs nothing new that we havenât been dealing with in the past. [Operator Instructions] And it appears at this time, we have no further questions. I would now like to turn the call back over to Ron Keating for any additional or closing remarks. Thank you again for your interest in Evoqua. As always, I want to thank our team members for driving and delivering every day very safely to take care of our customers to deliver against the expectations that our customers have of us in the marketplace and making sure that we make them more competitive. We have got a fantastic team of people. I look forward to continuing to deliver against the market guarantees that Evoqua makes and the promises. And I appreciate all of you having an interest in speaking with us today. Thank you. That concludes todayâs Evoqua Water Technologies first quarter fiscal 2023 earnings conference call. You may now disconnect your lines and thank you for your interest in Evoqua.
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Welcome to Triumphâs Third Quarter Fiscal Year 2023 Results Conference Call. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing the slide presentation. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. In addition, please note that this call is the property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval. I would now like to introduce Tom Quigley, Triumph's Vice President of Investor Relations, Mergers and Acquisitions and Treasurer, who will provide a brief opening statement. Thank you. Good morning, and welcome to our third quarter fiscal 2023 earnings call. Today, I'm joined by Dan Crowley, the company's Chairman, President and Chief Executive Officer; and Jim McCabe, Senior Vice President and Chief Financial Officer of Triumph. As we review the financial results for the quarter, please refer to the presentation posted on our website this morning. We will be discussing our adjusted results. Our adjustments in any reconciliation of non-GAAP financial measures to comparable GAAP measures are explained in the earnings press release and in the presentation. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements. Thanks, Tom. For the quarter Triumph delivered strong sales in our operations that were up both sequentially and over the prior year. We grew our backlog at double-digit rates. On our last earnings call, I discussed the supply chain constraints delaying deliveries in our second quarter, mostly impacting our defense programs. Intensive management of our supply chain enabled us to improve supplier on time and full deliveries from 77% to 87%, reducing the impact of these headwinds on Triumph. This enabled our defense sales to improve 5% sequentially up to $112 million. We anticipate the pickup in commercial volume we saw this quarter, particularly in the aftermarket will continue to improve. We forecast our Q4 top line and profitability to be materially higher sequentially and year-over-year as OEM and MRO deliveries accelerate. Accordingly, we are increasing our revenue and our full-year adjusted EPS guidance. As we committed, we also remain on track to be cash positive in the second half of the year and in fiscal â24. Overall, I'm pleased that we delivered our Q3 results in line with or above our expectations, positioning us well for Q4. I want to thank our employees. Like many others, we've experienced a few years of volatility. Internally, Triumph leveraged our experience from the pandemic to create a new deal, a new social contract and value proposition for employees, who work at our company for more than a paycheck. Extending the empowerment and flexible work environments, which helped us get through the pandemic. Now on slide three, I'll summarize the quarter's highlights. First, we generated organic sales growth of 21% quarter-over-quarter and 13% year-over-year, driven by improving commercial OEM and MRO demand. Triumph's exit of the legacy structures business was done at less than half of the budgeted costs. Q3 margins stepped up returning to prior year levels and are expected to increase in Q4 with year-end shipments. Backlog is up 12% as Triumph and our customers benefit from our diverse platforms and end markets. Beyond higher MRO receipts and OEM rates, new wins in the space market and for products supporting the war in Ukraine contribute to our goal to generate 25% of our sales from new products and markets. With a pipeline of over $9 billion in opportunities, strategic wins on new platforms and increasing R&D expenditures on differentiating technologies. We anticipate strong revenue increases over our planning horizon of fiscal â24 to â28. Turning to Q4, we expect strong positive free cash flow made possible by material reductions in past due backlog, inventory and working capital. We have high confidence in our Q4 and year-end outlook for several reasons. Triumph entered Q4 with higher levels of inventory as a result of deferred demand on certain programs and substantially all orders to be delivered in Q4 are now in hand. Legacy commercial aircraft MRO demand has increased as older aircraft remain in service pending new aircraft deliveries from Boeing and Airbus. Military MRO orders, which were seasonally delayed with the October end of the government's fiscal year are now funded. Military customers supporting the war in Ukraine and replenishment of U.S. inventories have requested quick turn and/or early deliveries with favorable cash terms. We completed a thorough review of all of our supply chain requirements for planned deliveries and have sufficient parts on hand or in transit to support planned deliveries. And supplier shortages are improving as we resource and dual source work to domestic and low-cost sources. So overall, we feel good about the quarter and the ramp is upon us. We saw month-over-month improvement during Q3, which we expect to benefit Q4 and our fiscal â24 forecast as we increase cash flow from operations year-over-year. Consistent with our track record, we're not standing still. Against a stronger and more promising operating environment, we've been turning our attention to strengthening our balance sheet and addressing near-term maturities, which is one of our top priorities. We have a comprehensive deleveraging plan that builds on our operational improvement. As one component of this plan, Triumph announced distribution of warrants in December. When the warrants are exercised, the benefits of this action are anticipated to be two-fold. It will lower our debt, while increasing equity for the benefit of our investors through a cost efficient transaction. We distributed the warrants given our confidence in our business results and growth outlook. The warrants are one lever we're pulling as we prepare to refinance our upcoming 2024 debt maturities with the assistance of outside financial advisors. Of course, timing is an important consideration. Our team has been agile in our refinancing approaches, which allowed us to bridge through the pandemic and market downturn. We are confident in our ability to secure the financing we need to fund our growth in that of our customers. Our improving results also support expanded reinvestment in CapEx and IRAD and enhance the value we deliver to all stakeholders. We're always looking at ways to manage cost in support of our future state. As we exit our structures business and retire IRAD programs, we are targeting reductions in overhead and SG&A. This enables continued margin expansion as our strong backlog growth translates into higher sales year-over-year. We are confident in the proactive steps we're taking to even better position Triumph for the future. Jim will now take us through our third quarter results and detailed outlook and then I'll provide some comments on the market. Jim? Thanks, Dan, and good morning, everyone. I'm pleased to report year-over-year profitable growth this quarter. Triumph's third quarter results met or exceeded our expectations and we are on track to achieve our full-year financial objectives. Our consolidated results for the quarter are on slide four. Revenue of $329 million reflects increasing demand from our commercial, military and MRO customers. Excluding revenue from divested businesses and sunsetting programs, we grew consolidated revenue 21% organically over the prior year quarter. Adjusted operating income for the quarter was $36 million, representing an 11% margin, which is up over the prior year. Systems and support segment results and highlights are on slide five. Organic revenue was up 21% in the quarter. Commercial market demand was the largest driver of the revenue growth in this segment, especially commercial MRO demand. More details on revenue by end market will be in our 10-Q. System and supports operating income was $43 million or 15% margin in the quarter. This is up from the prior year, excluding a licensing transaction and the benefit from the aviation manufacturing job protection act last year. The results from our Structures segment are on slide six. The continuing business in this segment is the interiors, insulation and ducting business. Excluding divestitures and sunsetting programs, revenue of $44 million was up 21% organically. Increasing production rates on the 737 and 787 programs in interiors are driving the strong organic growth. Operating income improved over the prior year on the higher revenue. Our free cash flow walk is on slide seven. Our $5 million of cash used this quarter included about $11 million of working capital growth supporting the planned ramp in Q4 deliveries. In Q4, we expect working capital to contribute to free cash flow as inventory and accounts receivable decrease from higher Q4 shipments and cash collections. We expect strong free cash flow in Q4, in line with our new full-year guidance. We expect capital expenditures to be approximately $25 million for the year and substantially all of that capital is investment in our Systems and Support segment. The schedule of our net debt and liquidity is on slide eight. At the end of the quarter, we had $1.5 billion of net debt. We had about $127 million of cash and availability, which is more than sufficient for our projected needs. We expect to be profitable and cash positive in Q4 consistent with our new full-year guidance. We're continuing to reduce our leverage as planned by expanding EBITDA and free cash flow in our continuing businesses. Dan and I remain confident in our ability to reduce our leverage, improve our capital structure and address our debt maturities with a series of timely and thoughtful actions. In December, we took one of those actions when we distributed warrants pro rata to Triumph shareholders. The warrants give Triumph shareholders a valuable security and the choice of how to realize that value. Warrants that are exercised will help reduce Triumph's leverage, reduce debt and interest expense and increased free cash flow and liquidity. Regarding refinancing of our 2024 maturities, we remain opportunistic and continue to pay close attention to the improving capital markets. We see the window of opportunity opening and we look forward to reporting progress in this area in the coming months. For our full-year guidance, turn to slide nine. We now expect FY â23 revenue to be up from prior guidance to a range of $1.3 billion to $1.35 billion. We expect GAAP EPS to be in the range of $1.59 to $1.79 per diluted share. We are increasing our adjusted EPS guidance range to $0.48 to $0.68 per share, up from $0.40 to $0.60 previously. Based on higher expected deliveries in Q4. We continue to expect cash taxes net of refunds received to be approximately $7 million for the year. We expect interest expense to be about $130 million and that includes $125 million of cash interest. For the full-year, we expect to use $30 million to $40 million of cash from operations with approximately $25 million in capital expenditures, resulting in free cash use of $55 million to $65 million in fiscal â23, that's a $5 million improvement over prior guidance. In summary, the profitable year-over-year growth in Q3 met or exceeded our expectations and we are increasing our full-year revenue, earnings and free cash flow guidance to reflect our expectations for a strong Q4. Thanks, Jim. Let me provide some insights about the market to put our guidance into perspective. But first, I want to acknowledge the success of our OEM customers and the airline carriers and overcoming the challenges of the last three years and returning to pre-pandemic levels of air traffic and production. Our customer partnerships are stronger. We're collaborating in new ways that are leading the better coordination of supply and demand and faster resolution of the challenges inherent to our industry. The commercial transport segment ended the 2022 calendar year on a solid recovery trajectory with an increase of over 325 more fourth quarter aircraft deliveries and 20% more on an annual basis. Orders for new aircraft also rose year-over-year as Boeing and Airbus both booked over 800 net orders each. Airline demand continues to recover as evidenced by nearly 70% increase in 2022 global RPKs versus â21. With China's new COVID policies expected to accelerate this year-over-year traffic increase, benefiting our third-party MRO operations in particular. The owners is now on the supply chain to ramp aircraft and engine production to satisfy that demand. Increasing demand will enable Triumph to burn down approximately $40 million of past due backlog by the end of fiscal â23. Triumph is producing Boeing 737 components at rates between 30 to 31 per month. Depending on the factory, while Airbus A320, 321 related production levels are 47 to 48 per month. Triumphâs Boeing 737 backlog is up 28% and the A320 backlog is up 12%. Triumph recently received new production forecast from both OEMs, which reaffirm our Q4 deliveries and increase year-over-year deliveries thereafter. While these forecasts reflected minor adjustments in production profiles, the facts are that rates are headed north, which will benefit all Triumph OEM factories. We're encouraged by these signals and look forward to providing our fiscal â24 guidance with our fiscal â23 year end results in May. Overall, this is translating into growth for Triumph. Sales for the quarter were up 20% with the OEM sales up 17% and MRO up 24%. The Commercial segment rose 32% and Military 7%. Our year-to-date book to bill is 1.21. Bookings increased 23% year-to-date. On the MRO front, inductions of new parts across our third-party MRO businesses are up 35% for the quarter and 29% year-to-date. Spares and repairs backlog across the entire business, both OEM and third-party MRO are up 36% for the quarter. Across Triumph backlog is up 12% year-over-year with commercial backlog rising 17%, while military grew 6% aided by programs like the C-130, F-35, Black Hawk, CH-47, Apache and the FAAT. We're pleased that year-to-date 45% of Triumph's awards are associated with new products and to our new customers. Competitive wins for the quarter totaling $130 million can be seen on slides 11 and 12. These wins are driven by Triumph IP, on products ranging from airframe mounted gearboxes for the next gen military platforms to landing gear systems for both Sierra space and a leading EV-12 aircraft to a thermal system solution for the General Atomicâs UAV. In the quarter, the fiscal â23 top line defense bill came out reflecting a $75 billion increase year-over-year benefiting key programs in the Triumph portfolio, including the F-15EX, Black Hawk, CH-53E, the B-21, sixth-gen fighters, the KC-46 and the E-2D. The bill incorporated decreases in the V-22 OEM production from the prior year. However, V-22 is transitioning to an MRO sustainment program for which Triumph maintains significant content and repair volume. We delivered 18 shipsets of V-22 Pylon Conversion Actuators in our third quarter. The recent FMS announcement of 12 CH-47s to Egypt and the U.S. Navy's decision to approve the CH-53K for full rate production, our welcome news as Triumph provides and maintain significant content on these platforms, including instant fuel controls, fuel pumps actuation and heat exchangers. Triumph has also got content on the recently revealed B-21 bomber and is pursuing work share across the sixth-generation fighters in early development. Our path to value through exiting lower margin build-to-print work in favor of proprietary and sole source positions across ramping and new start programs is reflected in the new wins on new platforms. Turning to slide 13, Triumph is bringing new capabilities to the market. These include fuel pumps and actuators for GE's new military adaptive cycle engine, a new high-capacity vapor cycle cooling system for next gen military platforms and the complete landing gear system for both the Sikorsky RAIDER and the RAIDER X vehicles, as well as the Sierra Nevada Dream Chaser Space Vehicle. We are working to implement additive solutions across all these product lines. Partnerships have been a key enabler to our MRO growth, our JV with Air France for nacelle repairs on newer aircraft and our planned JV in the Middle East with Mubadala and Sanad will provide access to the region's MRO markets and enable us to accelerate growth in engine accessory repairs. Taken together, our growing backlog and improving mix of OEM and aftermarket business keeps us on track to be cash positive in the second half of fiscal â23 and beyond. And to raise our guidance for the full-year. As a board and management team, we look forward to improving markets and stronger financial performance and to renewing our capital structure in support of our growth. Jim and I are happy to take any questions you have. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Seth Seifman with JPMorgan. You may now go ahead. Hey, thanks very much and good morning, everyone. I wonder if you could talk a little bit about the structures business. And the profitability there in the quarter, I think the core interiors piece, I think we talked last quarter about being about breakeven and then there were some closeouts related to 747. Should we think about this level of sales and profitability with kind of low-teens margin as being the go-forward margin from here for the core interiors business? Or was there some lingering goodness from the 747 in the December quarter as well? Yes. Thanks, Seth. I'll start, itâs Jim. Before the pandemic that was a 20% business and it still has the potential to go there again. It got hurt by the MAX, but the MAX is recovering now. So actually last quarter, it was modestly profitable and cash positive. So going forward, it's just going to grow from there. And you got hurt a little bit by the 787, but when that comes back, that's going to help even more. So it's a very good business. It is a continuing operating business in there. It is profitable and cash positive now and it can get back up to 20% margins. Right. Okay. But when we're thinking about sort of Q4 here, that kind of -- that's kind of like a 10% to 155 margin business now in interiors? Not yet. It's ramping. It's in the single-digit margins now. But it will ramp further as MAX continues to help it out with extra volume and as 787 comes back, we actually finished the consolidation of our Spokane facility operations into there. So we're starting to see the benefit from the cost reductions there as well. So no, it's not in the teens yet. But on a full-year basis, but quarterly, it's in that range that you described, because it's on a very steep slow. Okay, okay. Thanks. And then just the strong MRO growth in the S&S business, thinking about the difference there between, kind of, product related growth and your repair related growth. How would you characterize any differences between those two markets right now? Right now they're both on the upswing. When you look at the OEM rates like Airbus, they delivered -- they're delivering about 45 a month on the narrow body, but they're headed to 58 at year-end with similar increases out of Airbus and we're also on the A220 that's going up from about seven a month to 10 a month of India. So we're seeing strong OEM rates, but what's leading us out of the pandemic is the MRO growth. I mentioned the increase in induction, so we stand there and watch for parts coming in from the engine side. We do overhauls of gear boxes, engine accessories. And then the cells, thrust reversers, structural repair, even some interiors MRO, it's all going up. And this is a reflection just how much volume the carriers have. I mean, American had their highest full-year revenue in the company's history in â22. Delta had revenue that was higher in Q3, Q4 than 2019. And you read about United's big orders for 787 and 737 MAX, as well as Southwest. They also surpassed 2019 levels. And they're all triggering new orders. So in the short-term, the demand for MRO for both the legacy fleet, which they're keeping in operation till the new aircraft arrive and then their newer fleet is quite high. So that's been a big tailwind for us, because the MRO space has shorter cash payments and cash to cash and it's also profitable. Yes, thanks. Good morning, Dan and Jim. Hey Dan, you mentioned positive free cash flow thinking about that, you know, not only for the fourth quarter, but fiscal â24. Jim, I wonder if you could just maybe I know you're going to give us more detailed guidance on that in May, but just kind of some of the bigger moving pieces that are going to improve, like when we think about working capital this year, which is a big drain, just some of the key pieces that you're looking at? Thanks. Sure. So first, only cash use this quarter was $5 million and it's really to fund the growth in the fourth quarter, which is above what we expected. And in fourth quarter, if you look at the midpoint of the range, I think you're in the $60 million cash generation roughly in Q4. So it's nice solid finish and good trends going into next year. So for next year, obviously, the volume that we're seeing and the growth in both MRO and OEM is contributing to the cash positive next year. And the absence of one-timers, we did exit some businesses that were working capital users earlier in the year and maybe not as profitable as the rest of the business. So we've improved the portfolio. We've reduced our costs. We talked about rationalizing some of the SG&A overhead with the smaller business. Those are the key drivers. But as you said, and look forward to give you a lot more specifics when we give guidance next quarter. Okay. And just as a follow-up, Dan, it's great to see the structures business turn up and obviously you talked about an improving run rate there and a steep run rate. Is this business still considered core just given how you've reshaped the systems business for the long-term? Just having a lot of aftermarket and related IP versus this business? Maybe you could just describe it how it fits into the portfolio? Thanks. You bet. There is certainly customer synergies. In the last year, interiors booked about $1 billion of backlog that's going to keep them in business for 10-years without the need to win a lot. Our new work and yet they're still winning. I mentioned the A220, they've got key interiors work on that now. So it's contributing to us financially. It has an absorption benefit. One of our better operations in Mexico. They do a great job with their lean performance. There's not a lot of product synergies in the sense that we bundle interior solutions with systems. So in that sense, there's not a big connection. But it is an important business to us. I will say, we look at every one of our businesses every year in terms of its trajectory and contribution to Triumph and how fast we can grow it and make that decision about whether we retain it or manage it for cash. Right now it's about re-ramping that interiors business to the level of sales and profit they've had in the past and we're confident we can do it. Sure. Good morning, Dan and Jim, and thank you for the time. Jim, my first one is for you. How do you think about range of outcomes in terms of the debt refinancing? I know you're not going to the bank and asking for 12% debt. So what are the sort of potential options here? And how much cash do you need on the balance sheet to operate? Thanks, Sheila. Well, with the businesses we divested, those were the biggest cash volatile businesses that had a lot of working capital associated with them. So as we change the portfolio, we find less and less need for cash moving forward, because there's less volatility. And right now, we have $127 million of cash availability and that's sufficient for what we need, especially with the strong cash generation we expect in Q4. We talked about our confidence in refinancing. And as you watch the markets, you start to see them open up again. These high yield markets were shut down for the second -- for the last quarter and they're just starting to open up and we're seeing opportunities for us to go back. We still have well over a year before the first maturities are due in â24. And we continue to work with advisers and without give you details of the exact plans, we do have plans and contingency plans around the refinancing of those as we get closer to them going current. But we see markets opening and we see opportunities to expand on that favorable rates and not 12%. Yes, that's essentially about $127 million right now, itâs sufficient. And I don't see a need for a lot more than that going forward except for growth initiatives. We continue to invest our capital in our existing technologies alongside of our customers, who are investing with us to take our technologies on their new platforms. So we do want to keep in reinvesting cash to keep the business sustained and growing. And then eventually, we'll look outside after we get that reduction down for opportunities to grow externally. Yes, Sheila, you've been a post follower of our stock for many years and you remember, two years ago, we were about an 8% EBITDA business. Last year, we were 11%, this year we were about 14% and we're headed North from that in the coming years. And so we've been on a path to deleverage just through earnings and cash flow pre-pandemic. And I remember briefing the Board and we were I think three or four quarters away from achieving our leverage goals. So now we're resetting for that. And we enjoy a lot of interest and support from the investment banks and bondholders. So we're confident we can get refinanced. That makes a lot of sense. Thank you for that. And maybe just a shorter follow-up. I think, Dan, in your prepared remarks, you mentioned $130 million of new wins, but the backlog went up $20 million or $30 million. Can you maybe square that a little bit? Hey, Sheila. As you recall, our backlog is really only next two years of orders. So that's the thing that we've received firm orders on where contract win maybe a five-year or beyond orders and we're taking into account. What do we expect to earn on that portion of that contract? Just wanted to ask about working capital, it looks like if my math is right, you're assuming like $50 million in positive working capital in the fourth quarter? Is that correct, Jim? And then your comment around getting to positive free cash flow in 2020 for fiscal â24. What are you assuming for working capital in there? Yes. So directionally, as I mentioned, working capital is going to be contributing to cash flow in Q4. It will be a meaningful part of the $60 million generation, because we are shipping out a lot of product in the fourth quarter, both seasonally and from the stronger demand. I don't have specific working capital assumptions for next year. But what's happened with working capital is on time in full has improved substantially. I think it was about 10-point improvement just over one quarter. And that's a leading indicator to working capital coming down. We've seen working capital be a little higher because of supply chain disruptions, but that's improving, and we're looking forward to that improving into next year as well. And with the new portfolio, we should be a little less working capital dependent than we were in the past. Okay. And any sort of early thoughts on pension for next year, both from a -- I guess, from an income standpoint and whether you'll need to make any cash contributions? Yes. Too early to say what the year-end valuation is going to say, but we have put disclosure language in there about the risk with the assets, depending on how the markets do and how interest rates are. There could be some increased funding in the out years. But next year, it should not be material at all. Dan, I was hoping to maybe go back to something you said in the past, which is the doubling of EBITDA, I think $310 million is implied for $25 million. And sort of two questions. One, is there a margin target you mentioned 14% is about what you're going to do this year. Is your margin target embedded in that $310 million? And then should we think about it as a linear improvement projection from here to fiscal â25? Thanks. Yes. We have that very discussion in our own meetings and with the Board, Myles, and we've been on a fairly linear percent margin improvement over the last three years. As you can imagine, it's a little harder as you go. But what we did is a composite of our peers, and we looked at everybody from TransDigm and HEICO at the high end to other peers at the lower end to the average. So that's where Triumph needs to be at least at a peer like earnings multiple, which is between 18 and 20. And that's -- we believe that's achievable. But more important than the percentage of the absolute dollars, that's why Jim and I were setting a target to get above $300 million. It's because you can't delever with percentages. We need earnings and cash generation in the amounts that are sufficient to achieve our capital structure goals, and we're confident we can do it. When we provide our guidance for fiscal â24, we'll give you more color on that for next year, and we're contemplating an Investor Day in our next fiscal year as well that we can give you more insight on the multiyear outlook. Okay. All right. And then, Jim, I just want to make sure, I think in Seth's question, it sounds like there were some one-times in structures, maybe a few million. Is that right as kind of final cleanups? I think there's a -- around $1 million of cleanup there, continuing maintenance under the TSAs. There was -- cash, I think, was less than $1 million in the quarter. So it's getting de minimis as we don't have that many ESC programs left. There was a number of investors that reacted adversely to a reserve we put up for a closeout of pass about $75 million. And what we found is we donât need anything like that to wrap up the work at those sites and disposition tooling and shut them down. So weâre more confident in the close-down cost there than we were earlier in the year. I'm on for Mike Ciarmoli this morning. Thanks for taking our question. First, I just wanted to ask on Systems and Support margins. You mentioned the prior year period benefits there, but it looks like margins were down there on a sequential basis as well despite higher sales. So I was just wondering what's driving the margin pressure there. Did product mix have a negative impact quarter? Or was it more on the cost side? So compared to last year, you mentioned first, there were some one-timers I called out in there last year, the Aviation Manufacturing Protection Act money we got in, we had an IP license sale in conjunction with the legacy product line sale. But there was a modest IP sale in Q2 of this year, a small one, which benefits us as well. This quarter is very clean. There's not a whole lot of one-timers this quarter. So when you look at this quarter moving forward, we're going to grow from there. I mean the EBITDA margin, which is another way to look at it in the quarter for TSS was 17.5% in Q3, and that's up from 17.3% a year ago. So we're pleased with the progress there. The mix does change from time-to-time. Some of the spare sales can be lumpy. But the overall trend is positive, and we're pleased with it. Yes. When you take out those one-timers that Jim mentioned, that we had in prior years, and we didn't have any this quarter. It was clean earnings from operations. The rate of profitability growth in TSS was higher than the revenue growth. You mentioned revenue growth 21%, so the core earnings growth was, in fact, higher. And that's what we intend to demonstrate again in Q4. All right. That's helpful. And then just as a follow-up, how are conditions for you in the labor market currently? Are you seeing any elevated attrition? And do you have the hires in place that you need to meet the growth that you're anticipating into fiscal â24? We do. We look at our headcount every week across all the sites. And there's been a few pockets of touch labor. We're getting specialized skills like gear grinding has been harder. But generally, our attrition levels are better than our peers. And I attribute that to this new deal I mentioned in my comments, Triumph -- we can't throw money at all of our employees, but we can address all of their needs, which include flexible work hours, and support to their development plans. We did some things on giving cash stipends during the summer last year, because of gas prices. And people really appreciate that. And we've done a lot to engage employees and our community involvement. And we just want to be an employer of choice, and that's gone a long way. But where we've seen labor challenges has mostly been at the lower tier supply chain where they haven't been able to get the, kind of, experienced mechanics and casting houses, in particular, they've struggled. So that's a watch area for us. But internal Triumph, we're actually in good shape. Yes, thanks so much. Maybe walk me through sort of the thinking behind the warrants, which are sort of priced at strike at $12.35. And the stocks under that, I guess, it makes sense if someone wants to buy and use the 2025 maturities to exchange them that there's a positive arbitrage. But what are you seeing there? And what do you expect in terms of retiring debt by those warrants? Thanks, Cai. Yes, the warrants provide optionality to shareholders. And in the past, you've seen us raise equity through an ATM and that really didn't give an option to our shareholders. And some of the feedback was, we'd like to have the choice. So what the warrants did was give shareholders something of value. They got equity security, it's trading over a buck now, and they can choose to sell that into the market and get money that way and realize their value that way, they could go buy bonds and use those to exercise warrants to get stock and they could hold that stock or sell the stock, or they could may just hold on to it for the term. And when the time comes maybe they want exercise for cash, because the stock is trading above that point. So it provides optionality and value pro rata to our existing shareholders. So we're pleased to be able to do that. It's just one component of an overall deleveraging strategy, right? We're delevered naturally through EBITDA expansion and portfolio changes to get higher margins. We want to provide that optionality, but it doesn't solve all problems. It just provides one avenue for value for shareholders. We're still going to go through a refinance on the best terms possible at the right time, our maturities before they come due. But if I look, you basically have five quarters to get this done. And unlike other high-yield candidates like Bombardier or Spirit, your debt is bigger than your revenues. In their case, it's like twice as big. And while you're probably not going to pay 12% like Sheila said, you're clearly going to have to pay a whole lot more than 7.5% unless the market changes very substantially. So that basically a refi will really increase your interest or costs, and your margins are not that bad. Your margins are pretty good. But -- so -- but the percentage increase you can get in those margins, kind of, looks like it limits the adjusted EBITDA growth. And so I mean, do you feel like you're potentially in sort of a spiral where higher interest cost eats up most of the incremental adjusted EBITDA margin? Or is there a point where you see basically the adjusted EBITDA goes up and you can really deal with the interest expense, so you can really generate the type of value that I think your shareholders would like. Thanks, Cai. I think what our Q3 results show is the underlying value of our business, absent the debt, but your question is a fair one. First, let's start with the dividend warrant. At full execution, that should reduce our interest carry by about $20 million. When we refinanced the first and second lien, the average rate of those two is about 7.5%. And yes, the 2025s are trading at a lower price, but Triumph is viewed favorably by the bondholders in terms of our ability to service debt. And we are seeing an opening of credit in high-yield markets in the last few weeks. It gives us a lot of confidence that we're not going to pay as you said, a whole lot more than 7.5%. So I would say watch that space, first of all, and any debt we do, we'll have the option to refinance it a couple of years in and reduce any interest carry that comes along with that debt on a short-term basis. And then during that period, I think you'd agree all the projections for the A&D market are favorable by â24, â25, we're all looking forward to a full exit from the pandemic and be at rates that were higher than 2019 level. And the things we've done during the period, this downturn period really do position us to have these stronger earnings and cash generation. So we're confident that we can get refinanced. We're confident that we can get our debt carry -- our interest carry-down. Recall, we retired all of the Boeing advances we've shed the businesses that were sources of cash use, and we're getting our mix right between OEM and aftermarket, which benefits earnings as well. So a long answer, but an important question, and we're dealing with it head on. You had provided the slide of where you saw the major airplane production rates going 2025 before Boeing's Investor Day. Can you just square me up on what your internal plans now have for the MAX and the 787 in that period of time, compared to what you were thinking previously? Yes. We've gotten the latest schedule from Boeing that gives us bill rates. I mentioned our current delivery rates 30 to 31 a month. Now they put a marker out there to be at around 50 in 2024. And so it will ramp up incrementally between now and then and some logical step points. What I've observed about Boeing's rate changes is that with each new schedule we get, there's a smaller adjustment. So the ball is bouncing less high with each bounce. They're really dialing it in. They put a lot of people on the road as have we chasing those supplier shortages. And as they fix them, there's fewer and fewer ones to remedy that are constraints on the ramp. You read about Boeing opening the fourth line for 737, what they call the North line. That's going to help a lot. All the recent orders reinforced the need for that. So we are staying in lockstep with them. We're not building at rates above them. I will say, part of our higher working capital in Q2 and Q3 was flat spot that we saw on engine production and Boeing's build rate as well. And now that we've got clarity to the rate going up this year, and next year, we're going to burn that inventory off quickly. So we're excited. Even on the LEAP, we do a lot of gearboxes for the LEAP, there had been some deferral of orders midyear this year that got restored in our fourth quarter. So now we're scrambling to deliver them. And as they update their profile, we'll adjust, but we expect those adjustments to be smaller and generally in the direction of going from 30 to 50 on the narrow-body. Okay. That's helpful. And just a little -- digging in a little further on the MAX in the shorter term. Their stated production rate there has been about the same for a while and the delivery -- the monthly delivery number bounces around, but it's sort of been in the same zone for a while. It sounds like you're saying that's firming up or at least you're seeing a higher contribution from the MAX? And like you said, they're pointing to the fourth line. And is it the correct read that, that is stabilizing and now evaluating going higher sooner than later? Or is that too ambitious and there's still a lot to clean up? I think their delivery rate over the last four quarters supports it. In their first quarter, they delivered 95 aircraft total, and their MAX deliveries were in the 27 to 35, then they went up to 43 by June, and then they ended the year with 53 MAXs in December. So there's real quantifiable increases in output out of Boeing and their total delivery in December was 69, 53 were MAXs. So it's definitely happening. We've got people there in their plant, observing production, we supply a lot of hardware on the MAX. It is an important program for us. And as the rate comes back, it's benefiting not only interiors but a number of our actuation plants. So we are aligned with them. And as we continue to diversify our customer base, I mentioned all the Airbus content, we had some press releases in the quarter about new wins with Airbus. But the MAXs is going to be a tailwind for us as well. Some of the plants had some inventory there that Boeing was burning through. So that's why we may be ramping, kind of, trailing their ramp and we're still going up. Some of our places are near just in time and some are not. So I think that's the difference there is that we're ramping at inventory. Okay. Last one, you just referred to some new wins you announced. Your -- the investor presentation with the earnings now every quarter in a row for a while has a slide or two on strategic initiatives and new wins and -- this quarter, you described some clean sheet new products, and we see a lot of announcements. Is there any way to quantify that? The organic revenue growth has started to pick up. Obviously, the end market is picking up. But I mean, how many new products are you adding as a percentage of the existing portfolio? Or how much outgrowth do you see? Or any other way you could frame that, because it seems pretty encouraging. I mean, you're pointing to multiple new things there. Yes. First of all, I'll take that challenge to quantify the contribution of our new wins on a -- maybe a product-by-product basis for our Investor Day that's coming up. But in my script, I talked about how we set a goal of 25% of revenue coming from new customers and suppliers, and we're exceeding that. The new wins are on the order of 40%-plus of the volume. And our goal is to be throughout the product life cycle. So on early development programs, I think sixth-gen fighter on new current development programs, B-21, we can't talk about specific content, but we are on that platform. And then we want to be on low-rate programs that are transitioning in production like CH-53. And then we want to be on mature programs like the F-35 and the C5, C-130. C-130 was plused up in the President's budget, the V-22, they got plused up five aircraft as well. The Apache got plused up. There's a budget for 35 aircraft. So if you have -- and then we want to be at the very end, which is the tail end, the sustainment phase of mature aircraft, today, V-22 as an example, [Indiscernible] these are good problems for us in the aftermarket. If you get gaps in any part of that arc from early development through sustainment, you get these swings in your mix and then your financials. And Triumph had that problem five years ago. They had a lot of late life production programs like 747, G-650, C-17, and that was good while it lasted, but a big gap opened up in the pipeline. And now we've achieved, I think, a stability across those. So let us take the action to give you specifics on how they're contributing. But the real leading indicators, whether it's backlog growth or book-to-bill are very favorable, and they have been month-over-month. We look at our -- each of our operating companies vision controls, gears, actuators, aftermarket. And they all have book-to-bill greater than 1.0. So it's a consistent level of growth across all of our operating units. This concludes our question-and-answer session and Triumph Group's Third Quarter Fiscal Year 2023 Earnings Conference Call. This call will have a replay that will be available today at 11:30 a.m. Eastern Standard Time through February 8 at 11:59 p.m. Eastern Standard Time. You can access the replay by dialing 1 (877) 344-7529. Again, that's 1 (877) 344-7529 and entering access code 2140903, again it's 2140903. Thank you for attending today's presentation. You may now disconnect.
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Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bristol-Myers Squibb Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Thank you, and good morning, everyone. Thanks for joining us this morning for our fourth quarter 2022 earnings call. Joining me this morning with prepared remarks are Giovanni Caforio, our Board Chair and Chief Executive Officer; and David Elkins, our Chief Financial Officer. Also participating in today's call are Chris Boerner, our Chief Commercialization Officer; and Samit Hirawat, our Chief Medical Officer and Head of Global Drug Development. Before we get going, I'll read our forward-looking statements. During this call, we will make certain statements about the company's future plans and prospects that constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's SEC filings. These forward-looking statements represent our estimates as of today and should not be relied upon as representing our estimates as of any future date. We specifically disclaim any obligation to update forward-looking statements even if our estimates change. We'll also focus our comments on our non-GAAP financial measures, which are adjusted to exclude certain specified items. Reconciliations of certain non-GAAP financial measures to the most comparable GAAP measures are available at bms.com. Thank you, Tim, and good morning, everyone. Starting on Slide 4. I am pleased to report another strong quarter for Bristol-Myers Squibb, concluding a very successful year. Last year was an important year for our company, the first with Revlimid generics. Given that, I am very proud to say that in 2022, we grew our business and made tremendous progress advancing our pipeline, including launching three new first-in-class medicines and progressing six promising programs into registrational development. While David will provide additional details on the financials in a moment, I will point out a few highlights. Last year, we delivered revenue growth of 3%, adjusting for foreign exchange. Importantly, growth was driven by our in-line and new product portfolios. So I am pleased to note that we delivered continued strong growth in the fourth quarter for these assets, up 12% adjusting for foreign exchange. We also grew our earnings, including non-GAAP EPS growth of 8% for the full year. As we start 2023, I am confident we have established a strong foundation for Bristol-Myers Squibb. As you will note from our guidance, we expect to grow both revenue and non-GAAP EPS this year. Importantly, we remain on track to achieve the commitments we have made for 2025. Given increasing confidence in our new product portfolio and continued progress with our broader pipeline, we see multiple paths to growth through 2030. Let me now provide some perspective on 2022. On Slide 5, you can see our overall pipeline execution last year. I am very pleased with our progress, which further supports renewal of our portfolio. While we advanced on many fronts, I would like to highlight a few accomplishments: Approval of three first-in-class medicines, including Opdualag, Camzyos and Sotyktu, which address areas of high unmet medical need and have significant commercial potential. Further progress expanding the reach of our new product portfolio, including an important expansion opportunity for Reblozyl in first-line MDS with COMMANDS, positive top line results of KarMMa-3 based on which Abecma is the first BCMA CAR-T to have demonstrated superiority to standard regimens in relapsed and refractory multiple myeloma. And initiation of registrational trials for Sotyktu in lupus. Remember, in the Phase II study, Sotyktu demonstrated an encouraging profile in this hard-to-treat disease. We believe lupus can be an important expansion opportunity for the brand. Progress with the next generation of medicines includes important proof-of-concept data for milvexian in secondary stroke prevention, enabling the initiation of the Phase III program this year and a positive trial for our LPA1 asset in lung fibrosis. This asset has come into focus only recently and is a prime example of the optionality that comes from having a broad pipeline. We are looking forward to presenting data and starting Phase III trials for this asset later this year. On Slide 6, you can see how we strengthened the outlook for our new product portfolio, which, as you know, is central to our strategy of renewing our portfolio over the coming years. Our pipeline execution and strong commercial momentum position us well to achieve $10 billion to $13 billion of risk-adjusted revenue in 2025. And as a result of the strong progress with our pipeline, we have significantly de-risked the $25 billion plus of long-term non-risk-adjusted revenue potential. As you can also see on this slide, we continue to see exciting catalysts ahead for these assets. So turning to our scorecard for this year on Slide 7. It's encouraging to observe the breadth of catalysts we see ahead as a company in the near term. I'll point out a few highlights. Just last week, we announced our Phase I/II trial for Breyanzi in relapsed refractory CLL met the primary endpoint. In Europe, we expect to launch Camzyos in obstructive HCM and are pleased to have received positive CHMP opinion for our first and only selective TYK2 inhibitor, Sotyktu. We have an important expansion opportunity for Reblozyl in first-line MDS. Along with our partners at Janssen, we have embarked on registrational trials for milvexian, and we expect to move Abecma into earlier lines of therapy. Finally, we are further advancing our multiple myeloma CELMoD program with a head-to-head study of iberdomide versus Revlimid in the post-transplant maintenance setting. As we have done in the prior years, we look forward to updating you on our progress as we continue to advance our pipeline and further support our portfolio renewal. Turning to Slide 8. I I'd like to remind you about what we've accomplished in the past few years and how that prepares us well for the near, mid and long term. When we began the transformation of our company three years ago, we told you what we believed we could achieve and we have delivered across the board. Financially, we have grown our company, over delivered synergies, reduced our debt and generated significant cash flows. We have launched all nine new medicines, including three first-in-class products that were approved last year. And we've continued to execute disciplined business development to further support our growth profile in the future. With all of this in mind, let me move to Slide 9 to discuss our outlook for this year and beyond. As you know, we expect to drive growth through 2025 and sustain strong profitability as we transform our portfolio. And that journey continues this year. We delivered growth through Revlimid generics in 2022. And as you can see from our guidance today, we expect to continue to grow this year. With the focus turning to the second half of the decade, we continue to see multiple paths to growth, driven by growth of the new products, contribution from our advancing late-stage pipeline, including milvexian LPA1 and the CELMoDs, and significant optionality from our early pipeline, complemented by flexibility for additional business development. All the while, we are transforming our portfolio to be younger, more diversified and more resilient in the face of an increasingly complex pricing environment in the U.S. and internationally. Before I turn to David, let me express my gratitude to our teams across the globe, starting with our research and development organization, which had a stellar 2022. As you will have seen, this week, we announced Dr. Rupert Vessey's decision to retire, effective July 3. I want to thank Rupert for his extraordinary contributions since he joined BMS as a result of the acquisition of Celgene. Rupert led the successful integration of research and the development of a strong pipeline across all stages of development. We are now combining development across early and late stage under Samit's leadership and preparing to transition the research organization to report to Dr. Robert Plenge, who will serve as EVP and Chief Research Officer, when Rupert retires this summer. The focus and determination of these leaders and all of our teams will enable us to continue to deliver for the patients depending on us. Thank you, Giovanni, and thank you all again for joining our call today. I know this is a busy morning for all of you. As Giovanni mentioned, 2022 was another solid year of execution for Bristol-Myers Squibb. Let's get started with our top line performance on Slide 11. Unless otherwise stated, all comparisons are made versus the same period in 2021 and sales performance growth rates will be discussed on an underlying basis, which excludes the impact of foreign exchange. We delivered on our full year commitments with sales of approximately $46 billion with growth of 3%. Demand for our diversified in-line and new product portfolio was strong, with revenue growth of 13% for the year, more than offsetting the loss of exclusivity for Revlimid in the first year of generic entry. Let me dive deeper now into fourth quarter and full year performance of our new product portfolio on Slide 12. Global revenues in the quarter were $645 million, up 87%, while full year revenues topped over $2 billion, nearly doubling over 2021. With nine new product approvals and multiple additional indications coming to fruition, we have an increasingly de-risked new product portfolio. This provides us confidence that we are on track to deliver the potential of our new product portfolio with $25 billion of non-risk-adjusted revenue expected at the end of the decade. Moving to Slide 13 to discuss our performance of our solid tumor portfolio. Global Opdivo sales reflect strong demand for our newly launched and core indication with double-digit growth in the fourth quarter and the full year. In the U.S., fourth quarter revenue saw full year sales grow strong, growing 13% and 15%, respectively. This growth was primarily driven by demand for our new metastatic and adjuvant indications, partially offset by declining second-line eligibility as well as some use of Opdualag in first-line melanoma. Internationally, revenues grew 20% in the fourth quarter and 14% for the full year. Fourth quarter revenue growth was largely driven equally by demand and timing of shipments. Demand was primarily driven to new indications, particularly first-line lung and upper GI cancers. As we look to this year, we expect growth of Opdivo to continue. This growth will come from an expanded indications in both early and late-stage cancers. Now turning to our first-in-class LAG-3 inhibitor, Opdualag, which had an impressive first year on the market. Approved in the U.S. in late March, Opdualag generated sales of $252 million in 2022. Sales in the fourth quarter had strong sequential growth of 24% versus quarter three, with first-line melanoma market share now in the high teens. We continue to see room for growth of Opdualag in first-line melanoma, where PD-1 monotherapy share still is approximately 20%. And further potential with pivotal studies in adjuvant melanoma and second-line plus colorectal cancer underway. On Slide 14, let's discuss our growing cardiovascular portfolio, starting with Eliquis, which had another great year. Global revenues in the fourth quarter and the full year grew 6% and 14%, respectively. In the U.S., fourth quarter sales increased 15%, driven primarily by demand and favorable gross to net adjustments. Internationally, Eliquis is the leading OAC in many countries. Given high market shares across these countries, demand growth has been offset by pricing measures as well as generic entry in Canada, the UK and the Netherlands. Now turning to our first-in-class myosin inhibitor, Camzyos. Sales in the fourth quarter were $16 million. We are pleased with the progress we have made since the launch in May of 2022. We laid a strong foundation of REMS certify over 2,600 healthcare professionals and enabled key centers to get operationally ready to make Camzyos available to patients. We also significantly increased the number of patients on commercial dispensed drug, which provides strong momentum heading into this year. We look forward to continuing this momentum as well as bringing Camzyos to European patients with approval expected by midyear. Moving to our hematology portfolio on Slide 15, starting with Revlimid. Global sales for the full year were approximately $10 billion, impacted by generic entry. As we noted last year, we expected variability quarter-to-quarter. And in 2022, we saw slower-than-anticipated utilization of generic lenalidomide in the U.S. With favorability in 2022 and anticipated increase in generic volume this year, we expect Revlimid revenues to be approximately $6.5 billion in 2023. We continue to expect an average $2.5 billion annual step down as a reasonable assumption for 2024 and 2025. Pomalyst global revenues continue to grow in the fourth quarter and for the full year, driven primarily by demand for triple-based regimens in earlier lines of therapy and extending duration of treatment for patients. As usual, in the first quarter, I would like to remind you of the typical seasonality Revlimid and Pomalyst experience due to patients entering the Medicare Coverage Gap early in the year. Now moving to Reblozyl, our first-in-class EMA. Demand for Reblozyl was strong with fourth quarter and full year sales growing over 30%. In the U.S., revenues grew over 20% in both the fourth quarter and full year. We have made great progress since launch by increasing patient adherence, extending treatment durations and accelerating switches when ESAs fail. Internationally, Reblozyl continues to launch in different markets across the globe with launches now in 16 markets outside the U.S. Growth continues to be driven by demand in both MDS and beta thalassemia-associated anemia and attaining reimbursement in additional countries. Turning to our differentiated cell therapy portfolio, Abecma and Breyanzi. Our first-in-class BCMA cell therapy, Abecma, continued its robust performance. Global revenues for the full year were $388 million versus $164 million in 2021. This represents strong growth year-over-year reflecting significant patient demand and the work the company has done to increase manufacturing capacity. We remain focused on continuing to ramp up capacity and believe this will enable us to get Abecma to more patients with highly refractory myeloma as well as preparing to move into earlier lines of therapy. Lastly, moving to our best-in-class CD19 cell therapy, Breyanzi. Global sales for the year were $182 million, more than doubling over 2021. Sales in the quarter reflect strong demand and hard work of our teams to expand supply. Looking to this year, we continue to expect growth driven by demand for Breyanzi in second-line plus large B-cell lymphoma, and we remain focused on continuing to build manufacturing capacity to further support the uptake and prepare for additional indications. Now let's move to our expanded immunology portfolio on Slide 16, starting with our first-in-class S1P agonist, Zeposia. Fourth quarter sales grew 69%, while full year global sales nearly doubled, driven by increased demand in multiple sclerosis and ulcerative colitis. Our strategy to expand volume and to improve commercial access is materializing. We've made progress with several plans with either 0 or 1 step edit, which will meaningfully expand access as we move in 2023. We expect continued growth of Zeposia to evolve primarily from MS today to UC over time. And remember, as with any new immunology medicine heading into the first quarter, the typical dynamics of co-pays resetting each year tend to impact the first quarter performance as additional co-pay supports affects gross to net adjustments. Internationally, we are continuing to focus on securing reimbursement in additional markets to get Zeposia to more patients living with MS and UC. Finally, turning to our first-in-class TYK2 inhibitor for moderate to severe plaque psoriasis, Sotyktu. We're extremely pleased with the U.S. launch so far. Still early days, but physician feedback has been outstanding. As of December, we had over 2,000 script equivalents on Bridge and commercial drug. Since then, we continue to make progress in new scripts and see that the use of Sotyktu is roughly evenly split across systematic naive patients, Otezla switch patients and biologic switch patients. We remain focused on driving demand for this new medicine as the oral choice and ensuring as many patients as possible get Sotyktu to enable broader formulary positions in 2024. Internationally, we are now approved in Japan and in Canada with expected European approval by midyear. Switching gears to our fourth quarter P&L on Slide 17. Having just covered sales performance, let me walk you through a few non-GAAP key line items. As expected, fourth quarter gross margin was impacted primarily by product mix and higher manufacturing costs. For the full year, gross margin was in line with our prior guidance at approximately 79%. Excluding acquired in-process R&D, fourth quarter and full year operating expenses decreased primarily due to reallocation of investments behind our growth opportunities and the impact from foreign exchange and dilution from the Turning Point acquisition. Acquired in-process R&D in the quarter was $52 million, which was partially offset by $16 million of licensing income that benefited OI&E in the quarter. Fourth quarter effective tax rate was approximately 11%, driven by earnings mix and onetime items with the full year tax rate of approximately 15%. Overall, fourth quarter earnings per share was $1.82. From a full year perspective, we ended the year at the upper end of our guidance range at $7.70, representing 8% over previous year. Moving to the balance sheet and capital allocation on Slide 18. Cash flow from operations in the fourth quarter was $3.3 billion. The company's balance sheet remains strong with approximately $9 billion of cash and marketable securities on hand as of December 31. Our capital allocation priorities are unchanged. Business development remains a top priority to further renew and diversify our portfolio and strengthen our growth outlook while also focused on balance sheet strength and returning capital to shareholders. We have executed several early stage business development deals as well as acquiring Turning Point Therapeutics last year. Our strong balance sheet allows us to be size-agnostic on deals. As it relates to balance sheet strength in 2022, we reduced debt by over $5 billion, and we are committed to maintaining a strong investment-grade credit rating. And finally, as it relates to returning capital to shareholders, we have a longstanding track record of paying dividend for 91 consecutive years and recently grew the dividend for the 14th consecutive year. We remain committed to growing the dividend, subject to Board approval and continue to be opportunistic on share repurchases, with approximately $7 billion remaining in our share repurchase authorization. Let me close with our 2023 non-GAAP guidance on Slide 19. Due to unpredictable macroeconomic factors and large swings in foreign exchange last year, we are providing guidance on a reported basis as well as an underlying basis, which assumes currency remains consistent with prior year. We expect 2023 revenues to grow approximately 2% on a reported and constant currency basis. This reflects our confidence that our in-line and new product portfolios will more than offset the LOE impact from Revlimid and Abraxane. We expect Revlimid sales to be approximately $6.5 billion, which assumes additional step-up to generic manufacturers later in Q1 as well as continued variability quarter-to-quarter. With the momentum of our new product portfolio, we expect it to roughly double versus last year and will be approximately $4 billion. As it relates to our line item guidance for the year, we expect our gross margin to be approximately 77%, which reflects a shift in product mix. We do not predict acquired in-process R&D. So excluding this, we expect our total operating expenses to decline in the low single-digit range. This reflects a reallocation of cost and efficiency initiatives in MS&A as we continue to invest in our new launches. R&D expenses are expected to be largely in line with last year due to our dynamic portfolio of studies reading out and new study starts. We project our tax rate to be approximately 17%, reflecting changes to Puerto Rico tax laws and product mix. Finally, we expect to grow our non-GAAP earnings per share with a range of $7.95 to $8.25. This represents growth of approximately 5%. Excluding prior year acquired in-process R&D, adjusted EPS would grow approximately 2%. So before we move over to Q&A, I want to thank our colleagues around the world for the strong performance in 2022. Our strong execution in 2022 and our commitments for 2023 reflects the resiliency of our business and the renewal of our product portfolio. The performance in the year positions us well for long-term growth. Thanks very much, David. I know it's a very busy schedule today. So we're going to get into the Q&A. If you could keep questions just to one, that would be very helpful. Dennis, could we go to the first question, please? Yes. The first question is from the line of Chris Schott with JPMorgan. I'm sorry. It's from the line of Geoff Meacham with Bank of America. Okay. Hi, everyone. Thanks for the question. I'll keep it to one. So TYK2, I realize it's early days in the launch. But what are the opportunities to improve formulary positioning this year as your market share improves? And do the many biosimilars launching this year, HUMIRA as well as across the board, have an impact on any of these PBM discussions? Sure. Thanks for the question, Geoff. This is Chris. I'll take it. So first, we're very happy with the performance Sotyktu. It's obviously early days, but as is reflected in the remarks that David just had the reception for the product has been very, very good. The feedback that we're getting on the profile coming from customers is good. We now have over 2,000 scripts. As of the end of November our market share for the oral market in moderate-to-severe psoriasis is roughly 35% for new products. And it's roughly 12% if you look at the overall market, and that's just after two full months of launch. So very happy with what we're seeing in terms of the momentum coming out of Q4. And as it relates to whether we can accelerate the access position, I think the way we would characterize it is the base case continues to be 2024 for moving into a better access position. That said, we're doing everything we can to possibly accelerate that. We're obviously having good discussions with payers. And the strategy that we have for potentially accelerating that remains unchanged, which is continue to drive demand as quickly as possible for this product. And the good news is we have the profile, and we're seeing the feedback from customers that we think will enable us to do that. As for the impact of biosimilars, obviously, this is a dynamic environment. You've seen a number of movements just in the last few weeks. What I would say is that our approach to gaining access really doesn't evolve based on what we know about biosimilars. We think 2023 is going to be a transition year for biosimilars. Clearly, the strategies of companies and PBMs will continue to evolve. So it's something we'll stay on top of. But as we said right now, certainly, the strategy that we have for Sotyktu doesn't change. With Camzyos, that progress of rolling that out, you have previously talked about the different mix of centers of excellence, and you gave us a patient number. Can you give us a sense for what the relative distribution is of those larger centers versus perhaps maybe smaller practices? Are you seeing momentum with the setup of certifications and essentially the patient flow that you are hoping for at the pace so far? Sure. Thanks for the question, Chris. We're seeing a nice acceleration of both patient and physician dynamics for Camzyos. As I think David mentioned, we now have over 1,800 patients who have been prescribed. Importantly, we're seeing good and increasing conversion of those scripts to commercial drug. You may recall that in the third quarter, we talked about 30% of scripts that converted over to commercial drug. In Q4, that was 50%. So we're gaining momentum there. And the feedback that we're getting from the centers of excellence continues to be very strong. And so we've seen a nice pickup. And what I would say is that, that pickup has accelerated over the course of the fourth quarter. Recall that we are targeting approximately 500 accounts nationally. Those accounts account for roughly 60% of the overall patient volume. And what we've seen over the last quarter is a nice acceleration in the use of Camzyos in those accounts. And importantly, some of the slower accounts that we have been focused on continue to build the infrastructure necessary to get patients on therapy. And so we've seen a nice acceleration with those specific accounts as well. So overall, we feel like we're making good progress as we exit 2022. Just going back to Sotyktu. Does the mild to moderate Otezla label represent a hurdle at all for Sotyktu as you think about competing for frontline share? Obviously, you're seeing some now. But is that a hurdle you guys think about? And just maybe slip a really quick second one in. Eliquis, you saw favorable gross to net in most of the quarters in 2022. Does that continue in '23? Or should we think of growth this year, maybe more aligned with volume growth? Sure. This is Chris. I'll take both of those. Thanks for the questions, Chris. With respect to Sotyktu, we don't see that the Otezla broader market going into the mild category has an impact on us. And in fact, what we're seeing is very strong momentum with Sotyktu in moderate to severe patients. When we talk to customers, what we hear from them. There's excitement to use the product in the full spectrum of our label, which includes not only the severe patients, but importantly, those moderate patients. And then if you look at the uptake that we're seeing so far, it's reflective of the fact that physicians are going to be willing to use it, really both in moderate to severe. So given the fact that we have two Phase III studies that clearly show superiority across that patient population relative to Otezla, we don't see that being a particular barrier with respect to how we think about the uptake of the product. As for gross to nets for Eliquis, for 2022, as you know, we did see some favorability due to mainly the source of business and channel mix. But as you well know, this space is a very competitive space. It's heavily managed. So we don't see gross to net favorability as we look forward. There will continue to be variability across quarters. As we've talked about many times in the past, you do see late year seasonality with a product like Eliquis and gross to nets. But on a forward-looking basis, we don't see favorability with gross and that's with this product. So my question actually is on IRA and the drugs that are potentially going to be selected for negotiation towards the end of this year. Just wondering how Bristol is going to manage that situation in particular? I know that you do have patent expirations that will limit the impact there. But if that is starting in 2026, given Bristol's current product portfolio, Eliquis, one of the top players there, just interested to know what it is that you feel Bristol can do to temper the impact there? And then also a sort of separate but related question on IRA. We're seeing the sort of free drug launches that are running for at least a full year and maybe not purely free drug, but substantially aided. Trying to just get a better understanding, particularly for oral, it's starting to look like the life cycle there is starting to get truncated to six to seven years. Wondering if you feel comfortable or even confident that there'll be a better alignment of the oral incentives versus biologic incentives inside IRA as well? Thanks, Seamus. This is Giovanni. I'll take the question, and I'll ask Chris to comment on your second question about the free goods strategies. So I think when you look at IRA, similar to the discussion we've had before, I would say there is a lot that we still don't know. As you know, CMS is working through the procedural aspects of implementing the legislation. And of course, over the course of this year, we'll learn much more. Now when you look at your question about BMS. So first of all, we know that we do not see an impact from IRA until 2026 when some of the government price setting starts. And you are right that it is possible that Eliquis is impacted in 2026. So of course, we need to learn more in order to understand what the degree of impact may be. I'll just remind you that while we book 100% of the revenue for Eliquis, we split, obviously, the profit with Pfizer. So in many ways, it is an important brand, but it's a smaller brand in terms of determining our earnings trajectory versus what you would think about the revenue line. Now what can we do to continue to grow the company through the execution and implementation of IRA. In many ways, it's exactly what we are doing is advancing new medicines to the market in order to accelerate the renewal of our portfolio. So when you look at 2026, given our expectations that new launch brands will be $10 billion to $13 billion in sales. I would say there will be a very dynamic, young portfolio that will drive the company growth for the second half of the year. And of course, those products will have been launched very recently and therefore, won't be a candidate to government by setting for a while. Now the last comment that I would make is you are right about the challenges associated with the diverging natives as you refer to them, for the nine years, for all 13-year for biologics. We obviously are not pleased with that because the science is going very much in terms of enabling us to deliver -- to develop more and more molecules. But obviously, any change there would require legislative changes. Chris, do you want to comment on the launch of dynamics? Sure. Seamus, it's an interesting question on the role that free drug programs play in light of IRAs. As I think most of you know, free drug programs are typical, particularly in markets where rebates require that you have a transition period, particularly for new products to make their way into a more favorable access position. Now there's a dynamic there in that those free drug programs are typically targeted to commercial payers. I mean, commercial patients and IRA, of course, is focused on Medicare. That dynamic notwithstanding, I think that you're right, though, that to the extent that free drugs and free-drug programs play out for extended periods, it could have a negative impact when you look at the restrictions and price setting coming in, in nine years. I think what that reinforces for us though is the importance of very strong commercial execution because clearly, what you want to do is transition from free drugs into a more favorable access position as quickly as possible. And so as we just discussed, for a product like Sotyktu, that's going to continue to be our focus. But I think it's a very important question. It's something that we're going to have to continue to monitor as we learn more about the rollout of IRA. We noted that Bristol initiated a milvexian SSP Phase III trial with primary completion in November 2026 and that additional Phase IIIs will be started in the first half of this year. But Bayer studies are expected to read out a full year earlier. Is this consistent with your perception that Bristol is a year behind Bayer? I should add that you are not first with Eliquis and ended up dominating, but let me let you answer the question. Thank you, Steve. Samit here. Thank you for the question. Look, we planned the studies, and we put a timeline with those studies in terms of the enrollment. And then of course, these are event-driven trials. So we'll have to wait for the events to happen before we read out and report the results. So we have to take all of those into account, but of course, the clinical trials we can impact them by looking at what the enrollment rates are and how these trials are involved. So I think what you see on trials.gov is our guesstimate of when the trials are going to be reading out it is that we might be leading out earlier. It is possible our competitors will be reading out later. But these are early days, and we'll update you as the trial progresses if the time lines do shift. A few questions back on Sotyktu. Can you just quantify where you are on market access in '22 in terms of number of lives covered? And where you do have access, are there any step that is requiring Otezla first? And then on your Bridge program, will that last all the way through '23? Or will you begin to phase it out before year-end? Thanks for the question. So with respect to market access, we think we have about 10% of patients who are in plans that have open or preferred access. And obviously, that's going to continue to increase as we continue to engage with payers. And as we said, our base case for a much more favorable access position at large across the major PBMs is for 2024, but we're doing everything we can to accelerate that. As for the Bridge programs, Bridge programs are typical in this market, and I think we would typically think about keeping those Bridge programs open until we find that we are in a position where we've got the volume to negotiate a much faster access or more favorable access with the big PBMs. The nice thing that we're seeing, Tim, with Sotyktu is that the vast majority of patients are going into our hub. What that enables us to do is monitor the status of those patients with respect to formulary positioning. And so even if that Bridge program is open, we have the ability to transition those patients to commercial drug, the moment we certify that their plans are able to take them on commercial drug. And so it's a more dynamic process than might be indicated just in the discussions that we've had. In fact, we have the ability to look at this on a more real-time basis. But we do anticipate that those Bridge programs will remain open certainly as we get into 2024. On Abecma, you went from kind of struggling to meet patient demand in early 2022 to now expanding into earlier lines of therapy. Now how should we think about bridging this gap, really I'm talking about expanding capacity and when we could potentially see more slots come online for both your cell therapies? Yes. Evan, maybe I'll take that one. This is Chris. So we're actually quite happy with the capacity that we continue to -- and actually, we saw with both products in the fourth quarter. You may recall that for Breyanzi, we had anticipated the expansion of capacity would wait until we got into this year. We were very happy to see that expansion be accelerated into Q4. So I think that as we look forward to this year, we continue to see an expansion of capacity for both cell products, cell therapy products, and that's certainly true with Abecma. And I would say the other thing to keep in mind is we've thought about manufacturing, which is going to continue to be an area of focus for us for cell therapy is we have a threefold strategy. First, we continue to stay focused on manufacturing success rates. That's 1 of the more important elements that frankly affect all cell therapy products. It's -- these are complex drugs, they're living products and you have to stay focused on your manufacturing success rate. Second, we've talked at length about vector supply, and we obviously have a number of strategies in play from dual sourcing to increasing the number of suites and ultimately switching to a next-generation suspension vector on that front. And then finally, drug product. And there, it's mainly about bringing additional manufacturing sites online, and we've discussed previously our efforts in Devens, Massachusetts enlightened to do just that. So what I would say sort of leveling it up is that manufacturing has to continue to be an area of focus for us. We've got good strategies in place, and we've seen those strategies play out with expanded capacity, not only in Q4 but we anticipate through the remainder of this year. David, probably for you. Just thinking about the guidance, OpEx, you've guided a low single decline this year, which offsets some of the gross margin pressure and R&D, you're holding flat, so it looks like most of the decline is going to come on the SG&A side. So just as we look into 2024, I guess we're anticipating additional gross margin pressure given Revlimid rolling off more fully. How should we think about expenses in as we think about the cadence into '24? Terence, thank you for the question. And you're right as it relates to gross margins, we do anticipate them coming down and last year was in line with expectations as what we're guiding this year that 77% due to that product mix as revenue declines. As far as OpEx is concerned, we continue to find efficiencies, operational efficiencies. We learned a lot through COVID with digital technologies, particularly on how we're engaging with healthcare professionals. But also on top of that, reallocating resources from the mature brands to our launch products and making sure they're fully funded. We've been able to do that very effectively. From an R&D perspective, you may recall, as we talked about the levels of R&D spend, it's really driven by our portfolio. That has the single biggest impact on the level of R&D spend, and we just launched nine new products. So we had many late-stage programs coming offline. We have some new ones coming online, but some of those are through partnerships. I think milvexian a great example of that, where we have several Phase III programs that are going to be beginning, but that's shared with our -- those calls are shared with our partners. So that's why we believe, as we look at our business this year, a low single-digit decline in our overall operating expenses is what we're anticipating. But we feel very confident even with the step down in gross margin. As we look at our base, continue to grow the top line faster than our expense base that gives us the flexibility to maintain those operating margins above 40%. Maybe if I may ask a little bit more on the guidance side. So from our math, it looks like for in-line products, you are looking at another really good year. So after like 11% growth, we calculate, you're expecting about 8% growth again this year, which seems to be the delta between you and consensus. So could you please talk a little bit about puts and takes there? And where do you see the most robust growth in that in-line portfolio, considering Eliquis OUS challenges there as well? Yes. Well, thank you for the question. And you're right. We do see multiple drivers for our growth in '23. As I said, overall, 2% growth with our in-line and new product portfolio, offsetting the declines in our -- in Revlimid and the LOEs. And that's really coming across as we think about the in-line. And as we talked about before, we had really strong double-digit growth on Eliquis this past year. We continue to see growth despite some of the headwinds that we see in Europe, good strong growth in the U.S. and Opdivo-Yervoy with our additional tumor indications and adjuvant setting. We continue to see good growth in lung as well as in gastric cancers and continue to see very strong growth continuing on our IO franchise. And then the new products, remember, that's a significant growth driver. As I talked about in my earlier remarks, and that doubled last year. And as we said, we see that continuing into this year. So between the in-line business as well as that new product momentum that we have as we exited last year and the guidance we're providing this year, we have multiple ways to continue to grow, and we're very confident in our ability to do that this year. Maybe you focus on one of those launch products with Reblozyl here. You alluded to some duration growth. Would love any additional color you can provide there? And then as you think about COMMANDS, how should we think about the stages to filing and when we might see that data presented? Is that something we might have to wait to, say, late June 4? Or is there the opportunity to potentially share that data ahead of them? Yes. Maybe I'll start and then switch it over to Samit for your questions on COMMANDS. So with respect to Reblozyl, yes, we continue to see good acquisition of new patients on Reblozyl out of coming out of the fourth quarter. And certainly, we would expect to see that continue into this year. But as you note, where we see the potential for the most significant growth with this product is really first is increasing dosing and administration and ensuring that we've got the right titration of patients. We have seen some improvements in that regard over the last year. In fact, duration of therapy is up 6% in 2022 versus 2021, and we would expect to continue to see, particularly as patients titrate up over time, consistent with the MEDALIST study that, that duration of therapy would continue to increase this year. And then the second big area of focus that we have is getting those patients who are no longer responding to ESAs in the first-line setting to move on to Reblozyl. That's has been a big area of focus for us. And again, here, too, we've made good progress. The time on ESAs has decreased since our approval from roughly 18 months to now roughly 11 months. And so those are the two big dimensions that we have as a focus in 2023. And then obviously, the COMMANDS study provides the next large catalyst for growth. And we think that, that indication will roughly double the opportunity that we have with Reblozyl. But in terms of timing, I think Samit can speak to that. Thank you, Chris, and thanks, Carter, for the question as well. So we don't have the specifics of the conference right now, where we will be able to share the data. But certainly, we will confirm that as information becomes available. In terms of the filing, again, we do not comment on that until we have -- we release -- we do a press release after the file is accepted. But certainly pleased with the data, as Chris just mentioned, COMMANDS is an important study for moving Reblozyl to the front line where we compared against an active control of ESAs and shown the superiority. You noted in the slides the decision not to move cendakimab into forward in atopic derm. Is that something specific from the product profile in the Phase II? Or that could maybe read through to the ongoing EoE trial? Or is it just the competitive dynamics in atopic dermatitis? Yes, sure, Matt. I can take that question, Samit here. Thank you for that. Look, remember, we have always said that as we move our programs forward, we always look at the data and we want to see the differentiation of that data and then, of course, look at the landscape and the competitive dynamics as well in atopic dermatitis, there are several therapies that have recently become available for patients, and they're very effective. And so we had set our threshold quite high in terms of making that difference for the patients for atopic dermatitis. So we have seen the data. We do meet the primary endpoint, but we don't think that it has a competitive advantage over what is available to the patients at this time. And therefore, we are not moving it to the registration trials but it has nothing to do with what we saw for cendakimab in eosinophilic esophagitis, where we not only saw a change in the eosinophil infiltration, but also the dynamics in terms of the outcomes of patients for their dysphagia as well as the fibrosis in the Phase II study. And so that study continues and certainly, we'll share the results when the study is completed. Great. Thank you for the question. So you have TYK2 in lupus, Sotyktu in lupus, there's going to be a Phase III reading out with Pfizer on JAK plus TYK2 later this year. Maybe frame it on if that trial fails, like what's your thoughts on the biology and how you'll think about potential success of your TYK2? And then a flip question, if it succeeds, how do we think about from a biology standpoint, if you know anything about how much value adding JAK on top of a TYK2 might be for lupus? I know it could influence the safety profile, but anything you could give us on efficacy would be great. Maybe I can take that again. This is Samit. Thank you for the question. If you think about it, today, there is no JAK inhibitor approved for treatment of patients with psoriasis. We demonstrated the benefits of a TYK2 inhibitor, which has very specific downstream effects on IL-12, IL-23 and interferon, which, of course, is important. And throughout the last year or maybe even more, we've been answering that question of differentiation and protecting from a safety perspective, the profile of a TYK2 inhibitor versus a JAK inhibitor. So if you just move that fast forward now and think about it that for a patient population for whom we've just shown a superiority versus the prior standard of care that was being used in the oral setting, we've shown two trials with that superiority. We've got the data in the Phase II setting for psoriatic arthritis as well as SLE, and we are in the Phase III clinical trials for all of these indications. So I think the profile of Sotyktu is well set now, I think, and the confidence that we have on the data and the evolution of the data is making it very promising for physicians to prescribe it, as Chris talked about earlier. So we will rely on that information and the evolution of the data for our own molecule. I cannot speak to what Pfizer will do when their data reads out. But certainly, I'm pretty sure you will all be asking the question, is a JAK inhibitor right thing to do in psoriasis when there are efficacious safe therapies available for these patients. Chris, maybe one for you. Is there any update on Revlimid sales expectations looking beyond this year? I know you've talked about a $2 billion plus annual decrease in the past. But any changes to your thinking with respect to the revenue run rate there? And then a quick clarifying question on Sotyktu. Where are you guys at with the high-dose program? And could we see that move into any indications beyond UC at some point? Great. Hi, Olivia, it's David Elkins here. I'll take the Revlimid one. Nothing has really changed in our outlook for Revlimid through 2025. We provide our update for this year, that $6.5 billion, which is a $3.5 billion step-down given better performance this -- last year in 2022. As we think about '24 and '25, on average, about a $2.5 billion step-down is how we're thinking about it. Chris or Samit? Actually, thank you, David. So Olivia, certainly, so TYK2 has two studies in IBD that are ongoing, one of them using a higher dose in ulcerative colitis. If you recall, we do not have a proof-of-concept in ulcerative colitis or IBD at this time. And the -- one of the hypothesis that we want to test is the higher dose of Sotyktu in IBD or specifically over here in ulcerative colitis. So we are looking forward to seeing the data in the latter part of this year. And dependent on that data dependent on outcome, then we'll be able to formulate the strategies as to how to move forward in IBD and/or other indications at the higher dose. You recall, though, that we've also tested higher doses in previous trials and other indications, and our safety profile has been maintained in those clinical trials. So we are not necessarily looking forward to any major signals that could arise at the higher dose, but certainly looking for the efficacy signals. A couple of questions on your LPA1 antagonist. Can you just remind us when we might see that Phase II data? And also, given the failure of Roche's pentraxin today, how you're thinking about the Phase III trial design? And then finally, what other fibrotic indications aside from IPF you are looking at for that drug? Thank you, Andrew. So LPA1 certainly, we're looking forward to presentation of the data within this year, within the first half of this year. And certainly, as soon as we have confirmation on the conference, we will be able to share that information. We did see the news from the competitive program, as you're referring to Roche that the Phase III trial was stopped. We do see that our data, the Phase II data that we've seen thus far are very strong. We've talked about the patient population with no background standard of care as well as in combination with the background standard of care therapies, and we are pleased with what we've seen. We are in discussions on the appropriateness of the clinical trial design with the regulatory authorities, and you will get to see that as we launch that and as we make that public. So more to follow on that in appropriate time to come. But really pleased with that. And the last question that you had on the additional fibrosis programs, we're looking at LPA1 from two perspectives right now. One is the IPF program and the other one is the progressive or pulmonary fibrosis. But that Phase II data is going to be reading out later this year. So we're looking at those two things for now. Maybe just a couple of very quick pipeline questions. I see you have another TYK2 inhibitor in Phase I. Could you just give us any color on the matter and how you'd anticipate it differentiating versus the TYK2? And then just another one on 207, you recently terminated Phase 1 development in non-small cell. This is one of our anti-TIGIT. I think you cited safety issues. I was just wondering if you could specifically say what these issues were? Sure. Thank you. In terms of your first question around the Phase I that is ongoing with the next TYK2 inhibitor. In general, we always have one or two programs that we look at in terms of having the next generation of molecules in development. And so this is just phases of development of general pipeline that we have additional TYK2 inhibitor. We also have a CNS penetrant TYK2 inhibitor that is in Phase I. So there is nothing special at this time to talk about. But certainly, as the data arises, as the data evolves, we will be able to share those data in the future. For the TIGIT program, remember, this is a trial that was being conducted in patients with non-small cell lung cancer looking at a combination with nivolumab and ipilimumab. And what we have seen thus far, I'm not going into the specifics because those data will be presented at some future conference, but we do see that there is a toxicity that is observed when combined with dual I-O therapy for this particular TGT inhibitor. And so more data to come as we get more insights and more specifics on that and then the presentation will be done. But because of those safety reasons, we have decided to terminate this particular trial at this time. Thank you, Samit, and thanks to all of you for your participation. As you've seen, it's an exciting time for the company. We have another important year ahead, lots of things to talk about, but we know it's a very busy morning for all of you, so we're going to end the call here. And as always, please reach out to our team if you have any additional questions. So thanks, everyone, and have a great day. Thank you. This does conclude the Bristol-Myers Squibb's Fourth Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect.
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Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call are ASML's CEO, Peter Wennink; and our CFO, Roger Dassen. The subject of today's call is ASML's 2022 fourth quarter and full year results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received. This call is also being broadcast live over the Internet at asml.com. A transcript of management's opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and the presentation found on our website at asml.com and in ASML's annual report on Form 20-F and other documents as filed with the Securities and Exchange Commission. Welcome, everyone, and thank you for joining us for our fourth quarter and full year 2022 results conference call. And before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the fourth quarter and full year 2022 as well as provide our view of the coming quarters. And Roger will start with a review of our fourth quarter and full year 2022 financial performance, with some added comments on our short-term outlook. And I will complete the introduction with some additional comments on the current business environment and on our future business outlook. Roger, if you want -- like. Thank you, Peter, and welcome, everyone. I will first review the fourth quarter and full year financial accomplishments and then provide guidance on the first quarter of 2023. Let me start with our fourth quarter accomplishments. Net sales came in at â¬6.4 billion, around the midpoint of our guidance. We shipped 18 EUV unit -- EUV systems and recognized â¬2.3 billion revenue from 13 systems this quarter. Net system sales of â¬4.7 billion, which was again driven by Logic at 64% with the remaining 36% coming from Memory. Installed Base Management sales for the quarter came in at â¬1.7 billion, which was higher than guided due to additional upgrade revenue. Gross margin for the quarter came in at 51.5%, which is above our guidance, primarily due to the pull-in of additional upgrade business as well as an insurance settlement from ASML Berlin fire, which occurred in early 2022. On operating expenses, R&D expenses came in at â¬906 million, above our guidance due to higher depreciation. SG&A expenses were â¬280 million, higher than guided due to increased IT and recruiting spending as part of our headcount growth plan. Net income in Q4 was â¬1.8 billion, representing 28.2% of net sales and resulting in an EPS of â¬4.60. Turning to the balance sheet. We ended the fourth quarter with cash, cash equivalents and short-term investments at a level of â¬7.4 billion. Moving to the order book. Q4 net system bookings came in at â¬6.3 billion, which is made up of â¬3.4 billion for EUV bookings and â¬2.9 billion for non-EUV bookings. These values also include inflation corrections. Non-EUV bookings are a combination of deep UV and metrology and inspection. Net system bookings in the quarter were driven by Logic with 66% of the bookings, while Memory accounted for the remaining 34%. Looking at the full year, net sales grew 14% to â¬21.2 billion. EUV system sales grew 12% to â¬7 billion realized from 40 systems while in total, we shipped 54 EUV systems in 2022. Deep UV system sales grew 13% to â¬7.7 billion. Our metrology and inspection system sales grew 28% to â¬660 million. Looking at the market segments for 2022. Logic system revenue was â¬10 billion which is a 4% increase from last year. Memory system revenue was â¬5.5 billion, which is a 34% increase from last year. Installed Base Management sales was â¬5.7 billion, which is a 16% increase compared to previous year. At the end of 2022, we finished with a backlog of â¬40.4 billion, an increase of 67% compared to the end of 2021. Our R&D spending increased to â¬3.3 billion in 2022, as we continue to invest in innovation across our full product portfolio. Overall, R&D investments as a percentage of 2022 sales were about 15%. SG&A increased to â¬946 million in 2022, which was about 4% of sales. Net income for the full year was â¬5.6 billion, 26.6% of net sales, resulting in an EPS of â¬14.14. Improvements in working capital contributed to a free cash flow generation of â¬7.2 billion for 2022, mainly driven by customer down payments following the very significant order intake this year. We continue to invest in support of our road map and planned capacity ramp. Excess cash will be returned to our shareholders through a combination of dividends and share buybacks. With that, I would like to turn to our expectations for the first quarter of 2023. We expect Q1 net sales to be between â¬6.1 billion and â¬6.5 billion. Per customers' requests, we prioritized resources towards the acceleration of deep UV shipments at the end of 2022. As a result, we expect lower revenue in Q1 and higher revenue in the following quarters. We expect our Q1 Installed Base Management sales to be around â¬1.5 billion. Gross margin for Q1 is expected to be between 49% and 50%. The lower margin relative to last quarter is primarily due to lower upgrade revenue and deep UV mix effect. The expected R&D expenses for Q1 are around â¬965 million, and SG&A is expected to be around â¬285 million. The higher R&D guidance is primarily due to additional headcount and labor cost increases. These investments are in support of our continuous innovation as we further expand our deep UV, EUV and applications road map and, at the same time, work to improve our installed base performance. Higher SG&A is mainly due to additional headcount and IT spending. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%. In Q4, ASML paid a quarterly interim dividend of â¬1.37 per ordinary share. The third quarterly interim dividend will be â¬1.37 per ordinary share and will be made payable on February 15, 2023. Recognizing this interim dividend and the 2 interim dividends of â¬1.37 per ordinary share paid in 2022, this leads to a final dividend proposal to the general meeting of â¬1.69 per ordinary share. In Q4 2022, we purchased around 0.6 million shares for a total amount of around â¬300 million. ASML announced a new share buyback program during our Investor Day on November 11, 2022, to be executed by December 31, 2025. We intend to purchase shares up to an amount of â¬12 billion. Thank you, Roger. And as Roger has highlighted, we had a year of record sales in a dynamic environment. Demand remains strong and we finished the year with a record backlog. And looking to 2023, there continues to be a lot of uncertainty in the market due to a number of global macro concerns around inflation, rising interest rates, recession and the geopolitical environment, including export controls. Customers are still seeing demand weakness in consumer-driven end markets, the most notable with PCs and smartphones, with some indication of softening or lower growth rates in data center demand, while the demand strength continues in other markets such as automotive and industrial. Customers are telling us they expect a rebalancing of semiconductor inventories over the first half of 2023, with business expected to rebound in the second half of the year. A potential driver of this recovery in the second half of the year could also be the post-COVID opening of China. This could have a positive effect on both supply and demand. To help rebalance inventory levels, customers are running their lithography systems at lower utilization levels and some have also lowered their CapEx plan for this year. Based on this, we concluded that most of our customers have made the assessment that the duration of a potential recession is significantly shorter than our average delivery lead time. On top of this, lithography investments are strategic in nature, which means that the demand for our systems remain strong. For instance, this year, demand still exceeds our capacity, and we enter the year with a backlog of â¬40.4 billion, so our focus will still be on maximizing system output. We've experienced several quarters of very strong bookings, which now provides backlog coverage significantly beyond 2023, which is almost twice the expected 2023 system sales. Based on discussions with our customers and continued improvements in the capability of our supply chain, we are planning to increase our output capability this year. We're planning to ship around 60 EUV systems and around 375 deep UV systems in 2023, with around 25% of the deep UV systems to be immersion. We still plan a significant number of fast shipments this year, which under the current way of working will result in a similar amount of delayed revenue out of 2023 that came into 2023. Looking at the growth of the business for the full year 2023 compared to 2022. We expect EUV revenue growth of around 40% and non-EUV revenue growth of around 30%. And for the Installed Base Management business, we expect year-over-year revenue growth of around 5%. And as we are coming off a strong growth year in 2022 and customers are adjusting their utilization levels, we currently expect to see a slightly lower demand in our upgrade business in 2023. In summary, for the full year 2023, based on how we see the world today, we expect another year of strong growth with a net sales increase of over 25% and a slight improvement in gross margin. On the geopolitical front, as it relates to export control, this continues to be a geopolitical discussion with different government entities, a process where ASML is obviously not in control although we continue the discussion with governments to make sure that consequences of proposals are well understood. As of today, export control policy related to lithography equipment has not changed. We are still not able to ship EUV systems to China, but are able to ship deep UV as well as metrology and inspection systems to China. As our Prime Minister recently stated, this is a multinational discussion, not only with the U.S., but with several countries. He reiterated that multiple companies in the semiconductor industry, including their supply chains, are involved and that the matter is complex and sensitive. It needs careful handling with precision. And he reminded us there is a lot of interest at stake, and it's important to find the right balance. We will therefore not speculate about the possible outcome but will have to wait for the outcome of ongoing government discussions. Looking longer term, we talked at our Investor Day last year about the global megatrends, where the broadening application space is fueling demand for advanced and mature nodes. Secular growth drivers in semiconductor end markets and increasing lithography intensity on future technology nodes are driving the demand for our products and services. ASML and its supply chain partners are actively adding capacity to meet future customer demand as confirmed at Investor Day, with our capacity plans of 600 deep UV, 90 EUV low-NA systems by 2025-'26 and 20 EUV high-NA systems by '27-'28. Also presented during our Investor Day last November, we see an opportunity based on different market scenarios to reach an annual revenue in 2025 between â¬30 billion and â¬40 billion and in 2030, an annual revenue between â¬44 billion and â¬60 billion. Part of our long-term growth opportunity, we also remain committed to our ambitious ESG sustainability goals. On February 15, 2023, our 2022 annual report will be published. As part of this report, we plan to provide you with an update on how we collaborate with our stakeholders to deliver on the ambitions of our ESG Sustainability strategy, which we can summarize as follows: our ambition is to achieve carbon neutrality with net zero emissions in our operations, Scope 1 and 2 by 2025; we aim to achieve net zero emissions in our supply chain, Scope 3, by 2030; and net zero emissions from the use of our products by our customers, Scope 3, by 2040. In addition, our goal is also to have zero waste from operations to landfill and incineration by 2030. From a social perspective, our ambition is to ensure that responsible growth benefits everyone. To maintain our fast pace of innovation and ensure our long-term success as a company, we need to attract and retain the best talent and provide the best possible employee experience. We aim to be a valued and trusted partner, improving the quality of life for all people in our communities. In summary, while there's a lot of near-term uncertainty in the current environment, our customers' demand for our products continues to exceed supply. We're working to increase our capacity to meet our customers' future demand, and we're fully confident in the opportunity this provides for our future growth. Thank you, Roger and Peter. The operator will instruct you momentarily on the protocol for the Q&A session. [Operator Instructions]. Now operator, could we have your final instructions and then the first question, please? I was wondering in your 2023 outlook if you could kind of give us any color on how you're thinking about Logic versus Memory growth this year. Yes. I mean we've not made that -- Joe, thanks for the question. We've not been explicit on that. We think that in the current environment, with all the dynamics and all the uncertainty that are out there and also the fact that we still look at 2023 as a year where we are supply constrained. We don't think that, that makes a lot of sense to guide around that. So that's why we said we're going to guide on [indiscernible] so EUV versus -- EUV and non-EUV, but we think it is not very constructive and meaningful to provide guidance on Memory versus Logic. I mean clearly, if you look at the recent order intake, you do see that Memory is far from that. As a matter of fact, you see Memory actually picking up in the quarter and quite healthy in the year. And that tells you that the Memory buyers are also making strategic investments because they recognize that if at a certain point in time, the market is going to come back, they need capacity. So that's what you see in the order intake. But again, for the full year, given an indication of the distribution over Logic and Memory, we thought it was a meaningless action in light of the dynamics that I just talked about. Got it. That makes sense. And as a follow-up, you talked about the inflation-related adjustments in your bookings. Are you able to reprice kind of your entire backlog or portions of your backlog? And then is there any sort of quantification that you can help us with on just the average increase of ASP that we should be thinking about in our models? Yes, Joe. As you know, we've been through this before. We're having good discussions with customers. As you know, legally, the way the backlog is construed, we've agreed on a price. So this is just a matter of discussions with customers about a fair distribution of the burden. We're fairly advanced in that discussion. A number of customers have already made commitments to us on how they're going to contribute, with most other customers who are fairly advanced and are -- we think that we're going to find a solution. It's only a minority of customers that are not open to this conversation. So the lion's share is open to the conversation. But it really is in the spirit of finding a fair distribution of the inflation burden. So that has helped. And we're only putting into the backlog those inflation adjustments that have been explicitly agreed with customers. So more of that is to come because, as I said, we have a number of customers who are still in negotiations. So all of that is coming. I think the way it's going to pan out without really quantifying it, but just to give you an indication, as you know, last year, we said that we were having about 1.5% drag on the gross margin coming from inflation. I would say most of that is -- we expect to recover during the year. So most of the inflation that we incurred over 2022, I think most of that we will recover. But of course, there will be inflation in 2023, and that will remain a drag on the gross margin. So the gross margin impact of inflation will be less so than it was last year. But in comparison to 2021, you will still see a bit of a drag on the gross margin coming from inflation. Yes. I think on your sales price you want to put into your models, I mean we guided EUV sales up with 40%, non-EUV with 30% and then installed base with 5%. I mean that's in the end where you need to end up with if you're going to change your model and you come to a different outcome, then something went wrong in your calculation. So... And for the people that weren't really carefully listening, what that really means in terms of ASP for EUV, we talked about it before. Originally, we were looking at â¬160 million. We've then been talking about â¬165 million to recognize also increased functionality, I think, with the increases on ASP on the inflation. I think it's good to go somewhere between â¬165 million and â¬170 million. I think that's, on average, I think, the right way to go. I guess first question, Peter, I was hoping you could take a step back and maybe talk about your discussions with customers. Obviously, reducing utilization to clear inventories. But at the same time, given your lead times, you're continuing to have great visibility well beyond 2023. So I guess, can you kind of speak to the moving parts there? And I'd love to hear kind of your thoughts on your visibility for all of 2024. Yes. Good question, C.J. Yes, I think in the discussion with customers, it's exactly what I said. It's very clearly, we concluded from the discussions that customers believe. And I think it's also you can corroborate those statements with their public statements and basically saying some of the customers feel that they see a recovery towards the second half of this year. And that actually means that they tell us, "Listen, we know you guys are short of the demand we put on you." So that means that we don't want to risk our strategic investments, which go beyond the first half of 2023, moving into '24 and '25. So this is what that -- we're really having this midterm to long-term discussion with them of what's needed. And that's why they keep saying, "No, we need those machine." Having said that, of course, last year, we kept informing you that the demand on us significantly exceeded our build capacity, sometimes to 40%, 50%. Now that demand did come down. I mean that's also clear that some of that demand disappeared because of the market situation. But the end result is that the demand -- the cumulative demand is still higher than what we can make. So this is where we are. And I think that is driven by what I said that I think the average expectation on the duration of the downturn of, let's say, working through the inventory is significantly shorter than the average lead time of our tools. I think -- and that gives us a lot of visibility into 2024 also. Customers give us orders throughout the year, very significant levels of orders, which actually have over â¬40 billion in the backlog, which is almost twice the system sales that we expect to have in 2023. So yes, we have the visibility. And it still means that the customer expansion plans on adding that capacity in 2024 are still very real. Otherwise, you wouldn't give us these orders with down payments. So this is the level of visibility that we have. Now all of course hinges on the macroeconomic situation. Finally, you could say the expectation that the duration of any recession, if it would come, would indeed be short. I mean that's the big question mark that is out there for all of us. But this is where we are today. And we're just telling you what the discussions with our customers are currently at, and they are exactly what I just told you. So this is the level of visibility that we have, and always just a matter of watching the macroeconomic situation. Very helpful. As my follow-up, just two quick housekeeping. What percentage of EUV bookings in the quarter came from Memory in December? And then secondly, how many e-tools do you plan to ship in 2023? So the -- it's roughly 25%-75%. So that's true for the entire bookings. It's also true for the EUV tool. So about 25% would go to Memory, around 75% comes from Logic. And I didn't quite get your last question. I couldn't really understand that. Quick clarification, if I may. I think there seems to be quite a lot of confusion around fast shipment. So maybe Peter or Roger, if you could set the record straight. Number one, is it fair to assume that your calendar year '23 guide does not include any fast shipments, either on revenue or on gross margins? And then number two, if that's correct, when do you think you could get clarification from your accountants that, that could become the norm? I mean is that something tied to the sign-up of the accounts for 2022? Or is that a completely unrelated decision? I've got a quick follow-up. Thank you, Didier. Thanks for the question. I think this is helpful to indeed clarify that. So what you saw is that we're having -- that we had fast shipments for an amount of â¬3.1 billion at the end of 2022. So the revenue for that will be recorded in 2023. However, we also assume that a similar amount will go from '22 to '23 -- from '23 to '24. And what that means, Didier, is that the guidance or the more than 25% growth over 2022 that we've given you, that in fact, treats the fast shipment effect as neutral, right? So we assume that, that will be neutral, i.e., the amount that comes in to '23, the â¬3.1 billion, we also expect that to leave the year into '24. So it's neutralized for the fast shipment, so that's the way to look at it. The question on can you change the revenue recognition. As we mentioned before, there are 2 key elements in here. One is an accounting element, so to what extent can you get this done. But pivotal for the accounting treatment of fast shipments is that customers are actually upon shipments are going to accept the full risk on the tool. That's what is pivotal. So the conversation that we need to have with customers and need their final blessing on is that based on a far more limited testing protocol, because that's what fast shipment in essence is. It's a far more limited testing protocol where there's a couple of weeks of testing that we actually omit out of the sequence, that based on a far more limited testing sequence, they still assume the full risk of the tool upon shipment. So that's the conversation that we need to have. And you will appreciate that that's a conversation that, of course, customers need to really look into and become comfortable with. So that's not a 5-minute conversation. We're now done with the accounting analysis, so the accounting analysis in and by itself is clear, but it all hinges on the premise of being able to get to an agreement with customers on what I just told you. So those conversations were now starting. Cannot tell you when that is done. In all likelihood, I would say, by mid this year, we should have clarity on whether customers are willing to do that or not. It could also be that some customers are going to accept it, others could not. And then once we have that clarity, of course, we will share that with you, and we'll also clarify to you what that means. To the extent that we would be able to recognize revenue again upon shipment for these fast shipments, of course, that would be additional to the more than 25% revenue growth that we've mentioned. Yes, that's very clear, Roger. And as a follow-up to that, so if fast shipments becomes the norm, is it reasonable to assume that your actual capacity for EUV actually is increased by 5 units because you shave off effectively a month of cycle time? So 60 divided by 12, 65 -- I'm sorry, 5, plus 5, so 65, plus whatever deferred from '22 into '23 if fast shipments becomes the norm. Is that the way to think about it? I think that's directionally correct. That's directionally correct, Didier. And bear in mind, in the output that we had for this year, of course, we already started to have that benefit, right? So there's already that benefit. But then to the extent that we're really able to get all the supply chain issues sorted, get back to a normal cycle time. As you heard before, we're eyeing a regular cycle time of 17 weeks. If we're then able to shave off 3, 4 weeks of testing, then that's the unit number that you could see it increase with. Correct. So the first one is on, Peter, you mentioned in your remarks that the demand is still above what you are able to do in terms of supply. So in a situation where -- and it's quite often a market share shift within your customer base, in deep UV and EUV. How do you plan to treat that? If you see pushout, let's say, by a couple of quarters so it slips to 2024, do you keep the slot for those customers? Or are you going to reallocate directly to the one that can take it straight away? So just how do you deal with pushout in this kind of allocation market if some customers have some delays? That would be interesting to have your point on that. And I have a quick follow-up. Yes. Yes. I think let me be very clear. I mean we are capacity constrained. So if a customer says, "Sorry, we want to reallocate, I want to push it back to 2024," then that slot will be taken by a customer that raises their hand and says, "Ship it to me." And that's what we will do. So that slot will be taken. And that means that the slot that the customer says, well, I have an order for -- okay, please pull it -- push it back. We just need to negotiate when that pushback is because that pushback could fall into a period which is already fully booked. So this is then fine, if you don't want to do it then. It actually means that it's a kind of a negotiation when it's the first open spot in 2024. That's how it works. So yes, we are just filling it up, and that means customers need to accept the fact that, that tool will not stay here in our premises, in inventory or in work in process until they can ship it. No, it will go. Okay. That's very clear. And my quick follow-up is on memory China since we had the restriction on memory China not impacting a lithography based on your previous comments. I mean do you see any pullback or spend pullback on the memory China? Or you still see strong demand on that front? Yes. I think it's not only applicable to China, what I'm going to say. I mean it's applicable to all our Chinese customers and, as a matter of fact, non-Chinese customers also. You need to realize that -- and you actually know that, Francois, I mean, planning and building and executing a new fab is a matter of years. So that means that anything that we shipped this year has been planned in 2021, 2020. So these plans are there, and we just execute on those plans. Now having said that, it's also clear that we have a demand -- we have a capacity shortage. So we have an over-demand that indeed, when we reallocate, which is true for Chinese and non-Chinese customers, where we have a bit more space to reallocate, then we will reallocate because the demand has been higher than our capacity. So yes, that's true for Chinese and non-Chinese customers. We treat all the customers the same in that way. So I think we haven't seen any acceleration with just the execution of the plans because those plans are planned for years. You cannot just think of as semi fab and it exists in 6 months' time. So this is why it's just planned. But yes, you will probably see open spots, if you could call it this way or pushbacks of it. There are many customers that raise their hands, it's not only China, not only China, it's across the globe. And the demand from China remains very strong, right? So we reported last time on this call that the percentage of China in the backlog was around 18%, and that's remained throughout the quarter. As a matter of fact, it's even gone up a little bit. So the demand from China still remains quite strong. I have two of them. First one, Roger or Peter, just a clarification. On your backlog, can you give us some color if you did not -- if you did, I forgot, I missed it, between EUV and deep UV, Memory and logic foundry? Yes. So in the backlog, it's around 25%, 75%. So if you look at the backlog for EUV, around 25% of that is for Memory customers, around 75% of the EUV backlog is for logic. Got it. Got it. And then as a follow-up, I just wanted to touch again on the fast shipment. I understand last year and into this year, customers are scrambling to get litho tools and, therefore, they're willing to take fast shipments. In an ideal world, you'd like fast shipments, too. But if things do slow down a little bit, do customers really want fast shipment? Wouldn't they rather have you test the tool in your factory before you ship it to them? Well, customers, you could argue, they don't care whether it's a fast shipment or not a fast shipment, they want a tool at a certain moment in time. And that's whether it's fast ship or a regular ship, they don't care. Now we did the fast shipment because we're late, and we were late and the demand was higher than what they -- what we could make. And this actually is a driver for still the fast shipment this year because our demand is higher than what we can make. That has changed. So if the customer says you can ship the tool, as long as they know the date of which the tool will arrive, it can be installed and can be signed off. That's the date that they're actually interested in. And as we see it today, there is still a higher demand than what we can make. So it's the same situation. Congrats on the strong results. Firstly, I wondered if you could just update us on how much bigger demand is than supply. You're obviously still positive on the demand backdrop, even though you talked about utilization and machines having gone down. I think in the past, you talked about more than 30% excess demand versus supply. So is that still the case? And then secondly, a housekeeping item, just on OpEx. You've guided for 1Q, which is perhaps a little bit higher than expected. Can you help us put in context what that means for full year OpEx? And specifically, a bit more color on what you're investing in and what that means for harvesting future opportunities and your margin potential? Yes. I'll do the first part of the question, and Roger will take the second part. I think on the 30% excess, the amount of supply actually is more like 50%. So now that has come down, but it's still significantly double digit above our capacity. So -- and like I said earlier in an answer to an earlier question, yes, of course, we also see the reflection of the demand curve because of the weakness in, for instance, the consumer demand clearly. So some of that over-demand has gone away, but it's still there. And it was actually not 30%, it was more like 50%. And it's come down now to -- it's still significantly double digit. Roger? Yes. Alexander, on the OpEx question, I think the numbers that we gave you are, I think, a pretty good proxy for the full year. I think what I -- if you take them together, it's close to 19% that I would model for OpEx, so for SG&A and R&D combined for the full year. Of course, we had significant hiring in the course of Q4. Those people are added to the year, if you like, in terms of headcount. Of course, we had increases in wages. And of course, that kicks in from Q4 to Q1. But that's the rate I would assume for the full year. In terms of what do we get for that, very good question. So on the SG&A side, obviously, this is in line with the growth of the company. So you continue to see us operate around 4%-ish SG&A percentage of sales. As you also would have seen, if you look at the 2025 and 2030 scenarios that we've talked about, you see it coming down a little bit, and that's clearly the intention to get some operational leverage there. But for the fast-growing company that we are, investments like these are necessary to make sure that the organization has run in a very professional way, that security is up to scratch, that the IT support for our professionals is up to scratch, et cetera, et cetera. So that's what we're doing on the SG&A side. On the R&D side, this really is the very, very aggressive road map that we have on all cylinders. So this is deep UV. And as Peter mentioned earlier on, this is not just a deep UV on the immersion side where we continue to drive immersion but also, this is on the -- on the dry side, KrF. So for KrF, we continue to drive road maps for smaller customers on the XT platform for larger customers operating large fabs on an NXT platform. We're looking at i-Line road maps. We have a very broad road map that we have on metrology and inspection. And obviously, we continue to drive both low-NA and high-NA. So it's a very extensive road map, more extensive than we've ever had before in the history of the company. And of course, all of this is conducive to the goals that we've been talking about and the scenarios that we've been talking about at the Investor Day for 2025 and 2030. So yes, definitely significant investment, but definitely rewarding if you look at the potential that we see in the market for those products. Yes. I think it's what Roger said. I mean our relentless focus on innovation and R&D has paid off handsomely in terms of value that we could create with our products, but also the extension of our market shares, the integration of our product offering into a kind of a holistic approach and value to our customers, that will only increase going forward. I mean things in semiconductor manufacturing will not get easier. They are getting more complex. It actually means that the entire product portfolio focused on patterning, patterning the 2-nanometer, the 1.5- to 1-nanometer and beyond, that is going to be significantly valuable to our customers. And that means we need to spend on R&D that Roger just talked about to make sure that all the ingredients for that value recipe are actually there. And that's what we need to do. And it has served us extremely well in the past, it will serve us extremely well going forward. A couple of follow-ups. Peter, based on your conversation with customers over the past month or 2, has anything changed with your assumptions since the Analyst Day? I hear -- what I hear from you is pretty much the same as what we heard in November, which is also consistent with what you said in October. On the surface, it seems like there hasn't been any change to the customer zone or how they're planning despite the fact that end market demand is weaker. And I'm just wondering if there's anything else you can share. Yes. So I think what we definitely see in the discussion with the customers, they are addressing the short-term challenges, it's just clear. I mean they basically say, "No, we need to -- we see inventories rising. We need to rebalance the inventory. So how do you do that?" So you just lower the utilization of the tools. That's short term, they're very clear. They're also very clear about their confidence in the long-term growth trajectory of the industry and of the need for significantly more semiconductors in all kinds of applications. I think it's without any exception, customers are talking about the medium- to long-term growth trajectory of the industry. That hasn't changed. It is also why, of course, there are short-term concerns like always short-term concerns. They say, "What am I going to do short term that will not impact my long-term targets?" That's basically the question, what they have. That's why, yes, some of them have adjusted their CapEx plans, but they say, "What is absolutely essential to secure our long-term growth path?" We will still do, which of course, this is why litho is a very strategic tool. This is why the litho orders keep coming. So in that sense, yes, things have changed short term, and they are reacting. But longer term, and in the CMD, the Capital Markets Day, we didn't talk about Q4 or Q1. We talked about 2025 and 2030. And that's exactly the discussion we're having with customers. I would even say that the longer-term road map this time with our large customers have intensified to a level we have not seen before. So like I said earlier, it's not getting easier, it's getting more complex. But it also means that the [cooperation] models that we have with our key customers are actually intensifying. And that just confirms not only the technology road map, but it also confirms the capacity plans that they have and the confidence we both have in the growth of this industry. So in that sense, Mehdi, nothing changed in 2 months' time. And just quickly regarding your calendar year '23. If the non-EUV revenue is growing by 30%, how should I think about the mix of metrology and inspection? Yes, it is in there. Yes, I think it's the 30%. I think it applies roughly to all of it. I mean you have to remember that our metrology tools have a very strong attach rate to our deep UV tools. So yes, they're in line. So it's for both. Amit Harchandani from Citi. Two questions, if I may. My first question again goes back to the non-EUV business. The significant growth that you have guided for in 2023, which admittedly is aligned with some of the points you made at the Capital Markets Day, but clearly, that's where I feel investors also need the greatest -- need to see the greatest level of comfort. So could you give us a sense on the DUV drivers, your level of confidence in the demand, the level of discussions you are having around lagging edge? And simply reverse engineering your 30% guide does suggest that you'll get pretty close to the 375 capacity number that you've talked about. So any thoughts on DUV would be appreciated. And then I have a second question. Okay. Yes, I think you have to realize, and it goes back to what I said earlier, that the biggest shortage in terms of demand -- or let's say, shortage in terms of capacity or shipment was in deep UV. So there is a backlog of deep UV investments that were planned by customers that we're now able to fulfill. You should not underestimate the size of the gap in deep UV, which is one element. And that's especially true for those geographic areas where we cannot ship EUV, but deep UV is the, as you could say, the workhorse for the mature and less critical semiconductors, i.e., China. So that space, let's say, is strong. On top of that, if you have more EUV sales, well, you don't make a chip for a semiconductor device with only EUV. I mean so if you grow the EUV base, we need a lot of deep UV layers. While the layer growth, nodal node is there, as it's always been there. So this is also an extra driver against the background of the fact that we can't ship enough. So this is what is happening. There are very few customers, which by the way, when you look at the industrial domain and you look at, for instance, some of the smaller IDMs, smaller -- I don't need to -- but it's important customers, but have just simply don't buy the same quantities as the 3 or 4 large customers. There in the industrial domain, they still call me and tell me, "Where is my deep UV tool?" And up to tools, multiple, yes? That's also happening. So it's the shortage that's still there. And it's, of course, I fully understand from an investor point of view to say, yes, but we also see the weakness in the consumer markets, we see inventories going up. But in a specific domain, anywhere between 45- and 20-nanometer, it's still short. And definitely in certain industrial domains like automotive and just industry in general. So this is still there. And this is why there are a couple of drivers. Like I said, it's, of course, China. It's -- EUV will need deep UV, and it's the deep UV OEMs that are in the sweet spot of where the shortage is. And then these are the reasons. Understood. Very helpful, Peter. And as a second question, if I may go back to the topic of the gross margin evolution over the course of 2023. You've talked about a gradual improvement over 2022. At the same time, looking at your top line guidance, it seems like your ASPs are going to rise over the course of 2023. You obviously have greater operating leverage. Is the mix effect so strong, that's triggering this incremental step-up in gross margin? I guess I'm just trying to get a sense of what that incremental step-up is going to be in '23? And what are the headwinds which are offsetting some of the tailwinds you have highlighted earlier? Yes, Amit, let me take that one. So many moving parts to the gross margin. We already alluded to one, which is the inflation one. So on inflation, it's important to recognize, yes, on the one hand, we will get some compensation. Yes, that will lead to an increase in ASP, but we're also getting inflation on the cost side, both on parts and on labor. So net-net, that will still be -- that will be an improvement over the 1.5% negative that we talked about last year, but it's still a drag on the gross margin in comparison to, for instance, what we had in 2021, but still an improvement over the year. So that's one element. The second element, of course, the fast shipment. Last year, we had a drag of 1.5% on the fast shipment. Of course, that drag is gone because as I mentioned, we expect the fast shipment amount coming into the year to also lose out of the year. So that 1.5% drag is gone. So that's also a positive in comparison to last year. Then volume goes up, both on the EV side and on the deep UV side, so that gives you a bit of a positive. Mix effect in the deep UV business is slightly negative because of the increase in the dry business that we also talked about. So that's a slight negative. And then there are 2 big ones to bear in mind. First off, as you would have seen, we're pretty cautious, if you want to call it that way, on the installed base business. And of course, you can assume that the service business will continue to grow. So then if we only guide 5% increase on the total installed base business, that implies that the upgrade business that we have in there is actually contracting. So that might -- that's up for speculation because that's the one that's hardest to plan for reasons that we talked about before. But we assume that the upgrade business will be lower and that, of course, is a big drag on the gross margin. And then the last element in the gross margin, and that's important to recognize, and we've been talking about this before, but I just want to emphasize it. We are incurring significant costs in our operations as it relates to preparing for both high-NA and preparing for the big step changes that we're making in our capacity. Do not underestimate that. That's a significant number. It's an even bigger number than it was last year. And of course, that continues until the point in time where the capacity is built and will be fully utilized or -- and/or high-NA is going to be utilized. So that's a drag that we continue to have, and it's bigger, as I mentioned, in '23 and -- than it was in '22. So those are the moving parts. That's why we say, if you add it all up, we're talking about a slight improvement over last year. I think it's important to note, Amit, that if you look at all of that, a number of the negatives will be gone, let's say, in the '25 time frame. And that's why Peter also reiterated in his video that we believe the 54% to 56% is still there because at that point in time, the capacity is there and should also be utilized. And the same high-NA at that point would be up and running. And also potentially, the installed base business at that point would be normalized. So I think that's the way to look at it. This is Sandeep Deshpande here. I just want to touch base back again at the gross margin. I mean you've talked about the â¬3.1 billion of fast shipment being recognized in '23 and then potentially as much going into the following year. I mean does that have an impact on the gross margin? Or is it completely neutral to your gross margin? And secondly, in terms of the cost crossover on the gross margin, which was expected to happen in the second half of this year between EUV and deep UV, is that happening? And I have a quick follow-up. Okay. So on the effect of the fast shipments, if indeed we're going to have the same number going into the year as we see leaving the year, then the impact is 0. Of course, the impact, and as I mentioned before, Sandeep, if indeed we're going to see some change in our revenue recognition, of course, that would be a potential plus for the gross margin. But we're not planning on that in the numbers that we've now shared with you. Yes, the crossover. So EUV system gross margin at this stage around 50%, so more or less the corporate gross margin. What we said is there will be a point in time where you will also see EUV system gross margin getting closer and closer to the immersion business. There, I think the introduction of the 3800 is going to be a big one. So the introduction of the E model, the 3800E, by the end of this year even though, as we mentioned, it's only less than a handful this year. So the impact on the year will be small. But once the 3800E is going to be the lion's share of the EUV tool, then you will really see a good boost to the gross margin that will have on EUV. And just one quick follow-up on China, Peter. I mean I know you don't really want to talk about it, given everything is still up in the air. But when we look at what your competitors have done in other markets, there could be a future impact to ASML from whatever is negotiated in China. How should we look at it into 2023 year such really? I mean clearly, without quantifying it, will there be an impact? Or do you think that you have enough in your backlog that you could recognize through the year, which would mean that there should be no impact to ASML at all? It's a good question, Sandeep, but it really depends on what the outcome of the export control negotiations are because we can speculate all kinds of scenarios, what that would be and what the impact would be. The only thing is that we have a safe buffer, you could say, between the demand and our output capability. So it fully depends on what the outcome is. And it's not that I want to talk about that. I don't want to talk about China. I want to talk about China, it's no problem. What I cannot do is just tell you what the impact of the potential outcome is because I don't know the outcome. That's the only thing that -- so I just don't want to speculate. That's the only thing. But I think I find comfort in the significant buffer, you could say, between the demand curve and our output capability. All right. We have time for one last question. If you were unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations department with your question. Now operator, may we have the last caller, please? So just a final question would really be on your indication on EUV ASPs in 2023. Now you obviously highlighted it's slightly down versus '22. Is that a conservative assessment? And if you could maybe think about the elements that pushed the EUV ASP to such high levels in '22, those will not be achievable this year. And then I have a very quick follow-up with the E system, obviously. Should we also assume that if we look at the increased current for that machine, that you will basically keep half of the increase for yourself and the other half will be given to your customers as per the usual? Yes. Thanks, Aleksander. So as I mentioned, gradually, over these calls, we've increased the ASP of the D model that we've given to you. So it started with â¬160 million and we said use â¬165 million, and I just said, use somewhere between â¬165 million and â¬170 million. You're right that if you just calculate the ASP in the quarters in 2022, sometimes you've got to some higher numbers. But the reason that, that was the case, as we've also explained on previous calls, those were one-offs as a result of revenue deferrals that were in there. So sometimes, that led to a remeasurement of those deferrals. And that then sometimes, because we're also looking at distributing those adjustments over a very limited number of tools, that could actually have quite a significant impact. But we've always said normalize that, don't take for granted that those numbers are the right numbers to use on a go-forward basis. So it's not that anything bad happened. As a matter of fact, something good happened because systemically, I think the ASP on the D has gone up. As it relates to the pricing of the E, yes, I mean, definitely, we're still sharing value with the customers. I mean that's a fundamental principle in the way we do business with our customers. We want to make sure that the incremental value that the tool provides over the predecessor tool is being fairly shared between the customer and ourselves. So that promise has not changed. If you look at the way that pans out because you need to recognize value is a whole bunch of things, value is better imaging quality, value is better overlay, value is higher productivity. If you add it all up, then in the past, you saw a pretty strong correlation between improvement in productivity and ASP increase. And that historically, on EUV, there was sort of a near 100% correlation there. As you know, ultimately, on the 3800E, we'll see an improvement in productivity, 160 wafers per hour to 220. That will be in stages, but ultimately the 220 is the stage that we'll get to. So that definitely means that we're going to have a pretty significant improvement of the ASP. And I think that, that also should play out in your models. And in addition to that, it doesn't mean that this goes without any cost increase. I mean it's not that go down straight down to the bottom line. Why? Because the 3800, as we mentioned in many occasions, actually sees the first introduction of technology that we are applying in the high-NA tool. So there is also a sort of new stages, so it's also a cost element there. So it's not a one-to-one increase in ASP going to the gross margin. But yes, you'll see gross margin increase, but also a cost increase because we are using the latest and greatest technology out of high-NA backported into the 3800. So just... All right. So now on behalf of ASML, I'd like to thank you all for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you. Thank you. This concludes the ASML 2022 Fourth Quarter and Full Year Financial Results Conference Call. Thank you for participating. You may now disconnect.
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Good day, and thank you for standing by. Welcome to OZ Minerals December 2022 Quarterly Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Mr. Andrew Cole, Managing Director and Chief Executive Officer. Thank you. Please go ahead. Good morning, and thank you all for joining us for our 2022 fourth quarter report call. I'm on Kaurna land today, and I'd like to pay my respects to the Kaurna's elders past, present and emerging. I'd also like to acknowledge and pay my respects to the traditional owners of all the lands on which we work. But joining me today, I've got Warrick Ranson, our CFO; and our Operations Executive, Matt Reed. They are going to take us through the Q4 financial and operational performance, respectively, and then we'll then move on to Q&A. The upcoming 2 slides are our usual disclaimer and compliance statements, which are available on our website for you to review at your leisure. In Q4, we saw strong production improvements at our operating assets, which was very good to see, annual group production and cost guidance was met and significant progress achieved for our growth projects. Construction, as you know, commenced at our West Musgrave project, and our feasibility study into a downstream nickel processing plant, to produce mixed hydroxide precipitate, confirmed that technical and commercial viability, which enabled this opportunity to proceed. At Prominent Hill, we completed the shaft pre-sink with ramp-up moved from half 1 to half 2 in 2025. Copper guidance at Prom Hill was also met for the 8th consecutive year. The cave broke through the surface at Carrapateena and our Pedra Branca mine ramped up to full production ahead of schedule. Finally, exploration drilling commenced at our Kalkaroo project, hopefully adding further opportunities in our unique growth pipeline. OZ Minerals generated full year revenue of $1.9 billion. As most of you will be across in December, we also entered into a Scheme Implementation Deed with BHP, under which BHP has agreed to acquire 100% of OZ Minerals by way of scheme of arrangement for a cash price of $28.25 per OZ Minerals share. This is a 49.3% premium to our [undisturbed] share price prior to BHP's initial proposal. OZ Minerals directors unanimously recommend that shareholders vote in favor of the scheme, subject to the independent expert concluding and continuing to conclude that is in the best interest of shareholders and absent a superior proposal. We are currently preparing the scheme booklet, which will include the opinion from the independent expert as to whether the scheme is in the best interest of shareholders. Once complete and approved by AFIC and the court, the book will be released and will include a timetable for the transaction. The scheme meeting is expected to be held in April. I'm going to speak to our plans for 2023 in more detail a bit later. But in brief, our focus for this year is on the safe delivery of our operational and growth plans, progressing our exploration activities to continue to build our organic growth pipeline, implementing our decarbonization road map, strengthening our culture and, of course, moving towards realizing our strategic aspirations. Many of you will be familiar with the evolution of our strategy from a copper focused -- from copper focus to encompass the broader suite of modern minerals that are expected to face an unprecedented demand as we'll continue to decarbonize and electrify at a rapid rate. Our strategy is part of The OZWay, which above all prioritizes value-creation for all our stakeholders. We believe that only when we are creating value for all our stakeholders will we be a successful and sustainable company. Moving on to the next slide, which shows our portfolio and the key provinces we are creating, along with their production, their costs, resources and reserves, and the growth outline. Each province is an opportunity for us to create something that is multigenerational with low operating costs. The substantial market opportunity for copper has been well commented on over the past 6 months. Oz Minerals has a suite of long-life, low-cost operating assets in low-risk jurisdictions, which produce the modern minerals needed to power this electrification transition. So I'm going to move into a summary of our Q4 production and costs. As mentioned earlier, we saw strong production improvements achieved during the quarter with a 21% lift in copper production, providing a strong finish to 2022 and positive momentum coming into 2023. Q4 was our highest group quarterly copper production on record. We met revised 2022 group copper and gold production and cost guidance, including our Prominent Hill, which achieved its copper guidance now for the 8th consecutive year. I'm now going to ask Warrick, and then Matt to talk through the results in more detail, please. So first, Warrick, over to you on the financials, please. Thanks, Andrew, and good morning, everyone. So over the last quarter, the operating environment for the sector continued to be mixed with higher domestic inflation and slowing global growth countered by an improvement in our own performance. That enabled us to achieve our revised cost and production guidance for 2022. Our operations are now observing a regular improvement of performance indicators and we are entering 2023 with positive momentum, as Andrew mentioned. Copper prices saw a positive movement over the quarter with renewed concerns about supply from countries observing political unrest, lower expected supply from Chile, and historically, low visible LME stocks of copper. We do see further upside potential for copper if China can manage it through opening smoothly, and the property sector begins to improve. Whilst global inflation remains high, it has now peaked in several countries as oil prices have declined and supply chain pressures eased. However, at this stage, we don't anticipate a major reversion in costs going forward. But supply is likely to retain at current pricing levels across a range of inputs, effectively maintaining the step-up in the cost curve the industry is experiencing. This reaffirms our margin focus and productivity drive and projects, such as the Wira Shaft and extension of the materials handling system at Carrapateena, remained critical success components for both this and, of course, our emissions reduction objectives. The Australian dollar saw downward pressure early in the quarter, which supported our U.S. dollar revenue before a shift in global sentiment caused upward momentum to build and close the quarter higher. In the short term, we expect and plan for an Australian dollar slightly higher than the current spot levels as we expect the U.S. dollar depreciation trend to continue and Australia's strong terms of trade to support a slightly stronger Australian dollar position. Moving to cash generation. We continue to focus on cash generation to support both the business and progressed our brownfield expansion activity. Expenditure on West Musgrave is currently funded by the $1.2 billion syndicated term loan facility. Operating cash flow generation for the quarter was certainly lower than we would have preferred with a number of year-end working capital adjustments, but part of our logic for increasing our revolver in May last year was to cater for the inevitable variability in cash flow timing versus the extended brownfield capital investment profile we are currently operating within. This is reflected in a significant uplift in our trade receivables at the end of the quarter where we loaded nearly 24,000 tonnes of provisionally priced concentrate in the last few days of December. And we've also continued to experience higher cost outlays, particularly in our underground activities, which also contributed to our cash position. And as for every year-end period, we also incurred an acceleration in sustainable capital works to close out our projects before the year-end. As noted, we invested a further $164 million into our brownfield capital growth projects, including underground mine and decline development. The Stage 2 TSF and crusher 2 and material handling system work at Carrapateena and, of course, the Shaft development at Prominent Hill. And it's forecast at the time of our half year results release, we received an income tax refund this quarter in relation to prior year corporate tax paid following an assessment of our eligibility for a deduction under the temporary full expensing provisions included in the 2021 federal budget. On Slide 14, our operating cost performance for the quarter was impacted by a few factors: poor weather in October and a slow start to the production quarter, but pleasingly, this improved as the period progressed; our focus on recovering production from the interrupted first half and that we again capitalized less of our underground common cost base given the activity focus, while ensuring we did not sacrifice mid-term production development and, of course, we're continuing to manage against our cave management strategy at Carrapateena, which together with ventilation constraints limited of [indiscernible]. We also saw the regular variability in the timing of scheduled plant maintenance to unit costs this quarter, albeit also with the higher cost inputs across a number of drivers. As mentioned earlier, we are still seeing pressure on a number of cost categories, although a level of stability has also started to emerge. Mechanical rock bolting, underground labor [rates], along with the process of diesel has kept C1 costs at prior quarter levels. We are continuing to work with our operating partners on driving further cost and productivity gains underground, whilst maintaining safe and reliable operations in what continues to be a very tight labor market. An area where we've seen improvement has been on freight costs with the BDI at its lowest level in 30 months. On 2023 guidance, as I noted, we do see a continuing weakening of the U.S. dollar and I, therefore, used $0.72 exchange rate in our assumptions. We don't see a lot of inflationary relief in 2023 and have also assumed a 60% increase in power costs, given that we have now come off our fixed term -- fixed price rather contracts. Whilst we will see the benefit of additional volumes over the Carajas and Carrapateena, Prominent Hill's lower copper production, together with a lower available byproduct credit and higher underground production will add to its unit costs. And with that, I'll hand over to Matt, who will take us through some more of the detail from the operations. Thank you, Warrick, and good morning, everyone. As both Warrick and Andrew said, I'll talk to the details of our operational performance in Q4, starting with Prominent Hill, which delivered a record-breaking quarter and continues to confirm its reputation as a consistent and reliable operation. Higher production rates throughout the quarter were enabled by schedule optimization, improved diversity of ore sources, excellent [indiscernible] and strong stope performance as well. We delivered 1.3 million tonnes at 1.3% copper at Prominent Hill, the highest quarterly underground production achieved at the site and a 32% increase over Q3. Copper production also increased in Q4 with higher grade reduction in mill feed rates, also improved our plant performance. We continued the extraction of remnant ore in Malu open pit, providing around about 183,000 tonnes of mill feed at just over 1% of copper. We continued diamond drilling in Papa, Malu and Kalaya Resource areas with these activities to transition to delineation and grade control drilling of stoping areas in 2023. We are continuing to progress well on the expansion of Prominent Hill. The shaft pre-sink was completed in December, and the site is preparing for Stage 1 raise-bore to a depth of 650 meters. At the surface, the headframe sheave deck preassembly and auxiliary crane structure were also completed civil works for the underground fan chambers are now complete with the installation of the associated overhead crane structures well advanced. All other aspects of the project continue to make timely progress. To offset the impacts of the challenging first half, resources were redirected during the year's production over development, which will now see the production ramp-up from the shaft move from the first half of 2025 to the second half. Moving on to Carrapateena where we also delivered a good quarter. Ore mined from underground operations is just over 1 million tonnes of ore at just over 1.6% copper with production of 15,300 tonnes of copper and nearly 23,000 ounces of gold, a solid improvement when we compare that against Q3. Increased ore availability plus the reduction in unplanned downtime enabled record plant runtime of 93.5%. Really, though, the headline milestone for the quarter was the cave breakthrough. Throughout the quarter, we continued our cave propagation program accomplishing significant vertical cave growth of 90 meters in December and ultimately leading to breakthrough in the final days of 2022. This marks a significant moment in the life of Carrapateena, particularly because as we've discussed before, it's a critical derisking event for ongoing operations, and the cave now through the surface, we can reconfigure our ventilation systems and mine planning can now be optimized to production rather than prioritizing the development of the cave. And that compromised the managed propagation has been the primary focus over the first two years of the mine's life. Another pleasing development, production commenced from the 8th sub-level cave during the quarter. Crusher 2 excavation commenced or progressed, and pilot drilling from the 2 of the ore passes which will feed that crusher, also commenced. It's really important to reflect on what we're building at Carrapateena, this will be a world-class mine. Substantial upside given the significant mineral resources located outside the mine plant and that provides a pathway to substantially increasing mine's life. We also have the aim of doubling average production through the block cave conversion to approximately 110,000 to 120,000 tonnes of copper and about 110,000 to 120,000 ounces of gold, and we'll continue to explore for deposits in proximity to Carrapateena for further potential and options. In terms of short-term progress and I've spoken to the continuing crusher chamber excavation. Now, I would also like to call out that substantial progress was made in Q4 on the materials handling systems, with a series of transfer station installations completed, the main switch rooms for the material handling system were also installed underground. Now over to the Carajas and Gurupi provinces in Brazil. In the Carajas East province, operational performance continued to improve at Pedra Branca with increased grade and recoveries contributing to about 4% improvement in copper and gold produced during the quarter. Pleasingly, a record -- monthly copper production record was achieved in December with 1,300 tonnes copper produced. The OZ Minerals option to purchase the Santa Lucia project, Vale, was exercised in January to January 2023, and discussions with the Brazil National Economic Development Bank regarding the acquisition of its 50% interest in the project are well-progressed. Santa Lucia is a potential additional satellite mine for the Carajas East hub. Further acceleration plans for Santa Lucia continued during the quarter with progress on the mineral resources update and a pre-feasibility study well advanced. The Carajas West province, Pantera Mineral Resource estimate update was completed in December and a scoping study there is progressing. And then finally in Gurupi province, a significant milestone was made in December with the approval of the land use concession agreement that's required for progressing the court injunction removal. The request now to remove that injunction has been submitted to the court and it's progressing. Thanks very much, Warrick, and thank you, Matt. We still got West Musgrave. As we said when we announced the go-ahead on our final investment decision on West Musgrave, it reflects our strong conviction of this great copper, nickel project. It unlocks one of the largest undeveloped nickel resources in the world, and it's underpinned by robust project metrics with expected lowest quartile costs. In terms of progressing the project, efforts have been focused on the recruitment of the project execution and operations readiness personnel, procurement of additional long-lead items, execution of key contracts and critical path construction activity, including the expansion of site facilities. Pleasingly, the team has got off to a great start in 2023 with site activities, including the commencement of the bulk earthworks program and the establishment the footprint for enabling infrastructure such as the construction camp. The existing camp facilities have also been expanded with capacity now beyond 150 rooms. In a further development, after extensive engagement with potential suppliers during the quarter, the Living Hub is now expected to be delivered under a design and construct model as opposed to a third-party ownership model, resulting in an additional $110 million of capital with an offsetting reduction in operating costs for the project. The Living Hub is being funded through contingency for now, but we'll reassess the level of contingency in future as the project progresses. Looking further afield, there are substantial growth opportunities at West Musgrave, and we hold the view that there is significant potential for new nickel and copper discoveries. The downstream nickel study reached completion confirming the technical and commercial potential of producing MHP for the battery value chain. Now to touch on our Kalkaroo project, which we believe has the potential to be one of the largest undeveloped open pit copper deposits in Australia. And we hold an 18-month option to purchase the Kalkaroo project from Havilah. In the quarter, after some delays associated with severe weather events and heritage clearances, exploration drilling commenced. This drilling aims to identify new resources to help unlock the province and maximize the potential value of the Kalkaroo deposit. Further, some key contracts have been awarded with extensive core scanning programs now underway. I'll touch now on our asset timeline, which illustrates we've been building a suite of assets and projects, which could present substantial growth opportunities. In terms of exploration update, during the quarter, work continued at the Yarrie project with Red Metals, which is located approximately 250 kilometers north northeast of Mt Isa in Western Queensland. Pending approvals, drill testing is scheduled for the second half of this year. At the Peake and Denison project, about 150 km northeast of the Prominent Hill mine, drilling was completed on the first 3 IOCG targets with Demetallica Minerals identifying copper mineralization at both the Mawson and Wills targets. I'm not going to dwell too long on the asset timeline slide, which shows the usual information on our different asset projects, stages of development and resources and reserves information. This was provided as an easy reference to track the estimated delivery of the different assets or projects in our provinces. We've also now provided 2023 guidance, which will see group production broadly in line with 2022, with improving production at Carrapateena and the Carajas East being offset with lower production of Prominent Hill due to the processing of both lower grade and lower volume of stockpiles compared to 2022. As we continue to invest in our strong growth pipeline, we will see a high level of growth capital this year. Group all-in sustaining costs are expected to increase compared to 2022, primarily driven by the full year effect of cost inflation, a stronger Australian dollar assumption and higher electricity costs as Warrick pointed out, which have recently come off longer-term contracts and are now operating under market rates and subject to potential electricity price volatility. We've also provided an update to Carrapateena's guidance to 2025, which you can find in both the pre-production report and the appendix of our presentation. So to summarize the quarter, as we head into 2023 with positive momentum following a strong financial quarter, thanks to the considerable production improvements across our sites. At Prom Hill, we've progressed construction of the Wira Shaft mine expansion and completed the pre-sink. The Carrapateena cave safely broke through to surface, which marks a significant milestone for the mine and an important derisking event in the ongoing operations. In Carajas East, Pedra Branca delivered strong operational performance with the mine ramping up ahead of schedule. We commenced construction on the West Musgrave project. The study and the site works are underway on the Kalkaroo project, which is a further compelling growth opportunity. Our focus for '23 is on the site delivery of our operational growth plans, continuing our exploration activities to build our unique growth pipeline, enhancing our cost control, implementing our decarbonization road map, strengthening our culture, and moving towards realizing our strategic aspirations, and advocating for a sustained focus on stakeholder value through the remaining BHP transaction process milestone. What we achieved this last quarter, and more broadly, has been driven by the tireless efforts and dedication of our team, and I'd like to thank them for this. So thank you to Warrick and Matt. Thanks for listening in. We've got time now for Q&A. So, operator, can you please remind people how to ask questions? Thank you. Look, the first one is on the cost. You've talked a bit about it. I just wanted a bit more color, perhaps. Just wanted to understand the headwinds you're facing, the underlying sort of inflation rates that you're seeing across operations. Obviously, you had pretty strong gold production this quarter, but still, were -- that was just about enough to offset that inflation. You talked about power costs as well, if you can provide a bit more color. Was that 60% increase in the power cost? And have you entered into that as a contract now? Or is that still on spot and you wait for a better opportunity to go into a contract? I'll come back with a second. It's Warrick. So, of course, just generally, our inflationary impact through the year has been around that sort of 10% to 12%, a little bit higher in some of the other areas. We -- as I said, that's sort of steady, so we're not really seeing any further uplift, [but it's] just prices aren't coming back down, so sort of living with those higher price levels now. With power, yes, so as we said, there's 60% increase in our power charges overall. Look, I think we're likely to see some variation between quarters. So right now, we're playing -- certainly playing the spot market. So it's at a lower level but we've sort of accounted for an average in terms of our guidance, obviously, through the year. So we'll probably see some fluctuations reported in our quarter-on-quarter costs. We tend to see higher power charges come through in the cooler months, of course. So that's added probably around about $0.17 to our C1 costs. So that's been a major -- one of the major uplift factors. Probably the other uplift factor to [call], I think the average FX '22 is about $0.69. So we were picking up another $10 out of FX in terms of our $0.72 a function, so collectively, it sort of got another AUD0.30 that we're carrying through in terms of our guidance. Got you. Okay. Just one follow-up there, Warrick. The BHP takeover offer, I mean, on the ground, are you seeing any of your workforce starting to get impacted in the sense that you think perhaps potential for more turnover rates as people sort of start thinking about a more permanent home? Or are you seeing no change in terms of ground conditions with your labor force? From my perspective -- I'll ask Matt to comment as well, but no, we're not seeing any sort of significant change. I think there is a lot of opportunity for our people in terms of the [scheme], if it proceeds and we're trying to obviously encourage them to continue with an open mind around the opportunities that exists for them in a broader business. Yes, I'd echo those comments. I think from an operating asset perspective, we're seeing really no change. People are excited about the future of whatever that might look like. And if we see where that takes us, but no change from an operational perspective. It's also important to add that BHP have also stated that they intend to keep the vast majority of OZ Minerals people. So, I don't think people are necessarily concerned on that basis. Yes. No, that makes sense. Okay. Look, the second one is on Carra. So, congrats, obviously, for breaking through the surface. I perhaps wanted to touch a bit upon the mill rates and mine grades. Is it simply just the lower grades in the mill development ore that you're currently utilizing? And then in terms of next year or calendar year '23, what type of mine production rates are you expecting in that guidance? I'm just trying to get a sense for how the grades might track versus what you're mining. Yes. No problem. So yes, you're right. The difference between milled tonnage and grade, and then mined tonnage and grade is development [waste], that as we spoke about at the last couple of quarters. We are intending to continue at around about the same sort of rates for '23. We suspect we might change that strategy in '24 once the -- once crusher 2 comes online. So our current thinking is around about the same rates through Phase 3 and we're mining around about the -- I think we're mining reserve grade on average through the course of '23 as well. Andrew, now that the Board has recommended BHP's offer, just wondering if you can actually comment a little bit about this further compared to, say, the last couple of conference calls. In particular, the offer price of $28.25, it's still well above consensus NAV for OZ Minerals. So I can see why you might -- the Board might have recommended. But just wanted to dig into some of the underlying assumptions, which you've observed during -- with the Board recommending it. First of all, on the financial assumptions and operating assumptions, that's copper and nickel price and WACC on financial assumptions and on operating assumptions with respect to potential mine life extensions and scalability and also synergies, can you maybe just comment about where you think the differences have been between the Board's views and, say, the market's views? Okay. Look, I'll make a couple of pretty high-level comments here, Paul, and I'll ask Warrick to build on these. Look, the first thing I'll say is that, the OZ Minerals Board and all of the directors have unanimously recommended that shareholders vote in favor of the scheme. That's, of course, in essence of the superior proposal. It also requires an independent expert concludes and continues to conclude the schemes in the best interest of our shareholders. And that recommendation didn't come lightly. It's come based on deep and careful consideration of a range of factors. They include the OZ Minerals value on a stand-alone basis, of course, and that takes into account, amongst other things, commodity price forecasts, macroeconomic outlook, operational delivery, the projects, the capital cycle we're stepping into, et cetera. So we have -- that independent expert report is currently being prepared. I might just get Warrick to take us through the independent expert report and then the scheme which will -- I think, which will then answer some of your questions, Paul. Do you want to take us through that? Yes, maybe I'll just talk about price to start with, Andrew, because I think that's maybe where Paul is sort of coming from. But I mean, consensus long-term hasn't really moved, Paul. So I think it's about [3.45], I think the range has increased a little bit in terms of critical upside and obviously, there is a bit of a lag there, but we haven't seen a huge uplift despite the short-term market increase. I mean, there's still plenty of mine side risks, particularly, in South America, as we've talked about. So, on the supply side, that's certainly a factor. But the economic indicators in China is still a little bit weak, as we mentioned, around the property sector still struggling. So I think whilst we're seeing certainly some uplift in EV sales and battery installations there as positive drivers, there's a level of caution that still applies. So -- and I think, again, that sort of reflected in consensus. So, again, our Board has certainly taken a long-term view in terms of where that is, and it is a matter of also thinking about capital and risk in those considerations as to where it's at. So in terms of the independent expert, we're still -- we're working with the independent expert. We haven't -- that's still being worked through as we haven't seen any outcomes from that. I suppose that's why they're called independent in some ways so they can make that assessment. That will come in line with the Scheme Booklet, as Andrew mentioned. We hope to be able to issue that into the market in March for a shareholder vote in around about the middle of April. So we're continuing to work against that. And of course, the Board's recommendation is on the basis of the independent experts, concluding, but also continuing to conclude that the scheme is in the best interest of OZ Minerals shareholders. Okay. Just -- maybe just specifically on the synergies. Have you tried to quantify the synergies between Carra and Prominent Hill and BHP's Olympic Dam operations, particularly the 2-stage smelter and also the synergies potential between West Musgrave and Nickel West? And if you -- I'd be interested to know what sort of estimates if you can share those? And will the independent expert dig into those synergies and calculate those? A couple comments because we -- as we've answered -- we've talked a bit about this before, Paul, in that when we were -- the Board was forming a view on BHP's offer originally and then the revised offer at the end of last year, we did dig into synergies to understand what the synergy benefits may be between our assets. And we did form various views and various opinions based on our assessment and third-party assessments, and they went into the decision-making process to land on a unanimous Board recommendation for the '25. In terms of the specific synergies that exist between [OD] and the OZ Minerals assets and Nickel West and West Musgrave, that's really a question for BHP to answer, not really for us. We are leveraging as best we can the synergies between our assets currently. And we have historically spoken with BHP about commercial opportunities to exploit various synergies. But in terms of the specific synergies themselves, you really need to ask BHP what they believe they will achieve from a synergistic respective. I think that's a question for them to answer. All right. And then lastly for me, just again on the topic of BHP. You want to discuss with them around specifically West Musgrave and the design and timing with West Musgrave. If you got any comments about -- from BHP about are they happy with the design and also the timing of that project? So I can tell you under the current agreement that we've reached with BHP, I'll get Warrick to answer this, if I miss anything. We're progressing the construction of West Musgrave as released and as outlined in the study that we released last year. So that project is progressing. Contracts are being issued. There is a process here, which I'll ask Warrick take us through to review material contracts with BHP. But in essence, we are continuing to construct the project as we originally scoped. Yes. No, I think from a BHP perspective, obviously, it's a core interest to them in terms of the project, and that certainly supported the ongoing project development. So, as Andrew mentioned, I think the only thing that they wanted to make sure of is, if they do -- if the scheme does progress and becomes effective, then any opportunities that they might have to add some broader procurement power, purchasing power, et cetera, into the mix will be something that they'd like to consider. So certainly, from our perspective, we're full steam ahead in terms of West Musgrave. Two questions from me. Just wondering, just looking at the guidance there, I think the longer-term guidance a few months ago, I think, in December, there was a reserve update. And from memory, copper reserves from block cave were lowered about 200,000 tonnes. And now CapEx has been deferred, I think being flagged as lower priority spend being deferred. So just wondering what has changed. And how does low priority spend -- what does actually low priority spend mean? And how does that impact the overall mine plan? Yes. No problem. Yes, I think there's probably a couple of moving parts there. We have been certainly -- well, I would say, cutting our costs to see a more difficult external environment. So we have deferred, as you say, lower priority, lower value projects. There's nothing really very significant in that list, a lot of smaller activities. We don't believe that they will have an impact on the safe operation of that facility. The other thing that's going on is, we are getting -- sorry, before I go to that, there's another piece where there are activities that I think just as we better understand the operation, things like tail storage facility, we're getting improved performance out of the dam. We're getting more capacity through effectively improved [angle of proposed], let's call it, for the tailings. So things like that have allowed us to save capital. And then I think the other big driver is, we're getting much clearer now through the course of last year, we brought together the block cave project and the existing operation on some of the overlaps and synergies, let's say, between that interface of sub-level cave or block cave. So that's allowed us to make a reasonably substantial reduction in capital -- sustaining capital associated with a better understanding of that interface. So that is sort of the 3 blocks to think about as far as Carra, better understanding the performance of the asset, example, tail storage, decision to remove some of our lower-value projects without material impact and then better understanding of the interface between the sub-level cave and the block cave allowing us to optimize and remove activity. Yes. I think in December, the reserve update, there was from Block Cave 1, 200,000 tonnes of copper were -- reserves were lower by that. And also Block Cave 2, I think, about 60-odd tonnes. Just wondering what drove that. Yes. Okay. Again, a couple of things. So one is just the product of improved understanding of the ore body we drilled and then the second factor was we decided to bring some of the higher-grade material at the -- effectively what was at the top of the block cave and therefore, would have been at the end of the life of the block cave that we would have seen that through our processing facility. We decided to bring that into the sub-level cave. So what that does is brings forward that higher-grade that otherwise would have been at the end of the mine life and potentially buy that phase in whatever period of time that is dilutive. So they are 2 things that drive those changes around the block cave resource and reserve. Sure. And just second question was on the development rates at Carra. Seems like they are 2-year low. Just was production preferenced or is it more to do with breaking through the surface? Yes, it's a little bit of both. So we were focused on [indiscernible] certainly in the last quarter, as we've talked about before, that has constrained activity on the ground and particularly at challenges ventilation. And that can impact our development activities more so than our production activity. So there's an element of that. Development rates have come up a little bit over the course of this year. I think probably the other thing to keep in mind is that, development rate you see right at the start of the life of the asset are not required to maintain performance into the future. So around about, I think, 3,000 meters or so a quarter is where we expect to see it over the next year or so. [Operator Instructions] At this time, there are no further questions at this time. I would like to turn the call back to Andrew for closing. Yes. Thank you very much, operator. Thanks, everybody, for dialing in. Thank you for your questions. If there's anything to follow-up on, please give Travis a call, and he will know the right person to come in and answer the question. And we will speak again next month with our financial year results. So thank you very much. Have a great day.
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Good morning and welcome to Lazard's Full Year and Fourth Quarter 2022 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I will turn the call over to Alexandra Deignan, Lazard's Head of Investor Relations and Corporate Sustainability. Please go ahead. Thank you, [indiscernible] good morning and welcome to Lazard's earnings call for the fourth quarter and full-year 2022. I'm Alexandra Deignan, Head of Investor Relations and Corporate Sustainability. In addition to today's audio comments, weâve posted our earnings release and an investor presentation on our website. A replay of this call will also be available on our website later today. Before we begin, let me remind you that we may make forward-looking statements about our business and performance. There are important factors that could cause our actual results, level of activity, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements, including, but not limited to, those factors discussed in the company's SEC filings, which you can access on our website. Lazard assumes no responsibility for the accuracy or completeness of these forward-looking statements and assumes no duty to update these forward-looking statements. Today's discussion also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measure is provided in our earnings release and investor presentation. Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer; and Mary Ann Betsch, Lazard's Chief Financial Officer. Mary Ann will start the discussion with an overview of our financial results, then Ken will provide his perspective on the outlook for our business. After that, Ken and Mary Ann will be joined by Peter Orszag, Chief Financial Officer of Financial Advisory; and Evan Russo, Chief Executive Officer of Asset Management as they will open the call to questions. If you are currently on the call, please make sure your line is one mute. Thanks, Ale and good morning everyone. Today, we reported fourth quarter 2022 operating revenue of $671 million, a 31% decrease from record revenue of 968 million in the fourth quarter of 2021. Operating revenue for full-year 2022 was $2.8 billion, 12% lower than full-year 2021. For context, this represents the second highest annual operating revenue in Lazard's history, following the firm's record operating revenue in 2021. In Financial Advisory, we've reported fourth quarter revenue of $404 million, down 34% from last year's fourth quarter. For the full-year, operating revenue was $1.7 billion, 7% lower than record revenue in 2021. Despite the challenging market conditions of 2022, robust strategic M&A activity drove financial advisory to a record first nine months with activity slowing during the final months of the year. While the pace of announcements and completions moderated amid rising macroeconomic uncertainty, our client engagement remains active across geographies. In restructuring, our discussions with clients are increasing as a result of rising interest rates and demand for liability management and we are currently engaged on a number of assignments in both the U.S. and Europe. In Asset Management, fourth quarter operating revenue was $259 million, 25% lower than the fourth quarter of 2021. Annual operating revenue was $1.1 billion, 17% lower than 2021, primarily reflecting lower average assets under management and lower incentive fees. Management fees and other revenue was 245 million for the fourth quarter, 18% lower than the prior year period, reflecting a 21% decrease in assets under management year-over-year, partly offset by a slight increase in the average fee rate. Management fees and other revenue was $1 billion for full-year 2022, a 15% decrease from the prior year. 2022 was a year of significant market volatility, geopolitical tensions, and quantitative tightening, which manifested in lower valuations across asset classes globally. Although markets showed signs of improvement in the fourth quarter, investors reallocated portfolios at year-end to de-risk assets and increased liquidity. The strength of the U.S. dollar was also a sustained headwind for our asset management business as approximately two-thirds of our AUM is held in non-U.S. dollar denominated assets. As of December 31, 2022, we reported AUM of $216 billion, up 9% from September 30. This increase was driven by market appreciation of $14.4 billion, foreign currency appreciation of 7.7 billion and net outflows of 3.7 billion. Net outflows in the fourth quarter moderated significantly from the 6.7 billion in net outflows during the fourth quarter of 2021. Average AUM for the fourth quarter was $211 billion, a decrease of 23% from a year earlier. On a sequential basis, average AUM was essentially flat, compared to the third quarter of 2022, reflecting stabilizing market conditions and the weaker U.S. dollars. As of January 27, our AUM was approximately $230 billion, driven by market appreciation of 11 billion, foreign currency appreciation of 2 billion, and net inflows of $200 million. Now, turning to expenses. We accrued compensation and benefits expense and a 59.8% full-year adjusted ratio in 2022, compared to 58.5% in 2021. The 2022 ratio primarily reflects lower than anticipated advisory revenues in the fourth quarter, along with investments to expand our businesses and to ensure we are well-positioned to capitalize on market conditions when they improve. Our adjusted non-compensation expense for 2022 was $518 million, 10% higher than the prior year, reflecting the impact of increased travel and investments in technology. Our effective tax rate for full-year 2022 as adjusted was 25.7% versus 23.9% in 2021. The year-over-year increase was primarily due to the geographic mix of our earnings. We expect our annual effective tax rate in 2023 to be in the mid-20%. We generated strong cash flow in 2022 returning a record $936 million to shareholders, including 182 million in dividends and 692 million in share repurchases. Additionally, yesterday we declared a quarterly dividend of $0.50 per share. During the fourth quarter, we bought back 2.4 million shares at an average price of $32.91 per share. During the full-year 2022, we repurchased a record 19.7 million shares at an average price of $35.17 per share. Our weighted average share count as of the fourth quarter was 97 million shares, a reduction of 14% from the prior year quarter. Our total outstanding share repurchase authorization as of December 31 was $302 million. Ken will now provide his perspective on our performance and outlook. Thank you, Mary Ann. While the global macroeconomic environment remains uncertain conditions are generally better today than many were anticipating six months ago. Lazard enters 2023 having a [indiscernible] navigated the volatility of the past year. The diversity and breadth of our business allowed us to weather the worst of these conditions and achieve the second best annual operating revenue in our history. However, the global slowdown in M&A activity in this â and announcements in the second half of 2022 caught up with us in the fourth quarter and is likely to continue to impact our financial advisory performance through the first half of 2023. Although the near term outlook remains uncertain, we were cautiously optimistic regarding an improvement in the macroeconomic environment going into the second half of this year based on several factors. While global inflation remains elevated, recent data indicate that price increases are beginning to moderate. Central banks are slowing the pace of rate hikes, which may mean a shortening of the current tightening cycle. Equity markets have rallied, spreads have tightened, and volatility has receded, unemployment is generally holding steady around the world and most developed economies are maintaining GDP growth. And since the beginning of the year, we've noted an increase in M&A dialogue, while market sentiment seems to be improving. We also took advantage of last year's downturn to make strategic investments in our Financial Advisory business. These investments included adding senior financial advisory hires in the U.S., Europe, and the Middle East, broadening our private credit and infrastructure advisory capabilities, launching our new geopolitical advisory group, and expanding our venture and growth banking group into the U.S. Because of these in-depth investments and others taken over the past year. As the M&A environment picks up, we are well-positioned to capitalize on the recovery and gain market share. Turning to our asset management business. There has been a notable improvement in the overall climate for asset management since the end of the third quarter. Assets under management are up approximately 16% since Q3 2022, positively impacting both revenue and the businesses operating leverage going forward. Looking at performance, approximately two-thirds of our composite strategies with benchmarks are outperforming on a one-year and three-year basis. The weakening of the U.S. dollar is also providing a benefit as long standing headwind for our business is abating. Amid this improving outlook, we remain focused on our asset management clients, many of whom are reallocating portfolios in the wake of last year's repricing of risk. Investors sentiment also continues its shift towards research driven fundamental investment style in which Lazard has global breadth and expertise. Our asset management business has momentum behind it and is well-positioned for 2023 with a diverse array of innovative strategies and custom solutions to meet the investing needs of a sophisticated client base. Finally, 2023 marks the 175th anniversary of Lazardâs founding. For the better part of two centuries, our firm is thrived by staying focused on our core businesses and guiding principles, striving for excellence, empowering our people, and engaging with clients. Lazard continues to strategically invest in people and technology, maintain discipline around expenses, deliver profitable growth and shareholder value, and remain focused on serving our clients. I wanted to focus on the asset management side, it looks like another strong quarter on the fee rate here. And I know you noted earlier that part of this was from a mix shift. So, is this the right rate to assume going forward or are there any other puts and takes there? Hi Manan, its Evan, I'll kick that off. Yes, look, we've seen â as you've seen over the last couple of quarters, the fee rate is starting to tick back up. As we've said in the past, the bulk of that is driven by the asset mix. A little bit more on the vehicle side this time as well, we saw some vehicle mix have a positive impact for us. We saw more coming into funds a little bit less from some of the sub advised and some of the SMAs that we have in our business. Also, as we pointed out over the last couple of quarters, some of the larger outflows that we had were in lower fee mandate. So that would as you point out, sort of lead us to a starting run rate that's probably a little bit higher than it was a year ago. So, I think in general, yes, it seems to be the outlook, seems to be more stable than certainly the past few years where we're seeing it more contracting on a more steady pace and now it seems to have leveled off a little bit. I think it'll be a little bit bumpy still. I mean there's going to be quarter-to-quarter movement because all these flows sort of do play into it. The mix has a huge impact of it. And so as markets move around, you're going to continue to see that jump around a bit. But generally, it feels a lot better than it's been over less several years. Great. Thanks, Evan. And maybe just a big picture question on the strategy in the asset management space. What is the environment like for lift-outs? What is your capacity and willingness to do them? And any general updates in your strategy as we look ahead to 2023? Yes, sure. So, when you think about the market last year, certainly the volatility has played a huge role in the way a lot of the teams certainly smaller firms have been thinking about their own strategies. And whether or not they can go at it alone. They shift more towards larger institutional clients thinking about having less managers in their portfolio all that plays into the idea that there's a lot of these smaller firms and certainly smaller teams from smaller firms that are looking for homes on bigger platforms and certainly they're focused on ones that have global distribution, which is a significant benefit for us given the breadth and depth of our distribution capabilities, the breadth and depth of our research. So, we are certainly sought after by many of these teams. We are constantly reviewing what's out there from both a strategic acquisition and a lift-out scenario, sort of bringing teams onto the platform. We've done that selectively over the last couple of years. I would say from the market environment, you're asking how it feels today relative to the last couple of years. I would say the pace given the volatility of markets over the last year has certainly picked up in terms of the number of conversations, the number of firms that are looking to join larger platforms. And so, I would expect that to continue over the course of the year. Good morning. Hey, I guess first I want to start on the move in the dollar. So, for Lazard, that's a bigger deal than some of your peers. And so, I'd like to just maybe remind us, kind of the order of magnitude, the benefit of the weakening dollar on both advisory and asset management? And then just, kind of bigger picture how that's driving strategic dialogue with clients as well just given the market shift we've seen here recently Let's break it into two parts. Evan, do you want to take the impact on the asset management business and I'll cover the advisory and the client side? Of course. So Devin, as we pointed out in past calls, our asset management business is certainly weighted towards non-U.S. dollar AUM. Approximately two-thirds or so of our AUM is in securities that are non-U.S. dollars. So that translation impact has had a big impact on our AUM generally as a firm over the last several years. I mean even last year the FX that we call out was a $9 billion negative just that translation impact of our securities. So, it certainly is a positive as you've seen just in the last four months. So, Q4 plus January, where you've seen a significant turnaround on the FX side with a weakening dollar. So that plays in just both on the translation of AUM. It also speaks to the way in which the investor sentiment and general investor sentiment of allocation of portfolios has been changing a little too. There's been a big focus on U.S. dollar investments, U.S. centric investments, and people shifting portfolios to where the growth has been, and where market appreciation has been, which has been more U.S. focused than international global and certainly EM over the last several years. So as that starts to tilt and as people start to think about an environment where you may have several years of a, not only a weakening U.S. dollar, but certainly not a strengthening U.S. dollar that starts to abate as we just called out, that would certainly be a positive for our business. And that generally will work from both the focus of investors thinking about allocating their portfolios, as well as the translation of AUM back into our business as well. And on the advisory side, two things to comment on. First, the advisory business itself less impacted one way or the other we tend to have a lot of our costs in local currency where the revenues are, so not as much impact. And in terms of clients, look, again, over time, I don't think that small shifts in currency make that much difference in terms of cross-border activity. When you have a large shift, maybe there's a unique positioning of a company. It's cash flows, the way it can be financed that would help, but generally speaking, if someone's buying an asset in a different geography, they will finance it accordingly. And so, one way or the other, it hasn't had as much impact as I think many observers think it does. Okay, great. Just a follow-up question on the growth of the firm. So, the [AdvisoryMD headcount] [ph], I think, is up about 30% over the last three years. We've tracked a lot of â managing directors have joined the firm, so you guys have been I think more active over the last three, four, five, years in recruiting than you had been for some period of time. So, maybe just talk a little bit about just given the lags that occur when you bring somebody in externally or even promote somebody to, kind of hitting full run rate of potential? Like how this, kind of shift has set you up maybe for growth move forward? And then just also just expectations for continuation of bringing in senior talent just [indiscernible] already pace we've seen? Sure. So, on the ramp or onboarding, it does take somewhere between a year or two, sometimes three for people to be fully productive that can stretch out to four. In some cases, it depends on the sector and the person obviously. And the internal promotions are a bit different than the laterals, but I think you should be thinking about a year or two to become fully productive. So, you're right that we've got this pipeline of managing directors that we've been adding in private debt in the Middle East, in Germany, and elsewhere that will be coming, kind of fully online in the months and years ahead. And then with regard to the opportunities, we still do see significant opportunities for us to be picking up additional people and wallet share. And in fact, the hiring environment may become more attractive. So, we need to balance the fact that we're in a â that we need to balance the fact that there is a significant amount of opportunity out there in terms of people that are available against just being responsible on costs in the way that Ken already emphasized. Hey, good morning, Ken and Mary Ann. How are you? So, wanted to ask a follow-up, Ken, on your tone around advisory. That certainly sounded optimistic and seems like an improvement from the tone that we heard from December when there were a bunch of updates with conferences. So, we'd love to explore that a little bit and get a sense about whether or not it's just dialogue. In the past, we've heard that there's been a bit of a hesitance around pulling the trigger on deals? Are you sensing that that hesitance is abating or is it more that the dialogue is ramping and once there's some improved clarity, then we'll really see it follow through? Great question. And I think you're right. There has been a bit of an improvement in sentiments from where we were at â in the middle or beginning to middle of fourth quarter. So, a couple of things to note. I point to these a lot equity, credit conditions, equity prices, credit conditions, sentiment, and then usually there's a catalyst. I think I'll use the same old story here. On equity conditions, obviously, valuations are probably more reasonable than they were prior to the downturn early last year from the invasion. Credit conditions are clearly improving, and spreads have tightened since the beginning of the year. I think yesterday's announcement by the Fed more importantly, the reaction of the market to it because I think there may be a disconnect there a little bit, has been constructive. And when you look at credit conditions and you think about where rates are today, historically, they're still pretty low, compared to most periods of time and such. And then finally on sentiment, I think generally speaking, people, and most observers would concede that today things are just better off than what they would have guessed they would be six months ago. And I think that helps around sentiment. I think also the fact that GDP numbers both here and in Europe have been better than what's expected. We have China coming online in second half of this year. So, generally speaking, I think the overall environment and sentiments in the boardroom is probably starting to improve. That is a precondition for activity with bad credit conditions and unconstructive sentiment, you're not going to get M&A activity. Now, we have all three factors yellow, if not heading in a couple of cases towards something that almost resembles green. I think you're likely to see â start to see some pickup in activity. And then the catalyst on this, I think they continue to be very similar to what they were out of the downturn. The energy transition is going to be an enormous catalyst for activity in the M&A space. I think we're going continue to see enormous pressure on re-shoring into the U.S., which again will lead to some M&A activity, but quite a bit of infrastructure investment around many of these projects. You still have some restructuring activity, which I think will continue over the next couple of years. It may not get to the level that we've seen in previous cycles. I don't think it will, but may last longer and such. So, I think overall, we're seeing pick up in dialogue, we're seeing obviously an increased rate of activism, which usually results in corporate events, and with credit conditions improving, those corporate events can take place. And so, that's likely to lead to some pickup in announcements as the year progresses. So, that's kind of the advisory side. That asset management, I think just improving markets and the shift towards where we sit in the spectrum of investing and the fact that the dollar is weaker really tends a better environment for us, probably a better environment for us than we've seen in several years. Excellent. Thank you for that detailed run down, Ken. That's appreciated. And also, thanks for the asset management update through Jan 27. Evan, I believe you're on usually the end of the month can be pretty active for flows given your institutional orientation. So, any insights into whether that plus 200 million in flows is going to hold and we would see a positive month or how should we be thinking about that? Brennan, as you said, the last couple of days, you can always see some movement and some of that we don't actually see right away, sometimes take a couple of days post quarter-end until you get all the specific movement on some of the models and wraps and other things that we manage. So, it does take a couple extra days post quarter-end, but so far it feels like a good â feels like a good month for us from a flow perspective. I would say, it's very similar to what Ken mentioned earlier. We started to see that moderation, the more balance in our flow story to November. December had its usual quarter-end, year-end type reallocations, we also â with the volatility in the markets and the, sort of the shift up, we had less people wanting to put money to work and to allocate. As we got into this year, we're continuing to see good activity levels, a lot of interest in the types of products that we specialize in deep research fundamental investing that we do, the market certainly has moved a little bit away from the more growth and momentum and more towards relative value. And that space, the quality space, which is where [we a lot] [ph] of focus. And we're seeing good activity levels from clients, lots of interest in a whole host of our products across all of our platforms. And so, so far, it feels more balanced as we said towards year-end and that trend is continuing as we got into the beginning of this year as well. Hey, good morning. So, I just want to touch on the â on your European M&A business, you were obviously very clear on the broader advisory backdrop and outlook there, but given your unique perspective on Europe, how has your â the outlook for European M&A changed? Well, I was pretty surprised by our performance in Europe last year because we ended up having, in-spite of everything, I think record years in Europe on our advisory business. And so, given the events of Europe and the slowdown in the economies in Europe and all the fear, I was pleasantly surprised by that. So, I'm sitting here today, kind of pinching myself. Clearly, the first half of the year is going to be slower than last year, just given the pace of announcements in the second half of last year, but I'd say it's pretty even right now in terms of U.S. and Europe in terms of dialogues. And so, we may see the same, kind of pickup as the year progresses in Europe as we've seen in the U.S. if these dialogues turn into announcements, and so we'll see. I wouldnât differentiate too much between my comments about the M&A market generally and thinking there are big differences between Europe and the U.S. moment. That's very clear. And then, sort of related one, obviously financing markets have begun to reopen. Maybe you could speak to the specific impact this is having on your business or maybe it's too early? And then have there been differences in the impact of financing markets reopening across Europe or the U.S or is it sort of more similar? Well, look, I think as I said before, this is [indiscernible] to M&A activity, these events all have to happen, unique constructive equity markets or valuations in equity markets you need more favorable credit conditions and improving sentiment for M&A to start to evolve and tends to be pretty procyclical. So, I think right now the fact that credit conditions are improving and they're clearly improving in the U.S., as well as in Europe, I think you're likely to find that dialogues pick up as a result of that and then announcements will follow if sustained. And that's really the key thing. I mean, we're in a more positive environment right now than we've been in over the last year. I think generally speaking the consensus is that things are better than anyone anticipated they would be at this point. If you look back six months, if this market stays â if this kind of sentiment stays intact, that's a good sign for our advisory business as the year progresses. Hi, guys. Good morning. So, just one on the restructuring cycle. I think there's been some optimism that the cycle could be relatively elevated for a prolonged period of time. And it sounds like from your prepared remarks that this thought remains, just wanted to take a pause on that sentiment today. I mean, I think there's some kind of shifts in expectations since the start of the year and particularly for heightened expectations for soft landing. So, just wanted to get your updated thoughts there, particularly as we see Lazard on a lot of mandates and as we sit through the news. Yes, I think our view on this is, probably a little bit more nuanced in the following way. I'd say that the restructuring cycle here is going to be liquidity driven more than it is anything else that is a lot of the financings have been pushed â were pushed out. They're kind of covenant light. So, I think that the transactions that we're going to see more of, we're going to be more liquidity driven. And so, from our perspective, this cycle may last longer, because of that, but it may not get to the heights that we've seen in previous cycles, but we'll see. That's premised in part on the improving outlooks for GDP in both here and in Europe. But again, a lot depends on how that unfolds, but that's our hunch at the moment. Great. And then shifting gears just on the asset management. You guys recently announced the hire of Jennifer Ryan from BlackRock for the asset management business. I'm just curious, Evan, if you could, kind of speak to the rationale of the hire, especially since you've been at the helm for that business for over a quarter now? Kind of would just love to hear what you expect for her to bring to the table for Lazard and how she'll be additive to the leadership capabilities? And then just appreciate the update to AUM inflows was just curious if you could drill down a little further into, kind of the products where you're seeing both strengths, as well as weaknesses as it relates to that 200 million in inflows youâve seen so far year to date? So, as Ken mentioned, look, we seek to continue to focus on investing in talent when we find great people. And I think this is just a continuation of that. We've obviously have a tremendous focus on continuing to strengthen the team we have and add to it frankly to take advantage of what we're seeing in the marketplace today. In many ways, making senior hires in distribution is not surprising for us, right. We're continually expanding our distribution network, our global distribution across all of our channels over the last several years. It's been a strategic focus is for us to continue to broaden, strengthen, and deepen in every channel we have, adding Jen to this team is just in the continuation of that and continues to show the focus that we've got to make sure that we're capturing all the potential value off the great performance of so many of our funds. As we said, more than two-thirds of our funds have been outperforming on a one and three year basis. It's a great opportunity for us to be out there. We're seeing a lot of interest in so many of our products and I think just continuing to strengthen and deepen those relationships and just continue to build out a broader team and augment the great work that's been done for so long by so many of our other teams. It's just a great addition to the team. I don't think there's anything more than that just the continuation of all the things that we are doing to strengthen that focus. Our focus on distribution will continue. We're going to continue to build out and strengthen and deepen that team. There's just a lot of places that we have opportunities for. It's been a strategic area for us. It will continue to be under my realm as well. And I'm very excited to continue that strength and to work with Jen as she joins us here early part of this year. In terms of the flows, I would say, it's been fairly broad. I'd say the areas of strength, we continue to see strength in Q4. It was a lot driven by fixed income, [indiscernible], some of our local strategies, U.S. equities and others saw some very nice flows, the beginning of this year continues on that strength where we're starting to see it more broad based. Even the EM space is seeing a lot of quant searches, a lot of quality searches that we're participating and working with clients for new mandates that are coming online over the first six months of this year. So, I would say it's not any one specific area. It's been spread out over most of our platforms. And it continues to feel like it's been strengthening and it's across the board. I'd say particularly our [plant business] [ph] continues be very, very active in this environment and continues to play well in the spaces that they're in. And a lot of that is driven by just the great performance of so many of the teams. I think you're starting to feel, as I mentioned, moving away from markets that were momentum in growth and, sort of getting back fundamentals across the board the way we invest. I think you're starting to see that in performance because the markets are becoming more rational. These are the types where areas where you can truly see the benefit of the Lazard platform and the great people that work here that produce great returns. And so, I think it's all sort of coming together and markets starting to move in our direction and I think investors' sentiments and allocations are moving into that area. And we're just going to continue to get out there and try to capture as much of it as we possibly can. Hey, good morning. You talked a little bit about, Ken, about starting some new groups like Geopolitical Advisory. We've talked a little bit about restructuring, but maybe taking a step back and thinking about your non-M&A businesses more broadly, is there any way you can kind of help us think through the size, contribution from those businesses and how you think are they a little bit less volatile than M&A? Can they help you, kind of get through this slower M&A period in a reasonably good way? How do we think about those businesses near-term and over the long-term? Sure. Look, I think that they are less volatile in the sense that they're less lumpy. Theyâre often â many of these businesses tend to be more retainer based fee structures rather than dealer success based fee structures and for that reason they are less lumpy. With regard to the size, look we're â I mean, geopolitical is a great example. We just launched it a few months ago, so it is in a growth stage and we're really pleased with the initial feedback from clients and the mandates that we're exploring and winning, but it's early days and so you shouldn't expect something after a few months to be a significant share of revenue obviously. What we're excited about is building that over time. So, broadly speaking, you're spot-on in terms of the objectives, which is to obtain not only additional sources of fees and revenue, but things that have different volatility characteristics. And then another thing I note is, and geopolitical is a great example of this. Anything that expands our network gets us into board rooms and C-suites, can have spillovers in a good way into our M&A business also. And so thatâs another objective for many of these new things that we're trying. Okay. Fair enough. But I think sort of some of your more established non M&A businesses whether sales advisory, sovereign advisory, private capital, all those things, how are you thinking about those in this environment? It really varies by the individual business. So, the sovereign business is busy and the big question there, it almost comes back to restructuring question that Ken answered with regard to corporates, which is, are we going to see a wave over the next year or two of countries that have significant debt restructurings. There certainly is a class of countries that looking forward where that is possible. In the PCA business, that's [very tied] [ph] as you know to private equity. And so, the trends there, for example, are quite different than in the sovereign world. So, we do have a bunch of established businesses to your point. The trends tend to be different. In aggregate, we are pleased that they provide some offset or some diverse vacation away from just the core M&A business. Again, I'd say, restructuring business PCA, shareholder advisory, and these new ads are a pretty significant part of our overall revenues in Financial Advisory business and it's been part of our strategy from the beginning to try to make sure that we have some of these businesses that buffet the cyclicality of the advisory business. Okay, thanks. That's helpful. And maybe just as a follow-up, a quickie on the buyback. You guys were very aggressive buying your shares last year. How do we think about the pace in 2023? Yes, sure. I'll take that one. So, obviously, a very good year for buybacks in 2022, got down below 100 million shares outstanding, which was an important milestone. I would â and the price that â the average price that we've been able to buy them back at has been really attractive. So, I think looking forward, as we see higher prices and lower volumes, I would expect that to moderate. And I would also just mention that we continue to plan to buy back shares to offset dilution from compensation. And use excess cash â return excess cash to shareholders based on the prices that we see and the attractiveness of the value. Hi. Good morning. Thanks for squeezing me in here. I had a couple on expenses. The first is just on the comp ratio. Ken, you noted the challenging setup for first half 2023 advisory revenues, which was really an extension of some of the pressures that you saw in the fourth quarter. Just given the upward pressure on comp that we saw in the most recent quarter, the lower jumping off point for the first half, how should we think about the comp trajectory versus the 60% accrual that we saw this past year? And could you speak also to what drove the divergence in awarded versus adjusted comp in 2022? Sure. Great questions. Spot on. Look, on the comp ratio going into 2023, first we don't set it until first quarter. Here I just make the note, which I've been pretty consistent and I've spoken on is that when revenues go down GAAP, Compensation becomes more challenged â GAAP ratios become more challenging because you, sort of have fixed charges against declining revenues and we saw that in the fourth quarter. To the extent that we see a drop in revenue in the first half of next year, that also poses a challenge. Flipside is, you guys can tell our compensation practices by the deferral rates that we show in the earnings release and you can also see it in what we do on awarded compensation. The disconnect or the site separation between awarded and GAAP this year really just reflects the investments we've made in the business over the course of the last year, and the fact that we're trying to keep them in place depending on how the cycle unfolds. So, this is going to be like for all of our peers going to be an interesting first half when it comes to thinking about projections for ratios for the year and a lot of it ultimately will depend on how the year unfolds. Thanks for that color Ken. And just for my follow-up because you were talking about some of the investments that you're making in the business. You've been making a lot of investments on the technology side. We've certainly seen that translating to some level or elevated non-comp inflation. Can you talk about your ability to bend the cost curve on the non-comp side? How should we think about non-comp inflation as we look out to 2023? Yes. So, non-comp inflation this year, when you cut through, it's just a function of a couple of things. We first rent, we've got a couple of new facilities in Paris and we're also taking a new offices in London so there's a little bit of elevation that's going to come from that, long overdue in both cases and such. The second component clearly was T&E, obviously much more travel in a post-pandemic world. And unfortunately, a lot of inflation in travel expenses. I think some of that inflation will abate over the course of this year if inflation continues to abate across the economy, but let's wait and see what happens there. We're very focused on that. And then third of course is IT. I think there was quite a buildup in IT expense over the course of the last year, several years to modernize some of the things we're doing on the advisory side, asset management side, and then importantly on [Infosec] [ph]. I think at this point, we're probably through most of those investments and I think you'll start to see that abate over the next couple years or so and obviously this was over the last several years a very tough environment for people in that area. And I think we're finding many of those pressures abating as well. So that should help here over the course of the next year or so. So, this is something needless to say, we're very focused on and I expect there'll be some progress on that.
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Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Fourth Quarter and Full Year 2022 Earnings and Outlook Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about the forward-looking statements in yesterday's earnings release and to risk factors discussed in MetLife's SEC filings. Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's fourth quarter 2022 earnings and near-term outlook call. Before we begin, I'd point you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in our earnings release and in our quarterly financial supplements, which you should review. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussion are other members of senior management. Last night, we released a set of supplemental slides which address the quarter as well as our near term outlook. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along. An appendix to the slides features outlook sensitivities, disclosures, GAAP reconciliations and other information, which you should also review. After prepared remarks, we will have a Q&A session. In light of the busy morning, Q&A will promptly end at the top of the hour. [Operator Instructions] Thank you, John, and good morning, everyone. As I look back on 2022, I am pleased with the relevance of our Next Horizon strategy and how it positioned us to absorb the challenges presented in the year and to succeed going forward. 2022 was a year still affected by COVID, and we incurred an impact of more than $650 million pretax. For the year, we saw pretax variable investment income come in 19% lower than our outlook expectation on lower returns in our private equity portfolio. And from a macroeconomic perspective, we felt pressure from rising inflation, a falling equity market and a stronger dollar. Yet despite these hurdles, MetLife performed. Our strategy proved its resilience and our consistent execution driven by discipline and determination paid off in 2022. We delivered an adjusted return on equity of 12.3% for the year, meeting our target for this important metric. We pushed ourselves, driven by our efficiency mindset and succeeded in posting a full year direct expense ratio of 12.2%. Our strong 2022 free cash flow generation enabled us to hit our 2 year free cash flow ratio target of 65% to 75%. This fueled the return of $4.9 billion of cash to our shareholders. And finally, we ended the year with $5.4 billion of cash and liquid assets at our holding companies, arming us with ample financial flexibility. With our great set of market-leading businesses, good growth prospects around the world and the strength of our balance sheet and our free cash flow generation, I believe MetLife is very well positioned for the future. When we established our Next Horizon strategy at the end of 2019, we made several 5 year commitments against which we measure ourselves and, more importantly, hold ourselves accountable. I am pleased with our success to date in meeting those commitments. Even more, I am confident that we will beat each one. We committed to an adjusted return on equity of 12% to 14%. Today, we are boosting our target adjusted ROE range to 13% to 15%. This reflects, in part, our growth combined with our sustained discipline in pricing our products and in managing our capital. We said we would generate $20 billion over 5 years of free cash flow. We expect to exceed this target. We committed to freeing up an additional $1 billion over a 5 year period to invest in growth and innovation. Again, we are on track to overachieve against this target, and we are reaping the benefit of these investments. When we made these commitments, we did not expect U.S. interest rates to approach the lowest level in history, neither did we contemplate a global pandemic. While the environment may change, our accountability does not. We are also not content to maintain the status quo. We seek to challenge ourselves and push for more to raise the bar. Now let's turn to our fourth quarter 2022 results. Last night, we reported quarterly adjusted earnings of $1.2 billion or $1.55 per share, which compares to $1.8 billion or $2.17 per share a year ago. We generated strong underwriting results as COVID losses retreated further, while our recurring investment income continues to grow on higher new money rates. This was offset by variable investment income falling below our quarterly outlook expectation and a stronger dollar. Shifting to the full year 2022, the diversification of MetLife's portfolio of market-leading businesses once again proved its value. Most of our businesses and segments have returned to underlying levels of earnings equal to or greater than prior to the pandemic. Our U.S. Group Benefits business is a clear leader in this attractive segment of the life insurance industry. During the year, we grew our Group Benefits PFOs roughly 5% on top of double-digit growth the year prior. Our growth in Group Benefits represents more than $1 billion of new PFOs, bringing full year Group Benefit PFOs to approximately $23 billion. These numbers matter. First, we bring the broader set of products to our customers, life, dental, disability, vision, A&H, legal and pet insurance among many others, more than any other carrier. Second, Group Benefits is a business where you have to make significant investments to keep up with evolving customer and employer expectations. Our scale enables us to make those investments, to add products and capabilities and to further digitize and enhance the customer experience. All of this adds up to drive the growth and persistency we've achieved in our Group Benefits business over the last several years as well as the growth we expect to achieve in the future. Moving to highlights from other segments and businesses. Our Retirement and Income Solutions business produced its strongest year of pension risk transfer volume in our history, more than $12 billion, including our largest ever single deal. Our Asia segment continued to generate strong sales growth, topping 11% on a constant currency basis in a market that remained in COVID's grip for much of the year. And our Latin America segment enjoyed both strong top and bottom line results, particularly in Mexico, as a heightened awareness of the importance of the products we offer, coupled with a flight to quality, drove sales up 26% on a constant currency basis, pushed persistency higher and added to adjusted earnings. Moving to capital and cash. MetLife is well capitalized and has plenty of liquidity, well above our target cash buffer of $3 billion to $4 billion. Our U.S. and international insurance businesses are self-funding. Our strong capital and liquidity position allows us to meet our commitments and obligations, but also equips us with the financial flexibility to seize attractive opportunities that may present an unsettled environment. We have built a clear track record in terms of how we deploy capital to its highest use. If we have opportunities to put capital to work organically or via mergers and acquisitions at appropriate risk-adjusted hurdle rates, we will do so. Case in point, we deployed approximately $3.8 billion of capital to support organic new business in 2022. Absent such opportunities, we will return capital to shareholders. In 2022, we paid to MetLife shareholders $1.6 billion of common stock dividends, and we repurchased $3.3 billion of common stock. In January, we purchased roughly an additional $250 million of common stock, and we have around $900 million remaining on our current authorization. Before I close, I would like to take a moment to recognize a true visionary in the history of MetLife. Harry Cayman, MetLife's Chairman of the Board and Chief Executive Officer from 1993 to 1998, passed away on December 20 at the age of 89. Harry spent nearly his entire career at MetLife, starting as a junior attorney. As Chairman and CEO, Harry infused MetLife with a new corporate vision and an emphasis on profitable growth, something very much in line with our current focus on responsible growth. Harry's passing reminds us of the debt we owe at MetLife to those that went before us and building this great company since its founding in 1868. In closing, our Next Horizon strategy continues to prove its resilience in a changing and shifting environment. Our total shareholder return of more than 19% in 2022 underscores the significant value we created for our shareholders against this backdrop. As we look ahead, our work is not done. We are raising the bar and setting our standards higher. As much as we have accomplished in recent years, I believe there is still much ahead for us to achieve. As the world has opened up, I was able to spend more time on the road than the last half of 2022 since the start of the pandemic. I'm more invigorated than ever to get out and meet face-to-face with our customers, our distribution partners, our employees and our shareholders. I look forward to updating some and introducing others to what we're building up MetLife, a company capable of being a quality compounder across a range of economic cycles. Thank you, Michel, and good morning. I will start with the 4Q '22 supplemental slides, which provide highlights of our financial performance and update on our cash and capital positions and more detail on our near-term outlook. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year. Net income in 4Q of '22 was $1.3 billion or $88 million higher than adjusted earnings. Net investment gains in the fourth quarter were primarily driven by real estate sales, which were partially offset by losses on the fixed maturity portfolio due to normal trading activity in a rising rate environment. Credit losses in the portfolio remain modest. In addition, we had net derivative gains primarily due to the weakening of the U.S. dollar in the quarter. For the full year, net derivative losses accounted for most of the variance between net income and adjusted earnings, primarily due to higher interest rates in 2022. Overall, our hedging program continues to perform as expected. On Page 4, you can see the fourth quarter year-over-year comparison of adjusted earnings by segment, excluding $140 million of notable tax items that were favorable in the fourth quarter of '21 and accounted for in Corporate and Other. Adjusted earnings in 4Q of '22 were $1.2 billion, down 28% and down 26% on a constant currency basis. Lower variable investment income drove the year-over-year decline, while higher recurring interest margins and favorable underwriting were partial offsets. Adjusted earnings per share were $1.55, down 23% year-over-year and down 21% on a constant currency basis. Moving to the businesses, starting with the U.S. Group Benefits adjusted earnings were $400 million versus $20 million in 4Q of '21, primarily due to significant improvement in underwriting margins aided by lower COVID-19 life claims, as well as higher volume growth. This was partially offset by less favorable expense margins year-over-year. Group Life mortality ratio was 87.6% in the fourth quarter of '22, in the middle of our annual target range of 85% to 90%. Regarding non-medical health, the interest adjusted benefit ratio was 69.4% in Q4 of '22, slightly below its annual target range of 70% to 75% and below the prior year quarter of 74.2%. The non-medical health ratio benefited from favorable disability severity, while dental was in line with expectations. Turning to the top line, Group Benefits adjusted PFOs were essentially flat year-over-year. As we discussed in prior quarters, excess mortality can result in higher premiums from participating life contracts in the period. The higher excess mortality in Q4 '21 versus Q4 of '22 resulted in year-over-year decline in premiums from participating contracts, which dampened growth by roughly 6 percentage points. The underlying PFO increase of approximately 6% was primarily due to solid growth across most products, including continued strong momentum in voluntary. For the full year, Group Benefits adjusted PFO growth was 3%, while underlying growth, excluding excess premiums from participating contracts in 2021 versus 2022 was up 5% and within the 2022 target range of 4% to 6%. Retirement and Income Solutions, or RIS, adjusted earnings were down 40% year-over-year. The primary driver was lower variable investment income, mostly due to weaker private equity returns. This was partially offset by favorable recurring interest margins year-over-year. RIS investment spreads were 96 basis points and 112 basis points excluding VII, up 21 basis points versus Q4 of '21 and up 11 basis points sequentially, primarily due to income from in-the-money interest rate caps. RIS liability exposures were down 1% year-over-year due to certain accounting adjustments that do not impact fees or spread income. That said, RIS had strong volume growth driven by sales up 23% in 2022. This was primarily driven by pension risk transfers and stable value products. In addition, we had a record sales quarter for structured settlements, demonstrating the strength of product diversification within RIS. With regards to PRT, we completed 6 transactions worth $12.2 billion in 2022, a record year for MetLife, and we continue to see an active market. Moving to Asia. Adjusted earnings were down 63% and down 62% on a constant currency basis, primarily due to lower variable investment income. In addition, we had a write-down of a deferred tax asset in China as it was determined that the accumulated tax losses were unlikely to be utilized within the required 5 year statutory period. The write-down of the DTA reduced Asia's adjusted earnings in Q4 of 2022 by $34 million after tax and was accounted for in net investment income due to the equity method of accounting treatment for our China joint venture. While Asia's underwriting was modestly unfavorable versus Q4 of '21, we saw a significant sequential improvement due to lower COVID claims in Japan. Asia's key growth metrics remained solid as general account assets under management on an amortized cost basis grew 4% on a constant currency basis. And sales were up 12% year-over-year on a constant currency basis, primarily driven by FX annuities sold through face-to-face channels in Japan. For the full year, Asia sales were up 11%, exceeding its 2022 guidance of mid to high-single digits. Latin America adjusted earnings were $181 million, up 45% and up 51% on a constant currency basis. This strong performance was primarily driven by favorable underwriting and solid volume growth. Overall, COVID-19related deaths in Mexico were down significantly year-over-year. In addition, the Chilean encaje, which had a positive 6% return in 4Q '22 versus 4% in the prior year and higher recurring interest margins, were positive contributors. These two favorable items were partially offset by lower variable investment income year-over-year. LatAm's top line continues to perform well as adjusted PFOs are up 20% year-over-year on a constant currency basis, and sales were up 22% on a constant currency basis, driven by growth across the region. EMEA adjusted earnings were $70 million, up 67% and up 112% on a constant currency basis, primarily driven by favorable underwriting versus Q4 of '21, which had elevated COVID-19-related claims, particularly in the U.K. This was partially offset by less favorable expenses year-over-year. EMEA adjusted PFOs were up 2% on a constant currency basis, and sales were up 13% on a constant currency basis, reflecting solid growth across the region. MetLife Holdings adjusted earnings were $208 million, down 57%. This decline was primarily driven by lower variable investment income. In addition, less favorable expense margins and adverse equity market performance also reduced adjusted earnings year-over-year. Corporate and Other adjusted loss was $219 million versus an adjusted loss of $177 million in the prior year, which excludes favorable notable tax items of $140 million. Higher taxes and lower net investment income were partially offset by lower expenses year-over-year. The company's effective tax rate on adjusted earnings in the quarter was approximately 19%, which includes favorable tax benefits primarily related to the settlement of an IRS audit. Excluding these favorable items, the company's effective tax rate was approximately 22%, within our 2022 guidance range of 21% to 23%. On Page 5, this chart reflects our pretax variable investment income for the four quarters and full year of 2022. VII was $24 million in the fourth quarter. The private equity portfolio, which makes up the bulk of the VII asset balances, had a negative 0.3% return in the quarter. As we have previously discussed, private equities generally accounted for on a one quarter lag. For the full year, VII was $1.5 billion, below our 2022 target range of $1.8 billion to $2 billion. Our private equity portfolio had a positive 7% return in 2022, a solid performance in comparison to the public equity markets with the S&P 500 down 19%. While VII underperformed in 4Q '22, our new money rate increased to 5.66%, which was 150 basis points above our roll-off yield of 4.16%. On Page 6, we provide VII post-tax by segment for the four quarters and full year 2022. On a full year basis, you will note RIS MetLife Holdings in Asia continue to earn the vast majority of variable investment income, consistent with the higher VII assets in their respective investment portfolios. VII assets are primarily owned to match longer-dated liabilities, which are mostly in these three businesses. Turning to Page 7. This chart shows the comparison of our direct expense ratio over the prior eight quarters and full year 2021 and 2022. Our direct expense ratio in 4Q of '22 was elevated at 13.1%, reflecting the impact from seasonal enrollment costs in Group Benefits, as well as higher employee-related costs and timing of certain projects. That said, as we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. For the full year of 2022, our direct expense ratio was 12.2%, below our annual target of 12.3%. We believe this result once again demonstrates our consistent execution and focus on an efficiency mindset in a challenging inflationary environment while continuing to make investments in our businesses. I will now discuss our cash and capital positions on Page 8. Cash and liquid assets at the holding companies were approximately $5.4 billion at December 31, which was up from $5.2 billion at September 30 and remained above our target cash buffer of $3 billion to $4 billion. The sequential increase in cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of approximately $600 million in the fourth quarter as well as holding company expenses and other cash flows. For the 2 year period, 2021 to 2022, our average free cash flow ratio, excluding notable items, totaled 68% and was within our 65% to 75% target range. In terms of statutory capital for our U.S. companies, we expect our combined 2022 NAIC RBC ratio will be above our 360% target. Preliminary 2022 statutory operating earnings for our U.S. companies were approximately $2.6 billion, while net income was approximately $3 billion. We estimate that our total U.S. statutory adjusted capital was $18.3 billion as of December 31, 2022, a decrease of 3% sequentially, primarily due to derivative losses and dividends paid, partially offset by operating earnings and investment gains. Finally, while our Japan solvency margin ratio dipped below 500% as of September 30, we expect the Japan SMR to be approximately 700% as of December 31, which will be based on statutory statements that will be filed in the next few weeks. As we have discussed on prior calls, our Japan business as well as MetLife overall does better economically in a higher interest rate environment. However, given the asymmetrical nature of how the SMR is calculated, the ratio declines in a rising rate environment as assets are mark-to-market, but not the corresponding liabilities. As a result, we executed an internal reinsurance transaction in December with our Bermuda entity, which has an economic-based solvency regime. This transaction improved the Japan SMR ratio by approximately 250 percentage points. Before I shift to our near-term outlook, starting on Page 9, a few points on what we included in the appendix. The chart on Page 15 reflects new business value metrics for MetLife's major segments from 2017 through 2021. This is the same chart that we showed as part of our 3Q '22 supplemental slides, but we felt it was worth including again for the sake of completeness. Also, Pages 16 through 19 provide interest rate assumptions and key outlook sensitivities by line of business. Turning back to Page 9, our 2023 to 2025 outlook reflects the impacts of the new accounting requirements of long-duration targeted improvement or LDTI. While 2022 actually used for growth rate calculations remain as previously reported on a pre-LDTI basis. In mid-April or roughly two to three weeks prior to the reporting of our 1Q '23 earnings, we plan to provide you with a recasted QFS based on LDTI for each of the quarters in 2022. While there would be certain positive and negative effects depending on product and segment, we do not expect the underlying run rate of adjusted earnings for the firm overall to change materially. Now let's turn to Page 10 for further details on our near-term outlook. We assume COVID-19 to be endemic, consistent with the recent trends that we have been experiencing. We expect continued uncertainty to persist around inflation and a potential recession in 2023. Based on the 12/31/22 forward curve, we expect interest rates to rise in 2023. Finally, for purposes of the near-term outlook, we assume a 5% annual return for the S&P 500 and a 12% annual return for private equity. This is consistent with our long-term historical returns for PE. Moving to near-term targets. We are increasing our adjusted ROE range to 13% to 15%. This increase of 100 basis points from our prior 12% to 14% ROE range is a function of the growing impact of our mix of business and higher new business returns over the last several years as well as the impact of LDTI. We expect to maintain our 2 year average free cash flow ratio of 65% to 75% of adjusted earnings, excluding total notable items. Our direct expense ratio guidance for 2023 is being recalibrated to reflect LDTI by approximately 30 basis points to 12.6%. This captures an approximate $1 billion reduction in adjusted PFOs, excluding PRTs, due to the change in accounting. This is primarily related to certain annuity contracts within RIS as well as shifting certain variable annuity fees to market risk benefits, which are reported outside adjusted earnings. Since this change in accounting to LDTI will be retroactively applied back to the beginning of 2021, our previously reported direct expense ratios will likewise be recalibrated to put 2021 and 2022 on the same basis as 2023 and beyond. Our VII for 2023 is expected to be approximately $2 billion after applying our historical average returns on asset balances. I'll provide more detail on VII in a moment. Our Corporate and Other adjusted loss target is expected to remain at $650 million to $750 million after tax in 2023. We are increasing our expected effective tax rate range by 1 point to 22% to 24% to reflect our expectation for higher earnings in foreign markets and lower tax credits in the U.S. At the bottom of the page, you'll see certain interest rate sensitivities relative to our base case, reflecting a relatively modest impact on adjusted earnings over the near term. On Page 11, the chart reflects our VII average asset balances from $14.7 billion in 2021 to $19 billion expected in 2023. Private equities will continue to hold the vast majority of our VII asset balances. We are applying our historical annual returns for each asset class within VII. In addition to the PE annual return of 12%, we expect an annual 7% return for real estate and other funds. Finally, as a reminder, we include prepayment fees on fixed maturities and mortgage loans in VII. So now I will discuss our near term outlook for our business segments. Let's start with the U.S. on Page 12. For Group Benefits, excluding the excess premium from participating group life contracts of approximately $750 million in 2022, adjusted PFOs are expected to grow at 4% to 6% annually. Regarding underwriting, we expect the Group Life mortality ratio to be between 85% to 90%. We are also maintaining the expected group non-medical health interest adjusted benefit ratio at 70% to 75%. Keep in mind, these are annual ratios and are typically higher in the first quarter for both Group Life and Non-Medical Health given the seasonality of the business. For RIS, we are maintaining our 2% to 4% expected annual growth for total liability exposures across our general account spread and fee-based businesses. We are increasing the range of our expected annual RIS investment spread by 40 basis points to 135 to 160 basis points in 2023. The majority of this increase is driven by continued expectations of rising interest rates on the short end of the curve and the resulting benefit of interest rate cap income, which we expect to peak in the first half of 2023. In addition, LDTI will contribute approximately 10 basis points to the investment spread calculation while not increasing adjusted earnings. Upon transition to LDTI, the unlocking of future cash flow assumptions to current best estimate increased our deferred profit liability, which is amortized into earnings and will now be included in the spread calculation, reducing other sources of earnings. Overall, the conversion to LDTI will not significantly change RIS run rate adjusted earnings. For MetLife Holdings, we are expecting adjusted PFOs to decline 12% to 14% in 2023, driven by the normal runoff of the business, market declines and the transition to LDTI. Beyond 2023, we expect annual PFOs to decline 6% to 8%. We are lowering the life interest adjusted benefit ratio target to 40% to 45% in 2023 from the prior 45% to 50% target to reflect the impact of lowering policyholder dividend levels. Finally, we are maintaining the adjusted earnings guidance of $1 billion to $1.2 billion in 2023. Now let's look at the near-term guidance of our businesses outside the U.S. on Page 13. For Asia, we expect the recent sales momentum to continue and generate mid to high-single-digit growth on a constant currency basis over the near term. In addition, we expect general account AUM to maintain mid-single-digit growth on a constant currency basis. We expect Asia's adjusted earnings, excluding $270 million of COVID-19 claims in 2022, to grow at mid-single digits over the near term. For Latin America, we expect adjusted PFOs to grow by low double digits over the near term. We expect our adjusted earnings to grow high single digits over the near term, excluding roughly $80 million due to favorable market-related factors in 2022. Finally, for EMEA, we are expecting sales and adjusted PFOs to grow mid to high single digits on a constant currency basis over the near term. We expect EMEA run rate adjusted earnings to be roughly $55 million per quarter in 2023, reflecting the impact of currency headwinds and then grow by high single digits in 2024 and 2025. Let me conclude by saying that MetLife delivered a good quarter to close out another strong year, reflecting the strength of our business fundamentals, solid top line growth, favorable underwriting and ongoing expense discipline. While private equity returns were down this quarter, core spreads remained robust. In addition, results in our market-leading franchises, Group Benefits and Latin America continued their strong growth and recovery. Finally, our commitment to deploying capital to achieve responsible growth positions MetLife to build sustainable value for our customers and our shareholders. Hi. Thank you. So we've recently seen an increase in the number of layoffs announcements, particularly from larger employers. So I was just hoping you could talk about what you're seeing from your clients, particularly in the group business and then what you're assuming for employment and wage inflation in your 4% to 6% PFO growth outlook? Thanks, Erik. It's Ramy here. So the short answer is we're not seeing any impacts across our group business today; in fact, quite the opposite. So maybe let me give you just a couple of overall points before I get into the specifics of our business. So if you think about a recession and a potential recession, as you know, no two recessions are the same, so sitting here, it's really difficult to speculate how a potential recession scenario could play out in terms of the employment levels and particularly as to which segment of the economy that would impact. And the second point, before I get into the specifics of the business, we've all seen the headlines. But overall, we're still sitting in a pretty tight labor market with pretty - with low unemployment levels. And you also have to remember when you look at group benefits, their underlying long-term trends with respect to the dynamics in the workplace, which really favor benefits, and we see those trends continuing thought out [ph] in the future. So if you think about specifically our franchise, while we're certainly not immune to a downturn, there are a number of important mitigants in our business which make us fairly resilient from a top line and a bottom line perspective and, I would say, give us real confidence sitting here today with respect to our guidance ratios in terms of PFO growth. So let me just give you kind of a bit of a sense of what gives us that confidence. From a top line perspective, our book is highly diversified by industry and by size of employer, which limits our diversification, our exposure to any single segment. So really diversification is our friend here and is crucial to our ability to perform. As we stand here in January, we're off to a great start in '23. We're seeing excellent sales momentum across the business. And we had an in-force book that has performed exceptionally well, both with respect to the 1/1 persistency and renewal as well as the rate actions. And we still see significant growth opportunities in our market, and those are direct results of the investments which Michel referenced. So we've spoken about those in the past, be they be the voluntary opportunity with respect to enrollment strategies in the workplace, be it the market-leading national accounts business that we have or be it growth in regional markets where we see a fragmented marketplace that's consolidating. So all in all, you put all of this thing - all of this picture together in terms of our starting point and the profile of our business, and that gives us a pretty high degree of confidence with respect to the guidance range. The underlying assumptions, specific to your second question, really I'll guide you back to the assumptions that John mentioned in the outlook assumptions with respect to an uncertain environment with the potential for a recession. But despite that, we feel pretty good about our guidance ranges. Great. Thanks, Ramy. And then my second question was just on what's enabling the earnings for MetLife Holdings to be so resilient despite the decline in PFOs and then the lower equity markets that we saw last year? I guess related, at what point should earnings start to follow the PFOs lower? Good morning, Erik. It's John. Great question. We have had some resiliency in our runoff business here. So we did provide a guidance raise of 1 to 1.2. Let me start with just PFO decline versus earnings. So as I referenced in my opening remarks, one aspect of LDTI is for our VAs, we do move some of the fees down below the line. That's a revenue decline, but it's not an earnings decline. The way we have - our policy has been that we've attributed fees to the guarantees. And to the extent that they're below the line, we would put 100% of those fees below the line. So as you move, we have a number of SOP 03-1, which is kind of the accrual-based accounting, as you move them down below the line, so does the claims. So you see this like this kind of breakage between revenue decline but earnings staying flat. And then we did have - this is probably one of the businesses with a marginal positive from LDTI. And so that's probably another item. And then thirdly, I think it's the optimization efforts. Now the team has done a great job and continue to look for ways to find improvements around expenses, around contracts. And I think, all in all, we think with the guidance in terms of equity outlook, 1 to 1.2 is a good range. Good morning. Hey, sticking with Holdings, been a few of your peers like Aegon and Ameriprise saying they're going to pass on doing VA risk transfer deals because the pricing didn't work. I'm wondering whether your view has changed at all or maybe just give an update on what are you thinking about a potential risk transfer deal for Holdings. Has the environment changed there or pricing changed at all? Good morning, Tom. It's John. Yes, I don't think any update or change for us. I think we've been pretty transparent about this. This is not an easy solution, particularly when you're talking about a reinsurance arrangement. It is complex. I think particularly when it's a reinsurance, you're looking for a good partner and you're looking for to ensure that not only is it beneficial for us, but beneficial for them. And so there is a - you do have to look for ways for common ground. And sometimes that works out, and sometimes it doesn't. It hasn't changed our perspective on optimization. And so I think things are the same for us, so which is we continue to look for ways to optimize internally and we are, and I just referenced that on the previous comment, and that's helped us be resilient in terms of our earnings. And at the same time, we're still going to look and speak and converse with third parties and look for ways to see if we can accelerate the release and runoff of that block in an appropriate way. And if we can, we would do a deal, if we can't, then we'll continue to optimize internally. Okay. Thanks. And just a follow-up on, if I look at your group life and individual life mortality experience within Holdings, are you seeing worse experience versus pre-pandemic levels right now? Or are you more or less back to those types of levels? The reason I ask is if you look at the broader CDC data for all-cause mortality, it still looks to me like it's running around 5% to 10% worse. Yet I look at your guidance, I look at the results you've had for the last three quarters, you're kind of back to your targets. So I'm just curious what you're seeing. Maybe it's the insured population experience is better than general population, but any way you can kind of reconcile that? Thanks. Yes, I mean it's - you've got to really factor in a lot of different, call it, lenses as you go from an aggregate data to an insured population or a specific book of business. I would say in terms of what we're seeing this quarter, it's very much a shift to an endemic. With respect to COVID, we see continued reduction in the number of deaths below 65, which also reduces the severity of any potential impacts from COVID. But overall, you really should think about this moving to an endemic environment, one that we've priced for and, therefore, we feel pretty good about our guidance range and going back to the midpoint of the range on an annual basis. You'll still see some of the seasonality we've historically seen. So think about Q1 as typically being mortality heavy, which is - was the same dynamic that played out pre-COVID from a mortality perspective. Hi, thanks. Good morning. I had a question on the RIS spread outlook. I guess more so to the extent you can comment beyond 2023 and how to think about the interest rate cap, how much they're contributing in '23 and how we should think about them rolling off beyond '23? Good morning, Ryan. It's John. So as we mentioned, we're raising the guidance. And I think just to kind of frame it in terms of if you use fourth quarter, we're at about 112 ex-VII. If you add 10 for LDTI, which we referenced, it's more of a mechanic than it is necessarily an earnings change or run rate change. And then on top of that, you add kind of a normal VII balance, that gets you to the range we gave. And we are benefiting from the caps. I mean this is really how we constructed the portfolio is to put these in place to address a short-term headwind of rising rates and really rising short-term rates to allow for the longer end of the curve for the rollover and reinvest to start to manifest itself in portfolio yield. So it's all part of the plan. They'll be pretty healthy in '23. They'll start to roll off over the next 2 plus years, and that should give us some time to allow for the longer end of the curve to kind of improve in terms of contribution. We typically stick to '23 - to 1 year, and there's a reason for that. I mean, if you - if we try to predict more than 1 year, I think we would have been wrong every time. So I think we'll stick with that. Okay. Got it, thanks. And then I guess on capital deployment and are you - I guess there's a lot of talk about the risk of recession. I mean at this point, have you - are you - is there anything about the economic outlook that would lead you to pull back some on capital deployment at this point? Or are you kind of viewing as a somewhat status quo situation for now? Yes. Hi, Ryan. It's Michel. I mean I would say the short answer is no, no change in philosophy in our approach. And I might sound like a broken record here, but that's probably a good thing. So from our standpoint, the approach is that beyond supporting organic growth and in the absence of strategic accretive M&A, excess capital belongs to shareholders. And we've defined that as cash and equivalents at our holding companies above our liquidity buffer of $3 billion to $4 billion. And we do expect to migrate back to those levels over time. But just given the environment, I think having the financial flexibility that being above that range offer is not a bad thing. We've bought back $3.3 billion in 2022, an additional $250 million in January. And we have $900 million left on our current authorization. And as we've done in the past, we're going to continue to manage the authorization deliberately and in a consistent manner, I would say. So from that perspective, no change in terms of approach or philosophy. And our next question is from Jimmy Bhullar with JPMorgan. Please go ahead. Mr. Bhullar, do you have your phone muted by chance. We will move on to the next person, one moment here. We'll move on to Alex Scott [Goldman Sachs]. Please go ahead. Hey, good morning. First one I had is just on LDTI, could you provide an update on how book value is impacted as we sort of move over to that accounting as of year-end? And the reason I asked is just I want to better understand the ROE guidance that you've provided as part of your outlook. And then maybe if you can comment at all on how sensitive that will be to interest rates as we think through declining rates in the first quarter? Good morning, Alex. It's John. So we gave a range before, and we'll be providing a point estimate as we file our 10-K in the middle of that range was, call it, all in about a 22.5 change in total equity and about a $5 billion, so $22.5 billion and a $5 billion change in book value ex-AOCI, excluding FCTA. That was at 1/1/21. Since that time, obviously, a lot has changed in terms of economic and interest rate environments. And so I think if you were to compare to year-end this year of '22, the delta should be much different or smaller, at least, certainly, on book value ex-AOCI would be about 2 - a little less than a $2 billion, call it, impact on book value ex-AOCI. And then if you include AOCI, it actually flips a little bit to $2 billion positive from the overall $22.5 billion negative to GAAP equity. So hopefully, that helps. Yes, that's very helpful. Thank you. And then the second one I had is on LatAm and the outlook. You guys have had really strong growth there. How influenced has it all been by the macro environment and the employment in Mexico, which candidly am a little less doubt [ph] in on myself? And I just wanted to understand like, to what degree that's been fueling things and what that could look like if it more levels off or is not as robust as it's been? And then maybe also if the Chile pension reform does go into effect in 2024? Would that change your view on the growth rates on sort of the outer years of the guidance you gave? Okay. Hi, Alex. This is Eric. Let me take the first question regarding the LatAm outlook. So as you mentioned, and you've seen 2022 results and our near-term guidance, we're excited about our prospects in Latin America for a number of reasons. And let me put things in perspective. So we, as you know, we have a strong franchise across the region. We have a significant footprint in three of the largest insurance markets across LatAm. We are market leaders with a very strong brand in Mexico and Chile, and we have a fast-growing business in Brazil. So in addition, the market in the region has significant potential for three reasons in addition to the one that you mentioned. But the three core reasons that are really pushing things forward are, one, the insurance penetration rates remain very low. We are also seeing heightened protection awareness resulting in increased demand for our products. We're also observing an increased expectations from customers for more of a digital and seamless experience, and this is leading to a flight to quality that I mentioned during last year. And these evolving customer needs have been met by our franchise because we have invested significantly in our digital transformation over the past few years, and that digital transformation in both sales and service levels is now paying off clearly. And in parallel, we've been expanding and diversifying our distribution and product reach by growing bancassurance, direct marketing channels, while continuing to strengthen and grow our retail and group business across the region. The good example of that diversification strategy in Mexico where we had a record top and bottom line here in 2022. So we've been also expanding successfully in the private business in both retail and group while continuing that strong franchise that you know very well in worksite government. So all in all, I think there are market factors that are helping, but the strength of our franchise and our strategy is certainly positioning us well for the future and moving forward. So I hope this helps on the LatAm question. And I'll pass it to Michel regarding the Chile view. Yes. I mean the thing I would say about Chile is that I think all in all, we feel better about the environment. The pension reform is going to play out over, say, a number of months. And we'll have to see how things turn out. But all in all, I think compared to maybe six months ago, I would say the environment is better, more favorable. And we will go back to the line of Jimmy Bhullar with JPMorgan. Please go ahead. Mr. Bhullar, we are still unable to hear you. We will move on to Suneet Kamath [Jefferies]. You may go ahead. Okay, great. Perfect. So my first question, just on VII, I think I know the answer, but I figured I'd ask anyway. It looks like you've kept your return assumption consistent despite the economic uncertainty that you've talked about on this call. Is that just for the simplicity of being consistent with the past? Or is that at all informed by what you're hearing from your private equity partners? Hi, Suneet. It's Steve. Thanks for the question. And this really reflects the fact that we don't want to try and predict near-term market quarterly or annual returns. This really reflects our long-term experience for the asset class and then therefore our expectation going forward. So that's why I think if you go back, it's been 12%, 3% a quarter as long as I can recall. And again, it reflects the fact that we know that - a couple of things. One is that there is volatility in the returns. But basically, our PE portfolio has generally moved directionally in line with the broad markets. If you can look at the fourth quarter, what happened, we had basically strong kind of broad market returns. NASDAQ was down a little bit. I'm sure that will reflect its way through the portfolio as well. The key, though, is despite any volatility we see in the returns on the portfolio, we're also getting very solid cash distributions. And last year, we had over - about $2.5 billion of cash distribution. As you look at the last 5 years, they've totaled $9 billion. So it really is a very reliable portfolio in that respect as well. And I think a lot of it just reflects the diversification in the portfolio. I mean we've said a number of times, we're very diversified by strategy, by manager, by vintage. Yes, LBOs and BC are the biggest part of the portfolios, but we also have significant investments in specialized strategies like special situations, energy, power and the like. So all in all, our expectations really reflect the long-term experience we've seen in the portfolio that represents the strong diversification we have. Got it. That's helpful. And then, I guess, for John, it looks like you were able to use this Japanese reinsurance transaction to help solve for some of the uneconomic pieces of the SMR. Should we be thinking about this as another tool that you have going forward in terms of capital optimization? Or was this really just to solve that issue? Good morning, Suneet. Yes, I think you've done a nice job summarizing it. It's a tool in the toolbox. We - it's not our only. We did use it to solve that situation. It was - in the fourth quarter, we executed an internal reinsurance transaction, which improved the ratio by approximately 250 points. And so - and also remember, there is two other things. One, rising rates are good for this business. So that's important to remember from an economic perspective. Second is the solvency regime is meant to be replaced in a few years time and move to a more economic solvency framework that will better reflect the economics. So this is really to deal with, I'll say, a temporary situation. And ultimately, I think these tools allow us to have no concerns over capital generation or dividend capacity. And ladies and gentlemen, we have time for one last question, that's from Elyse Greenspan with Wells Fargo. Please go ahead. Thank you. Good morning. My first question, with your guidance and comments on Holdings, you guys have a pretty good handle on how LDTI will impact the income statement. Can you help give us a sense of the total impact to net from LDTI on adjusted earnings as well as on net income? Good morning, Elyse. It's John. As I mentioned, I think our summary around earnings run rate is there's a few puts and takes, but net-net for the firm overall, run rate is intact for adjusted earnings. Net income will probably become, I'd say, directionally smoother than it has been. It's probably the best way to describe it and you'll probably - and you'll see that when we provide our restated QFS in kind of early April. And you'll see that there's a bit more symmetry between net income and adjusted earnings. But it's - there's still some volatility and fluctuations that you'll see. But net-net, it should be directionally better. Okay. Thanks. And then in terms of PRT, can you just give us a sense of your outlook for deal volume during '23? And would you expect to see seasonality during the quarter as I think typically sometimes you've seen heavier activity to end the year? Elyse. So as you know, we had a record year last year with respect to PRT. And sitting here today, we're still seeing a pretty healthy pipeline given funded status of pension plans. And we're seeing that pipeline also geared towards the jumbo end of the market, which is the place where we compete the most and where we focus on. The seasonality has largely dissipated. If you looked at the timing of the deals over the last few years, we've seen less seasonality. We've seen more deals earlier on in some cases and more these later on. So I wouldn't speculate on the seasonality, but the pipeline is certainly healthy. And ladies and gentlemen, we do have no more time for questions. I'll turn you back to John Hall, Head of Investor Relations, for closing comments.
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Greetings. Welcome to the Fourth Quarter 2022 IDEX Corporation Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Allison Lausas, Vice President and Chief Accounting Officer. Thank you. You may begin. Good morning, everyone. This is Allison Lausas, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX fourth quarter and full year 2022 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months and full year ending December 31, 2022. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Bill Grogan, our Chief Financial Officer. We will begin with Eric providing an overview of the state of IDEX' business, including a recap of our recent performance. Bill will then provide a segment outlook for 2023 and discuss our fourth quarter and full year 2022 financial results as well as our guidance for the first quarter and full year 2023. Eric will then close the call with our key priorities for 2023. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately 2 hours after the call concludes by dialing the toll-free number (877) 660-6853 and entering conference ID 13734461 or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the safe harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. Thank you, Allison, and good morning, everyone. I'm on Slide 6. 2022 was a record year for IDEX. We experienced double-digit organic growth every quarter, driving all 3 of our segments to record sales levels and achieved strong record profitability, driven by solid execution. This year was not without its challenges. We experienced unprecedented inflation as well as a difficult supply chain environment. Despite these obstacles, we achieved some of the strongest financial results we've ever posted. I'd like to thank our IDEX employees around the globe for their efforts and hard work. We also deployed more capital than ever before, investing in our businesses, acquiring new ones and returning capital to our shareholders. We deployed a record $950 million for the acquisitions of Nexsight, KZValve and most recently, the Muon Group. We reinvested back into our core business to increase capacity to support growth and drive productivity and made investments in the commercial engineering and M&A resources that enable us to execute on our best opportunities. We also repurchased 795,000 shares of IDEX stock for $148 million as we followed our opportunistic disciplined approach to buybacks. As we turn to 2023, we are prepared to build upon a very solid foundation. We have strong backlog positions overall, and we continue to leverage innovative technologies to drive targeted growth opportunities. We have healthy price carryover in addition to new price actions to capture the value our products bring to our customers. Finally, we have an opportunity to drive strong productivity as we bring process-driven normalcy back to our operations through the application of the IDEX operating model. However, we're a short-cycle business and with that comes limited visibility. The broad-based supply chain constraints experienced last year have created some new dynamics around order patterns and customer delivery timing. And we predict that 2023 will be an uncertain period of transition as we dynamically calibrate with our customers. Additionally, there are likely to be pockets of demand softness due to a variety of intersecting economic and geopolitical factors. Regardless of these challenges, we will execute and deliver growth above-market entitlements. The short cycle and decentralized nature of our business supports quick adaptation and alignment to shifting conditions. And we will course-correct quickly and effectively when needed. Our balance sheet has ample capacity to support our M&A strategy as well as organic reinvestment. Our extended M&A and strategy team continues to build conviction around our best opportunities, and our funnel is strong and of high quality. We've also identified areas where we will deploy capital organically to expand capacity, capture market share and drive operational productivity. IDEX had a strong finish to an outstanding year in 2022. Our agility, resiliency and our fundamental ability to execute has IDEX exceptionally well positioned to outperform as we move forward. Thanks, Eric. In our Fluid & Metering Technology segment, industrial day rates were steady in the fourth quarter, and we expect they remain at this level in the near term with strong price support. We've seen initial signs that customers are returning to a book-and-bill order pattern, consistent with pre-pandemic behavior. We continue to monitor day rates to evaluate longer-term expectations as this is our most short-cycle market exposure. We expect another strong year in agricultural business with strong farmer sentiment and high crop prices. We continue to see positive signals from both our OEMs and distributors and a trend towards investing in precision technologies as a means of mitigating higher input costs. We are on our next phase of process automation at Banjo and see continued improvement in delivery and efficiencies putting us in a good position to capture share. Our outlook for our municipal water business continues to be favorable. The healthy quoting activity we experienced over the past few quarters is expected to translate into 2023 growth. And we continue to identify opportunities to leverage our technology to capture new programs. The EPA just received record funding and the Infrastructure Bill could provide a tailwind in the back half of the year. The chemical markets overall are soft. We see opportunities for growth in U.S. green energies and strong project activity in the Middle East, but this is offset by softer European demand due to higher energy costs and cuts to production capacity. In our energy business, we see favorable demand for energy exports and natural gas production as well as continued oil price support. However, customers continue to delay larger investments as they focus on cost, inventory and supply chain issues. The strong price capture and productivity achieved in 2022 as well as new pricing actions in '23 will continue to drive improvements in FMT margins with some risk of offset from lost volume leverage, depending on the second half volumes. Moving on to the Health & Science Technology segment. We expect HST to remain our highest growth segment. Our life sciences and analytical instrumentation businesses will continue to grow in '23 due to strong next-gen sequencing applications and continued expansion of cell-based therapies in various chromatography and mass spec applications. In the short term, however, several of our OEM customers are holding excess inventory, driving volume out of the first quarter and into the balance of the year. We believe this is a short-term issue, and the overall market outlook remains extremely positive for this sector. Our targeted growth initiatives tied to a wide variety of applications from satellites and space, to energy-efficient fuel cells continue to perform well, and our industrial businesses are seeing market trends similar to FMTs. We are seeing some slowing in semiconductor market, driven by higher memory device inventory levels and declining customer chip spending. Fabrication spending and new fab construction are both expected to be down for the year. That said, we provide critical consumable components for a large installed base, which tends to be more stable despite end market and CapEx cycles. Where we play in the market and our recent share gains are expected to drive continued outperformance versus the broader market. We are seeing overall signs of slowing demand in pharma and biopharma, particularly around larger projects. Customers are hesitant to make larger investments given inflation and higher interest rates. India continues to accelerate and the easing of China restrictions could drive growth and recovery in the region to offset some. Lastly, our auto business is expected to perform well. Global auto production is stable, and our presence in premium vehicle segments in EV and hybrids is driving a faster recovery as compared to the overall market. HST margins will expand in '23 due to pricing, productivity and volume, partially offset by continued reinvestment in our highest growth businesses and some mix headwinds in the short term due to expected life science AI demand patterns. Finally, we expect our Fire Safety and Diversified Products segment will experience growth towards the lower end of our guided range. In fire safety, U.S. and European fire OEM volumes remain constrained by supply chain and throughput issues, but backlogs are strong and volumes are steady. We expect continued share gain with smaller builders that are coming online to capture surplus demand. Our rescue business remains positive with strong NPD, and we continue to leverage our integrated model to drive distribution growth. We expect our Banjo business to continue to outperform across industrial, automotive and energy markets as it leverages its inventory and differentiation to capture share. Finally, our dispensing business has achieved strong results for the last 2 years, but will be down in 2023, driven by lower North American project volume as customer equipment refresh cycles approach their final innings. We continue to see growth in India, offset by some moderating demand in Europe and Southeast Asia. For the segment, we expect price cost and operational productivity will drive margin expansion with some offset for mix as we see lower dispensing project volume in the segment. With that, I'll discuss our financial results. Moving on to our consolidated financial results on Slide 9. Q4 orders of $803 million, were up 1% overall and up 1% organically. We experienced continued orders growth in FMT, driven by strong water and energy results and an FSD due to strong fire and rescue orders as well as the receipt of a large project order for dispensing in the quarter. HST orders were down 8%, mainly due to the life science and AI OEM orders and softer semi demand I highlighted earlier. For the year, orders were up 8% overall and up 5% organically. We experienced positive orders growth across all 3 of our segments. Fourth quarter sales of $811 million, were up 13% overall and up 12% organically. We experienced nearly 20% organic growth in HST and strong growth across both FMT and FSD. Full year sales of $3.2 billion, were up 15% overall and up 13% organically. We saw strong double-digit growth across FMT and HST and 9% growth in FSD. Q4 margin contracted by 140 basis points compared to the fourth quarter of 2021 and adjusted gross margin of 43.6% contracted by 40 basis points. This was driven by unfavorable mix within HST and FSD, the dilutive impact of acquisitions, employee-related inflation and unfavorable productivity in HST, partially offset by volume leverage and strong price cost. For the full year, gross margins expanded by 50 basis points, and adjusted gross margins expanded by 10 basis points to 44.8%, primarily driven by strong volume leverage, positive price/cost and productivity, more than offsetting employee-related inflation and engineering resource investments. Fourth quarter adjusted EBITDA margin was 27%, up 10 basis points versus 2021. A bridge of Q4 adjusted EBITDA as well as Q4 adjusted operating income can be found in the appendix of this presentation. Full year adjusted EBITDA margin of 27.9%, is up 20 basis points versus 2021's adjusted EBITDA of 27.7%. This represents record profitability for IDEX. I will discuss the drivers of full year adjusted EBITDA on the next slide. Our Q4 effective tax rate of 20.5%, decreased versus last year's effective tax rate of 22.5%, primarily due to tax benefits realized as we recognize certain foreign currency impacts for tax purposes with the funding of the Muon Group acquisition. Our full year effective tax rate of 21.7% also included tax benefits from the sale of our Knight business and was down from the 2021 effective tax rate of 22.5%. Fourth quarter net income was $130 million, which resulted in an EPS of $1.71 Adjusted net income was $153 million, with an adjusted EPS of $2.01, which was up $0.30 or 18% over prior year. Full year net income was $587 million, which resulted in an EPS of $7.71. Adjusted net income was $618 million, resulting in an EPS of $8.12, up $1.25 or 18% over prior year adjusted EPS. Finally, free cash flow for the quarter was $147 million, 96% of adjusted net income, mainly driven by improved working capital performance. For the year, free cash flow was $489 million, down 1% versus last year and coming in at 79% of adjusted net income. mainly driven by higher net working capital, partly offset by higher income. As we exit the year, we made progress in reducing core business inventories and have momentum behind us to continue to drive further reduction into next year. Moving on to Slide 10, which details the drivers of our total year adjusted EBITDA. Full year adjusted EBITDA increased $119 million compared to 2021 and Our 13% organic growth contributed approximately $91 million flowing through at our prior year gross margin rate. We levered well on the volume increase and had record price capture to offset record inflation. Price/cost was accretive to margins and has returned to historic levels. As we exited the year, all 3 of our segments posted positive price/cost results. We drove operational productivity to offset supply chain-driven inefficiencies and realized the benefits of our energy and Italian site consolidations. Mix was a small positive for the year. We saw unfavorable mix pressure in the fourth quarter of about $3 million that were reversed a majority of the year-to-date favorability. We invested $20 million taking in the form of engineering and commercial resources in the business and M&A and diversity equity inclusion resources in corporate. Tracking to the lower end of the $0.20 to $0.25 of full year spend we highlighted at the beginning of the year. Discretionary spending increased by $25 million versus last year, closer to the high end of the $0.20 to $0.25 range on significantly higher sales than our original guide. We exited the year with a solid 30% organic flow-through. ABEL, Nexsight, KZValve and Muon acquisitions, net of the Knight divestiture and FX contributed an additional $14 million of adjusted EBITDA. Inclusive of acquisitions, divestitures and FX, we also delivered 30% flow-through. With that, I would like to provide an update on our outlook for the first quarter and full year 2023. I'm on Slide 11. We expect full year organic revenue growth to be in the range of 1% to 5%. This range reflects the uncertainty in the second half of the year given the short-cycle nature of our business. This organic growth rate equates to $0.12 to $0.60 depending on the top line results. This range includes price cost, which we anticipate will be positive for the year and some mix pressure stemming from HST and dispensing volume in FSD. We expect that our operational productivity will more than offset pressure from employee-related wage and benefits inflation. We operated in a challenging supply chain environment in 2022, and we expect the easing of these conditions as well as driving our own internal productivity funnel will deliver $0.06 to $0.08 of net productivity for the year. In 2022, we returned to a more sustainable level of discretionary spending post-pandemic and invested in the people needed to drive our strategy. Travel and external services did not fully rebound until the second quarter of 2022. And we hired an increasing rate as we move through the year. Although our spend is only moderately increased versus our 4Q exit rate, we'll see pressure of approximately $0.09 on a year-over-year basis. This impact is entirely felt in the first quarter of 2023. Although not to the same level as in 2022, we will continue to invest for the future. People, new products as well as applications for existing products, and these investments will provide up to $0.20 of pressure in 2023, depending on top line results. The range indicates how we will focus on resource allocation and an uncertain period and dial in our investments appropriately. Net of the divestiture of our Knight business last year, we expect acquisitions to contribute $168 million of revenue and $0.43 of EPS. Now let's look at a couple of non-operational items. Interest expense associated with the Muon acquisition represents a headwind of $0.12, and we expect FX to be a small impact, providing $0.02 of EPS pressure. So in summary, we are projecting organic revenue growth of 1% to 5% for the year, adjusted EPS expectations are in the range of $8.50 to $8.80, a 5% to 8% growth over 2022. The midpoint of our guidance implies a solid 30% adjusted EBITDA flow-through. Moving on to Slide 12. We I'll now provide some additional details regarding our 2023 guidance for both the first quarter and full year. In the first quarter, we are projecting GAAP EPS to range from $1.74 to $1.79 and adjusted EPS to range from $1.98 to $2.03, with organic revenue of 3% to 5% and adjusted EBITDA margins of approximately 27%. Our guidance includes $0.07 of pressure from accelerated recognition of share-based compensation as well as a delay in HST OEM shipments to the latter part of the second quarter that is lowering our organic growth expectations for the quarter. These factors, plus the carryover item I mentioned on the previous slide, mutes our year-over-year flow-through for the quarter, but expect to deliver solid flow-through for the year. Turning to the full year 2023. We project GAAP EPS of $7.55 to $7.85 and adjusted EPS to range from $8.50 to $8.80. We expect full year organic revenue growth of 1% to 5% and adjusted EBITDA margins to be 28% or higher. Capital expenditures are anticipated to be about $70 million, in line with 2022 spending as we continue to identify opportunities to reinvest in our core businesses. And free cash flow is expected to be 100-plus percent of adjusted net income. Thanks, Bill. I'm on the final slide, Slide 13. Before we open the call for questions, I'd like to wrap up with a summary of our 2023 focus areas. First, we are refocusing our efforts on a foundational set of practices and tools that link us together the IDEX operating model as we exit 2 intense years of double-digit organic growth within an environment of temporal barriers and obstacles. This is a year to double down on the core execution elements that make us an excellent company. The use of daily management, monthly business reviews, goal deployment and other tools have long been a source of efficiency, innovation and growth for IDEX as market conditions, particularly within supply chains, begin to return to historic norms, we must seize the opportunity to optimize our process-driven fundamental business practices to best support future growth and outperformance. Second, we are committed to growing our talent at an even faster rate to fuel future IDEX growth. Our excellent execution is led by incredible leaders around the world who are committed to our core values to developing top-performing talent and creating an inspiring company culture that attracts and retains the best people. Diversity, equity and inclusion continues to be an area of focus, creating environments where people feel they belong and are comfortable bringing their true selves to work each and every day. One talent note I want to address is the recent departure of Melissa Aquino. If you recall from our last session together, I introduced her as the new leader of the FMT and FSD segments. Melissa made a difficult decision to go back to a previous employer to take an opportunity she felt she could not pass up. We wish her well in her new endeavors and continue the search for her replacement. In the meantime, the gap has allowed me to step in, get closer to our businesses and spend time with an outstanding group of business leaders. Lastly, we've deployed $1.5 billion over the last 2 years on high-quality growth businesses, and we look forward to deploying additional capital in 2023. Our M&A teams have made tremendous progress identifying compelling portfolio extensions. Our funnel is in the best shape it's been over my tenure at IDEX and our strong operating cash flow and balance sheet put us in a great position to continue to capitalize on those opportunities. Although the short-term economic picture might be uncertain, I could not be more excited as I consider the next few years of our story. I believe we're headed into an extended period of growth and above-market performance fueled by a combination of technology-driven tailwinds and our own high-quality business potential. Our businesses are first rate, our teams are outstanding, our culture is special. I just want to go back to your comment on optimizing processes and how we should think about that inventory is certainly a one that's been a target just because you've had to build it up to deal with some of the supply chain issues. But maybe a little bit more color about how you're thinking about that. Yes. And that's probably the area with the best example. We're coming off an environment where a lot of even the best intentional processes kind of turn into chasing things, looking for parts and waiting for the truck to come in at noon, all of that kind of stuff. So as that moderates and gets better, we just want to be intentional to make sure that we're going back and putting in those process-based fundamentals, the right people in the right room, having the right kind of conversations. That's actually how we're going to -- we frankly made a nice turn here in the fourth quarter on inventory. We got a long way to go, but we're really excited about that potential for us moving forward. But I think it's just -- I think everybody should be very thoughtful of recognizing that the way things have worked the last couple of years, if you're not intentional about reorienting it back to something that operates in a higher plane, it's going to lag. And so we're taking that opportunity. Got it. And then just turning to free cash flow, still a little bit below historical performance for IDEX in terms of that conversion. Is it really just that inventory holding it back? I would say, what would be the lever to drive it higher at this point and sort of back to normal for you guys? Yes. So in the fourth quarter, we talked to the third quarter inventory stabilized. It wasn't a detriment to cash flow. Here in the fourth quarter, it added about $20 million of free cash flow, the movement we made on our position, and we continue to see that momentum. I think we've got line of sight to a half a turn to a full turn of inventory improvements as we progress through the year. It will be a significant driver of our cash flow performance as we go from, obviously, less than historical averages on our free cash flow conversion to last year being 100-plus percent, which will yield somewhere between 30% and 40% increase in free cash flow year-over-year. So I think that's a huge win as we progress through the year. So a couple of questions here. First on the guidance. Obviously, the commentary on the first quarter and some pushouts, plus a lot of the commentary about basically expected volatility through the year. How have you cadence that guidance? Is it relative to normal seasonality? I mean how do you think about first half, back half versus a normal year? Not that we've had a lot of normal years lately, but any kind of context you give to how you're thinking about what that cadencing looks like and how much kind of caution maybe you've put in there given what that backdrop looks like? Yes. I think we're generally first half, second half is fairly close, 49, 50, 51, 49, something like that. So this year, I think the implied guide is a stronger first half with volume starting to decline in the back half. We've got pretty strong price carryover and price capture that will put in place here in the first quarter that will carry at least the price side. And then just the implied volumes in the back half are down somewhere between 2% to 4%. Great. That's helpful. Makes sense. And then the comment on order volatility expected is the -- essentially the booking to shipment time period compresses or return to normal. Are you essentially suggesting that you're going to be seeing some pretty volatile order patterns in a year, but maybe a little bit more linear demand patterns as we work through the year relative to the kind of front half, back half comments you just made, Bill? Is that basically a warning sign for -- in your view for what those order rates might be, but don't over extrapolate relative to the underlying demand? Yes. No, I think that's well said. I mean it's a recalibration year, just like we had dynamic recalibration on the way up and recovery from the pandemic and supply chain issues and things like that, stimulus. Now we -- I think we're going to be returning to more normal patterns. But given the nature of IDEX, that's liable to play out at differentiated rates. So we see some more of it, as you'd expect, in some of those OEM-centric markets within HST, where we're a lot closer to the customer. It's more high velocity anyways. And you can see a bit of a pause there to take a breath, take some inventory out of their system. And then those are healthy markets on the other side of them. Some of our industrial businesses that are a little further away from the end customer, lots of distribution between us and them, lots more fragmentation. I think you'll see some of those same things play out over time, but probably a little further down the road. And so what we're kind of expecting here is that from a high level, you'll see things return to more normal rates were off in the backlog or the order rates and the sales rates are pretty tightly linked for us, unless we're sort of beginning or ending the cycle. But I think that what's a little unusual here is just the way it will play out. The nature of it, given just the differentiated pockets of IDEX, and so we're prepared for all of that. What we're trying to do on one side is look at it, adjust to it, course correct, but then always looking on the other side so that we don't over interpret something in the short end. Think it means something that's sustainable for 2, 3 years when it doesn't, and we keep resources aligned in places that have the best growth prospects for us. Appreciate that. One quick one, just a clarification. Slide 7 with the arrows within the range. Are those arrows implying high end and lower of the range for the HST and FSD? Or are you suggesting a little bit above, a little bit below and then the green clarification? Yes, exactly. HST on the high end of the range, FMT in the middle and then FSD at the lower end of the range. I'm just going to -- I'm going to follow up on Mike's question -- last question there and follow up on this recalibration of orders and things like that. IDEX doesn't typically have a lot of inventory, a lot of channels. But I'm sure there are some pockets of the business where there are some inventory in new channels. How are you thinking about the potential for your customers to destock some of their inventory and for that to be a pause in demand for you guys? Is that something that you baked into that down 2% to 4% volume in the second half? Yes. I mean there's definitely some of that in there. I think, as you know, we're kind of low on the food chain. We do a lot of component work for people who then turn it into subsystems in terms of the final system. So at any point, along that food chain, there's the potential for accumulation and then frankly, the normalization of it along the way. I think what we're thinking about, though, is when you think of how order patterns are generated many of them are actually done in an automated way. There actually isn't a lot of human intervention. And the two factors that drive it, the most are, of course, lead times and whether or not they're pulling in, and we're seeing that. We're seeing that kind of across the supply base. We're experiencing as well. A factor a lot of people don't consider as much though is volatility or variability. And so even when lead times are pulling in, if you still have an inability to count on it, it will tend to keep driving higher demand requirements throughout the system. So we're kind of monitoring both of those. And as any one of them comes to something more normal, almost always, you're going to see an impact on that on the other side for a short cycle business like ourselves. I don't think it's a massive number because, as you say, most of the things we make are customized and they don't stock well anyways. But we're coming off a pretty robust time here. I do think this calibration matters. It will play out over time through much of IDEX. Again, I think the focus for us is to understand it make sure that our own inventory positions and resources are calibrated right, but then be very, very focused on end market demand, what's driving that, what's the actual consumption rate on the other side because that ultimately is what you want to dial in to. I think maybe the question on supply chain. I think over the last couple of years, generally, all of these lead times have stretched out. But for IDEX's businesses, the delays have really been up your supply chain because you buy these highly value-added components. So there's a number of steps for them to go through. And as they compress, that's compressing the order to ship time. So can you talk about where your supply chain is relative to where it was in 2019 chain? How much better it's got, how much there is still to go? And what your general assumption is now for getting back to something like normal? Does it happen in '23? Does it happen in '24? Yes. Sure. I mean, I would say, in general, it's improved a lot and pretty close to where we were in 2019 with a few commodity exceptions. I'd put probably put electronics still at the top of that list. But frankly, we're not the most electronics intensive business. So it matters, but it's not widespread across the company. I think I would also remind everybody on the call, we have a lot of local supply. So we're typically dealing with people we've known a long time that are not far away all through the kind of the worst of it. In many cases, we were helping them. We were kind of sending people over to figure things out, help improve their flow. It's those kind of relationships. So -- and given that, that sort of topology, these are the kind of companies that can course correct a little better and generally have. I would say we're not yet normalized to 2019 levels all across IDEX. We're definitely past the halfway line. So depending on how the year plays out, you could see us basically articulating a normal condition, I think, closer to year-end, certainly as we begin the next year, absent any other force that we can't see. I was hoping we could unpack the margins in HST. I know you gave some of the color in the prepared remarks. You certainly had the top line. And -- but you didn't get the margin read-through. It's unlike price/cost was positive. You gave some of the other data points. Was mix a factor? Just -- and how much of this was temporary versus how you expect it to play out the rest of this year? Yes. I think there's 3 things there, Deane. One, we continue to face some of the inefficiencies. We talked about here as we progress through the back half of the year. Some of those businesses have grown 20% and still calibrating on some of the manufacturability of some of this cutting-edge technology that they have. Two was some mix within the portfolio. We talked about some of the short-term OEM pushouts. A lot of that has been kind of our book and ship components that are higher margin. And then the last one, just the addition of Muon, they were only in the portfolio for a month. They were shut down to do a full physical inventory that, that diluted margins a little bit. The Muon on will go away in the first quarter. I think we're making progress on the productivity piece, but the mix, I think, is still a component that we'll experience in the first quarter. Yes, so we've got the volume impact and then that mix carrying through at least through the next 3 months. Got it. That's helpful. And just expectations on price cost into '23. Is there more pricing initiatives you need to put through? Or is this all-carryover benefit? No. We've got carryover and the incremental pricing actions that we took to kick off the year. Obviously, that's part of our normal process and cadence to continue to capture the value for our products. So I think we're in a really good position from a price cost. We said in the fourth quarter, we're back to historic levels, and we think that will continue here as we progress through the year. If something were to change, obviously, we go back to the customers with an incremental increase, but we're well positioned here as we kick off the year. Great. Just last question, I'm not sure how specific you can get, and I really appreciate the prepared remarks and some of the earlier questions about fleshing out the transition period year. Just right from the supply chain normalizing changes, order behavior, we get that. But we just saw the ISM taking another step down, orders another step down. With all your short-cycle businesses, this is a great canary in a coal mine company to like gauge lead time changes, and you've given fabulous color here. If we total up the collection of soft pockets of business, is this a demand deterioration you're seeing broadly? Could it be the early signs of it? Or do you feel like these are more temporary? Just kind of step back and say, okay, from seeing these trends, how does it look to you for the businesses that you touch play out for the course of the next couple of quarters? Yes. I'd say, Deane, it's still pretty early. I mean everything we're kind of talking about here near term that there was some exposure in Q4 and some carry into Q1. That's very much a temporal condition and otherwise very active and strong markets where you can see, hey, people are taking a pause for all the reasons that you just suggested. Those bellwethers that we have on the industrial side, most of which their order side is coming through the small order flow side, honestly, those are holding up. We're simply, in some cases, projecting that if you combine a couple of things, we kind of know where those inventory levels are, we know how they think about planning, we know where we are from a lead time perspective. We're saying at some point, we expect we'll have some of that moderation there, but it really isn't in front of us as we sit here today. And then back half of the year is more of a macro call than anything else as we think about kind of floor and top end of the range for all of IDEX. So I think your question is helpful because it helps us kind of parse that we'll at least put out there, hey, we're seeing some of these things from an early indication standpoint, but most of them are in a temporal spot. We can imagine some things that would be bigger pieces of IDEX, more industrial in nature that would kind of follow the same calibration. And then ultimately, like everyone else, we're kind of thinking about where does the future go back half of the year, it's more of a macro question. Your order commentary has been very clear and helpful. And I appreciate it. I'm sorry to sneak in one more on it. But just in general, HST, a vertical that had more excess inventory given some of the, the disruptions across the whole vertical. And then do you have a sense that supply chain has actually gotten a lot better or orders like coming in as people anticipated getting better? I'm just wondering if that's already happened, where people can feel more confidence in lead times, I guess, across the businesses, or whether it's an anticipation of that? And then I had an M&A question, if I could. Okay. Well, I think the first question, I wouldn't say that those businesses in the HST world, have more inventory. I would say that they have more sophisticated planning. I think that we've typically seen in any cycle, there's just -- they're bigger organizations, they're a little bit more formal, they're usually a little quicker to react to cycles. And when they do it, that's a more of a concentrated industry anyways. So it tends to be kind of amplified that way. So there's nothing that tells me that somehow that they're sitting on more than anywhere else. And it's in any way, frankly, unusual from some other patterns we've seen when things change. So I'd say that's number one. Remind me again on the second question, I want to make sure I get the exact essence. You talked about supply chain confidence. Exactly. Yes. So whether spy chain has already gotten better and that lets people have more confidence in lead times and thus destock a bit or whether that's not happened yet? Yes. No, again, I think, think of it as 2 variables. One is lead time compression, that's absolute. And I think people are seeing that. They're seeing that quoted to them when they call and ask about things. I would say the second component that I mentioned that is important, though, is the performance against those quotations. Neither one of them yet are kind of back to where they need to be. They're both improved, but they both work together. And frankly, that second piece, the one about sort of assurance and delivery against commitments, has a huge psychological impact. And I think it's one of the -- I think it's actually the more powerful of the two. So if people say, hey, it's still longer, but I know I'm going to get it exactly want to ask for it, they'll actually make that move in a more fundamental way. If they're still getting surprised from time to time, that tends to fuel a little bit of this. I'm going to keep some things, I'm going to protect some things. So both are moving. And as we continue to talk through the year, you'll hear us talk about both sides of that. That was very helpful. Just in general, we've had, I think, a reasonably solid level of deal activity you guys have done great over the last year. Your characterization of buyers market just among potential targets for acquisition and whether PE matters for you guys and whether there's less intense competition there. And I will stop. Yes. I mean -- so in general, our story is a good one here. I mean we've had some good performance over the last couple of years, some great businesses we brought in. I've talked from time to time about the intention of work we've done to sort of build strategic conviction in a really, really formal way that contributes to the basic business intelligence that we have from all the businesses across IDEX. So the things that we control are in a great spot. As we think of them engaging with the outside world, we've always been careful to help people understand that we're fishing in a very high-quality universe that I think, in some ways, holds up and it doesn't move around as much in terms of valuations and even timing of transactions, particularly to do this work well. So -- on the PE front, they're often competing with us for properties like this. They too are attracted to companies like this. And I will say it's probably a little less activity competitively there or people that have been able to raise funding and be in the game. But we've long aspired with this work that we're doing to sort of be ahead of that anyway with cultivation on a proprietary nature, talking to people that we meet at the trade shows, those kind of things so that we're not actually in kind of a classic bake-off with lots of people anyways. It's an efficient market, so it doesn't always happen when it does. I think the dynamic around PE activity is absolutely true. Valuations overall still pretty rich because, again, we're looking for high-quality companies like the last 3 that we've brought into the business. And Eric, thank you for all that transparency that was great. So the question is -- maybe I missed it because I was writing away because you talk -- saying so many things. Did you tell us what pricing was in the quarter? Got it. So I was just wondering also with the -- thank you, Bill. I was just wondering also with the step-down in the first quarter organic, is that mostly FMT and maybe secondarily, FSD in the organic? No, it's mostly HST. We highlighted just some of the temporal moves from some of the OEMs as they recalibrate order patterns and inventory levels, that's the major driver. Okay. And then I guess my sort of last question here is also on the M&A environment, I mean, in the past, you guys have sort of talked about what's available and a little bit about the funnel. Is there anything more you can say than what you've already said on M&A? Is that still the spreads been kind of coming in a little bit? Or anything changed? No. I mean, as I said just a minute ago that we're still looking for high-quality properties. Those valuations tend to hold up over time. because of the long track record usually predating our conversation and the expectation you'll have a good trail on the other side. I just think from an availability front, we've got more than ample capacity, even though we've deployed a lot over the last 2 years. The great part of being IDEXX is we generate that capacity each and every day. And then I think our targets, we really have not changed. We kind of are comfortable with a band of about $0.5 billion to $1 billion. And if long considered that to be a good target for us here in the next couple of years, sort of regardless of the cycle and they're generating all the right work to go realize that. I was wondering if you could offer a little more of a profile on the lung group, maybe a rough breakout of key end market exposures across semi, med tech, food and beverage and others. -- where historical growth rates have been -- how the current market environment impacts '23 expectations and where there's the greatest opportunity to extend or accelerate growth within the IDEXX portfolio going forward? Brian, we said about 2/3 of the business is in those major categories you started with on the medical, semi and food side, the balance in a variety of different applications. We've said it's grown at double digits here the last several years. It's got line of sight to continue to do that here as we progress even with some of the noise out there in the semicon market, where they play in this space is still healthy. They've got innovative technology that they continue to roll out. So we remain bullish on their growth profile both on core products and some of the NPD applications that we've gotten to know a little bit more as we progress through the last couple of months of our ownership. And then really past that, I mean, we did say there's some customer points that we have that they don't have that over time, we think, are interesting and we could exploit those. And that's very interesting things on the kind of codevelopment fronts, but the cycle of those are going to be further out in the future. So this always kind of was a game of capitalizing on the near-term strength and success of that business in those markets with sort of this additive element that we're going to work over time to enrich it with all the IDEXX assets. Definitely makes sense. And given the composition of Man Group, the -- from what I can see at least 5 businesses, I'm not certain divisions or platforms they're in. Are there any unique aspects of integration that you would call out? And I guess just to level set, obviously, this is a growth opportunity. But are there cost synergies? I mean, not so much within the IDEXX topology and things like that. I mean some certain things we do to leverage back office and being part of the company. But it's not kind of a classic story of us kind of putting things together and moving plants around. The -- as you often see in businesses like this, I mean a lot of that technology is resident in people. I think the single biggest lever that we anticipate pulling here absent that 1 is 80-20. I mean it's just the implementation of that model. And I can absolutely assure you their profile is very IDEX-like out of the gate, which means there are opportunities there to streamline and simplify it. Okay. Excellent. And 1 last one, if I can. You've called out an increase in project activity in municipal water. -- over recent quarters, there's obviously a lot of funding for domestic projects. Are you willing to offer some finer points on that front? How much the project funnel has expanded anticipated 2023 growth? Anything along those lines? Yes. I mean it's -- of course, it manifests itself across a series of franchises and very kind of different technologies that we have. So I would probably just roll back to very, very positive. The quote activity has been strong here at the end of last year continues into this year for all of the dynamics that you're citing, everything from EPA funding and enforcement possibilities, which has always been a catalyst for the businesses that we own now. as well as broader infrastructure support over time, which always takes a little longer to land but also has a potential to extend some of the growth time frames that we're thinking about into the future. So we're well positioned. We're continuing to kind of work those assets together. And then -- and this is an area of focus for us as we think about deploying some capital to. Just wanted to come back to the excess OEM inventory comment. Any sense in terms of months or weeks of inventory on hand at those OEs that needs to get worked down? And then -- any color or specific product customer segments that you're referring to there? No. I think from a segment, I think it's most of -- we described within some of the comments within our life sciences and total instrumentation, the folks in that group from a magnitude perspective on what they're holding in from inventory, I wouldn't speak to that other than just conversations with them, there is a calibration period that we're going through. As Eric highlighted earlier in the call, this isn't atypical to what we've seen historically we've gone through really robust cycles of growth. There is a quarter or 2 of recalibration to normalize and then back off. I think as you hear any of the external commentary for those large customers, they are still bullish on their equipment deliveries and the growth that they're going to see in 2023. All right. Makes sense. And then just shifting to the resource investment you contemplated for the guide. $0 to $0.20. I mean certainly a wide range given the macro and understand that. But historically, I'd say IDEX consistently invested regardless of the state of the environment. What type of situation really drives you to that lower end? And then maybe just a little color on some of the various projects that are being contemplated there. Absolutely. We always think of investing and investing for the future and investing to grow. One of the great things about a company like ours, though, is we can move things around sideways. -- a lot to help us kind of hit the lower end of that range and still make the right choices for the right businesses. And so whenever you see us talking about stuff like a 0, it's actually still very dynamic here. it's just to be candid, we would take businesses that are in softer parts of the universe, and we would quite intentionally like pull those down, lead them out a lot. And redistribute those costs elsewhere to parts of IDEXX that are stronger, sometimes literally taking the same people. and putting them over in stronger parts of IDEXX. So we actually have that nice optionality down at the lower end of the range, but keeps it all moving and allows us to kind of weather a storm if it happens. Just a couple of follow-ups on orders here. So if I look at HST, obviously, the orders there on an organic basis, the weakest across the portfolio, but the growth for the year on revenue expected to be the best. Like -- so when -- at what point kind of as you get through the year, do you need to see orders start to stabilize or start accelerating again before like you get a little bit more concerned about the organic revenue profile going forward. Yes. I think we have a while. HST is our biggest backlog. They've built the most backlog out of the 3 segments. So really comfortable with their position here as we go through the first half of the year. We said this calibration on the OEM inventory levels is generally a quarter maybe it spreads into the second. So we're confident that we're going to see that start to pick up and move as we progress into the back half of the year. And then similar on FMT -- sorry, on diversified dispensing is a headwind this year on a revenue basis, but it looks like orders kind of picked back up to almost essentially peak levels that you saw like a year ago. So are you starting to see that? Like do you feel more comfortable about the visibility? Are those like 24 orders, I guess, essentially for dispensing that you're getting on. No, the Q4 we got for dispensing will book in the second and third quarter of this year. Yes, Dispensing orders were up 25%, but their sales were down 20-plus percent in the fourth quarter. So this is -- that was the 1 last order to give us kind of the full set of visibility to still reasonable performance, but down, that's going to mask a little bit of the strong organic growth that we expect from Fire & Safety and Bandon next year. We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments. Okay. Well, thank you all for joining and listening to our story. And I know there were a lot of moving pieces there in an environment that's got some pluses and minuses and things that are playing out. So I'll keep this really, really simple. I want to, again, thank all the folks from IDEXX. 2022 was a great year. I mean really, really outstanding year, incredible growth, focused on the right things, getting capital to work, and we grew our people, we grew our culture. I think 2020, this is going to be an equally great year, and it really sets us up for the future to come. We talked a little bit in my last framing comments there about the power of execution. We're really excited about that. We think we've got a chance here to go establish even a little bit more competitive advantage as we jump on this and recalibrate to the world to come. So we're all over it. We're doing that actively. And then just as passionately, we've got a number of teams that are thinking about the future, what comes in 5 years, what comes in 10 years, and we're going to make the choices that we have to to capitalize on those too. So -- thanks for your support and interest, and have a great day. Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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EarningCall_861
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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 PotlatchDeltic Fourth Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would like to now turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed. Thank you, Devon. Good morning, and welcome to PotlatchDeltic's fourth quarter 2022 earnings conference call. Joining me on the call is Eric Cremers, PotlatchDeltic's President and Chief Executive Officer. This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides and in our filings with the SEC regarding the risks associated with these forward-looking statements. I'll now turn the call over to Eric for some comments, and then I'll review our fourth quarter results and our 2023 outlook. We reported total adjusted EBITDDA of $574 million for 2022 after the market closed yesterday. That is the company's second highest EBITDDA on record and it marks our third straight year of strong financial performance. Cumulative EBITDDA generated by our leverage to lumber strategy over that three-year period was $1.6 billion. Our Wood Products segment contributed $291 million of adjusted EBITDDA in 2022 and $861 million over the last three years. We shipped just over 1 billion board feet of lumber in 2022, and we had another strong year in terms of safety performance. As discussed on last quarter's call, we successfully completed the rebuild of our Ola, Arkansas sawmill, and restarted the large log line on schedule in the third quarter. While the start-up phase has taken a bit longer than we had hoped relative to our stretch goal, the mill is on track to reach its 150 million board feet annual capacity on a run rate basis by the end of the quarter. As a reminder, Ola's rebuild also significantly lowers the mill's cash processing costs and improves its log recovery. In 2022, we also announced a $131 million project to modernize and expand our Waldo, Arkansas sawmill. The project will increase the mill's annual capacity by 85 million board feet and significantly reduce cash processing costs. Activity will be focused on site prep in 2023, with equipment delivery and installation to come next year. The existing mill will continue to operate during the project with just three weeks of downtime expected in 2024 to tie in the new equipment. Project completion is expected by the end of 2024. Our Timberland segment generated adjusted EBITDDA of $249 million in 2022, which was just below the record the segment set in 2021. We harvested 6.5 million tons, which exceeded our planned harvest primarily due to the addition of CatchMark's timberlands in mid-September. Speaking of CatchMark, we had an excellent year on the M&A front. CatchMark added nearly 350,000 acres of high-quality timberlands and some of the strongest log markets in the U.S. South. Separately, we also acquired 46,000 acres of well-stocked timberlands in Mississippi and Arkansas, and three bolt-on timberland transactions. Overall, we added nearly 400,000 acres of attractive timberlands in the U.S. South to our portfolio in 2022. Our Real Estate segment also had a strong year, contributing adjusted EBITDDA of $73 million. On the rural side of the business, we sold 20,000 acres at nearly $2,400 an acre. Those sales included what we believe is the industry's first solar deal, comprising 1,760 acres for $13 million, or $7,500 per acre. Real estate has built a backlog of over $100 million of future potential solar deals. We expect that figure will increase as the team finishes stratifying CatchMark's acres in 2023. Our team also made good progress on potential carbon credit and carbon capture projects in 2022. While it will take time for these efforts to pay off, we are optimistic about growth tied to providing natural climate solutions, and we believe these efforts will result in higher returns as well as higher timberland values. On the development side of our real estate business, we sold 181 lots at an average price of $112,000 per lot in our Chenal Valley master-planned community in Little Rock. We also closed commercial sales every quarter in 2022, resulting in over $13 million of revenue at an average price of $290,000 per acre. Turning to housing. U.S. sentiment deteriorated quickly in 2022. While a significant decline in affordability has clearly caused the U.S. housing construction market to slow, we continue to believe that the backdrop is favorable over the long term. This is based on a fundamental shortage of housing stock due largely to the combination of underbuilding after the great financial crisis and favorable demographics in the form of Millennials. It is also apparent that the Fed's historic pace of interest rate increases has slowed the economy and is causing inflation rates to decline. Many economists are predicting that the Fed could shift into an easing cycle as soon as the middle of 2023. In fact, markets are pricing in this expectation, the mortgage rates have dropped over 100 basis points recently. Acknowledging it will take time, we continue to expect the U.S. housing starts will return to levels above the long-term average of 1.5 million units per year once homes become more affordable. In the meantime, the number of housing units under construction remains elevated at 1.7 million units in December. We expect that the elevated level of housing units under construction will support lumber demand during the Spring building season. In addition, home buyers and builders are responding to affordability issues. For example, remote work opened the possibility to move to less costly parts of the country for a lot of people. Builder concessions or a shift in product mix to smaller homes or fewer amenities are other examples that are occurring. Lower mortgage rates and improved consumer confidence are the key remaining ingredients needed to get housing construction back on track. Shifting to repair and remodel, which is the largest market segment for lumber demand, the underlying fundamentals continue to be favorable for a variety of reasons. Existing U.S. housing stock remains the oldest in the history of the statistic at 42 years on average. This is important because older homes are significantly smaller than new homes on average and older homes typically need more repairs. Higher mortgage rates mean that people are much more likely to stay in their existing homes. Remodeling is a very attractive option for homeowners given strong levels of home equity across the U.S., a job market that remains strong, and the fact that consumer balance sheets remain in good shape. In addition, higher interest rates usually have less of an effect than other factors on repair and remodel demand. Pundits expect repair and remodel spending to continue to grow this year. Harvard's leading indicator of remodeling activity report forecast R&R spending growth will remain positive and be 2.6% higher year-over-year in the fourth quarter of this year. This sentiment is supported by our home center customer takeaway, which remains strong. We continue to be optimistic about lumber demand in the R&R market segment. The Random Lengths' composite lumber price reached a bottom recently and has increased three weeks in a row to $412 per 1,000 board feet. Lumber futures are trading at $100 premium to cash prices. We expect lumber prices will continue to improve from current levels as supply chain stocks up for the spring building season. Moving to capital allocation. We returned $263 million of cash to shareholders in 2022. That amount included a $76 million special dividend, which was driven by our strong results in the first half of the year. We remain committed to growing our regular dividend sustainably. The key to doing so is by increasing our stable cash flows through accretive acquisitions, such as the CatchMark merger and the bolt-on timberland transactions that we completed in 2022. We increased our regular dividend 2.3% in December. Our regular dividend payout represented 43% of our cash available for distribution in 2022. We also remain committed to repurchasing our shares only when they trade at a significant discount as part of our overall focus on growing shareholder value over time. To that end, our Board approved a new $200 million share repurchase program in August. We bought back $55 million of stock during the year at an average price of $45 per share, which is well below our estimated NAV. Our opportunistic approach also applies to our borrowing costs. In 2022, we utilized interest rate swaps from 2020 to reduce our weighted average borrowing cost by 80 basis points in a year in which the Fed increased interest rates by over 4 percentage points. Our weighted average borrowing costs are now 2.4%, the lowest of the timber REITs. At the end of the year, we had $344 million of cash on the balance sheet and liquidity of nearly $650 million. Our leverage remains low and our financial strength provides a solid platform to continue growing shareholder value. Shifting gears, our environmental, social and governance reporting team had a very busy year in 2022. We published our third annual ESG report in May, our first carbon and climate report in September, and we launched our ESG website in Q4. We were also named to Newsweek's list of Most Responsible Companies for the second year in a row. Finally, we announced our commitment to greenhouse gas reduction goals at the end of the year. PotlatchDeltic has a strong ESG story and we are committed to do our part to mitigate climate change and continue our legacy responsibility across the ESG spectrum. In summary, 2022 was another great year for PotlatchDeltic. That is a real tribute to our employees who had a lot on their plate. Their dedication and hard work allowed us to complete the CatchMark merger, three bolt-on timberland acquisitions and the older rebuild and startup, all while delivering excellent financial results. Our strong balance sheet, liquidity and strategy provide a solid platform to continue increasing shareholder value. Starting with Page 5 of the slide. Adjusted EBITDDA was $52 million in the fourth quarter compared to $101 million in the third quarter. The quarter-over-quarter decline in EBITDDA was primarily due to lower lumber prices, lower index sawlog prices and seasonally lower harvest volumes. I'll now review each of our operating segments and provide more color on our fourth quarter results. Information for our Timberlands segment is displayed on Slides 6 through 8. The segment's adjusted EBITDDA decreased from $65 million in the third quarter to $51 million in the fourth quarter. Our sawlog harvest in the North was 456,000 tons in the fourth quarter, which is flat compared to the third quarter. As we discussed on last quarter's call, our harvest volume fell short of plan in the third quarter, primarily due to log-and-haul contractor availability issues. Our Northern team did a good job securing additional contractors and increasing the harvest in the fourth quarter, which reduced the harvest shortfall for the year. Northern sawlog prices were 18% lower on a per ton basis in the fourth quarter compared to the third quarter. The decline in sawlog prices primarily reflects lower prices for index sawlogs. In the South, we harvested 1.4 million tons in the fourth quarter. The fourth quarter was the first full quarter of operations on CatchMark's timberlands since we closed the merger in September. Solid execution and flexibility by our Southern Timberlands team were key to achieving that result. Our Southern sawlog prices were 3% higher in the fourth quarter compared to the third quarter. The increase was driven by a full quarter of volume in CatchMark's stronger southern markets, which was more -- which more than offset a seasonally lower mix of hardwood sawlogs. High sawlog prices in our legacy wood baskets were 2% higher in the fourth quarter than in the third quarter. Moving to Wood Products on Slides 9 and 10. Adjusted EBITDDA declined from $31 million in the third quarter to $2 million in the fourth quarter. Our average lumber price realization decreased nearly $100 per 1,000 board feet or 17% in the quarter. By comparison, the Random Lengths Framing Lumber Composite Price was 23% lower in the fourth quarter than the third quarter. As a reminder, the lag we experienced between booking and shipping orders is not captured by the composite, which is closer to a real-time indication of price. Our average lumber price realizations per 1,000 board feet were $487 in October, $480 in November and $450 in December. Lumber shipments decreased 7 million board feet from 265 million board feet in the third quarter to 258 million board feet in the fourth quarter. Our planned shipments in the fourth quarter were lower than expected, primarily due to a slower ramp-up at Ola than planned. As Eric mentioned, the team is making good progress at Ola, and we are on track to reach our full production run rate by the end of the first quarter. Shifting to Real Estate on Slides 11 and 12. The segment's adjusted EBITDDA was $7 million in the fourth quarter compared to $14 million in the third quarter. EBITDDA generated by rural sales declined sequentially due to the sale of fewer acres at a lower average price in the fourth quarter. This was expected as both our and CatchMark's rural land sales were heavily weighted to the first half of the year in 2022. EBITDDA generated by our Chenal Valley master-planned community also declined sequentially. We closed the sale of 24 residential lots in the fourth quarter compared to 48 lots in the third quarter. We also sold fewer commercial real estate acres in the fourth quarter. Having said that, we have closed at least one commercial sale every quarter this year for an average price of $290,000 per acre. Turning to financial items, which are summarized on Slide 13. Our total liquidity was $643 million. This amount includes $344 million of cash as well as availability on our undrawn revolver. We refinanced the $40 million of debt that matured in December. We had previously logged the refinance rate, which reduced our interest rate on this debt approximately 100 basis points and lowered our annual interest cost by approximately $400,000. Overall, we used interest rate swaps to reduce the weighted average borrowing cost on our outstanding debt to 2.4% this year. Including the refinance of CatchMark's debt in the third quarter, our annual interest cost run rate has declined nearly $9 million. We repurchased $50 million of our shares in the fourth quarter at an average price of $46 per share. We also paid a $76 million special dividend in December. Capital expenditures were $20 million in the fourth quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement and it excludes timberland acquisitions. As Eric mentioned, we were the successful bidders on three bolt-on timberland acquisitions in Mississippi and Arkansas earlier this year for $101 million in the aggregate. We used cash to close all three transactions, including $14 million to close the last of the three transactions early in the fourth quarter. Integration of CatchMark continues to go well, and we have now achieved cash synergies of $19 million on a run rate basis. We remain on track to achieve cash synergies of $21 million versus the $16 million target that we communicated when we announced the transaction at the end of May. I'll now provide some high-level outlook comments, the details are presented on Slide 14. We plan to harvest approximately 7.7 million tons in our Timberlands segment in 2023. Harvest volumes in the North are planned to be seasonally lower in the first quarter at a level comparable to the first quarter of 2022. We expect Northern sawlog prices to decline about 30% in the first quarter compared to the fourth quarter. In the South, we plan to harvest approximately 1.5 million tons in the first quarter. We expect our Southern sawlog prices to decrease modestly assuming customer log inventories remain full. We plan to ship 1.1 billion board feet of lumber in 2023. In the first quarter, we plan to ship 255 million to 265 million board feet of lumber. The effect of seasonally lower cut rates in our Northern sawmills and a planned maintenance outage in our Warren, Arkansas sawmill are expected to offset increased production at our Ola, Arkansas sawmill in the first quarter. Our average lumber price thus far in the first quarter is approximately 14% lower than our fourth quarter average lumber price. This is based on approximately 125 million board feet of lumber. Our lumber prices have been increasing recently and our spot price is currently about 8% lower than our fourth quarter average lumber price. As a reminder, a $10 per 1,000 board foot change in lumber price equals approximately $12 million of consolidated EBITDDA for us on an annual basis. Shifting to Real Estate. We expect to sell approximately 18,000 acres of rural land and 150 Chenal Valley residential lots in 2023. Additional real estate details are provided on the slide. We estimate that interest expense will be approximately $2 million in the first quarter and $9 million to $10 million per quarter for the second, third and fourth quarters of 2023. Interest expense is lower in the first quarter than the other quarters because that is when we receive our annual patronage payments from the Farm Credit banks. Also, interest income on our balance -- cash balance has increased due to higher short-term interest rates. Turning to capital expenditures. We are planning to spend $135 million to $145 million in 2023, excluding any potential acquisitions. That estimate includes $74 million for the Waldo, Arkansas sawmill modernization expansion that we announced last June. Overall, we expect our total adjusted EBITDDA will be lower in the first quarter due to lower lumber and index sawlog prices. Having said that, we believe that lumber prices reached the bottom in January, and we are optimistic the recent improvement will continue. We're well positioned to continue growing shareholder value over the long term. Thank you. In terms of the share repurchase, so you still got $150 million left on the $200 million authorization. How should we think about the type of pace you'd likely execute, recognizing you said that you're only going to do it when the stock is at the discount, but clearly, it has been? But, at the same time, obviously, your cash generation at least in the first part of the year is going to be a bunch lower. So, kind of how should we think about it? You do have the -- you do still have quite a bit of cash on the balance sheet and, obviously, the untapped revolver. Yes. Good question, Mark. Buying back shares opportunistically when our stock trades at a large discount to NAV, like it does today, that remains a very important part of our capital allocation strategy. But needless to say, there is a lot of uncertainty in the markets right now. We continue to believe that share repurchases are an attractive use of our capital, and we're going to constantly balance that against other capital option -- options. But at the end of the day, there really isn't a price for moving aggressively with share repurchases. And we think our cautious approach to capital allocation has served us very well in the past. Most companies get share repurchases wrong. So, I don't think I can give you a definitive answer on the pace other than we're going to be constantly evaluating where our stock is at relative to NAV and other valuation metrics against these other capital allocation alternatives that we have. And those alternatives, they come and go over time. So, it's very hard to predict how the pace is going to play out. And maybe just as a quick follow-up. Is there a certain level of cash that you want to retain on the balance sheet that -- can you kind of help us guide on what your thought process might be? Yes. So that's a good follow-on question, Mark. So, in terms of level of cash, I mean, historically, I thought about $100 million is kind of a base level we like to hold. And then, on top of that, as a reminder, we have $74 million that we're going to spend on the Waldo project this year. So, something approaching $200 million would be kind of the baseline. Hey, thanks very much. Just a question on -- Eric that you mentioned under harvest in the North in 2022. Just wondering how material that is and whether you're going to make up that volume in '23? Yes. Actually, I'll take that one, Paul. This is Jerry. So, in terms of the under harvest, that's primarily pulpwood and ton wood. So, there's a couple of things going on. One, we've seen pricing for pulpwood for the last few years have been pretty weak in the region. And for us, historically, that's a low-margin part of our business. So, when it doesn't pay to hold the wood out, we don't. And then, the other thing we've had, certainly, it was an issue in Q3 is contractor availability. So, our team did a really good job of: one, securing more contract availability in Q4; but they certainly prioritized shipping sawlogs over pulpwood and ton wood. So, at the end of the day, happy to report that 265 million board feet was the plan for the year and they hit that for the year. So, I think going forward, I don't know if that pulpwood and ton wood gets made up. So, I think it's -- I think that's in the [rear-view mirror] (ph). Okay. And then, just on the Wood Products side, just knowing that you've got the plywood asset, but I'm not sure how well it rained in the quarter, but were your lumber operations breakeven and were they affected by the slower-than-expected ramp-up at Ola? Well, they were definitely affected by the slower ramp-up at Ola. We missed our production and shipment targets at Ola in the quarter, simply because we're not where we want to be from a cut rate standpoint. From an earnings standpoint, we made money in Wood Products in the fourth quarter, a couple of million dollars. Plywood was definitely under some pressure in Q4, that's to be expected. But a good chunk of our plywood mix competes with OSB and commodity housing-type applications. And some of it's more industrial high-end applications. That part of the business is surprisingly is holding up reasonably well. But the other side, the non-repair side of our plywood business was under some pressure in Q4. Okay. And then, thanks for the detail on lumber prices by month. I'm just wondering, we had a big announcement by Canfor up in Canada last week and just wondering how much prices jumped down in Idaho as a result of that announcement. Was that material at all? Oh, yes, that was definitely material. And then, you raised a good point, which is our Southern prices weren't really impacted by the Canfor announcement. It was really all about Idaho lumber prices, [indiscernible] in particular. Yes, we saw a jump in the $30, $40, $50 a 1,000 kind of range, almost immediately from when that announcement was made. Yes. So, so far, we've seen, I don't know, roughly 2 billion board feet of either permanent shutdowns or curtailments over the last 12 months. We continue to hear -- we don't operate up in B.C., as you know, but we continue to hear that B.C. is relatively high cost. And so, with these lower prices, I hear a lot of chatter about mills curtailing or closing. And yes, I think there's an expectation that there could be more curtailments or closures, but that's really up to those producers in that region. Okay. And then just lastly, with the lower lumber pricing environment, has that freed up some of the timberland opportunities, i.e., is there more deals in the marketplace, or do you anticipate that in '23? Yes. The timberland M&A market right now, Paul, it's pretty quiet. We're coming off a really active 2022, so I guess it's no surprise the market is going to have a little bit of a pause here. But with housing starts pulling back and with lumber prices pulling back, I'm guessing that sellers are choosing to wait until there are some signs of a recovery in housing starts and lumber demand to bring properties to market. Also, we suspect sellers might be holding back as carbon potential is becoming a bigger and bigger deal. But so far, it looks like it's going to be a pretty quiet year on the timberland M&A front. Hi, good morning. This is [Roshni] (ph) on behalf of Ketan at BMO. Just to start off with -- back of Paul's question here, can you talk a little bit about what you're seeing in terms of lumber demand and channel inventory trends? Have you seen a change in the last recent weeks about the curtailment announcements? Well, we're not quite yet to the spring building season yet, so we haven't really seen firm uptick in demand. I think what -- dealers have been running with relatively low inventories all along and people are wondering how far prices are going to drop. So, they've been holding off from buying. I think we have seen a little bit of a pickup in demand here lately. People are starting to think, okay, prices have reached the bottom. They're probably not going to go any lower. So, it's time to step up buying. How that translates into end user demand, it's really hard for me to say is we don't really sell to direct users. I will say that on the R&R side, we sell to a number of home centers. And that side of our business has stayed remarkably strong. We're really happy with the R&R segment right now. And so, we're feeling good about that segment. There's no doubt housing starts are coming down this year relative to last year. That's going to hurt overall lumber demand. But as we look out into 2024, we think the Fed is going to be cutting rates later this year, and we think starts will be back added again as we get out to 2024. We have started to see a few positive signs in housing. The homebuilder confidence has moved up off the lows. I've seen mortgage rates come down 100 basis points or so, and I've read articles about homebuilders buying down mortgage rates. Some -- I think I read somewhere that one of the builders is offering a 5% mortgage rate to try to entice buyers. So, it's not like it's a complete disaster out there like it was after the great financial crisis. But it's -- we're not yet to the spring building season. Thanks for that color. And then, can you tell us what's the right way to think about decline in log prices in Idaho in Q1 is? How do you think about that? Yes, it's a great question. I mean, certainly, in Idaho and when you talk log costs, that's certainly the logs that we're buying ourselves to manufacture lumber and plywood. No question as lumber pricing has come down and we indexed the price of those logs. We're going to see some early effects, probably around a $3 million or so, number for the first quarter. And then, additional relief, which could be significant, actually, as the year plays out. Okay. Thank you. And then, could you also talk about your log cost benefit in Wood Products? Like, just when you see Idaho [falling] (ph) sawlogs and stuff, primarily in Idaho, are you seeing anything on the Southern side as well? No. Our Southern prices, they're actually up a little bit in the fourth quarter. They may be down a little bit in the first quarter, but not much. One of the benefits of having a timber business in the south is log prices tend to be relatively stable. So, we're not seeing any real decline in the South. Okay. And then just last one for me. How much is left of Deltic's real estate development in the Chenal Valley, both in residential and commercial? Yes. That's a great question. I mean -- and I'll start with the high-level stats just to frame the context. So that's a 4,800-acre master-planned community. It's been since the late 1980s is when Deltic started that project. And a little over 5,000 total residential lots, about 1,400 remain. And then, we also have about 300 acres of commercial real estate that's available for sale as well. With Ola, you mentioned that it was coming up the curve a little bit more slowly than perhaps you'd wanted. Was that, Jerry or Eric, sort of running to demand owing to the market? Or was it true learning curve issues as you're coming up the curve with Ola? And why was the cut rate not where you wanted it to be? Yes, George, good question. No, it clearly was not related to the demand. Starting up a mill it's not just an on-off switch. When we started Ola up back in late September, early October, our cut rate was around 13,000, 14,000 feet an hour. As we sit here today, last night on the night shift, we ran 31,000 board feet per hour. So, we've over doubled production volumes now since when we first turned the mill on. We're still not to where we want to be. We want to get to 40,000 an hour. That's our goal. That's our target. That's where we think we're going to be at the end of the quarter. This is two steps forward, one step back when you start up a lumber mill like this. We had residuals handling issues at the very start. We had vibration issues that we had to deal with. And we had alignment issues. Right now, we're grappling with optimization software control issues. But we're bird-dogging those issues. And like I said, two steps forward, one step back, and we're moving up the ramp-up curve and we think we'll be there by the end of the quarter. CapEx is guided a little bit higher than we were at and I think the Street, and obviously, you have Waldo. But is there anything else in there that we should be at least tracking progress on or asking about over the course of the year that you would point out? Yes, I'll start with a high level, and Eric may want to add something from a Wood Products standpoint. But you nailed it. I mean overall, $135 million to $145 million spend includes $74 million of Waldo. The rest of it, I would say, is kind of normal biz. It's planting trees in our Timberlands business. I mean, it's a little up a little bit because we now have more acres and higher harvest. That would be part of it. Real Estate, it's a little bit of timing, and that's conscious. We always stay a step ahead of demand. So, we kind of slowed down development a little bit at the end of 2022. And right now, we're planning to potentially pick that back up -- pace back up a little bit. And when you think about Wood Products, there's a certain level of maintenance, but there's also discretionary projects there as well. And the discretionary, we try to always think about a return greater than 15% for those discretionary projects. Thanks, Jerry. Last question for me, and this is probably more for us than for you folks. But aside from British Columbia, are there any other markets where you think the cost curve is such that capacity is going to be strained and we could see potential -- at least we should be watching for potential curtailments or shutdowns? Yes, George, I think the Pacific Northwest, the West side is vulnerable here. Those mills are competing for logs with export market logs. And they -- the price of logs on the West side -- mills have to make a profit if they're going to stay open. But I think the West side is vulnerable in large part because harvesting volume that's available to mills has been coming down. Standing timber inventories have been coming down over the past several years. We had a bunch of fires. There's been conservation measures that have been taken. So, I think there's the potential for further reductions over on the West side. It will be nothing like what's happened up in B.C., but that's probably the next most vulnerable region in North America. Thanks, Eric and Jerry. Appreciate taking my questions. Just first one, anything from a cost perspective that affected Wood Products in the quarter? You did mention, obviously, the slow rate at Ola. So, I'm just wondering if there's anything else, because the margins seem to be, on an EBITDDA basis, relatively pretty weak. And I'm just wondering if there's anything outside of price and Ola that affected that margin. Well, we're in a relatively inflationary environment, Mike. So, I -- that's part of it. I can't think of any one thing in particular that jumped out at us in the fourth quarter. Certainly, having Ola run at its run rate of 40 an hour would help leverage the cost structure, but I can't think of anything else that really hurt us in the fourth quarter in particular. Okay. Got it. Appreciate it, Eric. Just one last question on repair and remodel. You made the comment that home center customer takeaways remain strong, which is [indiscernible] fairly well, which is -- it's great. But typically, if you look back historically, there's been a few quarter lag between a decline in housing single-family starts and a decline in repair and remodel. So, any sense that you're going -- I understand that you're seeing right now still strong takeaway, but if you look out couple of weeks, do you see that abating at all? Do you see takeaway from home centers and deals especially declining? And the reason I'm asking is, not only do you see it -- not only does all typically lag starts, but the consumer itself has weakened. You look at rising unemployment, you look at type of wage growth. And you also look at the fact that R&R has been relatively elevated in the last couple of years, particularly given work from home. So, I'm just trying to get a sense of whether -- what you're seeing right now with home center takeaway is something that you expect to persist and if there are signs of any cracks. Yes. I don't see any signs of any cracks. I do think you're right. I do think it will slow. But by slowing, I still think I would point to growth even out to the fourth quarter. There's the other side of the coin here, which is, yes, you're right, during COVID, people sit around the house and do home repair projects. But the other side of it is, we were in a really high-priced lumber market environment over the past couple of years. And as those prices have come down, anybody that was deferring a home repair project, now is the time for them to pull the trigger on -- because you've got low lumber prices. There's a whole bunch of other issues that are out there that are favorable. You still got these really high levels of home equity. You've got -- there's not much inventory for sale that's out there. There's -- so people are stuck in their homes. And so, if you're stuck in your home -- yes, unemployment has ticked up, but it's still a 3.5%. There's still a lot of cash floating out there. So, there are so many other more favorable factors at play here that I don't see it slowing down. Maybe at the end of the year, the rate of growth will slow, but I don't see it turning negative, I'll put it that way. All right. Thank you, Devon. And thank you, everybody, for your questions and your interest in PotlatchDeltic. That concludes our call.
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EarningCall_862
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At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. Thank you, operator. Good afternoon, and welcome to our fourth quarter 2022 conference call. Joining me today are Rami Rahim, Chief Executive Officer; and Ken Miller, Chief Financial Officer. Today's call contains -- these statements are subject to risks and uncertainties -- in 10-Q, the press release and CFO commentary furnished with our 8-K filed today and in our other SEC filings. Our forward-looking statements speak only as of today, and Juniper undertakes no obligation to update any forward-looking statements. Our discussion today will include non-GAAP financial results. Reconciliation information can be found on the Investor Relations section of our website under Financial Reports. Commentary on why we consider non-GAAP information a useful view of the company's financial results is included in today's press release. Following our prepared remarks, we will take questions. We ask that you please limit yourself to one question so that as many people as possible who would like to ask a question have a chance. With that, I will now hand the call over to Rami. Good afternoon, everyone, and thank you for joining us on today's call to discuss our Q4 and full year 2022 results. We delivered record revenue during the fourth quarter, although total sales of $1.449 billion were slightly below the midpoint of our guidance due to the timing of supply and some logistical challenges at the end of the quarter. Despite these challenges, we achieved a second consecutive quarter of double-digit year-over-year revenue growth. A record performance by our Enterprise business and our second highest Cloud revenue quarter. Our non-GAAP gross and operating margin also exceeded expectations resulting in non-GAAP earnings per share of $0.65, which was above the midpoint of our quarterly guidance. Our Q4 results capped a record revenue year for Juniper in 2022, which saw us accelerate our growth despite the challenged global supply chain environment. The diversity of our strength was also a highlight during the year as we grew our Enterprise business by more than 20% year-over-year. We grew our Cloud business by more than 13% year-over-year, and we grew our Service Provider business by approximately 3% year-over-year with the revenue growth for each of these verticals, exceeding the high end of our long-term model. I believe these results speak to the strong execution by our teams, the strength of our portfolio and our ability to win across each of the customer verticals and use cases where we compete. While revenue growth was healthy in Q4 and for the full year of 2022, as we expected, overall demand moderated in the December quarter, with total orders declining more than 20% year-over-year. Although our Enterprise orders were flat year-over-year despite a very difficult comp. This moderation in total orders was primarily driven by a normalization of buying patterns amongst our Cloud and Service Provider customers. This follows a year in which many of these accounts placed multiple quarters of demand in advance of knowing requirements to account for extended lead times. Now that many of these orders placed in prior periods are shipping and with significant orders on the books for the upcoming year, Cloud and Service Provider customers are placing fewer new orders which is a trend we expect to continue through at least the first half of the current year. As this order normalization process continues, we think revenue growth will be the most important metric to gauge customer demand over the next several quarters. I'd like to acknowledge that we are seeing some customers across each of our customer verticals, more closely scrutinize spending plans and deployment time lines due to the economic uncertainties that are happening around the world. Order cancellations continue to remain low and our customers' appetite to receive orders that were placed in prior periods remains high. As a result, we remain confident in our ability to monetize our backlog as supply improves. That said, we're watching these strengths closely and have factored the certainties into our financial outlook. Despite these current macro uncertainties, I remain optimistic regarding our prospects for the upcoming year. Five reasons driving my optimism include: First, our focus on leveraging AI-driven cloud-based automation tools to simplify customer operations and improve the end user experience. What we call Experience First Networking continues to resonate across the customer verticals we serve, whether it be Mist in the campus to Apstra in the data center to Juniper Paragon in the service provider market, these software automation tools are enabling customers to achieve superior scale cost effectively to rapidly identify and remediate network problems in many cases, without the need for human intervention and to accelerate the time line for network deployments. These capabilities deliver tangible value to customers which is enabling us to win in the current market environment and may resonate even more if return on investment plays an increasingly important role in customer decisions. Given our level of portfolio differentiation, balanced against our relatively modest share in the large markets where we compete, I remain optimistic regarding our ability to grow revenue even in a more challenged macro environment. Second, we continue to invest in our go-to-market organization to capitalize on our product differentiation and take share, particularly in the enterprise. To this point, since the beginning of 2019, we have steadily increased our quota carrying headcount, meaningfully increased our channel presence and invested in both demand generation and modern selling tools that are creating more effect and more wind in the market. While these investments have enabled us to accelerate our growth over the last several years, particularly in the enterprise vertical, they are also continuing to provide tailwinds with deal registration from the channel growing 18% year-over-year and order momentum in the commercial market growing 43% year-over-year in the Q4 time frame. We expect this momentum to continue and further benefit growth in future periods. Third, we continue to see strong 400-gig progress with more than 100 new wins across wide area and data center use cases since our last quarterly update. Many of these wins constitute franchises that are likely to present tailwinds for revenue over a multiyear period. While 400-gig solutions are critical to enabling customers to meet the continuous growth in the network bandwidth, they are also critical for improving the power efficiency and cost of operating network, which we think is likely to add resilience to these important projects. Fourth, we continue to make progress transitioning our business to a more software-centric model. This includes transforming more of our perpetual offerings to term-based licenses, introducing more ratable subscription offerings and training our sales organization to better monetize the value of our software stack. While these efforts remain in the early innings, we experienced encouraging momentum in the Q4 time frame, which saw total software and related services revenue grew 26% year-over-year and accounts for 21% of our total sales. Our annualized recurring revenue, which solely consists of truly ratable software subscriptions and related services increased 43% year-over-year due to strong demand for Mist and certain security subscriptions. We are encouraged by the progress we are making in our software transformation strategy as many of these revenue streams are recurring, pull-through infrastructure and improve margin. Finally, we exited 2022 with an exceptional backlog of more than $2 billion, which is up approximately $200 million from where we entered the year and remains well above historical levels. This backlog is providing us with exceptional revenue visibility and should enable us to deliver another year of healthy growth. Based on our current backlog, customer demand and our assumptions regarding supply, we currently expect to deliver at least 8% revenue growth and at least a point of non-GAAP operating margin expansion in 2023. Our expectations for 2023 assumes the availability of supply only modestly improves and that the end market environment remains uncertain. Now I'd like to provide some additional insights into the quarter and address some of the key developments we're seeing from a customer solutions perspective. Starting with our automated WAN solutions. This business experienced revenue weakness during the fourth quarter due to the timing of supply following very strong shipments during the prior quarter. That said, our automated WAN business grew 12% on a full year basis, which exceeded our expectations and the high-end of our long-term model. We remain optimistic regarding the long-term outlook for our automated win business based on the momentum we're seeing for several of our newer products. To this point, our new 306-based MX 304 and LC 9600 line card continued to perform exceptionally well; with the MX 304 securing 150 new logos in Q4 and emerging as one of our fastest ramping products over the last five years. Our PTX portfolio also continues to perform well across Cloud, Service Provider and Enterprise accounts. In Q4, our PTX platform secured more than 15 new use case wins that we expect collectively will drive more than $200 million of incremental opportunity over the next three to five years. Not to be overlooked, we're continuing to make progress with our new cloud metro portfolio, which saw orders more than double on a year-over-year basis. Our pipeline of opportunities is strong, and we remain encouraged by our ability to win in the market, especially as we add new AI-driven cloud-based automation capabilities to the portfolio over the next few quarters. Our cloud-ready data center revenue experienced an exceptional performance in Q4 and grew more than 20% on a full year basis. 400-gig momentum remains strong, and we now have more than 120 400-gig data center wins that include Cloud majors, large Enterprise and Service Provider accounts. Our Apstra pipeline continues to build as new logos increased meaningfully on both a sequential and a year-over-year basis, and we experienced strong hardware pull-through for every dollar of software. Interest in our new Apstra freeform capability, which provides more flexible deployment options and expands the list of potential customers we can address is encouraging, and we plan to introduce new software capabilities that will further expand the use cases we can address in 2023. Customer interest in our cloud-ready data center portfolio remains healthy. And given the wins we've already secured, I'm optimistic about our ability to capitalize on the attractive growth within this market over the next several years. Our AI-driven enterprise revenue continued to significantly outpace the market, growing more than 30% year-over-year in Q4 and 24% on a full year basis. This strength was led by our mid-to five business, which is the segment of our campus and branch portfolio driven by Mist AI and the cloud. This area saw both revenue and orders grew more than 50% year-over-year, with record sales of AI-driven WiFi and EX switching in the Q4 time frame. On a full year basis, our Mistified revenue was $500 million in 2022, which was up from approximately $300 million in 2021. Our Mistified orders also continued to see strong momentum with fourth quarter results surpassing $900 million on an annualized basis. The industry is clearly recognizing the differentiation of Juniper's campus and branch offerings, driven by Mist AI. We believe this is reflected in Gartner's latest Magic Quadrant for Enterprise wired and wireless LAN infrastructure that was released in December of 2022 where Juniper was named a leader for a third consecutive year and was ranked highest in both completeness of vision and ability to execute for a second consecutive year. Additionally, the Gartner Enterprise wired and wireless LAN infrastructure critical capabilities report that was published in January 2023, Juniper received the top score in four out of five of the use cases. On the product side, we continue to invest heavily in new key areas that drive real value to customers and partners, including WiFi 60 and new AI-driven EX switch variants such as the 41 Hybrid both of which are seeing strong early adoption in the market. Lastly, customer traction for the AI-driven enterprise remains exceptionally strong. For example, we saw a nearly 80% increase in the number of accounts purchasing at least two Mistified products during the most recent year. This highlights the attractiveness of a full stacked Juniper offering managed via common AI engine and cloud as well as the land and expand opportunities available to our sellers and partners, which we believe remains in the early innings. Our security revenue returned to growth in Q4, although we expect this business to be pressured over the next few quarters as we transition from an appliance to a ratable software subscription model. We remain optimistic regarding the long-term outlook for our security business as we believe the convergence of networking and security provides us with a competitive advantage in the portions of the market where we are currently focused. We're also encouraged by the interest in our software security offerings, most notably our Security Director cloud platform. This product provides customers a single policy framework to manage all their firewalls, whether in the data center or at the edge or whether on-premises or in the cloud, which is essential to help customers migrate to Zero Trust and SASE architecture. This platform was recently named CRN Magazine's Edge Platform of the Year and already has secured more than 300 wins, which we view as an encouraging sign of future success. I'd like to mention that our Services team delivered another record quarter, and our Services business continued to grow year-over-year due to strong renewals and attach rates as well as the growth of our SaaS business. Our customer satisfaction scores remain at all-time highs, and our service margins came in better than expected due to higher revenue and lower costs. On a full year basis, our service margins achieved a new all-time record of 67.3%, up 150 basis points as compared to the prior year. Our Services organization continues to execute extremely well and is focused on driving incremental efficiencies through automation and cloud-delivered insights that not only create new revenue opportunities, but also benefit margin and customer experience. I would like to extend my thanks to our customers, partners and shareholders for their continued support and confidence in Juniper. I especially want to thank our employees for their hard work and dedication, which is essential to creating value for our stakeholders. I will now turn the call over to Ken, who will discuss the quarterly and full year financial results in more detail. Thank you, Rami, and good afternoon, everyone. I will start by discussing our fourth quarter results, then cover our fiscal year 2022 and end with some color on our outlook. We ended the fourth quarter of 2022 with record revenue of $1.449 billion, up 11% year-over-year and 2% sequentially. This was below the midpoint of our guidance due to the timing of supply and some of the logistical challenges towards the end of the quarter. Despite the slight revenue shortfall, we delivered non-GAAP earnings per share of $0.65 and which was above the midpoint of our guidance, driven by a better-than-expected gross margin result and prudent operating expense management. In terms of product orders, as expected, we saw a decline due to buying patterns normalizing and customers consuming previously placed orders. This was more pronounced with our Cloud and Service Provider customers. We expect this dynamic to continue as supply improves and backlog normalizes. During the fourth quarter, total product orders declined more than 20% year-over-year. Adjusted orders placed to accommodate for the extended lead times, declined single digits year-over-year versus a difficult comparison, but grew sequentially. Our adjusted orders calculation only includes a one-way adjustment to reduce bookings due to accelerated ordering. During the entire time that we've reported adjusted orders, we have not added those orders back into future periods where they would have normally been placed. We believe that if we were to add back those accelerated orders, adjusted orders would have grown in Q4 of 2022. We exited 2022 with backlog of slightly more than $2 billion, which is down sequentially but up approximately $200 million on a year-over-year basis. Looking at our revenue by vertical. Enterprise had record revenue and was our largest vertical in the fourth quarter. increasing 32% year-over-year and 16% sequentially. Cloud grew 14% year-over-year and increased 1% sequentially. Service Provider declined 8% year-over-year and 10% sequentially. From a customer solutions perspective, AI-Driven Enterprise revenue grew 30% year-over-year and 19% sequentially. Cloud-ready data center grew 50% year-over-year and 13% sequentially and automated WAN solutions revenue was down 4% year-over-year and 10% sequentially. The total software and related services revenue was $305 million, an increase of 26% year-over-year. Annual recurring revenue, or ARR, grew 43% year-over-year, and we exited the year with $294 million in ARR. Total security revenue was $169 million, up 5% year-over-year and up 21% sequentially. In reviewing our top 10 customers for the quarter, six were Cloud, 3 were Service Provider and 1 was an Enterprise. Our top 10 customers accounted for 34% of our total revenue as compared to 33% in the fourth quarter of 2021. Non-GAAP gross margin was 58.5% in the quarter, which was above our guidance midpoint, primarily driven by the favorable software mix and to a lesser extent, some improvement in transitory supply chain costs which more than offset an unfavorable product mix. Supply chain continues to be constrained with long lead times and elevated costs. If not for the elevated supply chain costs, we estimate that we would have posted non-GAAP gross margin of approximately 60%. Non-GAAP operating expenses increased 7% year-over-year and was up 1% sequentially, primarily due to headcount-related costs. We exited the quarter with total cash, cash equivalents and investments of $1.2 billion. Cash flow from operations was $120 million for the quarter. Turning to capital return. We paid $68 million in dividends, reflecting a quarterly dividend of $0.21 per share. We also repurchased $88 million worth of shares in the quarter. Moving on to our full year results. Our revenue for 2022 was a record, coming in at $5.301 billion, which is 12% growth versus 2021. Despite the impact of supply chain constraints, we saw growth across all verticals, customer solutions and geographies. Our Enterprise business became our largest vertical and grew 21%. Our Cloud business grew 13%, while Service Provider grew 3% year-over-year. From a customer solutions perspective, AI-driven enterprise revenue increased 24% and Cloud-ready data center revenue grew 21% and automated WAN solutions revenue grew 12% on a full year basis. Total software and related services revenue was $994 million, which was an increase of 31% year-over-year. This exceeded our expectations as we continue to make meaningful progress in transitioning our business to more of a software and SaaS-centric model. Total security revenue was $629 million, which was down 4% year-over-year. In reviewing our top 10 customers for the year, six were Cloud, three were Service Provider and 1 was an Enterprise. Our top 10 customers accounted for 33% of our total 2022 revenue as compared to 31% in 2021. Non-GAAP gross margin was 57.4%, a decline of 230 basis points versus 2021, primarily due to the product mix and increased supply chain costs. If not for elevated supply chain costs, we estimate that we would have posted non-GAAP gross margin of approximately 60% in 2022. Non-GAAP operating expenses increased 6% year-over-year primarily due to higher headcount-related costs. Non-GAAP diluted earnings per share was $1.95 in 2022, an increase of 12% versus 2021. During 2022, we repurchased $300 million worth of shares and paid $270 million in dividends. I am very pleased with our financial performance, both in the fourth quarter and throughout 2022. Now I would like to provide some color on our guidance, which you could find detailed in the CFO commentary available on our Investor Relations website. At the midpoint of our guidance, we expect first quarter revenue of $1.34 billion, which is 15% growth year-over-year. We are still experiencing supply chain-related headwinds associated with shortages as well as elevated components and freight costs, which are expected to modestly improve through the course of 2023. First quarter non-GAAP gross margin is expected to be down sequentially to 57% due to a normalized software mix and seasonality. We expect first quarter non-GAAP operating expense to increase sequentially, primarily driven by the typical seasonal increase of fringe costs. Despite these increases, non-GAAP operating margin is expected to increase more than 100 basis points versus Q1 2022. Turning to our expectations for the full year 2023. Given the ongoing customer demand for product, solid exiting backlog and improved supply, we're updating our revenue growth expectations for 2023 from at least 7% to at least 8%. Beyond the first quarter of 2023, we expect revenue to grow sequentially throughout the course of the year. This assumes the current supply chain environment modestly improves but remains challenged. This forecast as soon as we reduced backlog during the course of the year. However, we expect to exit the year with elevated backlog compared to historical normal levels. While non-GAAP gross margin can be difficult to predict, we expect full year non-GAAP gross margin to be flat to slightly up year-over-year. We remain committed to disciplined expense management and full year non-GAAP operating margin is expected to expand by at least 100 basis points versus 2022. That said, we will continue to invest to take advantage of market opportunities and non-GAAP operating expense is expected to be up on a full year basis. Our non-GAAP tax rate on worldwide earnings is expected to be 19%, plus or minus 1%. Our non-GAAP EPS is expected to grow double digits on a full year basis. Finally, I'm pleased to announce we have declared a 5% increase in our quarterly cash dividend to $0.22 per share to be paid this quarter to stockholders of record. In closing, I would like to thank our team for their continued dedication and commitment to Juniper's success, especially in this dynamic environment. Now I'd like to open the call for questions. Yes, just a two-parter on the orders, if I could. Maybe, Rami start with you. You're obviously coming up tough compares in a strange environment with the multi-quarter ordering. Is your view that the Service Provider and Cloud customers are going to, over this period, over the next six months or so, be well below trend line and kind of ordering well under consumption? Or is it just something that works out over time? And then maybe, Ken, if you could just give us a little more on the math here. I think if it was $2.3 billion or so last quarter for backlog and a little over $2 billion this quarter, implies a lot more than a 20% decline. So is there something else in the order backlog math there that we're missing? Tim. Okay, I'll start, and then Ken, I'll pass it on to you. So what we saw from an order standpoint in Q4 is pretty much expected. Yes, the compares are getting very difficult. A year ago period, definitely Service Providers and Cloud providers were placing orders for multiple quarters in order to get ahead of supply constraints. Enterprise is a little bit of a different story. We actually saw flattish type order momentum on a year-over-year basis in Q4, but that was off of a very difficult compare in the Enterprise segment, where a year ago period in Q4, this would be in '21, orders grew over 40% year-over-year. So looking forward to your question, I do think there will be for the next at least couple of quarters, a re-normalization of order patterns for Service Providers and Cloud providers as they consume orders that were placed a year ago period and in the Enterprise, I actually think that order momentum will continue. I think if I look at it to 2023, we should continue to see solid Enterprise growth, both from an order standpoint as well as from a revenue standpoint. Yes. And I think it's worth reiterating, even though I made a comment in my prepared remarks that when we talk about adjusted orders, which were down for the first time on a year-over-year basis, but up sequentially, we really are just doing that one-way adjustment that I referred to. So if you were to normalize and add back those accelerated orders in the proper period, if you will, some of that would have been added back to the last quarter, Q4 '22, and we believe it would have actually shown growth, had we made those adjustments on both sides of the equation, we only did the takeaway side. So I want to make sure that's clear to folks. From a backlog perspective, I mean, the math really is -- the primary driver of why the backlog decline was orders being down greater than 20% on a gross order basis. We also did see some growth in revenue as well as growth in deferred revenue that I would point to that some of the backlog doesn't get recognized immediately, particularly some of the software subscriptions and SaaS business that is in backlog until we actually invoice or execute that delivery which gives to deferred revenue versus revenue. So that growth also has an impact on backlog. The first question I wanted to ask was on the Services side of the equation. Obviously, there's a clear tie to future services as you ship more product. And with the product sales accelerating, it's hard for us to determine how rapidly that rolls into the income statement. So I was hoping you could give us a little bit more granularity around what you think Services revenues are going to do in the first quarter kind of growth and for the year, what kind of growth might we anticipate there? How much is that contributing to the increase. Yes, I'll take that one. So we are seeing -- as you mentioned, Alex, the Product revenue does have a direct correlation to our Service revenue opportunity as our installed base gets bigger, given the pretty positive product revenue results of both 2022 and 2021, you are going to see, I believe, that have a positive impact on Services going forward. So Services is a bit of a lagging indicator. It doesn't -- is not as volatile. Typically, you won't see as large of increases or as large of decreases as product kind of gets a little bit normalized, but trying to convert it to installed base and services. But I would expect our Services business to continue to be strong in 2023 as it has been strong in 2022. And the other thing I would point to is our margin is also quite positive in our Services business. The team has done a great job there. Not only satisfying customers and renewals, et cetera, but also really working down the costs. The growth rate accelerated from 4% to 7% to 8%. Is that kind of high single digits, the rate we should be anticipating both in the March quarter and the year? Yes. We're not giving specific guidance on Services, but I would say, as I mentioned, it is kind of -- it's a lagging unit care, it's not that volatile. So I wouldn't expect significant step function changes anytime soon. That said, maintenance business is the vast majority, but there also is a software element which is our SaaS element, which has been a big part of the growth of our services business over the last few years as more of our software revenue is getting recognized in the form of SaaS revenue. Okay. The second question I wanted to ask is you had a very significant increase in the cloud-ready data center year-over-year in the fourth quarter. That looks like it's somewhat of a spike versus a decline in the year ago, but nonetheless, a significant increase. Is that a function of that segment getting more of the available supply? What's the reasoning for that? Yes. Alex, I'll take that one. So obviously, very pleased with our cloud-ready data center momentum and success that we saw in Q4 time frame. Over the last several quarters, we did highlight a couple of meaningful wins, one in particular, in a Top 10 cloud provider that was a data center win. So this would be a part of our CRDC business and the solutions that we're developing in that business. So whereas in prior quarters, that was sort of shown in terms of orders, now we're actually starting to see the revenue contribution. There are other elements as well. I think our focus on software-led data center sales in much the same way as we've seen Mist lead to success in the AI-driven enterprise. Cloud-ready data center is still in the earlier phases of that growth period, but we're starting to see a pickup in Apstra-led type opportunities where the net new logos and the sort of the strategic nature of those logos are actually starting to contribute nicely as well. I would not expect this kind of cloud-ready data center performance on an ongoing basis, but again, I do think that I'm optimistic about the overall growth prospects for this business. I guess I wanted to ask about your thoughts on the composition of the growth this year. You said at least 8% revenue growth and I know if we look back, you guys have instituted some price increases, I think Q3 included. But how much of that 8% plus growth do you think really comes from pricing versus units? How do you think about it? Yes. So pricing is factored in, obviously, to our outlook. And the way I would describe it, George, is we expect the majority of that 8% to be volume based. There is definitely a pricing element, but it would be less than half, assuming we did revenue at 8%. Obviously, as we grow, if we were able to grow faster than eight, we did put 8% out there was a bit of a floor, but we talked about at least 8%. The majority of that incremental would also be volume related. Got it. And then as I think about the unit volume piece. Is that really driven by new products, Mistified or ACX or some of the other new initiatives you've got? Or do you think it's -- what's the dynamic between sort of existing versus new products? Yes. We're not giving too much detail on exactly the composition of 2023. But I would say this, though. I mean, I think the relative growth that we've outlined in our long-term model and actually that we've delivered for the last couple of years. So if you look at it by vertical, I would expect Enterprise to be our fastest-growing vertical and the products associated with Enterprise are predominantly AIDE and campus and branch, as well as some of our CRDC products. Then you could follow that by Cloud, which is predominantly routing and data center switching and then followed by Service Provider would be our slowest-growing vertical. So I do think relative mix of our products and the mix of our verticals from a growth rate perspective is likely to play out similarly in 2023. But at this point, it's a little bit too early to call the exact components of revenue growth. I guess my question was going to be about Service Provider revenues and if you could give us some more color there. It was down year-over-year and quarter-over-quarter. And Rami, I think in your script, you mentioned sort of revenue is going to be the driver or sort of the metric to judge sort of demand from. So what are you seeing in relation to sort of demand from that vertical? You mentioned scrutiny from customers. So are telco customers scrutinizing budgets a bit more than the other verticals? And how should we think of the CapEx positions impacting you here over the sort of next 12 months? Yes. Thanks for the question, Samik. So what we saw in Q4 was mostly, if not entirely a function of supply. And that's not totally unusual to see this kind of a pullback after a very strong quarter. And if you recall, Q3 was actually a great quarter for Service Provider because we happen to be able to ship quite a large volume of products that was required that was on our balance sheet and also new orders that came in, in the quarter. So -- but there's more that's happening in the Service Provider segment. First, we're monitoring closely new products that we have introduced over the last, let's say, a year or a couple of years or so. and we're seeing some really strong pickup, which I think gives us confidence in the next few years, if you will, in terms of the dynamics for this segment. The MX 304 is the fastest-growing product in the last five years, the PTX product family, which really goes to the heart of the 400-gig opportunities that are out there is performing really well as well. I just finished answering questions about the cloud-ready data center. One of the things that's actually driving momentum in our CRDC solutions is the fact that there is a strong diversity of interest among all of our segments especially including Service Providers that are moving to more of a virtualized approach to delivering the kind of services that we're delivering in the past. So there's a number of elements of this business that I think are positive for us long term. In the short term, we're going to get through this normalization of order patterns to revenue, as we just discussed. But long term, being in line with our long-term model, minus two to plus two or even better is definitely possible. I had two questions. When you talk about 8%, you're using the words at least versus prior, I believe the word you would use is floor. Is it -- should we assume 8% is the floor of growth for 2023? So that's the first question. And then the other question is of the product orders that were submitted in 4Q of '22, how much of the growth was driven by price increases versus volume just so we can get a better idea on composition of the backlog and how that change in 4Q? Yes. I'll take both of those questions. So when we do -- the words we use officially is at least 8%. And when I describe it often times, I referred to that as the floor, right, because we're setting a range starting at 8%, and we're not really putting a ceiling on it. That's why I described the at least 8& as the floor. But if not, much confuse you, it's meant to be really -- it's the same guidance. As far as price versus volume, again, I would say we are definitely getting a benefit from the pricing actions we've taken. It is impacting growth, but it is the minority of our growth, right? And the vast majority of our growth is tied to volume sales and quite honestly, taking shares in some of those markets that we're absolutely taking share and such as AI-driven enterprise in the campus branch base and I think we had a very strong quarter in data center as well. So I do prescribed our growth to the success and execution of the team much more than I do the pricing actions we've taken. I wanted to get a better sense of the trends coming from Service Providers in that. It sounds like you're blaming this quarter's relative weakness on supply chain, but there's been some others exposed to that vertical that have talked about. Inventory absorption and some of the operators slowing down either in the fourth quarter or first half of '23 as they maybe manage their own cash flow or manage their inventory of gear. I'm presuming that your customers haven't been able to stockpile your equipment and warehouses and don't have that inventory issue for you in the first half of '23. But I just want to get a sense directly from you if that's a factor of what's going on here or whether it's really concentrated around component shortages. Let me start, and then, Ken, you might want to weigh in as well. So are there macro sort of challenges weighing in on the Service Provider segment. As I said in my prepared remarks, there are definitely customers across all segments, including in Service Providers that are, let's just say, scrutinizing orders a bit more, looking at time lines for projects, making sure that they're spending as efficiently as possible. So that is happening without a doubt. Having said that, our outlook, our long-term model for Service Provider is a minus two to sort of plus two range. We've managed to exceed that over the last couple of years. I actually think we can still, even with these sorts of macro challenges that are -- that we're seeing out there, maintain that sort of long-term range. Just based on some of these factors that I just mentioned in answering the prior question, right, there are still 400-gig projects that are out there that remain exceptionally important for Service Providers in order to keep ahead of their demand pattern in their networks. Metro opportunities are definitely still there. The need to carry an increased amount of 5G traffic in fiber optic networks. The need for highly automated Metro solutions continues to be there, and this is a net new market opportunity for us. So net-net, I actually am long term, quite optimistic about this segment despite some of the macro concerns that might be out there? The only thing I would add is as I've said before, any 90-day period, you're going to see a little bit of lumpiness Q-to-Q based on either vertical cuts or customer solution cuts. That really is a factor of inventory and supply and what we're able to ship in any given quarter. I think a longer-term view of FY '22 was more indicative of what our Service Provider business is doing, and we did post 3% growth, as Rami mentioned, above our model. So I feel good about the space overall. Based on the customers conversations we've had and the supply constraints, quite honestly, that we've had over the last few quarters, we do not believe customers are sitting on excess at inventory levels. It's not something that we're particularly worried about at this point. They clearly are able to not book as much as they did prior because they're no longer accelerating orders and are actually -- we're actually delivering the orders they booked previously. So the bookings is getting impacted. But from a revenue perspective, we're not seeing that impact. You guys were pretty clear, I think, on all the puts and takes in '23, but I wanted to ask a question about normalization. And so if you think about your order growth pattern over the last couple of years, it's been incredibly strong, but your backlog exiting 2020 was roughly about $400 million, and your business is about 20% bigger today. So when we start to think about what normalized order growth rates look like and backlog looks like, how should we think about where backlog should be relative to where you were, let's say, two years ago or 2.5 years ago and your desire to obviously build some buffer stock to meet customer demand. Should we expect backlog to be a normalized period sort of commensurate with sort of the ratios that we've seen in the past? Or should we expect a slightly higher uptick in the backlog going forward when things normalize? Yes. It's a really good question. And quite honestly, if something, I don't have a perfect answer to you, but I'll let you know what I expect to happen. So I absolutely expect backlog to start to normalize, and I expect us to -- backlog to reduce in 2023. I still expect that we'll exit the year with what I refer to as elevated backlog. I don't exactly have the number for you, but I do think we'll exit the year elevated. So it will start to reduce, but remain elevated, would be my expectation. And what the new normal is hard to say. And as you mentioned, historically, we've been in that kind of $400 million to $450 million range for quite some time. I would like to think that the new normal is going to be greater than that, maybe closer to somewhere between $500 million and $1 billion as I think customers understand the value of giving us orders a little bit earlier, giving us a little longer lead times to react. I'm hoping that the new normal is a little less frantic as it was just a few years ago when we were starting the quarter with not enough backlog. So I feel good about our backlog position, obviously, the variability of it. I think it will decline throughout 2023 but remain elevated and work finally settled a couple of years from now, it's hard to predict, but I would like to speak more than where we were in that 400-level. I guess the first one I had was when you put talked about the order trajectory, you talked about auto going down on Service Provider and Cloud side, but they've be running to be flattish on the Enterprise side. I was wondering if you can talk about why are you seeing such a deviation in auto trends between those 3 buckets? And on the Enterprise side, is it flat because you're picking up share? What's to the better performance there versus other 2. Yes, I'll start. So SP and Cloud, primarily because of the fact a year ago period and before that, they were just doing more ordering for multiple quarters to get ahead of the supply constraints that we were facing. And I think it's not unusual because typically the kinds of projects that SPs and Clouds are engaging and tend to be just very strategic, very large. They require a lot of upfront planning and for that reason, that early ordering was just happening in more abundance. It also did happen in the Enterprise just not to that same extent. I think the second part of your question is about sort of the order momentum we're seeing in the Enterprise and why. I think we're just executing exceptionally well on the Enterprise across the board, pretty much every solution area, whether it be data center, are, of course, our AI-driven enterprise solution, even in the WAN, we had a great federal government quarter, for example, we're sort of firing on all cylinders. Our competitive differentiation and our solutions, especially in our AI-driven enterprise solution continues to work really well for us. And for that reason, Enterprise is now Juniper's is the largest segment. A few years ago, there was actually some doubt about whether Juniper can win or succeed in the Enterprise, and I think those doubts are pretty much behind us at this point. The only thing I would add is we've had a lot of momentum in Enterprise for the last several years, and we actually expect 2023 to be a growth year for Enterprise, both from a bookings, order perspective as well as a revenue perspective and I know we aren't naive to some of the macro conditions out there. But given the product differentiation we have, kind of the market share we have, the opportunity in front of us, we feel pretty confident we can continue to grow the enterprise in 2023 despite kind of some of the macro conditions. I have two questions on -- related to the backlog. If the backlog is down $300 million or $250 million in Q4. Do you -- and we are entering into a year that is supposed to be tougher for spending because it's really only -- really only starts this year. Does it mean that the backlog declines could accelerate this year on a sequential basis, dollar basis, et cetera? That's the first question. And the second question is how should I think about the adjustment of backlog? I'm trying to think about what could the growth rate be after the backlog is adjusted down if the order -- if the environment is not changing. So when I look at the sequential basis of 4Q, last year, it was up 10% roughly. And this year, if I remove this quarter, if I remove the backlog, there is a 25% delta between the growth you had last year and the growth you have this year because without the backlog, you were down 15% instead of being up 10%. So the question is, is the order environment deteriorate that much between 3Q and 4Q? And then how does it carry on to 1Q, 2Q, 3Q, when the year progresses and the spending environment worsened in some sense. So again, my question is more about understanding how could the environment look like once you consume the backlog if the order environment doesn't change much. Yes. So let me start with that. So from a backlog perspective, we did see a decline in the fourth quarter, as you noted, sequentially. However, I think it's important to note, backlog was up approximately $200 million year-on-year, right? So for the full year, we had a pretty strong bookings year and actually grew backlog, but you are starting to see that decline and you're starting to see orders, I would say, normalized, but actually, that's really not the right way to say it. Customers have already placed orders, and we are now shipping those orders. So actually orders are understated, if you will, the true demand whereas the past 3 quarters, orders have been overstating through demand because they've been accelerating orders to account for multiple periods of time to adjust the lead times, now kind of the opposite is happening. And as I mentioned, we're not adding that back in. So the bookings number is going to be very unusual, I believe. This like it has been on the positive side. I think you're going to see something similar on the negative side going over the next couple of quarters, which is why we think revenue is really the best demand metric you have. And backlog will come down, we haven't stated exactly how much and the timing of it, it really does depend on our ability to capture supply, which is uncertain at this point, but we do expect it to come down throughout 2023, but remain high as we exit the year as customers are basically consuming orders we've already received. So I look at it as kind of a burden hand better than two in the bush scenario, where we already have the orders that really is the demand for 2023 in-house. And as we shift that it's going to play havoc on growth rates for current period orders. And I'll just add on this. I think Ken summarized the situation for Q4 really well. Orders that we would have otherwise received in Q4, we already had them in hand because of customers that were early ordering, especially in SP and Cloud. As we look at it to 2023, orders don't need to grow in order for us to hit the at least 8% in revenue growth for the year. But I actually think they can grow. And in the Enterprise, I believe they will grow. Rami, for you, a big topic that's coming up is AI workloads. Is there a way to think about the opportunity -- or is that going to be out throughout the course of the year? Thanks. 2022 and I think it's a demonstration -- that drive market share taking for our Enterprise business, and that -- our Paragon automation for the metro within the Service Provider debate. Now having said that, I think your question is more around cloud providers and the opportunity that AI presents to us in terms of supplying the infrastructure necessary to keep up with demand. And earlier in this call, I mentioned how long term, I'm actually quite bullish about long-term cloudified businesses. And one of the reasons is because of AI. I believe that this is going to be yet another big initiative or a catalyst to increase traffic within the data centers and in the WAN leading or ending in their data centers among all cloud providers that they will have to get ahead of. And they get ahead of that by building higher performance, more cost effective, more cost-efficient networks, both within the data centers and in the wide area network. We will benefit from that because of the existing footprint that we already have within the cloud space -- as you know, we're in pretty much all of the major cloud providers, hyperscale and the top 10 cloud providers as well. Add to that the new 400-gig opportunities that become exceptionally important to carry all this traffic cost effectively. And I think it bodes well for our cloud provider business in the long run. Yes. And to your second question, so from a backlog perspective, we believe our backlog remains extremely durable. Level of cancellations remain extremely low compared to the backlog levels, and I expect that cancellation level to remain low going forward. From a Q4 kind of timing of revenue mix perspective, you're right in that the Q4 miss basically made -- we made that up in Q1. So it really was a timing thing. We had a few more days. We would have made the quarter's expectation, but that rate did slip into Q1. We've already made that up. You can see that reflected in the Q1 guide of $13.40 which lower sequential than we normally see from a Q4 to Q1. So I believe that has been made up. And other thing I'd mention is on the Q4 margin, which wasn't asked about, we did see some favorableness in the Q4 margin. Some of that is due to software mix and quite honestly, some of that's because we couldn't ship some of the hardware we were expecting to ship, which was at a lower margin. So that also has an impact on Q1 guidance where you're seeing margin come down seasonally a little more than normal off of Q4. It always -- it normally comes down, it comes down a little more to that software mix and as it relates to margin in 2023, I do think there's opportunity for margin to be flat to modestly up. I do expect there to be some improvement in some of those expedite fees and freight costs. That said, there's a lot of uncertainty with gross margin, and I feel that the street models as they are, the expectations there currently has, I would encourage you to keep those as they are for 2023. Operator, we'll take two more questions. This is Jake on for Aaron. I was just wondering if you could talk a little bit more about the momentum you're seeing in 400G and any changes in the competitive landscape there? Yes, I'd be happy to. So for 400-gig there's been 100 new wins between Service Providers and Cloud providers since our last update, which was a quarter ago. In terms of competitive landscape, it's always been a competitive environment. I believe that we have real strength, experience and know-how, especially in the WAN for service providers and hyperscale cloud providers where we can leverage our existing footprint in order to basically understand the specific feature by feature requirements and do sort of incremental upgrades to 400 gig. But we're actually also seeing some really promising success, if you will, in the cloud-ready data center space, and they basically inside the data center switching fabric with 120 cumulative total 400-gig data center wins now and I do believe that we're in the early innings right now. I get this question quite a bit, where I know it feels like we've been talking about the 400-gig opportunity for a while. But actually, it's still early periods because there's sort of this time period in the early part of any new Ethernet speed inflection point that starts with the introduction of optics, the optics have to become cost-effective. Then the project need to actually start to kick in. There's a testing period and there is a deployment period. I actually think that we're sort of right now in the early stages of that growth, and I do believe that it's going to be a wonderful opportunity for us, especially in SP and Cloud. I hate to go back to the topic of order normalization. Can you maybe help us maybe add a dimension of where lead times are? And should we expect as lead times now, customers will place orders as they normalize. Any indication on how lead times are trending? And then I have another question on what you're seeing on the broader market in terms of demand trends. You cited some macroeconomic challenges. Is it more pertaining to site segments like high tech or is it more broad? Any color there would be also very helpful. Let me start with the second part, and then I'll hand it over to you, Ken, for the first part. When we say some uncertainty that's out there, it's really more in conversations we're having with customers, the scrutiny that they're placing on budgets. There have been some, a few project push-outs, no cancellations really. But despite that, I think that there are plenty of reasons for us to be optimistic. The strategic importance of the network, digital transformation projects, the 400-gig opportunity that I just talked about, our Enterprise momentum that I think, in many ways, is unique to Juniper because of the differentiation, especially in artificial intelligence that we have and then the backlog that we're sitting on. Ken? Yes, from a lead time perspective, it's hard to get specific because the reality is all products have different lead times. But the range really is from 30 days to upwards of 9 months, even 12 months in some cases. One way to look at it would be our overall backlog. If you just went on a FIFO basis, we have roughly two quarters of backlogs. So lead times on average roughly six months as one might look at it and it's down a bit from where we entered the quarter. So we are seeing some improvements there. Thank you, gentlemen. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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EarningCall_863
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Thank you for standing by and welcome to the Resolute Mining Limited December 2022 Quarterly Results and 2023 Guidance Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Terry Holohan, Managing Director and CEO. Please go ahead. Thanks, Melanie and good morning, everybody and thanks for taking the time to join us on this call today. This is a quarterly activities report, which I presume we have all had a look at. I will initially go through the highlights, there is quite a few there and then take you through the ops and exploration. Then I will hand over to Doug to give us a bit of color on the finances in the corporate side. And I will finish off with guidance and then weâll hand over to Q&A. If we look at the highlights, obviously, the most important one at the top of the list, the accident and incident frequency rate, we again showed some improvements over that over the last quarter. We are now at record lows on our operations of 0.41. And what is very interesting and exciting for us is that we are less than a week away from 4 years loss time incident free at Syama, which I think is a fantastic record. A lot of focus going into this and given that we did that major shut in Q1 last year, we think itâs a great result. If you look at the physicals, the gold, we are excited about the gold ounces. We thought weâd squeeze a bit more out, but we had a few hiccups right at the end, but we did the 91,777. And this represents, in terms of physicals, our fifth consecutive quarter of improved numbers and we therefore ended the year on 353. We maintain the gains that we saw in the early part of the year. And eventually in the last quarter now the â as we expected, the grade started coming up in our oxides, which has set us in a nice place going forward for this year. So we exceeded our guidance, which was 345, we didnât change our guidance for this last year, which we think is a big step for us as a company. And then the all-in costs up 5%. This is our major area of focus. I am never happy with these sort of numbers, but we think we are turning the corner there. We are starting to see improvements coming through, but this is a major focus for 2023. And we think if we can put the effort into costs that we have into production, we will see some benefits over this next year. Gold sales, the important thing is, as you know, we have got a hedge book covering at least 30% of our production going forward and going forward this year. We gained an extra $89 an ounce over the quarter, which is good for us. And we beat â if you look at the net debt position, we came down to $31.6 million, beating most expectations by about $10 million. And at the end of the quarter, we had cash in bullion of $94 million. Major event in Q4 last year was the equity raise. We are very pleased with the Canaccord efforts there. Oversubscribed, large take-up from the retail investors and we brought in some long-term Tier 1 institutional investors who are in for the long-term, as I mentioned, and excited with the prospects of the future of this company. Revolving credit facility subsequent to year end, we have managed to get that down to zero and that â the term of that, the RCF, carries through to Q1 â24. So what it means with cash bullion etcetera, we have over $200 million now as available liquidity, which is a complete turnaround from where we were last year. We did conclude the final tranche of the Bibiani sale. And on the ESG side, as we said we would do, we have achieved 14,000 and 45,000 certification status. To get those awards, people have to come and visit your site, spend time and do full audits on that and we are very excited with the results of that. I will go through the guidance a little bit later, as I mentioned. We are looking at a very, very similar year this year, a year of consolidation, 350,000 ounces and with an all-in cost of $1,480 and thatâs something we will spend a lot of time on trying to reduce that over this year. And that does not contain any material coming from the Syama North at this stage. That brings me into the Syama North, the â we did announce it, very excited about this. This is almost a standalone mine that we found now, 3.18 million ounces of material. Good grade, close to mine, slightly softer than the underground material. Slightly higher recoveries we are seeing in the labs. And we have got 1.86 million ounces of measured and indicated. Itâs also confirmed, we have a large block of material in A21, this on our â drilling it down to 150 meters. We are still finishing off the 150-meter drill lines, it is a 6-kilometer stretch. There is a lot of drilling to do to get it down to 50-50 spacings. But we are also going to look â start looking deeper at that A21 because of the volumes we are seeing, we should be able to mine open pit a little bit deeper than that. So if we go to overall operations, I think the key thing is itâs all about tonnage and grade for us. At the moment, we are starting to break records on tonnage and holding grades. Thatâs the key thing. We are looking â I think if you look at the ore mine, we have â we are on a run-rate of the last quarter of about 7 million tons per annum, ore processed, around about 6 million tons per annum. These are the numbers that we wanted to get to. And obviously, our focus is on the debottlenecking of the process plants, which is an ongoing exercise and will be for the next 18 months as we continually tinker with those to improve the throughputs and the recoveries. On the ESG, I mentioned the ISO certification part of our program. We have mentioned to you that we are as a signatory to the World Gold Council we are following the RGMPs, which we expect to gain 100% certification of that midyear this year. At this point in time, we are sitting at 88%, which is an aggressive number. Just going into the operations little bit more detail, the Mali operation. If you remember, I have been talking to you quite some while about bringing the grade up. We got to the grade up to over the resource level of 2.61 in September. And I did say only at that point would we try and push tons and see if we can maintain that grade. I am very excited to say that we actually did 6.65, which is an annualized 2.66 million tons coming off underground, at 2.74. So we again saw a slight increase in grade, but more importantly, I think if we tried to do that earlier on, weâd have lost that grade. So I am very excited the guys are really in control of the underground operation now. Our reconciliations are within 4%, which is always â is a target. You are always looking to get it less than 5% error in plus and minuses. So we are â I think we are in a very, very good space now in the underground operation. On the processing side, we annualized the 2.1 million tons, and again, the grade into the plant, 2.83 give us an average of 2.68, which are aggressive numbers and the highest numbers we have seen for material coming from underground. And we just â itâs slow progress, but we are making progress on recoveries. You see the recoveries there on the sulfide slowly ticking up and that is part of a lot of work thatâs going in on the metallurgical front on the operation. Costs, as I say, if you look at the sulfide, slowly coming down, 1,400, we still got a long way to go. We believe we can get a lot less than that over this next year. But in the year, we produced 161,000 ounces. That was with that 35-day shut that we talked about. And if you remember, we got 20,000 ounces ex-inventory. A lot of material concentrates in ponds, lot of residues. We are certainly not going to see those sorts of numbers coming out this next year, but we still have materials to clean up on site in process water dams. In terms of the underground, all of trucks now have been fixed and refurbished and we are starting to focus really hard on productivities and therefore costs in the underground. We think we can further improve those. If you look at the Syama oxide grade finally coming up, we got 1.55, thatâs not the target number we are expecting a little bit more, expecting to see that rise over the first quarter this year. And â but again, tonnages were good in the plant, 430,000 tons and 88% recovery. We are back now at the sort of 17.8 thousand ounces coming out per quarter out of the oxide going forward. And most importantly, in terms of both these two operations at Syama, in terms of grade control, we have got development now ahead on the underground of over 12 months and now 6 months ahead in the â sorry, the open pit, which means we have got a lot more confidence in our predictions going forward on the grade. In terms of Mako, 30,000 ounces, we did mine a lot of material, as you can see, 781,000. Weâve got the new excavator as part of the new contract that kicked in last year. Grades coming down, this is an expected thing. We will talk about that a little bit more. Weâve got slightly lower grades coming forward in â23 before this return back to the higher levels â24 and â25. In the processing plant, weâre still making improvements with the mill slice. Weâve got an extra 7% through â on tonnage. And even at the lower grade, we still managed to get the recoveries 92%. Again, a lot of metallurgical work going in there. And in terms of maintenance and costs, we managed to finish off the year with only three downs on the relining of the SAG mill. If you remember, traditionally, weâve done four per year and that is one of the major benefits of the mill slices that weâve put into Mako and optimized over this last year. In terms of exploration, some really good news there. We announced that a couple of weeks ago. 3.2 million ounces, a lot bigger than we originally thought. But it just explains to us that while people have been operating and exploring on the Syama belt for the last 40 years or so, it is vastly under explored. This is material thatâs right next to the operation and itâs within 4 to 6 â 4 to 10 kilometers away. We are mining there at the moment on small satellite pits, but there is a large body very close to surface and extending down at the moment to 150 meters, and 1.86 million ounces of that is measured and indicated. That 1.86 million will actually underwrite our pre-feasibility study, which is ongoing at the moment. Drilling has continued on Syama but weâre very excited with the larger ore body that weâre seeing in Syama North than â sorry, at A21 pit. There is some spectacular results that came out of that over the Christmas period. We managed to get them into the mineral resource that we talked about, and weâre in the process at the moment of converting that to ore reserves. That ore reserve number should come out in mid-February. But weâre very excited about that. I think the other comment is on, as I mentioned, with the underexplored. We did do the aeromagnetic survey, weâre starting to review results now in Q1. Weâve actually cleaned up all that data. And again, we think there is going to be quite a few more targets coming out there. However, we will be focusing at Syama on further delineating this 3.2 million ounces that weâve recorded last week. And with that, Iâll hand over to Doug, and he will go through our corporate and finances in a bit more detail. Thanks, Terry. As I said, I plan to just add a bit more color on the costs and step through the cash flow, net debt and hedge book position at year-end. So starting with costs, December quarter, unit cash costs of $1,473 was 6% higher than September quarter of $1,389. This was largely due to a 19% increase in overburden that was removed to access the higher-grade Tabakoroni ore at the Syama oxide operation. In addition, we had a 25% increase in ore mine from underground at Syama, as the rom pad stocks were rebuilt following the wet season. And also, we had a 45% increase in underground development meters, which reflects the degree of catch-up during the quarter, where we did $1,341 meters against Q3 of 924 meters. So those items added to the costs in the December quarter. We continue to feel pressure on our input costs. By way of example, Syama diesel price has averaged $1.35 during the quarter. And indeed, that was the average for the second half. which represents a significant rise on the Q1 diesel price of $0.76 a liter that we paid prior to the Ukraine conflict. HFO prices, which is the bigger volume at Syama, still around $0.90. So the increase hasnât been as stark as with diesel, but we were paying $0.72 in Q1. Mako mining costs also under pressure. And by way of example, weâve seen an almost doubling of ammonium nitrate costs from about $1,100 a ton to over $2,000 a ton. That represents about a $7 million or $8 million per annum run rate increase, and thatâs all happened effectively since about March of last year, again, coinciding with the Ukraine conflict. So thatâs the story on cash costs. All-in sustaining costs were up similarly, not quite as much, $1,547 for the quarter, up 2% on September, for largely the same reasons as the cash cost with some non-cash going the other way relating to a reduction in the GIC that we pulled through. Lower ounces meant lower costs coming through the inventory line there on GIC. Group all-in sustaining for the year of $1,498, disappointing to miss the guidance of $1,425. We have been flagging that that was under pressure. It was about 5% up on that guidance for 2022. Turning briefly to the cash flow waterfall, I wonât go through this in detail, but obviously, the big-ticket items with the equity raise in addition to the final amounts of Bibiani, $20 million came in for that, helped pay down the debt that you see there of $105 million or applied to the revolver. As Terry said, that was â had a very small amount on at year-end, and that was â that revolver was paid down to zero in January. After accounting for the exploration spend, but before the asset sales and debt service and government dividends, the business generated $8 million of free cash flow in the quarter, is the other point to note there. Largely as a result of the asset sales and the equity raise of AUD164 million during the quarter. We ended the year with net debt of $31.6 million, representing almost $125 million reduction from September quarter. Briefly, on the hedge book, 172,500 ounces hedged as at 31 December 2022, an average price of $1,886. So that wraps up that â my piece. And with that, Iâll hand over to Terry to talk about 2023 guidance and wrap up. Thanks, Doug. Okay. So guidance weâre seeing, as I mentioned, a similar year at 350,000 ounces, $1,480 same sort of numbers as this â last year. However, thatâs the focus of most of our effort now, getting those costs down to numbers that Iâve talked about previously and I think that could be achievable this next year. The mix is a little bit different. The sulphide 160,000 ounces, just a 161,000. Remember â20, that came from stocks as we had the plant down. Itâs now coming from tons and grade. We think weâve really got the physicals right there. And weâve got that 12 months development in place, so we can understand where the metal is. The oxide, the again, great control, giving us far better clarity on numbers, this year, 73,000 ounces. So thatâs up. And then Mako, from its 129 thatâs performed at for the last couple of years, with the lower grades that, weâre going to weâre going to through a lower grade patch for â23, weâre looking at 117. Thatâs going to put quite a bit of cost pressure there, and coming back to the 350 at around about $1,480 per ounce. So in summary, sulphides, yes, at Syama, very similar. A little bit of material in the ponds, but not big numbers this year. Syama oxide, itâs all about grade, given weâve got the great control in place. And then the PFS study, which will be coming out, will be form in March. And then by early Q2, we will be putting out numbers there showing what we want to do with that on the low capital expansion, which we think was going to take about 18 months and get generated â sorry, come from generated cash flows. Mako, as I mentioned 117,000 ounces. Weâre actually doing quite a lot stripping there in the stage 6, which is lower grade, and we have to get through this to get to the higher grades below that. And that will allow us to have some in-pit dumping of waste in 2024 onwards, which subsequently will lower our costs quite considerably. So, if you look at the bottom of the page there, we are saying 2024 in the range of 1.35 to 1.45 at a cost of 12.75 â sorry $1,195 to $1,275, and subsequently 2025 coming down to around about $1,000 an ounce. Subsequent to that, we will be looking at treaty stockpiles. However, that moves me into the exploration. We certainly have not given up, and we are working really hard on the four targets we have got in Senegal. We are so optimistic there and we are going to be able to find something to put through that mill in a couple of yearsâ time. So, work is continuing there. And then as I previously mentioned on the exploration, the focus is Syama North. We did spend $16 million last year. We will probably spend about the same. The lionâs share of that, $16.10 million is going to be roughly going into the Syama North operation. In terms of capital expenditure, we think there is a reduction in sustaining capital coming down to $34 million from $53 million last year. And the non-sustaining capital thatâs stepping up or including the $25 million for Mako stripping costs. Thatâs been classified as non-sustainable, so we are seeing $54 million there. Thanks. Good morning. Terry and team thanks for the quarter. Just the first question on costs at Syama, particularly mining and processing costs, I mean there have been kind of hovering around the sort of high-4s, well, $35 a ton, something like that and then processing costs also sort of bouncing around the high-$30 a ton. Can you just talk a bit about what you are doing to try and drag those down the operation and then obviously, the headwinds that are going against you on that inflation and such like? And just perhaps give us a bit of a steer as to where you would really like to drag those costs down to. Thatâs the first one. Thanks. Thanks Richard. Yes, the original feasibility talked about $31 underground mining. And you are right we are at $35 at the moment. We are still using Sandvik for maintenance. But we are going to be taking over, so thatâs a small amount of $1 or $2 savings there that we are hoping to see over this year. The other is more largely around productivity. If you remember, we took over 13 underground vehicles of Sandvikâs. They were operating close to the end of the engineâs life. They have all been overhauled this last year, so we have had one or two trucks missing for most of the year. And in January, now, we have got all 13 of those refurbished. We are actually starting to see improvements now at the tail end of December, but here in January, we are starting to see improvements. We have got trucks sitting on the floor now on standby. We are filling the trucks a little bit fuller than we have done historically. And itâs all mainly about productivity underground there. And it is helping now having the â moving into another area where we have got better access. If you remember, we were mining a combination of transverse and longitudinal mining, but not based on the geology. That has been fixed, and thatâs why we are now able to access higher tonnages at the correct grades. So, itâs all really sort of mining 101 to try and get the improvements. And we think that will start coming through. Well, we are seeing it come through actually over the last quarter a little bit, but that will certainly come through over the next year. In terms on the processing side, I think the â there is a lot of work ongoing there focused on costs. We have put a lot of capital in, in the last 2 years. A lot of our chemicals were actually additional â added manually. We have now got control systems in place. We are fine-tuning those. And we are looking at making cyanide additional improvements. We are looking at flotation, chemical improvements, etcetera. So, a lot more focus metallurgically will be on the improvements through that plant there. And the other is the â other point is that the plant itself, we are trying to get more units through there. We are working on the tertiary crushers as we speak. They are the bottleneck on the plant, itâs not the mills. The mills can do about 2.8 million tons per annum and we certainly got the stocks and the production coming forward to be able to do that. But itâs a crushing plant at the moment holding us back a little bit on the tertiary crushers. By the end of â or letâs say, sometime in Q2, we should have that sorted, so we will be able to get extra throughput there â extra throughputs there. I will see the tonnage costs coming down on the processing plant. So, to me, itâs all about now in terms of getting more units through the operation and focusing on productivities on the shop floor, both on mining and on processing. Okay. Thanks Terry. And then just on Syama North, I mean it looks very interesting. But can you just remind us what the existing oxide operations have got in terms of their life. And then you kind of talk about a 19-month period of time, I mean are you â how should we think about kind of production from the open pit portion of the mine over the next few years? I think we have probably got 2 years to 3 years of oxides from satellite pits on the books at the moment and the grades of that material is typically 1.5 grams to 2 grams a ton. The beauty of that, with Syama North and they are ranging distance away from the operation up to 40 kilometers away. Strip ratio is averaging about 6 to 1, typically. If you look at Syama North, itâs going to â especially at the A21 side, itâs less than 8 kilometers away. We are mining there at the moment. So, itâs not that much strip to be done. But itâs sitting in the ground. The oxides are 8%, about 3.2 million ounces. Itâs not one continuous strip. So, thatâs why we are doing a lot of work on the modeling at the moment. But the grade is there. And especially in the larger blocks, we are expecting lower strip ratios than we have seen not coming out of that larger block. Dilution should be less because itâs larger, itâs higher grade. And so I would suggest that if we can bring that material online, we will be pushing â and just passed all the tests with the pre-feasibility study, we will be putting that into the operations as quickly as possible. So, you are looking around about 200,000 ounces of oxides there, which we havenât yet declared, and we are looking to convert significant numbers of that to ore reserves in the middle of February. So, I am trying not to say too much, but I am waiting for the numbers to confirm our thinking, because you look at the model and itâs looking good if you eyeball it. But letâs just wait for the numbers, which are imminent now. And â but we are quietly excited about it. We think itâs a game changer for oxides going forward. Okay. Thanks. And then the last one is just on Mako. I mean you pointed out in the exploration commentary you have got four targets to find further feed for the mill from 2025. Whatâs that action like and how comfortable are you with that, or whatâs your view on life extension at the mine? I think itâs 50-50 at the moment. I donât think those stats have changed since the last quarterly call when we have mentioned it. We have had some delays getting in there to do the work, but we are now â we have got into the areas [ph]. We have got JVs in place. We have got communities on our sites. Those were the big issues to us previously, because with COVID, we lost 2 years on that ground. And we have actually recovered that position. The geologists are on the ground there. We are taking samples. We are getting ready to start drilling. And I think we are going to see some results over this year. The one site that will â the west, which is right next to the mine has shown some indications, but nothing exciting at this point in time. We have done a couple of lines there. And we â as I have said, we have had some zeros, which we are not used to. We have had some 1 gram or 2 grams, which were exciting, but itâs not hanging together yet, but there is still a lot more work to be done. But we have got drills in place there. [Operator Instructions] Thank you. We are showing no further questions at this time. I will now hand back to Mr. Holohan for closing remarks. I think if we look at â22, I think itâs a story we have managed to get our tonnages up. We have managed to get our grades up. We managed to get our exploration working and that is really humming now and exciting going forward. We are starting to see the unit costs start to turn, but that is what our major focus is going to be, itâs cost, cost, cost. And as I have mentioned, we think we had a good quarter, a good year, mainly on the physicals, but thatâs put us in a position now for organic growth at Syama. But we have ticked a lot of the boxes and we are hoping to come back to quarter one next â end of quarter one now and show you the improvements that we are making on the costs. Thank you very much and have a good day.
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EarningCall_864
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Good day. And thank you for standing by. Welcome to the Brandywine Realty Trust Fourth Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that todayâs conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. You may begin. Catherine, thank you very much. Good morning, everyone and thank you for participating in our fourth quarter 2022 earnings call. On today's call with me today are George Johnstone, our Executive Vice President of Operations; Dan Palazzo; our Vice President and Chief Accounting Officer and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although, we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC. Well, first and foremost, we hope that you and your family had a wonderful holiday season and are looking forward to a successful 2023. During our prepared remarks this morning, we'll briefly review fourth quarter results, provide color on recent transactions and outline our â23 business plan. Tom will then review our â22 results and frame out the key assumptions driving our â23 guidance. After that certainly Dan, George, Tom and I are available to answer any questions. So quickly reviewing our â22 results we posted fourth quarter FFO of $0.32 per share in line with consensus and full year FFO of $1.38 per share, which exceeded consensus estimates by $0.01 per share. During the fourth quarter of â22, we executed 226,000 square feet of leases, including 142,000 square feet of new leasing activity. For 2022, we leased 1.8 million square feet of space, which compares favorably to both our volumes in 2021 and 2022. More specifically, looking at 2022, our new leases that we executed during the year exceeded our â21 new leasing activity by 11%, it was equal to pre pandemic levels that we experienced back in the fourth quarter of 2019. We also post a rental rate mark-to-market of 21% on a GAAP basis, and 12.5% on a cash basis. Our full year mark-to-market was just shy of 19% on a GAAP basis and just shy of 10% on a cash basis. Absorption for the quarter was negative by 123,000 square feet. Now half of this negative absorption was the result of a tenant default in Austin, while the other half were known tenant move outs, which resulted in a quarterly retention rate below our annual run rate. So for the year we did post the retention above our business plan guidance at 64%. We did end the quarter at 89.8% occupied and 91% lease which were below our targets. And the previously mentioned tenant default accounted for about 50 basis points on each of those metrics. And occupancy was generally a little bit lower due to anticipated December move into split into January and the sale of our forward Tower Bridge property. From an occupancy and leasing standpoint, our DC portfolio continues to underperform. And as such, it's worth noting that our Philadelphia, Pennsylvania suburbs and Austin portfolios, which comprise about 93% of our NOI are 91.7% occupied and 92.7% lease, spec revenue of $35.7 million exceeded the midpoint of our $34 million to $36 million range. As we look at it, the portfolio is solid with a stable outlook. As we noted in the supplemental package, we have reduced our forward rollover exposure through â24 to an average of 6.2% and through â26 to an average of 7%. Physical tour volume has also been encouraging. Fourth quarter physical tours exceeded third quarter tours by 50% and was also ahead of our fourth quarter â21 tour buying by 12%. For the full year â22, our tour volume was over 1.2 million square feet. We also continue to experience tenants taking advantage of opportunities to move up the quality curve. During 2022, over 600,000 square feet of leasing activity was the result of this flight to quality. In addition, looking at our portfolio tenant expansions continue to outweigh tenant contractions as a point of reference in 2022 expansions totaled 325,000 square feet, while contractions totaled 132,000 square feet. So almost a 2.5 to 1 ratio of expansions over contractions. Our leasing pipeline of 3 million square feet is about 1.2 million on our operating portfolio, and 1.8 million on our development projects. On our operating portfolio which includes about 184,000 square feet in advanced stages of lease negotiations. Also 41% of that pipeline are prospects looking to move up the quality curve. And in fact, during the fourth quarter 58% of the new leases we executed were flight to quality tenants. Looking at some financial metrics, based on increased 2022 leasing activity and higher EBITDA, our fourth quarter net debt to EBITDA ratio decreased to 7.0x from the 7.2 in the third quarter. And as we've discussed, this ratio was transitionally higher due to our development spend and the debt attribution from our joint venture activity. The more meaningful metric we track is our core net debt to EBITDA, which ended the year at the midpoint of our range of 6.2x and certainly in times of rate volatility and economic uncertainty, leasing and liquidity are our two key benchmarks. So since our last call, we've made significant progress on both the financing and capital recycling fronts by raising over $745 million of proceeds. As previously announced in December we completed a five-year $350 million unsecured bond offering at a 7.5% coupon. Those proceeds were essentially used to retire our February bond maturity. In January, we did complete a five-year $245 million secured financing with a 5 -- 5 -- an 8.75% coupon that's collateralized by seven wholly owned properties. The note has flexible release and prepayment provisions debt of about two years. And it's important to note, we took the secured route solely due to pricing differences between the secured and unsecured debt markets as we do plan to remain an investment grade unsecured borrower. Also during the fourth quarter, we get actually two sales generating $130 million of proceeds, the cap rates on those two sales were below 6%. The team also swapped our $250 million unsecured term loan towards June 27 maturity date at roughly 5%. So the results of all these combined transactions significantly improved our liquidity. Our consolidated debt is 96% fixed at essentially a 5% rate. We have no consolidated debt matures until our October 24 $350 million bond. We also now have full availability on our $600 million unsecured line of credit and approximately $30 million of unrestricted cash on hand. As we noted on page 13 in our SIP, based on our full development spending projections, our 2023 business plan execution after fully funding our remaining development spend all TI leasing and capital costs, we expect to have about $590 million of available capacity at yearend â23. So based on our business plan, only $10 million of net usage during the year so very strong liquidity position. Turning quickly to 2023. We are providing â23 earnings guidance and FFO range of $1.12 to $1.20 per share for midpoint of $1.16 per share. At the midpoint the â23 FFO projection is $0.23 per share below our â22 FFO. The primary drivers are as follows. Our â23 NOI will exceed â22 levels by $20 million, or about $0.10 a share. Those improved operating results include contributions from 405 Colorado, 250 King of Prussia Road and 2340 Dulles as well as higher same store results. This NOI growth though is offset by $33 million, or $0.19 per share due to increased interest expense on the recently completed financings. We also have about $0.08 per share decrease in our contribution from joint ventures, primarily due to higher interest rates, and initial projected losses from several development projects coming online and not being stabilized until after â23. We also anticipate about a $0.04 per share decline in other income as well as a $0.02 per share decrease in projected land gains over the activity in 2022. And Tom can certainly amplify those points in more detail. Our â23 plan is headlined by two key operating metrics. Our cash mark-to-market range is between 4% and 6% and GAAP mark-to-market is between 11% and 13%. While these ranges are lower than our â22 levels, they certainly remain very strong, and it's primarily driven by the composition of our projected â23 leasing activity. For example, during 2022 with much higher leasing revenue contributions from CBD, University City and the Pennsylvania suburbs. For â23, higher leasing volumes have shifted to Austin Texas given a high level of occupancy in our core Pennsylvania and Philadelphia markets. Our mark-to-market in CBD and University City will perform above our business plan ranges while Austin given current market conditions in demand drivers are anticipated to perform below those ranges. Spec revenue will be between $17 million and $19 million with $10 million or 56% done at the midpoint. The occupancy levels will be between 90% and 91%. Leasing levels between 91% and 92%. Retention rate will be between 49% and 51%. We do anticipate same store NOI growth will range from zero to 2% on a GAAP basis. And between 2.5% and 3.5% on a cash basis. Capital will run about 12% of revenues, which is lower than the 2022 results. And based on increased 2023 leasing activity and the continued development and redevelopment spend, we do project our net debt to EBITDA to be in the range of 7.0% to 7.3% with our core leverage between 6.2% and 6.5%. At the guidance midpoint our current dividend of $0.76 per share represents a 66% FFO payout ratio and 100% CAD payout ratio. Our business plan as we'll talk in a few moments does project between $100 million and $125 million of sales activity that could generate additional gains. And more importantly, with liquidity needs substantially addressed this targeted sale activity, we believe conservative underpinnings to our coverage ratios, we are keeping the dividend at current levels. Certainly as the business plan progresses, and we get more clarity on economic outlook, the board will as they always do continue to monitor both our coverages and the dividend payout levels. In addition to the financing activities that we already completed, we are actively engaged and planned to enter into a construction loan on our 155 King of Prussia Road project, which is fully leased and our 3151 Market Street project here Schuylkill Yards during the first half of the year. During 2023, we also have two joint ventures with non-recourse loans maturing. We are already well underway with the refinancing discussions for these loans as well. The first one is a $20 million loan on our Commerce Square joint venture is a very low levered financing with a significant current debt yield. And we're currently in the market to refinance that mortgage. We currently have over 15 lenders reviewing this financing opportunity. The second maturity is in August of â23. And refinancing efforts with our partners are underway there as well. As I touched on during the year, we are including a range in our business plan of between $100 million to $125 million at dispositions. We anticipate those occurring in the second half of the year. And we anticipate to generate those proceeds will have between $200 million to $300 million of properties in the market for price discovery. In looking at development, we currently have $1.2 billion under active development, of that our wholly owned development aggregates $302 million and is 30% Life Science and 70% office. This portfolio is 83% leased with remaining funding requirements as we outlined in the SIP of $91 million. On the joint venture front, our development pipeline approximates $930 million, with a Brandywine share of $500 million. At full cost, this pipeline is 31% residential, 41% Life Science and 28% office. Brandywineâs remaining funding obligation in this entire pipeline is $4 million, with $68 million of equity remaining to be funded by our joint venture partners. Furthermore, as I mentioned in the last call, other than fully leased build a suit opportunities, our future development starts are on hold, pending more leasing on the existing joint venture pipeline, and more clarity on the cost of debt, capital and cap rates. Looking ahead, though, we do plan to develop about 3 million square feet of life science space. And upon completion of the existing properties, we will have approximately 800,000 square feet of life science space in operation, representing about 8% of our portfolio. As we identified on page 6 in the SIP, our objective is to grow our life science platform to that 21% of our square footage. Just a quick review of specific projects. At 2340, our redevelopment project is now 92% leased with $45 million of remaining funding and a mid-year coming online at that lease -- for those leases. 250 King of Prussia Road in our Radnor some market remains 53% leased with a strong pipeline of over 200,000 square feet. You will note in the SIP we had increased our costs on this project as our original pro forma assumed a 50:50 office and life science split. The pipeline is now 100% life science which while requiring more capital is also generating longer term leases at a higher return on cost. And given the extended build that of the pipeline of several key prospects for life science base, we have also split the stabilization to Q1 of â24. 3025 JFK, our life science residential tower is on time and on budget for delivery in the second half of the year. We currently have an active pipeline totaling 472,000 square feet, which is up about 75,000 square feet from last quarter. The project continued to see more activity as construction progresses. And the superstructure is now complete the window wall systems halfway up the building. We've done over 120 Hard Hat tours. We also expect to start delivery of the first block of residential units in the second half of this year, so all remains on schedule there. 3151 Market, our 440,000 square foot dedicated life size building is also on schedule and on budget. We have a leasing pipeline totaling over 400,000 square feet, which again is up from Q3. And as I touched on during, we anticipate we will enter into a construction loan on this project in the second half of â23. Uptown ATX Block A, construction in Austin is also on time and on budget. On the office component, our leasing pipeline, there is 500,000 square feet. That pipeline is down from last quarter, primarily due to two larger users putting their requirements on hold. Our focus up to that -- up to this point has really been on full building users. We're now shifting to a multi-tenant marketing program. So expect that pipeline to build as the quarter progresses. And to wrap up our commentary on the development pipeline. But the key phrase in our forward pipeline is timing flexibility. We have a low land basis and product diversity, of the 13 million square feet that we can build only about 25% required to the office. With the ability to do between 3 and 4 million square feet of life science and over 4,000 apartments. Our overlay approvals do give us flexibility to further adjust that next meet market demands. Our â23 business plan does include as I mentioned the $100 million to $120 million of property dispositions, we expect they'll occur in the second half of the year. While not really including many in our plan for â23, we do anticipate continuing to sell non-core land parcels and looking at our joint ventures $458 million of our debt levels or about 19% of our total debt is coming from our joint ventures with about $416 million of that coming from our operating JVs. Our 2023 plan anticipates recapitalizing several of those JVs. So our plan assumes we will reduce attributed debt from operating JVs by about $100 million or 24% by the end of the year. Certainly a dollar is generated from these activities were used to improve our existing strong liquidity, fund our remaining development pipeline, reduce leverage and redeploy into higher growth opportunities, including as liquidity permits stock and debt buybacks on a leverage neutral basis. Tom will now provide an overview of our financial results. Thank you, Jerry. Our fourth quarter net income totaled $29.5 million or $0.17 per diluted share, and FFO totaled $55.7 million or $0.32 per diluted share in line with consensus estimates. Some general observations report regarding the fourth quarter while our fourth quarter results were in line with consensus, we had a number of moving pieces and several variances compared to our third quarter call guidance. Our portfolio occupants, portfolio income was up by $900,000 above our third quarter guidance call primarily due to overall portfolio performance being better throughout the portfolio. Termination and other income totaled $2.7 million. It was $800,000 below our third quarter forecast, primarily due to budgeted other income items that will occur in 2023. Interest expense totaled $20.5 million or $2 million below our third quarter guidance primarily due to the higher capitalized interest and our slower capital spend. So our line of credit balance at the end of the year was below where we thought to be x the bond deals transaction. G&A expense totaled $9.1 million or $1.1 million above our third quarter guidance. The increase was due to a $1.8 million onetime charge for the write off of acquisition pursuit costs partially offset by lower personnel costs. Before tested one land sale to generate 800,000 gains in the quarter which did not occur. We anticipate that transactions to occur in the first quarter. Our fourth quarter debt service and interest coverage ratios were 3.3 and 3.5 respectively. And net debt to GAV was slightly below 40%. Our fourth quarter annualized net debt to EBITDA was 7.0 and 1/10 of a churn above our high end of our guidance, which was 6 to 6.9. As far as the portfolio changes, we expect this year, we do expect that we will have four or five, stabilize and become part of our core portfolio during 2023. On the financing activities Jerry outline since our last call, we have made significant progress on our financing and capital recycling fronts. In December â22, we did complete the five-year $350 million unsecured bond offering at 7.55% coupon and in January completed a five-year $245 million secured financing at 5.875%. And it's collateralized by seven wholly owned properties. Those two financings raised $595 million at a blended rate of 6.7%. Prior to the securing secured financing, our wholly owned portfolio was completely unencumbered. And we anticipate that will remain as unsecured borrowing, we will remain an unsecured borrower on future financings. We also swapped our $250 million unsecured term loan through its June 27 maturity date, and our consolidated debt is now 96% fixed at just over 5% rate, only our floating line of -- only our line of credit and trust preferred securities are floating rate on the balance sheet. Regarding joint venture debt, we are currently working on the 2023 maturities including active marketing of our Commerce Square property. We also are already working with our â24 maturities with our partners to possibly extend the current maturity dates with existing lenders. We're also considering some asset sales to lower leverage. 2023 guidance, at the midpoint our net loss is $0.08 per share on a loss basis, and FFO will be $1.16 per diluted share. Based on the midpoint, FFO has decreased $0.22 per share. As Jerry mentioned, the primary drivers being GAAP and NOI being up. We do expect a small increase in management fees. But we do expect other income to be lower, interest incomes to be lower as a result of the sale of 1919 Market Street in Philadelphia and our JV. Interest expense is going to be up $23 million. Our land gains are down $5 million and the JV FFO is down 16.8 which is primarily interest expense that we anticipate happening due to higher rates but also some of our liability management in terms of caps and swaps that will burn off. We do also anticipate some initial losses primarily on the opening of our residential project at Schuylkill Yards West. Our 2023 range was built on some of the following assumptions. GAAP NOI will be $3.4 million, an increase of $20 million. Most of that is due to 2340 and 405 Colorado, having incrementally higher NOI as we go through the year, we expect continued leasing of our life science development at 250 King of Prussia to be about $5 million. And we do expect about $3 million of net increase to the improvement on the same store portfolio. Our FFO contribution from joint ventures will total $8 million to $10 million. And that is primarily due to lower income due to the higher interest expense. G&A expense will be $34 million to $35 million and consistent with 2022. As we talked about, total interest expense will be about $105 million. We do forecast some use of a line of credit throughout the year. But as we have the asset sales hit in the later part of the second half of the year. We do expect that to bring the line down but there will be incremental interest expense during that time. Capital interest -- capitalized interest will increase it to 1$2 million as we continue our development and redevelopment projects. And we have $2 million to $4 million of land sales program for this year. We do anticipate further progress on selling non-core land parcels. And then those numbers can change as we go through the year as well. Termination and other income, $5 million to $6 million, which is below 2022 due to several anticipated onetime items and normal recurring activity in â22 that we don't see happening in â23. Net management fees will be between $15 million and $16 million. And we do have the property sales as Jerry mentioned at the second half of the year between $100 million and $125 million. There are no property acquisitions in our model. There's no ATM or share buyback activity in the model and we anticipate a construction loan on 155 King of Prussia Road. Our share count will be approximately 174 million shares. As we look at the first quarter of the year, general assumptions are that we'll have about $73 million of property NOI. The FFO contribution from our joint ventures will total $5.5 million, G&A will increase to $9.5 million. This is normal for the first half of the year as we have sequential increases due to our compensation expenses recognized and total interest expense will be $24.5 million. Termination fee should be about $2 million. And we expect land gains to be about $1.5 million. From a capital plan perspective, our plan is about $465 million. Our CAD rage as Jerry mentioned between 95% and 105%. The main contributor to the higher range is primarily due to lower earnings, partially offset by reduced leasing costs. Those uses are going to be $105 million for development and redevelopment. The primary uses are going to be for 405 Colorado, 250 King of Prussia Road, 2340 Dulles and some work on Broadmoor infrastructure. Our common dividend is $132 million, revenue maintain should be about $34 million, $60 million of revenue create capital equity contributions to our joint ventures total. Some of that will be the development joint ventures but we also anticipate some capital contributions to our operating joint ventures including Commerce Square. We had $54 million to retire the balance of our bonds in January. And the primary sources are going to be cash flow from operations of $175 million. The secure term loan which did close and generated $236 million of proceeds, $80 million of our cash on hand and about $120 million between the land sales as well as the program sales between $100 and $125 million. Based on that capital plan, our line of credit balance will decrease by approximately $84 million at the end of the year leaving almost full availability. We also projected our net debt to EBITDA will range between 7.0 and 7.3. And the increase is primarily due to the incremental spend on a development project, which will have minimal income by yearend. And our net debt to JV will be in the 40% to 42% range. Our additional metric of core net debt to EBITDA will be 6.2 to 6.5 by the end of the year. That excludes our joint ventures and active development projects, but will include closed projects such as 405 Colorado. We believe this core metric better reflects the leverage of our core portfolio and eliminates our more highly leveraged joint ventures and our un-stabilized development and redevelopment projects. We believe these ratios are elevated. And due to growing development pipeline, and we believe that as these developments are stabilized, our leverage will decrease back towards the core leverage ratios. We anticipate our fixed charging interest coverage ratios will approximate 2.7x, which represents a sequential decrease in those coverage ratios primarily due to the capital spend, but also the higher interest rates. Tom ,Thank you very much. So key takeaways or we believe the portfolio is in solid shape from an operation standpoint, our average annual rollover exposure through â26 is only 7%. With strong mark-to-market, manageable capital spends and stable and accelerating leasing velocity. Since last quarter, we have fully covered all of our wholly near-term liquidity needs, we finance our â23 bonds, as Tom mentioned, I mentioned only reduced our line of credit to zero, and presented a baseline business plan that continues to improve all liquidity while fully covering our dividend and keeps our operating portfolio in very solid footing with strong forward growth prospects. As usual end where we start and that we really do wish you and your families well. And with that we'd be delighted to open up the floor for questions. We do ask that in the interest of time you limit yourself to one question and a follow up. Catherine. Yes, thanks. Good morning, Jerry and Tom. I guess I just wanted to start on the operating portfolio and some of the outlooks for lease and core occupancy. I know those numbers came in at the end of the year, kind of below your original forecasts. And some of those numbers are expected to be flat or even up in â22. And but you've got a lower retention ratio. So just trying to sort of square up your confidence level, in kind of the new leasing pipeline to kind of hit your leasing and occupancy numbers that seem to fall short last year. Yes, sure. Glad to and good morning, look on fourth quarter occupancy, we did, in fact, come up short the tenant default in Austin was 51 basis points, we had another 42,000 square feet or about 330 basis points of occupancy that did occur in January, but substantial completion, and the actual moving process did not occur in December. So all-in-all we thought we'd probably be closer to 90.7, which would have been about 34,000 square feet off of our 91% bottom end the outlook for â22 is probably again, close to a 90% average occupancy, that really being driven twofold, in Pennsylvania and CBD Philadelphia, we're going to average about a 93% occupancy levels for the year, but in Austin in DC, only an 82%. And as Jerry mentioned in his commentary, that's really the some of the dynamic that is occurring with CBD at 96% occupied for the year, the contribution levels that we will require and anticipate out of Austin, have risen. They were roughly 16% of our square footage contribution in â22, and are now projected to be about 32% of our square footage contribution in â23. The pipeline is relatively consistent with what we've seen in the past. As it relates to Austin, in particular, since a lot of our focus is there, we have seen some good levels of tour activity, we do have a lease out currently on about 12,000 square feet of that space that was defaulted and given back in December. So we're starting to see activity levels already in that building. So we remain positive, we still believe in the growth characteristics of Austin, a lot of our suburban properties are somewhat insulated from the big tech companies. And we see a lot more of financial service and just professional service prospects in that pipeline. Hope that answers -- Okay, and then maybe just quickly, yes, so thank you, I just wanted to touch quickly. Jerry, you talked about the 1.8 square feet on the development pipeline, and I know you've kind of walked through 3025, 3051, it sounded like Austin maybe was a bit slower. But can you just give us a little more color on the tenants that you're talking to the timelines? Like how many of these are new to Philadelphia for the life science assets? And are the Austin tenants kind of new to Austin or they expanding tenants in Austin and obviously that mark is feeling some pressure with the tech slowdown which you mentioned, but just case any flavor on kind of in-house tenants or in market tenants versus new to the market? Sure, happy to, and look, take a look at the Schuylkill Yards development, Steve, which is really the 3025 which companies coming online later this year, then 3151, which is about a year behind. As I touched on the pipeline is up quarter-over-quarter. The majority of the prospects are significant growth of in market companies. We have several who are new to the Philadelphia region. But the larger square footage tenants are consolidations from other areas around the city but also coupled with some significant expansion capabilities. So that seems to be the major driver in the life science tenant base that we're talking to Schuylkill Yards. From an office standpoint, they're all kind of in region companies. Not all in city but in region companies looking to kind of move up to higher quality, more amenitized projects. And just to touch on that for just one second, before I jump to Austin. And we continue to be very pleased. I know there's a lot of dissonance of what's happened in the office sector, we do continue to be very pleased with the level of new prospect activity that we're seeing across the board of tenants love to move from older into call it better, higher quality, better managed better run buildings. That's a trend line that we've seen, really for the last two years. And we're an interesting position because we have a very good high quality existing portfolio, and then very good new developments. And it's actually been quite pleasantly surprised to see the velocity of new deals coming into our pipeline from a market company but are looking to really upgrade their stock. And at this point, even with economic uncertainty, those tenants still seem to be willing to pay the higher quality, the higher rents to get into those higher quality building. So we monitor that dynamic very closely through our CRM software tools, our outreach programs and actually tracking the pipeline on a weekly basis. Relative to Austin, we'd really been focused thus far, Steve on trying to find a substantial full building user. And we had a number of those in the marketplace that were doing a lot of tours with us and a lot of discussions and trading in paper. As I mentioned in my comments, a couple of those got really put on hold not dead but put on hold. So we are shifting our strategy. They're really from trying to find one large tenant who would take the vast majority of the building to a couple of a midsize prospects we have and then think about a multi-tenant approach. We think that will be successful. Certainly Austin's been a bit, a little bit slower to return to the workplace than some other markets. We see that trend improving a bit, but it's certainly behind the other markets. But even then, we're seeing a big push towards the quality components with Block A presents. Did I answer your question? Thank you. So you mentioned the JV that maturing this year, including Commerce Square. And it sounds like there's a lot of interested lenders even though we've obviously heard that financing can be difficult to obtain for office properties in general. So maybe can you speak to the financing environment? And if you're able to share anything regarding what you might be expecting for proceeds or pricing on those loans? Sure. Mike, hi, itâs Tom. On that we are talking to a number of lending sources, I think that Mike, on the traditional lender side, which are mainly your banks, we are seeing, there has been and continues to be a bit of a pullback on their appetite for new loans, newer origination loans. So we are looking at some of the other opportunities, whether it be maybe securitized type loan, or whether it be one of the debt funds. So there are other sources other than just the traditional banks, although we have a couple of banks looking at it. And I think if they were to do it, it may be with a group of banks rather than one single bank, taking this project due to its size. Pricing is still a TBD, I would expect pricing, though, to be higher than where the debt is today. And we'll see how that progresses over the next month or so. We don't really have a good handle on pricing, we're getting those quotes kind of in the near future. Okay, great. Thanks. And then I read an article recently, arguing that Philadelphia suburban office market might be in trouble because the flight to quality is bringing those tenants into the Center City, you already talked about flight to quality a little bit. But on the other hand there's a theory more broadly that people are going into cities less so perhaps offices in the suburbs are more easily commutable and better position, post COVID. So are you seeing anything in terms of demand in the suburbs versus the city? That you think there's a shift that favors one strategy over the other? I know, obviously, you're involved in both? Hey, Michael, great question. We really haven't seen a discernible trendline to tell you the truth. We were expecting to see at certain points more people, either moving into the city or moving out to the suburbs, we really havenât seen that, we've only seen a couple of tenants from the CBD move out to the city. We conversely seen a few tenants move from outside of the city into the city. So no real discernible trend line by tenant type, or by tenant size. We do continue to see tenants focused on quality in both places. And I think our Radnor portfolio and look the build to suite we did, we announced on Arkema and Radnor is a great example of a company -- a high-quality company, great credit, really can upgrade the amenity space they present to their employee base. And they love the location of Radnor served by 2 train lines and access to Interstate highways. So I think those basic location and quality predicates are in place, whether it be in the city or the suburbs. By far the percentage of folks returning to the office is higher in the suburbs than it is in the city. And even though in the city foot traffic is back to the pre-pandemic levels during the workday mass transportation is kind of on a very positive trend line. It seems as though -- and I know, George, you've had those numbers, what kind of the occupancy, daily occupancy levels in the suburbs are higher than the city. But that has not been Michael a driver and locational decisions as of yet. Yes. And just to add on, I mean, in the suburbs, we're seeing closer to a 70% to 75% kind of back in the office, where in the city it's probably on average closer to 50%. But again, there's still a number of large employers that have been even a little bit slower to kind of bring everybody back even on a two -to three-day a week hybrid plan. Great, thanks. Maybe we can talk on life science demand for a bit, specifically 250 King of Prussia. You noted the stabilization was pushed back a quarter. This is a suburban asset kind of further out from where our city is, you kind of think of that core life science cluster down in CBD Philly? Just -- how confident are you that demand is there for a product like this? And any additional commentary you could give there would be great. Okay. No, I think we're very confident. I think the -- we were trying to market that project is kind of a hybrid life science office. And that really was the predicate behind our kind of leasing assumptions and the capital costs. So as I mentioned, this quarter, we did raise our capital cost by about $20 million. We did increase the yield by $0.2 to the point to 8.2 as we've been marketing that and the building really just delivered recently. So it's in showcase condition, we have a few tenants in there now. It's really become a magnet for life science companies. We put -- we invested a lot of money to the infrastructure of that building. It's really part of our kind of Radnor Life Science Center, which has a few buildings in it and the demand drivers here have been very strong. They've been -- the demand drivers, while they've been strong, they've been a little frustratingly slow in making decisions, which is what we're kind of seeing across the board. But as we look at that pipeline, it's a full bore 100% life science. Some of the larger users we're talking to, Michael, are -- they just tend to take a little bit more time than we frankly would like as they go through their technical requirements and space planning requirements. So just taking a look at the existing pipeline and when they're targeting their occupancy date, that was one of the drivers behind, key drivers behind moving the stabilization date back. But Philadelphia is pretty fortunate where there seems to be some strong life science demand drivers, particularly in University City here in close proximity to the anchor institutions, but also some kind of hubs of life science activity in the suburbs, primarily kind of the Radnor, King of Prussia quarter as well as further north of the springhouse. So you have a couple of those suburban pods that have generated some very good leasing activity on the life science front. And then here in the city, while it's been predominantly University City kind of between 30 and 30 A Street market. There's also been very good pods of primarily manufacturing and low-impact research based down the Navy or and a few other pads around the city as well. So we're actually -- we remain very encouraged with the demand drivers we're seeing on the life science side in both the University City and suburban locations. Got you. That's definitely helpful. And then just on the tenant default in Austin, can you expand on that a bit? And are there any other tenants in your portfolio that might find themselves in a similar situation? Sure. Yes, I'd be glad to. Yes, this was a 65,000 square foot tenant at our Martin Skyway project out in the Southwest Corridor. We had a kind of ongoing dispute with them over the course of 2022. They were one of our fully reserved tenants -- so weren't really having a negative impact on the '22 business plan due to the reserve. But -- we just got to the point where we got to a stalemate and proceeded with the next course of action, which was default in eviction and we've now got the space back on the market. And as I said, we've got a little bit of a pipeline forming and do have one lease for about 12,000 square feet that we're negotiating. Yes, really, not at this time. I mean we -- not really at this time, Michael. Tom and his team, along with our asset management folks kind of go through the accounts receivable on a monthly basis, and we're kind of always assessing who's utilizing space versus not utilizing space. And we think that at this time, we really don't have any other risk from that perspective. Yes, Michael, this is Tom jumping in for a second. We did -- as you go back even at the start of the pandemic and where people were getting help and who needed it and where we were seeing credit issues. For the most part, we were fairly lucky in terms of not having a lot of defaults. And most of those where we did give relief are more in the retail area than the office area. So we've been fairly good on monitoring that, and we do monitor the tenant's credit as we go through the year, that our team does a really good job of that. So it's nothing different than what we saw in the first pandemic so we really don't have a lot. This tenant has been on our list is by far the largest one that we've been following. So we really don't see any storm clouds right now that will lead us to think there's going to be any change in our current collection rate and tenant collections. Hi, good morning, everyone. I wanted to talk a little bit about just about the dividend. Given the guidance you guys are forecasting a dividend coverage on an FID basis of anywhere between 95 to 105, so you get really tight. Just kind of curious how you kind of think about it going forward, again, especially given your kind of source of the uses of capital in 2023? Yes. I guess, let me address that, and Tom certainly feel free to weigh in. Look, it was -- we acknowledge that the payout ratio for '23 will be tight and certainly, it's higher than we've had in the last several years. So as we're thinking about the dividend, we took a hard look and we think we've established a strong but conservative baseline cash flow as a foundational point in our '23 business plan. We'll obviously monitor that closely during the year. But as an example, we started off '22 with a range of 95% to 84%, and we wound up right at 84%. So we become very good at controlling our forward capital cost to making sure that we manage revenue and capital expenditure. So we feel that baseline gave us a good springboard to grow from. We also, as we look at the plan, we expect to sell, as I mentioned, between $100 million and $125 million of properties. In addition to partially liquidating exiting a couple of joint ventures, operating joint ventures. So some of those sales may generate losses, but we also anticipate some gains that could certainly impact our taxable income. So we felt with the baseline cash flow in place, the variable of potential sale gains we felt that it might be premature to take a look at cutting the dividend. And also, we -- as Tom has outlined and you've seen from our announcements, our liquidity is in very good shape. So looking ahead, and certainly subject to change based upon economic circumstances. Right now, we're very confident that our cash flow will continue to grow from this baseline forecast. So quantitatively, we assess that the dividend coverage wallet will be tight, should be adequately covered. And qualitatively, honestly, it's been a very challenging year for office company shareholders. So the Board after getting very comfortable with the baseline cash flow numbers wants to make sure that we really keep our folks on returning as much value as we can pragmatically and conservatively to our shareholder base. So the decision was made to keep the dividend in place. Certainly, the Board as they always do, will monitor that during the course of the year, make any adjustments as appropriate. But that was kind of the thought process. So hopefully, that answers your question. That's very helpful. And then just a follow-up on the JV debt side. Could you just give us a general sense at this point of where you think you could raise debt for a lot of the upcoming debt maturities and if you would consider kind of putting any kind of swaps on some of the outstanding variable rate debt? Sure, Tayo, this is Tom. I'll jump in on that. I just wanted to follow up on Jerry's comment on the dividend. As we looked at our dividend this year, our dividend because of our gains on the sales that we did have, we ended up having full utilization of the dividend between operating income as well as the gains. Our goal has always been to kind of keep it monitored and stable rather than giving out sort of onetime dividend or special dividends to the extent we have gained. So I thought we monitored that this year and basically came in right on top of our actual dividend. And so we'll monitor that again as we look at the sales, we have quite a bit in the market. That may generate gains that we know will happen and would certainly dictate whether we would keep the dividend in place for those reasons as well. As we look at the debt on the JVs, we are looking at probably executing on maybe a couple more swaps for the debt that's in place. So there may be increases to that from where they are right now. And then on the rates, we are looking a little further out. The rate seems to dip as we get into '24. We are talking to a couple of banks about extensions to those loans. So to the extent we can get those extensions, most of the properties are performing well. The occupancy in general is about 80% on the whole portfolio but they're still performing pretty well, leaving good leasing activity. So we would hope that if we can get some extensions on the debt, we may then talk to our partners about fixing the debt looking out on the curve at something that might be lower than where that curve is today. Hi, good morning. This morning, you mentioned the quantum of disposition targets this year. Can you talk to the asset types or geographies you're looking to sell? And more broadly, what your expectations of when we might start to see pricing stability for office properties? Yes. Great question. Good morning. Right now, as we look at our sales program for '23, actually, in all three of our markets, we've identified a few properties for sale. That includes Philadelphia as well as the Pennsylvania suburbs. Several properties we target for sale in our Washington, D.C. operation, also looking at test marketing a couple of properties in the suburban areas of Austin. The -- we have a number of properties in the market now. And in terms of pricing, I honestly think like everybody is out there doing price discovery. So sellers are trying to figure out what they think pricing will stabilize that. Buyers are trying to figure out where debt yields will be and what kind of price they can pay. So we've actually been pretty happy with the volume of confidentiality rooms that have been signed, people are reviewing the packages and checking out the share file rooms on the due diligence as well as the number of tours. So to give you an example, we have one property on the marketplace where we launched it back in January. This is in the Pennsylvania suburbs; we already have a 56-confidentiality agreement signed. Now how they all translate to pricing; I really don't know at this point. That's one of the reasons why we're going to get as many things in the market during the course of the year as we can. We do know that as a couple of questions have come up and Tom's articulated, the debt markets, while not ideal, are certainly better today than they were in the fourth quarter of last year. So we are seeing -- and we certainly are seeing that through our Commerce Square financing. The number of lenders looking at that has certainly been a pleasant surprise to us. Where, again, pricing and terms come out, we don't know. But certainly, a lot more lenders are out there looking for high-quality office loans. And we think once we get more clarity on that, we'll get more visibility on pricing. But right now, we're targeting cap rates from the very high 6s, low 7s up to 9 once given the quality of some of the properties we're selling. But until we actually get offers in, I really can't give you a definitive read. We've thought carefully how we want to sequence some of these properties in the market during the course of the year. And to some degree, that pace will be modulated based upon what we see happening in a macro term level and what we're hearing from exists from lenders on some of these current refinancings I think if we see that the lending market is opening up a bit and spreads are compressing and terms are a little more favorable, we might accelerate some of those sales opportunities going to the marketplace to take advantage of that window. Is that helpful? Does that answer your question? Good morning, guys. And thanks for taking the question. Just curious if you can kind of comment on your expectations for net effective rent growth across the portfolio? Yes, absolutely. And good morning, Dylan. Look, it varies a little bit market to market. But I think in our Philadelphia and Pennsylvania suburban markets, is probably where we see the best opportunities. When we kind of look at our CBD portfolio today, I mean, average lease is probably 5% below market today. So we do have continued opportunities as people roll to market. And depending on when those leases were last executed, we're seeing our best mark-to-market coming out of Philadelphia. So rental rate pace is outperforming the increases we've seen in construction costs and even in free rent requests. So I think Philadelphia, Pennsylvania suburbs are kind of on the plus side as it relates to net effective rent growth. And I think in Austin, we are probably flat to slightly down when you look at both where rental rates are kind of currently and factoring in where construction pricing has gone. Yes, I think Dylan add on to that. I mean, we've been very happy with the kind of the mark-to-markets that we've been receiving on particularly our University City, CBD and PA suburbs properties. And one of the things that we really do monitor and one of the key points we evaluate, look at our business plan is when we take a look at our '23 activity, leasing activity, our capital ratios are actually lower than they in '23 on a projected basis in '22. And that's even given the composition of the leasing activity that we've targeted. So we continue to remain pretty charged up about the ability to drive effective rent growth in a couple of our core markets University City here CBD filling in Pennsylvania suburbs. As George touched on, I mean, candidly, we're somewhat of a price taker in our D.C. operation and have not really had positive mark-to-market there for a number of years and capital costs have remained fairly static, but so down to decrease to that. And then Austin, look, we have some holes to fill in the Austin portfolio in '23 and '24. So we're very much in a very aggressive marketing posture to get those spaces at least up as soon as possible. Those leases again are done on a triple net basis. So we built a bit of an inflation hedge in. Construction cost increases have moderated across the board but are still upward bias. I mean we're seeing big decreases in construction costs kind of on building superstructure issues that don't really play in too much into TIs, which is basically sheetrock electrical, carpeting, et cetera, which anything that's controller-based still tend to have upward is the pricing model. So hopefully, that provides some clarity for you. Yes. No, that was extremely helpful. I appreciate the color there. And then just touching on the Conshohocken asset. I think you mentioned it traded at a sub-6% cap rate. Is there anything that's kind of driving that cap rate lower than sort of the high 6s to low 9s that you had mentioned in the previous question? I guess I mean in the rest of your suburban portfolio? I think for the properties are really well located like 4 Tower Bridge and our other contracting props, our Radnor properties. We certainly love the very low end of that cap rate range I quoted is in place. I think for some of the other products, particularly in the, I call it, kind of the D.C. marketplace kind of Northern Virginia, where effective rent growth has not been that great as we just touched on, I think there, we're thinking that those properties are trading closer to the midpoint of the range I gave before. But I mean we're still seeing very good demand. Again, somewhat driven by debt costs, I want to caveat my answer but every time we talk to a potential list of buyers on a really premier asset with good weighted average lease term, good lease structures, no deferred capital good credit tenants. We're actually seeing pretty good demand. How that all translates to pricing nuance we have to see how things play out during the course of the year. Hey, good morning, Jerry. As you talk to your joint venture partners, do you sense an increased interest in selling assets rather than financing at today's rate? Is there increased pressure? And I guess -- the other part of that is what does it mean for future joint venture agreements? Yes, Bill, good question. As we look at it, all these joint ventures we enter into on the operating side, really are really transitional financing strategies for us. So in the past, we've done a lot of joint ventures. We exited a lot of joint ventures and some of the joint ventures we have today are frankly kind of reaching the end of their targeted useful life for both parties. Certainly, we probably would have been more active on the JV front in the second half of '22 if the capital markets have been more cooperative. But as we're talking to all of our joint venture partners today, there on the operating side, every discussion includes is now a time to sell the assets is now time to sell one of the assets. What should we think about doing in terms of recharacterizing the platform. So it was really based on a lot of those discussions, Bill, that we kind of put into our prepared comments that we do expect to recapitalize partially exit or exit a couple of those joint ventures during the course of '23 whether that's through a buy-sell mechanism where we sell our interest. We have a seven or eight property portfolio with one particular partner, and we sell two or three assets out of that, refinance out the balance. All those discussions are very active. And we're blessed that a lot of our joint venture partners are really smart, too. They're very smart operators. They understand the real estate business. They're pragmatic. They understand the realities that we're facing and trying to sell and refinance properties day. So all of the discussion with every partner is productive, constructively focused forward on how we maximize returns to both parties. So we do think the first half of '23 will be very interesting in terms of getting some of these financings done, but more importantly, developing a 12- to 36-month horizon on how we can actually recycle out of some of these operating joint ventures. Is that helpful? Yes, I think so. And then for either you or Tom -- just curious, what of your West Coast peers cut their dividend but then implemented a share repurchase platform. And I'm just curious how you're thinking about, given where your stock is trading, the implied cap rate, et cetera, kind of the trade-off there between a lower dividend but getting more active on the repurchase side? Yes. Look, I think that -- look, it's a sound strategy that company is using. And I think our approach is let's generate some surplus liquidity through selling assets, keep the return levels to our existing shareholders where it is. And as we certainly can generate excess liquidity through some asset sales as you -- as we talk about some joint venture liquidations. As I mentioned in my comments, I think both share buybacks and debt buybacks of our longer-term debt are certainly on the table on a leverage-neutral basis. But we're very focused on continuing to grow cash flow very focused on as part of that, reducing our overall leverage metrics to provide more capital flexibility. But there's no question that both share and debt buybacks are on the table and Tom and I monitor that very carefully, really the driver there being how we view near-term source of liquidity to implement either one of those tactics. Thank you. And there are no further questions in the queue. I'd like to turn the call back to management for closing remarks. Great. Catherine, thank you very much. And everyone, thank you very much for participating in our call. We look forward to updating you on our '23 business plan progress on our first quarter call later this year. Thank you very much.
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Welcome to the MPLX Fourth Quarter 2022 Earnings Call. My name is Sheila, 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. [Operator Instructions]. Please note that this conference is being recorded. Good morning, and welcome to the MPLX fourth quarter 2022 earnings conference call. The slides that accompany this call can be found on our Web site at mplx.com, under the Investor tab. Joining me on the call today are Mike Hennigan, Chairman and CEO; John Quaid, CFO; and other members of the executive team. We invite you to read the Safe Harbor statements and non-GAAP disclaimer on Slide 2. It's a reminder that we will be making forward-looking statements during the call and during the question-and-answer session that follows. Actual results may differ materially from what we expect today. Factors that could cause actual results to differ are included there as well as in our filings with the SEC. Thanks, Kristina. Good morning. Thank you for joining our call. First off, I want to recognize a new Director on the MPLX Board. In November, Christy Breves, who recently served as CFO for U.S. Steel, was appointed as a new Independent Director. 2022 was a strong year as we successfully executed on all of our strategic priorities. Full year adjusted EBITDA was $5.8 billion and DCF was $5 billion. Strong operational performance and customer demand drove record annual pipeline throughputs and increasing Gathering and Processing and fractionation throughputs with each quarter of the year. We also realized EBITDA growth from recent capital investments and remain focused on cost management. Overall, our efforts resulted in a 4% year-over-year adjusted EBITDA and DCF growth. In line with our commitment to return capital, for the full year, MPLX returned over $3.5 billion of capital back to unitholders through our distribution and unit repurchases. We also made progress towards our goal of leading in sustainable energy through our methane reduction program and with the receipt of EPA's ENERGY STAR award for energy efficiency improvements at several terminals. Today, we announced our capital expenditure outlook for 2023 of $950 million. Our plan includes approximately $800 million of growth capital and $150 million of maintenance capital. Our growth capital plan is anchored in the Marcellus, Permian and Bakken basins. In addition to new gas processing plants in the Marcellus and Permian, the remainder of our capital plan is mostly focused on other investments targeted at expansion or debottlenecking of existing assets to meet customer demand. While our capital outlook is primarily focused on our current L&S and G&P footprint, we will continue to evaluate low carbon opportunities where we can leverage technologies that are complementary with our asset footprint and expertise. Moving to our capital allocation framework. First, maintenance capital. We remain steadfast in our commitment to safely operate our assets, protect the health and safety of our employees, and support the communities in which we operate. Second, we remain focused on delivering a secure distribution. Third, after these commitments are met, we will invest to grow while maintaining strict capital discipline. And fourth, we also intend to return excess capital to unitholders. As I've said in the past, we believe this is both a return on and a return of capital business. Last November, based on the strength and growth of our cash flows, we increased our distribution by 10% to an annual rate of $3.10 per unit, while maintaining a strong distribution coverage ratio of 1.6x. In 2023, we would expect to be similarly focused on our distribution as our primary tool to return capital to unitholders. We are optimistic about our opportunities in 2023 and remain focused on executing the strategic priorities of strict capital discipline, fostering a low cost culture, optimizing our asset portfolio, which are foundational to the growth of MPLX's cash flows. Thanks, Mike. Slide 6 outlines the fourth quarter operational and financial performance highlights for our Logistics and Storage segment. L&S segment adjusted EBITDA increased $45 million when compared to fourth quarter 2021. The increased results were primarily driven by higher pipeline tariffs and contributions from pipeline equity affiliates, partially offset by higher maintenance project-related expenses in the quarter. Pipeline volumes were flat year-over-year, primarily due to the impacts associated with Marathon's refinery turnarounds in both quarters. Terminal volumes were up 4%. Moving to our Gathering and Processing segment on Slide 7, G&P segment adjusted EBITDA decreased $36 million compared to fourth quarter 2021, as the benefits of higher volumes were more than offset by lower natural gas liquids prices, which averaged $0.78 per gallon for the quarter as compared to $1.05 in the fourth quarter of 2021. In total for the quarter, gathered volumes were up 14% year-over-year due to increased production in the Utica and our Southwest region, which includes our Permian operations. Processing volumes were up 1% year-over-year, primarily from higher volumes in the Southwest, driven by increased customer demand and our investments in processing capacity in the Permian. In the Marcellus, while Gathering and Processing volumes were slightly lower year-over-year, we did see sequential increases for gathering, processing and fractionation volumes in the basin. These activity levels were in line with our expectations for increased producer activity in the back half of the year. Moving to our fourth quarter financial highlights on Slide 8, total adjusted EBITDA of $1.5 billion was roughly flat versus the same period in the prior year, while distributable cash flow of $1.3 billion increased 5%. Results in the quarter were impacted by $23 million special compensation award provided to our employees in recognition of their efforts. We do not anticipate that this expense will structurally impact future costs. In the fourth quarter, we returned $975 million to unitholders through approximately $800 million in distributions and $175 million of repurchases of common units held by the public. MPLX ended the year with nearly $850 million remaining available under its unit repurchase authorizations. Last week, MPLX declared a fourth quarter distribution of 0.775 per unit, resulting in a distribution coverage ratio of 1.6x for the fourth quarter. MPLX ended the year with total debt of around $20 billion and a debt to EBITDA ratio of 3.5x, comfortably below our target of approximately 4x. While our absolute level of debt has remained relatively constant, our leverage has decreased due to the growth in our business. And at these leverage levels, we do not see the need to reduce our absolute level of debt. Earlier today, we announced our intent to redeem the par value, the $600 million of outstanding Series B preferred units in mid February. Subject to market conditions, we expect to refinance these preferred units into long-term debt. In closing, we expect our solid operating performance and growth of our cash flows will enable us to continue to invest in and grow the business while also supporting the return of capital to MPLX unitholders. Thanks, John. As we open the call for questions, we ask that you limit yourself to one question plus a follow up. We may re-prompt for additional questions as time permits. Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question will come from Brian Reynolds with UBS. Your line is open. Hi. Good morning, everyone. Perhaps to start off on capital allocation, we saw continued commitments, unit repurchases and the redemption announcement on the preferreds. With the preferred redemption announcement and some of the debt maturities that are coming up in '23 and '24, was just curious if you could opine and discuss on how you expect any change in return of cash via special distribution or buybacks going forward, like we've seen in the past just given the upcoming debt maturities and the path that you expect to refinance as well? Thanks. Great. Hi, Brian. Good morning. Thanks for the question. We'll try and pick that apart in a couple of pieces. First, as I said in my comments and just to reiterate, right, we provided notice to the Series B holders that we're going to redeem those in February. As you note, we also have 1 billion of senior notes maturing in July. And given our leverage and where we are and as we've done in the past, we'll likely look to refinance both of those into long-term debt, subject to market conditions. So that's the first piece on the Bs and the senior notes. And then thinking about return to capital, as you saw us last year, we've gotten lots of feedback from investors; some prefer distribution, some prefer unit repurchases. We've tried to think about our structure around that framework. As you -- more recently, it seems like it's been tilted towards the distribution, as Mike commented, and as you know, we increased the distribution 10% here effective with the third quarter distribution, still really strong coverage at 1.6x, a strong balance sheet at 3.5x leverage. So I think that will be an area we'll continue to focus on in 2023. And then we'll also I think continue to be opportunistic, perhaps more opportunistic around unit repurchases, right? If you look back to when we began the program, we've done a little over 1 billion and about 29 a unit. In the fourth quarter, we did about 176 million. I think 31.75, somewhere in that ballpark. So I think it'll continue to be a part of our framework, but perhaps a little more opportunistic. And, Mike, do you want to add something as well? Yes, Brian, let me just add a little bit to it. Just on a simple basis, we're generating about 6 billion of EBITDA, about 5 billion of distributable cash flow after that. We've been spending roughly around 1 billion. So we have about $4 billion of free cash flow and distributing 3 billion through our base distribution, which has been leaving about $1 billion of cash after all that. So I think the key is we have a lot of flexibility. And as John said, we'll try and be opportunistic on the buyback side. We'll try and continue to show the market that we continue to grow this partnership. So you'll see us continue to increase distributions over time. So we'll talk about that at some point. But I think we're in a real good position from a financial standpoint, strong balance sheet, excess cash flow, looking for opportunities to deploy but staying strict on returns. And overall, hopefully, that's where the market wants us to be. Great. Thanks. Really appreciate all that extra color. And maybe just to quickly touch on the operational side of the house, MPC refinery run siding [ph] into '23. It seems to be faring much better than peers. And curious if management could just opine on expectations for '23 products, volumes versus '22 and if you're seeing any nuances by products that could perhaps support resiliency and product volumes in '23 after just seeing really strong refinery runs last year? Thanks. It's a good question, Brian. I'm going to let Shawn give you a little more color. But I will say, at the MPC side of the house, we had a really strong year. Safe, reliable operations is key to our business on that side. We ran 96% utilization. If you've followed some of the activity during the year, we had deferred some turnaround activity to the back half of the year. But overall, it was a very strong utilization. So I'll let Shawn comment a little bit on the L&S side. Hi, Brian. This is Shawn. As Mike said, we had a strong year in '22. We had several records across our assets on the terminal pipeline side. And in '23, we're continuing to see another strong year. And we'll be matching the refinery rates that MPC and others habits. And then also we're excited about the growth out of the Permian and some of the pipelines coming out of the Permian. So, again, just like '22, we're excited to see again another solid year in '23 as far as volumes and growth. Hi. Good morning, everyone. Thanks for the time. Maybe I'll pick up on the CapEx guide. You touched on some of the moving pieces. But I'm just curious if you could break it down a little more for us just in terms of -- and it can be loose, I suppose. But just how much of the guide is going towards these kind of named projects you've talked about, like the next Permian processing plants, versus going to the smaller bucket of one-offs versus I guess what we're calling kind of the emerging opportunities on the transmission side, any sort of breakdown there or kind of trend maybe even year-over-year would be interesting? Thank you. Hi, John. Good morning. I'll start and then I'll let John add some color. So in general, most of the capital program is targeted at what we'll call the smaller expansion to bottlenecking projects. I know people like to see flashy big projects, but we actually get the best returns as producers grow, whether it's in the G&P side or in the L&S side of the business. As production increases, we have a pretty big system that we can continue to bolt-on to add to expand a little bit here and there. It's where we get our higher return projects. Now, we're still going to add to the platform. As you mentioned, we got a couple of processing plants coming on, which will continue to increase our base, which then allows us to add some gathering to support that, et cetera. But the real story behind our growth, and if you step back, we are pretty large, as I just mentioned, about 6 billion of EBITDA. So our face plan is we're going to have mid single digit growth in our system, have good discipline so that we get high return projects, continue to add EBITDA, and at the end of the day look for those other opportunities like you mentioned in low carbon. There hasn't been a lot today. There's been a lot of rhetoric around it. And there's a lot of talk about different things. We're obviously involved in projects that are looking at CCUS. We're involved in a lot of stuff that's down the road, but not going to be hitting the 2023 earnings profile in a strong way yet. I am a believer over time, there are going to be more opportunities for us there. They'll just have to develop as technology advances, et cetera. So in the meantime, our concentration -- we use the term strict capital discipline. It's a nice way of saying we want to make sure we get good high returns that are really going to hit the bottom line every year consistently, because we've continued to grow this partnership year-after-year and obviously a big outcome of that is returning a lot of capital to our investors. Hi, John. It's Shawn. Just a couple of things to add to Mike's comments. So maybe one is an example of kind of an expansion in debottleneck. The other item we're looking at in the Marcellus is we've got some space on our existing processing plants. So we've got an opportunity to look at those gathering systems and invest the monies and fill up some space on plants we have sitting there and ready to go. And then also remember there's a number of those projects that are listed on the slide there, mainly around our Permian opportunities, where those projects given shipper support, et cetera, we've been financing those at the JV level. So there's a good amount of capital that's going to drive EBITDA growth that's not in our capital outlook just because of that's getting financed down at the joint venture. So just wanted to highlight that as well. That's helpful. I appreciate all the stuff. Maybe turning to the quarter, two things. John, I think you mentioned some higher expenses maybe on the L&S side in the quarter. And then you also mentioned the $23 million special comp award. Is there any kind of total number there that you might be able to give us for the quarter that maybe won't be there in a run rate if we're trying to look at 2023 going forward? Is it as simple as kind of adding back $23 million or maybe $25 million? And that's kind of a more representative run rate of the base business. Yes. John. Thanks for the question. So a couple of pieces there. The special compensation award by it's kind of term we're using there, that's a one-time item we decided to do here in the quarter and that was the expense for the entire items. So I don't know that we anticipate having another award in the first quarter, right? That was really our effort to look at our employees, kind of non-executive level employees' efforts in achieving our 2022 results and wanting to recognize that. So that's a little unique. The other piece gets around our frequent discussion around kind of project maintenance expenses. Certainly, we tend to be a little more back half loaded, sometimes that can move with MPC's turnaround schedules, et cetera. So that number year-over-year I think we see being roughly the same amount of expenses as we continue to focus on cost management. But it will move quarter-to-quarter, John, but I don't know that today we're going to provide that number. Just a flag for you, as in the past, first quarter does tend to be our lowest spend quarter around that activity just due to weather and other items. So hopefully, that's helpful. Hi. Good morning. I wanted to start just -- I know this is a very recent data point, but just any updated commentary you're hearing from producers unplanned [ph] Marcellus and Utica activity, given the very rapid decline in gas prices that we've seen and how that might be impacting your expectations as well? Thanks, Keith. Really the 2022 prices, whether it be crude NGL or gas, were very supportive of increased drilling activity by producers and this is not just in the Permian Delaware, or even the Marcellus. It was across all basins. We've seen increased activity, so increased drilling in 2022 and some completions, and then completions into '23 mean higher volume outlook for '23. Certainly, there has been price volatility. We've seen prices over $10 per MMBtu in the summer, which, at a high and now we're kind of back to more of a normal level. But in the Permian, in places like the Bakken, even the condensate when on the Utica is really crude price driven. And the drilling is related to crude price, and we see the benefits of associated gas and NGLs that come off of that. So short-term price swings really, we don't expect right now will impact the volume as much because a lot of that activity was set up by drilling activity in 2022. Got it. Thanks. Second question, I just wanted to follow up on the distribution. So you had the 10% hike last quarter. Growth in the distribution I think was pretty small in the couple of years before that. How should investors think about distribution growth over the next several years for the company? Does it tie in your head to overall growth and cash flows of the business? Do you see some excess cushion and excess cash flow, so the distribution could grow potentially faster? Just how are you thinking about that over the next few years? Hi, Keith. It's John. I'll start and then I'm sure Michael will have some comments as well. Again, as you said, last quarter really driven off our confidence in the strength of our cash flows, we moved to the 10% distribution increase. But as I noted, still a really strong coverage ratio of 1.6x. And I think you've highlighted part of it, right? We've continued to grow the partnership. We've been focused on cost. And while we may have slowed on the distribution for a few years, we essentially built up our coverage. So that was partly -- you heard Mike talk about our target of kind of mid single digit growth. Ultimately, you would see the distribution getting towards that sort of run rate. But we probably have built up some capacity here to think about how we might look at the distribution later this year. I'm just going to add a little bit of -- repeat a little bit of what I said earlier, got to keep in mind the law of large numbers. We're roughly 6 billion of EBITDA. So if we grow that at mid single digit, that's $300 million more EBITDA, which would translate to more financial flexibility for us, whether we increase the base distribution, do buybacks or whatever. But the nice thing about our system is we're large enough that even mid single digit growth will add a significant amount of additional cash flow to a distribution that today is about $3 billion roughly. So if you think about the math of where does that even translate? It provides flexibility for us to make more moves. And to your point, everybody in this space kind of paused a little bit during COVID. And I think one of the things that I hoped the market recognized, we still grew earnings during that year, even though it was a tough year on the refining side of the house with reduced demand, et cetera. So part of it is to try and recognize where we are financially, part of it is to try and recognize where our growth potential is. And then, like I said, if you go to the simple math, you can start to kind of look at where our financial flexibility will be. And I keep saying it's a good problem to have. It's a good place to be. We'll try and reward investors in the best way that we can to get an overall total return in the manner that we think is most efficient at the time. We've traditionally said it's an all of the above approach. As John mentioned, we leaned in a little harder on distribution last year for the point that you made, as well as what John just made. We got strong coverage. We got continued line of sight for growth. So I think we're in a really good position to continue to grow the partnership. Good morning. Mike, I'd love to get some of your thoughts on the potential low carbon expansion opportunities and generally growth beyond what you have in the slate right now? As far as your ability and willingness to invest in the low carbon renewable space, are there hurdles at this point a matter of technology, financial hurdles? And given that MPC has made significant progress in its renewable investments, is there volition down the line to do something together with a C-Corp? Yes. Theresa, so at a high level, most of our low carbon activity in the short term is geared at the MPC side of the house. So we'll talk a little bit more about that at the 11 o'clock call. A little less right now on the MPLX side. But as I mentioned earlier, we are a believer that technology will continue to advance. One example that everybody's aware of is gathering carbon and sequestering it. So that's a great opportunity on the MPLX side of the house. We're active in several projects, but they're not 2023 projects. They're not going to happen to -- are not going to impact earnings profile this year. So overall, as you're very aware on the MPC side of the house, we have a couple of renewable diesel plants. There's going to be more growth in that area. So to get a little more color on the MPC call as far as what's happening on low carbon, so I'll just ask you to listen in on that. We'll give a little more detail. And then on the MPLX side, we think things are coming. They're just not ready for primetime at this time. And then, Theresa, itâs John. I might just jump in real quick. Just as a reminder, if you think about like the Martinez renewable fuels facility project that MPC is doing, those logistics assets around that were and remain MPLX assets. And we don't have a lot of investments to move around the different liquids. So to some degree, it maybe extends the life of the assets we have with minimal investments around those facilities. Theresa, itâs Mike again. The one last thing to your question on what's limiting technology or whatever, in a lot of the areas, the returns that we can get on those opportunities are not quite meeting what we would like to implement. But I think over time, the technologies will evolve and that will be an area for us to invest. As we've been talking throughout the call, we have a lot of financial flexibility on this side of the house. John mentioned, we're 3.5x on the balance sheet, we're generating $1 billion a year of excess cash beyond growing distribution. So we have the financial flexibility. We are ready and able, but we are going to be strict on returns. So part of what has held us back from some of what I'll call the splashier discussions that the returns just are not at a level that we think is investable at this point. But we think they're going to get there. It's just a matter of time. Thank you for the thorough response and I agree, John, that we definitely look forward to that 2026 re-contracting on the Martinez logistics assets. Maybe turning to the Northeast for a second. Following the startup and ramp up of your deethanizer, would love to get your take on how that facility is doing to support feedstock delivery to the Monaca cracker as well as your general outlook for economics in the Northeast, given the recent price volatility? Theresa, this is Greg. I'll answer that question on several -- there's several layers to it. We have within MPLX over 300,000 barrels a day of deethanization capacity in our fleet. We're unique and then our fleet is -- our deethanizer actually fleet is spread across all of our processing plants. So we have the ability to reject or recover ethane almost by customer, but definitely by plant. All those plants are connected by purity ethane line and we deliver to Mariner East, Marina West, Utopia, ATEX as well as the Shell Falcon line for pipeline for Monaca. The Smithburg deethanizer is the latest addition to our fleet. It adds a little over 40,000 barrels a day of purity ethane production capability to our fleet, which I mentioned is over 300,000 barrels a day. So that plant is in operation. It's operating well. It's ramping up along with the rest of our fleet to not only supply Monaca but also all of the Gulf Coast, East Coast and even Canadian takeaway points. In terms of the economics, the fractionation spread between ethane and natural gas, whether it's rejected or not, recently we've seen natural gas prices drop at a little higher rate than the ethane price drop. So the economics for recovery have improved. But it's really up to the producer in terms of whether we recover more or reject. We have the ability to do both. We have the capacity to do it. And frankly, in the Northeast, most of the recovery is tied to commitments that are already made by the producers for those takeaway pipelines and to the Shell plant. So we continue to ramp up towards as we increase our utilization there. Just want to shift over to the Permian a little bit if I could, as it relates to natural gas egress. And just wondering any high level thoughts you might be willing to share as far as takeaway tightness. We've seen Waha touch negative prices recently, not too long ago, and was just curious I guess that the Whistler expansion with Matterhorn, is there any ability to kind of start partial service ahead of the dates that you've said, or just trying to get a feel for how you see Permian egress tightness unfolding and what MPLX could do there? Hi, Jeremy. This is Shawn. I'll touch on gas takeaway out of the Permian there. As you know, we've got the Whistler Pipeline. And as we said, last quarter, we're really pleased by the ramp up of the volumes on there, again, showing that -- again, that gas takeaway as needed there. That volume and those commitments have continued to be strong, and we anticipate those will continue on into '23 here. We've got the half B [ph] expansion coming online in the third quarter of '23 for Whistler, and again we're seeing really meeting in expectations for that committed volume coming out of the Permian. And then on top of that, you got Matterhorn that we're a small participant in that really matches our producer and customers' needs coming out of there. So again, I think, as Greg said earlier, you're going to see volatility up and down on natural gas. But again, there's strong volume demand for the gas takeaway out of the Permian. Got it. Thanks for that. And I was just curious I guess as it relates to weather, during the quarter there was some freezing conditions across country. Wondering if that impacted your operations at all, if there's any weather headwinds that you would be willing to quantify for us if they did materialize? Hi, Jeremy. It's John. Thanks for the question. I'll start and Greg and Shawn can chime in if they want to as well on the ops. So across our platform, in the fourth quarter, we probably had mostly lost profit opportunity as some of our producers mainly on the G&P side, obviously, when it gets that cold, they run into some issues. So that reduced our operations there for 10 to 14 days, give or take, different across the basins in the fourth quarter. That probably was a lost opportunity of somewhere around $10 million in the quarter. And as we look to this quarter, Q1 '23, partly impacts on MPC's operations, partly remember I'm talking adjusted EBITDA. And when we think about our joint ventures on the G&P side, that really is distributions. So there's part of the effect in Q4 that shows up as lower distributions in Q1 as well. So probably 10 million of lost opportunity in both Q4 and Q1. Good morning, all. My question is on your Marcellus G&P, specifically number of E&Ps, I haven't heard too much from them as far as plan for any change of activity but yet I did hear from a flag provider last week that suggested that you could see some slowdown in fracking activity for the next few months or a bit longer in Appalachia. So I would just love to hear, I did know you're -- looking at Slide 7, it was down a little bit, not a whole lot there versus the year-over-year. So I'm just curious more on your overall thoughts in the area for the remainder of the year. Neal, this is Greg. At this point, we still -- we're in close communication with producer customers and we track over time well pads that are being drilled and completion rates. And depending on rig availability, depending on weather, depending on pricing, those things, obviously, those forecasts can and do change. But we still -- as I mentioned before, a lot of the activity in the volume drive that we forecast into '23 is based on activity, drilling activity in '22 and then some completion activity that already has been underway. So there could be pads delayed, not aware of those, but that's always a possibility. But at this point, we still feel bullish about volume this year. Yes. Let me just add, even outside of the Marcellus, I think everybody realizes now there's a structural change in gas from a lot of perspective. So in some of the areas that had not seen a lot of activity, as Greg mentioned earlier, in '22, you're starting to see rigs in other basins outside of the Marcellus that haven't had a lot of activity. So I think overall, people are recognizing a structural change in gas now. Very short term, it's been a little warm relative to expectation coming into the winter. But if you pull back up to a higher level of structural change, more activity, rigs being used in basins that there has not been activity for a while, I think shows that there's a change in gas potential going forward. Yes. Well said, Mike. And then one just clarification, I want to make sure on the gathering, you continue to have nice increase on the gather on the other side, non-Marcellus. Shawn, can you remind me of just capacity? I still think you have a bit there on the Permian at all. I'm just wondering again what is -- I think you talked about this earlier today. I just want to make clear on what is still the capacity available on the gathering side there. In terms of the Permian Delaware, the capacity, we basically build out and connect new wells and add compression as we need it to fill the processing capacity that we have. Neal, it's John. Specifically in the Permian, if that's what you're asking about, right, we've got our five plants, we're building our sixth. They're each about 200 million a day. So that's the size and scale of that operation, which, in our numbers, it's part of the Southwest region that we show. We're at a B heading to 1.2B. And we match the gathering which I believe you specifically asked for to that capacity. Thanks, operator. Good morning, team. Wanted to go back and follow up on one of Brian's questions just as we think about refinery run rates for '23. And if we zoom out a bit and just look at the industry as a whole, I believe it's supposed to be kind of a heavier refinery maintenance year this year. So curious how you're all thinking about the impact to your system overall, whether or not that ship flows on the export side or internally, just curious how you're thinking about the net benefit or negative there? Spiro, it's Mike. So I'll start off. MPC had a backend weighted turnaround year in '22. We're going to talk about a frontend weighted '23. But even with our activity there, I think one of the things that has been part of our success on the MPC side is to figure out a way to keep our utilizations high, despite taking our needed turnaround activities for safe, reliable operation. So it is a heavier year for us, especially if you think of the back half of the one year and the front half of the other on the MPC side. At the same time, even with that activity, we ran 96% utilization last year. We still expect a pretty strong year. It'll start off with more activity in the first quarter. But as Shawn mentioned earlier, we're still expecting -- even though we had a record year this year on the L&S side, we're still expecting a pretty strong year in '23. Got it. That's helpful. Thanks, Mike. Second question, just thinking about CapEx going forward, you guys have been utilizing joint ventures pretty effectively over the last few years. And I guess I'm curious -- and you sort of look back and assess that strategy. I think you'd be satisfied with it. But I'm just curious how you're thinking about it going forward. Is that a strategy using joint ventures something you plan on doing from here on any sort of larger multiyear projects? And ultimately, do you see these joint ventures as a pathway to own more of these current assets or even maybe some of these joint venture partners over time? Hi, Spiro. It's John. I'll start and then let Mike chime in. I think certainly, to your first point, we definitely have been very pleased with our investments in the Permian. I don't know that we started those from a financial aspect as well as other considerations, right, when you're entering a joint venture relationship, sharing of risks, commercial opportunity, et cetera. So I think it depends on the situation, because as you know, we certainly have a strong balance sheet and generating a good bit of cash. So those have worked really well for us. I think where there's opportunities that have both commercial, operational, and perhaps financial reasons, we can look at JV opportunities. But given the strength of the balance sheet, I don't know that financially we would need to leverage them in that regard. Yes. Spiro, I was just going to add to what John said. It's pretty specific to the opportunity and to the desire of all the partners. We try and be a good partner, as John said, in a couple of these instances, we had the financial capability to finance it ourselves. When other members want to do it at the project level and we can live with that, we're okay with it. We're not opposed to it. And if it makes for a better partnership, that's fine for us. But I would tell you, it's specific to the project itself and who the partners are. But John mentioned earlier, when we quote our capital, that's the capital that we're typically doing on our side of the house, and then there is additional capital that comes from those projects that gets financed at that project level. So it's hard to answer your question other than it's specific to John's point. We have been happy with them. We've had good partners. We're usually aligned. The goal, obviously, in any JV is already aligned in the intent of the project, et cetera. And we've been fortunate to have good alignment with our partners. And where we finance it at the project level, we've been okay with that as well. Hi. Good morning. I wanted to touch on the MPC Galveston Bay upgrades. I was wondering if that would have any impact on the L&S segment once that's completed? I'll start and I'll let Shawn jump in. We're probably going to talk about that in a lot more specifics on the MPC call. But just in general, that project is pretty strategic for us. It's a lot more crude processing and [indiscernible] upgrading. So as you know, obviously down on Galveston Bay, we have flexibility to bring barrels in via pipeline and/or water. So depending on the specifics of where the best crude opportunity is, it could hit our system or it could come waterborne on the crude side. But obviously, the outcome of the products, that tends to move on some other pipes as well. So it's much more of an MPC impacting project than it is an MPLX project. Okay, got it. Thank you. And then my second question on the G&P side, can you sum up how you look at the Permian portfolio? You have some good gathering and processing, natural gas takeaway with Whistler and a little bit with Matterhorn. How far downstream do you want to go? Are you thinking about NGL pipelines? And then do you feel like you need more scale on the G&P side to feed some of the downstream assets? I'm just wondering how you envision this portfolio looking like in the intermediate to longer term. Yes. At a high level, yes, we would like to continue to expand our footprint there. But I'll let Greg and Shawn touch or Dave. Neel, this is Dave. I think as you look at it, one of our strategies is to leverage the existing infrastructure and assets we have in place from gathering to processing in the long haul pipelines down to the export opportunities or the other infrastructure out there. So I think as you see, whether it be organic or inorganic growth opportunities, it's really going to keep that in the back of our mind. Again, all anchored by strict capital discipline and ensuring that we get the acceptable returns. And if I could just ask a follow up to that. Are you seeing some synergies between your gathering and processing and possibly being able to win contracts by having the Whistler capacity there, given the lack of natural gas takeaway and possibly bundling contracts between pipelines and G&P? Yes, they're definitely synergies. On the G&P side, for example, we're building and operating some of the crude gathering assets as we tie in new wells and put new [indiscernible] units in. There's associated gas that comes with that. So we connect the gas wells and bring the gas, and G&P operates that gathering system as well, the gas NOL, and then we operate the processing plants. But we're reliant then on handing off the residue gas to Whistler to bangle the NGLs. And then, of course, the crude coming from the pads is going to L&S operated downstream pipelines as well. So we operate seamlessly there. Neel, it's John. Definitely right to the point of your question, those producer customers want that product to the coast, and that's the solution we've built and we'll continue to look to think about how we can move further downstream across that value chain. It's Mike. I'll just add. We try or make every effort to be a full service provider. We will gather crude, we will gather gas. We will process the gas. We will transport the crude. Our intent is to be a partner to the producers or whoever needs to make infrastructure work for them or logistics work for them. So we try to be a full service provider and get into conversations, like you said on contracts or discussions as to what are their needs and how can we help them? And hopefully they turn into win-win situations. All right. With that, thank you guys for joining us today and thank you for your interest in MPLX. Should you have additional questions or if you'd like clarification on any of the topics we discussed this morning, members of our IR team will be available to take your call, so please just reach out. Thank you, everybody.
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Good morning, and welcome to Otisâ Fourth Quarter 2022 Earnings Conference Call. This call is being carried live on the Internet and recorded for replay. Presentation materials are available for download from Otisâ website at www.otis.com. Thank you, Norma. Welcome to Otisâ fourth quarter 2022 earnings conference call. On the call with me today are Judy Marks, Chair, CEO and President; and Anurag Maheshwari, Executive Vice President and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Otisâ SEC filings, including our Form 10-K and quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. Thank you, Mike, and thank you, everyone, for joining us. We hope everyone listening is safe and well. Weâre pleased that we ended the year with a strong fourth quarter and solid full year performance in a year characterized by a variety of macro headwinds. We entered 2023 with good momentum as we continue to execute our four strategic pillars: sustaining new equipment growth, accelerating service portfolio growth, advancing digitalization, while focusing and empowering our organization. Iâm proud of our colleagues around the globe who delivered these results demonstrating the strategic resiliency of our company as we continue to grow and perform in 2022. Starting on Slide 3. We continue to perform well in New Equipment Orders, growing 7% for the full year. In the quarter, orders grew 4%, with particularly strong performance in EMEA and continued solid performance in Asia-Pacific. China orders returned to growth with mid-single-digit performance in the quarter. Orders in the Americas were down 4% in the quarter, although the business had a very strong 2022 overall, with orders up almost 18%. Our New Equipment adjusted backlog at constant currency is up 11% heading into 2023, giving us solid multiyear visibility to grow sales. Organic sales increased 2.5%, driven by service, which grew 6%. We grew our industry-leading maintenance portfolio by 4.1%. It now stands at 2.2 million units, a new milestone for our company. We delivered 7.5% adjusted EPS growth despite $156 million in foreign exchange-related headwinds. We generated $1.45 billion in free cash flow, allowing us to return $1.3 billion of cash to shareholders through dividends and share repurchases. We continue to win many exciting projects based on our innovation, ability to deliver and the trust customers have in us. For example, in the Americas, Otis was selected to provide our Compass destination dispatch system, along with six SkyRise and two Gen 3 elevators for City Centre 4 in Surrey, British Columbia. The 23-storey building will be built to lead gold standards and extends our more than six-year relationship with the Lark Group. In China, Tianjin Metro has been using Otis equipment since opening in 1984. In November, Otis was selected to provide more than 120 escalators and Gen 3 elevators for their new Line 4 Northern Extension. This takes the number of Otis units on the Port Cityâs expanding subway network to more than 1,500. These new elevators will be connected to the Otis ONE IoT-based platform, already delivering real-time monitoring and predictive maintenance for the metro system. In the UK, weâve had a longstanding relationship with Transport for London, including a long-term contract through 2042, to manufacture, install and maintain the escalators and travelators on the busy network. Most recently, we were contracted to provide Battersea station with specialty escalators, specifically designed to run for about 20 hours a day and extend 24 meters in length and nine meters in rise. Weâre playing our part to keep the busy network flowing. Our ESG initiatives continued to progress in 2022, helping to drive stakeholder value alongside our financial priorities. Our manufacturing facility in Florence, South Carolina achieved gold level total resource and use efficiency, or true certification, recognizing its success in zero waste. With this achievement, Otis has become the first in the elevator industry to have a true certified facility, helping us towards our goal of having all our factories eligible for zero waste to landfill certification by 2025. We look forward to sharing more about our ESG progress in our second annual ESG report, which is set to be published in the spring. Moving to Slide 4. With strong orders performance in 2022, we were able to achieved approximately 1 point of new equipment share gain, on top of the 2-point increase between 2020 and 2021. For the first quarter since Q4 2021, New Equipment sales returned to growth as we continued the strong growth in EMEA and Asia-Pacific that weâve experienced all year and were able to overcome supply chain and installation-related challenges, especially in the Americas. These results mitigated the impact of mid-single-digit New Equipment sales decline in China, demonstrating the power of geographic diversification within our business. Notably, we see China on a recovery path as New Equipment sales in the region improved compared to Q3. Innovation is helping to drive growth across our business. For example, we continue to roll out our digitally-connected elevator platforms, launching Gen 3 in India, and expanding the deployment of Gen360 in Europe to the Czech Republic, Poland, Portugal and Slovakia. The accelerated portfolio growth we saw this year is an essential component of our long-term strategy and top line growth algorithm. We believe the disruption in our industry favors the OEM, and weâre demonstrating this as we deploy our Otis ONE IoT solution into our New Equipment product offerings and our service portfolio. We continue to work towards our goal of increasing connectivity to approximately 60% of the portfolio, and weâre pleased to have connected more than 100,000 additional units this year. Our service sales force performed well throughout the year, with like-for-like maintenance pricing of 3 points, helping to mitigate labor cost headwinds within the service business. For the third year in a row as an independent company, we delivered adjusted operating profit margin expansion, and we remain well positioned as we enter 2023 with momentum, especially as we execute on New Equipment projects from our backlog. Now turning to Slide 5. In the Americas market in 2022, while North America had a strong year, up better than mid-single digits, Latin America was roughly flat, leading to a market that was up low to mid-single digits. In EMEA, Western Europe performed well, offset by Eastern Europe due to the conflict. In Asia, the market was down high-single digits. Asia-Pacific had a very strong year, up approximately 10% with the performance masked by the downturn in China, which we estimate to be down about 15%. Although market dynamics remain fluid, as weâve seen over the past several years, the long-term fundamentals of the industry are well grounded in the service-driven growth model. In 2023, globally New Equipment markets are expected to be down mid-single digits in units with flattish markets in the Americas and EMEA and down mid-single digits in Asia, driven by China, where we expect the market to be down 5% to 10%. Asia-Pacific should see another year of mid-single-digit or better growth, driven by urbanization in the region and infrastructure investments. The global industry installed base is expected to grow at a similar rate to that of 2022 at about mid-single digits and reach approximately 21 million units. In the Americas and EMEA, we expect low single-digit growth. And in Asia, weâre expecting high single-digit growth driven by China. With this as the industry backdrop for Otis, we expect organic sales growth to be in the range of 4% to 6%, with total sales of $13.8 billion to $14.1 billion, up 1.5% to 4% at actual FX. By segment, we expect New Equipment will grow 3% to 5% this year, with mid-single-digit growth in the Americas and EMEA and low single-digit growth in Asia. We expect Asia-Pacific to grow at least mid-single digits, while we anticipate our China New Equipment business to be about flat for the year. Weâre expecting a better China market as we get into the second half of 2023 as COVID-related and liquidity constraints in the market should ease on the back of government support. In the Service segment, we anticipate another year of solid growth, with the business growing 5% to 7%. We expect volume and pricing to drive solid mid-single-digit growth in the maintenance and repair business, with higher growth in our modernization business line. Our modernization orders performed quite well over the past few quarters, and we entered the year with a MOD backlog up 7% at constant currency. We expect 7% sales growth at the midpoint, driven by the backlog growth. Adjusted operating profit is expected to be between $2.2 billion and $2.25 billion, up $70 million to $130 million of actual currency or $130 million to $175 million accounting for foreign exchange headwinds. We expect adjusted EPS to be in a range of $3.35 to $3.50, up 6% to 10% or approximately $0.26 at the midpoint versus the prior year. Finally, we expect free cash flow of $1.5 billion to $1.55 billion between 105% to 115% of GAAP net income. We remain committed to our discipline and balanced capital allocation strategy and expect to repurchase $600 million to $800 million in shares this year following the new Board authorized $2 billion repurchase program in addition to paying our dividends and pursuing our typical bolt-on M&A strategy. Thank you, Judy, and good morning, everyone. Starting with fourth quarter results on Slide 6. For the fourth quarter, reported sales of $3.4 billion were down 3.6%. Organic sales grew for the ninth consecutive quarter and growth accelerated to 6%, our best performance of the year with mid-single-digit growth in new equipment and high-single-digit growth in service. Adjusted operating profit excluding a $49 million Forex headwind increased $39 million with constant currency growth in both segments. Strong service performance, especially on volume and price was partially offset by commodities in mixed headwinds and new equipment as well as higher corporate cost. Adjusted SG&A expense for the quarter and the year improved 80 basis points as a percentage of sales, as we remain vigilant on structural cost reduction and cost containment to help mitigate the macro headwinds we have faced. At the same time, we are committed to growing the business and R&D and strategic investment as a percent of sales remain about flat. Adjusted EPS grew 4% or $0.03 in the quarter driven by operational growth of $0.07. This strong operational growth alongside the accretion from Zardoya and $850 million of share repurchases more than offset the $0.08 headwind from Forex. While the fourth quarter free cash flow conversion was strong at 145%, our full year free cash flow came in at $1.45 billion or 115% of net income lighter than we had anticipated as we built $65 million of inventory to mitigate supply chain challenges and support backlog conversion going into 2023. Moving to new equipment performance on Slide 7. Otis new equipment orders in the quarter increased 4% with EMEA and Asia-Pacific up high single digits and China orders returning to growth of mid-single digits, which more than offset a modest decline in the Americas. Overall with better than expected orders growth in the quarter, we finished the year with a new equipment adjusted backlog up 11% at constant currency with growth in all regions, including notably in China. Pricing on new equipment orders in the quarter increased 3 points led by the Americas with solid performance in EMEA and APAC. In China, we have been roughly price cost neutral throughout 2022 as commodity inflation eased and we continue to drive productivity to offset pricing pressure in the market. Fourth quarter new equipment sales of $1.5 billion return to growth driven by over 10% growth in the America, EMEA and Asia Pacific with EMEA outperforming our prior expectations. China sales declined at a lower rate than what we saw in the middle of the year as the team navigated well through post lockdown COVID outbreaks to execute on the backlog. Overall, strong execution by the team will return to sales growth in the fourth quarter in new equipment. Operating profit margins were roughly flat for the quarter. The benefit of higher volume, strong productivity and cost containment nearly mitigated the approximately $25 million headwinds from commodities and Forex. Now turning to Service segment performance on Slide 8. We saw an acceleration in our portfolio growth to over 4% with every region adding to the portfolio this year. With another year of excellent high teens growth in China and low single digit growth elsewhere, our portfolio now is about 2.2 million units. Globally, our recaptures more than offset cancellations for the year with conversions as the growth driver. Additional details on our portfolio growth in 2022 and drivers for future growth can be found in the appendix. Modernization orders were also a highlight up 13% with growth in all regions, including some major project bookings in the Americas and Asia Pacific and continued strength from a mod package offerings. Our modernization backlog is up 7% versus the prior year, giving us good line of sight for growth in 2023. Moving on to service sales. We delivered another quarter of strong organic sales growth up almost 7% with growth in all lines of business. Maintenance pricing, excluding the impact of mix and churn came in as expected up about 3 points for the year, contributing approximately 1 point to overall revenue growth. Organic modernization sales grew 8.8% and similar to last quarter we saw broad growth across regions, including double digit growth in both Americas and Asia Pacific. We finished with our best service margin expansion for the year up 70 basis points in the quarter. Adjusted operating profit, excluding $42 million of Forex headwind was up $51 million as higher volume, favorable pricing and productivity were partially offset by our annual wage increases. We have now delivered 12 consecutive quarters of service margin expansion with margins increasing roughly 200 basis points over the past three years. Slide 9 lays out the full year 2022 adjusted EPS bridge. Strong operational execution drove $0.39 of constant currency EPS growth, which mitigated $0. 18 in commodity headwinds leading to operating profit growth of $124 million or $0.21. Through our capital allocation strategy, including the accretion from the Zardoya transaction and share repurchase of $850 million and optimizing a tax rate, we were able to offset $0.26 in Forex headwinds. Overall, strong operational performance led to EPS growth of 7.5% or $0.22. We finished the year with 2022 adjusted tax rate of 26.5%, a 220 basis point improvement versus 2021, which contributed to EPS growth both in the quarter and for the full year. Overall, the team performed well throughout 2022 by executing on the controllables, which helped us to build a strong backlog, grow organic sales, expand margin by 30 basis points and return $1.3 billion to shareholders. As we look ahead to 2023, the new equipment outlook is on Slide 10. Over the past few years, we have delivered strong orders globally from a combination of market growth, our share gain initiatives and incremental pricing actions. This has resulted in a robust multi-year backlog, giving us good line of sight for the next couple of years. In 2023, we expect new equipment organic sales to grow between 3% to 5% with Americas and EMEA up mid-single digits and Asia growing low single digits. Asia-Pacific is expected to be up at least mid-single digits, and though the backlog in China is up 2 points, we expect sales to be about flat reflecting pressure on the Book and Ship business from expected market declines in the first half. We expect new equipment profit margins to be flat to up 40 basis points. We expect roughly $100 million of tailwinds from volume, pricing, productivity and commodities. This will be partially offset by unfavorable regional and project mix and some snap back in SG&A expense due to 2022 cost containment actions. We will continue to drive strong productivity on both material and installation and project closeouts as the year progresses to drive out performance. Turning to our service outlook on Slide 11. Starting with sales, we expect another solid year in service and anticipate organic sales increasing 5% to 7%. Maintenance and repair organic sales are expected to grow 4.5% or 6.5% driven by maintenance portfolio growth, pricing and low to mid-single digit repair growth after two strong years of COVID-related recovery. We expect more than 1 point of pricing after adjusting for mix and churn. For modernization, we anticipate organic sales of mid to high single digits as we execute on a solid backlog and drive our Book and Ship business from new product launches and focus on sales force specialization. Turning to profit, we expect roughly 50 basis points of margin expansion. Headwinds from annual wage inflation will be more than offset by volume, price and productivity similar drivers to 2022. Turning to Slide 12 for the 2023 adjusted EPS bridge. We are expecting $3.35 to $3.50 in adjusted EPS driven by $0.23 to $0.31 of operating profit growth. We expect to offset $0.09 of Forex headwind at the midpoint and a modest increase in interest expense through a lower share count, $0.04 of remaining Zardoya accretion and continued optimization of a tax rate. We plan to complete $600 million to $800 million in share repurchases during the year. For cadence, we expect strong EPS growth in the second half of the year, while the first half remains roughly flat. We see the bulk of the FX headwind, post lockdown COVID impact in China, and a modest supply chain overhang in new equipment in the first quarter. We anticipate stronger growth sequentially thereafter, including better performance in China in the second half of the year. Overall, we anticipate Otis organic sales growth of 4% to 6% with approximately 20 basis points to 30 basis points of margin expansion leading to 6% to 10% EPS growth. And on cash, we expect to generate $1.5 billion to $1.55 billion in free cash flow in 2023, 110% conversion of GAAP net income at the midpoint. This outlook demonstrates another year of consistent and solid operational execution as we continue to mitigate macro challenges and create meaningful shareholder value. Hi. Good morning, and thanks very much. First off, I suppose I just wanted to dig in a little bit more into the assumptions for how you see the China market starting out the year in terms of orders after a very good Q4 performance? And maybe just homing a little bit more on the commentary around some of those headwinds in Q1. Should we still expect EPS to be up kind of sequentially in the first quarter? Well, good morning, Julian. Itâs Judy. Let me start with what weâre seeing really on the ground. I would tell you that the Chinese economy is in a state of recovery now. We were really pleased with our teamâs performance in the fourth quarter, again, with orders being up in new equipment in what was a challenging quarter with all the lockdowns. Itâs a fluid situation on the ground between liquidity and the COVID-related absenteeism as we come back from the Chinese New Year. Weâre going to watch that closely. But 2022 came in where we expected on the market down about 15%. We shared, we think that was about down 10% in Q4 and came in where we thought between 540,000 and 550,000 units. Obviously, Q4 saw some abrupt changes with COVID between the lockdowns and then the lifting, which led to the outbreaks. And what weâre monitoring is the liquidity easing, which weâre seeing and where the consumer sentiment and confidence is in terms of the property market. So as we go through the first few quarters of 2023, first of all, weâre very encouraged by the government policy and actions to date. We are expecting a better second half. We have a harder compare in the first half based on what was happening in China, first half of 2022. But we did see an up infrastructure market that was the only segment that was up in 2022 in a 15% down market, and we did very well there. Perry and the team just executed really well. Tier 1 and 2 in China were the least negatively impacted by the down market. And again, you know our strategy there has been very focused on agents and distributors on key accounts and weâve executed that. So Iâll leave it with, Iâm feeling good about the health of our business in China. In a down market in 2022, we did well, we were down mid-single digits versus a down 15% market and in a down 5% to 10% market, we expect to do well as well. So we gained share last year. Our strategy will enable us to do that, and weâre going in with backlog. Iâll let Anurag talk to the EPS question. Great. Thanks, Judy. Yes, so Julian, just on the quarter one, let me start with the segments first. From a service perspective, we expect to see performance in line with the full year guidance. The swing factor could be repair, modernization or some mix, but overall we arenât seeing anything major to call out and expect kind of mid-single digit growth and margin expansion. It may be not close to 50 basis points regarding for the year, but still be good at expansion as we ran through the year. The new equipment is a segment that we do expect some weakness from both a sales and a margin perspective. Specifically compared to last year, China as a tough compare as the COVID impact didnât really start until the second quarter. And while we â as Judy mentioned, we do expect better performance in China as we go through the course of the year. We arenât expecting it to happen until the second half of the year. In Americas, the team performed very well in the fourth quarter. But there is still some supply chain inefficiencies and labor shortages, which I expected to clear up in the second or third quarter. So overall, we expect sales on the new equipment side to be down quarter-over-quarter and year-over-year, and margins to be above flattish with where we ended up in the fourth quarter. Now kind of going to the other line items, starting with corporate expenses. Last year, the first half was light because of all the cost containment we did. So it is going to â the run rate is going to pick up very similar to what we saw in the fourth quarter. So there could be a couple of pennies of headwinds over there. And then on the FX side, weâve said about at the midpoint $55 million of FX headwind and a bulk of it will come in the first quarter because last year at this point in time, the euro was $1.15, the renminbi was $6.35. So though the currencies have improved, there is still a significant headwind. So majority of our FX headwind will come in the first quarter. So putting it all together, we do expect EPS to be down a couple of pennies. As you know, the Forex any new equipment corporate will kind of offset the good performance in service and the Zardoya accretion. So net-net down a couple of pennies and sequentially also could be down $0.01 or $0.02. Thank you. One moment for our next question. Our next question comes from Steve Tusa with JPMorgan. Your line is now open. Steve, your line is now open. Mr. Tusa, are you on mute? Thank you. One moment for our next question. Our next question comes from Nick Housden with RBC Capital Markets. Your line is now open. Yes. Hi, everyone. Thanks for taking my question. Iâll just ask one. Looking at the outlook and maintenance, in particular, youâre guiding for up 4.5% to 6.5% organic. Iâm just thinking, units are increasing over 4% and you seem pretty competent in being able to maintain that kind of level. Pricing is already at 3% and is probably going up as you enforce the escalation clauses and you kind of hinted that in the slide. So 4% volumes, 3% pricing, am I wrong to think that a 5.5% midpoint in the guidance looks a little bit conservative? And is it to do with maybe pricing being a bit more competitive in Asia Pacific, where a lot of the new units are going into? Thanks. Let me â Nick, good afternoon. Let me answer the pricing question and then Iâll let Anurag take you through the walk. Listen, weâve been pleased like-for-like pricing similar to Q3 was up 3 points in Q4 and was very solid as predicted. Mature markets globally is where we saw really strong service pricing, mid-single-digit gains in the Americas, low single-digit in EMEA and Asia Pacific. And as Anurag said in his comments, kind of weâve got this â the margin drivers are really less on price and more on productivity, volume and density in China. But we think 2023, like-for-like should be better than that 3%. And thatâs really driven by the inflationary clauses we have in the majority of our contracts â service contracts, especially in Western Europe and in North America. The Western Europe clauses are backward looking, so they will reflect 2022 inflation indices. And we are signing those contracts right now, a lot of them in the first quarter. So next quarter weâll be able to â to be able to share how weâre performing on that. But pricingâs healthy, team deserves a lot of credit. We pivoted from being a discount kind of service pricing company for many years to being able to gain price, especially where it was appropriate and justified. Yes. And just to add to that in terms of the growth for 2023. So yes, youâre right that our growth at the midpoint is very similar to where it is in 2022, but the pieces are a little bit different. The portfolio growth as you put together 4% and what Judy spoke about the pricing, you add 3%, then you adjust for churn and mix, we should be up about 6% for 2023, which is higher than where we were in 2022. Repair is as I mentioned in my prepared comments, over the past two or three years weâve been running at a 10% CAGR on the Repair business coming out of COVID. Now, typically the Repair business will outgrow the Maintenance business because as we continue on our strategy on new repair packages, increasing penetration. But this year thereâll be â just be a little bit of a catch up from what happened in the past two to three years. And then going forward, it should outpace the Maintenance business. So thatâs why weâre saying low to mid-single digit. And modernization is pretty â itâs around 7-ish percent at the midpoint. So those are the pieces which get us to 5.5%. Now, clearly, if pricing is a little bit better, repair comes in better, and the modernization book and ship there could be a little bit more over there. But right now we feel well calibrated at the midpoint of the guidance. Thank you. One moment for our next question. And our next question comes from Gautam Khanna with Cowen. Your line is now open. Hi, there. Just a quick question kind of just on your perspective on the end market demand kind of back to Judyâs comments on the first question. Just kind of what youâre seeing in the field today maybe by geography and then by end market maybe kind of parsing resi versus commercial or infrastructure? Just anything there would be helpful. And then just if youâre seeing any with the slowing global macro backdrop here, if youâre kind of seeing any municipalities or other customers sort of defer projects or kind of what youâre seeing in 2023 so far? Sure. Jack, let me try and respond to both parts. Let me start with new equipment because Iâll break this into new equipment and service, and Iâll actually start with Asia Pacific where the market overall and weâre really expecting solid growth due to urbanization and infrastructure growth in Korea, in Southeast Asia and in India. And weâre not seeing any slowing in that part of the world. Itâs really accelerating and expectations should be for solid growth. For 2023 in the Americas, we think itâs going to be a little worse than the market was in 2022. 2022 is an incredibly strong market. First half stronger than second half, but as we saw a really strong market and weâre still seeing the Dodge Momentum Index rising on construction, but the Architects Billing Index for the past three months has been under 50, including December at 47.5. So weâre watching that carefully. In EMEA, we think flattish. Weâre balancing potential headwinds, but Iâll tell you, we have seen Europe become far more resilient in terms of the demand including the residential market in Europe is really strong despite all the challenges consumers are facing. And the Middle East is growing. Middle East, although itâs a smaller part of our EMEA has bounced back nicely so that end marketâs going to grow as well. The good news in China, itâs going to be better year-on-year than last year. Second half looks better. Again, segment down, weâre predicting 5% to 10% in 2023, down a little more on the first half, and then we expect to see acceleration through the second half. So, we look at that as we shared in the 2023 outlook slide. And weâre prepared for that because weâve got this great backlog at 11% on new equipment. When I turn to the Service business, itâs the end marketâs just growing in all regions. Itâs solid mid-single digit growth led by Asia and low-single digit really in the developed markets. And I just make you recall that the new equipment market swings really have minimal impact on the service market. Itâs going to grow mid-single digit year after year after year. Modernization is up nicely in all regions, and weâre ready for that. Weâre going in with a 7% backlog on mod, and we expect mod to continue to â from a demand side to continue to grow in 2023. We have not seen a slowing on projects. Weâve also not seen the impact of the Inflationary Reduction Act â the infrastructure â the Reduction Act in North America yet. We see that later cycle in terms of airports, metros and other infrastructure. But again, we did see good infrastructure. It was the only positive sector and segment that grew in China in 2022. So weâre feeling good. Our backlog will take us through, again, weâll watch the book and bill early in the year. But our backlog, we think is going to take us through on new equipment and mod and our Service business is coming in strong. And weâre looking forward to 2023. Thanks, Judy. Yes, thatâs really helpful. And then just one quick one for Anurag, really quickly just on price cost assumptions in 2023 and sort of the backlog margin converting here. Just kind of what your assumptions are snapping the line on seeing raw material sort of roll over here in 2023? Kind of just high level, how youâre kind of thinking about price cost in 2023? Thanks. Okay, great. Thanks for the question. So price cost is positive in 2023. I mean, you can see it from the margin expansion as well thatâs happening at the midpoint. So in pricing, if you look at this year, I mean, after flattish first half, we started seeing pricing going up 3% in the back half. And our backlog is actually up â our backlog margins are up over 100 basis points. And what we have assumed for next year is about 50 basis points of pricing coming through into the P&L, which is roughly about $30-ish million. And the reason itâs 50 basis points not what we have right now is it takes a while for the backlog to convert into revenue, and some of that will come into later years, but still are price positive. On commodities, we do expect about a $20 million to $30 million tailwind. If we look back over the past two years, we faced about $180 million of commodity headwind. Slightly more than $100 million came from Americas and China, and the rest came from Europe and Asia. In Americas and China, of the $100 million on headwind, weâre seeing about $30 million, $40 million of that come back as prices of steel have started coming down. And though we are 50% locked, we still see some of it coming down over years. So clearly, that is very positive. It is actually in EMEA and in Asia-Pacific where weâre not seeing the tailwinds right now. In Europe, if you look at guide rails, it set up 85% from where it was two years ago. So clearly, there is some headwind over there. And in Asia, we buy a lot from Tier 2 suppliers, and thatâs not yet come down as well. But overall, we see about a $20 million, $30 million tailwind on commodities. So net-net between price and commodities, itâs positive. Thank you. One moment for our next question. And our next question comes from Nigel Coe with Wolfe Research. Your line is now open. Thanks. Good morning, everyone. Thanks for the question. Just wanted to monitor some of the puts and take on margins. And I think you called out mix impacts in New Equipment. So just maybe just double-click on that and just to clarify what sort of the mixed headwinds are. But my real question is really on the investments, I mean you continue to invest. I think itâs been very successful on the recaptures and retention initiatives. But maybe just talk about the focus for investment spend going forward? Let me start with the investment spend, and then Iâll have Anurag talk to the mix. Yes, we are â I think youâve seen, Nigel, since we became independent, weâve been obviously focused on our business, focused on our markets, and weâve been extremely focused on investments in our strategy that will yield in terms of innovation. So weâve done â weâve continued our investments in our service business, both in making our incredible field professionals more productive and thatâs yielded the apps that theyâve been using continue to show incredible promise. Our Tune app is up in terms of usage, 70%. In terms of in the field, weâve got a lot of our service parts being ordered. And our sales â our field professionals using the upgrade app are also being part of our extended sales force and selling repairs. So all thatâs working well but the linchpin of our strategy is Otis ONE. Itâs being connected. Itâs having that predictive, transparent information available in our ecosystem. And we continued on our investment strategy for Otis ONE, again, where we define on the service side where weâre going to install these to get the best yield for both productivity and customer stickiness. So what weâre seeing, we did deploy well over 100,000 units again this year on our trajectory to 60% coverage of whatâs becoming a larger portfolio, 2.2 million this year. We said weâll be over 2.5 million units by 2026 in our medium term, and that 60% should be off that two point â that higher number. Thatâs where weâre heading. And weâre seeing the results of that. Weâre seeing it on the productivity side, where our running on arrivals are down. And weâre seeing that also on the customer stickiness side in two ways. One is when we are connected, like our EV product or any connected product, weâre getting more in price for service. And then weâre getting higher conversion rates and higher retention rates. Our retention rates this year, we were pleased with. Theyâre at 94%. I look forward to the day that we can report a 95% retention rate because that will have significant validity to our service-driven growth strategy. Conversions were up this year. And I think a lot of that, especially in China, going up to 48% this year where they ended was due to our Gen 3 elevators being connected and our Otis ONE units as well. So globally, weâre now at a 64% conversion rate. And as China continues on its path to get to 60%, which we think is the target, then, globally, we will be at about 70% conversion. And that is our higher margin conversion. On the portfolio itself, that it is Otis ONE. It is that connected product that gives us the conviction that we can take the 4.1% portfolio growth even higher. Even though this is what we shared for the medium-term guide at about 4%, we do believe we can get that higher, including in 2023. So all-in-all, investments in the New Equipment side are continuing. Our R&D spend is there. Our strategic investments are there. Weâre really pleased with expanding Gen 3 and Gen360. On the service side, the Otis ONE value proposition for the customers is working, and we believe itâs reflected in our margin expansion as well for our shareholders. Yes. Thanks. So as you can see, on the investment side, weâll continue to invest and still grow our margins. Last year, we grew about 30 basis points, this year weâre guiding for 2030. And weâll look for productivity other ways to kind of offset that. On the mix, itâs two, itâs regional and product or project mix. On the regional mix, as you are aware that China New Equipment is a higher margin market for us. And even last year in 2022, the other markets did a little bit better than China. But if you look at 2023, we are guiding for China to be flat, whereas Americas-EMEA to be up mid-single-digit and Asia mid to high single-digit. So that adds a little bit of a regional mix impact. But the more bigger mix impact is coming from project mix. And over the past two or three years, and as youâve seen us making announcements on, we won a lot of major projects, part of our share growth strategy has obviously been on the volume as well as looking at different verticals, be it infrastructure, others to grow our major projects. And the more major projects are, they definitely come in with very good maintenance business, very high stickiness, very good margin, but they are lower margin than the volume business. So thereâs a little bit of that impact, a healthy backlog that we have of 11% as we go into 2023 and beyond. Makes sense. Thanks for the detail. I guess that was my two questions. But I just want to ask a question on â you called out 800,000 connected elevators today. How much of those Otis ONE connectivity? I want to say about half, but clarify that. Thank you. One moment for our next question. And our next question comes from the line of Steve Tusa with JPMorgan. Your line is now open. I think you called me. I was â we got some other calls going on this morning, so you overlap. Sorry about that. Can we just get a little bit more info on like attrition or retention? Maybe a little more precision around how much that may have improved year-over-year. Obviously, 1% is a lot. So thereâs some nuance there. Maybe just a little more precision on that, from the 94%. Yes. Weâve got â thereâs a chart in the back. And Steve, weâve shared that we â our focus is having a net positive net churn between retention and recaptures. Retention, theyâre the most important units to us. We get them at the highest margin, and thatâs where we want to start that individual customer relationship that we hope last decades into modernization and then into it, just for decades. So itâs at 94%. Itâs about aligned with last â with 2021. Iâd say itâs pretty close in terms of retention and recapture though, it was up. And you can see that slightly, but it was up healthy, and that was really driven by a few items. Two, Iâll call out. One is our sales specialization where we actually have recapture sales reps that, that is all they do. And they focus on the density and capturing the best of the optimal units for Otis because we have to go in at a lower price than we would at a normal conversion, but we want to make sure that they are accretive. So the recapture specialists really â we saw them hit their stride as we went through 2022. And the second is Otis ONE. And the capital investment, we continue to make at the data level on connected units and on offering that when we do go recapture that really makes a difference to our customers. Iâve personally been involved in a few of those sales calls to win some portfolios back. And it really makes a difference. We can show them the visibility they have, their dashboard theyâre going to have and the whole ecosystem we offer. And so those two combined have really helped, and thatâs really â thatâs been our strategy, and itâs what weâre going to continue doing. And then just on the attrition in China. I know itâs a growing part of the installed base, but any trends there worth calling out? I think itâs pretty consistent with 2021 is what I would say. We didnât see huge anomalies. Obviously, itâs â our portfolio in China, our service portfolio, I think weâve shared is a little over 325,000 units. And thatâs grown. Itâs our sixth straight quarter of mid to high single-digit portfolio growth in China. And so weâre continuing, recapture, did well there. So weâre continuing to monitor that. But our team â our service teams in China are continuing against six straight quarters, and we expect â because of the growth in that segment, we expect that to be in the teens again for 2023. Thank you. [Operator Instructions] And our next question comes from Miguel Borrega with Exane BNP Paribas. Your line is now open. Hi, good morning, everyone. Iâve got a couple of questions. The first one on your margin for New Equipment in China, I know that you donât disclose this, but can you give us some color on how this has evolved over the years? How does your margin compare today versus, for example, pre-COVID levels? And at the moment, what is the direction of travel for margins on new orders? And then maybe longer term, can you give us a sense why margins in China were keeping much more profitable than, for example, Europe or the U.S.? Thank you. Okay. I think there were three questions over there. So let me start with the China New Equipment margin. We donât disclose margin by regions. If you look at China New Equipment, it is slightly higher. Itâs a good margin business for us. Importantly, if you look at even last year with all the volume decline, the commodities headwinds that we faced, we were still able to mitigate a significant amount of that through productivity. So the margins of the New Equipment business have actually held quite strong because of the productivity business. And even this year, where we are guiding to our margins to be, weâre almost back to 2021 levels. Despite volume being flattish or slightly down, China volume being down 10% and going through a commodity headwinds of about $150 million, $180 million. So clearly, the margins are trending in the right direction. And all I would say is that weâre quite happy with the way weâve been able to mitigate some of the headwinds to get to where we are right now. Yes. So thatâs on the first question regarding where our New Equipment margins are. Backlog is trending up. The backlog margin is trending up. Weâve had price increases over the past couple of quarters. If you look at where weâre exiting this year, in 2021, our backlog margin declined by one point, we are above one point right now. And â where commodities are and where our pricing and new orders and new proposals are going in, that backlog margin should kind of inch up as we move along through the course of the year. We, again, donât give specific guidance on where it would be, but itâs encouraging to see the price kind of sticking in the market over there. Yes. And sorry, what was the third question? I couldnât quite get the question completely. If you could just repeat that, Miguel. Well, just give us a sense on the spread between margins in China and the Rest of the World. Why shouldnât we see some kind of conversion trending down to more like Europe or the U.S.? Yes, itâs still accretive for us in terms of the margins over there when we keep driving productivity. So it will â the strategy that weâre kind of embarking upon the digitalization of productivity, we should see the margins kind of inching up. I mean net-net, on the service side, weâre seeing 50 basis points margin expansion this year, which is on the high end of a medium-term guidance. And obviously, margins will differ by region, by country. But with all the tools we are doing and we see margin expansion across all the regions. Thank you. And then just one last question on free cash flow conversion, I wanted to get your views, not only on 2023, but also a little bit further away. Where do you see this normalizing? Because 2021 was 128%; 2022, 115%, and now you guide between 105% and 115%. Is this basically China contributing less to working capital? And do you see that improving in 2023 with more financing to real estate developers? Maybe if we can get some of your color whatâs going on, on the ground in China today? Do you see any improvements there? Thank you very much. Yes. So let me take back, actually, our working capital in China collection is progressing quite well. If you look at this 2022, we finished about 115% of net income, which was quite good. We had a very strong fourth quarter. We came in a little bit lighter was because of the inventory that we built up to make sure that we can support our backlog as we get into 2023. Between receivables and payables, we are pretty much there. So it was more of the inventory build out. Now what weâre guiding at the midpoint for 2023 is 110% of net income. Itâs essentially driven by earnings growth with a little bit of a modest offset from capital expenditure as weâre embarking on our Otis ONE strategy. So that takes us to 110% net income. And as we move forward, we should grow our cash with earnings. And thatâs what weâve kind of guided towards. And you should see that normalizing around the 110-ish percent level. Yes. And Miguel, Iâll just let me wrap on that. But I mean this is â that was our medium-term guide that we gave at the Investor Day in February of last year, and thatâs what â we beat it in 2022, and weâre staying consistent right now with our guide with the Investor Day. Thank you. And Iâm currently showing no further questions at this time. Iâd like to hand the conference back over to Ms. Marks for any closing remarks. Well, thank you, Norma. Our success in 2022, our third year in a row of performing for all stakeholders, demonstrates the strategic resiliency of our business and provides us with confidence as we begin a new year. Supported by strong industry dynamics, we remain committed to our strategic pillars in order to deliver for our customers, shareholders, valued communities and the riding public. We set significant goals for the year ahead, and we look forward to sharing our 2023 success with you. Please stay safe and well. Thank you.
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EarningCall_867
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Good day and welcome to the FHI Q4 2022 Analyst Call and Webcast. At this time, all participants have been placed on a listen-only mode. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Ray Hanley, President of Federated Investors Management Company. Sir, the floor is yours. Good morning, and welcome. Leading today's call will be Chris Donahue, Federated Hermesâ CEO and President; Tom Donahue, Chief Financial Officer. And joining us for the Q&A are Saker Nusseibeh, who is the CEO of Federated Hermes Limited; and Debbie Cunningham, our Chief Investment Officer for Money Markets. Today's call, we will make forward-looking statements and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review our risk disclosures in our SEC filings. No assurance can be given as to future results and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris? Thank you Ray, and good morning all. I will review Federated Hermes' business performance, Tom will comment on our financial results. We ended 2022 with record total assets under management of 669 billion. This was driven by growth of 35.6 billion in money market assets in Q4 to reach a record high of 477 billion at year-end. Turning to equities. Assets increased by about 7 billion to 81.5 billion due to market gains, FX impact, and net positive sales in separate accounts, all of which were partially offset by net fund redemptions. The strategic value dividend strategy continued to produce solid net sales with nearly $1 billion in the Q4 with about a quarter of that from the fund, and almost three quarters of that from the SMA. The U.S. Strategic Value Dividend ETF launched in mid-November now has 42 million in assets. We saw Q4 positive net sales in 16 equity fund strategies, including Asia ex-Japan, International Strategic Value Dividend, MDT Large Cap Growth, European Alpha Equity, International Growth and Clover Small Value. Q4 equity fund net redemptions of [1.4 billion] [ph] were concentrated in our growth strategies. Our equity fund performance at the end of 2022, compared to peers was solid. Using Morningstar data for the trailing three years, at the end of the year, 61% of our equity funds were beating peers and 33% were in the top quartile of their category. As we begin 2023, our equity focus with clients continues to be on the strategies that have responded well in inflationary times. These include dividend income, international, emerging markets, and value. Now, for the first three weeks of Q1, combined equity and SMAs had net positive sales of 328 million. We had 23 equity funds with positive net sales during this period, including Strategic Value Dividend, Global Emerging Markets, Asia ex-Japan, MDT Small Cap Core, and international leaders. Turning now to fixed income. Assets increased by about 1.3 billion in Q4 to 86.7 billion as assets from the CW Henderson acquisition of about 3.5 billion and gains from market values of about 1.6 billion were partially offset by net redemptions from funds of 2.6 billion and separate accounts of 1.3 billion. Within our funds, our flagship Core Plus strategy total return bond had Q4 net sales of about 652 million, benefiting from a long-term performance record. And that has led to expanded distribution opportunities. Our two Microshort bond funds combined for just under 200 million of Q4 net sales. Core Plus and other multi-sector fixed income SMA strategies added 146 million of Q4 net sales. Within fixed income funds, Q4 net redemptions of about 1.8 billion occurred in the three ultrashort funds. We had nine fixed income funds with positive net sales in the fourth quarter, including total return bond and two Microshorts as already mentioned, as well as institutional high yield bond fund and the intermediate corporate bond fund. Regarding performance, at the end of 2022 using Morningstar data for the trailing three years, 57% of our fixed income funds were beating peers and 16% were in the top quartile of their category. For the first three weeks of 2023, fixed income funds and SMAs had net positive sales of 466 million led by total return bond and SDG engagement high yield credit. During the same period, we had 18 fixed income funds with positive net sales. Some of the others include: corporate bond, sterling cash plus, and institutional high-yield bond. In the alternative and private markets category, assets increased due to positive FX impact, partially offset by market losses and net redemptions. Pru Bear was up, MDT was up, and direct lending was up. These were offset by net redemptions in absolute return credit, private equity, and infrastructure. Now, we continue marketing the fifth vintage of P-E-C, PEC, our co-investment private equity structure and the third vintage of the Horizon Private Equity Fund. PEC 5 has raised about 400 million through year-end and Horizon has commitments of a little over a billion through year-end. We begin 2023 with about 4.8 billion in net institutional mandates yet to fund into both funds and separate accounts. About 3 billion of this net total is expected to come into private market strategies, including private equity, direct lending, and unconstrained credit. Equity wins of about 1.3 billion are in Asia ex-Japan, Global Emerging Markets, Global Equities. Fixed income expected additions are in SDG high yield credit, investment grade credit and short duration. Moving to money markets. The Q4 asset increase reflected seasonality and favorable market conditions for cash as an asset class. Money market strategies are benefiting from higher yields, elevated liquidity levels in the financial system, and favorable yields compared to bank deposits. We expect higher short-term rates will benefit money market funds over time, particularly as compared to deposit rates. Our money market mutual fund market share, including the sub advised funds was about 7.7% at the end of 2022, up from about 7.4% at the end of the third quarter of 2022. Looking now at recent asset totals as of a few days ago, managed assets were approximately 674 billion, including 475 billion in money markets, 90 billion in equities, 85 billion in fixed income, 21 billion in alternative private markets, and 3 billion in multi-asset. Money market mutual fund assets were 325 billion. Tom? Thanks, Chris. Total revenue for Q4 decreased 7.2 million or about 2% from the prior quarter due mainly to lower average long-term assets and lower performance fees in carried interest, partially offset by higher average money market assets. Q4 performance fees and carried interests were 3.3 million. Q4 operating expenses increased 25.8 million or 9%, compared to Q3, driven by the 31.5 million non-cash intangible asset impairment charge, offset mainly by FX impact of 8 million from the currency forwards used to hedge certain pound exposure. The impairment charge was due to the change in fair value of one of the intangible assets from the 2018 Hermes Fund Managers Limited acquisition, representing about 6% of the total acquisition price. The lower asset valuation was driven by changes in projected cash flows and a higher discount rate, compared to the prior quarter. In non-operating income, investment gains after subtracting the impact attributed to the non-controlling interest added earnings per share for the quarter of about $0.04, due to the positive impact of the market on the investments. Looking ahead to Q1, certain seasonal factors will impact results. The impact of fewer days is expected to result in about 6.4 million in lower operating income, excluding the impact of the impairment charge and with all else being equal. In addition, based on an early assessment, compensation and related expense could be $13 million higher than Q4, due primarily to about 9 million of seasonally higher expense for stock compensation and payroll taxes. We also expect to have higher base pay, higher incentive compensation expense, and of course, all these amounts will vary based on multiple factors. The effective tax rate was lower in Q4, primarily related to a one-time recognition of a capital loss for tax purposes. Non-taxable, non-controlling interest income that's included in our pretax income, but non-taxable to Federated Hermes and certain stock based compensation where we get a higher tax deduction when our stock price investing exceeds the price when the shares were granted. We expect our effective tax rate to be in the range of 24% to 26% in 2023. At the end of 2022, cash and investments were 522 million of which about 466 million was available to us. Hi, good morning. This is actually Rick on for Dan. Just thinking about expenses, how should we think about the general trajectory for non-comp expenses? And also, kind of double clicking into that, I believe the other line, excluding the impairment charge was lower by approximately 5.5 million or around that range, compared to the last three quarters and a year-ago. Just wondering was that, sort of the FX impact, FX impact in the other direction that was called out or is this, sort of [run rate] [ph] savings? Yes. I'll cover some of those, Ray will come in with a few more. So, I mentioned the comp already. So, all else being equal, we expect that to go up. Distribution, we would expect that to go up. We see that as the old days as success item, as we get more assets, distribution goes up, systems and communications, professional service fees, travel related, those all have inflation and price increases. All are expected to go up. And you would comment on the other? Yes. Rick, you're correct with the FX impact, and obviously, we saw pretty significant movement in the pound in Q3. And so, we had a net expense in that line item. And then for Q4 with the pound moving the other direction, we had a net credit that was the $80 million that we mentioned. Got it. Appreciate that color. And then just on, sort of the higher expenses that you called out, could you point to maybe a pre-pandemic, sort of year or set of quarters that we can look at for general levels as a percent of revenues or is there a better way to think of that? Yes. So, we don't look at it like that at all. We just don't calculate it based on that way and don't think that way. We're trying to raise assets what's the best way to do it. And, like for T&E, the sales force believes they should be out there and you can see that trending up, and it's trending up and they're out there traveling more and it costs more to do it. But we don't calculate the way you're talking about. Understood. Appreciate that. And if I could sneak one last question in there. In terms of long-term fee rate, just â and sort of the quarter to date, kind of flow discussion that was called out, how does the exit rate for the fourth quarter, kind of compared to the average? And how does that look like going into early January? The fee rate really is a function of the blend of changes in assets. And so, you've seen, for example, in equity over the course of 2022 with growth assets being down, to say one example that would be a case where we would have higher than the average â higher than our average fee rates. In addition, we've had growth in â we called out the strategic value dividend, SMA. And SMAs of course have lower management fee rates than the mutual funds do. So, it's really a function of the blend of where the average asset growth is occurring and looking at the first couple of weeks of 2023, I would say, we're not going to see, I wouldn't use that to forecast any material change in the fee rate. We'd want to cover some more ground before doing that. And they're good solid wins in categories like high yield, multiple, most of the equity products producing net positive flows. And of course, we've had positive market impact. So, all of that goes to the good. Hi, good morning everyone. So, my first question is on the Hermes impairment, could you give a little bit more detail on the changes that went into the cash flow downgrades? Are there some products that are not working out as planned? And I guess more broadly on that point, has your view on the opportunity for growth there changed in some way? Yes, Patrick from Autonomous. The cash flows, we have to go through, I think there's six different categories when we did the deal, and this is one category, the public markets. And since the deal, if you look at it from a â since 2018, the assets and particularly more recently, the asset declines, and then we have to go through and look at forecasts and predicting the future. We just had to scale those back and then the discount rates of course rates have gone up since we did the deal. And so, when you, kind of take the whole picture on a long-term basis, we had to have an impairment just on an accounting basis, pretty simple. In terms of excitement with what's going on, with Hermes, I think number of things that Chris mentioned in our pipeline are pretty exciting. And I think Saker out to give a comment on exciting things that we still see happening there. Thank you very much, Tom. So, I mean, let's start just with some of the stuff that you heard from Chris. If you remember, he said that $4.8 billion of net [institutional managers] [ph] are yet to fund, but these are signed and yet to fund. And the majority of these actually are coming into Federal Reserve and is limited, which is in London. With old Hermes business. And that gives you an idea of the strength of growth. And of that, for example, if you talk about the equity strategies well over a billion, 1.3 billion is in Asia ex-Japan. Then you've got further [270 odd million] [ph] going into global emerging markets, another [117 odd million] [ph] going into global equities and then some more into fixed income and [indiscernible] you look around 290 million, add to which you can add private equity, which is over 1.3 billion and you have a very exciting picture based on the future positivity that we see. I mean, yes, one [indiscernible], but it tells you the strength that's here we're looking forward. Now why is that? Two reasons. One is, yes, of course, since 2018, from an accounting perspective, we've got to look at the fact that markets went down, there was COVID and there was the Ukraine war and we have a lot of growth assets or growth equities in our public markets, but actually, they are much in demand. We've seen that even through the [couple of] [ph] last years, and it looks as if this is going to continue to grow for us. The proof of the [pudding] [ph] is within public markets is, we're continuing to invest particularly in sales. We're looking at offices in other parts of Continental Europe than the ones we've got. We've talked about offices there, at least one that's going to be established to see that possibly too. And that means that we increase our capability to distribute within the mentioned European markets. And then if you go to private equities, which is where we â sorry, I beg your pardon, with private markets, there's private equity, which includes private debt. That has been very exciting with lots of flows through over the last year. Strength seeing this year with a lot of interest from our clients, an excellent environment for our, kind of strategy. To get our private equity again, we're seeing lots of excitement from our clients. So, that's good and of course, our property is a long-term play, which continues to travel on. And for that, we're investing in â I mean for private markets as a whole, we're investing into a dedicated sales force work alongside our [generalists salesforce] [ph] to help increase that. So, there's lots of exciting things happening here in London. And if I look at the future and the growth, I'd say that it's very much here and it will come through notwithstanding that last year was obviously a difficult year as we all know because of the reasons that we do know. And I'm not going to comment on accounting, thatâs Tomâs job to do accounting, but Iâm a fund manager and I look for the future and the future in this looks exciting to me. Great. Good morning. Want to start on the â maybe on the balance sheet here. So, I guess the buybacks were lower in the quarter, but I did notice that your cash position has grown, meaningfully it stands at more than 25% of assets. So, how are you thinking about your cash levels and capital allocation more broadly, could we see a return to buybacks or a special dividend here? Well, yes, cash has grown. It's spectacular since we raised the long-term debt at what we view a very favorable rate and we bought back pretty significant amount of shares. And we historically have not wanted to hold on to cash. Now, starting new products has become more expensive i.e. more investing is needed. So that's, kind of a demand for resources to have seed assets, but on a long-term basis, we have not been a group to hold on to the cash. So, we will see, we want to do acquisitions that's been our first desire with the use of the money because of our returns on them. And we of course have the regular dividend. As you know, we paid five special dividends, and we bought back a lot of stocks. So, all of those are on the table for us to figure out what to do with the cash with no timetable and not trying to lead you to â we're going to do this through this through this. One other point I'd mention here is that even though earnings are down on a kind of impairment, we still have cash available to do a lot of the things, Tom said, which I would phrase as investing for the future. And this means putting money into the platform in the private equity area over the UK. It means $140 million worth of commitments in technology that it doesn't hit income in any one-year as you all know. And Tom mentioned the fact that investments in seed assets those are running at about 140 million, again the same number obviously not related. And so, those are â were the interest of cash, but they all point to building for the future. Great. Thank you. And then if we could just switch gears to the flows. The ultrashort fixed income flows, can you just expand on what drove the outflows there? Whatâs some of the investor dynamics that would cause that to happen? And then on the money market side, it sounds like you're basically just down a little bit in totality from the 4Q EOP levels, but the mix has shifted a little bit. Any additional color you can put around that? What's â we're kind of driving the growth of the SMAs? And is that more sticky than the fund side, which sounds like it benefited from some seasonality in 4Q? I can start to answer those questions. From an ultrashort perspective and it definitely pertains to where we are from an interest rate standpoint in the marketplace. Interest rates continued to go up in the fourth quarter by 75 basis points and then again 50 basis points in December. The expectation is, they'll continue to go up more modestly, but hold at a higher level in 2023. And when you see that sort of increase in rates in the marketplace generally, anything outside of liquidity products, i.e. money market products or cash are going to see flows going in the opposite direction. Those flows can come out of the institutional side, the retail side, corporate. So, there's generally speaking, a broad-based exit that has slowed down as the year has progressed. And in products even like Microshorts that got money in that basically is offsetting some of what we're seeing in the, sort of little bit further out the yield curve, the ultrashort types of products. From a money market fund perspective, the mix continues to be obviously predominantly in the government sector. However, where we experienced on a percentage basis, the most amount of growth during 2022 was in the [prime and muni] [ph] sectors and that's simply a result of being above zero at this point and therefore the spread between government and those other categories widening out as interest rates themselves have increased. When you look at it on a quarter-over-quarter basis, the fourth quarter always has a huge amount of inflows not always, but for the most part has a large amount of inflows in the second half of December, let's call it, itâs window dressing, as well as tax purpose issues that many firms are trying to do and ultimately this results in inflows into the government in particular money market funds during the second half of December, some of which then goes out, generally the first quarter of 2023 sees outflows out of those products. Because of increasing interest rates, however, the other categories prime, in particular, has continued on a percentage basis to offset those flows in a pretty decided way. And Mike, just on the separate account growth into January, you mentioned some seasonality there and that does come into play. That category of asset for us is dominated by large state cash pools that we manage. And so, it has a regular pattern of increasing when tax receipts are made at year-end, you know through the middle of the second quarter typically and then that tends to go down over the latter half of the year, but it's fallen, it's reached higher highs and higher lows. We've had a lot of underlying success both because of a favorable macro for money market yields and also some effective work that we've done with those clients to increase utilization of those pools. Hey, thanks for the follow-up. Just on the back of that question, I asked a similar question last quarter, but you â we keep hearing from some of your competitors that there is an expectation of a bigger surge into money fund flows from say deposits. And I know there's always some seasonality noise from December to January, but are you still at the view that that big rotation is coming this year and what milestones are you really looking for, for that to really pick up? Sure, Patrick. Generally speaking, when interest rates are increasing because money funds have a weighted average maturity that's something greater than a day. They lag the direct market, and so for many of our institutional clients that have the capability of going into the direct market, they might do just exactly that rather than go into money market funds that are increasing, but are increasing with, let's call it, a one-month lag versus the direct market, where money funds generally start to excel and exceed from a growth perspective is when interest rates have, kind of reached a plateau and when they start going back down the other side. Now, the caveat to that is that they're not going to zero, that they're going from 5 to 4 to 3, somewhere in that neighborhood. And in those cases, that's when much more outsized growth generally happens from an industry and from our own experience here at FHI versus the deposit market at this point. Overall, deposits in the U.S. are down about a trillion dollars, but they're still very large. And again, looking at the rates on deposits versus the rates on money market funds, they have increased during the first quarter, we're up to about 38% from a deposit beta perspective versus what's happening in the direct market, the Fed funds market. So, 38% of the increase is being captured in deposits. As such, I think that the average deposit rate for the fourth quarter was up to about 70 basis points, but compare that to where we are from a fund yield perspective, which is essentially all north of 4% and heading towards 5% vastly different. So, being a trillion down in deposits is just, sort of a drop in the bucket. The expectation would be that we'll continue to fuel outflows with that deposit beta being lower and a very natural recipient of those outflows would be money market funds. And if I can indulge this history, which I've used before, Patrick, I think it's informative. The Fed increase that was Q4 2016 to Q4 2018, we had a little pause and then the money â our money market assets increased by 15% from about 210 billion to 240 billion, and the industry followed a very similar pattern. They were up 11%, naturally we were up 15%. Then you go to the next one. Our assets went up about 22% through the third quarter of 2019, and the industry at that time did about 14%. So, depending on how big people are talking about numbers, that those are what happened. The next point I would make is that it matters a lot who your clients are and what is their history. And we have unique clients, others have unique clients and I can't comment on the overall situation with others clientele. And actually, we have a lot of the same ones, but it matters a lot, if you have a lot of trust departments, a lot of intermediaries and things like that. There appear to be no further questions in queue. I would like to hand the call back over to Ray Hanley for any closing remarks. 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_868
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Good morning, and thank you for joining us today. I am Yoontae Kim, the Vice President of Business Management Office at Samsung SDI. First, I'd like to introduce our management team attending today's conference call. This morning, we have with us Head of Business Management Office, Jong Sung Kim; Head of the Automotive and ESS Battery Strategic Marketing team, Michael Son; Head of the Small Battery Strategy Marketing team, Jaeyoung Lee; and Head of Electronic Materials Strategy Marketing team, Chijin Kim. We will now begin the earnings call. Let us start with the fourth quarter results. The revenue for the fourth quarter was KRW 5.96 trillion increased 11% from the previous year and 56% from the corresponding period last year. Looking at each business segment, the energy businesses expanded sales with automotive and battery business playing the central role and recorded a revenue of KRW 5,341.6 billion, up 11% quarter-on-quarter and 72% Y-o-Y. The Electronic Materials business posted KRW 624.3 billion in revenue, which increased by 17% quarter-on-quarter but down by 12% year-on-year. The operating profit was KRW 490.8 billion, down compared to the previous quarter and leap from the same period last year. Although the fourth quarter profit decreased quarter-on-quarter due to one-off costs such as [indiscernible] related allowance, excluding such one-off cost results in the profitability on par with the previous quarter. The pretax profit was KRW 803.2 billion and the net profit stood at KRW 629.2 billion. For the full year, we recorded KRW 20,124.1 billion volume revenue, up 48% versus last year, and our operating profit was KRW [1,808 billion], which increased 69% from the previous year, hitting a new record high 3 years in a row. As of the end of 2022, the total assets are recruited at KRW 30,257.5 billion. which is down by KRW 109.9 billion quarter-on-quarter due to increased accounts receivable affected by exchange rate decline. Liabilities were reduced down to [indiscernible] or KRW 4,216 billion decrease quarter-on-quarter. Shareholders' equity posted KRW 17,217.5 billion, which is up by KRW 310.4 billion quarter-on-quarter. Now our shareholder return policy. Last January, Samsung SDI disclosed and announced the shareholder return policy for the 3-year term that pays out common dividend of KRW 1,000 with additional 5% to 10% of the annual free cash flows amid the historic business volatility, this struck us in 2022. Samsung SDI means to achieve a record high revenue, yet due to increased CapEx and operating costs, the year-on-year cash flow stood at KRW 40.4 billion, duly considering those future needs for raising CapEx, we decide on the additional shareholder return at free cash flows with a total payout of KRW 69 billion, resulting in KRW 1,030 common dividends and KRW 1,080 preferred dividends. The dividend payout will be made upon final approval of the shareholders meeting. Please refer to the fiscal year 2022 dividend page under the appendix. Next, I would like to you through our ESG management performance last year. The year 2022 mark the first year, the Samsung SDI established sustainable management system and ESG mindset throughout the company under the management's firm determination. The specifics being, we set up a comprehensive framework for sustainable management by creating sustainable Managing Committee under the Board of Directors Sustainability Management Office under the CFO and Sustainability Management Council under the direct lead of the CEO. Also, we have beared no efforts in devising our own vision and strategy for sustainable management and in selecting and carrying out pressure tasks for environmental management. Last October, SDI not only declared the environment-friendly management, but also during RE100 initiative in this context. In the new year, SDI drive for global ESG management will be in full swing by establishing and reinforcing dedicated ESG working groups under each business unit and overseas operations [indiscernible] our capability in taking action against the climate change. SDI plans to assess and calculate Scope 3 carbon emissions, which encompass indirect emissions occurring throughout the entire value chain and formulate carbon reduction plans accordingly. We pledged to take the lead in ESG management by continuing our efforts and taking on even more environmental management tasks. Now each division will present the details of fourth quarter results and the outlook for the year 2023. Good morning. I am Michael Son Head of the Automotive and ESS Battery Strategy Marketing team, despite concerns over sluggish demand in the fourth quarter, automotive and ESS business saw a big jump in the revenue, both quarter-on-quarter and year-on-year. Automotive Battery business and revenue continued to expand, pushed by strong supply P5 our prismatic Gen5 battery, which -- with the launch of new vehicle models of our customers. And ESS batteries recruited our higher revenue, thanks to increased utility sales in the U.S. Profitability remained above the same level as the previous quarter with onetime costs excluded. In the first quarter of 2023, we expect those P5 sales to maintain its upward trend. Automotive batteries are expected to make higher sales, mainly with P5 for new vehicle models where seasonal low will steer easy battery sales to take the downturn. We expect to see revenues going up in both automotive and ESS batteries compared to the same period last year. As for the 2023 outlook, there are looming concerns over weakening consumer demand for vehicles overcast by rising global interest rates and slowing growth. However, with major OEMs push for electrification and ease of supply chain disruptions that persisted last year, the EV production is forecast to continue its expansion. As such, the automotive battery market is projected to grow by 40% from the previous year, reaching a value of $159 billion. SDI plans to maintain high level of revenue growth, where P5 battery will propel the sales increase in the premium EV market. Also, we will maintain our drive for project acquisitions and development of next-generation products such as [indiscernible] battery to PV for long-term growth. Yes, it's battery market size is forecast to grow to $16 billion by more than 40% from 2022. Utility sales is expected to lead the overall market growth driven by global push for green energy like EUs, repower EU and U.S. government IRA as well as economical synergy of renewable energies and ESS. Rise of data centers is set to hoist UPS demand, while efforts reduce power bills, create constant demand for residential solutions in ESS business. Samsung SDI will stay committed to meeting the market demand by relaunching new ESS products for utility application gaining edge on our competitiveness. This is the end of Automotive and ESS division's presentation. Good morning. I am Jae-Young Lee, Head of the Small Battery Strategy Marketing team. Small Battery business maintained a quarterly revenue on par with the previous quarter. Although the premium U.S. housing markets slump caused the power tool demand slow down, Samsung SDI managed to mitigate the impact from such low demand based on long-term supply agreements for power products with key customers. With increased sales in EV batteries, the revenue stood at about the same level as the last quarter. As for pouch battery start-up supply for the new product of our major customer has begun. Due to seasonality, the first quarter sales will drop quarter-on-quarter, but year-on-year growth is expected to be positive. In cylindrical battery segment, the unfavorable seasonality is likely to affect the power tools battery cells, while EV battery sales expected to increase significantly. We expect that the power tool demand will bounce back in the second quarter, making improvements in sales. Pouch sales is expected to rise slightly quarter-on-quarter stocked by a release of new flagship smartphone models. Now on to the outlook for small battery market in 2023. The small size lithium battery market is forecast grow by 7% from the last year, reaching $38 billion. For non-IT applications, power tool market growth is expected to slow down due to the downbeat housing demand. However, EV market, we will continue to high growth and micromobility demand is likely still float. Samsung SDI will keep up with growing EV market demand by launching new products with high capacity and high power in the first quarter, furthering our product competitiveness. In the market for IT applications, smartphone battery market is projected to be sluggish, yet rising popularity of foldable phones will push the demand for battery products for flagship smartphones. Battery demand for wearable devices, such as TWS and smart watches, is forecast to maintain its growing trend. I will focus on expanding sales with timely supply of new products. Good morning, everyone. I am Heonjoon Kim, Head of the Electronic Materials Strategy Marketing team. In the fourth quarter, Electronic Materials business saw a higher revenue. and better profitability quarter-on-quarter propelled by increased sales of high-value display materials as inventory of load cut in eased on customers, end-to-end customer portfolio diversified. Polarizer film sales went up recruiting an increased revenue compared to the previous quarter. The revenue of display materials, including lasers rose on account of supply initiated for customers' new platform applications and semiconductor materials maintained its quarter-on-quarter revenue level, the sales expanding in high-value products. As for the 2023 first outlook due to the seasonality, the electronic material sales is forecast for quarter-on-quarter. With the seasonal factor compounded by weakened market demand, sales of display materials is likely to decline. As for the polarizer film and semiconductor materials, despite the seasonality of the first quarter sales volume is expected to stay similar to the secure the start supply for the new applications such as [indiscernible] OLED and 5 functional [indiscernible] materials. In 2023, while sluggish market demand is likely to render the market growth downwards, the demand for high-value materials, which is Samsung SDI's main focus, is forecast to a similar level compared to the last year. In display market, the overall demand for polarizer film is expected to year-on-year. Some of these high-value panel film is expected to slightly increase. Mobile panel also paint a green outlook. Unlike the persisting business uncertainty in semiconductor market, our major customers transition to the next level process is set to slightly increase the demand for the semiconductor process materials compared to the last year since it calls for a higher volume supply. We expect to face a myriad of difficulties in the market since this year, but we will continue our efforts to secure continued growth by expanding the supply and sales of high value and high functional products, which are Samsung SDI's [indiscernible] strength in the market. Before we move on to the Q&A session, Jong Sung Kim, our Executive Vice President and Head of Business Management Office will highlight Samsung SDI's performance in 2022 and business outlook in 2023. In 2022, we saw the business environment reaching an extreme volatility arising from the prolonged pandemic and unexpected Ukraine, Russian war on many variables. Despite high market uncertainty reduced by a stable raw material supply, price hike and auto part supply constraints, not only did Samsung SDI expand the sales of P5 battery for high-end models by major customers, but also achieved revenue growth, surpassing the market growth rate and remarkable profit improvement by implementing preempted risk management, which included strength and post pass-through mechanisms. Whilst low-price batteries were aggressively finding their way to increase market share in the ESS market, we measure to leap in sales growth by capitalizing on our UPS and residential solutions leading to huge growth in revenue and better profitability. Small battery business focused on ensuring steady expansion of supply in cylindrical batteries for power tools to our key customers, while the supply for electric vehicles scaled up, all of which led to higher in your revenue for the total business. Going through difficulties caused by drop in demand for polarizing film as the market's inventory adjustments went on in the second half, we were able to improve our profitability as we steered our focus on to display and semiconductor materials to augment the business structure. And as a result, we eventually managed to gain a growing momentum with new product launch. Even if such unstable business environment in 2022, it was also a milestone year, while all business segments reached in your business targets producing all-time high results and materializing the vision of profitable and qualitative growth. Besides such feed we achieved a Samsung SDI have remained dedicated to laying down the groundwork for future growth as demonstrated by solid-state battery pilot line 46 Pi battery line, joint venture with Stellantis and the commencement of the second factory construction in Malaysia. In 2023, persistent global inflation and tightening monetary policy will continue to drive high interest rates and price volatility in raw materials and energy. Against the backdrop of such high business risks, Samsung SDI will maintain a flexible and preemptive approach to promote the company's growth. This year, automotive battery business is going to sustain its high growth by expanding the supply of P5 products for a high-end vehicle market. which tends to be less vulnerable to the market fluctuations as well as bolstering our competitiveness. To ensure the next-generation technology readiness and competitive edge, our plan for 46 pi battery production line and solid state pilot line will proceed as planned. Our push for market expansion in the U.S. will also continue. In the ESS business, while gaining an even more edge in UPS and residential solutions, in order to meet the demand of highly potential utility market, we will launch ESS specific battery cell products and integrated solutions quite a high performance and cost competitiveness to facilitate continued revenue growth and profit improvement. In the small battery business sector, the market for [indiscernible] batteries is forecast suffer from the downbeat housing market demand arising from stagnant housing market and inventory adjustment on the customers' end. We are planning on mitigating such impact by securing long-term partnerships with our key customers and expect that sales level will recover in the second half as the market gains strength. In the meantime, the demand of cylindrical batteries for electric vehicles and bicycles is on a rapid growth trajectory, casting a positive outlook on the annual sales growth and likely repeating last year's success. Samsung SDI will keep up with the market's expectations and needs with effective production line operation, carrying on with our upward momentum in the revenue and profit growth. Electronic materials business will undergo a tough first half followed by a strong finish in the second half. Under such [indiscernible] display and semiconductor market demand, we expect, however, as the market inventory overload will be cleared in the first half and the semiconductor market will rebound in the second half, which will call for gradual increase in demand for display materials and semiconductor materials. Shareholders of business uncertainties and concerns are here to stay in 2023 as well. But while Samsung SDI's in those shadows is a great opportunity to grow furthermore, we will endeavor to execute each and all our business strategies as planned as mid-2023, a truly fruitful year, stepping up as a company fully geared with per gap technology competitiveness, the best quality and profitable and qualitative growth. My first question is about EV batteries with concerns over global economic recessions, there are concerns that the EV demand may also weaken. Can you tell us a bit more detail about your outlook for EV battery market this year and also your sales plans overall, do you think that it's possible for you to further improve your revenue as well as profitability this year? Second question is about cylindrical batteries. I think already from the second half of last year, we saw a noticeable weakness in the power tool market and the demand, probably the situation is going to worsen this year with that given, how are you planning to grow your cylindrical battery revenue this year? To answer your first question about EV market outlook and our expectations regarding sales and profitability, we do agree that there is a potential risk of a slowdown of the EV market growth and demand contraction considering factors such as continuing global inflation, high interest rate and concerns of an economic recession. However, we are seeing OEMs continuing to expand their EV production according to their electrification plans and governments around the world are increasing support for EVs as part of their environment policy. Also consumer perception about EV is continuously improving. Given that, we expect EV market to continue growth this year. Also for reference, the market research firm, IHS, forecasted global EV demand to be 14.74 million vehicles this year, which is close to 40% growth versus last year. Furthermore, SDI supply batteries mainly to the premium EV models, which are less affected by economic conditions and customer demand for our main product, P5 is showing even stronger growth this year. Also the new lines in our Hungary plant 2 added last year are in stable mass production after completing ramp-up. And so overall, we expect to achieve revenue growth and better profitability this year by significantly increasing P5 supply in line with customer demand. To answer your second question about our cylindrical battery revenue outlook, considering the weak housing market driven by higher interest rates continuing from last year and also weaker demand from Europe tied to the Russia and Ukraine war, we expect power tool demand this year to grow at a pace slower than last year. Even though the market situation remains challenging, we plan to minimize the impact through long-term supply contracts with our major power tool customers and also focus on actively developing and driving the LIB conversion market for professional and construction tools. which have a relatively more solid demand. We'll do that by launching new products with higher power output at the right time. While the power tool demand may slow down, we expect EV demand for cylindricals to increase and that this would lead to an increase in our overall cylindrical battery sales versus last year. We will remain focused on maximizing our revenue by operating our production lines efficiently and flexibly by preparing for the possibility of greater-than-expected increase in EV demand. I have two questions. First question is about your U.S. plans. With the adoption of the IRA in the U.S., people are expecting the U.S. EV market to take off quite strongly. Following the Stellantis joint venture announcement, I don't think SDI has made any significant announcements regarding the U.S. market. In that context, can you give us some plans or outlook on what you are planning for to address the U.S. market. Second question is about the battery material prices going up. The major minerals, such as lithium, nickel prices have remained strong. This has increased the battery ASP and also in turn has resulted in higher EV sales prices itself. There are concerns that these higher prices may have a negative impact on mid- to long-term EV demand. Given that, how are you expecting this to pan out going forward? To answer your first question about the IRA and the U.S. market. Compared to Europe or China, the U.S. had a relatively lower EV penetration rate. But with the adoption of the IRA, the U.S. is expected to become the fastest-growing market. This is why many business opportunities are being created for OEMs and battery suppliers targeting the U.S. market and SDI has been also identifying many opportunities among such situation. While maintaining our basic principle of pursuing high-quality growth with a focus on profitability, we are working to create collaboration arrangements that would be a win-win for both the SDI as well as its customers. Currently, we are in discussion with many customers and will communicate with the market once details are determined in the future. To answer your second question about increasing battery and EV costs, the impact to the mid- to long-term demand. Even though lower battery price is an essential hurdle for increasing EV penetration and driving market growth. In 2022, with global inflation and widening volatility in commodity prices, battery costs actually increased contrary to market hopes. Raw material volatility is affected by a wide range of factors, including macro environment, and there is a limit to what SDI can control. Given that the focus of our battery cost reduction is on reducing the material cost per unit of power capacity by increasing energy density using innovative materials and also leveraging the benefits of scale gain from the R&D and production organized around platforms, such as P5 and P6. In addition to this, the industry continues to explore various cost-saving approaches at the module or pack level, such as cell to pack. And such efforts are expected to further bring down battery costs as well as EV costs. In the near term, raw materials are going to be affected by volatility. But in the mid- to long term, we believe that the industry's technology innovation efforts will drive a gradual decrease in battery prices and that the EV market will also maintain a high growth rate. I have two questions. The first question is about your preparations for operating, the 46-millimeter cylindrical battery line. I think you mentioned during the presentation that the company is preparing to put that into operation. Can you give us some updates on the preparations of that new line when do you think it would start operation? And also in connection with that, can you give us some details about customer orders for that 46-millimeter battery form factor. If you can give us some more details and color about the customer order situation, it would be very helpful. Second question is about the profitability of your overall small-sized batteries, especially the cylindrical battery market, you mentioned during the presentation with seasonality and also the overall weak housing demand, there is a weak demand from power tools for cylindrical batteries. You also mentioned, however, overall revenue for your small-sized slings is expected to grow this year driven mainly by increase in EV revenue. I understand that at the top line. But would there be any implications to your profitability of the small-sized battery as the share of EV revenue increase. To answer your first question about our 46-millimeter line, the 46-millimeter diameter cylindrical battery line currently undergoing investments in our [indiscernible] plant, is scheduled to complete equipment setup during first half of this year and start operation. The 46-millimeter battery is designed for maximum capacity using our high-nickel NCA cathode material and SCN anode material technology, while also maintaining the same level of SDI's quality competitiveness which would set it apart from products offered by other battery suppliers. You've also asked about our order win status. We're not able to details at the current moment, but we are in discussion with many customers about ways of collaborating, and we're planning to start production of mass production samples from the new line to drive business development. To answer your second question about the implications of the profitability of the cylindrical battery business. The rapid growth in demand of key customers, including Rivian, resulted in our cylindrical sales for EV applications, more than doubling in 2022 versus the previous year. This year, once again, we are expecting customer demand to grow significantly and our revenue to record a high growth rate. We understand that some in the market are concerned that the decrease in the share of our higher-margin power tool revenue in the cylindrical battery business and the increase in the lower-margin EV revenue may lower our overall profitability. However, in fact, the cylindrical batteries that we produce for EV projects consist of a limited number of product types produced at mass scale and offer greater production efficiency and profitability with an increase in product scale. In fact, since second half of last year, the significant increase in our cylindrical volume for EV has led to improved margins to levels similar to Power 2 batteries. And this year, with an even more significant jump in EV battery supply volume, we expect cylindrical EV batteries contribution to our profitability to further increase. My first question is about your all solid-state battery line that you've started investment for the pilot line for the all-solid-state battery. Can you give us some updates on when you expect that to be in operation? And also, can you give us some color on to what are the key tasks or challenges the company is focusing on in taking the all solid-state battery to a large-scale mass production level? Second question is about the polarizer film business. The LCD downstream industry has been weak since last year. Things appear to be -- we'll likely to continue to remain weak this year for the LCD downstream industries. Given that, what is your sales plan for the polarizer film this year? And how do you plan to address the weak downstream market? To answer your first question about the solid-state battery pilot line, SDI's all solid-state battery pilot line will be the industry's first production line to produce completely all solid-state batteries. Our plan is to complete line construction during the first half of this year, manufacture small size sample sales during the second half and to carry out cell performance, material component and manufacturing process testing. For commercialization of an all solid state battery in the future, an important task is to develop technology for implementing larger cells and also scaling up production. The critical point is to secure stable mass production technology while maintaining the same performance in high capacity and large-sized cells usable on EVs. Our plan is to use the test cells produced in the pilot line to carry out a wide range of technology evaluation and testing to drive an iteration of improving self-performance and mass production technology. We're currently under discussion with several OEMs on collaboration and also plan to cooperate with parts and raw material suppliers to build a stable SCM and to ensure that we're fully prepared to develop and mass produce all solid-state batteries with characteristics suitable for EVs. Our pace of development for mass production will significantly accelerate once the pilot line is in operation, and we will concentrate on shortening the time until mass production. To answer your second question about our polarizer film business. This year, total LCD TV panel shipments is expected to be around 240 million units, which is a roughly 6% decrease versus last year. And in line with that, the overall polarizer film demand is also expected to decrease. However, when you look at the 65-inch and larger segment where we have a high share, shipments are expected to increase slightly in 2022. And also in line with that, the large-sized polarizer film demand is also expected to slightly increase. The LCD panel market is expected to remain weak in the first half tied to recent weakness in the overall IT industry However, in the second half, demand is expected to recover as customers use up their inventory and consumer sentiment starts to improve. The market environment is challenging, but we will focus on continuing to diversify our customer base and also improving our product mix with a greater focus on high-end products to secure profitability. Also in the second half of this year, we plan to launch our polarizer film for mobile LEDs to keep customers to expand our product portfolio. My first question is about the ESS market. Your ESS battery business has continued to record revenue growth especially last year, I think the UPS and the residential ESS demand has played an important role in that. Now looking forward, the utility ESS is the largest segment. It's the segment that's expected to grow quite fast. I'm wondering what the company's plan is in terms of addressing the utility ESS market. Second question is about the OLED materials with global inflation concerns of economic recession. I think there are concerns in the market that demand for smartphones will continue to remain weak. Despite the challenging environment, your OLED business has been able to maintain a growing trend. Do you think you can continue growing your OLED business this year? Last year, we increased sales in the UPS and residential markets where our strength in high energy density had very strong appeal, and this has contributed to both our revenue and profitability. However, given that the power utility market, which does account for about 60% to 70% of the entire ESS market undeniably remains the main ESS segment. In order to drive continuous growth, SDI is currently preparing new ESS products targeting the power utility market with improved battery materials, manufacturing processes and systems to capture this utility segment. First, during the second half of this year, we're planning to launch a new ESS specific cell product with 15% higher energy density using high-nickel NCA cathode material and new manufacturing processes. We will also start supply of an integrated utility ESS solution that includes cell, module and system with maximized safety and efficiency features during the second half. We also have other products in the mid- to long-term pipeline being developed with better product performance and cost competitiveness and plan to expand our power utility ESS market sales using these new product line-up. To answer your question about the OLED materials business outlook tied, especially to the smartphone market outlook. The smartphone market demand is slowing down, but within the smartphone market, demand for the flexible OLED panels, which is our particular strength, is expected to slightly grow this year. In addition to smartphone, OLED demand is spreading to new applications such as laptops, tablets, TVs, and this is driving growth in the overall OLED market. This year, we plan to continue to drive sales growth using our differentiated products, such as p-dopant and the green host. And going forward, we will focus on maintaining this growth momentum over the mid- to long term by winning customers' new platforms and developing new items. And this completes our earnings conference call for fourth quarter 2022. If you have any further questions, please forward them to our IR team. Thank you.
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Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Second Quarter of Fiscal Year 2023. At this time, all participants have been placed in a listen-only mode, and the call will be open for questions following managementâs prepared remarks. During our Q&A session, please limit yourself to one question and a follow-up. Good morning and thank you for joining us. On the call with me this morning are Chuck Kummeth, Chief Executive Officer; and Jim Hippel, Chief Financial Officer of Bio-Techne. Before we begin, let me briefly cover our safe harbor statement. Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the company's future results, as well as the potential impact of the COVID-19 pandemic on our operations and financial results. The company's 10-K for fiscal year 2022 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward-looking statements made during this call. The company does not undertake to update any forward-looking statements because of any new information or future events or developments. The 10-K, as well as the company's other SEC filings, are available on the company's website within its Investor Relations section. During the call, non-GAAP financial measures may be used to provide information relevant to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the company's press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com. Separately, we will be presenting at the Citi, Cowen, Barclays and KeyBank health care conferences in March. We look forward to connecting with many of you at these upcoming conferences. Thanks, Dave, and good morning, everyone. Thank you for joining us for our second quarter conference call. In our second quarter of fiscal 2023, we delivered 4% organic growth on top of a challenging year-on-year comp, where we grew 17% in Q2 of last year. One year ago, the life sciences industry was in the midst of an incredibly strong biotech funding environment, spurred by COVID-related vaccine and therapeutic development that drove high equity valuations for smaller firms. It's been well documented that this funding environment has slowed in recent quarters, returning to pre-COVID levels. In Q2, we did experience a divergence in ordering patterns from our biotech end-market versus our larger pharma customer base, which is still very strong. This divergence was seen in certain large bulk reagent orders, which did not repeat this year, and the delay of instrument orders, as conservation of cash becomes more of a priority for our biotech customers. Encouragingly, the underlying research activity that accelerated during the past strong funding environment continues, which is evident in the strength of our bio-pharma research reagent run rate business, continued cell and gene therapy growth and strong utilization trends within our proteomic and analytical tools. Also, the order funnel for our protein and analytical instruments remains full, and we continue to experience record uptake of our ExoDx Prostate test. I will provide additional details on each of these growth drivers later in the call. Before we discuss the results, I'd first like to welcome Shane Bohnen to the leadership team of our new Senior Vice President, General Counsel effective March 3. Shane will be transitioning into this new role from Brenda Furlow who has served as Executive Vice President and General Counsel for the past nine years. The contributions Brenda has made to the company over the last nine years are immeasurable, including establishing Bio-Techne's legal and compliance functions and leading our corporate sustainability initiatives. I wish Brenda the very best in her retirement. Now let's get into the specifics of the quarter, starting with an overview of our performance by geography and end market. In Europe, we drove mid-single digit revenue growth in the quarter, recovering nicely sequentially from the growth rates experienced in Q1. As a reminder, Europe grew in the mid-teens last year on the wave of stronger biotech funding. We see more stability in European end markets as the year progresses and concerns around high energy prices and severe recession have tempered. The team is also nearly finished implementing a new Dublin warehouse to support Mainland Europe and a new ERP system that has been implemented with minimal disruption to our operation. North America is where we saw the biggest impact of lower biotech spend in Q2. However, North America was still able to grow low single digits on top of a prior year comp that experienced greater than 30% growth in bio-pharma and over 20% growth overall. The multiyear growth rates in North America are still double digit and in line with our long-term goals. The consumable run rate business and instrument order book also suggests that underlying research activity is still robust, and this should become more evident as we pass the remainder of last fiscal year's high biotech comps. Moving on to China. I want to first acknowledge the tremendous dedication and resilience of our team there. Following multiple lockdowns, our team has continued to supply the Chinese research market with the proteomic research reagents, analytical tools and spatial biology solutions to enable scientific discoveries in this geography. Now following a change in COVID management strategy by the Chinese government, COVID is spreading rapidly in the country, including within our China team, which is over 90% infected at one point. Thankfully, this does not appear to be a particularly virulent strain and our impacted team members are typically back to the office within five to 10 days. Despite the disruption caused by the rapid spread of COVID, our team in China was still able to produce mid-single digit growth in Q2. After the waves of COVID subside in China, most likely in our fiscal Q4, we believe a full re-opening of our end markets will accelerate faster compared to the government's prior zero-COVID strategy. Positioning Bio-Techne for a sustainable return to our historic 20-plus percent growth rate in this region. Given the proven pent-up demand in past shutdowns in 2020 and the pending RMB1.7 trillion government stimulus, we see a strong Q4 looking ahead. Now let's discuss our growth platform, starting with our Protein Sciences segment, where organic revenue increased 2% for the quarter on top of a strong comp from last year when the segment grew 19%. During the quarter, we continued to gain traction with our portfolio of cell and gene therapy workflow solutions despite a challenging year-on-year comp where we grew our cell and gene therapy business over 80% organically in Q2 of last year and within that, our GMP protein is over 185%. We still grew our cell and gene therapy portfolio over almost 20% in the quarter. Specific to our GMP proteins business, the commercial team did an excellent job growing business with existing customers as well as adding additional accounts during the quarter, culminating in a record quarter for our GMP protein business. The roadmap to adding additional GMP proteins to the menu produced in our state-of-the-art St. Paul manufacturing facility remains on track with plans in place to almost double in the number produced in this facility in the coming months. It's worth noting that GMP protein sales are driving cross-selling activity throughout our portfolio as this growing list of customers are also frequently purchasing additional items, including RUO media, proteins and small molecules. Speaking of small molecules, our GMP small molecules remain key components in the regenerative medicine cell therapy fields as they enable the reprogramming, self-renewal, storage and differentiation processes that are key to these workflows. Our leadership position in regenerative medicine workflow is driving substantial growth in our GMP small molecule business as well as specialty cell culture media, matrices in our portfolio of 19 GMP proteins that are focused to regenerative medicine, including 11 GMP proteins that are only available from Bio-Techne. The growth is so profound in our GMP small molecules that we are drastically expanding our manufacturing capacity in Bristol, UK. Now let's discuss our core portfolio of proteomic research reagents, including the RUO proteins, antibodies and small molecules that are key components to enabling biopharma and academic scientific discoveries. Collectively, our RUO reagents grew in the low teens in Q2 of last year, driven in part by a strong contribution from bulk reagent orders from biotech customers, some of which did not repeat during the quarter. We are very encouraged that excluding these large orders, the performance of our run rate research reagent business remains very healthy, especially in the US. We continue to expand our catalog of research reagents, which now includes over 6,000 proteins, 425,000 antibody variations in a growing small molecule portfolio. For example, during the quarter, we expanded the small molecule portfolio with the launch of our MitoBrilliant fluorescent dyes, enabling the fluorescent labeling and tracking of mitochondria in live and fixed cells. Initial reception to the launch was very strong with the initial production lot of these dyes selling out in the quarter. These dyes, when used with our new RNAscope Plus, small RNA for co-detection gives extremely high resolution at a single cell level and high detects short base RNA. Moving on to the performance of our ProteinSimple branded analytical tools, where the team delivered low single-digit growth in the quarter. Here, we faced a particularly strong year-on-year comp of nearly 30% in the second quarter of prior year, driven by strong adoption among vaccine and monoclonal antibody therapeutic manufacturers for Maurice in the prior period. The rapid installed base growth we delivered over the past few years is leading to a strong consumer growth, as our portfolio of biologics, fully automated Western blots and multiplex immunoassay solutions become fully ingrained in our biopharma and academic customers processes. We are very encouraged that the order funnel across all three of our instrument platforms remains very full, including a record level for our Maurice Biologics instrument, although the biotech funding environment has a length in the closing cycle. Simple Western lead instrument growth as the system's ability to automate the cumbersome and time-consuming Western blots process with a sample in and anther out solution continues to resonate with our biopharma and academic research end markets. Simple Western is turning out to be much more than an automated Western blot replacement with the system's ability to identify and quantify proteins in complex samples like lysates, leading to its use of the quantitative immunoassay platform. This expanded application for the system is driving usage in targeted protein degradation in drug tolerant studies, intracellular signaling the applications and is an alternative to customerized development. We are actively implementing marketing strategies to educate the market on these additional applications. On January 24, we officially launched our next-generation biologics platform, Maurice Flex at the WCBA Conference. As a reminder, we have seen tremendous adoption of the Maurice, since its launch in 2016. With the system's ability to provide protein purity charge and identity in five minutes in an easy-to-use cartridge-based instrument driving robust demand for the platform. Maurice Flex expands on these capabilities, adding icIEF fractionalization capabilities to instrument. Fractionalization is a front-end step in mass spectrometry, where the sample to be analyzed is separated into mixture components based on differences in their size, charge or other characteristics. MauriceFlex addresses the labor-intensive and time-consuming challenges of using legacy fractionation methods, including ion exchange chromatography. This new application allows us to expand Maurice into a new $300 million market. Now for an update on our SimplePlex branded multiplexing immunoassay system Ella. Ellaâs ease-of-use sub-picogram sensitivity, smaller footprint and cost advantages continue to draw increased attention from bio-pharma and academic researchers. As our installed base of Ella systems continues to grow, now nearing 1,000 placements and utilization trends remain robust, we opened a new state-of-the-art product innovation and manufacturing facility to meet current and forecasted cartridge demand. This new facility adds laboratory, manufacturing and clean room space and increases cartridge capacity to 500,000 cartridges per year. We also successfully completed the initial ISO 1345 audit of our Wallingford, Connecticut facility as we prepare Ella to make inroads into the large and nascent clinical diagnostics opportunities that exist for the platform. ICL is possibly our largest instrument platform someday. No other tool works so well across both biomarker discovery and diagnostics. Rounding out our instrument platforms, let's now discuss Namocell, our single cell separation and dispensing platform. Recall that we closed on the Namocell acquisition in July of 2022, and we are pleased with growing interest in this novel technology as well as the progress we have made integrating the team and the business. During the quarter, a single-cell cloning workflow publication using the Namocell single-cell isolation and dispensing platform was featured in nature protocols. The study outlines a robust and scale workflow that maximize cell viability for cloning Human Pluripotent Stem Cells, or HPSC using Namocellâs low-pressure microfluidic technology, which ensures gentle and rapid dispensing of cells. We are in the early stages of realizing the potential of the Namocell platform and see a bright future for this technology, having shipped over 100 instruments to-date. Now let's shift to Diagnostics and Genomics segment where we grew revenue by 7% organically in the quarter. Let's start with a discussion of our molecular diagnostics business and the continued adoption of our ExoDx prostate cancer test. During the quarter, the team delivered the fourth consecutive quarter of record test volume as the number of tests reformed increased over 70% and revenue grew over 110% in the quarter. The combination of a strengthened marketing message to the urology community that emphasizes ExoDx is a tool to identify not only the right patients for prostate biopsy, but also drive patient adherence to biopsy recommendations, a four to five and expanded commercial team as well as the favorable impact of our reconsidered local coverage decision, LCD, with our Medicare contractor has driven sustained momentum in the business. We are seeing strong trends across the key performance indicators we track for the ExoDx prostate test, including the number of ordering doctors, the average number of tests ordered per doctor and the number of new doctors over in which all set records in the quarter. We also hired a veteran reimbursement executive with a redesigned game plan to drive favorable coverage decisions within the private payer community. With less than 20% penetration of urologists in the US, who have used the test at least once and the potential to expand the usage of our test among current doctors by 5x, we are positioned to continue the strong growth in this business for the remainder of fiscal 2023 and for the years beyond. Continuing with molecular diagnostics. Asuragen branded genetic carrier screening and oncology kits continue to grow double-digit. During the quarter, Asuragen announced a partnership with Oxford Nanopore Technologies to develop assays designed to deliver more accurate and reliable options for reproductive health and carrier screening. The collaboration combines Asuragen's long-range PCR and Oxford Nanopore's any-read length sequencing capabilities in a single workflow to identify genetic sequence variance in both hard to decipher genes and conventional genes using a single sequencing system. Our spatial biology business, branded ACD, grew mid-single digits in the quarter as a softer biotech market provided some headwinds similar to Protein Sciences. Our professional assay service business had a strong quarter as revenue increased nearly 20% year-on-year. Historically, accounts leveraging ACD's pharma assay services capabilities for biomarker discovery eventually transition into product customers, making strength in the service business a proxy for future product demand. We recently expanded our ACD portfolio with the launch of RNAscope Plus small RNA, enabling the simultaneous fluorescent detection of small regulatory RNA using our new Vivid dyes, including microRNA together with three target RNAs or RNA biomarkers in the same tissue section at single cell and sub-cellular resolution. RNAscope Plus provides gene therapy researchers with a valuable new tool to quantify changes in gene expression and cellular function in response to the introduction of regulatory RNAs, which is essential for optimization efficiency and safety. I would note, RNAscope Plus was initially offered through spatial biology's professional assay services where it saw an overwhelmingly positive customer response. Lastly, we experienced low single-digit growth in our diagnostic reagents and controls business as order timing among a handful of customers impacted the quarter. Looking at this business on a trailing 12-month basis, growth remains in the mid-single digits. With patients returning to their physicians, demand for diagnostic testing is increasing. This favorable macro environment, plus a strong pipeline of additional products positions our diagnostic reagents and controls for future growth. In summary, despite the temporary challenges created by the current biotech funding environment and the COVID impact in China, our team continues to successfully navigate this dynamic environment and grow the business. The long-term tailwinds supporting proteomic scientific research, cell and gene therapies, spatial biology and liquid biopsies remain firmly intact, and our portfolio is ideally suited to capitalize on these opportunities as they shape the future of life science research and health care. The team to execute our strategy is in place at full strength, and we remain well-positioned and more optimistic than ever to deliver on our long-term targets. Thanks, Chuck. I will provide an overview of our Q2 financial performance for the total company, provide some additional details on the performance of each of our segments and give some thoughts on the remainder of the fiscal year. Before we get started, I'd like to remind everyone that Bio-Techne executed a four-for-one stock split on November 29, 2022. All references to share and per share amounts have been retroactively adjusted to reflect the effects of the stock split. Now let's start with the overall second quarter financial performance. Adjusted EPS was $0.47, consistent with the prior year quarter. Foreign exchange negatively impacted earnings per share by $0.02 or minus 4% in the quarter. GAAP EPS for the quarter was $0.31 compared to $0.49 in the prior year. The biggest driver for the decrease in GAAP EPS was a nonrecurring gain on our previously held ChemoCentryx investment in the prior year period. Q2 revenue was $271.6 million, an increase of 4% year-over-year on an organic basis and 1% on a reported basis. Foreign exchange translation had an unfavorable impact of 4% and acquisitions had a favorable impact of 1% to revenue growth. As Chuck mentioned, following a period of RedHawk [ph] biotech funding last year, we are seeing a normalization of purchasing trends from these customers. Additionally, COVID is now sweeping through China and slowing the amount of research activity in this region, temporarily impacting the growth of our proteomic research reagents, analytical tools and spatial biology products. Adjusting our organic growth rate for large orders from a handful of biotech customers that did not repeat and normalizing for China, our organic growth would have been double digits in the quarter. Summarizing our organic growth by region and end market in Q2. North America grew low single digits, Europe grew mid single-digits, China grew mid single-digits, while APAC was flat due to prior year government stimulus in Japan not repeating this year. By end market, biopharma grew low single-digits, while academic grew mid single-digits. We are encouraged by the revenue growth from our large pharma customers as well as the underlying health of the overall bio-pharma end market as is reflected in the continued strong momentum in our run rate business. For academia, we are encouraged by the recent NIH outlay data, which showed a 13% year-over-year increase in our second quarter. We anticipate this strong NIH allay begin to work its way through the system and benefit academic life science research spending in the near term. Additionally, the 5.6% NIH budget increase and 50% ARPA-H budget increase for the federal government's fiscal 2023, sets the stage for a healthy academic end market for the remainder of our fiscal year. Moving on to the details of the P&L. Total company adjusted gross margin was 71.7% in the quarter compared to 72.3% in the prior year. The decrease was primarily driven by unfavorable foreign exchange. Adjusted SG&A in Q2 was 27.9% of revenue compared to 26.5% in the prior year, while R&D expense in Q2 was 8.3% of revenue compared to 7.5% in the prior year. The increase in SG&A and R&D was driven by wage inflation and the acquisition of Namocell. The business has implemented strategic price increases during the first half of fiscal year 2023 to offset the dollar impact of inflation and operating income. However, the dollar for dollar offset did have a negative impact on operating margin. Adjusted operating margin for Q2 was 35.5%, a decrease of 280 basis points from the prior year period. Negative FX impact decreased margin by 100 basis points, the pricing inflation dynamic decreased adjusted operating margin by another 50 basis points. While the acquisition of Namocell and timing of other fiscal year 2022 growth investments drove the remainder of the margin dilution for the quarter. For the remainder of the year, we expect adjusted operating margins to continue to expand sequentially, ending the fourth quarter of fiscal year 2023, up to 100 basis points higher than the fourth quarter of fiscal year 2022. Looking at our numbers below operating income. Net interest expense in Q2 was $1.2 million, decreasing $1.3 million compared to the prior year period. Our bank debt on the balance sheet at the end of Q2 stood at $200 million, a decrease of $64.7 million compared to last quarter. Other adjusted net operating income was flat in the quarter, an increase of $1.2 million compared to the prior year, primarily reflecting the foreign exchange impact related to our cash pooling arrangements. Moving further down the P&L, our adjusted effective tax rate in Q2 was 21%. Turning to cash flow and return of capital. $64.3 million of cash was generated from operations in the quarter and our net investment and capital expenditures was $6.1 million. Also during Q2, we returned capital to shareholders by way of 12.5 million in dividend. Following our four-for-one stock split, we finished the quarter with 161.8 million average diluted shares outstanding. Our balance sheet finished Q2 in a very strong position with $196.8 million in cash and short-term available-for-sale investments bringing our net debt position very close to zero. Going forward, M&A remains a top priority for capital allocation. Next, I'll discuss the performance of our reporting segments, starting with the Protein Sciences segment. Q2 reported sales were $203.9 million, with reported revenue decreasing 1%. Organic growth for the segment was 2% with foreign exchange having an unfavorable impact of 4% and acquisitions contributing 1%. Despite the temporary headwinds and the tough year-over-year comps that Chuck pointed out for this segment, I will highlight that the longer term five-year organic CAGR for this segment is approximately 11%. Operating margin for the Protein Sciences segment was 43.8%, a decrease of 170 basis points year-over-year with operational productivity more than offset by foreign exchange, price inflation dynamics and the impact of Namocell acquisition. Turning to the Diagnostics and Genomics segment, Q2 reported sales were $68 million with reported revenue increasing 5%. Organic growth for the segment was 7% with foreign exchange having unfavorable 2% impact. As you heard from Chuck earlier, our Exosome Diagnostics business remained incredibly strong in the quarter, as our fortified marketing message and strengthened commercial team continue to drive test volume and revenue growth. Our spatial biology business grew mid-single digits in the quarter, with strong performance in our professional assay services and microRNA businesses, partially offset by order timing from a few bio-pharma customers. Moving on to the Diagnostics and Genomics segment operating margin at 12.2%, the segment operating margin decreased 470 basis points compared to the prior year. The segment's operating margin was unfavorably impacted by foreign exchange, price inflation dynamics and the timing of strategic growth investments. As we think about the setup for the second half of our fiscal year, it is important to reflect on the drivers of our performance in the first half relative to our expectations at the beginning of the year. Our Q1 relative performance was muddled by the pent-up vacation activity we saw from our customers, as well as heightened inflationary and recessionary concerns, especially in Europe. In Q2, we saw the slowing of large orders from our biotech customers that possibly could have been foreshadowed by the slowdown in biotech funding earlier in the calendar year. However, the impact to our business was not realized until the December quarter just ended. And throughout the entire first half of our fiscal year 2023, the COVID situation in China has been on a roller coaster with rolling government-mandated shutdown and now widespread infections. Despite all of this, as Chuck and I have expressed on this call, we believe our end markets are still very healthy, and our portfolio positioning is still very strong. Big pharma demand is high. Academic research budgets are on the rise, and most biotechs are not broke, just being more prudent. And finally, China appears to be closer to the end of the COVID roller coaster than ever before with pent-up demand and strong Chinese government stimulus setting up for what could be an incredible calendar year 2023. But we need to get through the March ended quarter, our fiscal Q3 first, and right now, it appears as though our organic growth this quarter will be similar to that of Q2. People in China are still sick with COVID and in Protein Sciences, we know of several large biotech orders that occurred last year in Q3 that are unlikely to repeat this year. Also in Q3, we will be lapping the large milestone payment realized in our Diagnostics and Genomics segment from the ExoTRU kidney transplant rejection assay licensing agreement made with Thermo Fisher last year. As we lap these difficult year-over-year comps, the normalization of biotech funding runs its course and COVID headwinds alleviate in China, we anticipate organic growth to improve significantly in Q4, positioning the company for continued progress on delivering our long-term strategic and financial targets. That concludes my prepared comments. And with that, I'll turn the call back over to the operator to open the line for questions. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Puneet Souda with SVB Securities. Please proceed with your question. Yes, hi Chuck, Jim, thanks for taking the question. So, first one, Chuck, I think it would be helpful if you could parse out a little bit more on the impact from the emerging biotechs. Are these smaller emerging biotechs, I think Jim said they're not going broke, but the number of projects are lower. But could you -- if you could describe a little bit more into that? And then is this a spreading to larger bio-pharma -- or the bio-pharma remains largely intact? And then how much of this is sort of COVID adjacencies. And if you could parse out what were -- what segments or what type of products were these sort of bulk orders and then, again, I appreciate that this is comp-related normalization that you're expecting. But I think the question is sort of how long do you think this can last in duration because obviously, funding concerns were -- they're here now. But just wondering how long will it be before -- sort of we see improvement here in a meaningful way? Okay. I'll try to cover that in less than 20 minutes. Thanks, Puneet. As the quarter finished, we are a little ejected. It's my 40th quarter, and it's been a few years since we've seen a growth rate like this. But as we look back into the data, man, we saw some amazing things. One, our run rate business, most of our business, both -- here in Europe was double-digit. Very strong end markets there, academia about the same, no real issues there. Biotech funding, we've -- as I mentioned last, we started digging in more and more about just how much are we becoming more of a front-end research company supporting our customers as we mitigated from academia to bio-pharma. But within that bio-pharma, how much is really biotech. And with that biotech, how much are really new biotech and start-ups and fresh research and leading-edge stuff. And it's about 30% is the number. About 20-some of most of our businesses has been in instruments, it's about 40%. And then -- and I think that's it's a funding issue right now. And as we dig in more, it's going to wash through, but there is definitely a growth being prudent. Their funding is solid right now, but they're trying to make things last. If you're further along in clinical, as you're probably okay, because it's committed. And if you're doing -- if you're a startup, there's actually funding. If you're kind of out there, but looking for your second round, it's tough right now, and it's just the way it is. So that long -- that's driven a lot of potential growth in OEM and a lot of larger orders as people are -- were starting these clinicals and doing special things with us. And there are a lot of one-off comps. Literally, it's a handful of deals that bring us back to like double-digit growth. It's kind of incredible. Now, talking about bio-pharma, the pharma side with you, that's just more about overall conservatism in general and the overhang of COVID, like vaccine makers, just the gravies over here, right? So it's just kind of a normalization, not long term, just kind of renormalizing and just, again, a little longer out for things and waiting things. And we get that vindicated to by looking at our funnel instruments. It's larger than it's ever been. Our instrument funnel is tremendous. It's just the conversion rate has slowed down a lot, as getting capital has been -- has gotten tighter for teams looking to buy instruments in our segments. And we see that flowing through as well. China will explode in Q4. I think, it may be a little better this quarter. We actually had mid-single-digit growth. I don't know how. There wasn't anybody working in the whole quarter, practically, but we still had growth. It will come back with a roar, I think, and we've seen that before. And we also have the government stimulus hitting and should be kicking in by Q4. The tenders are going out now, we've had that vindicated. So it should be a one-two punch there for China by Q4. I think that may cover most of your questions. Did I miss any? Yes. No, I think you covered it well, Chuck. Thanks for that. And just -- I'll keep it very simple for Jim. Just on 4Q, I appreciate your comments on Q3 being similar to 2Q. But 4Q, just even if I have double-digit increases there, I'm landing for the full year and single -- in single digits, so for total organic growth. So just wondering, does the aspiration for 15% or mid-teens sort of growth rate longer term still intact. If you could elaborate a bit on that. Thanks, so much. Yes, they are still intact. And, yes, the math would suggest that likely not hit double-digit growth for the year this year, even if we hit double-digit growth for Q4. But as I mentioned in my opening comments, if you look at it from a multi-year CAGR, we're still in the low teens and would probably end of the year still in the low teens on a multi-year basis. And that's essentially on track to where we said we'd be at this point in our five-year journey. So the mid-year -- the mid-teens is the average over five years, but again, as the cell and gene therapy continues to ramp and become more material for our business, particularly the GMP proteins, as well as the Exosome becomes more material to our business and continues at those kind of growth rates, and as Chuck alluded to, that we're still barely scratching the surface of the potential there, that's what kicks us into the mid- to higher teens growth rates later on in our five-year plan. So as far as we see it, we're still on track. Hey. Thanks. Good morning. Maybe kind of first question, kind of dovetailing Jim and Chuck on what Jim was just talking about. You're still targeting this $2 billion of revenue by FY 2026. I do think in your new deck, maybe you moderated some of your expected growth for instruments and on the spatial side. Can we just touch on kind of your latest thoughts on the path to $2 billion by FY 2026, once we get beyond some of these kind of near-term dynamics that you discussed? Thanks. Yes. We're not coming off that at all. I think the ink isn't even dry on our last analysis. I mean the bottom line is we got way ahead of the curve and I had a forecast last couple of years right in COVID and some of that's re-normalized, but we're still safely in the $2 billion number, we think. A couple of reasons, look at some reflex coming out. We're going to be now attacking $400 million market, $300 million in the HPLC market, for fractionization, just skipping whole while seeing right to mass spec, which can save weeks and months of work in an analytical lab at biopharma customers. And also the protein characterization market, it's a small market, $100 million but peptide mapping is a very important process, and we -- this machine can do that. And so it's going to grow in that category along with everything else that's been doing. It's been -- and things are picking up in cell and gene therapy for being spec-ed in for just good old-fashioned QC for purity, et cetera. ELA is just going to be on fire. We're doing about 90,000 cards a year now. We just finished the factory for 500,000 cards. We've got 1,345 coming. It's just almost done, and we're going to have diagnostic research coming out of our ears, we think, on top of biomarker discovery. So, this is going to be a platform that's going to get bigger than I think we have in our $2 billion model. I can go up and down this, but we're also, I think, possibly light on exosomes. Exosome is screaming now, 100% plus a quarter a scene in sight. We have a nice portfolio of new diagnostics, new tests coming out where we've got partners calling, the team is doing great. We've got a great new team with a new executive for the payer strategy on someone who's actually connected. And we've made more progress with private payers last quarter that we've made the last two years, to be honest. So, hopefully, more on that coming soon as we put some numbers to it. So, the end answer for you is all the stuff that we are waiting to start growing. And then by the way, cell and gene therapy, proteins on top of 185% comps still grew almost 20% this quarter. Nothing is slowing down here. All this new stuff start to pick up, but our core, which is the biggest part hit a speed bump because of the OEM and the biotech funding issues, which is going to recover quickly. We need this new stuff because that's how we get to high double-digit growth, as Jim alluded to, but it's picking up. but it's going to happen. And cell and gene therapy, a $100 million portfolio for us right now, growing to $2 billion in the next 8 to 10 years. So, we're not letting up. I don't see any issue right now at all. It's the things we put in place years ago are starting to happen, and we're going to have some bumps here and there with the kind of growth rates we have. I do think we kind of must the forecast for sure. I mean we did not appreciate -- fully appreciate the comps and the strong growth we had last couple of years due to COVID. We tried to level it out by averaging over the couple of years, as Jim pointed out, and I think the recovery will be good. Our brands, we've just done brand studies, R&D systems, still number one. Bio-Techne is actually moving right up the ladder two after 10 years of being out there. We've got great association. We keep investing digitally, and that's continued to pay back. There's no issue to back off the $2 billion. It's just that we probably aren't as safely in the block of hitting it as we were, but I think we're still there. And Namocell is going to be in the mix now too, so. Got it. Thanks for that Chuck. And then just the other big picture question. I heard Jim mention that I think M&A is the number one priority on the capital allocation side. So, I think that speaks to appetite. But maybe just kind of any thoughts on where seller expectations are in the current environment and any areas of interest? Well, time heals all here. So valuations have come down. They've come down all year, but there's still denial, but there's less denial. There's not a robust IPO market right now. So small companies have limited options. We talked about the funding issues, right? So that means a lot of small companies are going to be looking for ways out and help. So our phone is ringing more than it was. We're very active. We've been active, but we're definitely more active than usual. And I hope we can land a few more. We landed Namocell not too long ago, and we've got some more in the pipeline. And yes, it is our number one capital strategy. We're at net debt zero. We've got â we've got a $1.5 billion work chest rate to go with cash, and we'd love to put it to work. I don't think we'll go over four times leverage, but I'm going to get up near that. Board is very supportive of us getting much more aggressive in M&A. But it's like what you â the â your question is all about the price tags, right? And we've got to get real price tags to get to make to close some deals. Good morning, guys. Thanks for the questions. Chuck, on GMP proteins. Can you just refresh your view on how you think growth shapes up there, when you guys are opening up to St. Paul facility, you talked about expecting a couple of years where revenue basically doubles. It sounds like you dipped a little bit below that, but maybe now you're accelerating again. So what do you think the trajectory there is relative to the overall capacity, which I think at the time of like $140 million to $200 million? Yeah, there's a little bit of overlap, even in this â in the area we'd call OEMs. So we've got a lot of customers like 180 customers now for gene proteins, but only a handful that are really sizable and they're a little bit lumpy still. We have some year-on-year comps in the area, they are tough as well. Even there, we still had a pretty good quarter, I'd say. And going forward, I think it is going to accelerate. We added another product to the same St. Paul were its fixed. We'll more than double that in the coming year. We have the largest menu for regenerative medicine, and we're moving with most of those over the St. Paul facility in the coming year or two as well. And we're number one there. We're playing catch-up still in the CAR T area, but it's growing strong. It's still kind of, I think, going to be a double kind of year, maybe just a hair under this year, but it won't be too far off, we don't think. And next year should start lighting up as we land a few more larger accounts and we get some things further up in the clinicals to get more volume going. We call it turning minerals in the tunes and tunes in the whales. So we have a whole pipeline of how we move these customers forward. More of indication, we had a few of these customers are fairly sizable, and they went to zero, because their funding is tight right now. So they're going to probably come back online next year, we think, as they get more funding, but they've had some stalls in some of their clinicals. These are small to mid-range biotechs that were kind of hot last year and not so hot this year. They're customers. We're also seeing that with Wilson Wolf as well. It's definitely slowed down, seeing the same thing. Area isn't anybody who has a business that's really in the CAR T, in the biotech side in clinical, I can't say the same thing. It's just honest to God, true. There are things have slowed down. There is less funding and there are less clinical starting, and that's just reality. I don't think it's long term. I think it's just a blip for this year, but it's a reality. Okay. Okay. That's helpful. And then I guess, I need to go back to the long-term targets here just because â in order to hit that 17% organic growth CAGR that you laid out for 2021 through 2026 and that gets you to the $2 billion at least by my math, you basically have to do a couple of years of 20% growth. And one of the things that we're talking about is how hard comps can be. So apologies for beating a dead horse here, but I guess I just have to ask explicitly if that's at all a decent way to think about out-year growth? Well, the OEM side of things was bad enough and just on a handful of deals where it took our antibody and our protein business to near to about flat. And that's a short-term blip. We need mid-level, mid-digit growth in that category. We've had way higher than that for the last two years, and in fact, double digit, so I'm not too worried about that. It's more an issue about the back end and making sure that both cell and gene therapy and exosome as a platform can get to 45% to 50% growth in that range. That's what's got to happen. Everything else is within the air bars easily to hit there, but we've got to get to that level. And then we've got a couple more years to get to that point. I don't think we're shook about it. Things can only grow so fast, and we're kind of growing pretty fast. I'd say I just add that a little bit on. I mean, as I -- we mentioned in the call earlier, in literally a handful of customers, biotech customers, smaller biotech customers was a difference between double-digit growth and mid single-digit growth for us this past quarter. So that's how quickly it can flip the other direction as well when things come back online. Hi. Thank you. Chuck, in the past, you've talked about hiring challenges as being a gating factor to your growth and wanting to hire more. Can you give us an update on trends there? Are you still planning aggressive hiring, or have you moderated your ambitions there? No, it's a very insightful question. And I didn't bring it up on the call, but it is more late-breaking news, but we definitely had turnover in our sales force in the biologic platform area. As you know, a lot of instrumentation, things that were not in pretty hot still, larger metal things. And there's been a lot of attrition, and we lost a fair number of people. We're at full strength again, but there's definitely a component there. On spatial, we've come all the way back, I think, really down to one. Overall, we're riding our attrition to kind of stay leaner here as we ride through it. You saw our margins are held pretty well. We're on track. Part of that is that we've just not replaced everything through attrition. We had a pretty big spend plan for this year for this plan to hit these double-digit targets and they're not there. So we pulled back like any good operator would. I think we'll end up the year up 100 to 200 people, but not the 300 to 400. I think the salespeople is the biggest risk. I think there is a productivity hit we probably took in the last quarter or two off of 1,000 people turning over last year, a full third of the company that is probably unappreciated. And that will also level out going forward. But we're watching that very carefully. We're working it hard. We're changing. We've done a lot of market upgrades as wage inflation is a big hit. I mean, I think we've done a remarkable bottom line considering all the wage inflation we've actually had to absorb this past year. And we're on fighting it like everybody else. But we have a great portfolio, a lot of great sexy new products in our road map, and we're still in the business of helping people and helping people develop drugs, and that interests a lot of people to come on board. Demographically, we're a much younger company now than were three, four, five years ago and that makes you want to have more changes too. ESG is very important to us here. We have a lot of different new groups and clubs and dealing with different levels of diversity. The company has never been more focused on that. We're over 50% female in our management. We're 25% Chinese. So we've got a -- award this year for our diversity and stuff. So we're focused on all that. But youth and diversity are key in managing. That is a key to attrition, I think. Appreciate all that color, Chuck. And my follow-up question on China, I'm not sure I know how to quantify the word explode, but when it comes to the RMB1.7 trillion loan package. What are you seeing on the leading indicators on that? Are you seeing quote activity tied to that spend? Are you seeing RFPs? Is there anything that gives you confidence that money is going to start flowing beginning that June quarter? I had a meeting on that, just asking those very same questions with the leadership in Asia. And, yes, tenders are going out and there is discussion. So it looks like it's very real. It's about a two-month process so I don't think we'll see much of that here in Q3. It's a Q4 activity. We kind of have them at over 100% to plan in Q4. Of course, they're trying to negotiate that. But I think it's well over 100%. If there's a reality around this RMB1.7 trillion stimulus, which is really instrument driven, then it will be real. I think there's pent-up demand already. We're already -- we had mid-single-digit growth the last quarter with nobody working. So I think it will be a quick comeback story. We have data on that, right? This happened two years ago as well after the COVID quarter, and I think it will be similar. And government is very focused on prioritizing healthcare. I mean that's what the stimulus is for. I don't think anything changes there. People just got to get back to work. Kind of tough to read right now, too, because they're just coming off a new year now, right? So they just come back to work, I think, this week even so. And we're coming back fast. I mean, we had the whole office. 90% of our people are sick at the same time. Like within a two-week period, they all got hit, that was actually similar anywhere in Shanghai. So in customers, too. So it's going to snap back pretty fast, we think, unless there's some new variant. But I asked questions about that too. About when do they expect the second wave and they don't really expect one for a while. According to the people we talk to, everyone's already got it. Hey guys, thanks for the questions. I guess first, Jim, just circling back, you said adjusted for China and RUO region bulk ordering organic growth would have been double digits. Can you just quantify the bulk ordering portion? It seems like China is maybe a two-point headwind in bulk orders, four points or maybe a little bit more. Is that the right -- about the right ballpark? And then can you just quantify any bulk purchasing activity in the third or fourth quarter of last year, just as we think about comps heading into the back half of the year? So yeah, your percentages are pretty close to what we show as well. And yes, that's why we said we expect Q3 to be very similar to Q2 in terms of organic growth because the number of one-time bulk orders from these small biotechs was similar to Q2, perhaps a little bit less, but also keep in mind that we had the very large ExoTRU licensing agreement with Thermo Fisher in our Q3. We knew â we didn't know all along that Q3 was going to be our most challenging growth quarter because of that very large ExoTRU agreement that occurred. So that's an additional headwind that we didn't have. But we think with the overall momentum of the business, we'll be able to cover some of that sequentially, so that sequentially our growth rates will be similar. Okay. Got it. And then can you just talk to the rebound in Europe. On your last earnings call, you talked about September being up double digits and that strength continuing into October. So can you just walk through how things unfolded throughout the rest of the quarter? Yes, it was definitely a story of Europe doing better than the US and from last quarter. We had run rates 12% plus in Europe. Overall, it was about a mid- to high single-digit kind of level in Europe. So, a good recovery, not all the way back, we want, but remember they were negative last quarter. So, that was good. We have new management, hopefully going into place soon. There as well working on that. We didn't talk about -- we put in a whole new ERP system and without a glitch. So, we're -- that's all coming online. We have a whole new warehousing system in Dublin now to supporting Mainland Europe, and that's coming online with no glitches. So, been a lot of good things in Europe as well. Going forward, I think the risk of the war and energy in Europe, the winter and stuff has been mitigated pretty well. So, we're kind of focused on really getting the teams up to speed, new management in place, completing the mission on cross-selling and the commercialization strategies and tactics that we were in the middle of doing before COVID hit and all that. And funding seems reasonable in Europe, country-by-country. We're still weaker in Germany than we want to be. We always have been. So, we're really focused on trying to build on Germany more going forward. I think that's key. I think there's a risk in the UK given Brexit still, but so far, so good, but I guess I'd answer it that way for now. Europe is out of the hot seat from last quarter. Now, we got OEM issues in the US to deal with. Hey guys. Good morning. Thanks for taking the questions. Jim, maybe kind of a follow-up on one of the earlier questions in terms of headcount. As you guys kind of see the growth slowing for a little bit, obviously talked about 3Q being in this area as well. How are you thinking about managing expenses? How are you thinking about the margin cadence? How nimble can you guys be in terms of protecting the bottom line. I guess the margin has held up pretty well this quarter relative to the topline. So, just curious how you're thinking about that piece and if you're changing any growth investments or any way you're thinking about the P&L? Yes, I mean as we've talked about the last couple of quarters. We were behind in our investment -- investments and hiring for the most of fiscal year 2022 and even really fiscal year 2021. And we made great progress in catching up in those investments and catching up on that head count in Q4 in particular. And that's been a reason for our margin drag. One of the reasons for our margin drag in the first half of the year. And I think we've also been fairly public about this in the past where -- not just us, but everyone was dealing with retention issues for the last year and a half. And when you took about 3,000 employees that we ended the year at a relatively still at today, roughly a 1,000 of those employees have been hired in the last year because of both new hires but also replacements of loss folks. So, that's a huge, huge influx of new people in the organization that need to get up to speed and frankly, get productive. And so we're really focusing on getting the productivity of those folks we hired last year. And so that's really the focus of this year, which is why there's not a lot of new hiring happening nor needed. That being said, there are strategic investments we're making, particularly around our Molecular Diagnostics division to support the amazing growth we're seeing in our prostate test there. And there's a few other R&D programs that were slowing down just a bit, just to catch up from all the hiring we did last year, but nothing that's going to have any issue with our long-term growth plans. Well, let me interject here. Remember, one of our reasons for being successful over the last 10 years, I think, is our prioritization process. We've talked about it a lot. A lot of you have had the short course meeting with us offline. And it allows us to change priorities and change mix of people and programs very quickly. We do a zero-based every year. And we're already in the middle of that in making those changes. So we've doubled the size of our Namocell team since we hired them. We are adding people, we're up 50% in headcount in our exosome teams in the last years because we're waiting for trigger points to happen. They happen. We told you we'd start investing when we saw that. The reconsiderations went through. Urologists are seeing patients again, and we're lighting it up. So we're adding a lot of people there, but we're changing the mix and some other things. We're holding off and some things that are just prudent to do right now until we see a reason to change. Remember all -- myself and all of our leaders all come from working in large companies, all run billion-dollar-plus P&Ls, every one of them. They know how to operate. No, that's a great point, Chuck. We are actively reallocating resources towards those higher growth platform. So it's our prioritization process at work real-time. And as that relates to margins and by holding our overall cost base, we're relatively neutral, maybe a slight uptick throughout the year, but relatively neutral for the remainder of the year. Anyone who follows our business knows that our second half is. From a revenue perspective, seasonality-wise is much stronger than our first half, simply because our customers are at the bench more days than they are in the first half of the year without all the vacation interruption. That additional revenue on top of that same cost base should allow our margins to continue to expand sequentially. Yeah. Got you Chuck, and then maybe one on Wilson Wolf. Can you just refresh us in terms of the milestones and timing there? Has anything changed as your conviction and going forward with that change and all? We're running out of time, so I got to move fast here. They've slowed down, too. But as you know, the targets are $92 million in revenue or $55 million in EBITDA for the first tranche. They're very close on one of them. And we may strike soon, we may choose to wait. It's as much strategic as it is anything else. We've got the cash, we were ready to go. So we might choose this to weigh in and go sooner than later. We're not sure yet. But it's very -- we're getting close to trigger. I got to believe in the next things pick up at all for them, we're going to hit it soon. If they don't pick up, but it might be in the couple of quarters. But we're within our sights here. Nothing has changed strategically. Nothing has changed culturally, nothing has changed in the relationship. The teams are tighter than ever. If anything, they're pushing to get closer and get this to happen. So a great question. It's looming, and I can't wait. Hey good morning, Chuck and everyone. Just one here on China. Just -- is there a way to parse out how much of the slowdown was between the consumables versus the instrument business? And the second part to that would be in terms of the seamless funding coming on, do we have a sense of the duration of that, i.e., will that be a tailwind to calendar year 2024 as well based on some of your conversations? I think stimulus in the US, or anything related to that is here and gone. I think the OEM comments are more about consumables and the instruments are slow to basically of just prudent conservatism buying biotech and biopharma and funding in general. So it fits more funding on the instrument side and the conservatism and OEM is more on the consumable side. Well, in China, China is just they're not at work. They'll be screaming back here very soon. I'm not worried. Yes, I'd say the slowdown from our, call it, 20% plus normalized growth to mid single-digit growth was across the board in both instruments and consumables. And rains to be seen how long the stimulus impact last, but it's going to take more than a quarter to spend that much stimulus in our opinion. So I think for the one point, it will be a multi-quarter, if not a year in benefit. It will be this whole calendar year. They're intending it for that. They're intending it for health care. They're intending it to be in hardware more than anything else. And we play big there. We're about productivity and hardware. So we've got more platforms than ever. So we're going to share in that as well. I mean just to put that into scope, it's 1.7, if that's the real number, that's way bigger than our entire NIH budget. So it's going to be good. It would be good for everybody. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to management for concluding comments. All right. Well, thanks, everyone. We'll see at the end of next quarter. I think we were as transparent as we can be. We've been doing this a long time together as a team, and we'll always be transparent. Things still look really good here. We don't see any change in our thesis. And anyway, I see the future is bright, we think. So we'll talk to you soon. Thank you.
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Greetings and welcome to the Penn Entertainment Fourth Quarter Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Joe Jaffoni, Head of Investor Relations. Please go ahead. Thanks, Frank and good morning everyone and thank you for joining Penn Entertainmentâs 2022 fourth quarter conference call. We will get to managementâs presentation and comments momentarily as well as your questions and answers. [Operator Instructions] Now, I will review the Safe Harbor disclosure. Please note that todayâs discussion contains forward-looking statements. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please see our press release for details on specific risk factors. Thanks, Joe. Good morning, everyone. I am here in Wyomissing with our CFO, Felicia Hendrix and our Head of Operations, Todd George, as well as other members of my executive team who can help answer questions during Q&A. As you can see from our earnings release and corresponding investor presentation, we wrapped up another solid year at Penn despite ongoing macroeconomic headwinds throughout the year and severe weather in certain parts of the country in December. Revenues for the fourth quarter were $1.59 billion, and we generated $468.3 million in adjusted EBITDAR. For the year, our results were slightly above the midpoint of our revenue and EBITDAR guidance ranges. We also ended the quarter on a high note with strong performance across the portfolio between Christmas and New Yearâs, which has continued into January. Slide 6 in our earnings deck illustrates our year-over-year revenue growth was driven by our Interactive segment, which despite the Mattress Mack $10 million winning bet on the Astros in the World Series was profitable in the fourth quarter with several successful state launches and impressive growth in Ontario. On Slide 7, you will see for 2023, we are guiding to a revenue range of $6.15 billion to $6.58 billion and an adjusted EBITDAR range of $1.875 billion to $2 billion. This guidance includes our new growth opportunities, including the transition of Barstool Sportsbook to our own proprietary technology platform in the U.S. this summer. It does not reflect our acquisition of 100% of Barstool Sports, which we plan to close on later this month and we will update in our guidance next quarter. Notably, we are anticipating a roughly $100 million swing in profitability in our Interactive segment in 2023 as we are just beginning to scratch the surface of what we believe will be a tremendous long-term growth opportunity for us. On the retail side, we felt it was prudent to build into our guidance some element of conservatism given the relatively uncertain economic times and increased supply in some of our key markets, including Council Bluffs, Lake Charles and Chicago Lands. Nevertheless, as we sit here today, we are not seeing a slowdown in business volumes as January was actually a very strong month for us. Turning to Slide 9, our focused marketing strategy and new technology enhancements generated approximately 1.3 million new rated customers last year in our mychoice database. Approximately 300,000 of these guests signed up in the fourth quarter, representing a 15% year-over-year increase. Notably, over 50% of our database growth in the fourth quarter came from our online offerings. On Slide 10, we show the steady annual increase in play from our younger demo with the 21 to 44-year-old segment growing from 10.8% of total retail theoretical in 2017 and to 18.5% in 2022. To further capture and retain this group, we are continuing to reimagine our properties with best-in-class retail sports books, new games, greatly enhanced technology, refreshed hotel offerings and new third-party restaurant concepts. During the quarter, we also saw a meaningful increase in our mychoice app downloads and the adoption of our industry-leading cashless, cardless and contactless technologies, which we call 3Câs and is highlighted on Slide 11. With the launch of Missouri last week, the 3Câs are now active in 21 properties representing approximately 70% of our total retail company-wide EBITDAR. As a result of the continued rollout of this technology at new properties as well as increased engagement in our current 3Câs properties, we had 136,000 mywallet customers and received $80 million in total mywallet deposits as of year end, which represents significant sequential growth. As we have emphasized in the past, those guests who use the digital wallet demonstrate superior loyalty through increased visitation, time on device and total theoretical. And our effective cross-marketing efforts combined with our ability to deliver a seamless, best-in-class customer experience has led to a 25% increase in guests who engage with us across multiple channels. On the retail sportsbook side, we recently opened temporary sportsbooks at our 4 casinos in Ohio. Based on the results to-date, we are anticipating our permanent Barstool Sportsbooks, which are on track for Q1, will perform very well in a state with such passionate, knowledgeable sports fans. With the addition of Massachusetts this week, the birthplace of Barstool Sports, we now operate 31 retail sportsbooks across 14 states with market share of approximately 18%, excluding Nevada. This obviously positions us well for the upcoming Super Bowl, March Madness and beyond. As I mentioned, our Interactive segment generated positive EBITDA â adjusted EBITDA in the fourth quarter inclusive of expenses related to our online sports betting launches in Maryland and Ohio in an unfavorable sports betting outcome in the World Series. Following our successful playbook in Kansas and Maryland, as you will see on Slide 13, our omnichannel marketing approach in Ohio led to Barstool Sportsbooksâ strongest launch to-date. Our deep customer database, retail footprint and powerful Barstool Sports marketing engine contributed to a record number of first-time depositors at launch despite minimal external marketing expense. Importantly, more than 50% of our online handle came from our existing database. As highlighted on Slides 14 and 15, we are seeing improved iCasino results, thanks to our strong performance in Ontario with our iCasino GGR and Penn Game Studios handle experiencing significant year-over-year growth. Our ability to continually introduce new games, including proprietary content from Penn Game Studios sets the stage nicely for future growth. For example, we have got theScore Bet branded Blackjack games set to launch in the first quarter of this year. Ontario is now our top market in North America for both sports betting and iCasino with strong growth and positive trends through our first NFL season, including record gross and net revenues in December. We were able to maintain our market share in Ontario this quarter despite a 50% increase in the number of operators in the province, which I think really speaks to the quality of our products and the stickiness of theScore Media ecosystem. Turning to Slide 16, the transition of theScore Bet to our fully owned tech platform last summer has provided us with advanced trading and promotional tools that have led to impressive metrics relative to our performance in the U.S., including an approximately 85% increase in 3-month retention, an almost 20% improvement in our cross-sell rates to iCasino, and a 114 basis point increase in our hold rates. Our success in Ontario is very promising in terms of the upcoming migration of the Barstool Sportsbook and Casino to this tech platform later this summer. Despite well-known headwinds currently in the digital media and advertising space, as you will see on Slide 17 and 18, theScore Media business and Barstool Sports continued to produce impressive revenue and engagement results driven by compelling content and an exceptional product experience. In October, we completed the initial integration of the Barstool Sportsbook into theScore Media app. This was great timing considering theScoreâs mobile media audience is more engaged than ever with a 35% year-over-year increase in sessions during the fourth quarter and meaningful annual user session growth. Meanwhile, Barstool Sports achieved record revenues in 2022 while investing in and expanding into new verticals, including producing and broadcasting live sporting events, such as the Barstool Invitational College Basketball tournament on November 11 and the Arizona Bowl on December 30. We are excited about the upcoming acquisition of the remainder of Barstool Sports in February later this month and look forward to welcoming them to the Penn Entertainment family. As you have often heard us say, the combination of Barstoolâs vast loyal audience with theScoreâs fully integrated media and betting platform will provide us a powerful top of funnel for new customer acquisition and organic cross-selling opportunities like those that we are seeing in Ontario today. Finally, before turning it over to Felicia, I want to take a moment to congratulate our entire team for the significant progress we made last year on our ESG journey. We have come a long way in a relatively short amount of time in partnership with our Boardâs Nominating and Corporate Governance Committee as well as our internal ESG and diversity committees. I am particularly proud of Penn being named by Forbes Magazine last year as the top publicly traded gaming company on their list of Americaâs best employers for diversity. In addition, Penn was once again an employer of First Choice in the Annual Bristol Associates Spectrum Gaming Executive Satisfaction survey and Penn Interactive came in first place in their iGaming and mobile sports betting category as well. As it relates specifically to the fourth quarter, we finalized our Scope 1 and 2 greenhouse gas emissions assessment and plan to publish it in April, along with our inaugural SASB disclosure as part of our 2022 Corporate Social Responsibility report. In addition, we completed our mandatory company-wide diversity, equity and inclusion training and will soon begin the second phase of training focused on our leadership teams. Finally, I am proud to report that Penn Interactive received RG Check iGaming Accreditation from the Responsible Gambling Council for its online gaming operations. Penn Interactive is the first U.S. operator to undergo this accreditation process which is widely regarded as one of the most comprehensive responsible gaming accreditation programs in the world. Thanks, Jay. As mentioned, we achieved solid revenues of $1.59 billion in the fourth quarter with adjusted EBITDAR of $468.3 million and a 29.5% adjusted EBITDAR margin. For the year, our results were slightly above the midpoint of our revenue and EBITDAR guidance ranges. Our retail properties generated adjusted EBITDAR of $487.1 million. Now while we typically do not like to callout weather, the severe storms and freezing temperatures prior to the holidays did have an impact on demand, in particular at our properties in the Midwest. Importantly, as the weather broke, demand returned and we saw strong performance from Christmas to New Yearâs, which continued through January. For the Interactive segment, we reported adjusted EBITDA of $5.2 million. Corporate expense in the fourth quarter, inclusive of cash settled stock-based awards was $23.6 million. Cash payments to our REIT landlords was 239 â I am sorry, $231.9 million, cash taxes were $26.5 million, and cash interest on traditional debt was $29.1 million. Total CapEx for the quarter was $73.8 million, of which $1.9 million was project CapEx, mostly associated with our Category 4 Hollywood Morgantown Casino. Our fully diluted weighted average common shares outstanding as of 12/31/2022, was $168.7 million. As you know, we are guiding to a 2023 revenue range of $6.15 billion to $6.58 billion and an EBITDA range of $1.875 billion to $2 billion. This guidance does not include Barstool Sports and we will provide more color on the acquisition on our next earnings call. While we maintain our view that we can sustain retail EBITDA margins of 37% in a normalized environment, our outlook for 2023, which conservatively incorporates an uncertain economy and new supply in some markets implies a retail EBITDA margin closer to 36%. For the Interactive segment, our guidance assumes a roughly $100 million EBITDA improvement from 2022 results of a loss of $75 million. To further help your modeling for 2023, we expect â23 corporate expense of roughly $110 million, inclusive of our cash-settled stock-based awards. The year-over-year increase is primarily driven by the continued centralization of certain administrative and support functions. Total CapEx for 2023 will be $413 million and let me break that down for you as there are several moving parts. $25 million of the $413 million is insurance proceeds, which is an offset to CapEx. For project CapEx, we are estimating $87.5 million for the year as design work begins at our 4 growth properties: Aurora, Joliet, Columbus and M Resort. $200 million is maintenance CapEx and $100 million is growth CapEx on ROI generating projects such as new hotel remodels, the continued rollout of our Barstool retail sportsbooks and technology investments at our properties. On February 17, we expect to complete the acquisition of the remaining 64% interest in Barstool Sports that we do not own. The remaining interest will be acquired for approximately $388 million and we expect to use $320 million of cash to complete the purchase inclusive of the repayment of debt and transaction expenses. For cash interest expense, we forecast $164 million for the full year 2023 and cash taxes will be roughly $155 million for the full year of 2023. Our weighted average fully diluted common share count for the year, assuming no further share repurchases, is projected to be $168.1 million. Now speaking of shares, we repurchased 2.9 million shares in the fourth quarter for $91 million at an average price of $31.69 per share. This brings our total purchases in 2022 to 17.6 million shares for $601 million or $34.23 per share. Subsequent to quarter end, we repurchased an incremental 1 million shares for $31.5 million or $31.20 per share. We currently have $118 million remaining on our February 3, 2022 $750 million authorization. As a reminder, we received Board approval for further $750 million share repurchase authorization this past December. We continue to believe that our current stock price does not reflect our intrinsic valuation nor does it capture the momentum we faced this year and beyond. As we think about the cadence of our share repurchase program going forward, we will balance this view with our cash needs for â23, which includes via acquisition of Barstool Sports as well as keeping our powder dry for additional growth opportunities. Further, we remain committed to our balance sheet strength. As such, managing our lease-adjusted net leverage in the near-term will also be a factor in determining the cadence of future share repurchases. So as you think about our share repurchase activity for the remainder of 2023, you should assume that we will continue to be opportunistic, but also prudent which could lead to lower share repurchase activity this year compared to 2022. For â22, we ended the year with $2.6 billion in liquidity, inclusive of $1.6 billion in cash and cash equivalents. Traditional net debt at the end of the quarter was $1.1 billion, an increase of roughly $190 million from December 31, 2021 due to a lower cash balance reflecting our share repurchase activity. We ended the year with lease-adjusted net leverage of 4.4x compared to 4.1x on December 31, 2021. 85% of our debt is fixed rate, if you include our leases and our nearest debt maturity is in 2026. Alright. Thanks, Felicia. In closing, as we look back on 2022, it was another transformative year for Penn in which we undertook a successful rebrand of our company to Penn Entertainment. We opened 6 new retail sportsbooks, went live in a number of online sports betting jurisdictions and announced 4 new retail growth projects in Illinois, Ohio and Nevada. And this was a huge year for us on the technology front as the migration to our own tech stack in Ontario was a tremendous milestone and we cannot be more pleased with the results thus far. With full control of our product roadmap, we have been able to quickly add new features and betting markets to theScore Bet including our own same game parlay offering, which has led to a noticeable increase in hold, both compared to our pre-migration track record in Ontario as well as what we are seeing here in the U.S. More importantly, our advanced promotional capabilities are helping to deliver higher retention and higher revenue per player metrics in Ontario than in the U.S. This experience gives us confidence that there is meaningful upside for the Barstool Sportsbook and iCasino once we complete our tech stack migration this summer and are able to offer a product that is on par with our competitors. Looking ahead, I continue to be excited about our long-term potential in the iCasino space, beginning with the migration to our own player account management system, which is performing very well in Ontario. We are also taking steps behind the scenes to better connect our brands from a marketing perspective and to provide a more seamless omnichannel experience for our customers, which we think can have a meaningful impact on both our retail and online casino offerings. We have also heard a lot about the promotional environment getting more rational or becoming more rational in the online sports betting space. And I think we are starting to see this play out to some extent. For instance, our CPAs in new markets such as Ohio are very attractive compared to prior state launches. And we think this trend could certainly continue throughout this year. As you know, thus far, we have remained very disciplined and relied primarily on organic customer acquisition rather than external marketing spend. And this strategy has yielded impressive results as we were able to generate positive EBITDA in Q4 despite the cost of redundant tech stacks and abnormally low hold, which we covered earlier. Looking forward, as I noted last quarter, we think there will be an opportunity to be more aggressive from a marketing perspective post-migration second half of this year to our â when we convert to our own tech stack in order to profitably grow our market share, particularly as others are potentially pulling back. But we will continue to be measured in our approach is reflected in our EBITDAR guidance. Strategically, we certainly continue to play the long game. I look forward to sharing more information on these topics in future quarters. And with that, Frank, I think we can go ahead and open up the line for questions. Thank you. Good morning, guys. For the 2023 guidance, specifically land base, could you maybe break out whatâs in there for general macro-related headwinds as opposed to the specific hits youâre assuming from new supply threats? And I guess also, does the 36% margin guidance just reflect lower revenues or are there rising costs like labor also in there? Thanks. Yes. Iâll try to hit that at a high level. I know Todd will have some comments on that as well. I mean hereâs the approach, Barry that we took for 2023 guidance. We â as we built out our budget, from bottom up property by property and Interactive and at the corporate level. We included some anticipated impact in a few of our markets, which we mentioned earlier, Lake Charles, Council Bluffs, Chicago land. And we came up with a number. But based on what weâre continuing to read from â and look, weâre not â there is no economist on this team. Weâre not experts in that area, but we are continuing to read what all the banks are continuing to say and anticipate for 2023. And so we decided to put some level of conservatism, we took a haircut to the number that we organically came up with just based on what we know about current trends, what we know about new supply in key markets and felt like thatâs probably the prudent approach for 2023. If â what I would say at a high level is that what weâre seeing in the business today on the retail side and interactive, if that is status quo for the year, then the midpoint of guidance will end up being conservative, but itâs way too early to say if thatâs how itâs going to play out. We felt like it was the appropriate approach going into a new year. I think weâre the only gaming company out there right now thatâs providing guidance. So felt like being conservative in how we do that was probably the best approach. But Todd, you may have other things to add. Jay, I think all thatâs right. The only maybe a couple of other items, Barry, we continue to be impressed and very pleased with the industry and our approach to marketing. So we continue to envision a very rational marketing approach for all of us. But we do see some potential labor dollar increases. But much of that offset with our improvements in technology the way weâre looking at the business from a yielding and especially those non-gaming amenities. So to Jayâs point, itâs really a conservative approach the continuing evolution of our business model and adding a little bit of room for labor increases. Hi, good morning, thanks for taking my question. One more just on the land-based side, you just kind of went into some details in terms of how youâre thinking about it in â23, but dissecting the 3 months in the fourth quarter and then maybe going even a little bit more into January, Jay, you talked about continuing trends. As we saw the equity markets become more volatile and as we saw interest rates rise and more fears around the housing market. Was there any change in terms of what you saw from a spend per visit standpoint? I know thatâs kind of been leading the recovery visitation is still well off of prior levels, but itâs really that spend per visit within the different tiers. Just wondering if you saw anything kind of ebb and flow throughout the quarter if it was consistent? Thanks. Itâs actually been really interesting as we look back at â22 because, Chad, to your point, there are periods of time where it just sort of softens up a little bit. You notice it from a visitation and spend per visit perspective. We saw a little bit of that in June. And then July 4 came around and we were right back hitting on all cylinders going forward. We did hit a little period of softness. Some of it was due to weather, which has been highlighted by us and others. And then there was just a little bit of general malaise kind of mid-November through mid to late December. And so weâre kind of looking at that, like is this the start of something new. Then we got to the holidays robust between Christmas and New Yearâs as good as any year I can remember. And then the momentum has really continued on through January, much stronger January this year than last year. Youâll see the state numbers starting to come out. There is probably several factors. There could be a little bit of what we lost potentially in December moved over to January. So not really sure exactly how those dynamics play out. But certainly, trends currently feel good. But yes, we did see a little pocket of softness, somewhat due to weather and just a little malaise. Yes, Chad, the only â this is Todd. The only thing I would add is, to your point on impact on interest rates. I do think we â there is a lot of factors that go into that. So the other thing that we did see across the country and especially in some of our key markets, the decrease in gas pricing, a lot of that just due to supply and demand and relatively mild winter, that all factors into that equation as well. So when you start looking at that, weâre actually seeing numbers that are in line or slightly above the spend per visit from last year and significantly above where they were in 2019. Todd just triggered a thought for me as well. And this is something that weâve highlighted before having been asked the question a whole lot in 2022 about what could potentially cause a recession and impacts our customer behavior. And Iâve been doing this now for a long time. Itâs come up on 25 years. And I would say, looking back over those years that there is really only two economic factors that weâve seen over the years that are really tightly correlated to customer behavior and customer health, at least as we talk about our core consumer, which is the labor market. And whether youâre looking at jobs, unemployment percentage, wage growth, itâs actually in great shape. It was encouraging, I think, yesterday to watch Chair Powell talk about starting to see the beginning of disinflation and how heâs â my words, not his, but paraphrasing that heâs cautiously optimistic that they can potentially get this inflation level back down to desired levels without seeing any real erosion as it relates to employment. That would be ideal because that certainly has a very tight correlation for our consumer. And housing is the other one, which, though itâs come down off its peaks, itâs really held in relatively well. So those are the two that we continue to keep an eye on. Those seem to have a much bigger impact overall to consumer behavior and visitation and spend per visit patterns in our businesses than anything related super tightly to a gas price move of 5% or 10%. I mean the big shifts that Todd mentioned, thatâs different, but slight shift in gas prices or interest rates really donât seem to affect consumer behavior on our end. Hi, good morning, everyone. Jay, I was hoping we could delve into kind of the core online trend a little bit more in the quarter. You showed some really strong GGR growth in the iGaming side. And obviously, Ontario continues to gain some momentum. Can you help us think about what you saw in kind of core OSB year-on-year? Obviously, there is a pretty big hit from Mattress Mack, but could you help us think about sort of the growth rate and trend you saw there? Yes. Itâs a great question, Shaun. And itâs interesting because weâre in a sort of a peculiar spot right now in the U.S. that Iâll describe at a high level. We have our entire engineering and product teams really primarily focused on two things right now. One, of course, is the upcoming migration to our own platforms in the U.S., which will happen sometime in July later this summer, a lot of work going into the preparation for that. And then, of course, we are continuing to, as we always will, innovate and iterate around making sure that we have a best-in-class product in Ontario because thatâs the platform that weâre going to be on here in the U.S. and across our portfolio across North America later this summer. And so thatâs really been where the focus has been where we have not been focusing understandably is that the platforms that we run on here in the U.S., which are third-party platforms, we have not been able to throw the resources at those to innovate and iterate and really focus on enhancement. So weâve fallen a bit behind. And I think our market share in sports betting, this fall and this winter here in the U.S. has softened up a little bit, and we really havenât been as focused on driving acquisition, knowing that our product isnât as competitive currently here in the U.S. as it was compared to everybody else a year ago. And so we made the conscious decision that weâre okay with that. We want to focus on retention. Here in the U.S., we want to focus on both acquisition and retention in Ontario but weâre very pleased with the progress that weâre seeing across all metrics in Ontario thatâs going to allow us to really lean in once we convert over and migrate to our own platforms in the U.S. second half of the year. So you should expect us to be, I think, louder from a marketing standpoint as we head into football season â23, knowing that we have at that point platform and promotional capabilities and CRM capabilities, bonusing capabilities, parlay capabilities that we just donât have in the U.S. today. So thatâs sort of the way weâve been thinking about it. Weâve been focused on iCasino growth across North America. Weâre happy weâve made some progress there in the fourth quarter. Weâve got a long way to go, but weâre seeing progress. And then generally speaking, OSB and iCasino, weâve seen really nice trends in Ontario that we believe we can duplicate here in the U.S. second half of the year. Thank you very much. And maybe just as my follow-up to keep it short. Could you talk a little bit about the â just the â when you talk about the demographics on your kind of cohort slide by age type, I find this data like really fascinating. And can you just help us think about some broader implications here for how that spending might evolve and how youâre investing a little bit behind that? I know obviously, the retail sports book initiative has been there. But what other revenue streams are you seeing? What are some of the kind of broader implications of this shift as demographics change a little bit in the business? Yes. Shaun, this is Todd. Iâll take that. So a lot of our investment in the last few years as we sort of spot this trend coming out of the pandemic really involved not only our game offerings where maybe youâll see now a bit of a greater mix of electronic table games, which allow you a different price point, so you can enter at a different level. But especially in the non-gaming amenities and the entertainment offering. So the way weâre looking at our hotels, and we just completed the Greektown hotel in the fourth quarter of last year, and itâs really been performing quite well. And then sticking with that property, just looking at some of the restaurant offerings as well as the first retail offering that we put in that features the Amazon just walk out technology starting to see that ramp up quite a bit. And then a lot of the work we did around the 3Cs and making that more relatable to all the folks that have been coming in that use Venmo [ph] and Apple Pay in all of those different forms of currency that they are used to, they can now find those in our casino. So weâve got a great road map in front of us. I think as Jay mentioned earlier, weâre just scratching the surface on that, but weâve seen great results so far. Good morning, everybody. I know itâs early days in Ohio, but I was hoping you can talk a little bit about the impact of sports betting on land-based GGR and profitability. And then a follow-up on Interactive, youâre talking roughly about $25 million in positive EBITDA in that segment for the full year. Do you think it could be profitable in the first half? Or is it really weighted towards the second half? If you can give us some details on that? Thatâs all for me. Thanks. Yes. We will grab both of those, Joe. Iâll hit the second 1 first and Todd can hit the Ohio question, which is a good one. I would say, as you think about sort of the cadence on the interactive side for 2023 by quarter, you should think about the first two quarters both being pretty breakeven-ish, maybe a little positive, a little negative, not a lot of movement there. Third quarter is where we will have some negative numbers, not significant, but they will be negative as we really plan for football season, September being the first month of both college and NFL. And so we will be starting to lean in from a marketing standpoint, but you wonât have an entire quarter of the volumes that come with it. And then the fourth quarter is where you should really expect to see the highest levels of profitability that get you to that positive number for the year. That would be the cadence that I would think about for 2023. Thanks, Jay. And Joe, as it relates to the Ohio properties. This was really our most successful launch for Barstool Sportsbook and the property teams and the corporate marketing, everybody just working so well together. And what weâve seen also would have been good if maybe we could have launched a day earlier or Ohio State would have won that game because then we would have picked up another huge day. But Jay and I were just talking last weekend one of our properties in Ohio had an all-time record for volumes since opening, beating out New Yearâs Eve. And it was really amazing to see. So again, what weâve seen in other states with that 21 to 44-year-old demo coming in, experiencing things for the first time. Itâs really been a great complement to our existing database thatâs in there. So I could not be more pleased with the way weâre looking at it right now with all four of our Ohio properties exceeding budget in prior year. And just to be super clear on that all-time volume record day, that was last Saturday, which was not a holiday weekend. It was just a Saturday in January. So we do attribute a good portion of that to the addition of retail sports betting, the influx of â for the most part, younger customers coming in, being introduced to new people and people realizing once they come in, there is a lot of fun things to do other than just bet on sports, but to do some gambling and partaking the restaurant and entertainment offerings. So Yes, very encouraging. I think Todd and the team have done a great job in all these markets, and weâre just â weâre getting smarter every time we launch in a new state in terms of the collaboration between interactive and retail and really planning for omni-channel effect as opposed to just for whatâs our market share in to handle the first month. Good morning, Jay and Felicia. I want to stay on Interactive, so congrats on the positive EBITDA in Q4, likely the only operator from our standpoint that will probably report that here in Q4. But given the Mattress Mack World Series loss, your previous expectation was likely for a swing to a loss potentially in the quarter. Given that what went better to report that $5 million of positive EBITDA? Was it primarily the cost side or the user side? Yes. I would say, as you look at it, probably better results in Ontario than we had expected, which is great for lots of reasons. And then we have seen some progress. Again, weâre not where we want to be yet in iCasino, but we have grown our market share in iCasino as you can see in one of the slides that we provided. So I would say those are the two primary reasons. The cost structure is really itâs quite predictable. Weâre â this is what happens when youâre on third-party platforms and then youâre working on a migration. But we have ramping up of our own internal resources while weâre still paying full cost for third-party resources on the outside, but at least the ramp that youâre seeing in engineering and product and other areas is part of our budget, part of our plan and not surprising, quite predictable. So the cost structure really shouldnât be a surprise throughout the year. Itâs really going to depend on what happens with revenues, what happens with hold percentage those things would tend to fluctuate the results more so than the cost structure. Yes. Agree with all that. The only other thing I would add, and Jay touched on this earlier. The great thing for us, and itâs a little bit unique to our business model with the partnerships that we have. But keeping that CPA low, especially as we launch into these new states, always helps with that expense structure as well. And then for my follow-up, just curious any thoughts on Massachusetts with the recent launch live with the three retail sportsbooks there and then your plans hit over the next couple of months. Thanks. Yes. I appreciate it, Ryan. I mean look, we have high expectations for sports betting in Massachusetts for obvious reasons. Barstool was founded there, huge following. They â weâre celebrating Barstoolâs 20th year since being launched in 2003. So there is long-term relationships and loyalty there with the audience. And based on what weâre seeing in Ohio, and again, we havenât seen market share results, all weâre seeing is our own numbers, but weâre feeling really good about our launch in Ohio. We expect that to be one of our top-performing states, not just from a total revenue. Obviously, there is a significant population there, but we think from a market share standpoint as well and we expect Massachusetts to be very similar. And just a reminder for those that may not know, weâre only live currently as of yesterday with retail sportsbook, which was great timing, at least to be in time for Super Bowl wagers. We wonât be live with mobile until right before March Madness is what the regulators currently have planned. So we will be live in March. And I think we will have a lot more information as we get on our Q1 call in early May about both Ohio and Massachusetts. Great. Good morning. Thanks for taking the questions. To start, the $100 million swing in interactive profitability, how much of that is driven by just organic growth versus synergies, whether itâs revenue synergies or cost synergies? Well, we donât â we actually have synergies kind of working against us in â23, like I have said, because we have got redundancy on third-party cost platform costs that really carries through the end of the year, while we continue to ramp up building out our own product and engineering team. So, itâs certainly less synergy, and itâs a lot more us growing the business and us having improved retention results, cross-sell from sports betting into iCasino results the second half of the year. Those are the factors. And of course, we also highlighted in one of our slides that we are seeing the benefit of increased hold percentage. So, if you look at in the U.S., I think we are the lowest average hold percentage of all of the top six players. We think that, that will start to reverse itself once we are on our own tech stack and our own player account management, and then control more of the trading services. We have great partners, third-party partners today. But I think what you are seeing when you have control of the product roadmap and you can put more of those offerings front and center for the consumer that you can start to move the whole percentage in the right way with â especially with the retail masses that are betting mostly on parlays. We are still sitting at right around 20% of total wagers in the U.S. on parlays. I think thatâs a lot lower than most of our competitors. So, we look forward to that. I think those are the enhancements, but itâs going to be for 2023 profitability much more around growth and synergies. I think 2024, you will hear a lot more from us on the cost synergy side as some of those third-party costs start to roll off. Understood. And when the complete buying of Barstool happens in two weeks, is there anything that we should expect? I know we should get guidance on a later time. But operationally or anything to call out that once you have 100% control of it, it could be acting differently. I think certainly, more deeply integrated cross-sell opportunities. We have got all sorts of things. We actually â we are just in Miami for an executive retreat and spend a lot of time on this as an executive team along with Erica. And so I think more to come. We will spend some time on this in May on our Q1 call. Erica will join us on the call, and we are happy to â we will probably have a few slides on that. Happy to answer questions about it, but rather not get into it today until after we have closed on the full acquisition. Hey everybody. Good morning. Thanks for taking my questions. So, I wanted to actually follow-up on one of those points, Jay, the parlay mix in Ontario and the parlay mix in the U.S. If you look at the Slide 16, you guys talk about whole outperformance in Ontario. I assume thatâs because of the parlay mix there that you are able to get from being on your own tech stack. Is that the extent of the upside for the U.S.? And maybe another way of asking it is the Ontario parlay mix up to, letâs say, the market leader where you see it there? Is there more to go essentially? Yes. I think there is more to go, Brandt, even though we are seeing that delta between full performance in Ontario versus the U.S., I would say that we are still in the very early innings in Ontario as it relates to our parlay offerings. So, if you compare to what we are doing in Ontario to what â some of the top players in the U.S. are doing, there is still a pretty significant delta. And I think you can see that even our hold percentage in Ontario being higher than it is in the U.S., that whole percentage still trails where the top three or four players are in the U.S. So, I would say there is probably a couple of hundred to 300 basis point opportunity longer term for us to improve our hold percentage given where we are currently run rating here in the U.S. versus where we ultimately anticipate being. Okay. Great. Thanks. Thatâs helpful. And then a follow-up on your comments about the second half of this year and getting louder. And I donât â I know you probably donât want to give out any competitive information, but what does that really entail? Is it something we should be considering in terms of increased marketing spend? Is it more organic, the type of marketing that you guys have tended to do? Anything that you can provide there would be helpful. Thank you. Yes. I would say both. We are â you will see us, I think a little more aggressive. You shouldnât expect to see us running TV commercials every weekend, anything like that. But I think you will see us be more aggressive on paid media, probably more of a focus on digital than anything else there, a lot more heavy leaning in on the organic and cross-sell opportunities and user acquisition. Our partners at theScore and Barstool, I think being even louder, knowing that we have a great platform to showcase to our audience. So, you should expect us to just be more aggressive. But we are going to do it in a way where we still think we can drive profitability in the fourth quarter and then obviously, have some real momentum going into 2024, where we are picking up some market share. We are doing it in a profitable way and take those learnings into â24 and beyond. Hi everyone. Thanks for taking all the questions. Maybe to shift gears a little bit. Jay, there has been some more rumblings in Texas and Georgia about possible regulating of gaming and that type of stuff. I know itâs still probably a long road in both states. But curious if you have a view on whatâs happening there. We usually have a pretty good sense of that type of stuff? And then maybe secondarily, any thoughts on potential additional iGaming regulation around the country? Yes, happy to hit those. I would say, first, on the iGaming side, not a lot of momentum as we look at legislatively 2023. We are of the opinion that something will start to move probably in the Midwest, whether thatâs Illinois or in Indiana or in Iowa. And once that happens, as we have seen historically in our industry, it just starts to move a lot faster by neighboring states. So, I wouldnât know how to handicap whether or not something happens in â23. Itâs not real active right now. Honestly, from our perspective, thatâs fine. I think we are going to be a lot more prepared for iGaming generally and competitively on a platform that we feel really good about once we get to the second half of â23 and beyond. So, if itâs a little bit on the slower side, no problem. But I think something will start to go, if not this year, feel pretty confident. In 2024, you will see a state or maybe a couple of states continue down that path. Itâs only â our perspective would be itâs a matter of time for the states that have legalized and launched online sports betting, itâs natural to eventually also legalize online casino, like we have seen in Pennsylvania and New Jersey and Michigan. And so itâs just â we will see how that plays out. As it relates to Georgia, not a lot to say on Georgia, we donât have any real history there. So, we are sort of reading what you are reading. We have lobbyists that keep us connected. There seems to be more of an appetite in both states, Georgia and Texas now than there has been really ever. But take that all with a grain of salt because there really wasnât any interest for a long time, and now there is a little interest. So, Texas is like we have a pretty good pulse on. We have been making strategic investments in horse racing in Texas for a long time over a decade now. And we are the owners. We have ownership and/or controlling positions in a number of racetracks in Texas that we think sets us up really well if and when something does happen in Texas. Itâs very early in this legislative cycle for this year. As you know, Texas, the legislature only meets every 2 years. There is a lot more conversation and openness this legislative cycle than we have really ever seen. There seems to be a support on the health side and from the Governor and the Senate is really a TBD. But we are very active. We are very engaged. I have been spending a lot of my own personal time on this in Texas because we believe it could be a real significant opportunity and exciting one for the company. And I would say stay tuned as we know more, we are happy to share, but itâs so early, and I donât like trying to handicap outcomes, regulatory or legislative way. Thank you. Good morning. Jay, I wanted to ask you with respect to Ontario, itâs obviously a very important market, given the assets that you have there and pretty meager or slim information. And so can you maybe comment a little bit about just the competitive landscape, you have some pretty heavy competition from incumbents and kind of what you guys are doing thatâs encouraging and is leading to some initial success. Yes. Itâs a good question. Look, Ontario is the most competitive market by far that we operate in. I canât speak for every operator. But you have got every major U.S. and international operator in Ontario, some of which were there for many, many years when it was a great market. And so for us to be able to showcase results and momentum that we have in our slide deck on Slide 15, we are highly encouraged by that. And really, there is only two things to point to. theScore, obviously has a lot of history in the market, a lot of loyalty with a fan base to, for a long time, knew theScore more, the check scores and updates on their favorite teams and getting conversations and community features about their favorite teams and their favorite games and about betting on sports and all of that. So, thatâs theScore Media ecosystem. Certainly, it was a boost. We acquired a very strong brand in Ontario, very strong in the U.S. as well, but predominantly in Ontario. So, I think thatâs a huge piece. Then of course, we talked a lot about the platform and the capabilities that we have are very different than what we have to work with here in the U.S. And so that makes us feel really good about the migration in the U.S. and being able to compete on a level playing field and be in control of whatâs in your product roadmap queue, what you are prioritizing the capabilities. So, those are the two factors. And for us, itâs also been impressive in that our market share, as we calculate it based on the limited information thatâs been supplied publicly by the Ontario regulators there is that our market share is holding steady despite an influx of additional operators. As I mentioned in our prepared remarks, we saw the number of operators operating in Ontario from Q3 to Q4 grow by over 50%, and yet we held on to our market share and continue to really grow our business through football season both in online sports betting, online casino. And really excited about online casino because the cross-sell results in Ontario have been much stronger than what we have seen here in the U.S. Makes sense. And then your investments that you will make, I guess this year in 2023, Felicia, provided some numbers in terms of project CapEx, but what does that mean, I guess for specific retail Barstoolâs branding and any other sort of cashless investments that you are going to make and expand into 2023 and what are your plans there? I would say and Felicia, you can jump in here. But if I understand your question correctly, Joe, when Felicia broke down the CapEx plans for the year, what you saw is that a total number of, call it, $400 million and roughly $87 million, $88 million, and I call it, $90 million of that is going towards the four growth projects that we talked about earlier in the year, the two in Illinois, the hotel in Columbus, Ohio and the hotel at M Resort in Las Vegas. So, the rest of the $300 million, think about it is exactly how we talked about 2022. You have got $200 million in maintenance, and then you have got $100 million that we sort of consider discretionary spend and â but does have a return associated with it. And that $100 million would be going towards the exact types of projects that you are referencing, us launching more Barstool-branded retail sportsbooks. 3Câs roll out, although we have gotten a lot of that work done behind us. We have got more hotel renovation, entertainment additions, food and beverage, thatâs really the focus for that last $100 million. And we are very pleased with the early returns that we saw on the $100 million that we spent on those projects in 2022, which is why we are doing more of that in â23. So, outside of the growth, the four big projects, our CapEx plans for â23 look almost identical to what they look like in â22. Felicia, I donât know if there is anything more to add⦠No, thatâs exactly right. And I think just to underscore that point is that while we are investing in these new growth projects, itâs business as usual for us elsewhere. Yes. Hey guys. Good morning. So Jay, I want to go back to guidance for this year. And I think it was the Barryâs â I think it was the first question on the call. But obviously, you called out those potential headwinds in front of you. And new competition is going to be it is what it is, and you have a pretty good handle on what thatâs going to look like. But I want to ask, if the consumer stays pretty much status quo. I mean what you are seeing right now through January. Is it fair to think that there actually could be upside to the upper end of your guidance range? Yes. I donât know how else to answer that. If the trends that we are seeing in January, if that status quo for the remainder of the year, then there would be upside to the midpoint of the range that we provided. We took a haircut to what we anticipated seeing in â23, just to build in some level of recessionary concern conservatism really because thatâs what we continue to read from those that do this for a living is that something is going to happen later this year. If that something doesnât happen and what we are seeing in the business today, if the labor market hold steady and housing market holds steady and spend per visit and visitation throughout the year looks like it does in January, then yes, the guidance is going to be conservative. Okay. Thanks Jay. And then second question, either for you or Todd. I donât think you guys talked or mentioned at all labor so far on the call. And just could you give us any kind of quick update on what you are seeing out there from a labor perspective? And has the availability of labor gotten any better for you guys? Sure, Steve. So the second part of that question is a little bit easier to answer it. Yes, we have seen a pickup in inflow of applications and candidates for most of our jobs. So, thatâs actually been very encouraging. So, we are able to go at more full capacity with most of our offerings. On the first part, there is pockets where there is a little bit of upward pressure. I would say Colorado with some of what they have just recently passed from a minimum wage standpoint. But much of our portfolio, itâs more kind of status quo. We are not going backwards by any means. But there is more pressure, I guess just from a state mandate or a Federal mandate for minimum wage. But overall, there is a little bit more flow, so it offsets the need to pay up for talent. Thanks. Just a couple of quick follow-ups on interactive. First, on the implementation of the tech stack, how should we be thinking about the cadence of the rollout? Are you targeting a simultaneous introduction across states or doing any kind of testing at the state level and rolling out over time. And then as a follow-up on your comments about ramping marketing costs or marketing expenses and promotions maybe post implementation. How do you think CPAs are changing in the legacy markets not Ohio, or how might they change as states mature? Yes. So, the first part of your question, Stephen, around the tech stack cadence is we planning to go live across all states in the U.S. at one time. We are targeting baseball all-star weekend when there is literally nothing going on in the sports world in the U.S. we have been working very closely and continue to with our regulators in preparation for this. We feel really confident in the plan. And we have got of course, contingencies that you can imagine based on any adjustments that we need to make for that plan between now and July. But that is the plan right now for us to go live all at one time and to be live for 1.5 months before we have the influx of volume with college football and NFL starting up. So, thatâs the tech stack plan. And then from a CPA perspective, we are seeing that the promotional environment is more rational. You are seeing a little less spend from an advertising perspective for paid media across the online sports betting space, which means that CPAs are a little more attractive, certainly a new market like Ohio that we just launched in, in Maryland and Kansas. Massachusetts will see once mobile goes live. But to your question around some of the markets that have been live now for a year, 2 years, 3 years, we are seeing CPAs there that are a little more attractive than they were a year ago. And so thatâs part of what gives us some level of optimism not just having an improved product and tech stack going into football season here in 2023, but also an environment where I think there is much more of a focus from all of the top operators to get to profitability. We welcome that. Itâs been our focus. We got there in Q4. We think we are definitely confident we will be there for the year in 2023. But it allows us to be a little bit more aggressive maybe when the environment is a little bit more efficient, a little bit more attractive from a CPA perspective. Great. Thanks everyone for joining us this morning. I appreciate your time and look forward to speaking with you in early May to cover Q1 results. 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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EarningCall_871
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Hello, and thank you for standing by. My name is Drew, and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, management will conduct a question-and-answer session, and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. [Operator Instructions] Today's call will include remarks from Eric Colson, CEO; and C.J. Daley, CFO. Following these remarks, we will open the line for questions. Before we begin, I would like to remind you that comments made on today's call, including responses to questions, may deal with forward-looking statements. These are subject to risks and uncertainties and are presented in the earnings release and details in our SEC filings. We are not required to update or revise any of these statements following the call. In addition, some of our remarks today will include references to non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release. Outcomes in 2022 were difficult. For the year, our AUM declined from $175 billion to $128 billion, a 27% drop. Of our $9.8 billion of net outflows, more than $5 billion occurred in the fourth quarter, we experienced net outflows across majority of strategies and investment teams. For the year, our gross outflow rate was in line with our prior 10-year average. There was a broad array of reasons that clients rebalanced away with no single theme dominating. Lower gross inflows drove the net flow. Uncertainty, war, inflation, China, regulation paused decision making, especially allocations to risk assets. The market rebounded in the fourth quarter, especially in non-U.S. markets. We believe decision-makers are learning to operate with greater uncertainty and has gathered more information and knowledge about direction of inflation and China policies. We don't believe that our 2022 or fourth quarter flows will prove to be representative of net flows going forward. Today, we are particularly excited about fixed income as well as the dynamic for non-U.S. and global equities. With increases in rates and spreads, we see more excitement for fixed income today than any time since we launched our first fixed income strategy nearly nine years ago. We currently offer six high value-added fixed income strategies. We believe all of the strategies can and should capture some of the near-term demand for fixed income. The Artisan High Income, Floating Rate and Credit Opportunities strategies are managed by the Artisan Credit franchise, which I'll discuss on the following slides. The Artisan Emerging Markets Debt Opportunities, Emerging Markets Local Opportunities and Global Unconstrained strategies are managed by the EMsights Capital Group. EMsights Capital founders, Mike Cirami, Sarah Orvin and Mike O'Brien, have worked together for 14 years. They are well known in the marketplace, having built a well-regarded emerging market debt team at their prior firm. Last year, we built out the investment team, layered in technology, recruited business leadership and launched the three new strategies between March and July 2022. We expect all three strategies to experience early-stage growth this year, in particular, from institutional allocators willing to do deep diligence and capture the benefits of early adoption. We believe our two fixed income teams have great investments and business potential. There is long-term secular demand for fixed income and credit-oriented strategies. Aging demographics demand yield and income. Investors and allocators will continue to allocate to fixed income for diversification and risk return benefits. There are large opportunity sets in which talented investment managers can differentiate from and outperform indexes and peers. Both the Credit team and the EMsights Capital Group have the experience, capabilities, breadth of resources and ambition to manage multiple strategies and generate significant revenue within the context of our larger business. Slide 2 summarizes the Artisan Credit franchise as it stands today. Since Bryan Krug joined Artisan Partners in 2013, we have partnered with him to methodically build out his team and establish a powerful investment franchise. Today, the team possesses each of the franchise characteristics we seek: established leadership; a repeatable investment process; depth and breadth of resources, including people, networks and technology; proven results; economic alignment; a unique culture centered on the team's Denver office; and an established brand. The Credit team has developed and evolved from an individual into a team into a franchise. Since inception in 2014, the Artisan High Income strategy has generated average annual returns of 5.1% after fees. The strategy has beat the benchmark index by an average of 178 basis points per year after fees. The Artisan High Income Fund is ranked Number 5 of 338 funds in the Lipper High Yield category. The team's business has developed at a healthy pace during a period of muted flows for the high-yield asset class as a whole. Cumulatively, the team has generated net flows of $7 billion, averaging approximately $750 million per year. Of the 167 mutual funds in the Morningstar high-yield category, Artisan's High Income Fund has raised the third most since 2014. Slide 3 places the Credit franchise in broader Artisan historical context. The Credit team's cumulative net flows over its first nine years are in line with those of other multi-generational, multi-strategy franchises. Credit AUM lags primarily due to the delta between credit and equity returns. Based on our historical experience, the credit team is right on schedule, both in terms of developing franchise characteristics and experiencing foundational business growth. Historically, we have seen foundational growth translate into a subsequent phase of compounding growth. Investment teams compound existing capital at the same time, leveraging resources, returns and reputations to extend duration, diversify business and launch additional strategy. Two examples are our Growth and International Value teams, which today manage $34 billion and $30 billion, respectively, across a total of six investment strategies with multiple generations of decision-making leadership. Like foundational growth, compounding growth takes time. We prioritize existing client experience, and we thoughtfully manage capacity. For the Credit team, in the near-term, we expect continued growth and diversification across strategies and with institutional clients. Over the long-term, we expect the team to leverage their credit capabilities and investment networks to offer clients additional high value-added investment opportunities. Bryan leads an already powerful franchise. They are still early in their journey. There is tremendous additional potential. Slide 4 summarizes the near-term opportunity in high-yield credit. Rates and spreads have widened, creating an attractive entry point for allocators and absolute return potential for investors. Index yield to worst is currently about 8%, much more attractive than the 4% to 6% range that has prevailed for much of the last decade. When yield spikes in 2016, the High Income Strategy generated a return of 35.4% between February 2016 and January 2018 gross of fees. When yields spiked in 2020, over the next 12 months, High Income generated a 31.5% return and Credit Opportunities generated a 58.5% return, both gross of fees. Not only is the entry point better from a yield perspective, greater price dispersion increases credit picking opportunities, more opportunities for the Credit team to generate convex returns in excess of expected yields. What we see in the near term is alignment of the Credit team's foundational growth and franchise characteristics with a more favorable investment environment, a combination that has us very excited. On my last slide, Slide 5, I want to come back to the equity environment. Of our 19 equity strategies, 11 focus on non-U.S., global or emerging markets. 75% of our total AUM is benchmarked against EAFE, Global or other non-U.S. indices. Approximately 55% of our equity AUM is invested in companies domiciled outside the U.S. Dating back to 1996 with the launch of Mark Yockey's non-U.S. Growth Strategy, Artisan Partners has a long history of investing and adding value in international equity markets. Our eight non-U.S., global or EM strategies with track records of five years or more have beaten their indexes by an average of 289 basis points per year since inception after fees. As I mentioned earlier, in the fourth quarter, non-U.S. equity significantly outperformed, driving the more than $12 billion of investment returns we generated in the quarter. Even with the strong fourth quarter performance, non-U.S. equities remain modestly valued by historical standards and relative to the S&P 500. We are not predicting mean reversion or calling the market, nearly pointing out that non-U.S. equities are attractively valued, and we have a long history of generating alpha in these markets. After a difficult year of outcomes, we are excited about what we can control, our investment lineup, both in equities and fixed income; our financial and economic model, which C.J. will elaborate on; our brand and reputation to attract proven investment talent and sophisticated clients. We are optimistic about the current level of volatility and uncertainty; healthy security dispersion for active management, especially after a drawdown; greater clarity for risk-taking and decision-making; the ability to meet in person for due diligence and broaden our business development potential. 2022 follows on the heels of 2021, our most successful fiscal year ever in which we achieved record revenue and earnings. 2022 results, on the other hand, reflects the sharp decline in global markets and the impact of business investments made to support future growth. During the year, AUM declined from $175 billion to $128 billion. Revenues declined in line with the decrease in average AUM and were down 19%. As we often mention on these calls, our financial model was built to absorb volatile declines in global markets. And despite continuing to invest in long-term growth during 2022, our expenses were down 5% as a result of our model. Growth is not linear. AUM has grown 6% compounded annually, rising from $74 billion at the start of 2013 to $128 billion to end 2022. Revenue has compounded annually by 7% and adjusted operating income by 5%. During this time, we diversified the business from five long-only equity investment teams, managing 12 strategies to a platform that now includes 10 investment teams and 25 strategies, managing assets in both public and private equities, fixed income and alternative asset classes. Our financial results over this period have enabled us to return cash dividends in excess of $32 per share to our shareholders since the IPO, including our recent declaration. Assets under management ended the fourth quarter at $127.9 billion, up 6% from the September 2022 quarter and down 27% from the prior December year-end. Investment returns contributed $12.8 billion to the increase in AUM in the quarter, partially offset by $5.2 billion of net client cash outflows and $300 million of annual Artisan Funds distributions that were not reinvested. Average AUM for the quarter was down 4% sequentially and down 28% compared to the December 2021 quarter. For the full year, negative investment returns contributed $36.6 billion of the decrease in AUM and net client cash outflows lowered AUM by $9.8 billion. Average AUM for 2022 ended down 18% year-over-year. Across all generations, AUM was impacted by declining global markets and net client cash outflows. There were no material changes in the weighted average management fee or AUM mix by generation or vehicle. Financial results are presented on Slides 10 and 11. Our complete GAAP and adjusted results are presented in our earnings release. Quarterly revenues declined 4% compared to the previous quarter and 28% compared to the December 2021 quarter on lower average AUM. For the full year, revenues were down 19% from 2021 on lower average AUM and lower performance fees. Performance fees were negligible in 2022 compared to $13.3 million in 2021. Adjusted operating expenses for the quarter decreased 1% sequentially due to the decline in incentive compensation expense as a result of lower revenues. Occupancy expense increased in the quarter as a result of a $1.4 million one-time charge taken on the abandonment of an office lease, a decision we made in part to trim costs. We will continue to look for ways to more efficiently use our office footprint as we adjust to the evolution of a hybrid work environment. For the year, adjusted operating expenses decreased 5% compared to 2021. The $74 million decline in incentive compensation expense was partially offset by increases in travel and expenses for headcount additions in 2021 and 2022, primarily base salaries and benefits. A significant portion of the fixed cost increase from the prior year resulted from the launch of three strategies for our newest investment team. Adjusted operating income declined 8% for the quarter compared to the third quarter and declined 37% for the year compared to 2021. Likewise, adjusted net income per adjusted share declined 7% for the quarter compared to the third quarter and declined 38% for the year compared to 2021. Turning to Slide 12. Our balance sheet remains strong and continues to support our capital management needs and cash dividend policy. Our $100 million revolving credit facility remains unused. We continue to return capital to shareholders on a consistent and predictable basis through quarterly cash dividend payments and a year-end special dividend. Consistent with our dividend policy, our Board of Directors declared a quarterly dividend of $0.55 per share with respect to the 2022 December quarter, which represents approximately 80% of the cash generated in the quarter. Our Board also declared a special annual dividend of $0.35 per share. Similar to last year, we retained a portion of cash generated in 2022 to fund future growth initiatives, primarily seed capital investments and new strategies and vehicles. Our seed capital investments at the end of the year were $125 million, up from $72 million a year ago, and represent investments in future growth, primarily in the fixed income and alternative space. Including this declaration, cash dividends of $2.82 per share will be paid with respect to 2022 cash generation, a payout of approximately 92%. Calculated on a trailing 12-month period, this represents a yield of approximately 8%. Since our IPO, the average annual dividend yield has also been approximately 8%. Looking forward to the current year, each year, our Board of Directors approve a grant of long-term incentive awards. In the first quarter of 2023, the Board approved an award of approximately $57 million, consisting of $39 million of cash-based franchise capital awards and approximately $18 million of restricted stock awards. Generally, 50% of the award vests pro rata over five years and the remaining 50% vests on or after 18 months after a qualified retirement. We estimate the 2023 long-term incentive award amortization expense will be approximately $55 million. Fixed compensation costs are expected to rise approximately mid-single digits, reflecting 2023 merit increases, the absorption of a full year of expense for full-time employees hired in 2022 and an expected 5% increase in employees. The additions will primarily be investments in distribution roles to support new and existing strategies. We also expect increases in technology and travel spend, resulting in a projected increase in fixed operating expenses of approximately 5% in 2023. Occupancy, long-term incentive compensation and other fixed operating expenses are expected to be relatively flat compared to 2022. The note refinancing that closed in August 2022 provides annual interest savings of $2.4 million and will reduce interest expense by $1.5 million in 2023 compared to 2022. And as a reminder, our compensation and benefits expenses are generally higher in the first quarter of each year due to seasonal expenses, which we estimate will be approximately $5 million higher in the first quarter of 2023 compared to the fourth quarter of 2022. As Eric commented in his prepared remarks, we are optimistic that the investments we've made in our business over the past several years will lead to successful outcomes for our clients and shareholders. However, these outcomes will take time and will be lumpy. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alex Blostein with Goldman Sachs. Please go ahead. Hi, good morning, guys. Thanks for the question. Eric, maybe we could start with a question around some of the opportunities you guys are seeing from a gross sales perspective for non-U.S. equities, including emerging market equities. Obviously, the markets are off to a good start this year. So, curious if you're seeing an actual increase in RFPs and kind of active searches in that part of the market. And against that, you guys had a really strong 2020 and 2019 in terms of excess performance in those -- in a number of the strategies, but a pretty challenging '21 and '22. So, as people kind of think about the longer-term track record like a three- and five-year basis, which is likely to get worse as some of the kind of prime vintages roll off, how does that impact the opportunity set to win some of these mandates? Yes. Thanks, Alex. The fourth quarter really highlighted some performance difference between non-U.S., emerging markets, China and some of the domestic indexes and we had a nice uplift in AUM, as we noted on the call. I think the backdrop on asset flow has been mixed bag. We've looked over the past couple of years to get some direction and looking forward, and it's hard to extrapolate the trend line. We do see more activity in the marketplace with regards to due diligence than we've seen in the past couple of years, and we credit that to more of client research, consultant research, intermediary research, getting out and traveling again and conducting due diligence. And if you think about that, second half of 2020 into '21, most people just allocated to their trusted partner, and we were a strong partner during that lockdown phase. More recently, you've had the opening of due diligence, and we've picked up, and right now, we have a strong list of meetings for due diligence. But the trend line, I would say, is broader than just non-U.S. equities. Some clients are allocating to non-U.S. Other clients are still looking at growth value. Others are looking at active/passive. It's that each client's risk on and risk off has been different. And so, it really is hard for us to extrapolate any given year, especially last year when there was so much uncertainty in the market. I define that differently than just risk or volatility. I mean, uncertainties [freezes] (ph) clients in what -- where they need to go versus volatility and risk that you can understand a bit better and manage. So, we're pleased about our non-U.S. strategies. We're pleased about where the market is at. And hope to get some direction from asset flows, but I'm hesitant to make that call and respond to you that there is a -- that's the major focus. Got it. All right, thanks for that. C.J., maybe just a follow-up for you on expenses. When you take a step back and you look at the firm's margins for the full year at around, I guess, 34% on a revenue base that is actually, I think, still a little bit above where you guys were in 2020, but the margins are down almost 500 basis points from that time. And taking your expense guidance, it feels like margins are going to be maybe under some pressure again into 2023. So, help us maybe think about that dynamic against the fairly variable expense structure as you described it in your prepared remarks. And what's the path of kind of getting back to higher levels of operating leverage? Yes. No. Thanks, Alex. Well, of course, as you know, you saw the strength of our model in the declining revenues of 2022, as revenues pulled back from the high levels in 2021, yet our expenses were still down 5%. That really was the benefit of our model, which pulled almost $80 million out of variable expenses without us announcing layoffs or bonus cuts, et cetera. Through that time, we invested heavily into our business. The EMsights team, which we onboarded, seeded four products with $60 million, continue to build out our infrastructure to support privates and our fixed income strategies. So, we have made a fair amount of investment over the last two years in people and systems to be able to look to the future and growth. And now we're pretty much situated to capitalize on those growth opportunities. And so, as we look into 2023, we're really looking forward to just focusing on finishing what we've started on these growth opportunities and filling the capacity which likely is much greater than we've ever seen in our firm's history. And now it's just about executing on that and getting some help from the markets. Okay. Thank you very much as well for taking the question. Maybe just to come back to the discussion of an opportunity to sort of pickup of gross sales. Just a follow-up to Alex's question. As you -- given you have a strong brand, as you speak with your gatekeepers, whether it be on sort of the more affluent retail side or the institutional side, as you look at sort of the rolling one, three-year records, [which is getting] (ph) worse, but very robust five-plus years. Which is the bigger driver to that discussion? And could 2023 be a year where you get pretty good credit flows, but the equity book just sort of lags a little bit because of that interplay on the relative performance dynamics? Thank you. Hi, Bill. Yes, gross sales is our focus this year. As we noted in the call, our gross outflow has been hovering at the same rate for about 10 years, and I think our client service model is appropriately, it matches our product mix and our client mix. We have taken a look at the sales opportunities and looked back at last year, and we clearly had a lower sales rate, which created the higher-than-expected outflow. And as we look on a go-forward from a sales cycle, we are more so in past years, and you heard it in C.J.'s prepared remarks around expense management, but allowing some spend in the distribution and sales because we have the capacity and the strategies. We'll be leaning into the sales team and looking to apply resources to take advantage of opportunities we see. We certainly see the early stages of a new team with EMsights Capital Group and see strong interest in the institutional market, given the category, emerging market debt tends to be more dominated by institutional assets. The Credit team is clearly leaning into the institutional marketplace to diversify its asset base. And I think those could be very strong opportunities for the sales team. On the flip side, we got hit on the exchange of kicks of growth value, U.S., non-U.S., active/passive. We lost the exchanges in 2022. I don't think that's as easy to predict year-over-year in the short term. So, we'll be interested to see how those exchange kicks occur, but we like our equity lineup with the focus on non-U.S., global and emerging markets, as we highlighted, and the trend line in performance. So, hard to predict, Bill, but we're optimistic in the mix of equity just as much as we are in fixed income. Got you. Okay. And just as a follow-up, sort of -- your business has been sort of a little more incrementally geared to the institutional business. I think a lot of investors, as they look about the landscape are excited to sort of get into sort of the retail democratization opportunity and some of your assets certainly in that bucket. Can you talk a little bit about your plans to how to sort of go after the retail opportunity, if at all? Or is most of the incremental growth still going to be penetrating on the institutional side? Thank you. Yes. The retail democratization gets down to the customization of separate accounts, the custom indexes, how do you empower the individual, that is an enormous amount of people expense, back-office expense, and quite honestly, interesting fee environment as it races to the bottom. And we look at that opportunity set, coupled with the duration of those clients and assets we've seen in the retail mutual world. And you look at that short duration, high expense, difficult to differentiate by investment results and felt that we're better suited to be an investment organization instead of a consumer asset manager. So, our focus will be to focus on the investment talent, deliver investment strategies and to partner with those organizations that can bring democratization and that fits how we can deliver our strategies to those partners. And we've, over the years, have built a very strong business in our intermediary channel. Many of those clients know how to package these strategies well, and we're learning more and more how to partner those. And we've seen strong growth in the U.S. and outside the U.S. with these partners. And our mindset will be to focus our sales efforts with partners, so that we participate in that retail democratization as an investment firm. Thanks. Just following up on the EMsights opportunity, you talked about institutional interest. Is this different than what you've seen with other kind of teams they've come on board in terms of the ramp? The track record, maybe not as important here given their legacy. And I know it's hard to predict, but when you think about Credit in 2023 and that opportunity is more, is the dollar amounts coming in, you think more in these strategies or in the existing strategies of what would have been in the ground longer? Yes. Hi, Daniel. The record is still very important. Having that proven track record of success is always an important history and something to point to. The difference's really been, if you look back to some of our other teams where the strategy fit very well in the intermediary or financial adviser, broker dealer, it went into the pooled vehicle and the individual is probably a more well-known person or team in that space. The assets there can come a little bit quicker than a more complex strategy that tends to be more institutional in nature. And so, first and foremost, the institutional sales cycle is longer. You have gatekeepers, you have consultants, and then you have to marry that up with quarterly investment committee meetings to go through that cycle. So, the onboarding of assets take longer than what we've seen with some of the more recent strategies behind EMsights. Secondly, the setup and the account setup for emerging markets with regards to custodians and countries to open up to take advantage of the broader array that the Emerging Market Debt and Global Unconstrained strategies offer also takes time. So, while we have sophisticated clients that have gone through with the cycle, there's still a long setup period to open up some of these accounts and finish up the investment management agreements. So, the real difference is the complications around the account setup, coupled with the institutional marketplace. From what we can see, we are in a very strong position with numerous clients and prospects, doing their due diligence and moving down the tracks with us to hopefully provide some growth to the team in 2023 and beyond. Got it. That's helpful. Thank you. And then, C.J., just a follow-up on expenses. The flat year-over-year, that's inclusive of the onetime charge? I think you said it was in the fourth quarter. And then, I guess, just other kind of cost cutting or cost containment measures that you are contemplating or not as you think about the guidance that you just gave and what might be incorporated within that for this year? Yes. Thanks, Dan. So, the guidance, obviously, first and foremost, given our variable expense structure, the change in revenues is going to drive overall expenses as it has in the past. But on the fixed expense side, we're really guiding to about 5% increase over 2022, which would include that $1 million charge. The majority of it is going to come in our fixed compensation costs. We're still absorbing the full impact of the hires in the prior year. And then, we have a few additional roles in 2023, as Eric mentioned, skewed towards investments and distributions. Tech spend is going to go up probably mid-single digits. We've added some systems in 2022, which now the full cost of those systems, primarily related to fixed income kick in. And then, T&E continues to return to sort of pre-COVID levels, and we expect that to be fully back to what we would have expected prior to COVID in 2023. So, overall, you've got about 5% mid-single-digit expected increase in fixed costs and then variable costs will be what they'd be based on revenue levels. Okay. Great. You guys talked a little bit about some of the seed investments in 2022. And that was a key focal point for you guys in 2022. Should we expect a similar level of growth in 2023, and any other change to your capital allocation approach relative to 2022? Yes, Mike, it's C.J. Good questions. As we look forward, as I mentioned earlier, we're really focused on, in 2023, filling the capacity we have. As we sit here today, we have no major seed capital requirements that are planned. So, I would say, as we're sitting here today, it's sort of status quo on the seed. We did mention on the dividend that we held back $20 million. That's really looking forward to continued growth and continue to build a little bit of a chest to seed future requests. But as we look at 2023, there's nothing material planned. Okay. Great. And you guys are certainly focused on really building out a lot of the infrastructure and ensuring the success of the EMsights team. At what point would you start to consider other opportunities to bring on new teams? And how does -- how is the kind of market at the moment here? Is there some good interest in potential opportunities to bring in new talent? Yes, Mike, it's Eric. There's always opportunity in the marketplace, and we see quite a few teams a year. I think what we're thinking of right now is that we're really looking for that no-brainer talent that's out there. And that would be someone that if you apply the right economic alignment and the right resources and align them to their own four walls at Artisan, really, you're just -- it's just a matter of time before it works here. So, we're always in the marketplace looking for no-brainers. And so, if we see something out there, we're going to, of course, take the opportunity to meet and think about these individuals and teams. But really to become a destination for a no-brainer, you need to deliver on what you have. You need to deliver on the resources. You need to deliver on the talent around that person. You need to put the vehicles in place and they need to bring in the early assets to get that moving. And we've just launched quite a few strategies and teams over the last couple of years in this more uncertain market. And right now, our focus is to deliver on those. We're more focused on sales and service and marketing than we have in past years, given the breadth of strategies we've had, and the ability to get out in the marketplace and really react to due diligence calls and react to opportunities. Because if you don't deliver, then the no-brainer question is, is this the right spot? And we want to remain in that. I think, a small group of investment firms that if a talent becomes available and they say, where do I put my career? Where do I -- whose hands do I put it in to make sure that I can become successful. We want to be that first call. And to become that first call, you have to deliver on what you have. This concludes our question-and-answer session and today's Artisan Partners Business Update and Earnings Call. Thank you for attending today's presentation. You may now disconnect.
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EarningCall_872
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Thank you for joining today's Capital Southwest Third Quarter Fiscal Year 2023 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP Finance. Thank you. I'd like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information and management's expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other reason after the date of this press release, except as required by law. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute our investment strategy as steward of your capital. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.capital southwest.com. You also find our quarterly earnings press release issued last evening on our website. We'll begin on slide six of the earnings presentation where we have summarized some of the key performance highlights for the quarter. During the quarter, we generated pretax net investment income of $0.60 per share, which represented 11% growth over the $0.54 per share generated in the prior quarter and 18% growth over the $0.51 per share generated a year ago in the December quarter. The $0.60 per share more than earned a regular dividend paid during the quarter of $0.52 per share, while also covering the supplemental dividend paid during the December quarter of $0.05 per share. We were also pleased to announce today that our Board has declared another $0.01 per share increase in our regular dividend to $0.53 per share for the quarter ending March 31st, 2023. This increase represents 1.9% growth over the $0.52 per share paid in a December quarter and 10% growth over the $0.48 per share paid a year ago in the March quarter. These increases in our regular dividend are a result of the increased fundamental earnings power of our portfolio, dividends growth and performance, as well as improvements in our operating leverage. In addition, due to the continued excess earnings being generated from by our floating rate debt investment portfolio, our Board of Directors has again declared a supplemental dividend of $0.05 per share for the March quarter, bringing total dividends declared for the March 23 quarter to $0.58 per share. While future dividend declarations are at the discretion of our Board of Directors, it is our intent and expectation that Capital Southwest will continue to distribute quarterly supplemental dividends for the foreseeable future while base rates remain materially above long-term historical averages. Finally, I should note that as we have done in the past, we intend to also distribute additional supplemental dividends as we harvest realized gains from our equity coinvestment portfolio. During the quarter, we saw strong deal activity in the lower rental market, primarily focused on acquisitions rather than in refinance. The environment during the quarter was a favorable one for a first lean lender like Capital Southwest. We saw average spreads that were 50 to a 100 basis points wider than a year ago with leverage levels on our new platform deals that were a lower -- that were lower by a full turn of EBITDA. Interestingly, loan to value levels on new deals calculated as our firstly loan divided by the enterprise value being paid for an acquisition were also down meaningfully. This suggests that multiples being paid for strong companies remained robust. Portfolio growth during the quarter was driven by 164 million in new commitments consisting of commitments to five new portfolio companies totaling 122.4 million and add-on commitments to 12 existing portfolio companies totaling 41.6 million. This was offset by 12.4 million in proceeds from one debt prepayment and warrant equity sale during the quarter. On the capitalization front, we raised a total of $104.3 million in gross equity proceeds during the quarter at a weighted average price of $17.99 per share, or 109% of the prevailing NAV per share. This included $58.3 million raised through our equity ATM program and $46 million raised through an underwritten public equity offering. Our liquidity remains robust with approximately $196 million in cash and undrawn capital commitments as of the end of the quarter. We have remained diligent in funding a meaningful portion of our investment asset group with creative equity issuances, and we think it is critical that we maintain a conservative mindset to BDC leverage given the uncertainty of the economy. As we have spent many times we manage our BDC with a full economic cycle mentality. This starts with the underwriting of our new opportunities, but it also applies to how we manage the BDCs capitalization. Managing leverage to the lower end of our target range positions us to invest throughout a potential recession when risk adjusted returns can be a particularly attractive. It also allows us to support our portfolio companies will also opportunistically repurchasing our stock if it were to trade meaningfully below NAV. With business context, we are very pleased with the strength of our balance sheet as we reduced regulatory leverage to 0.91 to 1 from 1.11 to one in the prior quarter. We maintained our significant liquidity position, and we continue to operate with almost half of our balance sheet liabilities and fixed rate unsecured covenant free bonds, the earliest of which mature in 2026. On slide seven-eight, we illustrate our continued track record of producing strong dividend growth, consistent dividend coverage and solid value creation since the launch of our credit strategy back in January of 2015. Since that time, we have increased our regular dividend paid to shareholders 25 times and have never cut the regular dividend, including during the tumultuous environment we all experienced during the COVID pandemic. Additionally, over the same time period, we have paid or declared 19 special or supplemental dividends, totaling $3.60 per share generated from excess earnings and realized gains from our investment portfolio. We believe our track record of consistently growing our dividend, the solid performance of our portfolio, as well as our company's sustained access to the capital markets has demonstrated the strength of our investment and capitalization management strategies, as well as the absolute alignment of our decisions with the interest of our shareholders. Continuing to generate this strong track record, we believe is critically important to building long-term shareholder value. Turning to slide nine. Our investment strategy is laid out for our shareholders at its launch back in January, 2015 hasn't changed. The vast majority of our activity has been in our core lower middle market where we are the first lean senior secured lender, most often backing a private equity firm's acquisition of a growing lower middle market company. We also often participate on a minority basis in the equity of the company through -- in the equity of the company through an equity coinvestment made alongside the private equity firm. In fact, 90% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies, as well as the potential for new junior capital support if needed. Our lower middle market strategy is complimented by club participations in larger companies, led by like-minded lenders with whom we have relationships and have gained confidence in their post-closing loan management from working well together across multiple deals. Virtually all of these club deals are also backed by private equity firms. And so the end of the quarter, our equity coinvestment portfolio consisted of 48 investments with a total fair value of $112.1 million, which was 60% over our cost, representing $41.8 million in embedded unrealized appreciation of $1.21 per share. Our equity portfolio, which represented approximately 10% of our total portfolio at fair value is at the end of the quarter continues to provide our shareholders participation in attractive upside potential of these growing lower middle market businesses, which will come in the form of NAV per share and supplemental dividends over time. As illustrated on slide 10, our on balance sheet credit portfolios of the end of the quarter, excluding our I-45 senior loan funds, grew 10% to $990 million as compared to $903 million as of the end of the prior quarter. Over the past year, our credit portfolio has grown by $245 million or 33% from $745 million as of the end of December of 2021 quarter. For the current quarter, 99.7% of our new portfolio company debt originations were first lean senior secured debt, and as of the end of the quarter, 96% of our total credit portfolio was first leaned senior secured. On slide 11 and 12, we detailed the $164 million of capital invested and committed to portfolio companies during the quarter. Capital committed this quarter included $120.4 million in first lean senior secured debt and $1.6 million in equity coinvestments to five new portfolio companies. Additionally, we committed $39.7 million in first lean senior secured debt and $1.9 million in equity coinvestments to existing portfolio companies during the quarter. Turning to slide 13. During the quarter we had one debt prepayment and one equity sale. In total, these exits generated approximately $12.4 million in total proceeds generating a weighted average IRR of 10.1%. Since the launch of our credit strategy eight years ago, we have realized 67 portfolio exits representing $775 million in proceeds that have generated a cumulative weighted average IRR of 14.6%. The market for acquisition capital continues to be active. Not surprisingly, given the widening spreads on new loans in the market, the slowdown and refinancing activity continues. So, on a net basis, we expect solid net portfolio growth in near-term. We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital provider, as evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities. In terms of deal origination, we find that underwriting certain industries is more challenging given today's economic uncertainty. However, an important component of our underwriting has always been to run a stress case downside model for every new deal, simulating an extreme recession occurring soon after closing. But many respects our underwriting in the current environment hasn't changed. Although, our models today include much higher base rates than we have experienced historically. Our fundamental analysis attempts to tie the leverage level we are willing to put on a company to the potential performance volatility of a particular business in industry throughout the economic cycle. Performance across different industries can be very different through the economic cycle, so getting this right is an important component of the underwriting process. Specifically in a stress case financial model, we require the fundamental underwriting standard that we see our loan remain well within the portfolio company's enterprise value and the portfolio company's cash flow able to cover our loan interest throughout the cycle. On slide 14, we detailed some key stats for our unbalanced sheet portfolio as of the end of the quarter, again excluding our I-45 senior loan fund. As of the end of the quarter, the total portfolio at fair value was weighted approximately 87% to first lien senior secured debt, 3.2% to second lien senior secured debt, 0.1% to subordinated debt, and 10.2% to equity coinvestments. Credit portfolio had a weighted average yield of 12% and weighted average leverage through our security of 3.6 times. The weighted average leverage this quarter was down from 4.1 times in the prior quarter due in part to $67.3 million of funded debt originations to five new portfolio companies at a weighted average leverage through our security of 1.9 times EBITDA. Turning to slide 15. We have laid out the rating migration within our portfolio. As a reminder, all loans upon origination are initially assigned an investment rating of two on a four point scale, with one being the highest rating and four being the lowest rating. We feel very good about the performance of our portfolio with 95% of the portfolio at fair value rated in one of the top two categories a one or a two. As illustrated on slide 16, our total investment portfolio, including our I-45 senior loan fund, continues to be well diversified across industries with an accurate mix, which provides strong security for our shareholders capital. The portfolio remains heavily weighted towards first line senior secured debt with only 3% of the total portfolio secondly in senior secured debt. Thanks Bowen. Specific to our performance for the December quarter, let's summarize on slide 18. We increased pretax net investment income 25% quarter-over-quarter to $18.7 million compared to $15 million last quarter. Pretext NII was $0.60 per share for the quarter. During the quarter, we paid out a $0.52 per share regular dividend and a $0.05 per share supplemental dividend. As mentioned earlier, our Board has approved an increase to the regular dividend for the March quarter to $0.53 per share and declared another $0.05 per share supplemental dividend for the quarter. Maintaining a consistent track record meaningfully covering our dividend with pretext NII is important to our investment strategy. We continue our strong track record of regular dividend coverage with 108% for the last 12 months and December 31st, 2022, and 107% cumulative since the launch of our credit strategy in January, 2015. Given the floating rate nature of our credit portfolio, elevated interest rates continued to be a significant tailwind to our net investment income. The base rate index used to calculate interest on a majority of our loans reset in early January to 4.75% up from its early October reset at 3.75%. This significant increase quarter-over-quarter will provide another immediate step up in portfolio income in the March quarter. With that as context, we'll continue to execute our policy of having regular dividends follow the trajectory of recurring pretext NII per share. As such, we expect to thoughtfully increase our regular dividend to a level which can be sustained should base rates return to a neutral level. In addition, while base rates remain elevated, our intent is to distribute a portion of excess pretext NII to our shareholders each quarter through supplemental dividends. Based upon our current UTI balance of $0.34 per share, the ability to grow UTI each quarter organically by overrunning our dividend and harvesting gains from our existing $1.21 per share in unrealized appreciation on the equity portfolio, we are confident in our ability to continue to distribute quarterly supplemental dividends for the foreseeable future. For the quarter, we increase total investment income from our portfolio of 22% quarter-over-quarter to $32.8 million, producing a weighted average yield on all investments of 11.7%. Total investment income was $6 million higher this quarter due to a higher average balance of credit investments outstanding. In addition to the tailwind provided from increases in LIBOR and SOFR base rates. As at the end of the quarter, we had approximately $4 million of our investments on nonaccrual representing 0.3% of our investment portfolio at fair value. Finally, the weighted average yield on our loan portfolio was 12% for the quarter. As seen on slide 19, we further improved LTM operating leverage to 1.9% as of the end of the quarter, achieving 2% or lower operating leverage was one of our initial long-term goals when we relaunched Capital Southwest as a middle market lender back in 2015, so we were pleased to have reached this milestone. Looking ahead, we expect our internally managed structure to produce additional improvements in operating leverage. Turning to slide 20. The company's NAV per share at the end of the December quarter decreased by $0.28 per share to $16.25 cents, representing a decrease of 1.4% before giving effect to the supplemental dividend paid for the quarter. The primary drivers of the NAV per share decrease for the quarter included $8.5 million of net unrealized depreciation on the on balance sheet debt portfolio, $1.2 million, unrealized depreciation on the equity portfolio, and $3.3 million of unrealized depreciation on the I-45 portfolio. The vast majority of which was mark-to-market quote activity in the syndicated market. We also generated a total of $0.17 per share of accretion from the issuance of common stock at a premium to NAV per share. Turning to slide 21. As Bowen mentioned earlier, we are pleased to report that our balance sheet liquidity remains strong, with approximately $196 million in cash and undrawn leverage commitments on our revolving credit facility as at the end of the quarter. Based on our credit facility borrowing base as at the end of the quarter, we have full access to the incremental revolver capacity and we'll look to opportunistically increase commitments to the facility in the future. Our banks syndicate continues to support our growth, and we're pleased with the flexibility and the revolving credit facility provides to our capital structure. In addition, we have $26 million in committed, but unfunded SBA to ventures to be used to fund future SBIC eligible investments. As of December 31st, 2022, approximately 47% of our capital structure liabilities were unsecured and our earliest debt maturity is in January, 2026. A regulatory leverage as seen on slide 21, ended the quarter at a debt to equity ratio of 0.91 to one down significantly from 1.23 to one as of December, 2021 quarter. Over the past couple years, we've made a considered effort to strengthen our balance sheet to ensure we are prepared for any macro economic headwinds that we may encounter. These efforts have included our opportunistic unsecured bond issuances at record low rates in the late calendar 2021. Our continued support from banking relationships which have followed -- which have allowed for steady growth in our revolver facility commitment and our continued diligence in moderating leverage through a creative equity issuance in utilizing both our ATM program as well as the secondary equity market. We'll continue to work towards strengthening balance sheet, ensuring adequate liquidity and maintaining conservative leverage in covenant cushions throughout the economic cycle. Thanks Michael, and again, thank you everyone for joining us today. We appreciate the opportunity to provide you an update on our business, our portfolio and the market environment. Our company and portfolio continue to perform well, and I continue to be impressed by the job our team has done in building a robust asset base deal origination capability, as well as a flexible capital structure. Based to the uncertainty in the economy again, we have been underwriting with a full economic cycle mentality since day one, which we believe has positioned us well for the potential economic volatility in the coming months and years. In summary, we have a boarding rate credit portfolio heavily weighted to first lean senior secure debt allocated across a broader array of companies and industries, 90% of which is backed by private equity firms. We have a well capitalized balance sheet with diverse capital sources, strong liquidity and flexible capital, much of which is fixed rate and covenant life. We believe our first lean senior security investment focus and our capitalization strategy provide us complete confidence in the health and positioning of our company and our portfolio as we look ahead. Yes. Good morning, everyone. Bowen, in the fourth quarter we continue to see spreads in the middle market widen a little bit more, which is obviously helpful for your company's financial performance. So, I'd like to ask you, what's your outlook on how private lenders will behave going forward this year in terms of spread? When we think about the fact that LIBOR and SOFR have already climbed a lot and that stresses borrowers and what types of floors are you getting nowadays? Yeah. Thanks Mickey. I'll answer them in reverse order. So, we're pretty regularly getting 2% floors on the loans. And as far as what the market will do, spreads clearly widened. We address that in our prepared remarks and leverage levels will come down that we're seeing, which is attractive. That's a nice time to be a first lean lender. As far as what the market does in spread going forward, it's an interesting question. I mean in past cycles, candidly the lending market can tend to basically enjoy the increased index and bring in spreads by a small amount, 25 basis points or so, 50 basis points. I don't know what they'll do that this time or not, it seems to be that there's a lot of liquidity in the private equity market and the pipeline seems to be solid. So, I want to see -- I don't know, I mean, in past cycles, there has been trade-offs between spread and index, but it's hard to tell. We don't see that right now, for sure. Appreciate that. And Bowen, the portfolio's average debt to EBITDA declined quite a bit this quarter. I think you mentioned that some of that was due to new investments at lower multiples. But we've also seen data that somewhat surprisingly middle market company EBITDA growth on average rebounded pretty nicely in the fourth quarter. So, could you give us a sense of how your portfolio companies are performing in terms of their revenues and margins? Yeah. We had kind of two factors that brought that ratio down. One is what I referenced. The other one is we had a couple of names that had very low EBITDA so very high leverage ratios, and that EBITDA went from slightly positive to slightly negative. So that really a significant move from a credit picture perspective, but a very high multiple of a positive EBITDA. EBITDA goes to slightly negative, and there's not really a way to calculate that on the average. So, we -- basically, we had a couple of very high level or high leverage names move out of the average that brought the average down. But organically, if you look at the -- without that, leverage went from 4.1 times down to 3.9 times to give you an idea. So, across the portfolio. I would say our weighted average EBITDA across the portfolio. Revenue was up and EBITDA was basically flat. So, weighted average basis, we had some nice winters and some flat. But basically, it was EBITDA is basically flat for the quarter. I mean, revenue we saw, Mickey, we're still increasing, but at a slower clip than in previous quarters. And we think maybe potentially we're peaking on inflationary impacts in terms of cost -- that remains to be seen, but that kind of resulted in still being high and us having flat EBITDA-ish, but even though revenue was up. Okay. I understand. And that's a nice segue into my next question. You have several investments in the consumer sector, at least if we look at the SOI, the word consumer shows up. And we're seeing data that the consumer is really starting to retrench now. So, could you give us some insight into how your -- specifically your consumer related investments are performing and what you think their outlook is this year? Yeah. I mean, across our consumer, I'm just thinking about the names. We have had a couple of cases where revenue has kind of slowed. In one case, you saw retailers resetting inventory levels to an anticipated throughput and so, basically, kind of in the short-term, if you're selling into the retailers, your revenue go down, but if you kind of look at the sell-through, you get comfortable the revenue is not going to stay down and not really be down all that much yet. The first lien lender, I'm not sure it gives you credit worries, but as far as economic signposts for the U.S. economy or the U.S. consumer, yeah, I mean, I would put that in the category of what you're saying about the U.S. consumer, but not really in those cases, most of them we don't have equity investments in. But those -- in those cases, not a lot of not credit concern, but definitely those signals. Okay. I appreciate and understand. One last question, if I can. With this quarter's deleveraging of the balance sheet, I'd like to ask whether you've adjusted your leverage targets. And if not, where do they stand both on a total and regulatory basis? So, historically, I think we've said we expected once the FDA got ramped that our regulatory leverage would be somewhere in the 0.9 to 1.1 range. And that's -- obviously, we sit right now at the very bottom of that range. I think our perspective is going into a potential cycle, we would like to delever, and you'd expect the expectations that if there are concerns and you'll see us lever back up to some degree based upon depreciation. So, we got ahead of the curve from that perspective. But from a go forward basis, you'd expect to see us continue to stay within that 0.9 to 1.1 range. On an economic basis, we're at 1.1, which is also within the 1.1% to 1.3% range we've discussed. And we think we'll follow suit will vacillate inside that range. Yeah. I mean, obviously, as I tried to address in the prepared remarks, I mean, it's through a cycle, you kind of want to be at the lower end of your range going into a recession. And if we don't have a recession for some natural reason, and that's great. We're fine. But if we do, you want to maintain the ability to invest throughout the recession because risk adjusted returns, especially in the second half of the recession, can become really interesting based on past cycles, and then obviously, we mentioned stock buybacks as well. So, we want to be able to manage as we've always had a full cycle mentality. We want to be able to position the ship, if you will, to really perform and do well for the shareholders throughout the cycle. Thank you. And one moment for our next question. And our next question comes from the line of Kevin Fultz with JMP Securities. Your line is open. Please go ahead. Hi. Good morning and thanks for taking my question. My first question is on credit. I'm just curious if you've seen an increase in amendment request and if you can discuss your expectations for that to potentially pick up in the near-term? Yeah. We had two for the quarter. I would say it's increased slightly, but not really a lot. I mean, it's not zero, but it's kind of they've been request candidly, when a first lien lender gets to request for an amendment we get a fee. So, it's a nice dynamic of a first lien lender book. So, it's part of our business to have those amendments. But I wouldn't say there has definitely not been a flood of increase of eminent, but there's been some increase. Okay. That's helpful. And then just in regards to portfolio positioning, are there any pockets of industries that you find particularly attractive in the current environment? And if you can, maybe parsing out lower middle market and upper middle market opportunities? Yeah. I mean, the vast majority that we've been doing is in the lower middle market. I would say business is, first and foremost, that we can underwrite a full cycle. We've been looking at certain situations at high asset coverage. Basically, the industries that have like higher free cash flow margins, recurring revenue subscription type businesses that have shown to be low churn in past cycles. I mean, those are the kind of sectors that that certainly we like and -- in this market. Thank you. And one moment for our next question. And our next question comes from the line of Bryce Rowe with B. Riley. Your line is open. Please go ahead. Thanks a bunch. Good morning. I wanted to maybe start on the dividend, great to see another quarter of increase here. And based on your comments, it sounds like you're approaching these regular dividend increases pretty methodically. You noted in the prepared remarks some inclination to be careful about where the dividend or where earnings could be when rates get back to kind of a neutral level. So, any thoughts on what that neutral level might look like and how it kind of translates into kind of a neutral NII type of generation level? Yeah. Bryce, so looking specifically at this quarter, for example, we posted at $0.60. If rates were neutral, I'd say neutral was 3%. The run rate on the portfolio would look more like $0.56 per share. So, when you look at that relative to the dividend that we paid this quarter of $0.52, still $0.04 of cushion. As we move forward and we grow the portfolio, and you see -- we mentioned earlier, operating leverage, we expect operating leverage to continue to decline. That $0.56 bogey will grow. And that's why we, as you stated, we're going to methodically grow that dividend, but we do feel between now and high 50s, there's safety on the regular dividend. Got it. That's helpful, Michael. You mentioned the -- kind of the majority of your loans kind of resetting in January maybe a 100 basis points higher based on what we've seen in base rates. Is your expectation that we'll see, give or take, 100 basis points of weighted average yield expansion in the portfolio as we kind of get into April or into May when you report earnings next? Yes. We would expect that on the revenue side. I would just say that the one overhang you'll also see is obviously, we raised a lot of capital in the prior quarter and much of that was late stage. So, there will be some level of dilution that will offset that increase on the top line revenue. So, we will expect to see grow meaningfully next quarter, but there will be a little bit of an overhang. Okay. That's helpful. Maybe question around quarterly marks. You obviously highlighted the more kind of broader credit market driven marks on the I-45 portfolio. In terms of the $1.2 million of unrealized depreciation on the equity book, can you kind of talk or walk through kind of some of the puts and takes within that? And I would assume you're seeing some with appreciation versus some with some depreciation? Yeah. I mean, if I look down to equity marks, we had one -- two companies that were downgraded that were the majority of the decrease. And so, really a lot of -- taking those out, I mean, looking down, there's several very large winners, and then a bunch of like kind of slight positives and a bunch of flats and a few kind of downs. And so, I think the equity portfolio, we had those two kind of underperformed other than have portfolio was kind of net up. So -- did that answer your question? That's helpful. Appreciate that Bowen. And then maybe last one for me. From a pacing perspective, just kind of curious kind of how the pipeline is shaping up, it looks like -- it sounds like repayment activity is going to continue to be muted. So, just thoughts on how to think about pacing within our models, would be great. Thanks. We did a pretty robust pipeline this quarter, probably not to the same extent as last quarter for sure. But numerically, we would expect to be somewhere in the $90 million to $110 million of new originations this quarter. And we are only seeing -- we're saying like the pace of repayments have certainly slowed, I think our expectation is about $15 million this quarter and maybe going forward. So, it's essentially maybe one credit a quarter that it might come back. So, net portfolio growth is going to be somewhere in the -- I think, $75 million to $100 million for the next few quarters. I think that's right. And we have definitely that kind of repayment activity. We do have some visibility on some sales processes that are going on that based on the company's health, you would expect the companies to invest. So, we'll see some repayment activity, but it won't be a refinancing, everybody will be someone acquiring that company and resulting in us getting refinanced out. So, our refinancing won't be zero, but they definitely like Michael, so it to be lower. And I agree with that general comment on the pipeline. Thank you. And one moment for our next question. And our next question comes from the line of Erik Zwick with Hovde Group. Your line is open. Please go ahead. Thank you. Good morning. First question, within the prepared comments, you mentioned that underwriting certain industries is more challenging today. And I'm curious how you approach that. Does that mean there are certain industries that you are not willing to underwrite in today? Or does it just mean you need to adapt and maybe change your underwriting standards and structures for those particular industries? And maybe if you could what those industries are as well? Yeah. I would say generally -- I would say what I'm trying to communicate is that really the way we look at the world hasn't changed. And so, there's underwriting certain industries has always been tricky industries where there's higher fixed cost, lower margins. And then when you look at an economic backdrop or economic effect on the customers maybe the customers are making a capital investment decision, which results in your revenue at your portfolio company. Capital has become more expensive. CEOs across -- you hear on news or whatever, CEOs are being more judicious or careful about capital investment decisions they're making. And if you have a portfolio company that's got whose customers are making capital investment decisions that would drive revenue, that would be an industry that we would shy away from as an example. And then you throw on top of that industry, if you look at the margins on a portfolio of company, the split between fixed cost and variable cost is a really, really important metric to look at. The industry is going have more manufacturing, for example, that has -- obviously, if you have a manufacturing plant, you naturally have higher fixed cost, right? So -- and so those are tight industries that candidly, we shy away from, but also were the ones that are kind of tricky to underwrite. So -- but at the same time, what I'm trying to communicate is really the way we look at the world hasn't changed. We've been saying that since day one that we look at an extreme recession right after our loans made and trying to spell out for everyone kind of what that means in a financial model. And so, we were -- we've been thinking about the possibility of a recession for the last eight years because there's always -- you could have always along the way, maybe argument that were pretty long in the tube on this expansion. And in each year didn't come, now we're facing it potentially, but certainly a very advertised recession for good reason. And so in one sense, our underwriting hasn't changed at all, except for higher base rates going into that model. Yeah. The other thing I'd add as well is I think everybody probably have to deal with this is the COVID hangover. So looking at financials and seeing how far is that -- the bounce back from 2021 and 2022 related to coming off the bottom of 2020 with COVID as well as now if you look at healthcare, sometimes you're seeing flatter ups and COVID various places in the country. And so sometimes it's difficult to underwrite what the run rate was before and whether the run rate is current as well today. COVID is an interesting example. So, looking at rather than EBITDA as a portfolio company, post-COVID, some industries have kind of pent-up demand, as we all know. So, the bounce back can be pretty extreme. And so it makes looking at kind of 2018 and 2019 performance and getting a sense as to what the pre-COVID level of performance was for a particular company. So that's a little bit different than we were doing four years ago, for example. That's great color. I really appreciate that. And then my other question was just in your conversations with the PE sponsors that you work with. I'm curious if you've noticed any change and sentiment, certainly the industry data, I look at indicates there's still a lot of dry powder there for them. Are they sensing potential recession and maybe keeping some dry powder on hand in the event that they'd have to commit extra equity to initial investments? Or are they still out there looking for -- I'm sorry, to existing investments? Or are they still out there looking for new opportunities to the same level that they were 12, 18, 24 months ago? So, yes, there's liquidity out there in the private equity market. And yes, they're out looking for acquisitions. And hopefully, in the next 12 months, there's a bunch of sponsors. I think they'll have a nice opportunity to add some very accretive acquisitions. So that's definitely the case. I would also say that private equity firms, they're smart, right? And they're actively managing these companies their spreads are widening on their rent spreads, the index and so their cost of their debt is going up, and they're thinking about a recession like all of us on the call are, right? All of people listening to this call are thinking about that, right? And so what are the private equity firms are doing? I mean their cost of debt going up and they're thinking about recession. So they're leaning in and really actively looking at cost structures -- and candidly, I think that's probably -- that's really imposing really good discipline on these companies. And so, I think that's going to benefit the companies in the long run. The increased index or the cost of debt going up and poses discipline on the cost structure of a business. That's one thing. And then as I think about recessions and all that, they're imposing discipline also on the cost structures as well. And so we'll see. I mean, we'll see where that results in the layoffs or what have you. But I do think the dynamic -- to answer your question, private equity firms are kind of doing and signaling yes, liquidity, yes, acquisitions, but also unenhanced discipline on looking at their cost structures, which I think is helping. And we've also seen the company that have come to us with amendments or waivers or companies that might be having a little bit of trouble. They been willing and able to fund into these companies. Those negotiations have gone well. There's no signs that they're taking -- there's a dooming recession coming and that they're kind of taking the keys to us. They've been pretty productive in conversations across the board. Thank you. And one moment for our next question. And our next question comes from the line of Robert Dodd with Raymond James. Your line is open. Please go ahead. Hi, guys. And congratulations on the quarter. Kind of a follow-up, but the leverage question on a very beginning of your opening remark, you talked about leverage being a full turn lower in some cases on new originations, and that's driving that is portfolio leverage down a little. But can you give us any color on what's the driver? Is it the sponsors with lower asks? Or is it lenders kind of holding the line? Because obviously, if leverage is a turn lower, even with rates up 250 basis points, you might be underwriting the interest coverage where it was a year ago, i.e. it's very different with that leverage and the rate dynamic that both work together. So -- but is it really the sponsors that are asking less to your point, being disciplined? Or is it the lenders holding the line? Yeah. Certainly, a good -- an interesting question. So, it's kind of both of those things. So from a sponsor perspective, I mean, as indexes widening, if you're buying a company, the cash cost of that debt has gone up, right, dollar for dollar. And so, naturally, the way you solve for that is if you want to start amount of free cash flow to support the business and grow the business, you bring leverage down. That's why my comment on loan to value, not really -- loan to value also coming down, it's interesting because that would suggest certainly in the universe we're looking at the multiple for good, strong companies hasn't really come down much yet. It's kind of a nice wave nice time to be a first lien lender because we're effectively capturing a larger piece of the cash flow. And so -- and then on top of that, I think lender, we've been able to be more conservative on our proposals and candidly win some deals. And so, I would interpret that as the lending market being may be more cautious, also some dynamics. I mean, many lenders are backed by insurance companies and they're investing capital and it's their access their appetite for illiquid credit versus some of the more liquid credit and as they're investing in their books. And so, they kind of come and go. So, there's a dynamic of that in the market as well. So it's kind of over all of those things. We're working with sponsors now that -- in conversations with for the last three to six years, we probably haven't found a way to be useful to them. And right now with sort of less lenders playing in the market, we are able to be helpful to them, and we think long-term, this is going to enhance our originations platform. Got it. I really appreciate the color. Kind of are you seeing in the pipeline early stage or whatever? Are you seeing any changes in quality of companies. Obviously, that can be in customer environment, obviously, the average quality tends to go up and vice versa and things like that. So, are you seeing a mix shift on who's coming to market versus where it was, say, a year ago? Yeah. I would definitely say there is some aspect of that. It's true because really companies that are in the market right now for sale are ones that are candidly not super cyclical, right, because they would be able to raise the financing to do the deal, et cetera. So, in many respects, higher-quality companies, higher margins all the aspects of the company that make it higher quality credit. I think, it's definitely the case because anything that's even more lovely offset of the fairway, it would be very hard to sell the convert. I would definitely agree with that being a factor. And just if I can, this is maybe an unfair question. In your experience over the -- where is your impression of -- where do you think that given all these dynamics? Where do you think the 2023 vintage in terms of quality could shake out as a lag against previous originations and produce? Yeah. I mean, I think 2023, if it plays out of any kind of recession, that I think the 2023 vintage could end up being an outstanding vintage. I mean that -- and that would be consistent with past cycles, right? And so, especially in kind of the theoretical second half of a recession, right, where kind of the laundry has been -- the dirty laundry has been aired and sponsors have liquidity that can negotiate relatively interesting valuations from a cycle perspective, sellers are a little bit more flexible in structure or what have you, and really end up structuring deals at valuation multiples and leverage multiples because you're at a trough in EBITDA rate, so from a cycle perspective. So all people EBITDA goes up, which drives value, delevers. And so all those factors go in and make a recession year when you look back at past cycles, in my experience to end up being very attractive institutions. And the only downside of that is these assets may spend to be less sticky, right? We've had to negotiate cost protection and extremely important on these companies where the leverage is so well in the LTV as well. So, we'd expect if things -- if this recession is mild and/or if it passes, 2024 could be a high refinancing year. And that's consistent with past cycles, too. I mean that's a term that is that we're pretty aggressive on holding the line on, but that's a pushback term from sponsors, they want some relief or some lower prepayment penalties and that kind of thing. So, it's a term that's heavily negotiated deals right now, and that will be the case through the recession. And then clearly, coming out of a recession to Michael's point, is to best leverage comes down, things normalize and then you want to kind of normalize the capital structure. So that ends up being less sticky debt investments to really interesting on the equity piece. Well, thank you everyone for joining us, and we always appreciate giving you update on the company. And thanks for all the questions, and we look forward to talking to you next quarter.
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Good morning, and welcome to the Fourth Quarter Conference Call for Graco, Inc. If you wish to access the replay for this call, you may do so by visiting the company's website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. [Operator Instructions] During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute forward-looking statements for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in Item 1A of the companyâs 2021 annual report on Form 10-K and in Item 1A of the company's most recent quarterly report on Form 10-Q. These reports are available on the company's website at www.graco.com and the SEC's website at www.sec.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. Good morning, everyone, and thank you for joining our call. I'm here today with Mark Sheahan and David Lowe. I will provide a brief summary of our results and then turn the call over to Mark for additional discussion. Yesterday, we reported record fourth quarter sales of $555 million, an increase of 3% from last year. As a reminder, the fourth quarter of last year included 14 weeks, as compared to 13 weeks in 2022. Net earnings in the quarter were $126 million or $0.74 per diluted share, an increase of 7%. Currency translation rates continue to be a challenge in the fourth quarter, decreasing sales by $23 million and net earnings by $12 million or $0.07 per diluted share. The gross margin rate decreased 2 percentage points in the quarter, due to the unfavorable effect of foreign exchange. During the quarter, our pricing actions more than offset increased cost and had a favorable effect on both the gross margin rate and dollars. At current costs, we expect a favorable price cost dynamic to continue as we move into 2023. Operating expenses decreased $10 million or 7%. Reductions from lower sales and earnings-based expenses and translation rates were partially offset by volume and rate-related increases. Other expenses decreased $15 million in the quarter as last year included a $12 million pension settlement charge that did not repeat. The adjusted tax rate for the quarter was 19%, due to the unfavorable effects of foreign earnings taxed at higher rates than the U.S. rate. We anticipate the effective tax rate for 2023 will be between 19% and 20%. Cash provided by operating activities were $377 million for the year, a decrease of $80 million from last year. Contributing factors include increased annual incentive payments and investments in working capital. I'll take a moment now to cover a few items as we look forward to 2023. As we discussed in our materials issued last night, we are initiating a revenue outlook for the full-year 2023 of low single-digit growth on an organic constant currency basis. Slide eight of our conference call slides, however, incorrectly stated with growth expected in all segments and regions. A corrected presentation will be uploaded to our website following today's call. We have been and will continue to monitor changes in currency translation rates. More recently, we have seen improvements in our core rates and at the moment, anticipate the full-year effect of currency translation would increase sales and earnings by 1 percentage point in 2023. Unallocated corporate expenses are projected to increase and fall within the range of $31 million to $34 million. This increase is related to stock-based compensation. We expect capital expenditures to be approximately $200 million with $130 million for facility expansion projects at our Minnesota, South Dakota, Switzerland and Romania locations. Thank you, Kathy, and good morning, everyone. All of my comments this morning will be on an organic constant currency basis. Sales in the fourth quarter were up mid-single-digits, resulting in quarterly and annual records for both revenue and operating earnings. We achieved these records in each quarter of 2022. Contractor was the only segment that did not realize a record in the fourth quarter. However, the segment did reach record annual revenue and ended just shy of $1 billion in total sales. Our consolidated backlog was $355 million at the end of the quarter, which is approximately where it was last year at this time. Slowing demand in Contractor along with strong project completion in our powder equipment business reduced backlogs from what we reported at the end of the third quarter. We also experienced areas of improvement in component availability during the quarter. While some shortages of key items like electronics and castings persist, supply chains have improved from earlier in the year. The pace of incoming orders has slowed, compared to a year ago. However, year-over-year comparisons are heavily influenced by the magnitude and timing of our price increases in 2022 versus the fourth quarter of 2021. Many of you will remember that in 2021, we held pricing flat throughout the year after a modest increase in January. In the fourth quarter of 2021, we announced that we will be implementing a substantial price increase early in 2022, which led to heightened order activity in last yearâs fourth quarter. We have factored these things into our outlook, which I will cover later. Now turning to some commentary on our segments. The Contractor segment had a mid-single-digit revenue decline in the fourth quarter, driven by less demand in the home center channel, limited pro paint product availability in EMEA and Asia Pacific and the effect of lost sales, due to discontinuing our Russia operations earlier this year. The North American pro paint business remained strong, with revenue growth in the high-single-digits for the quarter and out-the-door sales were equally strong. Component availability improved, but we are still on back order, especially in our pro paint business. We continue to monitor global construction indicators. However, given the broad nature of our short-cycle business, which has multiple product categories, it is difficult for us to accurately predict the ultimate trajectory of revenue. Simply put, there is no silver bullet in terms of expert consensus or leading indicators that guide us to a certain revenue outcome. Our products are used in many things such as new construction projects for single-family residential, multifamily residential and commercial construction. Contractors also have repainting and remodeling projects covering these categories. In addition, we support specialty contractors doing things like spray foam insulation, line striping and pavement maintenance, texture spray applications and high-pressure protective coatings jobs that are often seen in infrastructure applications like bridges, pipelines and commercial shipping. Most contractors working in the aforementioned categories report project pipelines that go through much of 2023 and even into 2024 for commercial applications. Experience has shown us that as long as contractors have solid project pipelines, they will continue to buy both spare parts and new equipment. These factors, combined with new products being launched and our channel expansion initiatives, puts Graco in a better position than if we only had to rely on the economy to determine our revenue fate. In the Industrial segment, sales were up 17% in the quarter with positive results in all reportable regions, and they achieved fourth quarter and annual records for both sales and operating earnings. This segment is the most global of our businesses and experienced solid growth in all regions for the quarter and for the year. Key product categories such as finishing systems and sealant and adhesive equipment were the main drivers of this growth. Profitability continues to be strong with incremental margins of 55% in the quarter and 61% for the year. Checking with our teams, project activity remained good as we finished the year. The Process segment grew sales 16% for the quarter, resulting again in both quarterly and annual records for both revenue and operating earnings. This is the fifth consecutive quarter that process has set these records. Increased volume drove profitability improvements as the year went on. Incremental margins were 48% in the fourth quarter and 36% for the full-year. Broad-based sales growth in lubrication equipment, process pumps and semiconductor pumps, heaters and fittings, drove the strong performance. As we finish 2022, we have large backlogs in semiconductor, decent project activity in lubrication and process pumps, and we are excited about both recent and upcoming product launches in these businesses. Moving on to our outlook. As we enter â23, we're keeping a close eye on order trends and business tempo. At this time, we remain cautiously optimistic that we can drive another year of growth in both sales and net earnings. As such, we've initiated a low-single-digit organic revenue growth outlook on a constant currency basis for the year. Our teams performed extremely well over the last two years, and we are ready to react if conditions differ from our expectations. I am confident that our performance will reflect this in 2023. Our core strategies of launching new products, investing in our manufacturing capabilities, expanding our global channel and pursuing strategic acquisitions will facilitate growth not only this year, but also in the future. Thank you. The question-and-answer session will begin at this time. [Operator Instructions] Your first question comes from the line of Deane Dray from RBC Capital Markets. Hey, can we start with -- there was a lot of worry here regarding one of your pro paint customers being -- having an earnings miss and lower guide and everyone goes, oh, there's immediate negative read-through to Graco. And the reality is you're not as dependent as what people think, and there's other applications. But just take us through that misperception, and you and I have been through this before, but just kind of frame for us the relationship and the end market exposure, et cetera? Yes. So I would say that overall, we haven't really seen any, kind of, a decline in our pro paint business, and I think that's reflective of the fact that contractors are busy, they've still got projects, they buy stuff when they feel good about the outlook on different things. But notwithstanding that, we do sell into some of the newer construction markets that have, I think, been particularly hit by the increase in interest rates and housing activity overall. I tried to point out in the opening remarks that this is a pretty broad business when you're looking at our Contractor business. There's a lot of different applications, a lot of different product categories. And we aren't, as you said, tied into one specific macro thing that you can really use to guide what we see on the revenue growth side. So when we look at everything and what we're experiencing right now, we feel okay about CED. And as the year progresses, our visibility will be much better, because we are pretty short cycle, as you know. And orders come in, we get them out as quickly as we possibly can. It's good for our customers, but it does create some issues for us in terms of just having a clear visibility on where things are going. I was at a trade show last week by a large paint organization, it's their annual trade show. And it was very well attended. Our booth was extremely busy. They bring in their store managers from around the country. There was a lot of interest in our new products that we're launching. And I would say overall that it is a fairly positive takeaway for me being able to walk the floor and talk with different participants in that industry. So again, we'll see how it plays out, but things are hanging in there pretty good for now. That's all good to hear. And then just on pricing outlook, for 2023, you're going back to -- at least you had said you're going back to one price increase or that's the plan. What is the price increase expectation for January? What kind of realization are you expecting? And what does that mean for price cost? Yes. It really depends on the business unit in the region. But generally speaking, this will be more of a normal price increase, I would say, in line with what you might have seen in 2018, 2019. And each segment is implementing that here in the first quarter. And some of the regions are going to wait until a bit later on, because we did just push through a fairly healthy price increase at the end of the third quarter. In Contractor, I think given that they have raised their prices already twice, we're going to hang tight for a while. I think we're in better shape than we were. You actually saw price cost neutral to slightly favorable in Q4. We're hopeful that the actions that we've taken will continue to play out that way for the rest of the year. Hey, good morning, everyone. And I so -- maybe just then -- I think you kind of gave us all the pieces there, Mark, but maybe just talk about where you're expecting growth this year by segment and where you're not? And where the pressure points might be? And then whether -- then on a related basis -- well, I'll ask this as the second question. We'll start there and I'll keep them separate. Yes. So we didn't really break out, as you can see what the outlook is by segment or by region for a lot of different reasons, probably the biggest one that our visibility isn't that great, but I would say generally that we feel really good about product launches and channel expansion initiatives going on in the Process segment. As well as that particular group has a lot of backlog still from orders that we took, particularly in the semiconductor part of the business, which should really help them on a full-year revenue basis. So in that segment, things are -- we feel like they're in pretty good shape. On the industrial side, a lot of the growth that we saw here at the end of the year and really a lot of the growth in 2022 came from both our sealant and adhesive businesses as well as our powder equipment business. And fortunately, with regard to the latter, they do have backlogs and they do have some better visibility on orders and how the year might play out versus some of our other short-cycle businesses. So when you put those two things together, again, I feel like we're in pretty good shape with respect to being able to grow in industrial in 2023 without getting into details on regions and those types of things. And as you know, contractor's sort of a wildcard. As we sit here today, orders have been okay. The pro side is better than the home center side. As you know, pro center -- or pro side is more profitable for us than the home center side. So from that standpoint, if you had to have one that was weaker than the other, having a good strong pro side of the business should help us on the profitability front. So hopefully, that helps. But all in all, when you roll it all up, I think we feel pretty comfortable with the low single-digit guide. That makes sense. And then maybe talk a little bit about the cadence in that as you look through the year, some of the comments in the prepared remarks about a little bit of pre-buy ahead of some of the price increase in the fourth quarter, given kind of the time frame that tends to imply maybe a little more outflow in the front part of the year, visibility better front half versus back half? Is some of that reflected in guidance? Or is there an element of just relatively normal seasonality embedded in that outlook? Yes. I think we tried to do the best job that we could to factor all that in to give you the full year guide. There's probably going to be a little bit of volatility in terms of order rates and those types of things. We certainly saw that in Q4, just from a comparison standpoint from a year ago. But we also raised prices in Q3 of this past year. So you might see a little bit more order volatility around that as well. All in all, though, I think that the guide that we gave this kind of low single-digit number for the full-year, we feel pretty good about it. I think that the -- when we talk about the Industrial and Process space, I'm generalizing, but the channels really donât stock a lot. Their demand varies all over. And quite frankly, many of them wouldn't know what to order to do a plan ahead in terms of a price adjustment. As Mark touched on, certainly the CED is probably, if we look at the -- if we go back to 2019 -- we've done a little work on this, is certainly the shortest cycle of all of our short-cycle businesses. And I feel that there to some degree, what we could be experiencing at this point is a return to normalcy or more normalcy. Better quality supply chains, still some gaps in electronics and chips. But I feel pretty good that what we are seeing is, I'd say, getting to a situation -- getting closer to a situation where the channel partners order with confidence knowing that we're going to ship promptly. Got it. So it sounds like what you're saying is the seasonal patterns are reasonably normal, but there's going to be some volatility expected through the year. So there's going to be some variance in that thought process as we move forward. Yes, it could be some order volatility. Hopefully, the factories are a better spot where what we actually get out the door is a little bit smoother than the order rate volatility. Of course, we still got big backlogs, right? So I mean a year ago, when we were talking with you guys, we were lamenting the fact that we had $350-plus million of backlog, and that's where we're at here today, too. So⦠Hi, good morning. So gross margins were up a little bit sequentially, but still remain under pressure. What do you need to see to get gross margins back above that 50% level? Hi, Saree, this is Kathy. I think what we experienced in the quarter, as I said in my comments, we really saw the unfavorable effect of that current foreign currency exchange. I think where -- with where rates are at right now, we don't expect that headwind to continue into â23. I mean, obviously, rates could change. And given that we did have a favorable price/cost dynamic in the fourth quarter, I think we're optimistic about how we enter â23 and beginning to see some gross margin rate expansion. Of course, that -- we need volumes to remain the same, cost to main the same. So those will be the two factors that we continue to monitor here in the first quarter and throughout 2023. Yes. I would just add that after really about a half a dozen quarters of serious price cost pressure really going back to early in Q2 of -- gosh, I guess we've got to go back quite a way as maybe at the beginning of â22. The progress that we made here in Q4, I think, was impressive. And I would say it reflects the impact of pricing that we did at the beginning of the year. And the -- by now famous interim price increases that we completed throughout the summer months. And anticipating a question, the lesson is not lost on us. Yes. And like if you look at Q4, if currency were neutral, we would have been above 50%. So I think that -- let's hope that it stays neutral that our price cost gets in better shape, that the actual input costs come down at some point. We may see some of that starting to creep in. And then I have -- nothing is broken here, so we should get back up to those rates that you were talking about. Great. And then obviously, you've seen positive on the outlook for industrial next year. Can you just talk about what drove the strength in the quarter? And how do you think about those markets going into the year? Yes. I mean, I would just say that all in all, it was a great year for that team. I would point to the things I said before. I think our adhesive dispensing business, our sealant business is on solid footing across multiple industries, including general industry, aviation, solar. They have automation projects going on both in that business, as well as on the paint circulation side. They've got really good channel initiatives for expanding their channel. We've got engineering teams now located in the regions that are doing special projects for customers that lead to a more robust product plan. So overall, I think we feel like things are in good shape there. And then you throw in like e-mobility, battery production. We're trying to build our business in the packaging space and a really good powder equipment business, which has performed extremely well over the last couple of years, and they've got nice backlogs heading into â23. All of that really makes us feel pretty positive about what's going on in our industrial segment. Thank you. One moment for your next question. Your next question comes from the line of Matt Summerville from D.A. Davidson. Good morning. This is Will Jellison on for Matt Summerville today. I wanted to ask you -- in addition to the facility expansion plans, you've laid out for investing organically in the business. I was curious as to how you're thinking about investing inorganically in the business? And whether or not you have a pipeline that you believe is actionable at the moment? And what kind of businesses you would be interested in adding to the Graco portfolio as part of that process? Yes, it's a good question. Thanks for asking it. I mean, for sure, we're trying to put every penny back into this business that we possibly can. In good times and bad, we're going to keep investing in product development, upgrading our facilities, making capital investments that have good returns on investment associated with them. And everybody that follows the company knows that notwithstanding that, we still generate enough cash to be able to look at things like acquisitions. I would say that the teams over the last year have done a pretty good job of working with the corporate team in developing pipelines and looking at various applications, both with their existing markets, as well as adjacencies where we think we can drive some value. And for us, the value is really on the production side. We've got great manufacturing on the engineering side. I think we bring some skills there. And then, of course, channel sales, marketing and the infrastructure that we have around the world. So I feel really good about the -- where we're at in the journey here. We kind of stepped things up last year. All the business units now have decent pipelines, there's activities going on. We'll see what happens. The market has been a bit frothy, as everyone knows, over the last 18-months or so. But with rates coming up and multiples coming down, I think that could create some opportunities for Graco to help add some growth through good strategic acquisitions. Yes. I would just add to Mark's point that the corporate group has spent a lot of time with the operating teams and really has fleshed out attractive segments. And from there, attractive, what I would call a prospect list with an eye towards reaching out, perhaps building up a relationship, learning about their businesses before there's a day where there's an event. We've been in those situations before when we're in a reactive mode, and that's not the greatest. As far as just -- without getting specific on applications, I would say that things that we like, markets that have characteristics we like, we like niche markets. We like markets that are business-to-business. We like markets that have large installed base, because that puts long-term participants and extremely strong positions. Of course, we like recurring revenue. And there's no doubt about it, markets that will pay a supplier for quality and innovation is important to us because it's central to our value proposition. Thank you. One moment for your next question. Your next question comes from the line of Joe Ritchie from Goldman Sachs. So I just want to make sure I understand the framework for the low single-digit guidance for 2023. I guess the expectation is pricing is going to come in pretty much low-single-digits, the volumes may be flat to down. Is that -- did I understand that correctly? Yes. We didn't really break out price versus volume in our outlook. But when you roll it all up, that's where you get the low-single-digit guide. We do have a lot of built-in price realization in the outlook because, of course, we raised prices a couple of times last year. And those -- as we kind of roll through â23 versus â22, there should be some favorability there. But we didn't really break out volume in the overall outlook. Okay. And then maybe just on the pricing comment, as you're exiting 2022, how much of that pricing carries forward into 2023? Well, again, last year, we started the year, kind of, let's call it, ground zero. We had a big price increase that came through in January and then another one in the September time frame. So at least for the first nine months or so, you will -- you kind of get that double effect of those two price increases in that. And as we get to September, we should be on par with where we were at, at that time a year ago. Yes. When you age our backlog, the vast majority of our backlog reflects â22 pricing either in January or the interim adjustment we made at the middle of the year. Got it. Yes, that makes sense. I guess -- maybe just focusing on the Contractor segment for a second. This segment is really incredible, the growth you've seen over the last several years. It's almost shocking that it's almost 50% of your revenue base as of the end of last year. I guess you mentioned that the pro is continuing to stay pretty healthy, the demand outlook. And there's been a divergence between the pro and the home center? I guess just in your experience, is that typical that when you have cycles in that business that thereâs divergent trends in what you're seeing on the pro side versus the home center side? Or would you expect that to start to converge at some point if the demand outlook weakens? Yes. I don't really know. I mean, what I would tell you is that at least with regard to the home center over the last couple of years, it's been kind of crazy, right, with all the stimulus money and people working from home and hanging out at Home Depot doing projects, that kind of thing. So it probably doesn't really line up with what we may have seen historically. Money was free for a long time. Now money is not free anymore. So I do believe that the consumer is going to retrench a little bit and that likely would show up on that side of the business. On the pro side, again, our experience has always been that if they've got jobs and they've got a pipeline and they're busy and they can see projects going out, they buy new equipment. Typically, if you're a painter and you buy a new sprayer and you're busy, you can pay for that thing like within one or two jobs. So it's a really quick payback, plus you get all the benefits of having a new tool and a new piece of equipment. So it's sort of a confidence thing for them. And with all the different projects and things that they get involved with, at least for now, it appears to be on fairly good footing. Got it. If I could sneak one last one in on the Contractor. How do you think about normalized margins for that business? Because I remember a time when like the margins were in the low-20s, and there was an opportunity for them to really expand as you mixed up your products that were being sold, higher-priced sprayers. How do you guys think about normal margins for the Contractor segment over time? Yes. So one thing I'd just point out is if you go back historically, never had the protective coatings or the spray foam in their numbers. And those are in our Industrial business. So it's a little bit hard to go back and compare. What I will say is we don't really have a target for our teams when it comes to margin increases and what we're trying to get to. I think that if the volume is there, and we can get a little bit of relief on the price/cost equation, which we've really not seen much in contractor that their margins can trend higher. So a couple of years ago, somebody would probably have said, well, gosh, your Industrial margins are so high. Where do you go from here? And if you look at what we did this year, I mean, we went from 33% operating margins last year to 36% this year, and we were at 37% in the fourth quarter. So we don't really put a lid on these things for our people. They get incentivized to grow the business both on the top line and the bottom line. And we find ways to do it. Hey, good morning. I think in the presentation -- you said you changed something in the presentation. I don't know if you clarify what is changing. I think you said you're changing from growth in all markets and regions? Maybe just some clarification there. Sure. We are taking out the with growth expected in all segments and the regions and just leaving it to the guidance of full-year growth in the low single-digit range on an organic constant currency basis. It's just an overall comment. We couldn't really get real -- like I said, we can't really fine-tune or micromanage where things are going to come from. So we want to make sure that we put that clarification. And there -- unfortunately, that little note at the bottom was a carryover from the slide that we had published previously and just didn't get modified. So I wouldn't read too much into it. It's just an unfortunate clerical error. But we're still really confident in the overall guide of this low-single-digit for now. Okay, perfect. I think you've been mentioning, I think, pretty consistently in process semiconductor and maybe this quarter, just can you just remind us what your focus is there? And then there's been a lot of -- that market has been strong, but there's been a lot of CapEx cuts and worries around semi. And wondering if you're seeing any of those cracks? And just maybe even as we go longer term, how you think the Chips Act and some of the longer-term growth kind of plays into that market? Yes, we like the business. It's been really strong for us. It's grown, I think, 10 times, since we bought it. So there's certainly not much negative to say about it. There is still business happening there. Again, we make these high-purity components and pumps that go into the equipment that's used to actually manufacture chips. And so if they're putting in a new fab somewhere, they're going to need this equipment to go inside of the fab that's being built. So you've got the backlog that was created by all the business that's happened over the last couple of years. And then now as manufacturers are looking to move locations around the world, that creates opportunities for us to go in and sell them new high-purity equipment. We bought some other businesses, kind of, around it that do things like heating and then some of the baths that are used to actually house the chemicals before they get pumped and put in. So all in all, we like the space. We're in a nice niche, and we feel pretty good about it. And I would just add that in terms of the capital investment spend, the big fab investments that you read about -- and actually, we've been reading about for a couple of years now, the ones of â21 and â22, they're going to play out over the next couple of three years. So there's some legs in this space because it's, let's say, longer cycle than the Graco average. Thank you. One moment for your next question. Your next question comes from the line of Thomas Johnson from Morgan Stanley. Hi, thanks. I just wanted to revert back to the contractor segment here. I know in your comments, you had noted limited pro paint product availability as a headwind in the EMEA business? So it would just be helpful, if you could get some incremental color on exactly how that headwind has impacted the business and maybe what you've seen in terms of improvement or easing availability there? Yes. So I think the comment was about EMEA, as you said. And in the quarter, we were actually down, but if you were to back out the Russia business that we had a year ago and currency, it was actually sort of a flat environment for us in Contractor EMEA. But as you noted and we mentioned, part of that, we also believed, it would have been a better quarter for us and a better year if we were able to get some of the more higher-end pro units over to Europe in a more timely manner. As you probably know, we've been battling electronic components and different aspects of the things that go into our higher-end sprayers throughout the year. And our team over in EMEA believes that if we had better flow of those products, they would have posted better numbers. Great. That's very helpful. And then just in terms of what you've seen from improvements in availability and kind of -- I know -- not looking for region level outlook. But obviously, is it fair to assume that those headwinds on a year-over-year basis will be easing in 2023 for that business and region? Yes. I think we saw a pretty good improvement as we got through the back half of last year. We're still faced with some component shortages in things like electronics, but I would characterize that overall is we're in a better spot today than we would have been in the past. Thank you. One moment for our next question. Our next question comes from the line of Walter Liptak from Seaport Research. Yes, thanks for the clarity about EMEA and the Contractor part of the business. I wonder if you could just talk maybe a little bit more generally about EMEA and what you -- we've seen some macro data get a little bit better recently. What's been your experience there on industrial and process? Well, I would say that if we're talking EMEA on the -- I'll call it, macro data side, certainly, the economic outlook picture for Germany, which is Europe's largest industrial market, I would say, bodes -- maybe to call it a bright spot's an exaggeration, but is a favorable attribute. Our people on the ground in Europe indicate that we have had a milder winter than I guess than some people were projecting and which we've had in prior years, and that really helps. So the fact that energy prices have stabilized. And I think that also the work that the Europeans are doing around conservation, some new sources of natural gas and even extensions of nuclear and coal probably helped people in our space quite a bit. In terms of natural gas prices, we're down about 50% from peak our people tell us. And electric prices are down about 30%. It's -- those are still at elevated levels, but a pretty dramatic change. And I guess, lastly, always an important market for Europe, automotive has had a couple of tough years there, along with America. But retail auto sales are improving as well. Okay. Great. And similarly, China looks like it's beginning to open up. ISMs were a little bit better. Can you talk to us about just your exposure there? And is it mostly supply chain? Or do you benefit from an improving economy? Yes, we should benefit in China from an improving economy. Hopefully, now that they're opening things up. I think they're still going through this COVID wave over there, but the people that -- we talk to our team basically say things are getting better literally by the week. So as they open up more, it should be more activity for us. Big part of that business is industrial. All the factories that we serve and obviously all the alternative energy stuff that we talked about with batteries, solar, wind energy, all that, all those applications are important for Graco along with automotive. So hopefully -- I always say this with a grain of salt, but hopefully, once we work our way through COVID in China, that should be some potential upside for the company. Okay. Thank you, everyone. In closing, I'd like to thank our employees, our suppliers, our distributor partners around the world for their strong contributions and helping us post another record year at Graco. Yes, it's been a challenging year, but in true Graco fashion, we've been able to overcome the hurdles and deliver significant shareholder and customer value. While there are many things that contribute to our strong performance, it's really our loyal and hard-working employees that make this company great. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
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EarningCall_874
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Good day, and thank you for standing by. Welcome to the Q4 2022 Novo Nordisk A/S Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator instructions]. Please be advised that today's conference is being recorded. Thank you, operator. Welcome to this Novo's earnings call for the full year of 2022 and the outlook for 2023. My name is Lars Fruergaard Jorgensen, and I'm the CEO of Novo Nordisk. With me today, I have Executive Vice President and Head of Commercial Strategy and Corporate Affairs, Camilla Sylvest; Executive Vice President and Head of North America Operations, Doug Langa; Executive Vice President and Head of Development, Martin Holst Lange; and finally Chief Financial Officer, Karsten Munk Knudsen. All of us will be available for the Q&A session. Today's announcement and the slides for this call are available on our website novonordisk.com. Please note that the call is being webcast at live, and a recording will be made available on our website as well. This call is scheduled to last one hour. Please turn to the next slide. The presentation is structured as outlined on Slide 2. Please note that all sales and operating profit, all statements will be at constant exchange rates, unless otherwise specified. Please turn to Slide 3. As always, I need to advise you that this call will contain forward-looking statements. These are subject to risk and uncertainty that could cause actual results of different materially from expectations. For further information on the risk factors, please see the company's announcement for the full-year of 2022 and the slides prepared for this presentation. Please turn to the next slide. In 2022, we delivered double-digit sales growth and operating profit growth and we continue to make progress on our strategic aspirations. I would like to go through the highlights before handing over the word to my colleagues. We continue to make progress across all dimensions of progress and sustainability. Our carbon emissions decreased by 29% compared to pre-pandemic levels in 2019 and we continue to reach even more patients and patients living with diabetes compared to last year. In line with our aspiration of being a sustainable employer, we expanded the number of women in leadership positions to 39% compared to 36% in 2021. Within R&D, we are pleased that we now have initiated the first two Phase 1 trials based on the siRNA interference RNA technology platform that we acquired in 2021. Looking back at 2022, we have seen exciting trial readouts across all our therapy areas and in 2023 we look forward to having an equally exciting year. Martin will come back to this and our overall R&D milestones later. In 2022, we deliver double-digit sales growth reflecting strong commercial execution across geographies and our therapy areas by both operating units contributed to sales growth. We saw particular strong sales growth in North America driven by accelerated demand for our GLP-1 treatments for both diabetes and obesity. Camilla and Doug will go through the details per therapy area later. Karsten will go through the financials, but I'm very pleased with the sales growth of 16% and operating profit growth of 15% in 2022. Lastly, I have a brief update on our strategic aspirations within financials. We have achieved the U.S. aspiration of reverting 70% of sales to products launched since 2015, and IO sales growth has in the last couple of years surpassed expiration of 6% to 10% growth. Consequently, we have decided to remove these regional expirations going forward will be focused on and committed to delivering solid sales and operating profit growth. Thank you, Lars. And please turn to the next slide. As Lars mentioned, our 16% sales growth for the full-year of 2022 was driven by both operating units with North America operations growing by 21% and international operations growing 13%. The strong sales growth has unfortunately resulted in periodic supply constraints and related drug shortage notifications across a number of products and geographies. Our GLP-1 sales increased by 42%, driven by North America growing 36% and international operations growing 57%. Insulin sales decreased by 11%, driven by a 7% decline in international operations and a 21% sales decline in North America operations. The U.S. insulin sales declined by 22%. This was driven by lower realized prices as well as a decline in volume. Compared to 2021, the U.S. insulin volume market declined by 3%. Furthermore, insulin sales in international operations were impacted by the implementation of volume-based procurement in China, starting in May 2022 and lower sales in EMEA. Obesity care sales grew by 84% overall and international operations sales grew by 82% and in North America operations obesity care sales grew 85%. In the U.S. obesity care sales grew by 90%. Rare disease sales grew 1% driven by 5% sales increase in international operations offset by a 5% decline in North America operations. Please turn to Slide 6. Our 14% sales growth within diabetes care continues to been higher than the overall diabetes market. That means we have improved our market share by 1.8 percentage points to 31.9%. We continue to be on track to reach one-third of the diabetes value market by 2025. This increase primarily reflects GLP-1 market growth as well as share gains in both operating units. Please turn to the next slide. International operations diabetes care sales increased by 10% in 2022, driven by GLP-1 sales growing by 57%. Novo Nordisk remains the market leader in international operations with a GLP-1 value market share of 64%. This is driven by share gains across geographies. Ozempic continues to expand its GLP-1 market share leadership in international operations with around 43% market share. While the GLP-1 class growth is more than 50%, GLP-1 penetration remains low at around 5% of total diabetes groups globally. Rybelsus sales more than doubled compared to 2021. The growth was mainly driven by new launches and increasing volumes, making Rybelsus the second largest growth contributor in 2022 after Ozempic. The increased momentum in international operation is driven by launches in key markets such as Japan, Italy and Spain. Thank you for that update, Camilla. Please turn to the next slide. The U.S. GLP-1 market volume grew by around 50%, comparing the fourth quarter of 2022 to the fourth quarter of 2021. The recent competitor launch in GLP-1 has supported the continued acceleration in market growth and from an NBRx perspective, we continue to see all-time high levels of new patients starting on our portfolio of GLP-1 products on the end of 2022. Measured on total prescriptions, Novo Nordisk has maintained its market share leadership with a market share of more than 50%. Please go to the next slide. Obesity care sales increased by 84% with 85% growth in North America operations and 82% in international operations. The global branded obesity market expansion continues with a volume growth of more than 50%. We are excited that Wegovy is now launched in Denmark and Norway, their first two markets outside of the U.S. But we also remain encouraged by the performance of Saxenda in international operations. Region EMEA is the key growth driver with 96% growth in 2022. In the U.S., obesity care sales grew 90% with both Wegovy and Saxenda contributing to growth. All dose strengths of Wegovy were made available in the U.S. again in December of 2022. And in only a few weeks, Wegovy prescription trends have accelerated and already reached all-time high levels. The uptake underlines the significant unmet need for patients with obesity. Many patients have been waiting for all doses of Wegovy to be available again, which has created a pent-up demand. We are now looking forward to continuing the relaunch of Wegovy. Thank you, Doug. And next slide, please. Our rare disease sales increased by 1% in 2022. This was driven by a 5% sales growth in international operations offset by a 5% decline in North America provisions, where blood disorders grew by 7% driven by NovoSeven as well as the launch products Esperoct and Refixia. Specifically, Haemophilia A products grew by 6%, Haemophilia B sales by 16% and NovoSeven by 6%. Rare endocrine disorder sales declined by 6%. The declining sales were driven by international operations decreasing 1% and by North America operations decreasing by 18%. The sales were negatively impacted by lower realized prices in the U.S. as well as the supply constraint in the fourth quarter of 2022. Thank you, Camilla. Please turn to Slide 11. Firstly, I'm very happy to be able to share that we have initiated two Phase 1 trials within NASH. This is particularly exciting because the two assets are both based on the small interfering RNA technology that we acquired as part of the Dicerna acquisition back in 2021. Both trials are 52-week trials and target LXR and MARC1, respectively. Both assets are aiming for long-term NASH resolution and fibrosis improvement with monthly or even less frequent dosing. The objective of both Phase 1 trials is to investigate the safety, tolerability and PK/PD profile of each asset respectively. The fact that we have now initiated these trials is a testimony to the successful integration and fast progression of the RNA-based research and development in Novo Nordisk. As mentioned at our Capital Markets Day in March of last year, our ambition is to generate an annual average of free first human doses across therapy areas based on the RNA technology over the next 10 years. Please turn to the next slide. We're looking forward to a very exciting 2023 with many important Phase 3 trial readouts across our therapy areas. I would like to briefly go through a few highlights. Within Type 2 diabetes, we expect to see results from the Phase 3 trial PIONEER PLUS with once-daily oral semaglutide 25 and 50 milligram, respectively, during the first half of 2023. The primary endpoint of the 68-week trial is to confirm superiority of oral semaglutide 25 and 50-milligram versus oral semaglutide 14-milligram on A1C reduction. The expectation is to reach an efficacy and safety profile comparable to that of Ozempic. Also in diabetes, we expect to initiate the Phase 3 program with CagriSema in the second half of 2023, following the very exciting Phase 2 results that we shared last year. Furthermore, we have completed the 26-week safety extension phases for the ONWARDS 1 and 6 trials with insulin icodec. The results confirm that insulin icodec has the potential to be the ideal starter insulin for people with Type 2 diabetes, while there are still more assessments to be done in Type 1 diabetes. We expect to submit insulin icodec for regulatory review in the first half of 2023. In obesity, we look forward to sharing the Phase 3 results from once daily oral semaglutide 50 milligram, where our expectation is to reach a level of efficacy and safety comparable to that. Pending the results, this would add to our portfolio of obesity treatments to address the significant unmet need that remains for many patients with obesity. Furthermore, we look forward to sharing the results from the ongoing SELECT Cardiovascular Outcomes Trial in the middle of 2023. Within rare disease, we are looking forward to a decision from regulatory authorities on once-weekly Sogroya for the treatment of growth hormone deficiency. This will offer a reduced treatment burden compared to daily Norditropin and a device that is easy to use for patients. Finally, we expect to initiate a Phase 3b trial with Ziltivekimab for the treatment of heart failure with preserved ejection fraction in the first half of 2023. Altogether, we're looking forward to a very exciting year with clinical trial initiations as well as results across all therapy areas. Thank you, Martin. Please turn to the next slide. In 2022, our sales grew by 26% in Danish kroner and 16% at constant exchange rates, driven by both operating units. The gross margin increased to 83.9% compared to 83.2% in 2021, driven by a positive product mix due to increased GLP-1 sales, a positive currency impact and productivity improvements. Lower realized prices, particularly in the U.S. and China partially offset these effects. Sales and distribution costs increased by 25% in Danish kroner and 16% at constant exchange rates. The increase is driven by launch activities and promotional spend for Rybelsus and Ozempic as well as market development activities for obesity. The cost increase is reflecting low activity levels in 2021 due to COVID-19 and higher distribution costs. Research and development costs increased by 35% in Danish kroner and 29% at constant exchange rates. The increase is driven by higher clinical activity levels within other serious growing diseases and GLP-1 as well as the operating costs and amortizations related to the acquisition of Dicerna Pharmaceuticals. We acquired Dicerna in the fourth quarter of '21. Administration costs increased by 10% in Danish kroner and 6% at constant exchange rates. Operating profit increased by 28% in Danish kroner and by 15% at constant exchange rates. Net financial items for 2022 showed a loss of around DKK 6 billion compared to a gain of around DKK 0.4 billion in '21. This mainly relates to losses following the appreciation of the U.S. dollar as reflected in the favorable currency impact on operating profits. As per the end of December '22, a positive market value of financial contracts of approximately DKK 1 billion has been deferred for recognition in 2023. The effective tax rate in '22 was 19.6% compared to 19.2% in '21, mainly reflecting nonrecurring impacts from acquisitions. Net profit increased by 16% and diluted earnings per share increased by 18% to DKK 24.44. Free cash flow was DKK 57.4 billion compared to DKK 29.3 billion in '21, supporting the strategic aspiration to deliver attractive capital allocation to shareholders. The cash conversion in '22 is positively impacted by timing of rebate payments in the U.S., including provisions related to the revised 340B distribution policy in the U.S. Income under the 340B program has been partially recognized. Please go to the next slide. In 2023, we expect to increase our capital expenditure to around DKK 25 billion. This is a significant step-up compared to 2022 and reflects the innovation-based growth strategy that we're pursuing in Novo Nordisk. The increase in capital expenditure mainly relates to investments in additional capacity for active pharmaceutical ingredient production and fill/finish capacity for both current and future injectable and all products across therapy areas. In the coming years, the capital expenditure to sales ratio is expected to be low double-digits. The investments will gradually add capacity, flexibility and resilience in our manufacturing setup while also accommodating for potential upsides to forecast. Next slide, please. In 2022, we returned more than DKK 49 billion to shareholders via dividends and share buybacks. Novo Nordisk has consistently returned its free cash flow to investors through both share buybacks and dividends. At the Annual General Meeting on March 23, 2023, the Board of Directors will propose a final dividend of DKK 8.15 for a total 2022 dividend of DKK 12.40, a 19% increase compared to 2021, making it the 27th consecutive year with increasing dividends. In addition to the dividend, DKK 24 billion was used for repurchase of shares. For 2023, the Board of Directors has approved a new share repurchase program of up to DKK 28 billion to be executed during the coming 12 months. Next slide, please. We continued 2023 with solid growth momentum and expect the sales growth to be between 13% and 19% at constant exchange rates. This is based on several assumptions as described in the company announcement. The guidance reflects expectations for sales growth in both International Operations and North America operations, mainly driven by GLP-1 based treatments for diabetes and obesity care. The sales growth within diabetes and obesity care is expected to be partially countered by declining sales in rare disease due to supply constraints. The guidance ranges for sales and operating profit growth reflect the level of volume growth of GLP-1-based diabetes treatments. They also reflect the inherent uncertainty of the pace of obesity care market expansion following the relaunch of Wegovy in the U.S. and expected gradual rollout in international operations. The outlook includes an expectation of continued periodic supply constraints and related drug shortage notifications in 2023 across a number of products and geographies. This is driven by higher-than-expected volume growth for GLP-1 based products, such as Ozempic and temporary capacity limitations at some manufacturing sites. We're gradually increasing our supply capacity. We expect that operating profit will grow between 13% and 19% at constant exchange rates. This primarily reflects the sales growth outlook and continued investments in current and future growth drivers within research, development and commercial. Commercial investments are mainly related to the relaunch of Wegovy in the U.S., obesity care market development activities in international operations as well as promotional activities for Ozempic and Rybelsus. The acquisition of Forma Therapeutics is negatively impacting operating profit growth due to higher operating costs and amortizations. Finally, the guidance also reflects inflationary impacts on the cost base. Given the current exchange rates, most notably a weakening of the U.S. dollar, we expect a negative currency impact for 2023. Our reported sales are expected to be four percentage points lower at CER and operating profit is expected to be five percentage points lower at CER. The negative currency impact on operating profit of five percentage points is partially offset by a net gain on financial items. We expect that financial items will amount to a net gain of around DKK 2.4 billion, mainly reflecting gains associated with foreign exchange and hedging contracts. Capital expenditure is expected to be around DKK 25 billion in 2023, as I outlined earlier in this presentation. Our free cash flow is now expected to be between DKK 60 million and DKK 68 billion, reflecting the sales growth and investments in capital expenditure. Thank you, Karsten. Please turn to the final slide. We're very pleased with double-digit sales growth for the full-year of 2022 and that we continue to reach even more patients. 2023 is a truly significant year in history of Novo Nordisk as we celebrate our 100-year anniversary. In this period, we have grown from a small Danish company into a global one, developing life-saving medicines for millions of patients around the world. In 2023, we look forward to continuing our focus on commercial execution, expanding our pipeline and investing significantly in the expansion of production capacity for current and future products. With that we're now ready for the Q&A, where kindly ask all participants to limit her or himself one or maximum two questions. Operator, we're now ready to take the first question. Thank you. [Operator Instructions]. We will now take our first question. One moment, please. And it comes from the line of Harry Sephton from Credit Suisse. Please go ahead. Your line is open. Thank you very much for taking my question. I'll just the one on pricing, please. So our latest pricing data suggests that you've only taken a low single-digit price increase in January across your U.S. portfolio, despite the larger headroom for price increases this year with high CPI. Could you look to increase prices the second time later in the year given the headroom for price increases? And then just on your international operations as well. There are a number of drug pricing reforms being proposed across European markets. Do you anticipate that these changes could be material near-term headwinds to your growth in international operations? Thank you very much. Yes. Thanks, Harry, for the question. We had a commitment back in 2016 around price and we've held that commitment. And I don't want to give any forward-looking statements on price moving forward. Thank you. So on Europe, we don't anticipate any single event to be material. We have over the years seen various countries operating with the different reforms sometimes in the form of something that looks more like a tax. So we used to operating in this environment, and you should expect that for now, our guidance incorporates what we anticipate in this. Thank you, Harry. So next question, please. Thank you. We will now take the next question. And it comes from the line of Peter Verdult from Citi. Please go ahead. Your line is open. Thank you. Pete Verdult from Citi. Two questions, Doug and Camilla. Firstly, just in light of these U.S. GLP-1 trends we're seeing, the intense publicity and media coverage. Can you characterize how if at all recent payer discussions are evolving? Are you sensing any efforts to step up and restrict access more aggressively? And can you provide an update on the DKK 30 million commercial opt-in number that you provided at Q3? And then to Lars and Karsten, just if I could try my luck and push you to better understand what is possible and what is not with respect to Wegovy capacities that you have in place for 2023. If I look at the Q1 trends, we're fast approaching 40,000 weekly script rate, which is implying annualized sales around DKK 3 billion. I know you've talked about pent-up demand, but you and Lilly are also going to start promoting quite actively to develop the market further. So just with that in mind, do you have the theoretical capacity in place to support Wegovy being a DKK 3 billion to DKK 4 billion drug in 2023? I'm not asking for guidance, but I want to get a handle on what's possible and what is [indiscernible] in respect to [indiscernible] market potential this year? Thank you. Yes. Thanks, Pete, for the question. And I would say that certainly, first thing to recognize is that the volume of prescriptions in the GLP-1 category is still only about 10%. So there's a lot of runway there. Secondly, what I would say is that the payers do tech notice the categories that are growing. This one is certainly growing at double-digit, but they also recognize the need for this product. And again, it's only 12% -- 10% of the subscription volume. Did I miss something within there? Yes, Pete, I'm sorry. Importantly, we guided on -- in Q3 of DKK 30 million. We're now at approximately 40 million lives. So it's overall 80% access, and that equates to the effective access or number of lives is approximately 40 million. And that's comprised of commercial, Medicaid and some federal business. Thank you, Doug. And Karsten, on Wegovy capacity versus what we see in the market now. I know you're not going to tell the whole story. What can you say? Yes. So it's, of course, a key question that we spend a lot of time on, also internally to ensure that we're not disappointing our customers when we launch products in different markets. And my starting point to answering the question is the guidance I just covered before. So at 13% to 19% top-line growth guidance, which in itself is very competitive industry-wise, is of course, very attractive and a large chunk of that growth comes from Wegovy. So we will not be able to get to this level of guidance without a significant step-up in Wegovy. And as I'm sure you can appreciate, then it's important for us to say that we can supply to our guidance. So both the top end and the low end of the guidance. So that's what we commit to in terms of our investor communication. Then in terms of additional scenarios, then what I would say is that the -- that 19% is not a magic ceiling in terms of our guidance. It's basically a function of products and geographies and timing. And then yes, we continue to scale our manufacturing capacity of Wegovy. As you know, we have one line in-house. We have one CMO up and running full speed and we have one line on track to be online in first half of this year. And then another line on track to be -- get online second half this year. So we have significant step-up in Wegovy production capacity. And then I'd say, just at a final note, of course, we have -- we do not have unlimited capacity. And so trending on a vertical TRx uptake is impossible. And that's why we've been out saying be careful with the first data points because they are impacted by the pent-up demand that Doug was talking to. So to summarize, clearly, a significant addressable market from an access point of view and also capacity coming in, so we can go after that opportunity. So very encouraging, indeed. Thank you, Pete. Next question, please. Thank you. We will now take the next question. And it comes from the line of Michael Nedelcovych from Cowen. Please go ahead. Your line is open. Thank you for the questions. I have two. The first is on the SELECT trial. When taking interim looks at SELECT, does Novo consider whether or not a futility analysis has been prespecified and presumably passed to be material information to be shared with the market? That's the first question. And then the second question is on the oral semaglutide readout. So when we see Phase 3 obesity data for oral semaglutide, some of our consultants are expecting meaningfully diminished weight loss relative to injectables. If that ends up being the case, what percent weight loss would still support commercial success? Thank you. Yes, absolutely. So with regards to SELECT, as we already discussed, we had one look before the expected final outcome of the trial. That was done by a DMC. So we are not perfect to the data. The DMC is looking at the totality of the data, and there was a pre-specification for -- when they could recommend to stop use of the very convincing superiority for semaglutide, i.e., more than 20% difference between semaglutide and placebo. They recommended us to continue the trial, which makes us believe that we are probably still in the realm of the 17% that we have sample sized for. But they look at everything and they can recommend to stop the trial should they feel to do so. With regards to oral semaglutide, both in diabetes and obesity, the trials had assigned and the doses are picked so that we expect to get exposure similar to that of subcutaneous semaglutide, both Ozempic 2.0 milligram, and Wegovy 2.4 milligram. And we would, therefore aim to have full efficacy and full safety profile comparable to those two formulations. So various active product profiles from what we can tell from a commercial opportunity perspective. Thank you, Martin, and thank you, Michael. Next question, please. Thank you. We will now take the next question. It comes from the line of Sachin Jain from Bank of America. Please go ahead. Your line is open. Hi, it is Sachin Jain, Bank of America. Just two very simple questions, trying to get a bit more color on what's in guide. So again, I'll try my luck. So firstly, on obesity, you've noted inherent uncertainty. I think there's been commentary on pent-up demand and cash flow with the first data points. So I'm just trying to get a sense of how much of a bolus you think this will go over the first couple of weeks and best expectations for a run rate once that bolus comes off? And then secondly, I know Karsten, we've discussed this a lot before, but GLP-1 growth rate is the biggest delta to guide. Just from your perspective, are you expecting a trend shift through full-year '23 from the existing 40% to 50% growth because I don't think a continuation of existing trends as assumed even in the top end of guide. Thank you. Thank you, Sachin. If I try to address the first question on Wegovy pent-up demand and sizing of that, and then Karsten, you can get to the GLP-1. So we know for a fact that patients have been lined up. We have had some 60-plus patients on notice for when products would be available. That's a quite unusual situation to have. So we know for a fact that there is pent-up demand. It's really difficult for us to size it, to be honest. We are obviously encouraged by the trend line we see. But we also do believe that there will be a normalization of that as we have gone through that bolus. But it's really very difficult for us to give any meaningful sizing of it. We'll be looking at the first, say, a couple of months, say, Q1 to really understand how that looks. So -- but the first data points are really exciting. So we feel we're in a really, really good place. Karsten, on growth rates, I recall we've been saying in prior years that we thought the growth rate would go down. It didn't happen. So any crystal ball now? Yes. Thanks for reminding me on that one. So I'd say for -- first of all, that's one of the reasons why we have a forward-looking statement in our announcement. That is when we start to comment on future market growth rates. And I'd say secondly, that's also one of the reasons why we are rolling with an unusually broad guidance range this time around. When we look at the market growth, I can start out with the U.S. MAT-wise for -- based on the latest monthly data points or at the latest data points overall. We are around 40%, and that would be the same ex-U.S. also. So a global volume market growth MAT-wise, around 40% being the latest data point. If we take shorter data points in the U.S., we're closer to the 50% mark as a data point. In terms of what that implies going forward, that's, of course, a function of our activities and competitor activities as well as supply capacity for the players in the markets. So I'd say we have built our guidance based on continued strong market growth. Of course, I cannot give you our assumptions but more than to say continued strong market growth and GLP-1 in diabetes being a key growth driver for Novo Nordisk also in '23. Maybe just adding to that, when you have a category where you have efficacious products competing against each other, typically leads to market growth more than share gain and that's what we see in Type 2 diabetes. And I think that's also what we would expect to see in the obesity category that if the cases products drives market growth more than share play. Thank you, Karsten. Thank you, Sachin. Next question, please. Thank you. We will now take the next question. It comes from the line of Richard Parkes from BNP Paribas. Please go ahead. Your line is open. Hi, thanks very much for taking my questions. Just got a couple. Firstly, on CapEx expansion plans. And just on whether you can give us any indication of what that increased capacity could allow you to meet in terms of market expansion kind of by the end of the decade, at least some kind of ballpark range in terms of kind of what market -- GLP-1 market expansion, that would allow you to meet supply would be really helpful. And then secondly, on the ONWARDS 1 and 2 trials of insulin icodec. I mean, playing devil's advocate looks incrementally worse than previously. I think with the HBA1c advantage no longer significant or significantly worse in both trials showing worse hyperglycemia profile. So I'm just wondering how this impacts your expectations for that product over both approvability and commercial potential? Thanks very much. Thank you, Richard. So let me try to give a perspective on CapEx. And then Martin, you can get to the ONWARDS side. So for us, this is to create, obviously, ability to supply in a market that we believe will have a very, very attractive growth creates strategic flexibility. And I think in the GLP-1 space, you will have the potential of having one of the biggest, say, drop categories ever seen. So really being able to build that capacity and serve the markets, I believe creates a competitive advantage that is very, very attractive. So we also have pipeline products coming that will be using the same type of capacity. So both from an API and fill/finish perspective, we have a lot of optionality in the footprint we have. And being able to build this and drive efficiencies is something that's required to play longer-term in this category. So you should take it as a sign of confidence and trust in the existing business we have and the pipeline we have coming. Martin, ONWARDS and the later stage and what does happen for the potential? Yes, absolutely. So first of all, it's important to recall that both ONWARDS 1 and ONWARDS 6 were originally 52 and 26-week studies. This was the regulatory intent. And in the 52-week period of the ONWARDS 1 study, as you know, we showed a superior A1C reduction with a good and flat and stable, sorry, hypoglycemia profile. We then for regulatory reasons, have to do extensions of those two studies in both Type 2 and in Type 1 diabetes, basically because we need to show safety exposure. So this focus of the extension is safety assessment and establishing the long-term safety profile of insulin icodec in both Type 1 and Type 2 diabetes. If I stay with ONWARDS 1, over the additional 26 weeks, we actually saw a completely flat A1C curve show a maintained glycemic control over time. We lost the statistical significance. But again, in an open label extension, you also lose a little bit of rigor and power, and we sort of have to expect that, but it certainly confirms the efficacy profile of insulin icodec. With regards to hypoglycemia, first of all, it's important to recall already at 52 weeks, we saw very, very low hypoglycemia rates. There was a numerical difference between the two insulins, and that difference actually remained completely stable throughout the trial. So when we then see the statistically significant, it's a function of more events rather than all of a sudden seeing a difference between the two treatment arms. And it's also important if we put that into a clinical context, to recall with the rates that we have seen, a patient on an insulin icodec in this setting would have to wait two to three years to experience an event of not severe hypoglycemia. And in that context, I also want to call out that the risk of having severe hypoglycemia with insulin icodec in ONWARDS 1 was almost effect of 10 lower than with insulin degludec. So again, confirming the safety profile of icodec in this setting. So we remain very, very confident from a clinical perspective that icodec is the perfect starter insulin for Type 2 diabetes. And obviously, we're looking at ONWARDS 6, we had to acknowledge that, we have some work to do with Type 1 diabetes, and Camilla can maybe talk to the commercial potential of both obviously Type 2, Type 1 diabetes. Yes. Thanks a lot, Martin. So based on the totality of the data that you just went through and from the total ONWARDS program, we are very confident in the efficacy and the safety profile of once-weekly icodec and also the potential to become standard of care insulin of choice for people with Type 2 diabetes. And once weekly insulin, of course, represents a whole new way of managing insulin that gives a lot of benefits to people as just described, but also on the convenience part. By the way, also has a very positive environmental profile. And to your question about Type 1 diabetes, we would estimate that that is to the tune of potentially 7% of the total potential. So that doesn't change our overall profile of icodec potential. Thank you, Camilla. Thank you, Martin. It's a clear sign of our commitment to raising the innovation height also in a classical area. The market for the degeneration of Novo Nordisk. We're still inviting in insulin and think we can drive tremendous value for patients and physicians here still 100 years in. Thank you, Richard. Next question, please. Thank you. We will now take the next question. It comes from the line of Richard Vosser from JPMorgan. Please go ahead. Your line is open. Hi, thanks for taking my questions. First question, just thinking on Ozempic trends and how you see those going forward. I think Q3, you were saying 40% of patients were naive to diabetes treatment of the new patients going on Ozempic. How are you seeing the Wegovy relaunch impact that? And how do you see sort of that Ozempic situation developing throughout this year with Wegovy back into to full supply? Do you see that slowing down significantly because of Wegovy? And then the second question. Just going back to the reimbursement and payers. Obviously, very good getting 40 million patients. How are the payers treating the patients may be in the second, maybe third year of treatment if patients get that long. If they reach levels of normal BMI or lose significant amounts of weight, do payers then say, well, that's brilliant, you're back to normal and to come off the drug? Or how are they treating that in your reimbursement discussions? Thanks very much. Thank you, Richard. First, Camilla, on the Ozempic trends after Wegovy is in the market, then Doug, you can talk a bit through payers with a U.S. perspective. Yes. So on Ozempic, we see a continued increase. We see -- we are back to TRx and NBRx leadership. When it comes to how much of the Wegovy sourcing that is from diabetes, then we can say that the uplift in the Wegovy trends in the U.S. is basically from primarily the 0.25 the starter dose. And that basically means that these are patients that are new to GLP-1 treatment. Of course, looking forward, that means that we expect that there is a potential for both of these two classes to coexist and to continue increasing as we see both unexploited potential for GLP-1 treatment in diabetes as well as in obesity. Yes, Richard, thank you. I think it's important to note that we're pleased with the level of access that we have today. Overall, 80% access is something that we're proud of, and the team has done a nice job. Effective access we've been hard at work at. As you know, this requires opt-ins. But again, we're pleased with the overall 40 million lives that can have access. And how the parents are treating this. There's no stopping roles in place today. And I think the payers recognize that this is a chronic treatment, and that's important for not only stakeholders, payers, but all the work that we're doing is to realize this as a serious chronic disease, and it's a chronic disease that needs long-term treatment. Thank you. We will now take the next question. It comes from the line of Michael Leuchten from UBS. Please go ahead. Your line is open. Thank you. Two questions, please. Michael Leuchten from UBS. One, if I look at the value of the volume for Ozempic and Rybelsus in the U.S., there seem to be some trend changes in Q4, maybe Ozempic also in Q3. Is that a fair reflection of the competitive rebating environment? Or should we not overinterpret those trends as we think about the value to volume looking into 2023? And then a question for Martin. SELECT isn't really something you talk about actively anymore. It only really comes up in Q&A. Is that because in your mind, the relevance has taken a step back given it didn't stop at the interim? And we're maybe on track for the 17% risk reduction, which may not be as meaningful as maybe a 25% would have been? Or is there another reason why you don't mention it as much more as you have in the past? Thank you. Yes. So Michael, first of all, to your Q4 questions versus '22 or then there are no changes vis-à -vis '22. So as you know, normally, then for '24 -- then we give the lag of scripts, then there will be true-ups normally in Q4 that can impact the value to volume equation. So I think the more appropriate way to look at it is for the full-year. And then I'd say on top of that, given the supply situation on Ozempic, there might be also some noise in that calculation from changes in inventory levels on Ozempic specifically. From there, moving into 2023, while not guiding for value and volume for '23, then I'd say the dynamics remain the same between '22 and '23. So first of all, we are still very excited and very confident about SELECT issue is obviously that we have no results to share. We have no data to share. And therefore, the only thing I can call out, which hopefully you also saw in my part of the presentation is that we are looking very much forward to the data coming out around mid-2023. And that will be incredibly exciting. So we still think SELECT is very important and very exciting. Thank you. We will now take the next question. It comes from the line of Keyur Parekh from Goldman Sachs. Please go ahead. Your line is open. All right. Thank you. Hopefully, you can hear me okay. Two separate lines of questioning, please. The first one on CapEx. As the 2022 Capital Markets Day, your slides implied CapEx for 2025 to be between kind of DKK 10 billion and DKK 15 billion. What you're guiding to today implies CapEx close to DKK 25 billion to DKK 30 billion in 2025. So just wondering if you can give us a sense for kind of how much of that doubling of CapEx is attributable to your perception of higher demand for the existing products. So B2B kind of Rybelsus or GLP-1 diabetes products versus how much of this is with a view to ensuring supply for the non-diabetes, non-obesity product as that pipeline emerges over the course of the next kind of two to three years? So that's kind of question number one. And then separately kind of coming back to icodec. Camilla, would love your thoughts on how you think ONWARDS 1 and ONWARDS 6 the extension data changes, if at all, the commercial positioning kind of for this molecule from your perspective. Does this make it a little bit more of an international product compared to a U.S. product given the convenience at play here? Or do you still think there exists room for you to have differential pricing for this molecule in the U.S. given the extension data? Thank you. Thank you, Keyur. Two very clear questions. So first, Karsten, on CapEx versus what we said at Capital Markets Day and a perspective on existing products, new areas and then Camilla, you can talk to the icodec, say commercial opportunity? Yes, thank you, Lars. So CapEx, of course quite a significant step-up compared at our Capital Markets Day and again, that's what we are forward-looking statements. So the world has a tendency to change these days more than usual. I would say this step-up in CapEx to me, comes on a very positive background. I can, unfortunately, not to kind of separate how much is what because we have both facing and a different share platform. So it's a little bit trying to separate hot and cold water, unfortunately, Keyur. But I would say that the main drivers to it is, first of all, a stronger volume uptick than what we had built into our initial CapEx modeling clearly and the stronger volume uptick impacts both on the API side of our current marketed products as well as the fill/finish that we're scaling more so than the initiative plans. And then as to the pipeline, I'd say there are two main drivers to step-up. And you can say in a historic perspective, where we were like, call it, between 5% and 10% CapEx to sales and now we are more in the, call it, between 10% and 15% CapEx to sales ratio towards 25%, the delta is that historically, it was injectable peptide-based CapEx investments we're doing. And we continue to do that through the volume scaling I just spoke about. But on top of that, we are building to cater for the all platform that just requires significantly higher amounts of API, whether it's for Rybelsus or semi obesity or some of the earlier oral compounds. As you know, we have all accretion in Phase 1 and we have all GLP-1 also. So clearly, for the all platform and then for the nonprotein peptide platforms, I would say we're looking at -- and what are we doing to cater for pipeline assets like my MACE and Ziltivekimab and our ATTI as well which is on an antibody platform. So that's where we're looking at also expanding our capacity on the monoclonal antibody side. So I hope that provides a little bit of color, but not fully able to separate the hot and the cold water. Thank you, Karsten. Exciting pipeline line leads to need for CapEx. So Camilla, how excited are you on icodec based on the recent data? Yes, thank you, Lars. And as we just discussed before, we remain very confident in the efficacy and safety profile of icodec that given as a once-weekly insulin has the potential to become standard of care for people with Type 2 diabetes. And to your question, this has not changed our perspective in terms of a global rollout of icodec. We remain equally confident in the U.S. and in the Rest of the World for how this can help people with Type 2 diabetes. And keep in mind that the potential of this is that the basal segment approximately includes 30 million patients with a value of around $8 billion. So that's a place where we today have a market share in the ballpark of one-third. So there's ample potential to increase that. Thank you. We will now take the next question. It comes from the line of Simon Baker from Redburn. Please go ahead. Your line is open. Thank you for taking my questions. Two if I may, please. Firstly, and this relates to some earlier questions. In recent years, the increased spend in the U.S. on GLP-1 was offset by lower spending on insulin, which gave some easy headwinds for the category to expand. I was just wondering if you could give us an update on whether that is still the case? And then [Technical Difficulty] you talked about the impact of the Dicerna acquisition on 4Q R&D. I just wondered if you could give us an idea how much of the additional R&D expense incurred was one-off and how much is continuing? Thanks so much. What I would say is this, that insulin, as you saw, as we just reported, continue to be under pressure, pricing pressure, so payers still continue to take value there. And as I mentioned earlier, there's still only approximately 10% of the prescription volumes coming out of GLP-1. So we still think that there's opportunity there. You can add that to DPP-4, price decline and soon to come SGLT2 will also create some space to fund innovation. So yes, Karsten on Dicerna. Any one-off versus continued. Yes, Simon, as we've been communicating all along in terms of our overall strategic resource allocation, then we are highly focused on allocating additional resources towards R&D to expand and diversify our pipeline. And that you've seen throughout the year with a significant step-up in R&D spend ending at 29% for the full-year. You're right that in the fourth quarter, we have an extraordinary step-up also when you do the quarterly trending. It's not due to Dicerna because we had the Dicerna all along. So it's basically due to two factors: one being, a, I would say, minor impairment on intangible assets and another piece being costs related to the Forma Therapeutics transaction and restructuring. And as you recall, then here at Novo, we are reporting clean numbers. So where other companies would have been -- some of the companies have been adjusting this into core earnings or adjusted earnings, then here you get what you see is what you get. As to a specific number for Q4 in round terms between the two impairments and Forma around DKK 0.5 billion. Thank you. We will now take the next question. It comes from the line of Mattias Häggblom from Handelsbanken. Please go ahead. Your line is open. Thank you so much. Two questions, please. Firstly, with regards to the decision in January to double down and initiate the high dose sema obesity trial. I'm curious to understand what triggered the decision and why now almost 1.5 years after the Wegovy approval and why not earlier? And then secondly, with top line data from SELECT data due mid-2023. What's a reasonable time frame from top line results and the data can help facilitate reimbursement outside the U.S., a year or is it rather two, given the size and complexity of the study? So first of all, we see emerging data suggesting that it is possible to max out on GLP-1 biology. And it's very, very clear based on some of our recent start is that we could potentially increase exposure and thereby accruing more weight loss than what we see with the current doses. There's obviously, we had to pursue, we have to investigate because there is an opportunity to, without compromising on safety to accrue even more weight loss, specifically in obesity and potentially also improved glycemic control in diabetes. We aim to conduct these studies very, very fast, and that also means that they will be available to patients if the data supports it in an also distant future and still well within the relevant time period for semaglutide. Then there was a question on time line from SELECT data to reimbursement. So ballpark without going into too much detail. So some of you have heard about, I was breaking about being able to obviously handle our clinical data in a reasonable way. I would not be looking at a one to two year timeline. Obviously, we will close down the study. We will have the results around mid this year. We'll do a regulatory file, and then we'll have the regulatory interactions. And then it's in U.S. up to Doug and his team to discuss with payers and others on how that will impact the dynamics. Thank you, Martin, and thank you, Mattias, and thank you all for participating in our earnings call. Please reach out to our Investor Relations Officer, if you have more questions and look forward to meet you and talk to you in the near future. Thank you very much. Bye-bye.
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At this time, I'd like to turn the conference over to Kim Booth, Vice President of Investor Relations. Please, go ahead. Good morning and welcome to Corteva's fourth quarter and full year 2022 earnings conference call. Our prepared remarks today will be led by Chuck Magro, Chief Executive Officer; and Dave Anderson, Executive Vice President and Chief Financial Officer. Additionally, Tim Glenn, Executive Vice President, Seed Business Unit; and Robert King, Executive Vice President, Crop Protection Business Unit, will join the Q&A session. We have prepared presentation slides to supplement our remarks during this call, which are posted on the Investor Relations section of the Corteva website and through the link to our webcast. During this call, we will make forward-looking statements which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including, but not limited to, those discussed on this call and in the Risk Factors section of our reports filed with the SEC. We do not undertake any duty to update any forward-looking statements. Please note, in today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in our earnings press release and related schedules, along with our supplemental financial summary slide deck available on our Investor Relations website. Thanks, Kim. Good morning and thanks for joining us today. I hope everyone's year is off to a great start. There are several key messages I'd like to share with you today including our strong 2022 performance, an overview of the market fundamentals and an update on our value creation plan, with a closer look at what's ahead for 2023. Corteva executed well amidst a dynamic market environment, delivering double-digit sales and operating EBITDA growth, as well as over 200 basis points in margin expansion. Enlist E3 soybeans reached about 45% market penetration in the US and new product sales in Crop Protection reached over $1.9 billion for the full year, an increase of more than 30% over prior year. On capital deployment, we returned more than $1.4 billion to shareholders via dividends and share repurchases for the full year. Our 2022 results support the value creation plan presented at Investor Day, where we outlined a framework to achieve $4.4 billion of EBITDA by 2025, with a margin range of 21% to 23% and we're on track to do just that. The framework is simple and straightforward and hinges upon four key elements: portfolio simplification, royalty neutrality, product mix and operational improvements. The strategic and operational actions implemented since we announced the plan, show that we are already making progress on accelerating our performance and we were even able to achieve some of that value in 2022. We remain committed to our value creation plan and 2023 is going to be a year largely focused on execution. As a reminder, a critical part of our refined strategy involves increasing investment in R&D. We're focused on delivering greater value to farmers through more differentiated and sustainably advantaged solutions and leveraging our pipeline to drive advancements in global food security and climate change. On the M&A front, we announced our intent to acquire Symborg and Stoller, two biological acquisitions which are both set to close in the first half of 2023. These acquisitions reinforce our commitment to providing farmers with environmentally friendly sustainable tools with proven effectiveness that complement evolving farming practices and help them meet changing market expectations. As communicated previously, we expect that biologicals will be the fastest-growing segment in the Crop Protection industry over the next decade. Turning to the outlook. We entered 2023 well positioned with best-in-class technologies to continue to deliver market-leading value for our customers, as we tilt our portfolio towards our differentiated offerings. This is a big step change year for our Enlist platform. We're expecting E3 US soybean market penetration in the mid-50s and a royalty reduction benefit of over $100 million. Organic sales of new Crop Protection products including our Enlist herbicide are expected to grow by an additional 20%. And we're on track to cross $1 billion in annual sales with our Spinosyns franchise. More broadly, we expect that favorable pricing and mix in addition to productivity and restructuring benefits will continue to outpace headwinds associated with cost inflation. We will also continue to monitor the effects of currency, which we believe will be a headwind this year. As a result for 2023, we expect to deliver 5% sales growth in between $3.4 billion and $3.6 billion in operating EBITDA translating into yet another year of impressive margin expansion. Now let's spend a few minutes on the market outlook on slide 5. Market fundamentals remain constructive, as we enter 2023. Global grain and oilseed stocks are tight, due to last year's below trend yields which were impacted by dry weather in the Northern Hemisphere and the war in Ukraine. Crop prices which remained well above historic averages are supported by tight supply-demand fundamentals globally. Farmers are financially healthy with strong liquidity and they will continue to prioritize yield to meet market demand and offset inflationary pressures. Farm income is expected to be one of the largest ever, albeit below the record achieved in 2022. And demand for corn and soybean oil, is expected to grow in 2023 supported by strong energy prices and policy adjustments focusing on low-carbon energy sources. Crop area is forecasted to be up in most major crop-producing regions in 2023. The USDA gave a January update indicating U.S. planted area is estimated to be 91 million acres for corn and 89 million acres for soybeans, both showing increases versus 2022. We continue to monitor the effects of weather around the globe including the drought conditions in Argentina. Brazil is projecting that national grain output, for the 2022-2023 crop season will be a new record, translating to low- to mid-single-digit growth. We expect these positive market conditions to continue throughout the year and could extend well past 2023 depending on supply-demand dynamics which is consistent with our previous messaging, that global grains and oilseed inventories need to be rebuilt over at least two years. And with that let me turn it over to Dave to provide details on our financial performance, as well as updates on the 2023 outlook. Thanks Chuck and welcome everyone to the call. Let's start on slide 6 which provides the financial results for the quarter and full year. You can see in the table, we finished 2022 with another quarter of strong performance. Quickly touching on the fourth quarter, organic sales were up 11% versus prior year, led by Latin America and North America. The strong organic sales translated into earnings of $370 million for the quarter more than 200 basis points of margin improvement. Turning to the full year, organic sales grew 15% versus 2021 with broad-based pricing and volume gains. Global pricing was up 10% over prior year with notable gains in both seed and crop protection. Seed volumes were flat due mostly to lower planted area in the U.S. Canola supply constraints and the impact of our Russia exit in EMEA. Crop Protection volume was up 9% for the year, driven by strong demand for new products. These new products delivered over $475 million of sales growth year-over-year an increase of more than 30%. We delivered $3.2 billion in operating EBITDA for the year an increase of 25% over the prior year. Pricing product mix and productivity more than offset higher input costs and currency headwinds. This earnings improvement translated into more than 200 basis points of margin expansion year-over-year reflecting the strength in execution by our organization. And as Chuck said, 2022 is an early installment on our multiyear performance goals that we shared with you at Investor Day. So let's now go to slide 7. You can see the broad-based growth with strong organic sales gains in every region for the full year 2022. In North America organic sales were up 10%, driven by crop protection on demand for new technology including Enlist herbicide. Seed volumes were down versus prior year, primarily due to a reduction in U.S. corn acres and supply constraints for canola in Canada. Soybean volumes were up 7% driven by penetration of Enlist. Both seed and Crop Protection delivered pricing gains with pricing up 6% and 14%, respectively. In Europe, Middle East and Africa, we delivered 18% organic growth compared to prior year, driven by price and volume gains in both segments. Seed pricing increased 11% and helped to mitigate currency impacts. In Crop Protection demand remains high for new and differentiated products driving volume growth of 15% for the year. In the fourth quarter volumes were muted by approximately $50 million related to the war in Ukraine in our previously announced exit from Russia. In Latin America, organic sales increased 23% with notable gains in both price and volume. Pricing increased 16% compared to prior year, driven by our price for value strategy coupled with increases to offset rising input costs. Seed volumes increased 4% with some pressure due to tight supply of corn, while Crop Protection volumes increased 10% driven by demand for new products. Asia Pacific organic sales were up 9% over prior year on both volume and price gains. Seed organic sales increased 23% on strong price execution and the recovery of corn-planted area. Crop Protection volume was down 1% due to wet weather and low pest pressure in certain areas, partially offset by demand for new products. So with that let's go to slide 8 for a summary of 2022 operating EBITDA performance. For the full year, operating EBITDA increased approximately $650 million to $3.2 billion. And as I covered on the prior slide, strong customer demand drove broad-based organic growth with price and volume gains in all regions and we particularly benefited from the strong finish to the year including favorable year-over-year performance in our functional spend. We incurred approximately $1.2 billion of market driven headwinds and other costs over the course of 2022 driven by higher seed commodity costs, Crop Protection raw material costs and freight and logistics. We delivered approximately $250 million in productivity savings, which helped to partially offset these headwinds. SG&A as a percent of sales was down more than 230 basis points versus prior year as we maintain disciplined spending and accelerated execution on certain cost actions. Currency was a $290 million headwind, driven primarily by the euro and other European currencies. Standing back to performance in 2022 is a result of strong execution by the organization, demonstrating our ability to meet increased customer demand while effectively managing costs through pricing, product mix and productivity. Turning now to slide 9. I want to provide an update on our full-year free cash flow performance. Free cash flow for the year was approximately $270 million, compared to over $2 billion in 2021. The year-over-year decrease is driven by higher working capital balances, primarily accounts receivable and inventory. Receivables increases were largely due to higher sales, reflecting both volume and pricing. Importantly, DSO metrics remain healthy, benefiting from the strength of farmer incomes and also customer collections. In the case of inventory, you'll recall we had significant drawdowns in 2020 and 2021 particularly in Crop Protection. This inventory drawdown was driven by significant customer demand in the face of supply chain challenges, product availability and shipping and logistics issues. This set of challenges was obviously not unique to Corteva and affected broader industry. In 2022, inventory increases reflect a rebuild of safety stocks to support growth, higher input and commodity costs, as well as the impact from market volatility. We have now been able to rebuild our inventory levels. We believe we have about the right balances at this time. Due to supply chain dynamics and their impact on working capital over the last few years, it's meaningful to look at the free cash flow to EBITDA conversion over the most recent two years rather than either year in isolation. Free cash flow conversion averaged 42% in a two-year period from 2021 to 2022. In 2022, we returned $1.4 billion to shareholders including, $1 billion in share repurchases, a clear commitment to deliver value for our shareholders. Our pension liability continues to be well managed despite volatility in both equity and bond markets. As of year-end, the funded status of the US plan was 92%, and we do not anticipate cash contributions to the US plan in either 2023 or 2024. Now transition to a discussion on the guidance for 2023 on Slide 10. We expect net sales to be in the range of $18.1 billion and $18.4 billion, representing 5% growth at the midpoint driven by pricing and strong customer demand for differentiated best-in-class technology and increased US planted area. Keep in mind, that this growth is muted by approximately $600 million of product and geographic exits. 2023 operating EBITDA is expected to be in the range of $3.4 billion and $3.6 billion, a 9% improvement over prior year at the midpoint. Margins are also expected to improve with pricing, mix and productivity actions more than offsetting further cost inflation and currency headwinds, translating to roughly 70 basis points of improvement at the midpoint. Operating EPS is expected to be in the range of $2.70 and $2.90 per share, an increase of 5% at the midpoint, which reflects earnings growth, lower average share count, partially offset by a higher effective tax rate and interest expense. We expect our 2023 tax rate to be in the range of 22% to 24%, an increase from the 2022 rate of 20.6% largely driven by US tax law changes impacting foreign tax credits and the treatment of R&D expenses. Higher interest expense is driven by higher borrowing costs and higher debt balances. As you know, we carry significant commercial paper balances throughout most of the year to fund cash needs. Our 2023 guidance assumptions include, a higher average interest rate on the commercial paper balances, as well as higher borrowing to finance growth including the Biologicals acquisitions. We expect that free cash flow will be in the range of $1.1 billion to $1.3 billion, with higher earnings partially offset by the higher cash taxes and higher interest expense. At the midpoint, this translates into a free cash flow to EBITDA conversion rate of roughly 34% or approximately 40% over the last three-year period. On Slide 11, I want to remind you of the value creation framework we laid out in September to accelerate our performance and deliver greater value to shareholders. The growth targets we presented included, a 2025 operating EBITDA of $4.4 billion or a 22% margin at the midpoint. This slide includes our 2025 performance targets from Investor Day, and it also reflects our actual 2022 performance in today's guidance for 2023. Execution on our strategic decisions including focusing on core crops and markets, pricing for value being disciplined in cost, is driving margin expansion while also enabling increased R&D investment. Again, our performance in 2022 was a major installment on the path to our 2025 financial targets. Coupled with our guidance for 2023, we're confident we're on track to deliver those targets. So let's now go to Slide 12, to discuss the operating EBITDA bridge for 2023. You can see the pricing in 2023 will be in the mid-single-digit range, which will more than offset the impact from higher commodity costs and raw material inflation. Increased planted area in the US and demand for our best-in-class technology including, continued penetration of Enlist E3 soybeans are expected to drive volume increases in North America. Latin America seed volumes are expected to be up for the full year, with the increase weighted to the second half due to supply constraints early in the year from last season's dry weather. Volume growth in North America and Latin America will be partially offset in EMEA, driven by lower expected corn-planted area and an approximate $200 million impact from our decision to exit Russia. Demand remains strong for differentiated technology, which will drive increased volume in Crop Protection. Sales of new crop protection products will add approximately $300 million of incremental organic revenue. We'll benefit from the ongoing Spinosyns capacity expansion as we expect the franchise to generate more than $1 billion in sales in 2023. Volume growth will be partially offset by the approximately $400 million impact from our previously discussed product exits including commodity glyphosate. And while we're seeing some slowing in the rate of inflation as well as overall supply chain improvements the operating environment is still dynamic. For the full year of 2023, we expect approximately 6% increase in market-driven cost headwinds including higher commodity prices, input costs, and freight and logistics. This impact should be largely weighted to the first half of the year reflecting seed commodity cost impact and the sell-through of higher cost inventory. This translates into high single-digit rate of inflation in the first half of the year dropping down to low single digit in the second half. In addition to these market-driven costs, we expect additional headwinds on other cost of sales. Importantly, the outlook includes approximately $100 million reduction in royalty expense and an additional $300 million of productivity and restructuring benefits. Another key element of our cost structure and consistent with our multiyear plan, we are increasing our investment in R&D in 2023. Regarding currency, we expect continued headwinds. Our assumption is for a weaker exchange rate relative to the dollar for several key currencies including the Brazilian real, the euro, and the Canadian dollar. We estimate 3% to 4% currency headwind on revenues and low double-digit headwind on EBITDA. Now, it's important to note the guidance does not include the impact of the biologicals acquisitions which are expected to close in the first half of the year. We'll provide an update for 2023 to include these acquisitions in the quarter in which they close. So, let's now go to slide 13 and summarize the key takeaways. We had great performance in 2022 with 15% growth in organic sales, more than 200 basis points of margin improvement, amidst a dynamic operating environment. We have favorable momentum and we'll carry that into 2023 and expect another year of strong performance in growth, supporting our 2025 financial targets. And finally, we're investing in innovation in the future of Corteva. We remain committed to a disciplined capital allocation strategy that is a balance of investing for growth or returning cash to shareholders. Since 2019, our capital deployment was heavily weighted towards returning cash to shareholders as we returned more than $3.6 billion through share repurchases and dividends. In 2023, against the backdrop of M&A, this distribution will be tilted towards investing for growth as we close on the previously announced biologicals acquisitions in the first half of the year. Thank you, Dave. Now, let's move on to your questions. I would like to remind you that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions. Thank you and good morning everyone. Wondering if I could ask on the value creation program? Just it looks like there probably was some upside from that in the fourth quarter versus expectations just given how strong the quarter came in and what's normally a very weak quarter. Are you just finding that you're getting stuff done faster? Are you finding more stuff to do, or is it both? Good morning Vincent. That's right. So, look when we look at the performance for 2022, what I'd start with is we're very pleased with the year and we had a very strong year across the board and really focused on execution. Obviously, the market fundamentals are robust we've said that. We believe that, conditions are going to be constructive through 2023, and potentially into 2024 depending on supply demand. And when it comes to the value creation framework, right now, we'd say we're actually a little ahead of the plan and that's really driven by â we got after some of the portfolio decisions a little sooner than we thought. And we took some of the cost management actions, and you could see that hit the bottom line. If you look back to the value creation framework that we proposed in September, we indicated somewhere between 100 and 150 basis points per year. In 2022, we hit 200 basis points. So there's some acceleration there. We are finding new opportunities every day. So we'll give the market an update at the right time. But what I'd say right now is we're very comfortable with the $4.4 billion in the 21% to 23% margins by 2025. And 2022 sort of a reflection of that with a bit of an acceleration from some of the actions we took a little faster than we thought we could get after. Thank you. Good morning. Chuck on 2023 guidance the low end $3.4 billion. I guess, the question is why is this so low given the strong tailwinds we're seeing? I understand cost FX headwinds, but how conservative is that low end of the guidance range in your view? Yeah. Good morning. Let me give you the high-level view that, I have and then I'll ask Dave to talk about the low end but also the top end of the guidance range because there's a pathway to the top end as well. So first of all, what we'd say is the guidance range obviously fits nicely within the 2025 value creation framework. And as I mentioned already, we're on track and a little ahead of schedule. I'd say that, the guidance range also reflects some of the headwinds from the portfolio changes. So this is a big year of finalizing a lot of the country exits and the AI rationalization. Last year, we were pretty aggressive as I mentioned. We did over a dozen country exits last year alone, and we have a similar amount lined up for 2023. So, there'll be a lot of the portfolio decisions made in this year. And then finally, from a guidance perspective, there's a bit of a disconnect, and Dave will explain it in detail. We obviously included the higher interest rates to finance some of the growth particularly around Stoller and Symborg, but we did not include any of the earnings contribution from those acquisitions. So there's a bit of a mix there from a guidance perspective. Now, when you think about the guidance range, I'll have Dave talk about the specifics. Go ahead Dave. Sure. Yeah. So â good morning, by the way. And if you think about the high end of the guidance versus the midpoint of the guidance clearly more corn acres in the US would be a positive favorable cost realization of price would be a positive. And then we're also looking at some upside potential in terms of Brazil. To your point on the bottom end, it really still is very much a focus on our part on currency impacts and also just the dynamics in terms of the rate of inflation, which continues to be somewhat dynamic. We're seeing positive early indications on that, but that continues to be something, we're very, very focused on. So you can think of that and then of course in this business there's always Dave as you know, weather impacts that we would consider. Chuck mentioned, Symborg and Stoller. Our expectation is run rate for 2022 on those businesses in terms of EBITDA collectively is in the range of $120 million. So depending upon the time of the close and Chuck you may want to comment a little bit about that you could think of something like two-thirds of that coming through and actually benefiting us. And that reflects the fact as you know Stoller with being Latin America focused that would be towards the end of the year. Symborg really Europe some of that performance in earnings we won't really capture in 2023. But in 2024 in terms of run rate, we're going to see some very attractive contribution from both of those businesses, which will be very additive both obviously revenue added EBITDA and EBITDA margin additive for the company. Chuck, do you want to talk a little bit about timing? Yes. David, so if you recall in the prepared remarks, we mentioned closing the deal in the first half. We've got a bit more of an update, we've seen some of the regulatory filings come in. So, what we can say right now is that, we've received all the pre-closing regulatory approvals that are required for Symborg. So that's very good news and we expect that to be in a similar position with the Stoller transaction very soon. So, now we're thinking that we'll be able to close both of these acquisitions in Q1. So, a little earlier than we thought. And of course good news as Dave indicated, these are going to be good earnings contributions and will be accretive to EBITDA and certainly even accretive to margins. And as we look at it, we're pretty excited that this is a biologicals platform now that we'll be able to continue to grow. So we've got high aspirations for this part of our portfolio and it looks like we'll be able to close both of these transactions in Q1. Good morning. This is Cory on for Kevin. And coming up with the 2023 free cash flow range of $1.1 billion to $1.3 billion, what are your assumptions for working capital in 2023? Yes. Essentially what we've assumed particularly very importantly, a good question around inventory is our inventory levels in terms of inventory to revenue or inventory to sales be basically constant. So in other words that would end up than being -- inventory would be a contribution. The change on the change would be a contribution to cash in 2023. Two of the key items beyond working capital they're very important and somewhat embedded in my prepared remarks earlier. One was the expectation for higher interest expense. Obviously, both amount of debt, but also the rate on that debt in 2023. That will flow through as a cash use for incrementally '23 compared to '22. And then the other one is higher cash taxes. That's predominantly related to the R&D tax credit phenomena if you will the capitalization amortization as opposed to expense benefit that we've been receiving. We're not unique in terms of that challenge and of course, that's something that's going to continue to be very much the focus of legislative lobbying because it's really we think highly punitive. So it's really working capital actually ending up net of increase in receivables, being a source of cash and then higher usage of cash on both the interest and on the tax side. Yes, Dave, maybe it's a bit more instructive to talk a little bit about working capital and specifically the inventory. If you go back to 2020 and 2021, obviously, the entire industry Corteva included had significant supply chain challenges right across the board. We saw raw material shortages, logistics challenges and as a result we were forced to draw down our inventories to what we would consider to be unhealthy, unsustainable levels and our service levels for our customers, especially around some of the products that are very unique to Corteva. So think about our seed portfolio, but also think about the Enlist platform, these service levels became unacceptable. So, last year we saw an opportunity to rebuild those inventories. We feel now that we've got the right service levels in place to support our customers. And don't forget the global CP market is expected to grow mid-single digits this year. So we're preparing for another good year in agriculture. We're preparing for another good year of growth and we feel we've got the service levels now to support our customers, very important. Hi, good morning. Just want to ask a question on free cash flow conversion. So, I think you've been targeting about 50%. You talked about getting a 42% average cross 2021 to '22. Can you talk about why the free cash flow conversion is a little bit lower in '23? And then, thinking about that question and thinking about some of your acquisitions this year, what kind of share buyback capacity do you have this year? Sure, Joel. The sort of the short answer on the free cash flow conversion for 2023 relates to the points I made in the previous question which really have to do with the higher -- on a year-over-year basis, higher cash taxes and higher interest. There's some other factors in there, but those are the biggest components of that. In terms of capital allocation, as you know -- and we've really demonstrated that balance in terms of our overall capital allocation with history if you will up through 2022 very much of course weighted towards returning cash to shareholders. And that was I think very, very smartly executed during that period of time. 2023 is going to be much more significantly tilted towards growth and specifically M&A with the Stoller and Symborg acquisitions. We anticipate continuing on our share buyback, but that's going to be at a -- likely will be at a reduced level just given the significance of those acquisitions. One of the best success stories I think Corteva in 2022 was just the progress you've made in CPC margins. You laid out some helpful framework in the PowerPoint, but if you could just offer some further color on first of all just obviously the price/cost environment new product growth the exit of certain business lines. It seems like things are probably ahead of schedule as it pertains to your longer-term margin guidance. So just any additional framework you could offer on that would be very helpful? Thank you so much. Let me introduce very quickly and then I'll turn it over to Robert for his comments. You're exactly right Chris. I mean, it's the combination of those things. The focus on differentiated products new products what we've been able to do in terms of managing headwinds associated with by the way not only cost inflation in terms of material cost or market-driven costs, but also currency. It's been a big headwind for both businesses to include crop. So the setup right now I think for 2023 is positive. The thing to keep in mind of course and Chuck mentioned that I mentioned it in my prepared remarks is the headwind -- just the volume headwind that's associated with the product and geographic exits particularly the product exits for crop in 2023. Robert., do you want to talk a little bit about some of the formula? Sure. Yes Chris when you look at 2022 just a quick recap on how do we do it and what were some of the key drivers there. Dave hit on a few of them, but it really starts out with our strategy around price for value and productivity. We continue to be able to offset inflation in that year of -- inflation was about 10% as you roll the year up and yet we were able to continue to put new technology on the ground and the demand for it continues to grow up -- continues to go up with the growers. Our new product growth finished up about 33% as you've seen. And this is really a good story around that technology that continues to be a pull into the market. So these types of things with our supply chain becoming more resilient. We delivered nearly 10% more volume last year. This will be the continued story into 2023, as we begin to look at how will we manage margins what's that look like and how do we get through the year. We're going to continue to follow our price for value strategy. We do expect we'll have a little headwinds in the first half of the year for inflation and we'll work with that and productivity to continue to offset that. And then really what you look at in 2022 is structural changes that we're making and with the exits that have started we will finish up. It will be about 70% done with all of our AI exits in 2023. So 2023 really becomes a transformation year that we begin to change our portfolio and position us for even better margin accretion as we move forward into the future. Hi. Good morning. This is Patrick Cunningham on for P.J. In crop volumes in the quarter Crop Protection were down outside of North America and it seems like fungicides took a pretty big hit. Can you walk us through why the Crop chem volumes were so weak in the quarter? Thank you. Sure. Q4 is one that played out really in South America for us and Latin America. As you look at the big volumes, we had a strong Northern Hemisphere with Enlist continuing to go to fill tanks and took over a lot of tanks this Q4. But in Latin America the drought is really bad. When it comes to Argentina and Southern Brazil and so the fungicide growth that we typically would see there we thought we would see didn't come through just wasn't in demand. And so that's really what the difference was in Q4 when you look at volumes. The other thing, I would mention is roll back to Q4 2021 Brazil had mid-20s growth in that quarter alone and so had a huge mountain to compare against as well when you begin to look at Q4 versus Q4. Yes. Thank you very much. This is [indiscernible] filling in for Steve. Just wanted to ask about the settlement charges you're taking on Lorsban. I think this was the third quarter this year that you took a charge. And given that can you start providing commentary on what you expect next year for any charges? And what is -- as we think about that I think $7 million this year what is the cash flow impact from these settlements? Are they mostly for future cash flow impacted? Have you already paid the settlement? How should we think about that? Yes. This is Dave. So as we -- as you know we really have not provided -- cannot provide any kind of forward view. There's just no estimate that's available that would allow us to do that. We do -- we'll have an $87 million charge for the full year of 2022. There's just at this time limited forecast visibility as to what that would translate to in terms of 2023 and we've really just not prepared to comment on that. In the same way on the cash side, I mean, I think that's very, very much a TBD. We'll obviously update as actuals occur and actuals progress. Yes. Good morning. I wanted to follow up on the Crop Protection Chemical. Growth that you saw in new products, obviously, that was a nice success story for 2022. The original guidance was for $300 million increase in 2022 and you came in at $475 million and you're guiding again for $300 million in 2023. So I'm wondering what went right in 2022? And what could go right in 2023, or what could go wrong in 2023? Frank, thanks. Hopefully more goes right than wrong in 2023. But as you begin to look at new products, yes, we had a great year finishing up about $1.9 billion for the year in the sales of those products. And as you stated there $475 million increase. The strengths around it really centered around three big molecules that led this. Enlist primarily with the demand that we're following with Tim in the seed. And we're 80-plus percent at our last estimate now of acres over-the-top spray with Enlist. Arylex in Latin America -- excuse me in Europe was a strong performer as well. And as you know this herbicide is one that has a growing demand also. And then finally I would say our insecticide of Inatreq was the third one that was a standout there that helping us grow this. When you begin to roll that now forward to 2023 we expect that our new products will continue to see high-teens growth. It's going to have -- those three products will be well over $300 million each in total revenue and the upside there is that it's going to depend on more demand from our technology. It's strong and we don't see a whole lot of downside from the new products primarily because farm fundamentals are healthy. Growers are sitting on good profits. And then with that they're trying to maximize value and to do that you turn to new technologies to do that and that's where we come to play in this area. So this is a good story that really helps us play out I guess a proof point of our strategy to build more differentiated portfolio and these new products are a key piece of that. Yes. Frank, maybe I'll add one other point. It's not necessarily a new product, but we've got the new Spinosyns franchise capacity that will come into the market in 2023. So beyond what Robert said around that existing portfolio, we've got a capacity expansion and one of the most profitable franchises we've got with Spinosyns and that will start to go into the market, the new capacity this year. So we're looking forward to good things from that franchise as well. Great. Thanks for taking my question. So just looking at the guidance, it looks like you've noted that the cost headwinds are largely weighted to 1H 2023. Is there any potential for maybe cost to surprise to the downside or upside? How would you kind of look at that? And if so is the pricing that you have in place sufficient to offset some higher costs if there is any possible increase, or would you be able to enact pricing to offset that? I'm just wondering what drives the lower end of your range there. Maybe I could just introduce and then Tim and Robert you guys could comment respectively on your business. As we said, and you correctly stated that the majority of our call it market driven headwinds. So think of that as commodity and input costs as well as freight and logistics. The majority of that on a year-over-year basis will occur -- about 80% of that in terms of our forecast is going to occur in the first half and we'll see improvement/relief. Still we've got those costs going up but at a much more modest rate in the second half of the year. In the big picture on the pricing as we expect as we did in 2022 that we'll see seed pricing more than offset those commodity cost increases. And on Crop Protection we'll see the ability to cover those costs. And by the way it also offset the currency impacts that we've built into the guide the EBITDA approaches I shared with you earlier. Yeah. Dave on the seed side, I'd say for the first half we have a very good understanding of what our seed costs are that seed we would have produced last year. And so consider in the barn and well-understood in terms of the cost that we have there and we've been live in the marketplace with pricing for really since August in North America. And given where we're at in the market, we got great performance, very good demand for our technology. And I would describe our pricing as being well accepted in the marketplace. And again that's largely driven by good value proposition our ability to go out there and demonstrate value to our customers. So North America in a great spot. We've been live in Europe for about three months and again understood what our cost position was. And again pricing I was in Europe last week and our pricing is holding well in the marketplace and great implementation. You think about exposure for the rest of the year on seed. Latin America we're still in the field, producing our seed in Brazil especially but also Argentina. And so we have a little bit more exposure if you will in terms of those costs, but obviously we're working hard and we factor that in I think to our guide so far. And in terms of pricing, we still have flexibility there. We're not live in the marketplace per se. And so we're going to continue to evaluate where we're at there. We got a great track record of capturing value in Latin America and so we believe we're positioned very well for value -- strong value proposition. Again we've got an excellent track record in terms of being able to capture value and confident that we're going to be able to more than offset what that inflation pressure is. And in Crop Protection, just to add a little bit to that is that we continue to see as I said before mid-single digits inflation that will continue with us. It will be heavier in the first half than the second half, but our price for value strategy and productivity will continue to help offset that. So far we're seeing good progress in all of our markets with what we're doing and what we're going to market with. And the other thing I'd say is just a comment that one of the key indicators for us is what's going on in the generic market and how is pricing holding there. And all the leading generic producers have come out and said that prices are stable for the first half of the year from what they can see so far. And so that's always a good indicator for us as well as what's price going on there. So we expect we can offset the cost using the same strategy that we've used in the past for Crop Protection. Good morning. This is Lucas on for Josh. I just wanted to go back to the path for the 2025 targets. So, looking at your EBITDA for this year, I mean that seems to be progressing pretty ratably. You sort of highlighted why your free cash flow is going to be depressed in the next year. So you're kind of looking at like a mid-30s conversion versus the 55 to 75 target. So could you just kind of help us bridge how the free cash flow is going to converge there towards the target range? And if you see any risk there now given it's sort of more back weighted versus what's happening with EBITDA. I think I would just comment that we've got on a year-over-year basis, obviously, those additional headwinds that I mentioned to you. The other thing that I would mention is that we will get the cash contribution over time from acquisitions. It's not going to be significant, but it will be important to the overall equation. But the other thing is just the growth in EBITDA that's going to occur over that period of time. So, we also see some call it improvement as we look to more normal patterns in terms of the cost and inflation issues and some of the supply chain issues that we've been dealing with and the industry have been dealing with in general. All of those are going to be able to be contributors towards the targets that we've talked about. And by the way just to reinforce again, the 2022 performance combined with the 2022-2023 guide is again a very important statement we think we're making about the attainment of those 2025 numbers. Yes. Dave maybe just a couple more minutes on this topic. Look, when we, Dave and I look at the free cash flow conversion, it is obviously a focus for the company. So if you think about what we've done as an organization, we started with the portfolio and the strategy and then the operating model for Corteva. And I think we've made a lot of progress in 12 months in those areas. So now the next level of focus, obviously, is looking at the cash conversion. It is a high priority for the management team. It's a complete focus for us. And as we make the structural changes to the portfolio, I mentioned we still have some country exits, some AI exits. That's going to be looked at through the lens of earnings of margin but also of cash generation. And that was always the plan. So what I'd say is we're very comfortable with the path that we're on and by the time we get to the end of 2023 from a margin and EBITDA perspective, we're going to be halfway through this journey. And we believe that there's a pathway to get free cash flow conversion sort of north of where it is today as well and that will be a primary focus as we look through the rest of the portfolio changes that we're planning to make. Yes. Thanks. Good morning, everyone. I wanted to maybe come into the some of the market assumptions that you have both at the industry level and at the Corteva level for 2023 and just maybe on the Crop Protection side. And I know there's some noise related to the portfolio exits, but mid-single-digit kind of market CPC growth. Help me think about Corteva volumes organically for Corteva in that context? And any maybe differentiation by region? And along those lines kind of where you see channel inventories kind of going into 2023 in your key kind of operating regions? Adam, thanks for the question of what's going on in the market. It's going to be a dynamic year. But as we look at it it's â we're expecting the market organic growth to be in the mid-single digits call it 4% to 7% with biologicals outstripping that. It will be the fastest-moving segment. Overall, the demand continues very strong across all regions. And again, it's â growers are chasing yield and that's where we â that's our sweet spot I guess is what I would say with the products we have. You asked about channel inventory, and right now we see inventory to be about normal across all regions with a few hotspots around some pockets that we're going to have to watch. One being, we talked about earlier the fungicide in Latin America is elevated a bit. To a lesser extent Europe not near as much but in a couple of areas in Europe. And then insecticide in Asia is elevated as well because it's just been vet not have pest pressures. But if you roll all that together, those inventory levels from what we see in the channels is very manageable across the year, across the seasons. No issues there from a standpoint of will it work itself out. We do see that the pace of price for the year flattening as compared to a year-over-year comparison. But we â like we said before, mid-single-digit inflation we're still expecting for crop protection. Again more weighted towards the first half. I think the thing to watch is the global supply chain. So all things are trending in the right direction. If you look at all the key indicators for the global supply chain market. But what I would say is it's stable. It's not getting any worse for the first time in a while. And I guess, I'm cautiously optimistic that that continues to improve but that's one to watch as well to see how does that drive the market as we move into this year. So overall from a market standpoint, it's poised to have a really good year and we think we're sitting in a pretty good position across all levels there as well. Maybe a couple of comments on seed. Yes. I think Adam, when you think a seed this year, one of the big movers obviously is the shift back towards corn here in North America. We believe we'll have an increased area in both corn and beans, but that tilt towards corn is very important. Clearly for us, we were still operating in a very healthy environment as well. Customers are generally good in terms of what their farmer income is and there's certainly as always demand for the latest and best technology that's going to help them be most productive. The dynamics between corn and soy, we watch that all the time up through final decision-making and it continues to tilt towards corn. And I'm comfortable with that current 91, 89 as reasonable assumption. Around the world, certainly dynamics are different than what we see here in North America. In Europe, I'd say that we're probably more expecting corn to be flat-ish in the marketplace and that's driven by a couple of markets including Ukraine impacting that. Latin America, still strong momentum there. Certainly, we're in the midst of planting this safrinha season and here in a few months we'll be out selling next summer corn, as well as soybeans and then on to safrinha. That all comes very fast, but still tremendous growth across Latin America and no reason to see that hectares won't be up, not just this season, but also in the coming seasons as well for Brazil in particular. Thank you. Good morning. Actually, this is Edlain Rodriguez. A quick follow-up on seed for Tim. I mean, this is the first time in a long time where the seed business has a positive EBITDA in the fourth quarter. Can you talk about how sustainable that trend is going forward? And also, with minus, what's driving that change? Yes. I mean, we -- I'd say, fourth quarter for us, it's our second smallest quarter. Let's not forget that. We're heavily, heavily weighted towards the first half of the year. And the big driver in the fourth quarter is certainly Latin America, the live market that we have and that tends to be somewhat -- it can change between fourth and first quarter, depending upon how timely that safrinha season starts. And this year, I'd say, we had a timely start to the season and very strong demand for product in Latin America. I think you're also seeing, here in North America, our business. We don't move a lot of Pioneer through the rep model, because that business is direct-to-farmer. And so, very little of that has taken place at this time of the year, but we are seeing an increase in the importance of Brevant in our multi-channel business and we would expect that to continue on. So it's never kind of set in stone. There's still some seasonality elements depending upon how the year is going, but, obviously, part of it was pricing, part of it was volume and certainly those are healthy factors. And we expect to see Latin America business continue to grow over time, so that late -- end of the year business is going to be there and we expect our multi-channel on Brevant business to continue to grow. So that's certainly a factor that supported the fourth quarter, but it's a little bit of luck and obviously good execution here because it was driven by customer demand. Thank you. And that concludes today's call. We thank you for joining and for your interest in Corteva. We hope you have a safe and wonderful day.
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Good day, and welcome to the AMETEKâs Fourth Quarter 2022 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] Please note this event is being recorded. I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead, sir. Thank you, Rocco. Good morning and thank you for joining us for AMETEKâs fourth quarter 2022 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer. During the course of todayâs call, we will be making forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risk and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2021 or 2022 results or 2023 guidance will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our Web site. We'll begin today's call with prepared remarks by Dave and Bill, and then we'll open it up for questions. Thank you, Kevin, and good morning, everyone. I'm very pleased with AMETEK's results in the fourth quarter, and for all of 2022. AMETEK's continued excellent performance reflects the quality of our niche-differentiated businesses, the strength of the AMETEK growth model, and the expanding impact of our organic growth initiatives, and most importantly, the outstanding efforts of our global employees. Thank you to all AMETEK colleagues for your many contributions to our success. We have navigated many challenges over the last few years only to emerge stronger and even better positioned for sustained growth. Our results in the fourth quarter were outstanding. Stronger-than-expected sales growth and excellent operating performance led to a high quality of earnings which exceeded our expectations in the quarter. We ended the year with a record backlog as demand remains solid across our diverse end markets. Organic growth was again very strong in the quarter as our teams are successfully driving key organic growth initiatives across their businesses and expanding their presence serving attractive growth markets. Operationally, we're performing exceptionally well and offsetting inflation with price increases, resulting in strong margin expansion. Additionally, cash flow in the quarter was outstanding, providing us the flexibility to invest in our businesses and deploy capital on strategic acquisitions. Now, on to the results of the fourth quarter and all of 2022, fourth quarter sales were $1.63 billion, up 8% over the same period in 2021. Organic sales growth was 9%, acquisitions added two points. And foreign currency was a three-point headwind in the quarter. Orders were solid in the fourth quarter against a challenging comparison, resulting in a record backlog of $3.22 billion. Operating income in the quarter was a record $398 million, a 10% increase over the fourth quarter of 2021. Operating margins were 24.5% in the quarter, up 50 basis points [technical difficulty] from the prior year. EBITDA in the quarter was a record $489 million, up 12% over the prior year. And EBITDA margins were an impressive 30.1%. This outstanding operating performance led to record earnings of $1.52 per diluted share, up 11% versus the fourth quarter of 2021, and above our guidance range of $1.45 to $1.47 per share. Now, let me provide some additional details at the operating group level; first, the Electronic Instruments Group. The Electronic Instruments Group delivered continued strong sales growth and excellent operating performance. Sales for EIG were a record $1.16 billion in the quarter, up 10% from the fourth quarter of last year. Organic sales were up 9%, acquisitions added 3%, and foreign currency was a three-point headwind. EIG growth was broad-based with particularly strong growth across our Aerospace & Defense and Ultra Precision Technologies businesses in the quarter. EIG's operating income in the fourth quarter was a record $307 million, up 10% versus the prior year, while EIG margins were a very strong 26.5% in the quarter. The Electromechanical Group also finished the year with outstanding performance. EMG's fourth quarter sales were $466 million, up 4% versus the prior year, with organic sales growing 8%, and foreign currency a three-point headwind. Growth was again broad-based across EMG, with our Aerospace & Defense businesses leading the growth. EMG's operating income in the fourth quarter was $115 million, up 9% compared to the prior year period. EMG's fourth quarter operating margins were 24.6%, up an impressive 100 basis points versus the prior year. Now for the full-year results; overall, performance was outstanding in 2022, establishing annual records for essentially all key financial metrics. Overall sales for the year were $6.15 billion, up 11% from 2021. Organic sales increased 11%, acquisitions added 2%, and foreign currency was a three-point headwind. Operating income for 2022 was $1.5 billion, up 15%. And operating margins were 24.4%, up 80 basis points versus the prior year. While core margins up and impressive 130 basis points, reflecting our ability to successfully manage inflation and supply chain challenges. EBITDA for the year was $1.83 billion, up 15% from 2021, with EBITDA margins a very strong 29.7%, up 100 basis points from the prior year. Full-year earnings were $5.68 per diluted share, up an impressive 17% versus the prior year. AMETEK's performance in a challenging operating environment highlights the proven strength and flexibility of the AMETEK growth model and our ability to successfully navigate through uncertain economic times. Our businesses continue to leverage the key elements of the AMETEK growth model to accelerate global growth, develop innovative new products, and identify and execute on operational efficiency improvements. Additionally, our businesses worked closely with our corporate development team to manage our acquisition pipeline, resulting in a continued strong deployment of capital on strategic acquisitions. In 2021 and 2022 combined, we deployed over $2.4 billion in capital on eight acquisitions, and acquired over $600 million in annual sales. We expect to remain active in 2023 as our deal pipeline remains very strong, and our balance sheet provides us significant financial capacity to deploy capital. In addition to our acquisition strategy, we remain committed to investing in organic growth initiatives and are very pleased with the impact these investments are having on AMETEK's growth. As I highlighted during our last earnings call, AMETEK's portfolio has strategically evolved with increased exposure to higher growth market segments. This portfolio evolution has been driven by our acquisition strategy and by the organic investments we are making in our businesses. In 2023, we expect to invest an incremental $90 million in support of these growth initiatives, including investments across research, development, and engineering, and sales and marketing. One way we measure the success of these investments is through our Vitality Index, which was an outstanding 27% of sales in 2022. Our increased investments in RD&E continue to yield innovative advanced technology solutions, including within our Zygo business. Zygo, which is based in Middlefield, Connecticut, designs and manufactures advanced optical metrology systems and ultra-precise optical components and assembles for a diverse set of end markets, including defense, research, and semiconductor. Zygo partnered with the Lawrence Livermore National Laboratory's National Ignition Facility to provide high-end precision optics in support of their inertial fusion energy testing program, which provides a significant leap forward in the realization of sustainable fusion energy. Achieving these heights of energy production requires the use of highly precise optics and scalable manufacturing processes which were developed in partnership with Zygo. I want to congratulate the Zygo team for their tremendous contributions supporting important advancements in research and technology. Lastly, let me briefly touch on the supply chain issues and inflation. While tightness remains in certain areas, we're seeing improvements in the global supply and logistics. Additionally, although inflation remains elevated, we are also seeing modest improvements versus levels experienced in 2022. As we look ahead to 2023, we will continue to proactively manage our supply chain and remain confident in our ability to offset inflation with price increases. Now, shifting to our outlook for the year ahead, while macroeconomic uncertainties remain, we are confident in the quality of our businesses, the flexibility of the AMETEK growth model, and our ability to navigate through these uncertain times. Additionally, given our record backlog and proven operating capability, we are confident in our outlook for 2023. For 2023, we expect both overall and organic sales to be up mid-single-digits versus 2022. Diluted earnings per share for the year are expected to be in the range of $5.84 to $6, up 3% to 6% compared to last year's results. For the first quarter, we anticipate overall sales up mid-single-digits with adjusted earnings up $1.38, of the $1.38 to $1.42, up 4% to 7% versus the prior-year. In summary, AMETEK's fourth quarter and full-year results were excellent, our record backlog, the strength and flexibility of the AMETEK growth model and a world class workforce position us nicely for 2023. I will now turn it over to Bill Burke who will cover some of the financial details of the quarter. Then we'll be glad to take your questions, Bill? Thank you, Dave. As Dave highlighted, AMETEK had a very strong fourth quarter to complete an outstanding year. In the quarter, we delivered record level operating performance at a high quality of earnings. Let me provide some additional financial highlights for the fourth quarter and for the full-year along with some additional guidance for 2023. Fourth quarter general and administrative expenses were essentially flat versus the prior-year and for the full-year general and administrative expenses were up $6 million, driven largely by higher compensation costs. And as a percentage of sales were 1.5% versus 1.6% of sales in 2021. For 2023, general and administrative expenses are expected to be up modestly versus 2022 levels and remain at approximately 1.5% of sales. The effective tax rate in the fourth quarter was 18.9%, up from 17% in the fourth quarter of 2021. For 2023, we anticipate our effective tax rate to be between 19% and 20% and as we've stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from this full-year estimated rate. Capital expenditures were $58 million in the fourth quarter, and $139 million for the full-year. Capital expenditures in 2023 are expected to be approximately $114 million, or about 2% of sales. Depreciation and amortization expense in the quarter was $89 million, and for the full-year was $320 million. In 2023, we expect depreciation and amortization to be approximately $325 million, including after-tax, acquisition-related intangible amortization of approximately $154 million or $0.66 per diluted share. For the quarter, operating working capital was 18.9% of sales. Cash flow in the fourth quarter was excellent with operating cash flow of $385 million, up 37% versus the fourth quarter of 2021. Free cash flow was also up 37% to $327 million in the quarter, while free cash flow conversion was 106% of net income. Total debt at year-end was $2.39 billion down from $2.54 billion at the end of 2021. Offsetting this debt is cash and cash equivalents of $345 million and during the fourth quarter, we deployed approximately $240 million on the acquisition of RTDS Technologies. Gross debt-to-EBITDA ratio at year-end was 1.2 times and our net debt-to-EBITDA ratio was 1.1 times. As Dave noted, we remain active on the acquisition front with a solid pipeline of acquisition candidates. Given our strong cash flow and modest levels of leverage, we're well-positioned to deploy additional capital. We have approximately $2.3 billion of cash and existing credit facilities to support our growth initiatives. In summary, our businesses performed exceptionally well in the fourth quarter and throughout all of 2022 delivering strong growth and high quality of earnings in a challenging operating environment. AMETEK is well-positioned for 2023, given our strong financial position, our proven growth model, and our world-class workforce. Can we turn organic investments, the $90 million, if I recall, I think that's a step-down from what you did in '22, just any color there, is there just some conservative nature just given the uncertainty out there, are there unusual projects in '22, just any thoughts on that side? Yes, that's to start off the year, and there a potential to do more, and -- but the $90 million was a good number, and it's incremental; Keep in mind, incremental over what we've done in 2022. So, it's incremental, and we're making healthy investments in RD&E, it's up double digits for the year, and healthy investments for sales and marketing. So, we think the $90 million is appropriate. And, obviously, that can be flexed up or down if required. Great. And then a lot of concerns, I mean, out there about potentially some weakness showing up in H2. Just any thoughts on your end, what you're seeing in terms of that? Is there anything concerning or sort of popping out that has you a bit worried as we enter the back-half of '23 and into '24? Not really. I mean, the -- obviously, our growth is slowing, but the record backlogs and we're executing very well, we're getting the price, and it still feels good to us. It feels strong and good. And when you get out to the second-half of 2023, I mean this is a -- there's less visibility because you're further out, but our backlog is at a record level. It's usually at about 30% of annual sales. And right now, it's running at about 50% of annual sales. So, we feel really good. And we don't see a slowdown yet. I was hoping you'd take us through the key end markets. And then also on the regional updates, it's been interesting, maybe people got too negative on Europe. So, like to know how Europe did. And then China reopening, how does that impact you all? Sure, Deane. I'll start with your second question, the geographical outlook. Strong, broad-based growth across most geographies. Our Asia region was flat on China headwinds. And to your point, our fastest growing market was Europe. Europe was up 12% with notable strength in both our process and aerospace defense markets. And then we had a really strong performance in the U.S., up 10% organically; broad-based strength, notable strength in our process businesses. And in Asia, as I said, it was flat, with notable strength in aerospace and defense, and process. And China was down for us low double digits in the quarter on a difficult prior-year comp, and the impact of the Zero COVID policy. And Asia, we think that the China situation is going to turn around as the reopening occurs. And we're pretty optimistic for it in the second-half. But that's the picture in Q4, really strong broad-based growth, strongest Europe, and second U.S. Most of Asia was really good, and in China there was some weakness. Okay, and the second question was in market segment's summery. I'll take a walk around the company. In our process area, our overall process businesses, they were up high-single digits in the quarter. Organic sales were up 10%, and you also had the contributions from the acquisition of Navitar and it was offset by foreign currency headwinds. And as we saw throughout last year, growth across our process businesses was particularly -- was broad-based, but it was particularly strong in our Ultra Precision Technologies businesses in the quarter. And as we look ahead to 2023, we expect organic sales for process businesses to be up mid-single digits for the year. Next I'll talk about Aerospace & Defense. Our Aerospace & Defense businesses had a very strong finish to the year, and with overall and organic sales up mid teens. So, that was the strongest growth rate of the year for Aerospace & Defense. Our commercial businesses led the growth in the quarter. We had sales of high teens on a percentage business in the commercial business. And Defense was also strong in the quarter, growing low double digits. And for all of 2023, we expect organic sales for our Aerospace & Defense businesses to be up mid-to-high single digits, with commercial aerospace growth expected to be modestly stronger than defense growth. I'll next go to our Power & Industrial, overall sales for our Power & Industrial businesses were up high single digits in the fourth quarter, driven by mid single-digit organic growth and the contributions from the acquisition of RTDS. Growth in the quarter was particularly strong across our programmable power business. For all of 2023, we expect organic sales for our Power & Industrial business to be up mid single digits, with similar growth across both the Power & Industrials segments. And finally, I'll talk about our Automation & Engineered Solutions market segment. And overall sales were up low single digits in the fourth quarter, with very solid mid single-digit organic sales growth, had some currency headwind in that segment. I was very pleased with the overall growth and the performance of Automation & Engineered Solutions in 2022. They're continuing to expand exposures in attractive niche markets. And in particular, our Engineered Medical Components business saw strong growth in the quarter. And in 2023, we expect organic sales for our Automation & Engineered Solutions businesses to be up mid single digits, with similar growth expected across both our Automation and Engineered Solutions business. Yes, just as a follow-up, just how would you characterize the pace of orders, industrial demand, the size of orders, is there -- just with respect to how normalization might be happening for AMETEK's businesses? That's a great question, Deane. Our overall orders were up 1.5% in the quarter. And the overall demand environment, as I answered Allison's questions, feels really solid. We had our 10th straight positive book-to-bill quarter. And we ended with an all-time record backlog as I mentioned in the prepared remarks. And this level of backlog, as I said, was 50% of our annual sales, well above the normal level of 30%. And it's up 78% from the end of 2020. So, we're in a really strong position as we enter 2023. So, your question on some of the nuances, if you recall, over the last couple of earnings calls, we highlighted a couple of dynamics that would impact our order growth. But the first was the difficult comparisons we're facing because as orders have been strong for an extended period of time. To give some context, over the prior nine quarters, our orders grew over 20% a quarter. So, it's been sizable and sustained that that helped build the backlog. The second dynamic we highlighted was the expectation of customers to return to more normalized ordering patterns. Now that the supply chain is improving and -- we started to see that dynamic play out in the fourth quarter. So, overall, we're comfortable with our order levels in Q4. After starting off in January and we just finished January, we had another sold orders a month, ahead of our expectations, and solidly up from January 2022 order levels. So, again, we're feeling pretty good with a strong backlog and our orders are hanging in there. So, we think that we're in -- looking at a pretty good year. Hey. And just wanted to come back to the inventories, some of your peers have been talking about some elevated inventory in some of the OEM channels. Just curious what you're seeing there in some of your serve businesses, serve markets, and if there's any area of concern there? Yes, the first point I'd like to make is that when you're looking at customer inventories, a lot of our products are customized, and they're high-value products. So, we don't really have a lot of distributor stocking issues to worry about. That's particularly true in EIG. In EMG, there's more of an OEM deal with the customer base, and that's where you're seeing a bit of the customer ordering patterns normalize. But overall, we think we've got a good handle on it, and we feel pretty good about where we're at. Yes, okay, that's great. And just shifting to the 2023 outlook, I was hoping maybe you could put a finer point on just the underlying assumptions. How much price do you expect verses volume? And then anything specific on the quarterly phasing, I mean do you think you'll get growth in both the first-half, second-half, or as you work down the backlog, does it begin to decline there in the second-half? Yes, great question. I mean with our budget model, we pretty much have a traditional first quarter. So, it's not really second-half-biased. And we think we'll grow in each of the quarters of the year. And in terms of pricing, in our budget model we have about four points of price. And we assume that we assume that we have about 3.5 points of inflation. So, we are going to offset price and inflation by about 50 basis points. Now, thatâs down a bit from 2022 where six points of price. And we offset about 5 points of inflation. But, itâs the guide for the entire year. And we are being a bit conservative now. And, we will probably start out a little better than that. But, thatâs our plan for 2023. Also in 2023, I mean in addition to staying in front of inflation with price, we think supply chain shortages are going to abate. And we believe our working capital levels will decrease to more normalized levels to a very healthy 110% to 115% conversion to net income on the free cash flow. We also think that in terms of vertical markets we do expect our longer cycle aerospace and defense businesses to be a bit stronger than the balance of the portfolio. So, one through the mortgage segment commentary, Deane, it was a little bit higher, was -- had a mid- to-high outlook. So, we think thatâs going to be true. And that was accelerating as we -- each quarter of 2022 really. We expect both of our groups to grow mid single digits. We talked about the historically strong backlog. And, thatâs some assumptions that went into our budget. Do you have any questions, Brett? Hey, thatâs a really interesting, that's really helping, but that team did a great job. And itâs working on fusion energy is a great thing. And, it just shows our capability. Yes, for sure. Thank you. The orders gave you said up 1.5 in the quarter. Was that organic? And can you also tell the split by segment? Yes. That was overall worse. Organic was down minus 2. And so, overall orders were up 1.5. Organic was minus 2. And both segments were about at that same 1:1 book-to-bill. So, wasnât a distinct difference between the segments, and as I said, overall demand environment showed a solid 10 straight quarter of book-to-bill. So, we have a strong backlog. And as we have this dynamic of customers returning to more normalized ordering patterns, we have a strong backlog. So, we feel pretty good about it. Okay, great. Thank you. Based on your answer to the prior question, is it possible then that sales volumes could sort of flatten out in the second half of the year. And your growth organic is essentially all price? Is that what you are what you are thinking cadence wise? I donât think in the second half of the year. I mean we are going to have some healthy price. But I think itâs going to actually increase a bit in the second-half. And, if you think about our order rates we have that mid single digit sales growth forecasted. We think we are going to grow orders also. So, orders are going to grow a little bit less than sales as our forecast. But, they are going to grow. And really by the end of the year, our backlog is still going to be at elevated levels. It will be down a bit, but at elevated levels historically. So, we are clearly done with our strong backlog which will provide a buffer is there is some kind of downturn. We donât see it right now. And our orders will be up, but it will be up a little less than sales. And again, at the end of 2023, we have historically elevated levels of backlog similar to now. I was curious about your recent acquisitions with Navitar and RTDS. And just about your first observations with those companies as part of the AMETEK portfolio. How did things unfold related to expectations? And how are things going with bringing them into the fold? Yes, they are going very well. I mean Bill and I have met with both of the acquisition integration teams and really positive. Just to recap a little bit, RTDS provides real-time power simulations used by utilities and various strategic acquisitions that broadens our power instruments businesses with differentiated testing and measurement and simulation capabilities. So, it's attractive position and high growth market. Really good team, I mean, just experts in the field. And it's kind of fun interacting with them. And they're really adopting AMETEK and feel good about that one. Same with Navitar, Navitar is in some good growth markets. The optics market is doing quite well with us. And even in the semiconductor space, where they play their main customers is one that's very differentiated and has unique capabilities. So, that along with Life Sciences along with machine vision, there's a very good outlook there. And that business is a little bit different as being integrated into our Zygo business. So, it has new capability for Zygo. Much needed capacity for Zygo and the integration is going very well. Great, thank you. And then, as a follow-up, staying on the theme of M&A, you mentioned your pipeline is very strong at this juncture. And I'm curious about what your observations are in the market overall, with respect to the level of competition for assets and where multiples seem to be moving in your observation? Right, yes, I think with the interest rates increasing, and with money, not as free as it was, is actually an advantage to us. So, we have a good pipeline and a good balance sheet. And we remain very active with a solid pipeline of deals, the valuations have come in a bit. We're looking at some quality assets, though. So, they're still a bit elevated from historical levels, but no doubt they've come in. And important for us in our pipeline, we have a very disciplined acquisition process. And these deals are going to meet our traditional financial hurdles, which is primarily a return on invested capital of 10% by the third year of ownership. These are important thresholds for us as we want to ensure we're providing a strong level returns on the capital we deploy for our shareholders. And that's been a hallmark of AMETEK's acquisition program for a long period of time. We do this all with cash and debt, don't use equity. And there's a bigger pipeline right now than has been historically because when there's less, less money around the system to bid up deals. So, we feel pretty good with where we're at. And if we do something, and I believe we will be talking to you about deals in the near future, they're going to be, they're going to meet all of our traditional hurdles. And we're committed to have an investment grade credit rating, and we got plenty of about $2.3 billion of capital and financing capacity available. So, in this environment, discipline is going to be a key word as it's always been for AMETEK. But have been very key in terms of executing our forward-looking M&A strategy. Good morning. How much of the one-time costs around supply chain disruptions last year, the higher freight costs, the spot buys and electronics, all those things fall-off in 2023? I'm guessing I'm wondering is this a meaningful tailwind in kind of your forecasts? Yes, I think that what you're going to see, there's still an elevated level of inflation. But at the same time, some of the one-time distributor purchases of inventory are going to go away. So, there's going to be some natural tailwinds for us in terms of margins, we expect that working in the P&L in our budget model, our productivity/cost savings of about $110 million. So, we think it'll be substantial. And that's where we're starting out the year but we think there's maybe even some upside to that. And it's largely related to a, and there is a couple of opposing forces, you're dealing with inflation and some costs of things are still going up. But at the same time, some of the supply chain issues are working the other way and especially the higher prices that we paid on a one-time basis to some of the electronics distributors to continue shipping products. Got it and then you have been adding capacity through 2022, I guess in the CapEx, what's kind of growth versus maintenance or whatever framework you want to use to discuss kind of how you're thinking about capacity additions here in 2022? We added a lot of capacity in 2022, we brought some low cost region facilities online, we've talked about that. For 2023, we expect our capital expenditures to be flat, a little bit more than 2% of sales, as we've done historically. So, and it's a good balance between growth CapEx, maintenance CapEx and CapEx funding cost reductions. Yes, you mentioned -- you mentioned customers kind of getting normalized on their behavior and their ordering patterns, like, can you maybe get a little bit finer point on that? And like, what you're seeing, are actual things getting pushed out, or are they just ordering more real times? Yes, if you think about it from the customer's view, they've kind of got trained by the pandemic, to order things early. And now, most companies are getting including AMETEK is getting back to being able to deliver in lead time. And in fact, that's part of the reason that we grow our businesses at a faster rate during the pandemic period, we were able to ship and deliver and we had the inventory buffer. So, what's happening is, as customers normalize their buying patterns, they don't have to order early anymore. And that's what's really happening, I think across the broader supply chain, and we're seeing that. So, that's the main normalization that we're talking about. And then when you mentioned the M&A pipeline looks good. How do you think about timing of execution, just given the macro year, given it looks like industrial is getting lighter, is getting weaker and are you relying on trailing 12 results that might be different than forward 12 for acquired for companies that you're looking at. So, how does it impact your desire to do be actionable right now, given where we are in the business cycle? AMETEK has historically bought through both upcycles and down cycles. And sometimes you can get your best deals during a down cycle. And you have to be cognizant of what the forward-looking EBITDA is not really the trailing, but the forward. So, it's something that we've been keenly aware of for years, and we're focused on it. Hey, Dave. Good morning, good morning. Dave, I'm just going to see if you could drill into the process segment a little more, you called out Ultra Precision with relative stronger growth, does that carry forward into '23 just in terms of what leads that part of the business? And then just maybe higher level anyway to cut the mix of what that process segment, that sales into more of an R&D function versus more of a production environment? Yes, that's a good way to think about it. And I'll try to put some more color into that. I mean, if you look at 2022, what stood out was our healthcare component. And our healthcare component is a big part of process across all of AMETEK, it's about 50% of sales, but it's a big part of the process. And I'll give you an idea. And Q4, our rolling business was up 20% organically, so they're really doing a good job. And that market has -- hospital spending has been fantastic for us, and people were putting in new systems post-pandemic. Also the semiconductor markets about 6% of sales, and the vast majority of that is in process and the semiconductor market was up high single-digits in the Q4. And we think in 2023, there'll be a slight downtick there, that'll be up low-to-mid but still growing because we have a lot of applications and research and also in the areas that are continuing to grow. So, we're in the right places in semiconductor. So, you got healthcare, you got semiconductor. You got the research market where we've had with our CAMECA business just every lab in the world has to have one of our atom probes, every lab in the world has to have some of our SIMS products. So, their backlog is really good. And they're doing well. And then, you got the old traditional oil and gas part of process. And that's doing very well in Q4, it was up high-single-digits. And for all '22, it was up low double-digits. And for '23, we expect plus high-single-digits. So, process is doing very well. And we think it's going to continue in the future. Excellent. That's very helpful. Just as a follow-up, could you speak to how you think the incrementals will look for EIG versus EMG, in '23 they were, EMG was certainly very strong in '22. But just how did those look going forward comparatively? Good question. In terms of incrementals, in both groups, I think the core incrementals will be up 30% to 35%. And I think the core and reported margins will be up 30 to 40 Bps. So, we really think we have a clear line of sight to grow margins. Again, there'll be healthy incrementals. And we'll be able to increase our core margins as we go forward. Some automation and robotics OEMs have recently talked about distribution channel bottlenecks being a hindrance to growth, can you just talk about what you're seeing in that market, both near-term and expectations for how that market grows in the future? Yes, I think for 2023, we think that business will be at mid-single-digits. And both our automation and our engineering solutions will be up mid-single-digits, I think that we're selling to mainly OEM customers there. So, you're going to have a bit of the effect of the ordering patterns, a change in ordering patterns there, but we have a really healthy backlog. So, it's really what we talked about customers are changing ordering patterns. We're really good at delivery. So, we're meeting our customer commitments, so they're now ordering at normal lead times. So, you'll see a little bit of the order corrections that we talked about in Q4 continuing. But we still have a record backlog and all the comments that I made hold for that part of the business also. Got it. Thanks. And obviously semiconductor demand has been under pressure, especially on the memory side. But you just said you're in the right places to grow. That mean, you're supplying the makers of tools that go to foundry and logic or just how will you grow this year in the context of what's a pretty tough memory side? Right, it's pretty tough. And again, we grew mid-teens in 2022. So, that growth for 2023 is up low-to-mid. So, it's a substantial decline. But we're still growing and the reason we're growing the key application areas, at our CAMECA business, they're really involved in semiconductor research and development and staying ahead and getting the next generation. And we have some tools that are must haves for the semiconductor market, and really strong backlogs and orders are continuing well. And then, the second area is we're in the EUV optics area for used in semiconductor fabrication. So, the EUV market is kind of separate from the memory market and really strong. So, those two areas are the good part of our semiconductor business and they're really strong. And that's why we think we'll still be able to grow low to mid-single-digits in an environment where you have some of the headwinds. And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Kevin Coleman for any closing remarks. Great. Thank you again, Rocco. And thank you, everyone for joining us for our conference call. As a reminder, a replay of today's webcast can be accessed in the Investors section of ametek.com. Have a great day. Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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Thank you for standing by and welcome to the PointsBet Holdings Limited Q3 FY 2023 Appendix 4C Investor Presentation Conference Call. All participants are in a listen-only mode. [Operator Instructions] Good morning and thank you all for joining PointsBet Holdings Limited Q2 FY 2023 business update and activities report. This is Group CEO, Sam Swanell, and I'm joined on the call today by our Group CFO, Andrew Mellor; our regional CEOs and our U.S. Chief Strategy Officer. Turning to slide three. Before speaking to our quarterly results, we were pleased to announce this morning that we have agreed to amend the media services agreement with NBCUniversal originally dated August 27, 2020. The original agreement had a five-year term ending in August 2025, and the parties have now agreed to extend the agreement by two years to August 2027. As a reminder, we are currently in year three of the agreement, which runs August 2022 to August 2023. PointsBet has trialed and gathered key learnings from a media perspective since going live in the U.S. market. We are thrilled to have agreed with NBCU on mutually beneficial adjustments to our agreement that fit perfectly within our more targeted, localized strategy, which is informed by those learnings. Put simply, we firmly believe a dollar spent in marketing on any other platform does not come close to rivaling the terms and efficacy of the partnership we now have with NBCU. The remaining committed marketing spend for the final three years of the original agreement will now be invested over the remaining five years of the extended term, being August 2022 to August 2027, significantly reducing the marketing spend in each remaining year to match our desired level of investment under the more localized targeted strategy. The total committed marketing spend for the five remaining years to August 2027 is US$294 million, with US$25 million of its commitment being already been paid as at December 31, 2022, leaving US$269 million remaining. The total commitment for the current year ending August 27, 2023, is US$50 million, a reduction of 42% from the original agreement. It should be noted that over the next four years of the term, August 2023 to August 2027, the maximum cash payment in any one year will not exceed US$56 million. Should the options issued to NBCU at the time of the original agreement not be exercised instead of a lump sum repayment of the option premium value of AU$105 million by the company at the end of year five, this amount will now be applied to pay for the media services across year six and seven. In this scenario, the total cash commitment over the remaining five years of the term applied largely on an equal annual basis will be US$270.4 million, less the US$25 million already paid this year, with the balance to be covered by the remaining value of the shares previously issued to NBC. To provide further context, we expect the U.S. marketing expense for FY 2023 to be circa US$90 million, down from US$118 million in FY 2022. We will provide some details later in the presentation regarding the superior effectiveness and ROI we are seeing from our more targeted marketing strategy. I will now ask our U.S. Chief Strategy Officer, Eric Foote, to provide some further insight into our marketing strategy and how the media properties of NBCU and Comcast under our amended agreement will assist. Eric? Thank you, Sam. As a result of our learnings referenced by Sam earlier, we have shifted our marketing strategy from investing in large-scale national assets, which mainly focused on brand building, to highly targeted investment into states where PointsBet is live. The local focus is aimed at acquisition and retention of clients in our immediately addressable markets and delivering a direct return on investment from the marketing spend. In the current year of the amended term, 99% of total spend with NBCUniversal is being utilized locally or through geo targeted assets, such as NBC-owned and operated broadcast stations, NBC Sports Regional television networks and Comcast Effectv. PointsBet continues to enjoy favorable media pricing across NBCUniversal's various media platforms and retains its status as official sports betting partner and exclusive online casino partner of NBCUniversal and NBC Sports. The unrivaled media properties of NBCUniversal, of which PointsBet have access to include; exclusivity on local and regional assets in both the sports betting and online casino categories, including integrations with its NBC Sports Regional television networks and our successful alternative television sports betting experiences called BetCast, and first-look rights on any new local and regional sports betting and online casino partnership opportunities across Comcast and NBCUniversal properties such as NBC Sports, Peacock Sports, Comcast Effectv and any new digital properties, platforms and products developed by NBC Sports during the agreement. Further, the amended agreement allows PointsBet to more heavily utilize Comcast Effectv platform. With an estimated reach of 96 million U.S. adults, Effectv allows PointsBet to target audiences with hyper local level precision across a wide variety of linear TV inventory. Further, leveraging the best-in-class X1 voice remote in certain markets, PointsBet can serve a targeted call to action. Viewers are promoted to say PointsBet into the remote and then directed to the sign-up page via text messaging that includes special offers. As a result of our focused and targeted strategy, PointsBet has relinquished integration exclusivity over NBCUniversal's National Media assets. During the first two years of the partnership, the NBCUniversal National Media assets have successfully assisted PointsBet with establishing strong national brand recognition. However, we have learned that this approach is not the most productive tactic at this current juncture. Now PointsBet can execute on its highly effective local focused advertising strategy, while the reduction in the annual commitment marketing spend to NBC for the remaining five years of the agreement provides flexibility with the company's overall U.S. marketing budget. Additionally, if desired during the life cycle of the agreement, PointsBet will maintain second look rights on these national properties. An external brand lift analysis conducted by Kantar in October 2022 indicates that between December 2021 and June 2022, we saw a 27% increase in brand favorability and an 18% increase in consideration intent against our key audience demographics via NBC advertising. Throughout the term, we will continue to refine our spend to ensure we achieve optimum efficiency, maintaining and building upon momentum. NBC has been an excellent partner and very flexible through the process of the structuring. I can speak on behalf of our entire team when I say that we are excited to enter this new phase and look towards 2023 and beyond. Thank you, Eric. Turning to slide four. The December quarter has been another period of progress for the company, achieving record net win across the group as well as each region. From a market launch perspective, on 24th of November 2022, we successfully launched online sportsbook operations in Maryland. This was followed by our launch in Ohio on the 1st of January 2023. In both states, PointsBet launched on the starting line representing the company's 13th and 14th online sportsbook operations in the United States. We've been very pleased with the activity we've seen since both state launches. During the first three weeks operations, Ohio has delivered the highest number of first-time bidders of any state launch. This is very pleasing as Ohio is the seventh largest population in the U.S. with 11.7 million people. As we've mentioned previously, these early results highlight the importance of being on the starting line in order to improve state launch effectiveness. From a product perspective, during the quarter, we delivered continued enhancements of our broader live betting product with the successful launch of additional lightning bet contingencies, including important NFL markets such as result of [indiscernible]. Further, our in-house odds factory soccer model was released for the start of the FIFA World Cup, offering a market leading array of live betting opportunities, including live player props and additional lightning bet options as we continue to focus on broadening the depth and breadth of our market leading live betting offering. In addition to the FIFA World Cup, soccer odds factory markets are now available across 18 international leagues, including LaLiga, MLS, French Ligue 1 and UEFA Champions League, providing customers even more betting opportunities across numerous time zones. Turning to slide five. Compared to the group results for Q2 FY 2022 to be referred to as the prior corresponding period, or PCP, in Q2 FY 2023, sports betting turnover was up 56% to $2.06 billion, and total group net win was up 34% at $103.4 million. As you will hear from our regional CEOs, the U.S. continued its strong trend of net win growth, while Australia was back into growth mode, having cycled through a strong PCP comparison that lapped lockdown assisted months. I'll provide some concluding comments at the end of the call and will now hand over to the regional CEOs to provide an overview of their regions. Firstly, our U.S. CEO, Johnny Aitken. Thank you, Sam. Now turning to slide six. Compared to the PCP, the U.S. trading business ended the quarter with sports betting handle up 75% at $1.05 billion, and total net went up 68% at $40.6 million. The strong growth in net win compared to the PCP was assisted by our strategy to focus on targeting, delighting and retaining a super user customer through product and service excellence. Given our focus on the super user, it was pleasing to see our net win growth, which increased 68% compared to the PCP, outpacing our player growth with rolling cash actives growing 39%, to 192,000 [ph]. This implied growth in player value is driven by our continuously improving product and has impacted our customer Net Promoter Scores, bets per player days favorably. This has achieved while simultaneously reducing our bonus investment. Our primary objective, sports betting net win grew 51% when compared to the PCP. Gross trading margin at 5.2% was impacted by some short-term negative VIP barring late in the quarter. However, margins have corrected higher in January as trading normalized with January net win expected to significantly exceed the December quarterly monthly average net win. This increase in net win growth momentum is pleasing to see. Looking to the rest of H2 FY 2023, we would guide towards an expected net win margin in excess of 4% for sports betting. This forecast for H2 is above the year-to-date trend, but in line with what we have observed to date in January. This shift is enabled by the continuous evolution of our pricing model and trends in consumer behavior towards parlay bet types. Both of these trends are enabled by continued improvements with our betting platform. iGaming delivered a 128 increase -- a 128% increase, I should say, in net win compared to the PCP. This meant we achieved a new record high for iGaming net win performance in Q2 driven by the overall growth of the casino-only cohort and an ongoing improvement in our ability to convert and retain cross-sold sports betters on our gaming. From a product perspective, Q2 saw improvements, with every content launching in Michigan and gaming realms [indiscernible] game type launched in New Jersey and Michigan, supplementing content addition and improvements through existing suppliers. The iGaming lobby saw improvements in look and feel, with game category creation functionality deployed to support customers finding new and favorite content as well as a more optimized game layout, ensuring more content is exposed above the fold. However, we believe we have continued headroom to improve our iGaming product and the net win contributions iGaming can deliver to business in live U.S. states. Our marketing efforts are hyper focused. This means investing in our target customer and in regions and markets where PointsBet is live. Despite increasing our total addressable and being live in five more states this quarter compared to the PCP, total marketing expense reduced by 78% [ph] to US$24.5 million. The aforementioned growth in player value is driven by three factors fundamentally. Number one is marketing. With our continued increased brand values, combined with more efficient and targeted investments. Number two is product, which fundamentally improves ability to retain and engage customers. The impact of our investments have been evident this half year in our internal Net Promoter Scores as well as the [indiscernible] externally published product rankings where we continue to be ranked in the top three online sports betting apps in the U.S. And number three is our iGaming, with our ability to target both new direct casino customers and better engage our sports space, which has significantly helped drive up our player values in live iGaming markets. The improving marketing ROI can be seen by the increased net win versus the decreased marketing investment. It can also be clearly seen via our internal marketing investment to net win payback ratio. Tracking with our forecast, our payback ratio being more than 2x our FY 2022 H1 in our PCP number. Payback is defined as the relationship between the expected lifetime by value clients and the cost to acquire them. Our working CPA -- our working media CPA, I should say, for the quarter was well below US$400. On a like-for-like comparison, our same-state total net win grew 36% compared to the PCP despite the reduced marketing investment as we realize the benefits of retained client cohorts. As has been reported by some other operators, PointsBet is seeing combined revenue from acquired clients in a given month, increasingly material -- increased materially from year one to year two. That is acquired clients as a group are more valuable in year two than year one. During Q2, we launched one new state, Maryland in November, and also launched Ohio on January 1, 2023. That growth has meant that PointsBet is now live with its proprietary sports betting platform in 14 states of the U.S. Each new market launch carries expectations of improved velocity from day one in terms of FTB and overall activity as we continue to harness learnings from prior launches and optimize our go-to-market strategy. Despite Maryland being a smaller population size in comparison to launches in Illinois, New York and Pennsylvania, for example, it broke internal records for third five-day FTB volume compared with our prior 12 online sports betting launches. Our launch in Ohio followed on the 1st of January 2023 where we again proceeded to beat the FTB record set in our prior Maryland launch. Turning to slide seven. We continue to shift more key sports onto odds factory, our proprietary trading platform, which powers our stated mission to own and create the best live betting experience for North American customers. Odd factory to date has enabled PointsBet customers to experience a comprehensive depth and breadth of live betting markets supported by increased market uptime and faster bet acceptance than competitors. It is worth emphasizing some key data points on live betting and why it forms the foundation of our strategy and ability to win with the super user customer. This includes significantly reducing NFL suspension times versus the 2020 to 2021 season. The inability to place a live bet because of suspension is a key customer frustration, and we've invested considerably in delivering a leading betting experience in this respect, enabling customers to place faster bets with minimal interruptions. Our lighting bets products also referred to as micro markets continues to attract our users, bringing them closer to the live action, allowing them to bet, for instance, on the NFL on the outcome of every play in drive. The Q2 2023 FY, lightning bets accounted for an average of 20% of all cash in-play debts. We were pleased to have again ranked third in the Eilers & Krejcik U.S. sporting apps testing, continuing to demonstrate that we have one of the leading apps in the U.S. market. Also in the quarter, we debuted a market-leading suite of 130 live betting options for the Soccer World Cup. Customers had access to an unmatched number of one-minute and five-minute lightning bet markets, along with the ability to build a same game parlay pre-match or live maximize their live betting experience. As we articulated previously, we expect net win margin performance to be sustainable above 4% as we continue to reap the benefits of owning our in-house sports betting technology and odd factory, our proprietary sports betting trading feed solution. This will allow us to continually decrease promotional investment as we lean on our product and service excellence to drive sign-ups, retention and continued net win growth. I would now like to hand it over to our Australian CEO, Andrew Catterall, to provide an overview of the Australian trading business. Thank you, Johnny. Now turning to slide eight, Australia. In Q2 FY 2023, the Australian trading business delivered PCP and quarter-on-quarter growth in turnover, gross win and net win. Our net win in Q2 was a record, not just for the second quarter or any quarter in the company history. Total turnover was $938.5 million, up 29% compared to the PCP. And net win was $57.7 million, up 9% on the PCP. We cycled out of book down impacts on PCP comparisons by mid-November. December 2022 was the first full month in FY 2023, clear of lockdown impacts for PCP comparisons. Pleasingly, in December, we delivered 21% growth in cash actives and 14% growth in net win compared to December 2021, validating the underlying growth in the mass market appeal of the PointsBet brand in Australia. Sport continued to be the primary driver of growth in actives, turnover and net win in Q2 FY 2023. In our last report, we called out a net decline in free code racing turnover for the first quarter, primarily due to the hangover of lockdown impacts on Victorian and New South Wales based customers. As we cycled out of these lockdown impacts from December onwards, racing performance returned to a consistent, slightly positive year-on-year trend. Our overall trading margin was lower at 10% for Q2 FY 2023 compared to 12.7% in the PCP and 11.9% in the previous quarter. Turnover continued to weight towards sport versus racing through Q2, thus lowering margins despite the fact we made material improvements in the margin performance of multis. We continue to prioritize improvement in multi performance in our combined local and global product roadmaps. The global roll bet [ph] of improved same-game multi products powered by odds factory has delivered material increases in activity and net win for the FIFA World Cup soccer and season-to-date performance for NBA and NFL, which we anticipate will also benefit in H2. We continued our strategy to improve the efficiency of our client promotions and to prioritize the retention and reactivation of known positive value clients over a less valuable promotion led clients during -- recruited during the lockdowns. The rate of client promotions as a percentage of gross win improved to 38% versus 42% in the PCP. The average monthly cash actives for the quarter was up 6% on the PCP. The 12-month rolling cash actives as at 30th December 2022 were nearly 235,000, up 1% on the PCP. Total marketing expense was $20.1 million for Q2, down 11% on the PCP and down 20% quarter-on-quarter. This is a continuation of our strategy to invest hard in brand promotion in Q1 and scale back from Q2. Our forecast marketing expenditure for the H2 FY 2023 will be less than 50% of the H1. In Q2, we extended brand partnerships with Seven Racing, Fox Footy and Australian Community Media and secured a new partnership with ESPN, which will underpin our marketing efforts in H2. Thank you, Andrew. Now turning to slide nine. We have been live in Canada since the market opened in April and have completed three operational quarters. This past quarter, we were pleased to see growth, and momentum continue to build across both our sportsbook and online casino offerings. Total sportsbook handle was $80.4 million, up 284% quarter-on-quarter. With the NFL regular season in full swing, the NBA and NHL season is returning to action, our in-play mix of total handle grew to 63% in Q2, up from 59% last quarter, as customers continue to experience and enjoy this new form of betting, particularly during the recent FIFA World Cup. Sportsbook gross win was $3.5 million, up 121% quarter-on-quarter. And net win came in at $2.1 million, 4.8 times higher than Q1. On the online casino side, we delivered $2.9 million in net win, an increase of 128% quarter-on-quarter. In total, across the full offering, we delivered a total net win of $5 million, a 192% increase over our first quarter results. The competitiveness of the Ontario market continues to rise, with 67 licensed gaming sites from 35 different operators as of the end of December. Within that highly competitive environment, we continue to be pleased with the strength and quality of the customers that are making the choice to play on PointsBet. Our growing cash actives growing to almost 21,000, up 57% from Q1 and average turnover per customer continuing to grow. Our marketing spend was $8.2 million in Q2, and our marketing to net win payback ratio is very strong. We continue to make gains in strengthening our brand awareness and consideration and building our presence in the local community. We recently opened our Canadian office in the heart of downtown Toronto, providing a permanent home to our local staff supporting our Canadian clients. Our approach of working hand-in-hand with iconic partners and ambassadors, including Maple Leaf Sports & Entertainment, is helping to build connections with customers. And we see continued value in leveraging these trusted relationships as we build the PointsBet brand in market. Looking ahead, we expect to continue to deliver sequential performance improvements in Q3 as our base of customer grows. Our already class leading product continues to innovate and improve. And the scoring calendar continues to be robust through the NFL playoffs, Super Bowl and the second half of the NBA and NHL seasons. Thank you, Scott. Turning to slide 10 for the quarterly 4C cash flow summary. I'll move through each of the main line items. Net cash used in operating activities, excluding movement in play cash accounts in the quarter ending December 31, was $64.7 million, an increase on the $58.5 million of operating outflows in the prior quarter. Receipts from customers for the quarter totaled $105.8 million, a quarterly record for the group. This includes net win from sportsbook and iGaming verticals of $103.4 million. And the balance includes cash receipts from our European and New York B2B operations and cash receipts from our U.S. racing ADW business. Cash outflows during the quarter included cost of sales of $61.3 million, which was higher than last quarter driven by timing of payments as well as by increased trading activities across the three regions in Q2 versus Q1. Non-capitalized staff costs $25.7 million lower than Q1 due to the timing of the FY 2022 annual performance payment during Q1. Marketing cash outflow for the quarter was $67.5 million, higher than last quarter due to the timing of payments of accruals and prepayments across the quarters. As previously spoken to, the Australian marketing expense was $20.2 million for the quarter, below Q1 of $25.2 million, and the U.S. marketing expense was US$24.5 million, slightly higher than Q1 of US$22.8 million. The Canadian marketing expense was CAD$8.2 million above Q1 of CAD$5.5 million. Administration and corporate costs and GST paid on Australian net win was $18.9 million for the quarter, slightly higher than Q1. Turning to investing activities. Net cash used in investing activities during the quarter ending December 31 was $16 million, higher from the $14.9 million in the prior quarter. Capitalized development costs were lower than Q1 due to the timing of the FY 2022 annual performance payment during Q1. The U.S. business development costs increased on the prior quarter, and this was driven by market access and regulatory-related payments for the Maryland and Ohio state launches. There was $1.1 million used -- there was $1.1 million cash used in financing activities during Q2 versus $0.9 million in the previous quarter. It should be noted that there was a negative impact of $12 million from the movement in exchange rates due to the move in the USD/AUD spot price during the quarter given the majority of corporate cash is held in USD. Now to provide some commentary on the H2 FY 2023 cash flow outlook. Based on our expected trading performance for the second half, we currently anticipate the H2 FY 2023 net cash outflows excluding movement in player cash will be circa 35% lower than H1. The operating cash outflows for H1 FY 2023, excluding movement in player cash, was $123.1 million, and H2 operating cash outflows, excluding the movement in player cash, not anticipated to exceed $70 million, a significant reduction versus H1. This will be driven by continued trading momentum of the three trading businesses. Further in Australia, we front loaded the marketing expense into the first half, with marketing in the second half to less than half of H1. In the U.S., we expect the marketing expense in the second half lower than the US$47.3 million in the first half, with marketing -- with total marketing for the U.S. FY 2023 to be circa US$90 million, down from US$118 million in FY 2022. In closing, we would note that the velocity of hiring into FY 2023 reduced significantly versus FY 2022 with a focus on hiring into a low-cost locations up to the end of December. At the 31st December 2022, we have reached operational scale, and the group has implemented a global headcount freeze. We look forward to presenting our half year financial statements later in February. Thanks Andy. The end of the calendar year marks a turning point for PointsBet. In Australia, we look forward to delivering another full year of growth and EBITDA positivity on the back of an improving product and greater promotional efficiency. In Canada, we are seeing strong ROI from our early investment in a jurisdiction structured favorably for operators with iGaming and a reasonable tax rate. In the U.S., we've delivered strong PCP revenue growth through H1 while reducing marketing investment materially. As previously communicated, we expect New Jersey to be EBITDA positive by June 2023. With operational scale now having been reached, the impact of our growing revenues will begin to be seen in H2 as cash burn reduces by circa 35% from H1. We will report our half yearly results in the coming weeks. However, as can be seen from our H1 trading results, together with the realigned NBC deal and commentary on our cash flow outlook, we believe this is an important and positive juncture for the company and for our path to profitability. Thank you for your time, and I will now take questions with regards to our amended NBC partnership and our quarterly results discussed this morning. Before we do, please note that today, we will not be commenting on or answering questions on the ASX announcement dated 28th of December, which addressed speculation regarding our Australian trading business. As noted in that release, PointsBet will continue to keep the market updated in accordance with our continuous disclosure obligations. Thank you. Hi, team. Just I might to start with a question on iGaming. And Johnny, you might have touched on it in the call. I might have missed it. But I noticed in the states like Michigan, there was a step change up in the revenue in the December quarter versus previous quarters. Can you just recap on what is driving that? What changes have you made that's driving that? And is that a sustainable increase? Is that a new base we should now expect to see from iGaming and further strong ramp up? Sure. Thanks Rohan. Good to speak. Yeah. I think it's a combination of three things. Firstly, we're getting better and better at knowing when the cross-sell engage sports betters into casino with an improving product depth and game lobby. So, when they're cross-sold through to the PointsBet casino, it's on par from an experience compared with other again iGaming products. Secondly, we're starting to invest in acquiring as a casino player. That's someone that thinks and bets first someone that's more drawn to play slot games, and we're seeing them be quite engaged again off a low space and spend, but something that will continue to ramp up with efficiency. And again, part of our NBC deal realignment is the ability, for instance, to invest through a marketing mechanic called Effectv, which allows us to go sort of over the top in sort of local markets around America. And again, we'll be doing that with casino branding and messaging in the state of Michigan. And then the third is the team just continues again to execute better and better. We're identifying customers earlier that are high value that are both playing across sports and casino, and those that are playing across casino and giving them more personalized experiences, messages and offers. So, there's not one, I guess, sort of silver bullet thereon. It's been a combination of those three key factors that has seen our sort of revenue performance in Michigan growth. Thanks Johnny. And maybe one more just for either Sam or yourself, Johnny. Just how are you seeing the competitive environment at the moment, especially in those new state launches? I appreciate that always going to be competitive. But how are you seeing it now versus say 12 months ago? Sure. Again, what we're seeing is still a very, I guess, obviously, heavy-duty assets from all competitors that go live on sort of day one, both in, call it, brand spend and promotional spend. Again, we're being very tactile and efficient with how we go-to-market in states. For both Maryland and Ohio, we were tactile in evolving our strategy to invest ahead of day one to continue to build a database that has been through the sign-up flow, again, without the point of depositing. But again, being through a sign-up flow, so when you get to day one, they're sort of in our net, call it, and then able to step-up and become first-time depositors and first time betters. And I think that sort of materially added Sam and I articulated upon setting FTB records for first five days of sort of Maryland's a record and then, again, Ohio eclipsing that. On the 1st of January, I am surprised that competitors are continuing to be really heavy-duty sort of with promotional spend. A lot of competitors are still investing 200% to 300% of their gross earnings and promotions months sort of one and two, which probably overstate to a degree their sort of market shares where sort of monthly onwards it starts to wash out as operators act more sort of normal and sort of rational, which we're sort of doing from month one. But I'd say, Rohan, in general, the launches in Maryland and Ohio competitors have been as competitive as ever with the brand and sort of promotional spend. Thanks gentlemen. I appreciate the time. Just firstly on this marketing switch in the U.S. with NBC. You've highlighted this sort of switch or focus, if you like, to more localized marketing. Can we just unpack that a little bit why are you convinced that that's the way forward. Perhaps you can reflect on your experience to date and just outline a bit more of the strategy. Yeah. I'll go first, and then Johnny can chime in [indiscernible]. Yeah. I think we've learned, obviously, through the first couple of years of the NBC agreement. And I would note the changes to the agreement effectively -- we've been operating sort of under the expectations of this adjusted agreement since August. So, while we're talking about we've seen a sort of a forward-looking way, we've been talking for the last couple of quarters about the more targeted localized strategy that we've been implementing, and that's been critical to the success and the efficiency that we've seen. So, we've been moving in this direction since post the NFL launch season in 2021 when the market obviously went really, really hard, and it got all over heated, and we said, okay, we need to be more targeted with the target client that we're after and we need to be targeted with our marketing. We can't just be generic. And I think we just feel that it's not -- it's probably not hard to see that if you're spending money nationally across all of America, while you're live in 14 states, there's a bunch of states out there that you're not immediately monetizing. And at this juncture, we want to be monetizing and getting direct ROI from the states and where we're live. So, we saw the benefits in terms of the impact it could have on brand by being on those national properties around the NFL, et cetera. But when it comes to marketing payback, making sure our marketing dollars are getting us on that path to profitability, it's far more efficient to focus them locally and regionally where we're live and making sure we're getting that right rather than perhaps worrying about when California might go live and the amount of marketing dollars that would be going into that jurisdiction from a -- if you're still spending nationally. Yeah. I think, Sam, sort of again articulate that really well. So that firstly stepping up our performance when it comes to cost of acquisition to lifetime value and again, investing more and more of our sort of marketing dollars in states where live and operational very much assist that growth. From a local or sort of regional front, we really like those assets. We've obviously used them now for two and a half years. We've tested sort of robustly again on those assets, and we have most freedom working with the leagues and then the sort of regional network, for instance, in Chicago and Philadelphia, to sort of integrate inside this morning broadcast for NBA, MLB, NHL being sort of one-on-one when doing those integrations, integrating our offers, our talent and really adding to the storytelling the broadcast. At that point there wants to be, we want to be very authentic and bring to life what makes the company special product, taking big bets, odd movements and talent as such. So, we feel we have the best chance of bringing to life the brand with those key sort of regional and sort of local assets and again, very pleased with the deal amendment that was announced today. Okay. Thanks. Just one more, if I may. If we can just pivot to the Australian business. Sam, can you make a little bit of a comment as to the competitive environment that you're experiencing here. If I look at between that, that gross margin is obviously down a little bit versus PCP, but you've said that's due to the mix to sports. But yeah, I'd just be interested in that broad sort of promotional strategy that you've got here and how well or how aggressive you think the market is here at the moment. Yeah. Again, I'll get us going, and then Andrew Catterall can join in with some comments. I mean, look, I think there's no doubt there's a lot of competition going in Australia. Obviously, there's a big brand that's coming in, in bet hour [ph] during sort of the half, and you've still got a long tail, I think, of operators that came in. Some are probably emboldened by the growth that was experienced through that lockdown period. I mean I'll be really interested to see other operators report this period. We're back in growth mode. I'd be interested to see if others are back in growth mode. I think it will be a marginal thing. So, we believe -- I think I said at the end of the last financial year, with Andrew coming on board, we really believe that our Australian business hadn't had a lot of love. And that if we put some product effort into it along with Andrew's focused leadership, we had a lot of improvements still to come. Perhaps took a little bit of while that first quarter after Andrew coming in for that to sort of start flowing through, but also as we highlighted, we're cycling out against the COVID period. But I think we're now seeing that. We've got great confidence in our continued growth through the rest of the financial year. We stated that we'll be growing again this year, and we'll do it within EBITDA positivity. But yeah, the market is definitely competitive. Again, it'd be interesting to see how behavior sort of goes if others aren't necessarily growing as they come out of that period. Again, our principles were improving product, greater use of promotional efficiency. Yes, there's been a little bit of a surprising change in yields due to the overweight of sports. We do think we can get those trading margins back above 4% as an example, as a starting point because there was some particular turnover that we saw during the quarter on some really low-margin product like tennis sort of head-to-head staffing things. So, on a normal product mix, even with sport growing, we think those margins can come back up. Probably still the most of your -- Andrew anything you'd add. No. I think you've answered it well. Maybe you've covered the margin issue. And just with respect to the competitive environment, I'll just reiterate that we're back in that growth mode as reported in the presentation. We've made a deliberate strategy to be much more efficient in our promotions and focus on that the below the line, direct to target customer -- positive value customer activity. That's where the promotional tokens things referenced in the presentation really take effect and also making sure we're competing more aggressively on our product offering where the odds factory initiatives have a lot of traction, especially for NBA and soccer and even other elements like our fast retrial implementation with [indiscernible]. So, we're not just impeding on the promotional battle. It's the other dimensions such as our brand partnerships, our product, our withdrawals, et cetera, et cetera. So, I think you answered it quite well, Sam. I just had one for Johnny, too. Can you just clarify, are you saying in the second half, you'll see much better gross margin now or net win margin. Can you talk through that? And then talk through the market share. Was that lower than expected? Or was it within the range that you expected? And what the key driver of that was in the second quarter versus first quarter? Yeah. Look, I think in terms of market share -- answering the second part first, look, the market -- we're growing very, very strongly. And as we've said, we know that there's been a focus on market share, but our focus is on net win growth. And as long as we keep producing the type of PCP growth that we've produced for the last two quarters, we're steaming along and we're doing so while reducing marketing, stabilizing our cost base. So, we know that we're earning that share on the back of our product, on the back of our better execution. And we're very happy with that net win growth. If the market is outpacing us for growth because the big guys are still spending a lot more than us on marketing, that's not the end of the world. They continue to grow the size of the market, educate the market, et cetera. We're very confident. We don't obviously have the starting brand recognition that they have. But with our targeted strategy, we're confident of continuing to deliver quarter-on-quarter very robust growth. The other -- I'd just point around sort of average sort of market share is, obviously, states like -- state like New York, with the biggest amount of turnover, including most of the market, is going to be overweight. Obviously, if we do lesser in New York versus how we do here in Michigan as an example, that'll drag us down a little bit. And we are targeted on certain jurisdictions. We are not investing in every market equally. But I think the overall thing I would say is we're focused on the robust net win growth that we're clearly delivering. We're delivering that with less marketing spend on the back of our improving product and better execution. If the market is outgrowing us and growing more quickly, that's okay. That means there's a big market, and it's going to reach the potential that we all see for this huge U.S. opportunity. Thanks Sam. And then sort of in, I guess, relation to margin and the comment there, Ben, just around our guidance towards the 4% or more net win margin for H2. The primary facilitator again of that guidance is the continued development and delivery of, again, sort of initiatives around the experience and excitement placing pilot bets with PointsBet there, particularly around sort of same game parlays, which we believe in turn will materially continue to increase parlays as a percentage of our overall handle. And we know, obviously, the parlays could be five to six times the margin at the time you strike on a singles bet. So, the favorable shift in sort of bet type mix will definitely help to grow our -- grow sort of margin. And then if we're able to maintain, if not decrease the sort of promotional reinvestment, it puts us in a really strong position to deliver those improved net win margins and have the confidence to be 4% or more for H2 of this year. Hi, team. Thanks for taking the question. I had a question on the NBC arrangement, the modified arrangement. I don't really understand the last sentence in that paragraph, which says the balance to be covered by the remaining value of the shares previously issued to NBCUniversal. Is that the options that backs the 105 million when you refer to shares? Or is there some other set of shares? Good, Larry. When we cut the original agreement with NBC, you might recall there were three components to the marketing value that we were to receive from NBC. There was a cash component, and then there was value for the options, but there was also some equity issued to NBC at the time, and that has some value. So that's what we're referring to. Okay. So that -- but that equity has been issued already, right? It's -- NBC owns a 5% -- whatever it is they own. They have those shares already. $24 million. So, there's $24 million of equity still for us to spend on marketing as part of the remaining amount. Let me just walk through, so it's clear for everyone. Sorry to interrupt, Larry. So, there's $294 million of marketing value remaining. That's now being split over five years instead of three, okay? So, there's $294 million. If the options aren't exercised, and we just think of the option value as cash, there's $270 million of cash to be paid over the next five years, less the $25 million we've already paid until the 31st of December. So, there's $245 million of cash remaining over the five years as part of the NBC agreement, assuming and this is -- it's assuming that they don'Thanks. exercise those options, which obviously are out of the money at the moment. Yeah. Okay. Got it. That makes sense. Okay. And I know you're not specifically wanted to comment on the notice about the Australian business. But Sam, maybe you could just talk to how today are the Australian and U.S. businesses integrated. And maybe that's changed over the years. So, if you could talk to from a bookmaking and tech stack perspective, how the Australian and U.S. businesses are or are not integrated. Yeah. Certainly. So, the main way we get the global scale for the business is through the technology team. So at a marketing level, at a product level, at a focus level, we have the local teams with their local CEOs, but we have a global tech function that supports the global platform. So, we're live in 16 jurisdictions. They have differences between each jurisdiction. Obviously, even the states of America have differences, but it's a common code base. And so that's being done, obviously, for maximum efficiency and synergy. Having said that, there are local teams within that tech organization who focus on local initiatives. There's sort of global initiatives. And as an example, the odds factory work on NBA and NFL, as Andrew Catterall referenced, has had benefits for Australia and flows through to Australia, U.S. and Canada. But for example, if we're doing something related to the fixed odds racing in Australia, well, that's going to be worked on by a localized tech team. So, it's predominantly global, but there are some local elements to it. And trading, as you referenced, is probably the other one that has an element of global sort of follow the sun attached to it. We have trading teams in the U.S., Australia and Ireland. That's where Benik [ph] Technologies originally located in Ireland. So that offers where some of the Benik team are also includes some traders who work closely with our clubs team and our technology team. So, yeah, we do have like a follow the sun. But every -- the U.S. has a substantial trading team. Australia has a substantial trading team, and Ireland has a sort of a slightly -- slight smaller trading team. And the tech stack, you mentioned it's sort of all using the same code. And what about sort of the software and the hardware, is that distributed? Is the software owned by a particular entity? Yeah. So, we have five corporate entities inside under the PointsBet Holdings Group. We have the Australian trading business, the U.S. trading business, the Canadian trading business, the technology business and the corporate business. They are the P&L. So, it's own P&L, and it charges each of the trading groups for its services. So, within our cost of goods sold, there's a charge from the trading business to -- from -- sorry -- from the technology business to each of the trading businesses. So, it's owned by us. It's like -- every jurisdiction has to have its own instance of the platform. That's a regulatory requirement. So, there's an Australian instance, a Canadian instance and 14 instances in the U.S. And yeah, there's differences. Obviously, again, Australia has fixed odds racing. Most U.S. jurisdictions don't have online casino as an example. So, there's definitely differences between the end product and the end user experience that the client sees, but we try and gain efficiencies on a back-end perspective. Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.
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EarningCall_878
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Ladies and gentlemen, thank you for standing by. Welcome to the Provident Financial Holdings Second Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donavon Ternes, our President, Chief Operating and Chief Financial Officer. Before we begin, I have a brief administrative item to address. Our presentation today discusses the company's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecasts of financial or other performance measures and statements about the company's general outlook for economic and business conditions. We also may make forward-looking statements during the question-and-answer period following management's presentation. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the Risk Factors that could cause actual results to differ from any forward-looking statement is available from the earnings release that was distributed last Friday, from the Annual Report on Form 10-K for the year ended June 30, 2022, and from the Form 10-Qs and other SEC filings that were filed subsequent to the Form 10-K. Forward-looking statements are effective only as of the date they are made, and the company assumes no obligation to update this information. To begin with, thank you for participating in our call. I hope that each of you has had an opportunity to review our earnings release which describes our second quarter results. In the most recent quarter, we originated $74.3 million of loans held for investment, declined from $84.6 million in the prior sequential quarter. During the most recent quarter, we also experienced $28 million of loan principal payoffs and payments, which is down from the $31.7 million in the September 2022 quarter and at the lower end of the quarterly range. Currently, competition remains elevated for loan originations and it seems that many borrowers have reduced their new activity as a result of rising mortgage interest rates. Additionally, we're seeing more demand for single family adjustable rate mortgage products as a result of higher fixed rate mortgage interest rates. For the most part, our underwriting requirements have not changed, but certain loan products, such as retail and office CRE remained somewhat higher than other CRE products. Additionally, our single family and multifamily pipelines are smaller in comparison to last quarter, adjusting originations in the March 2023 quarter will decline from this quarter and may drop below the range of recent prior quarters, which has been between $65 million and $95 million. For the three months ended December 31, 2022, loans held for investment increased by approximately 5% compared to September 30, 2022 ending balances, with the increase in single family loans more than offsetting the small declines in the multifamily commercial real estate and construction loan categories. Current credit quality is holding up very well and you will note that there are just $4,000 of early stage delinquency balances as of December 31, 2022. And additionally, nonperforming assets decreased to just $956,000, which is down from $964,000 on September 30, 2022. We recorded $191,000 provision for loan losses in the December 2022 quarter. The allowance for loan losses to gross loans held for investment decreased to 56 basis points on December 31, 2022 from 57 basis points on September 30. We will note that we remain on the incurred loss model and have not adopted CECL. This means that our allowance methodology cannot be reasonably compared to CECL adopters. Our net interest margin was unchanged at 3.05% for the quarter ended December 31, 2022, compared to the September 2022 sequential quarter as the net result of a 27 basis point increase in the average yield on total interest earning assets and a 28 basis point increase in the cost of total interest bearing liabilities. Notably, our average cost of deposits increased by just 7 basis points to 20 basis points for the quarter ended December 31, 2022, compared to 13 basis points in the prior sequential quarter, but our borrowing costs increased by 99 basis points in the December 2022 quarter compared to the September 2022 quarter. The net interest margin this quarter was positively impacted by approximately 5 basis points as a result of lower net deferred cost -- loan costs associated with fewer loan payoffs in the December 2022 quarter in comparison to the average net deferred loan cost amortization of the five previous quarters. New loan production is being originated at higher mortgage interest rates than recent prior quarters and adjusted rate loans in our portfolio are now adjusting to higher interest rates in comparison to their existing interest rates. Also for multifamily and commercial real estate loans, the loans are adjusting above their existing floors. However, many adjustable rate loans in all categories are limited in their upward adjustment by their periodic interest rate caps. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on December 31, 2022 decreased 160 compared to 170 FTE on the same date last year. You will note that operating expenses decreased to $6.8 million in the December 2022 quarter, somewhat lower than what we described as a stable run rate of approximately $6.9 million per quarter. We expect a similar run rate for the remainder of fiscal 2023, but may experience some pressure on operating expenses as a result of increased wages and inflationary pressure on other operating expenses. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that leveraging the balance sheet with prudent loan portfolio growth is the best course of action. We were very successful in execution this quarter with loan origination volumes at the mid-point of the quarterly range and loan payoffs at the lower end of the quarterly range. The total interest earning assets composition improved during the quarter with an increase in average balance of loans receivable and a decrease in lower yielding average balance of investment securities. However, total interest bearing liabilities composition deteriorates a bit with a small increase in the average balance of deposits, but a larger increase in the average balance of borrowings. We exceed well capitalized capital ratios by a significant margin allowing us to execute on our business plan and capital management goals without complications. We believe that maintaining our cash dividend is very important. We also recognize that prudent capital returns to shareholders through stock buyback program is a valid capital management tool and we repurchased approximately 103,000 shares of common stock in the December 2022 quarter. For the fiscal year-to-date, we distributed approximately $2 million of cash dividends to shareholders and repurchased approximately $2.2 million worth of common stock. As a result, our capital management activities resulted in a 95% distribution of year-to-date fiscal 2023 net income. We encourage everyone to review our December 31 investor presentation posted on our website. You will find that we included slides regarding financial metrics, asset quality and capital management, which we believe will give you additional insight on our solid financial foundation supporting the future growth of the company. All right. Thank you. Well, we look forward to talking with everybody again next quarter. At our investor conference call. Thank you. And ladies and gentlemen, today's conference will be available for replay after 11:00 a.m. Pacific today through February 6. You may access the AT&T replay system at any time by dialing 1866-207-1041 entering the access code 2446007. International participants may dial 402-970-0847. And those numbers again are 1866-207-1041 and 402-970-0847, again, entering the access code 2446007. That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Services. You may now disconnect.
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EarningCall_879
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Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the Conference of the Fiscal Year 2022 Fourth Quarter Earnings Results by LG Display. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Good morning. This is Brian Heo in charge of LG Displayâs IR. On behalf of the company, let me thank all the participants at this conference call. Today, I am joined by the CFO, Sunghyun Kim; CSO, Hee Yeon Kim; Seung Min Lim, Senior Vice President of Corporate Planning; Jeong Lee, in charge of Business Intelligence; [indiscernible] Lee, In Charge of Large Display Marketing; Seong Gon Kim, in charge of Medium Display Marketing, and Ki Hwan Son, Vice President of Auto Marketing. The conference call will be conducted in both Korean and English. Please refer to the provisional earnings release today or the IR Events section of the companyâs website for more details on the financial results of Q4 2022. Before we begin the presentation, please take a moment to read the disclaimer. Please note that todayâs results are based on consolidated IFRS standards prepared for your benefit and have not yet been audited by an outside auditor. Good morning. This is Sunghyun Kim, CFO of LG Display. Looking back on 2022, we see demand slowdown accelerate in major product groups on the heels of worsening macro environment, resulting in year long inventory correction in downstream industries, softening demand that started in general B2C products, spread to B2B then to high-end product groups as well, which had shown relatively solid demand. The display market continued to face headwinds, with panel prices still on the trend of decline although the pace slowed down. Given the protracted challenges in the market, the company is focusing on recovering financial soundness and future proofing. Upgrading our business structure remains our utmost priority, where we will concentrate our internal capabilities. Allow me to first brief you on our activities and achievements in recovering our financial soundness. The company is moving ahead of the original timeline to downsize LCD TV business, which has structurally weakened competitiveness. Production in Gen 7 LCD TV fab located in Korea was terminated at the end of last year and the remaining Gen 8 LCD TV fab in China is scheduled to downsize to 50% of its capacity starting this year. Under the assessment that LCD TV business is unlikely to recover competitiveness, we will phase it out while responding to commercial products and the volume agreed with customers. To address the continued soft demand and secure operational flexibility, the company undertook intense production adjustment. The inventory reduction by around KRW1.6 trillion from Q3 affected profitability in Q4, but it placed the company in a better position to flexibly respond to market environment in the first half of this year. The pre-emptive inventory adjustment in Q4 is expected to reduce costs in Q1 this year. The company plans to keep reducing cost and improving operational efficiency through LCD TV capacity downsizing in China, intense production adjustment in large OLED fabs in Korea, and close monitoring of real demand changes and market inventory. Next is on the progress of the companyâs business realignment efforts and future plans. In supply and demand based business, we will enable a more rational operational structure and secure consistent profitability and create value by focusing on high value-add products while responding to market volatility. Not stopping there the company will add a stronger drive to the transition in order based business structure. We are systematically preparing for projects agreed with customers like the new smartphone lines to be mass produced in the second half of the year and OLED for IT products to be mass produced in the first half of next year. Such order based business took up 30% of our business last year, expected to be in the low 40% this year, and exceed 50% in 2024. We also continue to broaden market creating businesses. The company keeps exploring new markets with our competitive products like gaming and transparent. We will build a stable revenue structure by strengthening the future business portfolio. With market volatility remaining high, sluggish demand for panels is expected to last into the first half of the year. The market situation where panel shipments fall short of actual sales is expected to persist in the first half. But the panel inventory issue is likely to be mostly addressed in the first half regardless of the real demand for sets, thanks to intense production adjustment across the industry. This will hopefully return the industry-wide inventory to healthy levels in the second half. Having said that, with recovery in real demand remaining uncertain, the company remains focused on large scale cost-cutting, both volume and revenue are expected to decrease in Q1 given its traditional seasonality on top of industry-wide inventory adjustment. The company expects about KRW1 trillion cost reduction in Q1 from the large scale business rationalization underway from Q4 such as active inventory control, LCD TV downsizing and OLED TV production adjustments. In addition, new capacity utilization for smartphones and strong improvement in fundamentals will improve performance quarter-to-quarter and help achieve a turnaround in the second half of the year. In terms of investment, only the minimum ordinary investment will be made along with the investment in order-based projects already agreed with customers. CapEx for the year will be around KRW3 trillion on a cash-out basis. The last point before we present the Q4 earnings is regarding the increase in Q4 net loss. The companyâs mid to large size panel businesses had been accounted as one cash generating unit, but following the decision to phase out the marginal LCD TV business, large OLED business was separated as standalone cash generating unit in Q4. For the separated cash generating unit, asset valuation was reviewed and assessed by an outside organization in accordance with the standards and procedure in place. With soft demand for premium TVs last year due to economic slowdown as well as the downward revision of demand outlook, asset impairment of approximately KRW1.3 trillion was recognized for OLED business to ensure proper accounting. The result was reflected as non-operating expense in Q4, which increased the net loss, but as you would all understand it is the result of accounting adjustment that has nothing to do with cash flow. The company expects positive impact down the road as it reduces our business uncertainties. As the leader in large OLED, the company possesses incomparable competitiveness in premium TV market, where we intend to keep growing our market share. We will keep reading a consistent revenue structure by enabling qualitative growth as we keep strengthening our product and cost competitiveness and accelerate our push to open up new markets like transparent and gaming. Let me now continue with our business performance in Q4. With worsening macro economy in Q4, set demand continued to remain subdued. It was followed by inventory adjustment across downstream industries, the impact of which also spread to high-end products, which had been showing relatively solid trends. Revenue in Q4 went up 8%, Q-o-Q, thanks to shipment of smartphone products. But there was operating loss of KRW876 billion following shipment decrease of IT panels, decline in panel prices and intense production adjustment to reduce inventory. Operating profit margin in Q4 was minus 12%, with EBITDA margin at 3%. There was net loss of KRW2.094 trillion with KRW1.33 trillion of impairment being accounted as non-operating loss. For the year, revenue in 2022 was KRW26.152 trillion, down 13% Y-o-Y. There was operating loss of KRW2.085 trillion. Operating profit margin was minus 8%. Next is area shipment and ASP trend. Area shipment in Q4 was 7.86 million square meters, increasing 2% from the previous quarter. It was slower than ordinary seasonality due to demand decrease in mid-sized products and structural innovation in large product business. ASP per square meter was $708 going up 5% Q-o-Q. This is owed to the increase in a portion of smartphones and wearables. Next is revenue breakdown by product segment. OLED accounted for 52% in Q4, following the transition to OLED focused business structure. For the year, its portion grew sharply from 32% in 2021 to 40% in 2022. OLEDâs contribution to financial performance is expected to keep growing this year, with its portion of the revenue exceeding 50%. It will be largely driven by growth in smartphone capacity and panel shipments in the second half of the year as well as the continued phase-out of LCD TV business. TV panels accounted for 25% unchanged Q-o-Q. Share of IT panel was 34% falling by 9 percentage points Q-o-Q. There was decrease in panel shipments and decline in panel prices. Portion of mobile and other products was 34%, up by 9 percentage points Q-o-Q on the back of higher shipment of smartphones and wearables. Auto business, which is a new growth engine for the company, has maintained growth, with its portion moving up from 5% in 2021 to 7% in â22. It is expected to keep growing by double-digits this year with its portion continuing to rise. Next is the companyâs financial position and ratios. The companyâs cash and cash equivalents was KRW3.547 trillion, staying above the KRW3 trillion line. Inventory was KRW2.873 trillion, decreasing by KRW1.644 trillion Q-o-Q as a result of the decision to keep inventory at the minimum and the subsequent strong adjustment in production. As for the main financial ratios, debt to equity ratio was 215% and net debt to equity ratio 101%, both up Q-o-Q. Next is cash flow. The companyâs cash and cash equivalent at the start of Q4 was KRW3.264 trillion. It increased by KRW283 billion and stood at KRW3.547 trillion at the end of Q4 with increased cash flow from financial activities. Last but not least, outlook for Q1. With growing market volatility and demand uncertainty, as well as the companyâs execution of LCD exit strategy, area shipment is expected to fall more sharply than in ordinary seasonality. In response to the demand slowdown that will last for some time, the company will keep improving profitability quarter-to-quarter by improving financial soundness and remaining on the path of structural innovation. In addition to KRW1 trillion cost-cutting in Q1, we will strive to achieve a turnaround in the second half by helping recover panel demand and utilizing new smartphone capacity. That completes my briefing. Thank you very much. That brings us to the end of earnings presentation for Q4 2022. We will now take your questions. Operator, please commence with the Q&A session. Thank you very much for giving me the chance to ask my questions. I have two questions, one each for the companyâs financial strategy and the large OLED business. The first is about the companyâs financial plan including any potential borrowings following the worsening of the financial performance? And related to that, can you also give us an overview of the CapEx implementation in 2022 and what is the companyâs plan for CapEx this year? And next is about the large OLED business strategy and also the exit strategy, so if you could also â if the company can also brief us about the large OLED business strategy and also what will be the way for OLED to continue to enhance its premium image over LCD, so what would be the strategy to differentiate OLED from LCD? Thank you very much for the question. This is the CFO responding. Now, for a company the â fundamentally, the financial strategy would be to keep our earning revenue from our operations. But now given the nature of the industry and also the market situation sometimes that is not conducive, so in such a case and we will try to improve the financial soundness through better cash flow management, which is what we are doing currently. So, as for now, the plan is to accelerate our exit strategy in LCD TV which has been proven to be a marginal business, so as to minimize our potential losses from this business. And we will also keep reducing our investment as well as expenditure and also enhance the efficiency of such costs, so that we will also be able to create the kind of operational structure that will be in line with the current market situation. Another part of the plan is to minimize our inventory and the working capital. And in order to do that, and by doing so, we will be able to minimize our cash flow expenditure. And some of our recent actions for example determination of the production in the Gen 7 LCD fab, as well as the downsizing of production in Gen 8 LCD fab in China. So, these actions are not just about downsizing production, it also entails reducing expenditure or reducing the cost. And by doing so, we intend to reduce costs by about KRW1 trillion in the first quarter of this year as has been explained earlier by better managing our working capital and improving the efficiency of our cost structure. And now about the CapEx, I did explain about the principles earlier in the briefing and that is that for last year and this year we will be maintaining the minimum ordinary investment, so as to that will be necessary to maintain the production facilities and also maintain the investment for the order-based businesses for which demand and revenue are pretty much fixed. And also on a cash-out basis last year, it was KRW5.2 trillion which was a bit higher than expected. So for last year on a cash-out basis, it was KRW5.2 trillion which was a bit higher than expected. But then so what this means is that this actually is in line with our principle of transitioning more towards the order-based business. So, we have accelerated our investment timeline for some of the order-based business and this also means that the achievement of revenue or the accrual of the revenue will also be pulled up. So, this means that the revenue to occur this year and the year afterwards will also be put up as well. So when we look at the cash flow across the next few years, then we will see that the investment expenditure will not go up. And about the funding, so there are some concerns about potential shortage of funds due to our investment plan as well as the current performance. But then regarding that, I would like to assure the investors and the shareholders that there is no cause for concern as we are making the â we are making preparation and also implementing the preparation with regard to different aspects as well. Now, when it comes to investment or the operations of our business, then there are ways in the market that are available aside from borrowing or aside from using our own funds to do so. So when it comes to cash management, once again I would like to reassure the shareholders and investors that you do not have to worry about them, because we will be making the best use of the other means and ways that are available in the market. This is [indiscernible] in charge of Large Display Marketing responding to your question about the OLED plan for 2023. In terms of the shipment, shipment of OLED is expected to be similar in 2023 Y-o-Y. But now in the high-end market, the demand keeps changing. And also given that it is not clear when there is going to be recovery in the demand, we will keep closely monitoring the market and try to continue to differentiate OLED in the high-end TV market, so that we will be able to increase our market share from the current high 20% level to over 30%. And with the goal of improving the healthy level â improving the inventory level in the â among the distributors and the set customers, we will be adjusting our production and also trying to reduce the fixed costs in line with the trends in the actual demand. And about the business strategy for large OLED, now in terms of the infrastructure, we have already achieved the economy of scale in large OLED based on which we can compete in the high end market, meaning that that is 10 million units. So, we have already achieved the economy of scale. And we also see more opportunities still arising in terms of new markets as well as new customers. So, we will continue to strengthen our competitiveness and improve profitability, strengthen our competitiveness and strengthen our structure, so that we will also be able to see profitability from the existing market as well. And another positive aspect is the fact that we are also seeing visible results come out of our market creating businesses like gaming and transparent OLED. So, these are the new markets that go beyond the existing TV market, as the current TV market continues to remain subdued. So, in short, although demand in the downstream industries remains slow mostly due to the macroeconomic situation, this is the business segments where there are still potential and many opportunities. So, we will continue to strengthen our cost innovation and also strengthen the OLED specific competitiveness so that we will be able to keep growing this market as well as the business. And there was also a question about the differentiation of the product especially between OLED versus LCD. But given the fact that my answer has become quite long winded, I would like to wait for another opportunity to give you more details. Thank you. We will take the next question. Thank you. I also have two questions. Now, first is about the LCD TV exist [ph] strategy and the company explained earlier how the company has accelerated the execution of this exist strategy. So, I believe that as a result of this, it will place the company in a different position from the peers in terms of financial performance. So, if you could give us a guidance on the financial performance for the first quarter as well as for the year. And the second question is about the specific business plan. Since the company also discussed the market creating businesses as well as the plan to strengthen the future business portfolio, so if the company can provide more details about the business plan. Thank you. Now first, about the outlook for the year and there is a clear response to this and it is low in the first half and high in the second half. And now, we all know that the macro economy continues to struggle. So, then this means that demand is likely to remain slow into the first half of the year. And then also the situation that we had been seeing since last year where the purchase of panels fell short of the actual sales of sets, we believe that this phenomenon is likely to continue into the first half of the year as inventory adjustment continues. Now, given this environment then the one of the options given to the company is to go into large scale cost cutting. And that is what we have been doing. So, in order to reduce the inventory burden, last year we had reduced the inventory level by about KRW1.6 trillion across one quarter. So, we believe that that is going to provide us with the positive benefits in the first quarter of this year. In addition to that, we also have taken actions to downsize or reduce production of the large size business. And we are also cutting costs by rationalizing our business structure. So, all-in-all, I believe that in terms of the innovation or the rationalization of our business, and also reducing of the inventory, this will bring about a cost cutting benefit of about KRW1 trillion in the first quarter. So, at the end of this process, what we are expecting is to see revenue growth start in the second quarter and the loss shrinking. And as a result, we hope to see the beginning of a turnaround in the second half of the year. Now, this is the CSO, Hee Yeon Kim speaking about our business plan. And so I would like to explain our business plan based on the three businesses gaming monitors, and transparent OLED and sound solutions. Based on our competitive large OLED, we are trying to target the new business segment which is the high end gaming monitor where the customers are willing to pay more. So, we are currently in discussions with around eight to nine customers. And our plan is to go into mass production within the year. And second for the transparent OLED, we are currently targeting the key vertical customers who can see the importance of these products for retail and construction purposes. Now for the transparent product, unlike others, this is not something that we can address as standalone products. Itâs more appropriate as a solution product. So, that is why it is important for us to build the right ecosystem and that is why we are currently discussing with and also cooperating with the important key vertical partners. By doing so, we hope to keep building up the ecosystem and see and achieve visible progress and outcome within the year. Next is about the sound solution. Now, usually speakers would require space to be installed. But unlike the traditional products, we have come up with the film type sound solutions that will take up less space and this is the solution that also won the Innovation Award at the CES. And we believe that there is a particular value to be gained in applications where the space is limited, in other words, automotive. So, the automotive sector is where we are going to concentrate with our film type sound solution. It can be provided together with OLED or as I mentioned earlier in automotive or vehicles where the space is limited. Now, I also have two questions. And first of all, thank you very much for the presentation. Now, it appears as if the companyâs trajectory is headed towards Gen 6 OLED. But even in this business demand, it is not probably easy to come by. Because first of all, there are competitors and also there is BOE. And also, the tablet prices remain lower than smartphones. Now, given the current environment, then what is the rationale for the company to believe that the company will be able to have â we will be able to drive sales in discussions with the clients for the high priced OLED products? And the second question is about the recent press reports about the micro OLED and that there have been reports about how the micro OLED is likely to replace a small OLED in the near future. And of course, that is probably in 2 years to 3 years time, but what does the company see in terms of the possibility of the Gen 6 OLED panel being replaced by micro OLED? Thank you. This is a CSO, Hee Yeon Kim and I will be responding to both questions. Second question first, about the press reports on micro OLED, I do not believe that the company is in the position to respond to this particular question. By having said that, in any market, there are always alternative technologies. And for the TV market as well, there are both OLED and micro LED. And I believe that there is a market size to accommodate both and the company has been responding to a decent development quite effectively. Likewise, there are different technological options available in the mobile sector as well. So, the company has been making preparation for different types of technology and when there is business case to be made and business visibility and if there are any visible potential within negotiations with the customers then, of course, we will move ahead with this. So, allow me to complete my response to this question by providing you with this, letâs say a fundamental response. And as pointed out we will keep a closely monitoring the changes in the market and respond accordingly. Next is about the question on IT OLED. Now, this is the segment where we need to maintain not only the short-term perspective, but also the mid to long-term perspective because it involves not only tablets, but also monitors and notebooks as well. Now, in terms of the Monitors segment, we will also start targeting the gaming monitors, which is a premium market where the customers are willing to pay more. So, this is the segment that we will start targeting and tablet is part of that. And looking at the mobile case, we see that the BOEâs market share is now about 30% in the high end segment. Of course, there had been concerns of the premium price and also concerns about the potential scalability. But then I believe that there has been value up from the set makers side. And we believe that that is how we were able to increase the penetration. And we believe that the same developments could occur in the Tablet segment as well. But at the same time, as the questioner had rightly pointed out, the high end payment of value in tablet monitors or notebooks would be lower than for the smartphones and also the use cases might be limited still. So, we would be looking into the different factors and the circumstances and tried to come up with rational prospects for penetration rate and then also set our business plan and strategy accordingly. If there are no further questions, we will now close Q4 2022 earnings conference call. Thank you once again for joining us today. Please do contact us at the IR team for any additional questions. Thank you.
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Hello, and welcome to the Sanmina Corporation's First Quarter 2023 Earnings 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 the Senior Vice President of Investor Communications, Paige Melching. Please go ahead. A copy of our press release and slides for today's discussion are available on our website at sanmina.com in the Investor Relations section. Before we begin our prepared remarks, let me remind everyone that today's call is being webcasted and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. Please turn to Slide 3 of our presentation or the press release safe harbor statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results could differ materially from these projections in these statements as a result of a number of factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission. The company is under no obligation and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in this earnings release, the earnings presentation, the conference call or the Investor Relations section of our website, whether as a result of new information, future events or otherwise, unless otherwise required by law. Included in our press release and slides issued today, we have provided you with statements of operations for the quarter ended December 31, 2022 on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense and other unusual or infrequent items. Any comments we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, taxes, net income and earnings per share, we are referring to our non-GAAP information. First, I would like to take this opportunity to recognize Sanmina leadership team and our employees for doing an exceptional job. So, to you, Sanmina's team, thank you for delivering strong and consistent results for the first quarter of fiscal year 2023, and let's keep it up. For agenda, we have Kurt, our CFO, to review details of our results for you; I will follow up with additional comments about Sanmina results and future goals; then Kurt and I will open for question and answers. Please turn to Slide 5. As Jure mentioned, our team did an outstanding job delivering strong revenue and profit growth for the quarter. Q1 revenue of [$2.136] (ph) billion grew nicely by approximately 7.2% from the prior quarter and exceeded the high end of our outlook of $2.1 billion to $2.2 billion. This was primarily due to strong customer demand, as well as continued improvements in the supply chain. Non-GAAP gross margin was flat at 8.3%. Non-GAAP operating margin was 5.8% compared to 5.6% in the prior quarter. This was primarily due to operating expense leverage. Non-GAAP fully diluted earnings per share grew approximately 9% to $1.64 compared to $1.50 in the prior quarter, and exceeded the upper end of our outlook of $1.41 to $1.51 by $0.13. Finally, Q1 GAAP fully diluted EPS was $1.48. Please turn to Slide 6. This slide shows the quarterly trends in our financial results. You can see here that non-GAAP operating margins have continued to improve over time. Furthermore, earnings per share grew over 50% from $1.08 in Q1 FY '22 to $1.64 in Q1 FY '23. Please turn to Slide 7. Q1 IMS revenue increased to $1.94 billion, an increase of 7.7% over the prior quarter, primarily due to strong customer demand and continued improvements in the supply chain. Non-GAAP gross margin for IMS was 6.9% compared to 7.2% in the prior quarter. This decline was primarily due to a reserve taken during the quarter related to a start-up customer. We expect IMS gross margins to return to a more normalized level in fiscal Q2. Components, Products and Services revenue grew to $464 million, an increase of 3.8% over the prior quarter. Non-GAAP gross margin for CPS improved to 13.3% compared to 11.9% in the prior quarter, primarily due to better product mix. Now, please turn to Slide 8. We have a very healthy balance sheet, which provides our company a competitive advantage. Cash and cash equivalents were $735 million. The increase in cash was primarily due to $216 million as a result of the previously announced joint venture in India, which closed on October 3, 2022. At the end of the quarter, there were no borrowings outstanding under our $800 million revolver. Cash flow from operations was $37 million in Q1. Cash flow is typically lower during our first fiscal quarter, given the calendar year-end. Capital expenditures were approximately $37 million in Q1. Our free cash flow was approximately $1 million in Q1. Now turn to Slide 9. We continue to focus on the management of working capital. Cash cycle days remained relatively flat at 50 days in Q1. Non-GAAP pre-tax ROIC was 35.5% for Q1. Please turn to Slide 10. Let's talk a bit about the outlook for Q2. Overall, customer demand remained strong, but there continues to be uncertainty related to the supply chain as well as the macroeconomic and political environment. We expect Q2 revenue to be in the range of $2.2 billion to $2.3 billion. Typically, there is some seasonal impact in our fiscal Q2. We expect non-GAAP gross margins in the range of 8.2% to 8.7% depending on product mix. Non-GAAP operating expenses in the range of $59 million to $61 million, primarily due to the annual re-setting of the employer portion of payroll tax and any annual salary adjustments. And non-GAAP operating margin in the range of 5.5% to 6%. We expect non-GAAP interest and other of $15 million, primarily driven by the increase in interest rates. In addition, we estimate an approximate $3 million non-cash reduction to our net income to reflect our JV partner's equity interest in the net income of the Indian JV. We expect non-GAAP taxes of approximately 18%. The fully diluted non-GAAP share count of 60 million shares. When you take all of this guidance into account, our outlook for non-GAAP diluted earnings per share is in the range of $1.50 to $1.60. We expect Q2 capital expenditures of around $50 million, driven by the growth of new programs as well as to support future growth. Q2 depreciation is expected to be around $30 million. While we are pleased with our recent results, we continue to believe that there is opportunity to further improve our business model over the long term. Thank you, Kurt. Ladies and gentlemen, let me add few more comments about our financial highlights for the first quarter and I'll review our end markets and outlook for the second quarter and the rest of the fiscal year 2023. The key highlights were: growth was broad-based, driven by strong demand from our end markets; and performance of our supply chain organization was excellent by working closely with our customers and suppliers. We can also tell you that the lead times for semi components is getting better. We saw nice improvements in the first quarter. Despite ongoing macroeconomic uncertainty, these results are a reflection of our continued focus on execution of our strategy. Our Sanmina team has done an outstanding job as we continue to differentiate our industry-leading capabilities, and all of this is continuing to translate into growth and margin expansion for Sanmina. Please turn to Slide 12. Let's look at the revenue for our first quarter by end markets. I can tell you that the demand for our products was strong across all markets. For Industrial, Medical, Defense and Automotive segments, we delivered a revenue of $1.345 billion, which was quarter-over-quarter growth of 4.5% and year-over-year, 27.5%. Total for our first quarter, we delivered $2.361 billion. It was nice organic growth, quarter-over-quarter growth of 7.2% and year-over-year growth of 34.4%. For the first quarter, top 10 customers were 50.6% of our revenue. Overall, we are seeing strong demand and solid backlog for our future. In summary, we are off to a good start for fiscal year 2023. Please turn to Slide 13. Now, let me review our second quarter end markets outlook. The key markets for Sanmina are industrial, medical, defense and aerospace, automotive, communication networks and cloud infrastructure. As you can see, Sanmina does not serve consumer markets at all, but our focus is on high-complexity, heavy regulated markets. For us, this is a seasonally down quarter, but with healthy backlog, we have strong outlook for the second quarter of $2.2 billion to $2.3 billion. We expect to see some supply constraints to continue through our second quarter and beyond. But good news is that things are getting a lot better. As I look at the rest of the fiscal year 2023, I'm excited about Sanmina's future. For fiscal '23, we expect to deliver nice improvements over fiscal year '22. At this time, we've seen a strong outlook from our key customers. Revenue growth will be driven from existing and new programs. We are well diversified in the growth markets. Strong pipeline of new opportunities will continue to drive growth for the future. Margin expansion to be driven by revenue growth in IMS segment and by continuous improvements in manufacturing efficiencies. Margin expansion at CPS segment will be driven by technology components, defense products, optical packaging and other services. And lean OpEx leverage as we continue to drive efficient structure. Now let me talk to you about managing through these challenging macroenvironment. From Sanmina's management point of view, we have positioned the company to be able to navigate any market dynamics that could come up in the future. Sanmina has embedded resiliency in our focused market space and strong global management to do the job. Again, Sanmina is well positioned for any economical environment. Our priorities have not changed. Strategy is working and it's delivering results. Our focus today is on quality of our customer base, building right partnerships. We are focused on continuing to diversify revenue growth with market leaders in mission-critical products. We're focused on quality of earnings, delivering consistency and growth of our earnings. We're focused on quarterly and yearly cash flow. And we are focused on maximizing shareholders value, short-term and long-term. I can also tell you there is still lot of leverage at Sanmina's business model. Please turn to Slide 14. So, in summary, as you heard from both Kurt and I, we delivered a strong quarter, with solid execution, revenue of $2.36 billion, growth of 7.2% quarter-over-quarter and growth of 34.4% year-over-year. And non-GAAP operating margin, we improved by 20 basis points to 5.8%. And we delivered a non-GAAP diluted EPS of $1.64, growth of 9.5% quarter-over-quarter and 52.7% year-over-year. For second quarter, we are forecasting, again, strong revenue outlook of $2.2 billion to $2.3 billion, typically this is seasonally down quarter for us, but the demand is strong and backlog is strong. So, non-GAAP diluted EPS, we're forecasting of $1.50 to $1.60. As Kurt said, we believe there's still upside, as we continue to look at opportunities in front of us, we believe we can improve our business model over the long term. So, ladies and gentlemen, now I would like to thank you all for your time and support. Operator, we're now ready to open the lines for question and answer. Thank you. Operator? Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Jim Suva with Citigroup. Please go ahead, Jim. Hello. Good evening. Thank you so much for the details. Some of your peers have talked about some inventory digestion or inventory buffer that needs to be worked down. Are you seeing that in any of your markets? And if so, which ones and how long? Or I'm just kind of curious on that topic and I probably have a follow-up. Yes. Jim, definitely during this period, as you know, when our customer gives us a forecast, we're basically bringing inventory based on their needs, but then there was a lot of shortages, and sometimes we had to wait for those shortages a little bit longer and in end of the day inventory went up. We believe we're at the peak. As we look at the next couple of quarters, we expect to work that inventory down and generate more cash. So that's kind of where we are at. It's across all the markets, Jim. It's not just one then another, it's all -- really more customer-driven than just the markets itself. Okay. So, across several. And then, you have seen a lot of success in recent years with your cloud hyperscaler server storage. And just, can you update us on that and give us some view on additional colors on that effort? Well, that segment for us, if you look at the last quarter, communication network and cloud computing did pretty well, grew about 11%-plus. So, we always were well positioned in that market. It's, again, we got a lot of new programs there. Overall, we're very positive. Jim, we take one quarter at a time. We're a lot more confident about '23, let's say, today than we were six months ago. So, I will take one quarter at a time and we expect to grow these markets. You're talking about a nice improvement for fiscal 2023, but you don't really quantify it. If I think about the growth for the next couple of quarters, the second quarter seems to be stronger even though you normally have seasonal weakness there. So, should we expect sequential revenue increase throughout the year? Well, Anja, let me put it this way, we had a great start to a year. So, I think, first quarter speaks for itself. I believe our guidance for the second quarter are very solid. So, we'll take one quarter at a time, Anja. As we operate in this macro environment, we're very positive about the year based on our customer forecast. But at the same time, we read papers. Inflation is up, it's going up and still up, my opinion. I think Sanmina is positioned to weather no matter what happens. And we're very positive on what's in front of us, especially with the new programs that are coming up. As Kurt mentioned, we're spending a little bit more money on expansion. And the reason we're doing that is all driven by the new programs in our high-technology product mission-critical customers. So, we are -- we believe in a better future. Okay. Thank you. And can you just talk a little bit about the end markets that you participate in? And you're talking about new programs. Can you just tell us a little bit about those programs and what excites you about them? Well, as we talked in our last quarter, we continue to drive in these mission-critical programs, such as industrial, medical. In industrial, we're well-established there. I think, our alternative energy market is going to be expanding there substantially. I think on automotive, same thing. On EV vehicle, we are well positioned there. When Jim asked the question regarding communication network, cloud -- and cloud infrastructure, we are also well positioned there, and of course, medical and defense. So, a lot of the new programs are really across all our markets. Competition is always there, but I'm more worried about ourselves than competition. I always believe it's what we do. We are focused to really build a strong partnership with our customer. We're focused on mission-critical products, heavy regulated markets that require a lot of technology, and that's what we're spending energy in. Anja, that's -- thank you very much. Operator? That's all for today. We appreciate everybody's input. And if there's any more questions, please let us know. Thanks a lot. Yes. Thanks for -- we'd like to thank everybody for joining this call. Again, if there's any more questions, please let us know, we're available for next 90 days.
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EarningCall_881
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Good morning, ladies and gentlemen. Welcome to the EZCORP First Quarter Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded. I'd now like to turn the conference over to Jane Marine Young, Investor Relations with Freeport's Advisors. Please go ahead, Jane. Thank you, and good morning, everyone. During our prepared remarks, we will be referring to slides, which are available for viewing or download from our website at investors.ezcorp.com. Before we begin, I'd like to remind everyone that this conference call as well as the presentation slides contain certain forward-looking statements regarding the Company's expected operating and financial performance for future periods. These statements are based on the Company's current expectations. Actual results for future periods may differ materially from those expressed due to a number of risks or other factors that are discussed in our annual, quarterly and other reports filed with the Securities and Exchange Commission. And as noted in our presentation materials and unless otherwise identified, results are presented on an adjusted basis to remove the effect of foreign currency fluctuations and other discrete items. Thanks, Jean, and good morning, everyone. Our team continues to consistently execute on the three-year strategic plan put in place at the end of fiscal 2020. We began fiscal 2023 with an excellent first quarter. I want to thank our passionate, engaged and highly productive team members for their continued focus on operational excellence, which continues to drive our very strong financial results. Pawn loans outstanding, the key driver of our business, was $208.6 million at quarter-end, an 18% year-over-year increase and our highest ever result for Q1, and merchandise sales were up 14% to $161.9 million, a highest ever quarterly sales result. Beginning on Slide 3, we are a global leader in pawn broking and pre-owned and recycled retail. We operate 1,186 stores in the U.S. and Latin America with strategic investments in adjacent businesses, which expand our geographic footprint worldwide. Across our diverse store base, we offer two core products to our consumers. We make pawn loans and we sell second-hand goods. The macroeconomic environment continues to be a challenge for our customer base. Inflationary pressures and economic uncertainty drive increased demand for pawn loans. The demand for second-hand goods also increases as consumers increasingly seek value for money and environmentally responsible alternatives. Our goal is to provide the best, most convenient experience for our customers through continuous innovation, while positively impacting the environment and the communities in which we serve. Moving on to Slide 4, we continue to embrace people, pawn and passion as our core operating team. We know that our engaged team drives our success, so we are committed to investing in recruitment, retention and incentivization. We strive to be the best option for our customers by providing outstanding customer service and attractive and well-positioned store footprint, a differentiated digital platform, a proprietary pod system and importantly, ample liquidity from our balance sheet to provide core loans across all of the regions in which we operate. Slide 5 shows our progression towards our three-year strategic goals. I believe we have the most passionate, productive and committed team in the industry and we continue to find new ways to motivate and retain them. In the U.S., we implemented no-cost team member health insurance. And in Mexico, we reinstituted the employee savings program. This has been extremely well received by our operating teams. We are also committed to enhancing our customersâ experience by growing and improving our points-based loyalty program. Turning to our key financial themes for Q4 on Slide 6. As mentioned, PLO, the most significant driver of revenue and earnings, was up 18% year-over-year, with an associated 21% increase in PSC. Total revenue for the quarter was $261.6 million, up 18%. EBITDA was $37.9 million for the quarter, up 22%. PLO on a same-store basis continues to remain strong above pre-COVID fiscal year 2019 levels, and same-store sales and merchandise sales gross profit are at record levels. We have seen aged inventory increase in LatAm and are focused on better execution in that region to address this issue. The slight increase in cash on the balance sheet was a result of the net cash proceeds from the convertible debt refinancing, offset by an increase in earning assets, acquisitions of new stores, strategic investments and share repurchases. Slide 7, EBITDA margin was 13% for the last 12 months ending December 2022 versus 11% in the last 12 months ending December 2021, with the U.S. driving the growth. Recently, EBITDA margin has flattened due to inflationary pressure affecting the business. On Slide 8, we talk about strengthening our core with a primary focus on people and systems. We are focused on recruitment, retention, inclusion and incentivization to ensure that the team remain highly engaged. Improving the bench strength of our field team continues to [indiscernible]. In addition, we continue to invest in technology, and believe we are leading the industry in this area. All in-house applications have been transitioned from co-location data center to the cloud. Our technology and digital initiatives are improving our operational efficiency at the store level and the ease of use of our products and services for our customers. We have now deployed store network and system upgrades in 80% of our stores to improve the stability and support digital initiatives. With Max Pawn, our first venture into the luxury pawn broking business, we enhanced e-commerce capabilities by migrating to a secure, mobile-ready and user-friendly platform and have a full e-commerce offering been tested in that business. On Slide 9, innovation and growth is the third pillar of our three-year strategy and we continue to execute our plan. Our EZ+ loyalty program has over 2.4 million customers enrolled versus over 1.9 million last quarter, showing an increase of 26%. We also collected $11.8 million in online payments this quarter, up $6.6 million from the first quarter of fiscal 2022. Adding points earned, balance and account QR to physical receipts and bonus points, campaigns increased visibility, enrollment and transactions. We received more than 15,000 Google reviews this quarter, averaging 4.9 stars in the U.S. and Latin America. Website visits for the main brands are up 35% over the previous quarter. And we believe we are attracting new customers by making shopping more convenient. From an inorganic perspective, we acquired nine stores in the Houston area. We bought the countryâs leading luxury pawn store in Las Vegas and opened the second store there this week. Both of these acquisitions have started very well from an operating and financial perspective. We also invested an additional $15 million in preferred equity and $15 million in debt into Founders, which purchased additional ownership in SMG. This capital was used by SMG to complete the 100% acquisition of La Familia Paw, which operates 53 stores in Florida and Puerto Rico, where it is the market leader. In addition, we opened two de novo stores in Latin America. We continue to be disciplined in evaluating acquisition opportunities and the pipeline remains robust. We increased our stake in CCV from 41.6% to 43.7% during the quarter, after receiving a cash dividend from CCV for $1.8 million, our net cash outlay was $300,000. Slide 10 outlines our ESG highlights for the fiscal first quarter. Our business, by its very nature, makes us a neighborhood recycler and a compelling component of the local circular economy. We are a significant recycler of second-hand goods to hundreds of local neighborhoods. We sold over $1.6 million pre-owned items in the quarter, including toxic consumer electronic items such as computers, TVs, phones as well as tools, musical instruments, household goods, and jewelry, saving them all from landfills. We use sound recycling and e-waste processing in the U.S. We do not use factories, distribution facilities or heavy trucking. Importantly, we provide an essential, simple, regulated and transparent financial resource for those who are underserved by traditional sources. Diversity and inclusion are a significant focus, and we continue to have excellent engagement in both our Black Empowerment and womenâs empowerment affinity groups. In addition to the previously mentioned low-cost health insurance for the team members in the U.S., we have also implemented paid parental leave and enhanced voluntary paid time-off to support our team members at home and in the communities where they live. I would now like to turn over the call to Tim Jugmans, our CFO, to provide more details on our financial results. Tim? Thanks, Lachie. On Slide 11, we laid out the effects of the $230 million seven-year convertible debt refinancing on the near-term convertible notes, diluted shares outstanding and cash interest expense. We derisked the balance sheet and enhanced our low cash cost capital base so we can continue to grow. Slide 12 details our consolidated financial results for the first quarter. PLO ended the period at $208.6 million, up 18% on a year-over-year basis, which is the highest first quarter in EZCORPâs history. PSC revenue was up 21% over last year, with growth driven by both increased same-store PLO growth and acquisitions. Merchandise sales was up 18% to $161.9 million, our highest quarterly sales results ever, but as expected, margins fell back to 36%, which is within our normal range. Inventory turnover is stronger at 2.8x. It was another great quarter with consolidated EBITDA of $37.9 million, up 22%. Turning to our U.S. pawn operations on Slide 13. PLO rose 18% to the highest ever in the U.S. PSC was up 23% year-over-year, primarily driven by higher average PLO growth. On the retail side of the business, merchandise sales were up 16%, with merchandise sales gross profit up 2%, with an expected 500 basis points drop in sales margin. Store expenses increased by 13%, primarily due to labor in line with store activity and to a lesser extent, expenses related to our loyalty program and rent associated with lease renewals. U.S. pawn EBITDA for the quarter was $42 million, up 13% on the prior year. Slide 14 focuses on our Latin American pawn operations. Segment PLO grew 17% for the first quarter or 15% on a same-store basis, where results in PSC up 15%. Merchandise sales were up 22%, 18% on a same-store basis. Merchandise sales gross profit was up 28% due to increased sales and margins up 200 basis points. Store expenses were up 20% and 18% on a same-store basis, mainly due to increased labor in line with store activity and to a lesser extent, expenses related to our loyalty program and rent associated with lease renewals. Inventory turnover remained strong at 3.3x. However, aged GM is up 2.9%, which has been driven mainly by the recent acquisitions. The team is focused on improving execution to bring this down. For the first quarter, Latin American pawn and EBITDA improved by $1.2 million. With the successful placement of a $230 million seven-year convertible note, we have derisked the balance sheet and are in a stronger position to fund continued growth across our business. We repurchased $7 million of shares during the quarter and $1.9 million of shares in January 2023. We will continue to execute this program in an opportunistic and responsible way taking into consideration general market conditions, liquidity and capital needs and the availability of attractive alternative investment opportunities. Looking forward on a consolidated basis, we should see PLO levels continue to hit record on a seasonal basis. As we have suggested in prior quarters, we are likely to continue to see gross margin remain at the lower end of our range of 35% to 38% as we remain focused on strong inventory turns and limited aged general merchandise. Also, as we have seen this quarter, store expenses increased and will do so on a sequential basis as inflationary pressures continue to affect the business. We also expect G&A expenses to increase sequentially for the same reason. We are excited to see our business continue to achieve earning results above what we had pre-COVID with a superior operating model. Thanks, Tim. In closing, I want to thank our EZCORP team for another outstanding quarter. We are consistently delivering strong operating and financial results for our stakeholders and driving additional inorganic growth through de novo store build-outs, disciplined acquisitions and investments. We strengthened our already robust balance sheet during the quarter and returned capital to shareholders. We are committed to improving the experience for our employees and our customers in an environmentally responsible way. We are excited to continue to execute on our three-year plan in what is a supported macroeconomic environment for our business, and drive enhanced value for all of our shareholders. Thank you. [Operator Instructions] We have our first question comes from Brian Nagel from Oppenheimer. Brian, your line is now open. So a couple of questions here. So a couple of questions here. First, I guess, this is probably more for Tim, but just on the margin front. I mean, you talked about â in your script about essentially margins kind of normalizing now and then you gave some longer-term parameters. But as we think about the trajectory of margins from here, can you just help us understand better kind of the key puts and takes and some of the timing there of how this should be realized? Yes. Thanks, Brian. The margins definitely have obviously have come down over a period of time back to this normalized range, which we think operates between 35% and 38%. At the moment, as our customer does come under some pressure, there definitely has been â we've definitely seen some more negotiation at store level. And so we believe that it will stay at that lower end of the range for the moment as the pressure continues to mount on our customer base. Tim, do you want to talk a little about, that's obviously gross margin, do you want to talk about EBITDA margin. Is that â were you wanted to talk EBITDA margin, too, Brian? Or you just meant gross margin. On the EBITDA margin, as we talked a little bit about in â when we produced our annual results, we will have some pressure this year on â from wage and inflationary pressures on expenses. And we did see a little bit of that come through in this quarter. We're really comping on last year where we really hadn't taken on much of that inflationary pressures even though lots of other businesses have had and it's a bit delayed for us. So we'll continue to see a little bit. So there will be some pressure on EBITDA margins as we try and keep expenses under control, but continue to grow the topline. That's helpful. And then my second question, I guess, maybe longer term or strategic in nature. But just with respect to the loyalty program, you talked about just the kind of the consumer acceptance of the program. And then what you're seeing as far as the benefits of the business as this continues to sort of say, rollout? I think from a strategic perspective, it's incredibly pleasing to say that we've got 2.4 million customers that have signed up. It's been very, very rapid growth. I think there are a lot of benefits to the program for both the customer and for us, a much better retention, much better engagement, and that should drive in turn better sales and better margins going forward. But we are just really â we're a year in and we're only just really starting to track that. So I think we've done a wonderful job in the sign-ups. I think now it's all about maximizing the benefit for both our customers and for us. And I think in coming quarters, we'll be able to comment more on the financials. I think, strategically, it's incredibly pretty pleasing to see the growth there. Tim, would you add anything to that? No, that's a very similar comment there, Lachie. It's a great addition. The stores love talking about it and the customers are definitely embracing. Thanks, guys. Good morning. Maybe you touch on the recent investment in the Caribbean stores, maybe touch on the accounting of that? And then anything else with respect to the acquisition pipeline, you guys have been pretty active just maybe get an update on the opportunity set there? Yes. Thanks, John. So it was a very active quarter. Obviously, we bought nine stores in Houston, thatâs really our home-based home market. So right down the middle of the fairway, that started off really well. As weâd already announced, weâve commenced our Luxury Pawn strategy by buying MaxPawn in Vegas and we opened a new store this week under that brand, so weâre all excited about that. And then the investment in Founders, is obviously significant. That has then been in turn invested in the simple, which bought La Familia, that is the market leader in Puerto Rico, which is a really exciting market and has 25 stores in Florida. So that is now becoming a real scale business. Weâre all focused on pawn with a very strong management team that we know well. So weâre really excited about that opportunity. And on the accounting, we continue to cost account. We have a preferred equity return there. And then in the future, it is obviously a potential acquisition opportunity. We feel weâre well placed there and the way that weâre doing it now, weâre very comfortable with the super exciting opportunity, given the Puerto Rico leadership position that has. And then I think going forward elsewhere, it remains a really robust acquisition pipeline. Now while weâre exploring new markets around the world where thereâs still plenty of opportunity, I think, our bias is to the places where weâve got strongest existing management and clearly thatâs in the U.S. and Latin America. So look, it remains robust, lots there to do. It was a really great quarter. But as I say to our team, itâs not about doing the deals, itâs actually about making them work. So weâre very focused now on making those acquisitions work for our shareholders. And I think weâre really happy with the progress there, but the robust pipeline and youâll continue to see more from us on that front. Okay. Thatâs very helpful. Thanks. And then maybe touch on â you touched on the consumer and how it's impacting margins as you want to continue to clear inventory and so forth. But maybe â I mean, I guess, any thoughts on kind of â are we kind of getting to the point where we've kind of lapped inflation, so things are stabilizing? Maybe talk about kind of bargain shopping and is that pulling more people in the stores? Or just any kind of way to characterize the overall â I know the results have been healthy, but maybe anything transitioning in the overall retail environment for you guys, both plus or minus? Look, it's a good question. I think on the topline, we're continuing to see kind of unprecedented results in both our pawn loans and our sales. So it's clearly the quarter was, as you said, very, very strong in terms of growth and core demand for our products. Where that goes from here? It's difficult to predict, but our expectation is that both of our core products will continue to grow. We're comping â we're now starting to comp against some pretty fantastic numbers from last year. But I think the consumer is definitely â you can see in our sales results they're definitely bargain-shopping. Anecdotally young people who are much more â who are very environmentally conscious, seem to be coming to our stores to buy secondhand. So look, we are â we remain excited and bullish about core demand for those two products. I think on the cost side, as Tim said, we are seeing inflationary pressures hit the business. But those are hitting our customers as well. So with higher rates, higher interest rates, higher inflation, we expect to see continued growth in both of those core products. Thank you, John. We have our next question comes from Brian McNamara from Canaccord Genuity. Brian, your line is now open. Hey. Good morning, guys. Congrats on the strong results. A few for me. So your aged inventory was up significantly in LatAm, albeit off a low base. I think you cited an impact from recent acquisitions. But you guys have a proprietary POS system that should help with potentially mispricing loans or goods. I guess my question is, do you expect over time for your merchandise margins to improve structurally closer to what your larger peer earns? Thanks. Yes. Thanks, Brian. So yes, the recent acquisition, especially in [indiscernible] is really a lot about training and how to use the system. We did have a little bit of turnover in that acquisition. And so it's taken a little bit longer than expected to get them fully embraced on how to use the system. So we feel confident about that number coming down over time. From a margin perspective, we do run a little bit different business to our competitor. We do focus a little bit more on the lending side and they focus a little bit more on the retail. But overall, we do expect that we will continue to try and maximize the return from the goods that come in, whether that is trying to get a little bit more out of the PSC or a little bit more out of the margin, it depends on the customer. Got it. And then just on store expenses, you had kind of broadly spoke about inflationary pressure. Store expenses per unit were up pretty significantly in Q1. Should we model kind of similar growth rates for the balance of the year? Or how should we kind of think about that, if you could provide a little more color? Yes. Obviously, that we're â comping against Q1 last year where there was no real effect on inflation yet. If you look back at Q4 last year on a sequential basis, you definitely could see some of that inflation coming through. And so on a sequential basis, we expect to continue to see some lift in expenses, but not â that's a better way to look at it rather than on a comping basis. The major reasons are, we've hired a number of people. We were very short staffed a year ago. So definitely a lot more people in our stores supporting the extra transactions that are going on. And obviously, there's been some wage inflation and some change in laws in Latin America are pushing wages up as well. Got it. And just one last one for me on the rewards program. I think you have about 2,000 members per store now, which is an incredible number at year-end. How many of those members are actually "active?" I mean if you just look at your online payments per member, it's down quite a bit, but I know that's probably not the way to look at it, but like â I guess what I'm trying to get at is like what percent of your customers are regulars versus those to come in more episodically? And how should we think about maybe the longer-term opportunity about how high those memberships can go? Thanks. Those numbers are â those numbers â because of the program has only been in effect for a short period of time, we're still working through on exactly what we're going to be calling active versus inactive. Basically, those are all people that have done a transaction within the last year, which we would call â which we generally call an active customer. Any commentary on like the upper bound of that? I mean I think it's â the recruitment in and of itself has been tremendous. I'm just curious kind of what you think the upper bound of the long-term potential range could be? Yes, that is obviously â we â this has definitely grown much quicker than we expected. So it's definitely beating our expectations at the moment. So the upper bound, we really haven't talked about that at this stage, but pretty excited about how it could drive additional revenue through the business. Hey, guys. Congrats on the strong quarter. Just wanted to see if you could recap real quick just for modeling purposes, just the guidance points maybe for next quarter and for the full-year? Just want to make sure we have those in the model and as accurate as possible. Thank you. Thanks. So what we â just to reiterate a couple of points there. We definitely â we likely to continue to see PLO on a sequential basis continue to hit record levels. We definitely see the sales margin remaining at the low end of our stated range of 35% to 38%. Expenses, we think that will continue to have pressure on expenses, and we're likely to see sequential growth on the expense base. Thank you, Alexander. We currently have no further questions on the line. I will now hand the floor back to Lachie for closing remarks. Thank you, operator. Thank you, everyone, for joining. And again, on behalf of our leadership team, thanking our entire EZCORP team for another outstanding quarter driving value for our shareholders. So thanks, everyone, for joining, and weâll talk soon. Thanks.
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EarningCall_882
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Welcome to the Lennox International Fourth Quarter 2022 Earnings Conference Call. All lines are currently in a listen only mode, and there will be a question and answer session at the end of the presentation [Operator Instructions]. As a reminder, this call is being recorded. Thank you, Ashley. Good morning, and welcome. I hope everyone is having a good start to 2023. It was nice to meet many of you face-to-face during the Investor Day on December 14th. Thanks for attending and sharing your feedback. Turning to Slide 2, a reminder that during today's call, we will be making certain forward-looking statements that are subject to numerous risks and uncertainties, as outlined on this page. Please refer to our SEC filings available on our Web site for additional details. Before we begin, I want to express my gratitude and appreciation to all of our employees who enabled us to deliver record financial results in 2022. Last year, our dedicated employees improved our customer experience while facing significant supply chain disruptions. This enabled us to reestablish our cadence of gaining residential market share. I want to take this opportunity to also thank our dealers and customers for their loyalty to Lennox. We will continue to improve our service levels while maintaining the best HVACR products and solution in North America so that we can continue gaining share in the future. Now please turn to Slide 3 where I want to highlight four key messages. First, we are proud to report solid fourth quarter results that capped off another record year for Lennox. Q4 revenues of $1.1 billion and full year revenues of $4.7 billion were both up 13% year-over-year. Strong price execution and continued volume growth enabled us to set new records for both quarterly and full year revenues. Q4 adjusted earnings per share of $2.63 and full year EPS of $14.07 both grew 12%, establishing a new record of full year EPS. Second, we successfully transitioned our product portfolio to meet the new minimum regional efficiency regulation that went into effect on January 1, 2023. We believe that our superior design and solid execution has put us in a strong position to win share during and after the transition. Third, we ended the year with fully replenished finished goods inventory levels to support our customers through the SEER transition. In addition, we are also carrying higher level of raw material safety stock to mitigate the impact of ongoing supply chain disruptions. Given this, our 2022 free cash flow was $203 million, which was below our expectations. We are undertaking countermeasures to improve our cash flow forecasting and remain committed to converting 90% to 100% of our net income into free cash over the long term. Fourth, our 2023 full year outlook remains unchanged, and we still expect revenue growth of 0% to 4% and an EPS range of $14.25 to $15.25. Now please turn to Slide 4 to discuss business updates as a follow-up to our dialogue during the Investor Day. In terms of end market update, as we approach February, our order rates remain consistent with our prior expectations. While we are noticing signs of a slowdown, we remain confident in our dealer networks' ability to continue driving both replacement and new construction sales, especially as equipment lead times normalize. We do anticipate some channel destocking in our two step distribution businesses like Allied Air, ADP and Heatcraft. We are maintaining solid communication with our distribution partners to effectively manage channel inventory levels. In addition to successful execution during the SEER transition, we are pleased to report that we remain on track to transition our portfolio to comply with the upcoming 2025 low GWP regulation. In terms of order updates on our innovation road map, we recently launched our next generation thermostat controller, the Lennox S40, which has built-in indoor air quality monitoring capabilities and improved connectivity to further improve the experience of our customers and our dealers. We also continue to make progress on accelerating our heat pump growth, and we're a proud recipient of the good design award for our Dave Lennox signature series collection heat pump. Switching gears. As part of our commercial recovery effort, the construction of our new commercial factory in Saltillo has started and will be complete by the end of 2024. Lastly, on this page, the formal process for divesting our European assets has started and our internal segment consolidation is complete. We expect to close the European divestiture sometime this year. With that, let me hand the call over to Joe, who will provide you a more detailed view of our financial performance. Thank you, Alok. Good morning, everyone. Please turn to Slide 5. Looking at the quarter for Lennox overall, the company posted strong revenue and profit growth. Revenue was a record $1.1 billion, up 13% as reported and up 14% at constant currency, with the growth driven by volume and price. Total segment profit increased $30 million or 30% versus prior year as pricing gains more than offset cost inflation, and all three segments contributed to profit growth. Total segment margin was 12.1%, up 150 basis points as price gains outpaced cost inflation and Commercial margins improved due to higher factory output. GAAP EPS of $2.65 was up 17% and adjusted EPS rose 12% to $2.63. Regarding special items, the company had an $800,000 adjustment for the fourth quarter and $6.6 million for the full year. Corporate expenses were $34 million in the fourth quarter and $91 million for the full year. Overall, SG&A was $155 million in the fourth quarter or 14.2% of revenue, down from 15.7% in the prior year quarter. And for the full year, SG&A was $627 million or 13.3% of revenue, down from 14.3% in the prior year. Our full year 2022 income tax rate was 19.3%, which was up from the 17.2% last year, the result of higher tax benefits from share based compensation and the finalization of our prior year tax obligations with taxing authorities. For 2022, the company generated cash from operations of $302 million compared to $516 million in the prior year. The reduction in cash flow was primarily due to inventory cost inflation and investments to both minimize supply chain disruptions and prepare for the minimum efficiency regulatory change that took effect January 1, 2023. Capital expenditures were approximately $101 million for the full year compared to $107 million in the prior year. Free cash flow was $203 million for the year compared to $410 million in the prior year. In 2022, the company paid approximately $142 million in dividends and repurchased $300 million of the company's stock. Total debt was $1.5 billion at the end of the fourth quarter and we ended the year with a debt to EBITDA ratio of 2.1. Cash, cash equivalents and short term investments were $61 million at the end of the year. Moving to the business segments, starting on Slide 6. Our Residential segment delivered record fourth quarter revenue and profit. Residential revenue grew 13% to $703 million, vwolume was up 5%, price and mix were up 9% and foreign exchange had a negative 1% impact. Residential segment profit rose 8% to $119 million. Segment margin contracted 90 basis points to 16.9%, primarily due to incremental costs associated with supply chain disruptions and the factory changeover for the new 2023 minimum efficiency standard products. For the full year, Residential segment revenue was a record $3.2 billion, up 15%. Volume was up 4%, price was up 11% and product mix was flat for the full year. For the full year, Residential profit was a record $597 million, up 10%. Segment margin was 18.7%, down 80 basis points, primarily the result of supply chain challenges, which drove manufacturing inefficiencies and unfavorable product mix with reduced production output for higher end products. Now turning to Slide 7 and our Commercial business. Revenue was $241 million in the quarter, which was up 19%. Commercial price and mix was up 17%. Volume was up 3%, and foreign exchange had an unfavorable 1% impact. Commercial segment profit was up 79%, and segment margin expanded 390 basis points to 11.6%. Commercial demand and backlog remains solid, and our Arkansas factory recovery is progressing well. Staffing in the plant is at our desired levels with productivity progressing and production output increasing. For the full year, Commercial revenue was $901 million, up 4%. Price and mix were up 13% and volume was down 9%. For the full year, segment profit was $81 million, down 27%. Segment margin was 9%, down 380 basis points. Looking at our Refrigeration business on Slide 8. Revenue was $150 million for the fourth quarter, up 5% as reported and up 10% at constant currency. Price and mix were up 21%, volume down 11% and foreign exchange had a negative 5% impact. Revenue growth was led by our North American business with price and mix, which was up more than 20%. Europe revenue was up 9% as reported and up 22% at constant currency. Overall, the Refrigeration segment profit rose 42% to $19 million and segment margin expanded 330 basis points to 12.5%. Refrigeration demand, order rates and backlog remain strong. For the full year, Refrigeration revenue was $619 million, up 12%. Volume was up 3%, price and mix was up 14% and foreign exchange had an unfavorable 5% impact. Segment profit was $79 million, which was up 60% and segment profit was 12.7%, up 380 basis points. Turning to Slide 9 for a free cash flow update. Free cash flow was $203 million and was impacted by inventory replenishment to get our distribution network back to effective levels to serve our customers, along with inventory investment to buffer the supply chain to support demand for the new minimum efficiency standards that became effective January 1st. As we look to 2023 and free cash flow, we expect cash from operations to increase as we work to optimize inventory levels while we prepare for the next regulatory change to take effect in 2025 for the new low GWP refrigerants and minimize supply chain disruptions. Our capital expenditures in 2023 will be approximately $250 million and includes investments for a second commercial factory and investments necessary to prepare us for the 2025 refrigerant change. Free cash flow in 2023 is planned within a range of $250 million to $350 million, including increased capital spending to support regulatory change and growth initiatives, including factory capacity. Free cash flow in 2023 is planned within a range of $250 million to $350 million, including increased capital spending to support regulatory and growth initiatives, including factory capacity. Now turning to Slide 10. Let's review our 2023 full year guidance. Our outlook collectively for the end markets we serve remains unchanged. We expect revenue to be flat to up 4% for the year. There is no change to our EPS guidance of $14.25 to $15.25 that we shared with you during our Analyst Day. Free cash flow is targeted within the range of $250 million to $350 million, as I mentioned. And we are planning capital expenditures of $250 million that includes the necessary investments in a second factory, as I mentioned, and investments related to the refrigerant transition that take effect in 2025. Price benefit, including price associated with the 2023 SEER transition is now expected to be within a range of $150 million to $175 million. Now turning to the cost side of the equation. We expect net material cost to be a $35 million headwind in 2023. That material cost headwind is driven by component cost inflation of $100 million, net of $30 million in savings from sourcing and engineering initiatives, along with a $35 million commodity cost benefit. Corporate expenses are still targeted at $80 million. We will manage SG&A tightly while continuing to make the necessary investments in the businesses to support growth initiatives and to drive productivity. And finally, we expect the weighted average diluted share count for the full year to be between 35 million to 36 million shares, which incorporates our plans to repurchase $100 million to $200 million of the company's stock this year. Thanks, Joe. Summarizing our financial results and providing an update on the assumptions behind our 2023 fiscal guidance. Please turn to Slide 11 for the key success factors for Lennox this year that are summarized on this page. While we have little control over the industry unit shipments in 2023 that are still expected to decline year-over-year. Given that, we are focusing our effort on the three controllable factors to grow our revenues and expand our margins. First, to offset inflation, we are maintaining and expanding our pricing initiatives. We have already implemented price increases for 2023 and are confident in our ability to offset cost inflation with pricing. Second, on the heel of a strong Q4 performance, we continue to maintain focus on commercial profit recovery. As Joe mentioned earlier, staffing levels are stable and the Stuttgart plant has switched over to the 2023 SEER standards while simplifying our product portfolio. Our new commercial product lineup provides greater value to our customers and we intend to share part of that value through pricing and contract negotiations. Third, Lennox is now well positioned to start gaining share again. As you may recall, our service levels suffered after the Marshalltown tornado in 2018 and we were unable to fully restore the service levels during the COVID years. Now, the Marshalltown reconstruction is complete, our finished good inventory levels have been replenished, Saltillo continues to add capacity, and our commercial lead times are approaching competitive levels. The improved service levels, along with recently introduced new products, put us in a strong position to relaunch our share gain programs. Even during a period of economic uncertainty, our confidence in executing on the three controllable key success factors makes us cautiously optimistic for 2023. Again, I want to thank our employees who are working hard to sustain and improve our customer service levels. Now please turn to Slide 12 for some final thoughts before Q&A. I would like to close our prepared remarks by summarizing why I believe LII is an attractive investment opportunity. Lennox is narrowly focused leader in energy efficient, environmentally friendly climate controlled solutions. We operate in high growth end markets with strong replacement demand that provides us with resiliency even during periods of economic uncertainty. The company has a unique direct to dealer network, which creates a sustainable competitive advantage. And finally, we have a history of robust execution with disciplined capital allocation. Thank you for listening. Joe and I will be happy to take your questions. Ashley, let's go to Q&A. It's Gautam here. I was just curious if you could elaborate on your opening remarks about seeing some channel or seeing some pressure on volumes. Just if you could talk about the Allied versus the Lennox brand, if you're seeing -- what you're seeing in terms of destocking, if any? And how -- maybe you think it's just maybe an early read on Q1 based on what you're seeing on resi. So I guess, first of all, as you know, majority of our sales are direct to dealers. And we highlighted Allied, ADP and Heatcraft as the three business units that do go through two step distribution model. Each of them are in a different cycle stage on distributor inventory levels. For something like Heatcraft, we saw some destocking already occur and we might be back to more normal levels. For Allied and ADP, as we talk to our channel partners, we believe there's some destocking that's going to occur this year, which frankly puts our Lennox brand in a strong position. That all is baked into our guidance as we look at 0% to 4% revenue growth. While we don't give quarterly guidance, Gautam, as you know, I mean, so far, I mean, as we said, the Q1 order rates are consistent with our expectations. And I don't see anything falling off a cliff or so, but we do see gradual slowdown that we have talked about in the past. And then if you could just comment on the recovery on the high end product, Lennox products. Sort of where are we in that journey, and do you expect to be a full participant in the summer selling season with that product line that was impacted last year? Yes, Gautam, now since Marshalltown tornado, this would be the year, 2023, we have all the inventory levels needed to launch our programs, to recapture our position on the high end, especially as we look at some of the new products like the Dave Lennox Signature series heat pumps and the new higher efficiency furnaces. So we feel good going into the year to be able to capture our fair share of market and higher than growth in 2022 on the higher end products. So I was a little bit late joining the call. So I just wondered, could you give any color in terms of the order activity in 1Q? I'm guessing not, but if it did, it'd be helpful to hear that. But just my broader question is, how has the SEER transition from a market perspective and obviously, asset, how has that gone versus expectations and has it caused any sort of air pocket post the year end? So we didn't give any numbers on Q1 but we did talk about that January order rates were consistent with our expectations and outlook. So no change, it went as we expected. On the SEER change, overall, I think it went fine for the industry. The industry has gotten used to these changes. You know we think our design has got the winning formula in terms of -- we talked about in the last call, we don't need to change some of the indoor units. We can only change the outdoor unit. So we think we did quite well and we'll wait for some of the industry numbers to compare our share. But in general, I think the industry is used to it. I think us and majority of other industry players had a seamless SEER transition. Some of the smaller players may have had hiccups. But overall, I think it went as good or better than expected for the industry. And then my follow-on is on inventories. You built inventory into 4Q versus 3Q, quite unusual from a [seasonal] perspective. But I'm curious, was that planned or were there some issues that caused that build? I think the inventory build was very planned. We wanted to make sure of two things. One is that we have sufficient high end products in stock, even though that's not selling until the summer season given the challenges we had. Second is given the SEER change, we wanted to make sure that we have sufficient inventory of the new SEER product as we went into the new year. So I think that was planned. I think where we fell short, honestly, was more appropriate forecasting and where we landed up on some of the raw material side where I think our supply chains normalize, we should have opportunity to convert more of that inventory into cash. So [Indiscernible] at this stage been complete with inventory build. Alok, can we just maybe just talk about the Commercial business for a second? It sounded like pretty positive comments on the hiring front. I guess just where does production stand relative to normal levels? And then maybe just talk about how you're seeing that business from a share gain perspective. It sounds like you're starting to recover some gains or recovering some share that you may have lost previously. So first of all, we are pleased with the recovery in Commercial and remain committed to $100 million EBIT improvement in Commercial over the planning period. We had a strong Q4, as you saw from numbers slightly better than expected, and that was kind of the prime driver of why we came to the higher end of our guidance. The recovery was driven by very stable levels of staffing. I mean at this stage, we're hiring as much as we are losing and that's kind of back to normal levels. I think the team has done a good job making sure that the output has come back up compared to the lows of the year, but we are still not back to normal. I would say we are probably still about 20% below normal on factory output where we could get there just with this factory even before the next factory comes online. So we remain pleased with the efforts in Q4. Q1, that's going to go through SEER transition. And obviously, that's something we are very excited about given the change in product lineup. So net-net, excited about the new Commercial segment. We will continue delivering and focusing. And even as we take a step into '24, '25, the new factory will give us more productivity, more capacity. And the last question you have is, yes, we did lose share in Commercial despite all the things I said earlier. Most of that was earlier in the year. Towards the end of the year, we started recovering shares and we did a little better. And we think that trend will continue because the industry lead times remain extended and ours are now getting to very competitive levels within the industry. And just to elaborate a little bit on what Alok mentioned, where we lost share was in the emergency replacement segment of the market. And as productivity and output improves, it'll enable us to replenish our distribution channels with that stockable product and then you should really see the share gain gain traction. Once again, we're able to reengage in the emergency replacement side of the market. I guess my one follow-up question. Residential volumes are continuing to stay positive, I know that you're expecting a decline in the year, and I know that you don't give quarterly guidance. But I guess just based on what you see with inventory levels today, I mean, are you expecting things to turn negative at the start of the year? Is that something that maybe happens later on in the year? I'm just -- any color that you can give on like the seasonality as we progress through 2023 would be helpful. First of all, thereâs significant uncertainty remains and at some stage, your guess is going to be as good as ours. January met expectations. Because majority of our business is dealer direct, the impact of channel destocking would be minimal. But for the industry, I do saw it happening more in the first half versus the second half. So I think the industry will see some decline in sales to distributors that distributors pull back orders, just to get the inventory rightsized. I think the seasonality, as we typically expect as in the summer seasonality, still remains. So I would say, yes, there's going to be some channel destocking impact in the industry in the first half. It's going to impact us less. But beyond that, it's going to be watching all the numbers that you would watch, consumer confidence, interest rates, new home starts and see where we come up. Because the new home starts that fell in second half of 2022 will have an impact in 2023 at those come up for completion, because our new home business did well in Q4 that's lower margin, as you know. But going into '23, we expect that to slow down for sure. So just on the Allied side, what was the growth rate, the difference between Allied and your -- the Lennox brands in the fourth quarter? I'll be honest with you, Steve, I don't think it was radically different than what we saw in the direct to dealer business because we had a [really solid] and we had a record year in our Allied business, they did a tremendous job. They gained more than 100 basis points of share, along with our Lennox business. So it was a pretty good quarter for both businesses. So when you kind of roll forward into the first half, and you talk about some destocking, what kind of split would you expect here in the -- how is it trending in January? And then what kind of split would you expect as this destock cycle move into the first half? Yes, in the Allied business, we would expect a slower start because, as Joe said, I mean, they had a good year. I mean in Q4, they grew very well, Lennox grew well as well. Allied grew faster than Lennox in Q4. And as we take this forward, I would expect 20% of our business, which is on through two step distribution to have a slower start to the year versus the rest of our business, which is dealer direct. Can you just provide a little bit of color on that? So is it like -- is it a 10% difference, at 20%? I mean there's there's just a lot of moving parts here, so it'd be helpful to figure out just roughly what kind of split you would expect there between -- effectively between sell through and sell in we're asking for the industry, if you even want to put it that way. I think that's a fair question and we are wondering the same questions in that. I mean, 30 days in, we haven't noticed a huge difference between the two. So like time will tell. Some of it also comes down to how distributors are thinking of the year and what kind of signals and tea leaves they are reading about demand this year. But sometimes when these air pockets come in, in the two step model, they last a few weeks. We haven't started experiencing that yet. We're just prepared to experience that. Unfortunately, we don't have any numbers. And your guess is going to be as good as mine, Steve. And then one last one. What was the actual, like -- just what were the inefficiencies from this year changeover, what exactly was that? Quite a bit, I mean when we -- so I guess get three different areas, right? First is in our factories, we had to turn over different lines, which means there was work stoppage at different lines at different times. We did that on a rotating basis. But clearly, there was labor inefficiency and underutilization as we went through that. Second, we had to air freight and look at some prebuy of components at elevated prices just to make sure we met all the deadlines and pull that together. And I think finally, within our own distribution network, we have to spend extra because we had to manage old SEER, new SEER, different freights, move it around. So I mean those would be the three different things that we looked at, right, is just air freight and component costs, factory and efficiency and then additional distribution cost. I wanted to check on the Commercial business, not so much the sort of internal self help initiatives. We can see that clear green light on Slide 11 for that, but more just on the sort of the market as you see it. Classically, there was a lag, but a relationship from Residential trends to light Commercial unitary, just wondered how you see that dynamic playing out this time, if you have seen any more kind of choppiness in project activity or so forth amidst higher interest rates and weaker housing starts activity. So Julian, you're right. Historically, there has been a lag with the correlation. If there is one this time, I think it's going to be extended because the industry has such long lead times, and there's still a pent-up demand because of number of replacements that were converted into repair over the past few years. So if a unit broke, historically, they could have replaced it, but they chose to repair it. So when we talk to our larger customers, we don't notice any change in their replacement plans, their spend plan, their capital. Now that could change. But so far, we haven't noticed that. We see a lot of customers still talking about 2025 and how they plan to significantly upgrade their facilities and HVAC system with the low GWP refrigerants to meet their carbon footprint goals and get better ESG values out of it. So we have not noticed anything in the short term. The lead times are still anything from 24 to 52 weeks. And then we start hitting 2025, which we do expect a lot of the key accounts to start ordering more and planning for 2025 replacement. But we're watching it closely, the same data that you would look at, Julian, from -- everything from ABI to other indexes. But so far, it's more lead time and supply constrained, not demand constrained. And then just looking at Slide 10, you laid out some of those moving pieces below the top line around the net material cost inflation. So I noticed, I think the components headwind that you expect went up a bit from what you'd said in December, any more color around that? And when you're looking at that net material cost inflation of sort of minus $35 million, what are the latest thoughts on how that headwind is weighted sort of first half versus second half? Are you getting a good tailwind in the back half or it's closer to flat? We get some tailwind in the back half. I mean, it's right now heavily weighted but at the same time, we haven't locked in the commodities for the second half yet. So some variability still exist in that. The component piece is higher and we wanted to be upfront. Itâs higher than what we thought. But some of the items such as compressors, variable speed motor, given the supply constraints that everybody is facing, I think vendors have decided to charge higher, and we clearly had to play a part in that. So yes, the component costs are higher and that just puts more onus to get pricing. That's why you see pricing, we increase our range and talk about 1.50 to 1.75 versus just a flat number of 1.50. So different moving pieces. We'll remain committed to offsetting material costs with pricing and keep doing our best to bring components down. And if commodities ease in the second half, the number could get better. So really just want to dig in a little bit more on kind of share gain momentum. One, on the Commercial, I think you said you're kind of getting back into that emergency replacement. I'm just wondering, one, how easy it is to kind of gain back share and kind of gain dealer distributor trust? And then on the Residential side, I think you mentioned like you're -- for the first time in a while, you're positioned for share gain. Just maybe elaborate a little bit around, is it just kind of having everything together organizationally and with the plants or is it, hey, you think you got better products, better availability, et cetera? Yes, I think on the emergency replacement side, Jeff, I think it's very difficult to distinguish. Where you compete there is on availability and price and we've got the distribution network, we've got the people who sell it. In 2022, we're just short of product. So it's a matter of once again, I'm just replenishing those distribution channels such that we have the product available, and we feel we're back in the game on emergency replacement and we expect that to happen over the course of 2023. And if I could just answer the Residential piece, Jeff. We have been constrained in '18 on the appropriate product mix, the appropriate inventory. And we are excited about the new leadership there. We're excited about being back with fully stocked warehouses. We are -- I think put some specific efforts around sales excellence. I mean all of those efforts are coming to fruition. So historically, as we go back through regulatory transitions, we do always win more share because at least we believe that our products are superior and our current design is going to lead us to greater benefits. So I think that's what gives us confidence on the Residential side. And then I don't know if I missed this. But any kind of update on the noncore divestiture and when you think that might be complete? Jeff, we just kicked off a process literally this week, the teasers went out. So we're waiting for, once again, the NDAs to flow in and engagement to take place with potential suitors. We should have more news for you on the first quarter call, but we're out of the gate with the process. And we're excited about what lies in front of us with the portfolio of businesses that we have in 2023. There are no further questions, and this concludes Lennox fourth quarter and full year 2022 earnings call. The earnings release with GAAP to non-GAAP reconciliations, today's presentation slides and the webcast link for today's call are available on our Web site at www.lennoxinternational.com. This webcast also will be archived on the site for replay. Thank you for joining us today.
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Good day, ladies and gentlemen, and welcome to the GE HealthCare Fourth Quarter 2022 Earnings Conference Call. My name is Michelle, and Iâll be your conference coordinator today. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for todayâs conference, Carolynne Borders, Chief Investor Relations Officer. Please proceed. Thanks, Michelle. Welcome to GE HealthCareâs fourth quarter and full year 2022 earnings call. Iâm joined by our President and CEO, Peter Arduini; and Vice President and CFO, Helmut Zodl. Our conference call remarks will include both GAAP and non GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in todayâs press release and in the presentation slides available on our website. During this call, weâll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. Thank you, Carolynne, and good morning, everyone. Welcome to our first earnings call as an independent publicly traded company. Iâm incredibly proud of the work our team has done to complete the spin-off of GE HealthCare. The energy across the company is palpable and thereâs tremendous excitement and focus around our purpose to create a world where healthcare has no limits. I want to thank all of our team for their commitment to the customers and patients we serve as we chart our own path forward and execute on our precision care strategy. Letâs start with our fourth quarter 2022 performance. We delivered strong organic revenue growth of 13% year-over-year, reflecting an acceleration from prior quarters in 2022. These results were driven by continued robust demand, backlog fulfillment and improved pricing. In addition, supply chain pressures that we experienced earlier in the year eased continuing the trend that we experienced in the third quarter. Adjusted EBIT margin was 17.1%. Volume and price improved in the fourth quarter, but this was offset by inflation, mix, planned R&D investments and some foreign exchange headwinds. We saw sequential margin improvement as volume and price grew and logistics cost eased with the disciplined optimization actions weâve taken across the business. This result is equivalent to 16.1% on a standalone basis. Adjusted EPS was $1.31 impacted by incremental interest from debt issuance, partially offset by volume and price. In order to facilitate comparability on a go-forward basis, weâve also provided a standalone adjusted EPS result of $1.06. Free cash flow was $987 million in the fourth quarter as we start to see supply chain issues ease and we improved collections year-over-year. Total company book-to-bill, which is a calculation of orders to revenues growth, was 1.07 times led by strong orders growth in imaging and ultrasound. For the full year, organic revenues grew 7% year-over-year at the higher end of our mid-single-digit growth target. And while China was impacted by COVID for most of the year, we saw increased momentum coming out of the fourth quarter and we expect that to continue. Globally, we have a healthy backlog heading into 2023 as customers continue to invest in imaging ultrasound as well as PCS. 2022 adjusted EBIT margin was 15.6% impacted by inflationary pressures and planned R&D investments. This is equivalent to the 14.5% on a standalone basis. Looking ahead, we have several levers to expand margin through strategic pricing, enhancing volume and mix and increasing variable cost productivity as discussed at our Investor Day. Adjusted EPS for the full year was $4.63 and our standalone adjusted EPS result was $3.38. Free cash flow was $1.8 billion in 2022, and Helmut will discuss guidance in greater detail here later in the call. Overall, weâre pleased with the strong performance we delivered in 2022. Weâre encouraged by the easing supply chain pressures and the resilient end market demand weâre seeing across our portfolio, and we remain confident in our ability to drive sustainable value creation in 20 23. Iâd also like to highlight an important announcement we recently made with the ointment of Dr. Taha Kass-Hout as our Chief Technology Officer. Taha is leading our science and technology organization as well as our efforts to drive growth through clinical research and the advancement of our digital and machine learning capabilities, specifically our Edison Digital Health Platform. He joins us with deep clinical, digital and machine learning experience. Taha was most recently Vice President of Machine Learning and Chief Medical Officer at Amazon. Taha also served as the FDAâs first informatics leader and heâs joining the team at a perfect time as we accelerate investments in digital products and software. As we invest in our business, weâre continuing to make progress on enhancing our operating model to better serve customers through a simplified more decentralized model And weâre reducing bureaucracy in the organization, optimizing our geographic footprint and implementing platforming initiatives across key product lines. And with that, let me hand the call over to Helmut to walk through our financials and business segment performance. Helmut? Thanks, Pete. Letâs take a closer look at our financial performance in the fourth quarter. Revenues of $4.9 billion increased 8% year-over-year and were up 13% on an organic basis. Reported product revenues increased 13% versus the prior year, led by Imaging, Patient Care Solutions and Ultrasound. Reported Services revenues declined 2%, mainly due to the unfavorable impact of foreign exchange, partly offset by growth in our cloud services business. We are pleased with product growth in the quarter that will lead to additional services revenue. Now, Iâd like to talk about the actions we are taking to increase margins through improving delivery, price and cost. As always, delivering for our customers is our number one priority. Weâve improved our access to key components, measured by the number of red flag parts that indicate constraints and made good progress in the requalifying, redesigning and tool sourcing parts. In fact, weâve requalified 7,700 parts since COVID began and we are now seeing the lowest level of red flag parts since the first quarter of 2021. Weâve also applied lean principles to improve our supply chain. A great example of how we apply lean across the organization was our CTâs output initiative this past quarter. We align factory output with customer installations to drive better end-to-end planning. This resulted in an improved customer experience and early deliveries in the quarter. We have achieved a positive sales price index for the third consecutive quarters now. And this price accretion occurred across each of our four segments in the fourth quarter. We are pleased with our progress in pricing and have good visibility on price in our backlog. We are driving variable cost productivity for logistics and material cost reductions. We are also reducing our real estate footprint and optimizing our commercial organization. Turning to Imaging. We saw strong organic revenue growth, up 18% year-over-year, led by molecular imaging, CT, MR and surgery. Our customers remain focused on expansion of capacity and access to care. Looking ahead, we expect imaging demand will remain healthy supporting top line growth. Following strong revenue growth in the fourth quarter, we expect growth will normalize as we move into the second half of the year. Segment EBIT margin declined 120 basis points year-over-year. We realized improving volume and price, but this was offset by headwinds from inflation, mix and planned investments. Our double-digit investment in imaging R&D this quarter reflects our commitment to innovation and commercial growth. During the quarter, NPIâs driving growth included our Revolution Apex CT with a scalable detector as well as Ascend CT with improved imaging and workflow. Globally, weâve already seen success using deep learning from improved image quality in MR with AIR Recon DL. We are now very proud to be the first to extend those capabilities to Omni Legend PET/CT with precision deep learning available in select regions. Sequentially, EBIT margin increased 120 basis points, driven by improved volume and price. We expect margin expansion in 2023 to be driven by NPIs, commercial execution, supply chain productivity, platforming, and digital. Overall, we are investing to drive technology leadership and have the opportunity to increase market share with strategic NPIs digital and AI leadership and a focus on care pathways. In addition, weâre making progress with platforming initiatives that provide a more consistent user experience and drive parts sensitization and cost reduction. Moving to Ultrasound. Customer demand continues to be strong in both hospital and other care settings. Organic revenues were up 7% year-over-year, driven by price, improvements in sourcing and fulfillment. Our customer-led innovation continues to drive healthy revenue growth with strong performance in radiology and primary care, womenâs health and cardiovascular, and our handheld business delivered strong growth in the quarter. We see continuous traction with our differentiated products, including our recently launched Voluson Expert 22 premium ultrasound system for womenâs health and the Vivid E95 ultrasound addition advanced cardiovascular ultrasound. Both innovations are powered by advanced artificial intelligence tools to help improve workflow, efficiency and productivity. Segment EBIT margin contracted 120 basis points year-over-year. In the fourth quarter, price improved. However, we experienced headwinds from inflation and planned investments. In line with our lean philosophy, we are shifting from stocking inventory to make to order. This initiative is streamlining cost and reducing lead times. We are enabling this through redesign of parts, dual sourcing and platforming. This is an initiative that we will be leveraging across the company, providing additional margin opportunity. Looking ahead, we are driving sustainable growth in ultrasound through continuous NPI innovation, commercial excellence and localization. The integration of BK Medical is also well on track. Letâs move to Patient Care Solutions. PCS had a solid fourth quarter, following a year of supply chain challenges, which improved as we exited 2022. Organic revenue was up 10% year-over-year, driven by volume and price improvement. Higher volumes were driven by supply delivery and the launch of NPIs. Looking ahead, we expect fulfillment to improve as we ship our backlog. PCS margins increased 410 basis points compared to fourth quarter 2021, with improving price and volume as well as lower cost, partially offset by inflation. The cost favorability drove roughly half of the upside and was associated with one time items. Sequentially, PCS margins increased significantly due to improving volume and price. We remain focused on innovation and commercial growth investments with R&D investment up double digits in the fourth quarter. Key highlights from the quarter include continued momentum with patient monitoring, including Portrait Mobile and CARESCAPE Canvas in Europe. Moving to Pharmaceutical Diagnostics. Organic revenues were up 2% year-over-year impacted by fewer procedures in China due to COVID as well as normalization of U.S. customer inventory. Margins were impacted due to inflationary pressures on raw materials and lower volumes. The team is executing on the pricing strategy that is built around the value we deliver for our customers and patients. We continue to monitor the COVID situation closely in China and expect elective procedures to pick up when COVID infections decline. In the fourth quarter, we introduced a new GE HealthCare CT motion injector that will provide better product integration and an improved patient experience. Next, Iâll walk through our cash performance for fourth quarter and full year 2022. During the quarter, we generated $987 million of free cash flow, up year-over-year with improvement in supply chain and collections. With our focus on prioritizing patients and customers, our free cash flow declined for the full year 2022. But as we enter 2023, we are well positioned to deliver on our backlog. This is a robust and consistent cash flow generating business with a disciplined capital allocation strategy. We are committed to a strong investment-grade rating and will employ a disciplined capital allocation framework. This will include paying down debt and evaluating accretive M&A that advances our precision care strategy. Our balance sheet is strong. As expected post spin, our day one cash balance was $1.8 billion. Day one leverage, excluding pension, was approximately 2.5 times, in line with our expectation. Let me now move to our 2023 financial outlook. For the full year 2023, we are reaffirming our guidance that was introduced on January 10, calling for year-over-year organic revenue growth in the range of 5% to 7%. We expect stronger organic revenue growth in the first half of the year with more normalized growth in the second half. We continue to expect fully adjusted EBIT margin to be in the range of 15% to 15.5%, reflecting an expansion of 50 basis points to 100 basis points over the 2022 standalone adjusted EBIT margin of 14.5%. This includes the impact of approximately $200 million of standalone costs. Margin expansion in 2023 will be back-half weighted as transformation initiatives take hold. We expect 2023 adjusted EPS in the range of $3.60 to $3.75, reflecting a growth of 7% to 11%. This compares to 2022 standalone adjusted EPS of $3.38, and includes the impact of the standalone costs. We are assuming a tax and adjusted tax rate of 23% to 25%. Free cash flow conversion is expected to be 85% or more for the full year. Our cash flow outlook assumes that the legislation requiring R&D capitalization for tax purposes is repealed or deferred beyond 2023. The free cash flow impact of this legislation is approximately 10 points of free cash flow conversion for the year. Second half free cash flow will be substantially higher than the first half of the year, in line with typical cash seasonality due to increased inventory as well as interest and compensation and benefits payments in the first half. Our teams are well positioned to deliver on our 2023 commitments. Weâre investing in organic growth as demonstrated by the introduction of over 40 new products at the RSNA event in November. And with workflow solutions enhanced by AI to help healthcare professionals and health systems overcome the top operational challenges they face today, while also improving outcomes for patients. Weâre deepening customer engagement across care pathways, including oncology and cardiology, and weâve announced some exciting new products, collaborations and investments that are changing the way healthcare is delivered. On the M&A front, we recently announced the agreement to acquire IMACTIS, an innovator in CT Interventional guidance. This acquisition, although small, is our first as an independent company and is a great example of the type of transactions that we plan to pursue. They had innovative technology in fast-growing areas that enhances the breadth of capabilities we can deliver for customers. In Imaging, weâre very proud to announce SIGNA Experience, an MR platform that was â comes with an integrated set of solutions, including workflow capabilities, an intuitive user interface and deep learning AI applications such as Air Recon DL, which has already reduced scan times for approximately 5.5 million patients globally and is increasing efficiency for clinicians. Globally, demand for minimally invasive surgical procedures continues to grow. In the U. S., for example, ambulatory surgical centers are performing more than half of all outpatient procedures. And to serve patients, our customers need efficient imaging capabilities. As a leader in surgery imaging, which is a high-growth and high-margin business for us, we see increasing opportunities for our OEC 3D C-arms to provide precise 2D and 3D images interoperably for many of clinical applications being done in ASCs, including spine, orthopedics and pulmonary work. During the fourth quarter, we also announced an $80 million investment in one of our facilities in Norway to increase capacity for our contrast active pharmaceutical ingredient. In our PCS business, weâre excited about our Portrait Mobile patient monitoring solution currently available in Europe. This technology allows us to expand care into sub-acute therapy areas, giving providers the ability to monitor patients that arenât always monitor as thoroughly as they should be. In Ultrasound, weâre excited about the customer demand for our Vivid Cardiac Ultrasound portfolio, which again is equipped with AI features that help improve consistency of assessing the heart muscles function and significantly reduce the time it takes to acquire those imaging measurements. And in digital, we continue to make progress with the development of our Edison Digital Health Platform to help solve customer challenges. We have several pilots underway at hospital systems in the U. S. and Europe and we expect that cloud-based or on-prem Edison Digital Health Platform will be a vendor agnostic platform aggregating data from multiple sources and enabling integrated care pathway management. Our goal is that customers will benefit from a wide range of AI applications developed by us and third parties to make better connected decisions, operate more efficiently or better detect trends and populations. These are just a few of the examples of products and partnerships weâve invested in to advance our capabilities in precision care. Thank you, Peter. Iâd like to ask participants to please limit yourself to one question and one follow-up, so that we can take as many questions as possible during the one hour that we have allotted for the call. Michelle, can you please open the line? Thank you. [Operator Instructions] One moment for your question. Our first question comes from Drew Ranieri with Morgan Stanley. Your line is open. Good morning. Good morning and congratulations to you and the GE HealthCare team on the spin-off and Pete welcome back to more earnings calls. Just maybe first to start on the macro environment. I think thereâs still some concerns that there will be a capital spending slowdown at some stage. Your results, I mean, youâre pointing to ongoing demand across your portfolio, but maybe just help us kind of square what youâre seeing from the demand side globally? Maybe what product categories are getting probably the most interest? And do you think there has been any risk of pull forward of capital sales just over the past year or anything? And I have a follow-up. Thanks. Thanks, Drew, for the question. Yes, I would just say if I go around the world and start maybe in Europe, thereâs still robust demand at this point. I think as weâve talked about in the past with â in different audiences, that from different sick funds and tenders to really drive incremental imaging capabilities post-COVID. And so we see that continuing here into the future. China has obviously been a topic in the news. And although COVID was challenging in Q4, there was quite a bit of investment that we saw going into imaging in particular and in an ultrasound. And we believe as the market there works through some of the challenges with COVID in Q1, but thereâs just a lot of pent-up demand. If you think about 2022 and even 2021 with some of the lockdowns, thereâs a lot of people that have a lot of procedures to be taken care of. And in the United States, we were pleased to see with different customers that have reported as well as customers that myself, Helmut and the team have been talking to regularly are seeing improving conditions. It doesnât mean that theyâre back to, say, 2019 levels. But it means that weâre seeing improvements in labor costs. The demand or backlog, meaning the need for imaging procedures, both in our interventional diagnostic and ultrasound modalities is still at a record high. And so we look as we start the year that the demand is running strong. I think part of the piece that we all keep an eye on is CapEx prioritization in the United States. I think all indications are that people are being prudent and prioritizing for sure, but many of the technologies that we offer tend to be prioritized to the higher end of the list. And what customers tell us is, in many cases, that added productivity to get patients diagnosed faster, sooner, get them healthier and out of the system is one of the key attributes that we bring. So weâre cautiously optimistic, but Iâd say with our large backlog that we have starting the year, we feel good about the horizon that we see here over the next couple of quarters. Got it. Thank you. Maybe one other question just on the margin expansion, maybe more for Helmut. But can you maybe help us just bridge the 50 basis point to 100 basis point of improvement for the year. Maybe just talk about, is this all really gross margin-driven or on the leverage side? But just trying to get a better sense there and maybe how your 5% to 7% organic growth guidance really will drive that margin expansion and if thereâs any particular segments that are really going to be the primary beneficiaries? Thank you. Yes. Thank you, Drew. I think so when we look at the overall margin expansion in the 50 basis points to 100 basis points, there is a number of drivers in there So clearly, volume is a driver, VCP, so we have a cost productivity, improvement in material cost, improvement in logistics cost, and also price is key drivers. So those are really, I would say, those key elements that are driving them with the positive improvement on the margin side. If you look at the headwinds against that, weâre still seeing material costs elevated. So especially material cost that is sitting on our balance sheet, in our inventory currently. And we also continue to invest into the business, both for our growth, but also what we are putting innovation investment in R&D into the business. So these are really the offsetting element. So both of those elements together are really driving our 50 basis point to 100 basis point margin expansion and weâre very focused on what is really in our control, which is price, VCP and obviously volume execution. Thatâs really how we look at the margin expansion for 2023. If I give you a little bit more color, Drew, on the four segments, obviously, as youâve seen in the fourth quarter, the Imaging segment, very strong with its growth. We expect that growth, as we work through our backlog, continue especially for the first half. So thereâs going to be more growth on the imaging side. But also all our other three segments, Ultrasound, PCS and PDx, we expect to grow in that range as we have laid out the 5% to 7% as we go forward. So itâs a very good balance as we go into the New Year. Good morning. Thank you very much, and Iâd add my congratulations on your successful spin and your results. And first question for me would be actually around your molecular imaging business, this continues to drive growth in the wider imaging business. Could you help us better quantify the benefits you see there, particularly what percent of your imaging business does this represent roughly? And also in pharmaceutical diagnostics, you have provided the market breakdown between contrast and molecular. But what percent of pharmaceutical diagnostics is radio pharmaceuticals? Itâs a great opportunity. So itâd be great to have any color you can give on that? And just a quick follow-up on pricing. Could you give us an idea of the price â rough price increase you hope to push through for this year? Thank you. Thanks, Ed, for the questions, Yes, Iâll start maybe a little bit with MI and frame it up, and then maybe, Helmut, you can comment a little bit on price. I would start first with saying, yes, I think one of the really interesting things that weâre excited about strategically is weâre the only company out there that actually makes the fuels for molecular imaging as well as has the devices that capture to create the images themselves. Why thatâs important is this rise of different technologies out there called theranostics, this combination of a therapy and a diagnostic together and how you tune the device to the agent whether it be in the neurosciences area such as Parkinsonâs or amyloid beta plaque imaging or other parts of the body. Thereâs a lot of longer-term benefits we think will come that way. Our â in the agent business itself, MI agents are about a third of volume, about two-thirds is contrast imaging agents used in the X-ray equipment. But we believe thatâs going to be a growing area with again newer capabilities coming out of the pharma space that we play a critical role in helping do the diagnostics. On the device side itself, weâve got a great platform, a great team. We do some outstanding work here in the United States as well as in Israel on these devices, probably one of the deeper expertise capabilities on different technologies, whether they be BGO or LSO, different types of PET/CT detectors as well as the CZT expertise we have within our MI devices. And combined between PET and MI, we think that this is going to be continuing growth area. Itâs still at this point compared to MR and CT, a more moderate sized business. But again, with the rise of these new technologies and giving an example of an aging comes out that needs this type a follow-up to actually assess either amyloid beta plaque or other capabilities, we believe our MI technologies out in the industry will really play a key role in helping drive that diagnosis. And then down the road can even play a larger role in the therapy process either dose or delivery of agents. Yes. Thanks, Pete. So Ed, on price, weâre quite happy with the progress weâve been making on price throughout the year. So we started really tracking price on orders last year. So we have both a management system that looks at the orders, but also looks at how much price we have in sales. And in sales, since the second quarter, we have price in our sales or in revenue. It started at the low single-digit. It improved as it went through the third quarter. And we are now for some of our modalities in the mid single-digit level what we are seeing on price. So we were quite happy about how we performed, and we also have good visibility on price for this in our backlog. So we already know what is going to happen and ship here over the next quarters and how much price is in the backlog. Maybe my first question here on the guidance assumptions here. Peter, can you talk about any trends and cancellation rates or cadence that we need to be aware of? When you look at the 5% or 7%, what is pricing? How much of that 5% or 7% do you have visibility given the backlog and the book-to-bill ratios here? Yes, Vijay. Look, good question. We have some actually quite good visibility at this point with carrying a little bit larger backlog than we normally do. One of the advantages of that is we actually have greater visibility out into the distance about what the deals look like, what the margin is on the deal, the timing thereof. And one of the things our operating teams in each of the segments have done a very nice job is actually speaking with customers and getting all the installed base products planned out as far as we can go, which is in many cases, a couple of quarters out, which is longer than we have historically done, but we did that purposely just based on some of the questions within the macro environment. And so that gave us more confidence obviously here about what customers want, when they want it and weâve got some pretty good visibility into that. Other businesses such as ultrasound that have more flow capabilities based on prospecting funnels and stuff, we have quite good visibility as well. So if we look at that backlog, we know what the cost â the input costs are going into that. We have â we know what the price is in the backlog. So again, for those deals, itâs quite good. We clearly have orders coming into the system that will feed into that backlog. We know what our current pricing is. And weâve also either taken some price increases or had some that would cut in. And keep in mind, thereâs a couple of different ways to think about price looking at your configurations and really optimizing them is something that we started last year. And I think thatâs of high value. Our new NPIs, we really focus on getting the right value for the customer and pricing it right the first time, which typically then aligns to making sure that we have the right gross margins associated with it. And then classic price increases on many of our products. So again, the combination of those gives us a pretty good view into how we see the year at this point, but probably more so a better lens on the first half. Understood. Thatâs helpful. And maybe one follow-up for Helmut. Look at EPS guidance here, 7% to 11% between your organic top line assumptions and margin expansion, I think operating profit should be growing close to double digits here. Any â what are you assuming for FX and any below the line sensitivity here on interest expense or other items that we need to be aware of? Yes. So Vijay, we have been obviously tightening up the range on the EPS guide. So the $3.60 to $3.75, we believe is right in the middle. When you look at the upper and lower end of the revenue and the margin expansion guide, so we wanted to tighten that range up. And to the assumption question, so thereâs about 2.5 basis points of negative impact from FX assumed in those numbers, very little below the line. So thatâs really how you should look at it. Yes. And I would just say, Vijay, one of the things is weâve got and weâve talked about improving supply chain. But again, improving isnât back to, say, the good old days. All of our input costs have some added cost to them. Itâs why we put a lot of focus on variable cost productivity. Weâre carrying some inventory from spot buys and things that was at higher rates. And weâre going to see much of that continue into 2023, but we have good visibility to it. And I think as we see how the economy plays out and how that plays out relative to inflation, weâll have better insights about what we can do about it. But again, our first half visibility looks quite good at this point in time. And again, weâre optimistic that weâre going to continue to see improvements throughout the year. Hi, Pete. Hi, Helmet. Thanks for taking the question. One on the top line, one on the margins. Pete, you talked about clearly Q4 results were very strong, 18% in imaging. You talked about the backlog here. Is there any way to quantify this? Is there â I mean, is this somewhat of a catch-up, if you will, and what are your expectations for that for 2023? Clearly, youâre growing well in excess of historical market growth. And I had one follow-up. Yes. Larry, I think particular to imaging, we obviously as well as us and pretty much everyone in other industries with the installed type products had some pent-up demand. And I mean thatâs part of our backlog, right? And we were able to deliver a higher percentage of that. That typically is more in MR, CT, PET/CT, again some of the bigger installation-based products, but itâs affected the whole portfolio at some level. And so, Helmut mentioned the words we focused on making sure that we leaned in on getting the parts that we needed at the right time. It had a little bit of an impact on our cash flow, but we had the components available to ship, which then resulted in the higher growth. And I think with that, weâre going to see that into the first half. Now we would expect that that will start moderating and get back to more classical historic growth rates. But whatâs interesting is you speak with customers again back on the list of their top capital buys are, in many cases, diagnostic imaging equipment, MR ranks up their high. Weâve mentioned the OEC C-arms in our remarks. Anybody thatâs doing any type of surgical imaging and outpatient center, thatâs the preferred device. So itâs quite strong, but we are definitely running at a higher level. And our RPO or our backlog that we have is quite strong. And again, just to emphasize, weâve got good visibility on that into 20 23 and well into the year. Thank you. And Helmut, on â well, sales and margin cadence, appreciate the color. Maybe if you could help calibrate us a little bit more. How much lower do you expect second half organic growth? Is it going to be below the 5% to 7%? And then margins kind of how much lower in the first half, do you still expect to be down year year-over-year? Thanks for taking the question. Larry, So maybe Iâll reiterate how we look at the overall guidance for the full year and quarterly flows. So on revenue, we expect growth to be stronger in the first half, clearly and that is driven by the backlog and also how we have lined up really past and inventory in the first half accordingly. But the good news is going to be that we still expect sequential growth in the â into the second half. So typically, our Q3 and Q4 is higher than our Q1 and Q2. But growth rates, we expect to be slightly lower than what we are seeing in the first half accordingly. So thatâs the side on the revenue. On the margin side, you will see, I think, more of the margin expansion in the second half as we expect some of those productivity initiatives to taking hold, especially around VCP and cost improvements on the gross margin side. And the reason for that is really because we still have, as I think, Pete said that earlier, we still have elevated cost that is sitting in our inventory on our balance sheet. And as we flush that inventory through, we will have lower margins in the first half that then will improve into the second half. And weâre already seeing this based on those red flag parts of how much parts we have, how much parts we have to purchase at spot buys. And so thatâs going to be the side on the margins and more of that in the second half. And maybe Iâll comment on cash flow also just to be clear on that also. So a very large piece of the cash flow given our seasonality in our business we expect to happen in the second half, less of cash is going to be generated in the first half because of interest payments, because of some of the supplier payments that are bigger in the first half as well. So thatâs really how you should look at the quarterly flow for 2023. Maybe you guys can talk a little bit about the competitive environment that youâre seeing, and Iâm thinking in particular in imaging and ultrasound. Curious if youâre seeing any changes. We saw one of your peers this morning canceled some historical orders, which they felt were at a lower price. Is that creating opportunities? Or in general, are you seeing opportunities that are driven by the disruption that this one peer of yours has suffered? And maybe specifically if you can comment on China and how the local strategy is playing out for you guys? Then I have one follow-up after that, but I appreciate this is a long question, so Iâll let you answer that first. Yes, Veronika, I would say, look, from an environment in the marketplace, I would say a little bit just because of some of the dynamics here that thereâs quite a bit of demand thatâs actually out in the marketplace when you look at these backlogs of imaging procedures. And so all of the different players, I think, at some level are having some positive benefits of this market. I mean, again, the prioritization of the CapEx just doesnât apply to GE HealthCare, right? It applies to everybody. And so weâre expecting that thereâs a reasonable healthy amount of demand out there. And everyone at some level has had different experiences and challenges with their supply chain. So there is some similarities. At the same time, we think because of the investments that weâve made over the past few years, we have some products that are winning share more so about the capabilities they bring to patients and customers than a situation where maybe one or two of our competitors are in. And so I mentioned molecular imaging, where weâve got leadership positions. What weâve done in MR with our image quality as well as productivity, our CT surgery, whatâs come out with ultrasound, thatâs how weâre winning the day and in many cases, taking share in different marketplaces. I would say we are really being balanced about what we go after to make sure that we get the right margins and capability around. So thatâs an important part of our overall strategy. I would say to your China question, look, thereâs always been lots of local competitors. In many of our modalities for 10 to 20 years, thereâs been 5x or 4x the amount of competition within China for China versus the rest of the world. And I think, as you know, weâve been competing there for many, many years, manufacturing for over 30. So we have a pretty good handle on it. And with some of the stimulus funds that were â the government put out really at the beginning of Q4, weâve been seeing some robust demand for imaging equipment, in particular, both ultrasound and the whole spectrum of the imaging portfolio. And again, I think weâre going to see that continue into beginning of next year. And so weâve been able to be quite successful we believe in competing against, both multinational as well as local competitors. We see ourselves, in many cases, as local â as a local player in many of our modalities again because of how we actually design and make products in China for China. You have another question? Yeah, I did it, which was China specifically, if you can just remind us what proportion of your portfolio is certified as local now? And when might we hit 100%? Yes. So, Veronika, we have a very large components of our portfolio is localized. And I would say itâs not close to 100%, but not far off 100%, thatâs how I will answer the question for most of our modalities. And we continue to expand that on an ongoing basis because itâs not only the localization of the manufacturing, but thereâs also the innovation in China. So having specific product thatâs really made for China, made in China, thatâs really how we look at it. So innovating for the China market then accordingly. So this is quite high percentages. The teams worked very hard. And we have a long â as Pete said earlier, we have a long history in China. Itâs an important market for us. Our brand is very well recognized, which we are proud of and we are continuing to innovate for customers in China. And I would just to put a finer point, Veronika, I mean, for what we have set as our operating plan for 2023, we have all of that localized and feel quite good about it. As Helmut said, as we bring new products out, one of the big question is, how much youâre going to localize versus not. But for what we need to compete, weâre in a very good position with localized components and that type of recognition thatâs needed in certain types of tenders or constructs to compete. Hi, Pete. Hi, Helmut. Congratulations on the spin and a great initial quarter out of the gate here. So congratulations to the team. Maybe a little bit on new product introductions, MPIs and that is certainly a contributor here. So in the plus 13% overall, I guess what percent of that actually came from new products.? And then when we think about the backlog, what is embedded in there for new products? What percentage of the backlog is going to flow through with newer systems that are recently introduced, letâs say, over the last 12 to 18 months? And Iâll have one quick follow-up on capital allocation. Yes, Anthony, Iâll make some comments and Helmut feel free to jump in. I think again, in this business having new products that bring solutions that solve some of the challenges for customers, in many case, productivity, products that help deal with some of the labor challenges or expertise and then solving big issues for patients. Weâve been quite fortunate with a lot of our launches recently again and some of the classic modalities, MR, CT, we mentioned about the PET system that has integrated AI on it. All of those have played a key role. I think in the fourth quarter, we were in the upper 20s, high 20s or so relative to vitality rate on new products that have been recently launched. My metric typically is if youâre above 20% in that range, thatâs a very good vitality metric, then you were closer to 30% within new products that are out there. I think thereâs quite a bit of demand as we talked about for certain products in outpatient centers and thereâs still quite a bit of demand in updating, in some levels, an older fleet within the acute hospitals around the world. Helmut, do you want to add anything? Yes, I would just add, I think as Pete said, so the innovation and the new products are happening really across the portfolio. I just would call out, itâs happening both on the device and I talked about a couple of those innovation in my remarks, but itâs also happening on the digital side. So a lot of AI and machine learning that happens on the device accordingly, which is really a different way of introducing an NPI. So thereâs a lot of times spend on that by the team, which really helps clinicians significantly both get more productive, but also help better patient outcomes. Yes. And the last part, Anthony, is I think from a service standpoint, as we sell these more highly sophisticated products into the installed base, 12 months out, the probability of capturing that for a service contract because of the sophistication of the product and really the limited amount of other folks that can provide the type of services needed for one of these advanced products will then become more reoccurring revenue growth down the road. And so that type of capture rate involved with leading products, itâs an important part of our equation on growth. Very helpful. And quickly on capital allocation, itâs been dynamic out of the gate here. You did the tuck-in with IMACTIS. We also had the debt recapitalization with the spin. And of course, youâre doing internal investments with contrast, expanded the plant last year. So maybe just high-level comments on capital allocation when we think of internal investment, the debt service out of the gate here post spin, tuck-in M&A and then return to free cash holders? Again congratulations. Thanks. Yes. Thanks, Anthony. So the way we look at our capital location, first and foremost, we are very happy with our strong investment-grade ratings we received last year. This is important for us access to capital, but itâs also equally important for our customers. I mean, Pete just talked about long-term services contracts. People want a strong financial partner that know â they know thatâs going to be with them for many years, sometimes decades only. So this is first and foremost very important. Obviously, investing in the business is a key priority. We increased our R&A investment substantially in 2022, it was up more than $1 billion that we spend on R&D now. And going forward, we expect that to really grow with the revenue. But when you then look at the rest of the capital allocation, obviously, this is a strong cash-generating business. Iâm talking about 85% or more free cash flow conversion. And we will use and deploy that cash to continue to invest organically into the business, but also out of the free cash flow inorganic investment. IMACTIS was one example. Pete and I spent a lot of time with our M&A team to look at opportunities because I think itâs important for us to see what is out there and make sure that we have a good transparency and visibility and then make decisions that are going to be very disciplined for such acquisitions if they fit into our portfolio and AI accretive both at the top line growth, but also from a profitability perspective. Hey, thanks for taking the questions, and I echo everyone elseâs sentiments in the first quarter here. So just want to ask about two metrics that youâre giving to The Street? And what is the book-to-bill ratio? I know thereâs been a lot of questions on it, but would appreciate some historical context in terms of how to think about that 1.07 ratio and how to think about it on a go forward basis? If you could give us any quantitative perspective from prior quarters on the book-to-bill ratio and just how to think about that? And similarly in that vein, Iâll ask my follow-up is, is thereâs about $10 billion in remaining performance obligations, at least as of the filings. And so just if you can, Helmut, elaborate on the length of those obligations, how far those extend out? How those are realized over the coming quarters? And then how to think about that $10 billion on a go-forward basis? Is that kind of the par level to think about 4G healthcare as we think about going forward? And if youâll be giving out these kind of metrics going forward? Thank you. Yes. So Ryan, I think to the RPO, we feel good about the Q4 in a book-to-bill ratio of 1.07. And this really I think demonstrated that the markets are strong. The book-to-bill, the way how we define it is really, I think, a quite simple calculation across the whole portfolio. And you mustnât forget, we had quite a large services business in this as well where book-to-bill is 1. Also the PDx business for us as a book-to-bill of 1. So when we look across the portfolio, you will see book-to-bill is actually higher in our imaging products, where we have obviously from taking the order until shipment takes a longer time and weâre quite comfortable with the backlog. Historically, that book-to-bill, I would say, has been running in similar ranges. It would have been up above the 110 level at certain quarters if we look at historically, but itâs running at a very solid basis at this stage. As it relates to our RPO, the RPO, as you mentioned, is a big amount that we have disclosed and weâre quite happy with that backlog. The RPO, the way itâs defined, I want to be also maybe clear on, itâs defined as backlog that is non-cancelable. So we also have backlog that is non â that is cancelable, where we see very, very little, very few cancelations from our customers because theyâre committed to the product, thatâs really how we look at that RPO. And weâre exiting the year at a very strong position both on the RPO side as well as the total backlog. And just to be clear, the RPO, it is $14 billion. I donât know if they did better $10 billion number you quoted came from, but it is $14 billion at the end of 2022. Hey, good morning, everybody. And again, Iâll echo the congratulations here on the quarter and the guide and with the spin and everything. I do want to touch here on China and build on the discussions from prior questions. I think most acknowledge thereâs some level of pent-up demand in that market. I know youâve referenced it, Pete. It might be tough to call right now, but how do you see the China market unfolding here for GE HealthCare in 2023? And really, as we look throughout the year, if thereâs any cadence youâd like us to think about? And then maybe if you could speak to what youâve embedded in the guide for China this year? Yes, Jason, I think â look, I think China, itâs obviously tricky to fully estimate how things will play out. I mean, weâre cautiously optimistic. But again, if you pull the lens back, you look at the market, you take a look at how, in many cases, procedures have been suppressed over the last 18 months at least potentially even 24 months. Things are clearly opening up. And yes, thereâs challenges within the hospitals now with COVID patients and such. But if we think of our own facilities that weâve been able to keep running through Q4 when COVID levels were up 60%, 70% in the environment, we were able to do that with learnings we had from how to run it in the first half of 2022. But weâre now seeing a lot of those rates, particularly in the bigger cities, where a lot of the businesses transacted to drop off quite a bit. And so our estimates would be Q1, I think, is going to be a little bit choppy based on the type of products. If I think of flowable products like our PDx is tied to procedures, probably a lower level of a procedure volume in that quarter versus how we would see quarters two, three and four. But on equipment, we actually would expect that itâs still going to be reasonably strong and itâs driven by a different dynamic, which is the stimulus funds that are out there and requiring products to be taken on install. We also make some products that actually help assist with COVID patients whether it be monitoring events or other products in CT and stuff. So thereâs a bunch of different activities going on, but we would expect that China will continue to ramp throughout the year. And again, we canât predict all the different changes that may take out, but our take at this point in time is Q1 a little bit more tempered and then continue improvement throughout the year. Okay. Thatâs helpful. Thanks, Pete. And then maybe just as a follow-up with respect to price and Iâll come back to that topic here. Pete, you and the team do have a lot of confidence in price and tailwind supporting growth here going forward. I know weâve talked a lot about price increases on products and goods, but I guess how are you seeing pricing play out in the services side of your business? And are you anticipating similar pricing power there over time with your service contracts? Thank you. Yes. No, I think, look, I would just say on broader pricing, our job to get price really comes down to is to bring more value to the customer to help solve their problems. And the more we can create products that really solve a bigger issue, we can get our fair share of more pricing. And so having your organization, your teams aligned and thinking that way, having a gross margin focus as well, is something weâve just driven across the company and build into compensation plans, build into focus. So I think thatâs an important part. And it goes for both equipment and services. Obviously, with services, thereâs a different type of horizon, usually multi-year how you think about it. Weâre also investing in innovative new services, whether they be different types of remote capabilities, Again, when you think about the brake fix side of our business, these are highly valuable products that being down for half a day or a day can wipe out a lot of profits for the institution. So if you have capabilities to be able to keep the product up running, customers are able to pay more for that. The other aspect is there are other services with an S on the end and some of those are digital on how you run your operation or how you can run capabilities. And in that â those cases, we can obviously ask for even higher prices as well as better margins than what we would have from normal brake fix. But weâve been successful at taking selective increases. And again, with more of these advanced products, the related service contracts for them will also have a tail of better pricing down the road as well. Good morning. This is Yuan, and thank you for taking our questions. I have a couple of them related to the pharmaceutical diagnostic business. First, on PDx. PDx was listed as a revenue priority. Can you elaborate between molecular imaging and contrast media, which segment would drive the growth you guys have mentioned? And I have a follow-up question. Thank you. Yes. No, look, good question. PDx is definitely a growth driver. And again, I just want to reframe as we talked about all of our businesses, all of them have growth opportunities and all of them have margin expansion. But PDx has more of a growth priority upfront. And I think itâs both sides of the PDx Health, both our contrast business as well as our MI business, weâre expecting to see accelerated growth. As an example, in contrast with the growth of the imaging procedures that weâre talking about, anything that needs a contrasted-based capability like a vascular study with our leadership position in contrast ionized imaging, weâre going to continue to see that increase. So I think thatâs one. On the molecular imaging side, again, with the rise of new agents that are out there, whether they be in prostate or different neuroscience-based agents, we would be expecting to see that pick up. I would say the contrast agent is probably more of a temporal or closer 2023 impact. And the MI is probably has more of an impact later in 2023 into 2024, just to kind of give you a profile of how we think about the growth there. Got it. Thank you for the helpful color there. The follow-up question is our understanding is that the product such as Optison for ultrasound and with Vizamyl for Alzheimerâs disease PET scan maintaining a healthy gross margin. Can you maybe help us understand what prevents competitors to lower price and gain a larger market share, while at the same time, what stops other companies entering the space and making generic compounds of this product? Thank you. Yes. No, itâs a good question. I would say, first of all, they do have healthy margins. One of the interesting things about our pharmaceutical diagnostic business, both in contrast and MI that you had referenced, is the proprietary nature of how we make it, I would say, the capital hurdles of the infrastructure and then the sophistication of the infrastructure. And just to give an example, if there is a typical molecule in the pharmaceutical world that comes in a 10 ml vial and a generic comes out, people can have five ready, they can be shelf stable, they can be shipped around the world, stored for two years. Many of our agents are made that have half-lives, theyâre radioactive, right, that only can live for maybe a couple of days. And so you literally have to have production capabilities cyclotron setup, a distribution network on how to deliver radioactive capabilities to pharmacies, we have that infrastructure and that know-how. And so even though some of these will have patents on them, the actual barriers to entry are more around the infrastructure and capability than they are based on particular IP and the normal pharmaceutical space. Thank you. So, look, in closing, let me just reiterate how excited Iâm about our path forward as we invest in our business. The emphasis on innovative products in high-growth areas, many we talked about today, we delivered strong organic revenue growth and sequential margin improvement in the fourth quarter and we expect to capitalize on robust demand in 2023, as we execute on our revenue drivers across each of our segments. And weâre also optimizing the business through lean. Weâve given quite a few examples today, and this gives us confidence in our ability to reach our margin targets and drive meaningful shareholder value over the long-term. Our full team is united and excited about our purpose-driven approach for the benefit of customers and most importantly patients that we serve. So thank you for joining us today, and we look forward to seeing you at one of our upcoming conferences that will attend. Thank you very much. Thank you, ladies and gentlemen. This concludes todayâs conference. Thank you for participating. You may now disconnect. Everyone, have a great day.
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EarningCall_884
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Thank you. Good afternoon. Thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO; and John Morici, CFO. We issued fourth quarter and full year 2022 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 1 month. A telephone replay will be available by approximately 5:30 p.m. Eastern time through 5:30 p.m. Eastern time on February 15. To access the telephone replay, domestic callers should dial 866-813-9403 with access code 328900. International callers should dial 929-458-6194 using the same access code. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statements. We have posted historical financial statements, including the corresponding reconciliations, including our GAAP to non-GAAP reconciliation if applicable. And our fourth quarter and full year 2022 conference call slides on our website under Align quarterly results. Please refer to these files for more detailed information. Thanks, Shirley. Good afternoon, and thanks for joining us. On our call today, I'll provide an overview of our fourth quarter results and discuss a few highlights from our 2 operating segments, Systems and Services and Clear Aligners. John will provide more detail on our Q4 financial performance and comment on our views for 2023. Following that, I'll come back and summarize a few key points and open the call to questions. You'll note that we have shortened our formal remarks in order to leave more time for Q&A. Overall, I'm pleased to report fourth quarter results that reflect a more stable environment for doctors and their patients than the recent quarters, especially in the Americas and EMEA regions, as well as parts of APAC. For Q4, trends in consumer interest for orthodontic treatment, patient traffic in doctors' practices and iTero scanner demos improved. However, the unfavorable effect of foreign exchange on our fourth quarter and full year 2022 results reduced our revenues and margins significantly. Despite the large impact of unfavorable foreign exchange, Q4 revenues of $901.5 million, increased sequentially from Q3, reflecting growth in Systems and Services as well as a slight increase in Clear Aligner shipments. This is the first quarter in a year that our total revenues and Clear Aligner volumes increased sequentially. As we move through 2023 and hopeful that we'll see continued stability in an improving operating environment, but remind everyone that the macroeconomic situation remains fragile. Regardless, we are confident in our large untapped market opportunity for digital orthodontics and restorative dentistry. We anticipate 2023 will be an exciting year for new innovation at Align, and we'll begin to commercialize one of the largest new product and technology cycles in our 25-year history. The Q4 Systems and Services revenue of $169.9 million were up 7.8% sequentially and down 21.3% year-over-year. On a constant currency basis, Q4 Systems and Services revenues were impacted by unfavorable foreign exchange of approximately $2.7 million or 1.5% sequentially and approximately $11.2 million or 6.2% year-over-year. For Q4, Systems and Services revenues increased sequentially, driven by growth in the Americas and EMEA regions, reflecting continued sales of intraoral scanners, especially the iTero 5D. Q4 sequential growth also reflects continued growth of our scanner rental programs as well as initial deployment of a certified preowned, what we call CPO scanner leasing rental program with desktop metal, that I'll describe in more detail shortly. We continue to develop new capital equipment opportunities to meet the digital transformation needs of our customers, and DSO partners, which is a natural progression for our equipment business with a large and growing base of scanners sold. As our scanner portfolio expands and we introduce new products, we increased the opportunities for customers to upgrade to make trade-ins to provide refurbished scanners for emerging markets. We expect to continue rolling out programs such as leasing and rental offerings that help customers in the current macroeconomic environment by leveraging our balance sheet and selling the way our customers want to buy. On a year-over-year basis, Q4 services revenues increased primarily due to increased subscription revenue, resulting in a larger number of field scanners. We also had higher non-case systems revenues related to our scanner leasing rental programs previously mentioned. To help accelerate the adoption of digital orthodontics and restorative dentistry, in Q4, we announced a strategic collaboration with Desktop Metal to supply iTero Element Flex scanners to Desktop Labs, one of the largest lab networks in the U.S. serving general dentists. The iTero Element Flex is now the preferred restorative scanner for desktop labs and will connect dentists directly to a suite of offerings from desktop labs that simplifies the digital design and manufacture restorations with both traditional and digital technologies. Our collaboration with Desktop Metal reflects our commitment to a relationship we expect will evolve and expand to being advanced restorative workflows to market. We see significant opportunities to enable dentists to use scan data directly order restorative services or printed ready digital files from Desktop Labs that can be used for 3D printing in their offices. In addition to iTero scanners, we're also excited about extending the benefits of the Align Digital Platform, including the Invisalign System and Exocad software to Desktop Labs' customers as well. For Q4, total Clear Aligner revenues of $731.7 million were down slightly, 0.2% sequentially and down 10.3% year-over-year. On a constant currency basis, for Q4 Clear Aligner revenues were impacted by unfavorable foreign exchange of $13.4 million or 1.8% sequentially and $56.4 million or 7.2% year-over-year. Q4 total Clear Aligner volumes of $583,000 was up slightly sequentially, reflecting growth in the Americas and EMEA regions, offset by lower APAC volumes primarily in China. For the Americas, Q4 Clear Aligner volumes were down slightly sequentially, reflecting lower ortho cases, especially teen starts as compared to the typical higher teen season in Q3. Offset primarily by an increase in adult patients from the GP dentist channel. For Q4, Clear Aligner volume from DSO customers continue to outpace non-DSO customers. For EMEA, Q4 Clear Aligner volume increased sequentially in all markets and across products, especially recently launched Invisalign Moderate, iGO Plus and iGO Express, which enabled GP dentists to treat a broader range of cases, mild-to-moderate types of malocclusions and can easily be integrated in a wide range of restorative treatments in a dental practice. EMEA had a strong sequential growth in the teen market segment with continued demand for Invisalign Teen case packs, which are available in France and Iberia as well as Invisalign's first treatment for kids as young as 6 years old. APAC, Q4 Clear Aligner volumes were lower sequentially due primarily to China, which continues to be impacted by COVID. In Q4, ongoing COVID restrictions and lockdowns in China persisted throughout the quarter. Outside of China, APAC volumes increased sequentially led by Japan, Taiwan, India and Southeast Asia markets. On a year-over-year basis, Q4 Clear Aligner case volumes reflected increased shipments led by Korea, India, Japan, Taiwan and Vietnam. While the easing of COVID restrictions in China and the more recent downward trend in COVID infection rates are encouraging, many uncertainties remain, including the lingering impacts from COVID across the population and the time and effort needed to restore consumer confidence. For the other non-case revenues, which include retention products such as our Vivera Retainers, clinical training and education, accessories, e-commerce, and a new subscription programs such as our DSP, fourth quarter revenues were down slightly sequentially and up double digits year-over-year. For retention and e-commerce products, Q4 revenues were relatively unchanged from Q3. We are pleased with our subscription-based programs like DSP, which increased sequentially and year-over-year and expect to continue expanding DSP offerings in other regions. For Q4, the total number of new Invisalign trained doctors decreased sequentially due primarily to fourth quarter being a seasonally slower period for clinical education with holidays, et cetera, as well as fewer trainings in China and Brazil. This was offset by somewhat significantly higher numbers of new Invisalign doctors trained in EMEA. Teen orthodontic treatment is the largest segment of the orthodontic market worldwide and represents our largest opportunity for Clear Aligner sales to orthos. We continue to focus on gaining share from traditional metal braces through team specific sales and marketing programs and product features, including Invisalign First for kids, as young as 6, which was up sequentially across all markets. For Q4, total Clear Aligner teen cases were down sequentially due primarily to the impact of COVID in China as well as seasonally fewer team starts in North America as compared to Q3. According to the December gauge report, which tracks approximately 1,000 orthos in the United States and Canada, new patient exams for teens slowed in Q4, while new patient exams for adults improved slightly. A smaller pool of potential teen patients may put pressure on traditional orthos and cause them to go between clear aligners and wires and brackets, especially those practices that have failed to understand the significant benefits of adopting more efficient digital workflows, believing metal braces are more profitable. In EMEA, Q4 was a record quarter for teen case starts. On a year-over-year basis, Q4 teen case starts were relatively unchanged. For Q4, Invisalign First increased year-over-year and was strong across all regions. Invisalign First Clear Aligner treatment is designed for predictive results and a positive experience while addressing the unique needs of growing children from as young as 6 to treat Phase I. For the full year, Invisalign Clear aligner shipments for teens and young kids was approximately 733,000 cases, our teen case mix overall was a record 31% of Invisalign cases shipped for the year. Finally, in Q4, the total number of doctors shipped was 82, 900 doctors, a slight decrease due primarily to the impact of COVID in China and off our Q3 '22 high point, which included a major DSO onboarding in North America. For the full year 2023, we also shipped to the highest cumulative number of Invisalign trained doctors over 124,000 doctors, reinforcing our commitment to doctor-directed care for Clear Aligner treatment to achieve the safest and best possible clinical treatment outcomes for patients. Thanks, Joe. Before I go through the details of our Q4 results, I want to comment on 2 items in our fourth quarter financial results. Restructuring and other charges, during Q4 2022, we incurred a total of $14.3 million of restructuring and other charges, of which $2.9 million was included in the cost of net revenues and $11.5 million included in operating expenses. Restructuring and other charges included $8.7 million of severance-related costs and $5.6 million of certain lease terminations and asset impairments, primarily related to rightsizing operations in Russia in light of business needs. Second, non-GAAP tax rate. In Q4 2022, we changed to a long-term projected tax rate for our non-GAAP provision for income taxes. Our previous methodology for calculating our non-GAAP effective tax rates included certain nonrecurring and period-specific items. That produced fluctuating effective tax rates that management does not believe are reflective of the company's long-term effective tax rate. We have recast non-GAAP results for our provision for income taxes. Effective tax rate, net income and diluted net income per share for each reporting period in 2022 to reflect this change. We did not make any changes to the results reported for 2021 as reflecting the change in our methodology for the computation of the non-GAAP effective tax rate was immaterial to our 2021 results. Refer to the section in our Q4 press release titled Recast financial measures for prior periods in 2022 for a tax rate change under unaudited GAAP to non-GAAP reconciliation for further information. Now for our Q4 financial results. Total revenues for the fourth quarter were $901.5 million, up 1.3% from the prior quarter and down 12.6% from the corresponding quarter a year ago. On a constant currency basis, Q4 2022 revenues were impacted by unfavorable foreign exchange of approximately $16 million or approximately 1.7% sequentially and approximately $67.6 million year-over-year or approximately 7%. For Clear Aligners, Q4 revenues of $731.7 million were flat sequentially, primarily from lower ASPs, mostly offset by higher volumes. On a year-over-year basis, Q4 Clear Aligner revenues were down 10.3% and primarily due to lower volumes and lower ASPs, partially offset by higher non-case revenues. For Q4, Invisalign ASPs for comprehensive treatment were flat sequentially and decreased year-over-year. On a sequential basis, ASPs reflect the unfavorable impact from foreign exchange, partially offset by higher additional aligners and product mix shift. On a year-over-year basis, the decline in comprehensive ASPs reflect the significant impact of unfavorable foreign exchange, product mix shift and higher discounts partially offset by higher additional aligners and per order processing fees. For Q4, Invisalign ASPs for noncomprehensive treatment decreased sequentially and year-over-year. On a sequential basis, the decline in ASPs reflect product mix shift, unfavorable impact from foreign exchange and higher discounts, partially offset by higher additional aligners. On a year-over-year basis, the decline in ASPs reflect the significant impact of unfavorable foreign exchange, product mix shift and higher discounts, partially offset by higher additional aligners and per order processing fees. As we mentioned last quarter, as our revenues from subscriptions, retainers and other ancillary products continue to grow and expand globally, some of the historical metrics that focus only on case shipments do not account for our overall growth. In our earnings release and financial slides, you will see that we've added our total Clear Aligner revenue per case shipment, which is more indicative of our overall growth strategy. Clear Aligner's deferred revenues on the balance sheet increased $56.4 million or 4.8% sequentially and $171.9 million or up 16.2% year-over-year and will be recognized as the additional aligners are shipped. Q4 2022 Systems and Services revenues of $169.9 million were up 7.8% sequentially, primarily due to higher scanner volume, services and exocad revenues, partially offset by lower ASPs and were down 21.3% year-over-year primarily due to lower scanner volume and ASPs, partially offset by higher services revenue from our larger installed base of scanners and increased nonsystem revenues related to our certified preowned and leasing and rental programs. Q4 2022 Systems and Services revenue were unfavorably impacted by foreign exchange of approximately $2.7 million or approximately 1.5% sequentially. On a year-over-year basis, System and Services revenue were unfavorably impacted by foreign exchange of approximately $11.2 million or approximately 6.2%. The Systems and Services deferred revenues on the balance sheet was up $9 million or 3.4% sequentially and up $42.9 million or 18.7% year-over-year, primarily due to the increase in scanner sales and the deferral of service revenues included with the scanner purchase, which will be recognized ratably over the service period. Moving on to gross margin. Fourth quarter overall gross margin was 68.5%, down 1 point sequentially and down 3.7 points year-over-year. Overall, gross margin was unfavorably impacted by foreign exchange on our revenues by approximately 0.6 points sequentially and 2.2 points on a year-over-year basis. Clear Aligner gross margin for the fourth quarter was 70.8%, down 0.1 point sequentially due to lower ASPs and higher warranty and restructuring costs, partially offset by improved manufacturing absorption and lower training costs. Clear Aligner gross margin for the fourth quarter was down 3.4 points year-over-year, primarily due to lower ASPs, increased manufacturing spend as we continue to ramp up operations at our new manufacturing facility in Poland and a higher mix of additional aligner volume. Systems and Services gross margin for the fourth quarter was 58.8%, down 4.6 points sequentially due to lower ASPs and higher inventory costs and manufacturing inefficiencies, partially offset by higher services revenues and lower freight costs. Systems and Services gross margin for the fourth quarter was down 5.9 points year-over-year for the reasons stated previously. Q4 operating expenses were $505 million, up sequentially 6.2% and down 3.6% year-over-year. On a sequential basis, operating expenses were up $29.5 million, mainly due to restructuring and other charges and our continued investment in sales and R&D activities, along with higher consulting expenses. Year-over-year, operating expenses decreased by $18.6 million primarily due to controlled spend on advertising and marketing as part of our efforts to proactively manage costs as well as lower incentive compensation, partially offset by restructuring and other charges. On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges and amortization of acquired intangibles related to certain acquisitions, operating expenses were up were $459.7 million, up 3.7% sequentially and down 7% year-over-year. Our fourth quarter operating income of $112.7 million resulted in an operating margin of 12.5%, down 3.6 points sequentially and down 8.9 points year-over-year. Operating margin was unfavorably impacted by 0.9 points sequentially, primarily due to foreign exchange and lower gross margin. The year-over-year decrease in operating margin is primarily attributed to lower gross margin, investments in our go-to-market teams and technology as well as unfavorable impact from foreign exchange by approximately 4.2 points. On a non-GAAP basis, which excludes stock-based compensation, restructuring and other charges and amortization of intangibles related to certain acquisitions. Operating margin for the fourth quarter was 18.3%, down 1.9 points sequentially and down 6.4 points year-over-year. Interest and other income expense net for the fourth quarter was income of $2.7 million compared to a loss of $21 million in the third quarter and a loss of $0.9 million in Q4 of 2021, primarily due to net foreign exchange gains from the strengthening of certain foreign currencies against the U.S. dollar. The GAAP effective tax rate in the fourth quarter was 63.8% compared to 40.7% in the third quarter and 13.2% in the fourth quarter of the prior year. The fourth quarter GAAP effective tax rate was higher than the third quarter effective tax rate primarily due to decreased earnings in low tax jurisdictions as -- and an increase in the amount of U.S. minimum tax on foreign earnings. Our non-GAAP effective tax rate was 20% in the fourth quarter and reflects the change in our methodology that was discussed earlier. Our non-GAAP effective tax rate was 11.5% in the fourth quarter of the prior year in 2021, which does not reflect the change in our methodology. Fourth quarter net income per diluted share was $0.54, down sequentially $0.39 and down $1.86 compared to the prior year. Our earnings per share was unfavorably impacted by $0.04 on a sequential basis and $0.22 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $1.73 for the fourth quarter, up $0.10 sequentially and down $1.10 year-over-year. Note that the prior year 2021 non-GAAP net income per diluted share or prior year 2021 EPS does not reflect the Q4 2022 change in our methodology for the computation of the non-GAAP effective tax rate. Moving on to the balance sheet. As of December 31, 2022, cash and cash equivalents and short-term and long-term marketable securities were $1 billion, down sequentially $99.5 million and down $255.1 million year-over-year. Of our $1 billion balance $387.9 million was held in the U.S. and $653.7 million was held by our international entities. In October 2022, we purchased approximately 848,000 shares of our common stock at an average price of $188.62 per share through a $200 million accelerated share repurchase under our May 2021, $1 billion stock repurchase program. We have $250 million remaining available for repurchase under this program, and we plan to repurchase this remaining amount starting in Q1 2023 through either -- either or a combination of open market repurchases or an accelerated stock repurchase agreement, completing the repurchases in Q2 of 2023. Q4 accounts receivable balance was $859.7 million, flat sequentially. Our overall days sales outstanding was 85 days, down 1 day sequentially and up approximately 7 days as compared to Q4 last year. Cash flow from operations for the fourth quarter was $144.7 million, Capital expenditures for the fourth quarter were $53.2 million, primarily related to our continued investment to increase aligner manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations less capital expenditures, amounted to $91.5 million. We exited fiscal 2022 with a strong balance sheet, including $1 billion in cash and investments, a healthy cash flow position and no long-term debt. As we announced with our earnings, Align's Board of Directors has authorized a new $1 billion stock repurchase program to succeed the current $1 billion program. This new $1 billion program reflects the strength of our balance sheet and our cash flow generation as well as management and our board's continued confidence in our ability to capitalize on large market opportunities in our target markets and trajectory for growth while concurrently returning capital to our shareholders. Now turning to our outlook. As Joe mentioned earlier, we are pleased with our Q4 results and what appears to be a more stable environment in North America and EMEA. We are cautiously optimistic for continued stability and improving trends as we move through the year. However, the macroeconomic environment remains fragile. And given continued global challenges in the and uncertainty, we are not providing full year revenue guidance. We would like to see improvements in the operating environment and consumer demand signals, including stability in China before revisiting our approach. At the same time, we are confident in our large, untapped market opportunity for digital orthodontics and restorative dentistry and our ability to make progress towards our strategic initiatives. We intend to focus on the things we can control and influence, which includes strategic investments in sales, marketing, technology and innovation. For full year 2023, assuming no additional material disruptions or circumstances beyond our control, we anticipate our 2023 non-GAAP operating margin to be slightly above 20%. With this backdrop for Q1 2023, we anticipate Clear Aligner volumes to be down sequentially, primarily due to weakness in China from COVID, partially offset by some stability from our Americas and EMEA regions. We anticipate Clear Aligner ASPs to be up from Q4 2022, primarily due to higher pricing and non-favorable and favorable foreign exchange rates. We anticipate iTero scanner and services revenue to be down sequentially as the business follows a more typical capital equipment cycle. Taken in total, we expect Q1 2023 revenues to be about flat to Q4 of 2022. We expect our Q1 2023 non-GAAP operating margin to be consistent with our Q4 2022 non-GAAP operating margin as we continue to make investments in R&D and other go-to-market activities. For 2023, we expect our investments in capital expenditures to exceed $200 million. Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international expansion. Thanks, John. In closing, we're pleased with our fourth quarter results and the improved trends in sequential growth we saw in the Americas and EMEA regions and parts of APAC that reflect a more stable environment for doctors and their patients. While still very early and many uncertainties remain, we're hopeful that we'll see continued stability across the business and regions, especially in China. As we continue to work through these challenges, we're confident in our ability to focus on our customers and deliver key technology and innovation that furthers our leadership position in digital orthodontics and restorative dentistry. We are balancing investments to deliver shareholder value through transformative digital orthodontic solutions unique to Align. Align is a purpose-driven business, and we are committed to helping doctors transform smiles and change lives of millions of people around the world. Over the last year, we have flooded our customer base with a lot of new technology that represents one of the largest new product cycles in our history. But there is still a great deal of room for innovation. In the next 1 to 3 years, you should expect to see new platforms from us that will continue to revolutionize doctors' practices and patients' expectations for doctor-led treatment. And scanning, making it simpler and faster. In software, saving both doctors and patients more time with improved clinical outcomes. In direct 3D printing, an evolution in both product and material science. These 3 platforms will give doctors tools only dreamt of before with a singular focus to make the Invisalign system the standard of orthodontic and restorative care, and we couldn't be more excited about it. Thank you for your time today. We look forward to updating you on our next earnings call. Joe and John, congrats on seeing the stability return to the business. Maybe I'll start with that point. If you could talk about maybe what's changed versus, say, 3 to 6 months ago, the adult part of the market still sounds maybe a little sluggish, but you also saw that sequential improvement. Teens are holding in. Could you maybe speak to the visibility you have today versus where you sat last summer or in the fall? What has led to the greater confidence in demand forecasting? Jason, it's Joe. First of all, I think we have a more stable macroeconomic environment. Mean obviously, 2022 was pretty unprecedented when you think about China situation, Ukraine situation in Europe, the rapid increase federal reserve rates that really put the economy in a lot of ways. So I mean we're working from a better platform in that sense. And I think, obviously, Powell's comments today and 0.25 increase in all. I mean it shows a little bit of confidence on the Fed's partners and what they're seeing and what they're directing to. So I'd just say, Jason, from a broad standpoint, we feel really good about our portfolio. We feel good about the technology we talk about and all those things. We're just looking for a stable platform from an economic standpoint to operate from. Okay. No, that's helpful. It definitely sounds more macro related than anything else. But that's helpful. And then maybe, Joe, I wanted to pick up on one point you mentioned regarding the bracket and wire piece. It sure seems like maybe a profit motivated decision for docs, maybe shortsighted, but still profit motivated as they focus on the cost of brackets and wires versus that Clear Aligner lab fee. Maybe what do you think it's going to take to reverse that trend back to Clear Aligners picking up meaningful share I guess, especially with teens, do market volumes need to come back in a bigger way to convince doctors to free up more chair time with Clear Aligners? Or is there something you can do on your end to really stimulate that shift back towards Invisalign? Jason, that's a great question. First of all, I mean, doctors are doing what they think are in their best financial interest and from a patient standpoint, too. A stronger economic environment will help in that sense, because they'll have a higher patient traffic and the trade-off won't be as severe in that sense because of the patient throughput. But where we help us in technology and that's why we emphasize the technology developments and the investments that we're making that are really significant as we launch in this year. And like I talked about with just software alone to pick one in the sense of being able to move patients through faster being able to have doctors really do cases a lot faster before with our products like IPP in different areas. So those technology advancements are really important. And then how we put those together in business models like our digital subscription programs really help doctors get over that line, too. So I feel we have a good format to be able to address that going forward. But again, I'll emphasize, we need a market that we can stand on in the sense and predict. Joe, I just want to ask a couple of questions here. I guess, one, just on the Clear Aligner volume guidance for 1Q. It sounds like it's because China, incrementally weaker stability in Americas and the EMEA, you kind of had that in the press release. You got some hedging words in there about primarily due to weakness in China and some stability in the Americas and EMEA. I mean, should we be thinking at this point that your Americas and the EMEA are kind of a baseline here? And I know, obviously, macro can change from here, but assuming that macro change away, are we kind of at a baseline level now in absolute volumes for Americas and the EMEA? And do you think China, could it be a recovery play throughout this year? Are you seeing any early signs of some pickup in some of those big dental hospitals or the new adult standard product there or anything? Jeff, first of all, on the front end with the Western economies is we just see stability. That's what we talked about. That's what we see versus before we saw the market falling away from us. So right now, we see it being stable. And feel better about that point. On China, I mean, uncertainty in China is incredible when you think about billion people being sick there right now or have been sick over the last couple of weeks. And Jeff, I refuse to give a forecast over a number of quarters now because a lot of it has to do with the uncertainty that we see in China and specifically, which our second biggest market in the world. So I don't want to try to forecast China right now. I can tell you now it's a blur for us and very difficult, but just we feel good about where we stand with EMEA and the States from a stability standpoint. We try to reflect as much in our words, what we see for the first quarter for you, too. Understood. And I'm sure there's going to be a lot more questions here on the short-term things. I don't want to look or ask you about the Desktop Metal deal, though. On that, right now, is it all for kind of milling using iTero to connect to the lab there for milling and/or 3D printing of just restorations. Are you guys doing any early work with them on 3D printing of Clear Aligners? And just kind of again kind of update us maybe with your most recent thoughts on when we might start seeing 3D printing of the aligners in the office and kind of your competitive advantages you think you can -- as Align carve out in that kind of setting? Yes, Jeff, that's a good question. The Desktop Metals is primarily we think about a restorative play, how labs play a huge role and restore a dentistry with general dentists. I mean, they're really strong partners in that sense. What Desktop Metal represents is you see a lot of 3D printing going on. There's some really great resin development around restorative types of things, dentures, different areas the Desktop Metal leads in and our iTero scanner can really help with that, too. Also, we have a vision of ortho restorative where you use our orthodontic procedures in order to reduce the amount of tooth loss mass that often comes with restorative procedures, too, that we'll work together with Desktop about. The idea of printing aligners and standard types of STL kind of processes from a 3D standpoint. I don't see that. And honestly, Jeff, I'm not one to think that doctors should turn their offices into production facilities. 3D printing is hard. The materials are difficult. There's a lot of doctors actually trying it, but I feel like doctors are much better being physicians and doctors in that sense than trying to run a manufacturing operation. Even in that first case to try to seal the deal and really lock that patient in as a pain customer? Jeff, I just think there are some things that kind of make sense from a productivity standpoint and some things that don't. Maybe the technology changes to the point, Jeff, will have a different conversation. But as it stands today, I really don't believe that. I was wondering if you could talk about, one, how you sort of think about the OpEx spend in terms of particularly sales and marketing in this environment? Do you sort of -- obviously, with the uncertain demand profile, are there things that you're doing incrementally in fourth quarter and the first quarter that sort of switch that spend around? Yes, I think what we always look at, Elizabeth, this is John. We're always looking at trying to find the right return on investment. So as you see some of the markets stabilize and start to come back that we see, that's where we'll continue to make investments. And as we see volumes come back, we'll invest even more. Like we talked about some of the stability in Americas and EMEA. So we'll also look at trying to find the right return on investment. And as those markets stabilize and come back, you'll see us continue to invest in there. And as we said, last year, we kind of had to pair some of that back based on the conditions. And ideally, we could be in a better situation where we can make additional investments this year. That makes sense. And maybe I was wondering if you could talk a little bit more about the GP demand profile, because it was interesting how that was sort of holding up on a relative basis. I heard what you said, obviously, about the teen commentary. Is it something about that market or maybe the lower price point per case or anything like that, that would sort of be impacting that? I'd be just curious to get more color on that. I think in your prepared remarks, you talked about the GP dentist sort of strength versus the ortho on a relative basis in the quarter. So I was wondering if you could talk more about sort of the underlying color about why that -- why you sort of think that is at this point? Yes, that's a good question. When you think about it, we have -- we're an elective procedure, right? And so someone is going to go to an orthodontist on a procedure like this to have teeth straighten. With the GP dentist, there is patient traffic there constantly with cleaning and restorations and different things. And so just it's an area right now where -- since it's not just elective procedures there, we feel GPs are just seeing more patients than an ortho would when you compare period to period. Maybe for the first one, John or Joe, can you just talk about the 5.5% price increase for 2023? The 1Q guidance is lower cases, lower scanner and services but revs flat. So clearly, ASP benefits. And I think you realized the 5.5%, the doc stays on comprehensive or goes to 3 x 3. But how do we think about what flows to realized ASP, John, is that sort of a, I don't know, a plus 2% or 3% from the 4Q '22 levels when we think about 1Q '23 and into the balance of '23? That's a good way to look at it, John, because you're going to have some cases that kind of carry over where they kind of order them and they get shipped a little bit later. And then you're right, you're going to have some mix shift between the 3x3, which is kind of the same price and then the full comprehensive. So 2% to 3% in that first quarter is about in that range. Okay. Go ahead, Jon. I'm sorry, I know it was to clarify. That was just 2% to 3% sequential, John, correct from the 4Q to 1Q? Okay. And sorry, the second question, just on the op margin, I think you said 18% non-GAAP for 1Q greater than 20% for the year. I'll just sort of load up a modeling question here. Do we think about a sequential improvement for each of the quarters throughout 2023? And then -- that might be for John. And Joe for you. Just talk to us on how you're comfortable on that OM guide, when you still have a lot of moving parts with the economy, you've got what's going on in China? I think you framed it as a fragile environment. How do you get comfortable with that OM guide there's enough wiggle room, I suppose, in the OpEx where you feel you could titrate spend accordingly? Yes, I'll take the modeling question, John. Yes, you would expect that just like we have in maybe prior years and so on, as you start to get that volume leverage, you'll start to see some of that margin improvement as you go throughout the year. So kind of starts at that lower point and you would model it to see some improvement as you go through the year. And like we said, total year slightly above the 20%. And John, on the OM guide and the confidence is related to what we see right now and what we think is some macro trends that are much more stable than what we've experienced before. So from that, we understand our costs, and we know what we have give and take. And John and I watch it closely and we obviously manage it as a percentage of the total revenues are 2. So revenues have to adjust. We have to adjust to. But again, I think we know what the levers are in this business. And within the context of stability, we feel we can manage to the numbers that we've given. Joe, I just wanted to kind of follow up on your comments about starting to commercialize. Obviously, product and technology cycle that you seem very excited about in that sort of ortho and restorative vision. I guess could you maybe just kind of help crystallize that for us in terms of how that kind of come to market in 2023 and the kind of type of investment that the company needs to make to kind of go after that opportunity? Nathan, overall, obviously, we do spend a significant amount on R&D in the business. And the foundation of that is the history of Align because basically we realize we're a revolutionized digital orthodontics overall. But what we see is it's not just invention for inventions sake, we're always after, how can we do these cases faster, how do we do them more predictably, how do we make it simpler for doctors, a better treatment for patients overall and experience? And just to give you one statistic, right? So versus wires and brackets, which you talked about in the script. On an average, we do patient cases 5 months fast and 35% fewer visits to a doctor. And you do that from technology, right? You do that through remote monitoring, you do that through the consistency of your algorithms and moving teeth and knowing when those seats are going to land as long as patients were. And so the technology I talked about in those 3 areas, first of all, whether it's scanning, we get better on scanning every year. AI is a real important part of that because through AI, you can anticipate a lot of things move these scans through a lot faster. Inventions last year like IPP, Invisalign Personal Plan, those kinds of technologies really reduce the traffic and communications between a doctor and us in the sense of setting up treatment plans. And lastly, 3D printed devices, as I mentioned, has always been the holy grail because we're the biggest 3D printer in the world, but we don't really 3D print devices, we print molds, which you vacuum form over top of it. When you vacuum-form over top of a mold, you can't control wall thickness as you can in 3D printing. And all think this is really critical to move teeth. So all these inventions take a lot of time and money overall, but we just see a huge opportunity for us to be able to increase clinical efficacy, efficiency for doctors and patient experience, and that's why we're so excited about it. Okay. Great. And then just a quick clarification. On the adult side, cases were up 7% sequentially and it sounds like you saw a modest improvement in North America. I think that was the case in APAC as well. I guess I didn't hear reference to adult as you're talking about EMEA. I guess, was the -- kind of adult dynamic kind of more in -- when thinking about the Western economy is more in North America. Just curious if you also saw the same thing play out in EMEA as well? If I get the question right, Nathan, I mean, EMEA was great, both adults and teens. We felt good about it. They came -- you always go around, I call it, the dark side of the moon in Europe in the third quarter, right? But when they came out from the third quarter, we had a good fourth quarter from that. And so we felt good on both the adult side and the teen side in Europe. I always struggle with this number that you really haven't grown the number of docs and it's been a while. And I understand that when demand is down, you don't ship to docs every quarter. But even the ones that are registered Invisalign users haven't really grown. And I guess my question is, is there an issue with that? Like why hasn't that number really expanded over the last 4 to 5 quarters? And do you need it as part of your growth algorithm to keep expanding the number of doctors? Is it just a change in culture in the world right now? Or is it competitive pressures? Or is it just harder to find docs, who are willing to do this? Because the penetration of Clear Aligners would suggest there's a lot of doctors out there that could be doing this. I mean, doctors both on the orthodontic side and on the GP side. I mean, obviously, you're right about that. And obviously, we expand a lot globally, too. So everything you said is true. I'll just give you one word on your questions on China. China is China is like -- it's down. We ship the thousands of doctors in China, we can't ship to right now. And that's the answer to your question since why it's gone down. There's no systemic overall issue in the sense of us being penetrated to the point that we can't buy more doctors, it's just we can't escape the downdraft of China right now. And your equation is right. It's new doctors, doctors ship to as well as utilization. That is -- those are 2 key metrics that help us grow our business. Can I ask a quick follow-up? You talk about the need to see consumer demand signals improving. And how far ahead can you actually see that? Meaning -- is it -- is there something in ordering and planning? Like can you see 3 months ahead or 6 months ahead in terms of you're starting to see demand increase? Or is it really real time, like we've made -- we're starting to see an inflection point? I guess it gets to the point of like what do you need to see in terms of consumer demand? How far forward can you look before you can really feel comfortable that there's been an inflection plan? Kevin, when we look at things, we're a real-time business, obviously, when you have 3D freebies like we do what we make. And there's no leading indicator that would say it hasn't or squared of overnight, 90%. But what we watch closely are the consumer confidence indices in the States and Europe where we can get good wins. Now they're more confirming than they are predictive in what we're seeing but they reflect the, I think, best from a demand standpoint of what we can expect in the consumer confidence indices that we see both in Europe and the States have flattened out or turned slightly positive in the last month or so. I wanted to ask one to kind of go back to a couple of us, who are trying to get at. You guided to a full year op margin above 20%, and you're a little bit below that now, of course, probably transient. The question being, do you need sequential improvements in sales to then drive the sequential improvements in op margins through the year? Like how should we be thinking about that? Or are you prepared to kind of deliver that 20% even if let's say, were just stable through the rest of the year rather than improving? Yes, it's a good question. I mean we would expect as we start to see demand as it stabilized as things change in the world and give us a better operating environment, we would expect to see some sequential improvement in revenue as you go through the year. And that would help us get some of the leverage that we need from an op margin standpoint. Great. Just a follow-up to that last question, just to clarify, I understand you're not giving the full year guidance from a volume perspective. But if you do continue to see the environment is what you're saying sustained where it is today or get slightly better? You are in a position to grow volume year-over-year in 2023. And then just a separate question on subscription offerings, particularly in retainers. And I'm curious how that's resonating with customers today as another revenue driver for the practice. And when do you think that, that will be material in terms of contribution? I can start on the volume. I mean we would expect -- we're watching a lot of the signals closely. We tried to give more color around Q1 and the rest of the year will play out as things as things in the world change to the situation. So we'll watch volume closely. But like I said, we would expect some sequential improvement as you go forward through the year. But -- we're not getting into the specifics of what it is for total. It's Joe, on the DSP program, originally, that was targeted primarily at retainers or orthodontists because a lot of orthodontists are making their own retainers in the back room and picking up for wires and brackets. And so we signed up, we also obviously do the touch-up cases with that too is 10 aligners less. That's worked out well. And we -- I think what you're referring to in the end is that's a subscription program to the doctor but we also have a subscription program we offer from the doctor through the patients, and we're implementing that now. There's a lot of enthusiasm from our doctors about that because it becomes a reoccurring revenue stream for them that they haven't many of them haven't tapped into before. And so we feel good about that. And we'll be working closely with our doctors to implement that more fully this year. Also on a couple of just real quick, some are very fast. First, on China. I think you mentioned that you used the word on more, which is kind of understandable. But any updated thoughts on BPP or any [indiscernible] Can you tell what's going on there while the COVID situation is ongoing? Or is it just kind of a box. And then I also wanted to ask on the tax rate, the non-GAAP tax rate, you called out 20% in 4Q, should we sort of assume that the tax rate go forward? On China, BPP, I mean, obviously, that program over there, we talked about it several times, it's in Tier 3, Tier 4 cities. It's really not in the middle of our portfolio. It was picked up by some Chinese competitors. We're primarily private over there. We will sell the public hospitals. The program is not exclusive in that sense, too. So may we feel like we can manage in China right now around this fine. Well, thank you, everyone. We appreciate your time today. This concludes our conference call. We look forward to speaking to you at upcoming financial conferences and industry meetings, including Chicago Midwinter, IDS and AAO. If you have any follow-up questions, please contact our Investor Relations line. Have a great day.
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Welcome to the Q4 and Full Year 2022 Harmonic Earnings Conference Call. My name is Latif and I will be your operator for todayâs call. [Operator Instructions] Please note that this conference is being recorded. Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonicâs fourth quarter and full year 2022 financial results conference call. With me today are Patrick Harshman, President and Chief Executive Officer; and Sanjay Kalra, Chief Financial Officer. Before we begin, Iâd like to point out that in addition to the audio portion of the webcast, we have also provided slides for this webcast, which you may view by going to our webcast on our Investor Relations website. Now going to Slide 2. During this call, we will provide projections and other forward-looking statements regarding future events or future financial performance of the company. Such statements are only current expectations and actual events or results may differ materially. We refer you to documents Harmonic filed with the SEC, including our most recent 10-Q and 10-K reports and the forward-looking statements section of todayâs preliminary results press release. These documents identify important risk factors, which can cause actual results to differ materially from those contained in our projections or our forward-looking statements. And please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP basis. These metrics, together with corresponding GAAP numbers and a reconciliation to GAAP, are contained in todayâs press release, which we have posted on our website and filed with the SEC on Form 8-K. We will also discuss historical financial and other statistical information regarding our business and operation and some of this information is included in the press release. The remainder of the information will be available on a recorded version of this call or on our website. Well, thanks, David, and welcome, everyone, to our fourth quarter call. In the fourth quarter, Harmonic closed out 2022 with another period of excellent results. Revenue was a record $164 million, EPS was $0.17 and adjusted EBITDA margin was over 16% as both business segments were again solidly profitable. Our Broadband segment grew revenue 38% year-over-year and contributed EBITDA margin of 21%. Video segment transformation continues with fourth quarter SaaS revenue of 51% year-over-year and segment EBITDA margin over 9%. This impressive fourth quarter and full year results demonstrates the tremendous market success and execution momentum we are carrying into 2023. We are entering the year with strong demand, unique technology and competitive differentiation and continuing confidence in our ability to deliver on the multiyear growth plan we outlined in our September 2022 Analyst Day. Now taking a closer look first at our Broadband segment, we again delivered excellent financial results that reflect both a healthy broadband market and expanding breadth and depth of our technology leadership position. Segment revenue was $96 million, up 4% sequentially and 38% year-over-year. Segment gross margin was over 47% and adjusted segment EBITDA margin was 21%, demonstrating consistently improving operating leverage. Sensing the worst of the supply chain disruption risks are behind us, some customers slowed orders as a step towards normalizing advanced purchase lead times. Nonetheless, we again exited the quarter with near-record backlog and deferred revenue. Our sustained broadband growth is a result of both the robust end market and strong go-to-market and project execution. The quarter-end modem served grew to $15.2 million, up 218% year-over-year. And we again added several new customers during the quarter, bringing the number deploying our solution to 91, up 25% year-over-year. Among these new wins is our first Asia-Pacific Tier 1 operator an account we expect to begin to scale in 2023. Looking ahead, we are confident about both our 2023 and multiyear growth prospects. Our global pipeline of new account relationships is excellent, aided by growing industry recognition of our technology and deployment execution leadership. Two areas of rapidly expanding leadership to highlight are DOCSIS 4.0 and Fiber-on-Demand. In the DOCSIS 4.0 area, we have made great strides with both variants of the standard, ESD and FDX and we are actively supporting on customers in advanced demonstrations and trials of these technologies. In the fiber area, our converged PON plus DOCSIS solution is unique and gaining increasing recognition from both existing and prospective customers as a powerful competitive advantage. Although we only recorded modest fiber revenue in 2022, we are entering 2023 with several new design wins, good order backlog and a trajectory that is in line with our 2025 fiber growth target. Regarding 2023, more generally, the full year growth outlook that Sanjay will share momentarily, is supported by our year-end backlog, deferred revenue and the existing plans of our current customers with only very modest contribution assumed from new accounts. To be clear, we are confident about winning new accounts in 2023, both large and small. And for now, we are conservatively assuming these new wins will drive significant revenue and growth starting in 2024 and beyond, supporting our multiyear growth targets. As a reminder, in our mid-September Analyst Day, we laid out an aggressive 3-year growth plan that calls for over $820 million of revenue and 28% EBITDA margin in 2025. As we closed a very successful 2022 and head into 2023, we are pleased with our continued financial execution, we are excited about our increasingly strong technology and leadership position in the market and we are confident in our ability to continue to execute our overall strategic plan. Turning now to our Video segment. Here also, we delivered an excellent quarter. Fourth quarter segment revenue was $68.3 million, up 7% sequentially, although down 21% year-over-year when compared to an extraordinarily strong fourth quarter in 2021. SaaS transformation execution continues to be the highlight, with record quarterly revenue of $10.5 million, up 51% year-over-year. As a result, quarterly gross margin was 59.9%, also up year-over-year and adjusted segment EBITDA margin was over 9%. Full year segment gross profit and adjusted EBITDA margin finished ahead of the guidance we provided at the beginning of the year despite the loss of business in Russia and Ukraine, an encouraging result. As you will recall from our September Analyst Day, our video business strategy has two pillars: taking a leading position in the growing streaming SaaS market, particularly for live sports; and maximizing profit from the traditional video appliance market, with a financial focus on gross profit and EBITDA. Our full year 2022 results are fully in line with our longer-range projections and support our continued confidence in the execution of this plan. Our streaming SaaS growth was again driven principally by larger media accounts expanding their consumer footprints and live sports content rights and correspondingly expanding consumption of our servers. The World Cup was a notable international success in the fourth quarter and SaaS usage exceeded our expectations and feedback on the quality of service we delivered was excellent. During the quarter, we also again secured several new SaaS contracts, including for Blue Chip North America Sports Services that will launch later this year. We continue to see live sports streaming and the movement of legacy broadcast workflows to the cloud is attractive and growing opportunities. And with our recent successes, our brand and technology leadership in high-quality streaming is strengthened. While SaaS transformation continues to be the headline, our video client sales pipeline remains solid, including in Europe, where we are pleased to say we are not seeing an impact from macroeconomic headwinds. Putting it altogether, we remain confident that our transformation in video to consumption-driven streaming SaaS is working and we are on track to achieve the targets we laid out for you in our September Analyst Day. As a reminder, this plan calls for greater than 45% compounded annual SaaS growth through 2025, consistent profitability and return to mid-teens EBITDA segment margin. Our full year 2022 Video segment results, the high-profile streaming services we are now powering and the new wins we have recently secured and our full year 2023 guidance, all demonstrate we remain on track to achieve these objectives. Thanks, Patrick, and thank you all for joining us today. Before I discuss our quarterly and annual results as well as our outlook, Iâd like to remind everyone that the financial results Iâll be referring to are provided on a non-GAAP basis. As David mentioned earlier, our Q4 press release and earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP that are discussed on this call. Both of these are available on our website. We finished the year delivering another quarter of strong financial results and our strong balance sheet at year-end positions us well for continued growth in 2023. Before reviewing our quarterly financials in more detail, Iâll briefly review the Q4 and full year 2022 key highlights here on Slide 7. For the fourth quarter, we reported record revenue of $164.3 million, with strong gross margins of 52.7%. We also generated strong adjusted EBITDA of 16.2% and EPS of $0.17. Our balance sheet remains solid, ending 2022 with a cash balance of $89.6 million while reducing convertible debt by $37.7 million. For the full year 2022, our total revenue was a record $625 million, up 23% as broadband revenue increased over 60% and video SaaS revenue increased 63% year-over-year. Adjusted EBITDA of $86.5 million, increased over 50% year-over-year. Diluted EPS increased 62% to $0.55. We exited the year with near record backlog and deferred revenue of $457.1 million. Now, letâs review our fourth quarter financials in detail. Turning to Slide 8, again, total Q4 revenue was $164.3 million, up 5.5% on both a sequential basis and year-over-year basis. Looking first at our broadband business segment, Q4 revenue was $96 million, up 4.5% sequentially and 37.7% year-over-year, reflecting continued current customer ramp up and newer customer launches, including modest fiber revenue generated during the quarter. In our video segment, we reported Q4 revenue of $68.3 million, up 7% sequentially and down 20.7% year-over-year, with the comp being a very strong Q4 2021. Our video revenue included SaaS revenue of $10.5 million, up 51.3% from prior year, once again ahead of our expectations. We had one customer representing greater than 10% of total revenue during the quarter. Total Comcast Corporation contributed 48% of total revenue. Total company gross margin was 52.7% for Q4 â22, up 180 basis points sequentially and 220 basis points year-over-year, reflecting increased gross margins in both of our business segments. Broadband gross margin was 47.6% for Q4, up 260 basis points sequentially and 730 basis points year-over-year. This improvement was due to several factors, including a favorable products and services mix, which included high margin non-recurring services, our strategic inventory investments in 2022, modest improvement in freight rates and improved pricing. Video segment gross margin was 59.9% in Q4 â22, up 60 basis points sequentially and 110 basis points year-over-year. We have seen a strong overall gross margin improvement over the past 2 years as Q4 video gross margins have risen 370 basis points from 2020 and 110 basis points from 2021 respectively primarily due to SaaS continuing to scale. Moving down to the income statement on Slide 9, Q4 operating expenses were $63 million, up 3.2% sequentially and 8.5% year-over-year. The increases were primarily due to increased research and development to support the growth of our broadband business and the ongoing strategic transition of video segment to SaaS. Adjusted EBITDA for Q4 â22 was $26.6 million or 16.2% of revenue, up 88 basis points versus Q4 â21, comprised of $20.2 million from broadband, representing 21% of segment revenue and $6.4 million from video, representing 9.3% of segment revenue. This all translated into Q4 EPS of $0.17 per share compared to $0.13 per share in Q3 â22 and $0.16 per share for Q4 â21. We ended the quarter with calculated diluted weighted average share count of 117.3 million compared to 113.2 million in Q3 â22 and 110.5 million in Q4 â21. The sequential increase is primarily due to the issuance of shares for settlement of the premium for convertible debt conversions upon maturity in December and an increase in outstanding convertible debt dilution and the dilutive effect of outstanding RSUs and options resulting from the increase in our average stock price during the quarter. Turning now to the order book, we reported new December bookings of $130.2 million. The book-to-bill ratio was 0.8% for the fourth quarter, which was in line with our expectations. For Q3 â22 and Q4 â21, our book-to-bill ratios were 1.1% and 1.7%, respectively, which is higher than what we have seen historically. Thatâs because in the past few quarters, some customers ordering patterns were affected by the challenging supply chain landscape. As supply chain conditions improved, we expected this ratio to normalize and approach the historical benchmark. Consistent with that, our book-to-bill ratio for the full year was 1.04%. Turning to the balance sheet on Slide 10, we ended Q4 with cash of $89.6 million compared to $105.3 million at the end of Q3 â22 and $133.4 million in Q4 last year. The net $15.7 million sequential decrease was primarily due to a cash payment of $37.7 million for the principal of maturing convertible debt. You may recall, we mentioned December â22 debt maturities on our last earnings call. We generated $19.4 million cash from operations, net of investing $19.5 million in inventory. Increased inventory has, by design, enabled us to meet strong demand for our products and to proactively manage our supply chain, enhance product availability and provide us with flexibility to use a higher mix of ocean freight rather than air freight, resulting in improved gross margins. As noted earlier, these investments helped drive the gross margin expansion we reported for the quarter. We also used $1.9 million of cash in purchase of fixed assets and saw a favorable foreign exchange rate impact of $4.9 million. Turning to days sales outstanding at the end of Q4, DSO was 59 comparable to previous quarter and previous year period. Days inventory on hand was 140 days at the end of Q4, up 20% compared to the end of Q3 â22 and up over 50% compared to end of Q4 â21. The increase reflects our continued proactive investment in inventory as we prepare for strong shipments growth during 2023. Regarding capital allocation, our top priority is driving our future growth. As such, we will continue to strategically invest in building inventory to meet the strong demand we are seeing. This strategy has proven highly successful to-date as demonstrated by our revenue and gross margin results for Q4. Having said that, should the supply chain situation improve considerably, we have the optionality to manage our working capital differently and generate additional cash by keeping lower inventory levels. Along those lines, our capital allocation strategy also considers returning capital to shareholders through share repurchases. The timing and amount of any repurchases will depend on variety of factors, including the price of Harmonicâs common stock, market conditions, corporate needs and regulatory requirements. This balanced capital allocation strategy also takes into account anticipated future debt obligations as well as our current debt repayment of $37.7 million in December 2022. At the end of Q4, total backlog and deferred revenue was $457.1 million. This large backlog and deferred revenue reflects strong demand from our large broadband customers and growing video SaaS commitments. Note that approximately 80% of our backlog and deferred revenue has customer request days for shipments of products and providing services within the next 12 months. As mentioned on previous calls, not included in our backlog is additional contractually agreed CableOS business with two of our initial Tier 1 broadband customers. At the end of Q4 â22, this incremental amount was approximately $47 million, down from $60 million last quarter as approximately $13 million went through purchase order process and therefore, moved into bookings. So in summary, operating cash flow was strong in Q4 â22, consistent with our capital allocation strategy I discussed earlier. Our free cash was invested in inventory to meet demand and support growth as well as for debt repayment. Iâll now review our non-GAAP guidance for 2023, beginning on Slide 11. For the full year 2023 based on our progress to date, we expect broadband to achieve revenue between $445 million to $465 million, a 30% increase at the midpoint, based on the strong demand trends we continue to see. This guidance includes revenue from existing Tier 1 customers and does not include significant revenue from potential Tier 1 customer wins in our pipeline: gross margins between 45% to 46%, a 190 basis point improvement over 2022 based on assumed hardware and software mix, that is typical of what we have seen over the past 18 months, operating expenses between $120 million to $123 million, adjusted EBITDA between $86 million to $97 million. For full year â23, video segment results we expect revenue in the range of $250 million to $270 million, gross margins range of 58.5% to 60.5%, operating expenses $140 million to $144 million, adjusted EBITDA, $12 million to $25 million. For total company for the full year â23, we expect revenue in the range of $695 million to $735 million; gross margins in the range of 49.8% to 51.3%, operating expenses in the range of $260 million to $267 million, adjusted EBITDA in the range of $98 million to $122 million. An effective tax rate of 20%, up from 13% last year as we have exhausted our NOLs in the past year. A weighted average diluted share count of approximately 118.3 million. Please note that the convertible debt-related dilution included in our share count uses the average stock price for the last 90 days, which was approximately $14. As a reminder, the share count figure utilized in our dilution calculation will change depending on the stock price movement. For those modeling this, consider as an example that currently, an increase in our stock price by $1 would increase dilution by only approximately 400,000 shares. Inversely, a decrease in our stock price by $1 would decrease dilution by approximately 900,000 shares, EPS range from $0.56 to $0.72 per share, subject to the just mentioned dilution calculation. Cash at the end of â23 is expected to come between $90 million to $100 million. Now on Slide 12, Iâll review the non-GAAP guidance for the first quarter of 2023. For Broadband segment in Q1, we expect revenue in the range of $97 million to $102 million; gross margins, 45% to 46%; operating expenses, $29 million to $30 million, adjusted EBITDA of $16 million to $18 million. For our video segment in Q1, we expect revenue in the range of $55 million to $60 million, gross margins, 58% to 59%; operating expenses, $35 million to $36 million; adjusted EBITDA in the range from a loss of $2 million to a profit of $1 million. For total company for first quarter of â23, we expect revenue in the range of $152 million to $162 million, gross margins, 49.7% to 50.8%; operating expense is $64 million to $66 million; adjusted EBITDA, $14 million to $19 million; effective tax rate of 20%; a weighted average diluted share count of approximately $117.9 million; and EPS to range from $0.07 to $0.10; cash to range from $75 million to $85 million. In summary, during the fourth quarter, we continued to execute and drive strong growth in our broadband segment while advancing the strategic transformation of our video segment. We ended the fourth quarter with a strong backlog and deferred revenue position. We believe this and the strong demand we continue to see from both our new and existing customers positions us well for 2023 as we continue to execute on our long-term business plan. Thank you, everyone, for your attention today. And now Iâll turn it back to Patrick for final remarks before we open up the call for questions. Well, thanks, Sanjay. So in summary, we delivered a record of 2022, ahead of our initial targets through continued focused execution of our strategic plan, our technology, our customer relationships and our people are all extraordinary and working extraordinarily well together, pointing to compelling value creation, opportunities weâre determined to take full advantage of. Weâre excited and confident about 2023 and the longer-range future of our business, and we appreciate your continued support. Great. Thanks for taking the question. Iâve got two, one on each segment. I want to start out asking about the 2023 outlook for the video segment, which is a little bit lower than the 2022 sales. And as I recall, the outlook you gave us for 2025 reflected some modest growth. And so I would like to get an understanding of whether or not that long-term 2025 outlook has changed or what factors are leading to the 2023 decline versus 2022, specifically to the video segment? And then Iâve got a follow-up on broadband. Okay. Well, thank you, Simon. Iâll take the first one. The outlook for 2025 has absolutely not changed at all. Weâre seeing somewhat faster transition to SaaS. And in particular, some of the new wins will not materialize as revenue until later this year. I mentioned in the prepared remarks, we had a couple of very significant new sports wins. If it was traditional appliance business, we would have recognized that revenue kind of immediately upon booking and shipping of appliances. But as with the way SaaS works, we will only start recognizing that revenue as the services themselves or launch the natural consumption happens. So in short, the plan is fully on target. In fact, if anything, we see SaaS moving a little bit ahead of plan. Youâll note that the gross margin actually evolution is a little bit ahead of plan. And the slight movement in revenue would actually review favorable as it reflects quicker success around movement to SaaS than we anticipated even 6 months ago. Great. Thank you for that. And then I guess, Iâm struggling with how to ask about the Broadband segment. But Iâm trying to understand whatâs built into your assumptions in terms of incremental contributions from Tier 1 cable operators and how you envision your customer concentration evolving? I guess Iâm sort of struggling with maybe the timing and the extent of whatâs baked into the numbers versus what you have yet to secure hopefully, you can maybe understand that and drill into that a little bit for us? Yes. Well, itâs a little tricky for us as well, as you might imagine. And so in fact. kind of led to our decision at the risk of being too conservative to just kind of cut it black and white. The guidance weâve given you excludes new Tier 1s that weâre quite optimistic about bringing on board. The issue is until we bring them on board and until we have visibility to the timing and the impact of the initial orders, itâs premature for us to put it in the guidance. I think the good news is, therefore, that weâve given you guidance that is based almost exclusively on the activity around our existing customer base and put that together with our high confidence and being able to bring on new Tier 1 customers, we feel that really underlines our confidence in our 2024 and 2025 targets. Now look, if we get in a position where we can confirm additional Tier 1s, and we further confirm that theyâll have a meaningful incremental impact for us in 2023. We will update our 2023 guidance accordingly. But frankly, stepping back and looking at the big picture, thatâs not nearly as consequential as from our perspective is, number one, winning those accounts; and number two, having them firmly in the pipeline. Indeed, as you kind of allude to, further diversifying the customer base in 2024 and 2025. Thank you. Patrick, let me go at the broadband growth in a slightly different way. Weâre clearly seeing the Comcast acceleration. Can you give us a flavor for when do you expect the other Tier 1s that you already have to kind of accelerate their pace of deployment, which is, I think, something weâve been anticipating with at some point kind of, or maybe another way to cut out is it, how many of the current customers are at what you think is steady state versus still early in that ramp? Well, look, a couple of things. Weâre fortunate for the relationship with Comcast. They are aggressive, they are out in front and they are pushing hard I think anyone, who listened to their conference call last week can test to all of that. And so we are pleased to be and feel fortunate to be right in the middle and able to support them. That being said, I think that they are paving the way for other parts of the industry. And to date, if youâve been following us, weâve â I think weâve been able to disclose 11 Tier 1s to date. And of those, about seven, Steve, I would say, are really in the process of rolling. None of them is as far along and has the pace with Comcast to date. And we see them all of those accelerating toward that. And indeed, there is another four out of the 11 that are just getting going and havenât really materially impacted things. So with the â just the currently one Tier 1s, we see the rest of the pack picking up the pace, of course, proportionate to their size, right? And then going back to our September Analyst Day, there is a big chunk of the market, over two-thirds of the market that is not on board with our platform yet. And thatâs also very much in our sights. And we expect that the rest of the market is also headed our way from an architecture point of view. We think weâre very well positioned to do well in the rest of the market. And over the next couple of years, we see corresponding aggressive deployment. And all that really does speak to the reason why we have been kind of consistent in articulating not only our coming 12-month target about a 36-month outlook for you and the rest of the investment community. And I hope it comes across loud and clear here not only our growth target for 2023, but our conviction and delivering on the aggressive growth numbers weâve laid out for 2025 as well. Great. And given the comment around the booking, the supply chain pressures seem to be easing a bit. What do you think now are typical lead times for node? So how should we anticipate those orders and deliveries lining up over the next couple of quarters? Well, to be clear, I think a couple of our customers are â maybe a little bit ahead of the good news or slowing down anticipating improvement. I mean itâs still an environment which is not â Sanjay indicated, has not returned to what we would consider normal, or pre-pandemic semiconductor shortage conditions. So the situation has improved. Weâve made a number of decisions to optimize our execution in the context of continuing challenges. And I think we have to â we certainly want to see a couple more quarters before we declare victory or, letâs say, a return to normal. Okay. Let me sneak one last quick one in here for Sanjay, how should we think about the strategy for paying off the 2024 convertible given the way youâve laid out cash flow projections for year end 2023? So Steve, as we laid out earlier, our capital allocation policy is for the debt, we would pay the principal in cash. We are committed to do that. We recently did for the $37.7 million debt, and we will do exactly the same for our $115 million net in 2024. As far as it relates to the premium on conversion, we have time to make that decision. But at least for accounting purposes, conservatively presume that the premium will be paid in shares, and thatâs baked into our diluted share down. Thank you. Two questions, if I could. First, not to belabor this point here, but I wanted to ask kind of about maybe changing contracts and situations as technology emerges and other players come into place. So Iâm just curious when you start talking to some of the newer larger Tier 1s or even in your current customer base. Number one, are you seeing any kind of different rollout timing that are available as the technologies has matured? And number two, are you seeing more of an appetite for multi-vendor types of arrangements within some of these networks? And then I have another follow-up. Well, letâs see, on the first part, I think that the â one of the benefits of us having really pioneered the work in virtualization DAA is that we, as a company, have tremendous deployment expertise. And while any rollout â any network rollout is inherently complex and particularly with larger operators, they all have different idiosyncrasies factors to consider. I think our ability to bring our expertise and experience to bear is certainly improving the possible pace of rollout relative to what it was a couple of years. That being said, I mean, I think all the customers we talk to still look at and think about multiyear kind of rollout plans. And certainly, multi rollout plan is plans or what is contemplated in our multiyear outlook or targets that weâve established. On the question of multi-vendor, specifically around the cable architecture, frankly, we continue not to see any competitor on the horizon with a competitive virtualized software core. On the other hand, from the beginning, weâve acknowledged and talked about competitors in the hardware arena. You may recall, going back 15 months or so ago, our initial multiyear model contemplated us only having about 30% of DAA market share. We raised that somewhat in our more recent September â22 outlook is just reflecting the strong success that weâre seeing in the hardware area. But to be clear, we always expected and continue to expect the hardware piece of DAA to be a multi-competitor situation. And really, Tim, that hasnât changed. That being said please donât get me wrong. While we think we have a kind of an overwhelming lead in software, Iâd say we have a strong lead in hardware. And while I fully expect to split hardware business, we still have a pretty strong competitive advantage in hardware that we are seeing play out. Okay, great, great. And maybe just on to the fiber-to-the-home piece, it sounded like some good wins there. Can you just maybe qualify that a little bit or a little bit more detail on kind of where you are seeing success there, what type of customers? And how that arc looks over the next few years? Itâs been predominantly with our cable customers. A combination of what we would call fiber on demand that is filling in brownfield opportunities. But together with an increasing exposure to greenfield new footprint. And itâs still a smaller piece, but for example, in the U.S., the beam funding is something that we currently worked with several customers on putting in proposals for. So, we see a combination of those two applications. Okay. Thanks for the question. On the book-to-bill there about 0.8, thatâs the lowest we have seen little, I am sure itâs raising some eyebrows out there and your backlog being down, and you talked about normalization in lead times of your ordering patterns from customers. Can you share any color specifics on the composition of the backlog there that might support there? Are you seeing more of the backlog now comprised of next six months versus previous prints? Well, Ryan, I will say that. First of all, we were not surprised by the book and bill in the fourth quarter. Thatâs something which we anticipated as we were entering in the quarter. We knew that the elevated book-to-bill levels we have seen in the past, during the pandemic, they would not persist however. And we always expected them to come back to the historical levels. And our exit backlog and deferred revenue is still very close to record levels of $457 million. And both segments are looking good in terms of the composition. One metric we share is that 80% of our backlog and deferred revenue is expected to convert revenue in the next 12 months. And thatâs consistent. That team persists since last two quarters, and thatâs how both the segments are comprised of. We feel very strong in the position we have for our total backlog and deferred revenue for both the segments. Alright. And just to follow if I could. On the Europe number in Q4 look like it was pretty soft. How much would you attribute that to FX, or is it an impact and may be impacted by the Video segment there and you talked about some weakness historically coming from the Video segment in Europe? The FX impact was not that significant. We do experienced some FX impact, but looking at our total revenue, it wasnât as much. I would say, a few million dollars, maybe around $2 million or so. Okay. I think that was me. I have a question on â and good afternoon. I have a question on really Comcast in particular, quite an uptick there in the quarter. And I guess I want to get your perspectives along several lines on that, which is for that specifically, would you characterize that as sort of a year-end spending thing or because you have been kind of stair stepping up here, I guess the overall question I am getting to is that are we at or near peak Comcast contribution on a quarterly type basis. So, how would you describe that? And where would you put them in terms of their overall deployment of the kind of next-gen remote PHY technology? And I have a follow-up on that. Tim, I appreciate where the question is coming from. Itâs difficult to answer without really crossing the line and discussing my understanding, our understanding of Comcastâs plans and intentions, etcetera, which is somewhere we canât and shouldnât try to go. They have â I think then, as explicit as they want to be on their recent public statements about their intentions in this area. I would say that there is always some variability quarter-to-quarter. It was a strong quarter. But we â look, we said that there â excuse me, our total business is 15 million modems passed, and thatâs across what is now 90-plus customers. So, Comcast is certainly the biggest piece of that, but by no means the whole piece of that. So, you can do some very rough math looking and saying that even within Comcast, we are â we still have quite a bit of runway ahead of us, I think in any scenario in which they go forward. And our approach to the relationship is to be a long-term partner as they continue to evolve and develop their network. Beyond that, there is not much more specifically we can say. Let me try on that one. And I donât get to my follow-up, but just focus on something that you said there. Well, obviously, you did about $240 million with those guys this year. And obviously, the vast majority of that, call it, 200 plus is in cable access. I guess what I am really trying to get to as you look towards your growth expectations for â23, in particular, and not being driven by any new customers, and thatâs going to be the focus of my follow-up. Do you expect a lot of growth there, or should we think about more of a steady state at a high level on com â from Comcast, which we have seen to beginning these last two quarters, or do you expect Comcast to be a meaningful source of growth for broadband in â23? Well, again, we cannot forecast expectations around any specific customer. I appreciate where the question is coming from, but we simply canât go there. What I can say is that of 11 announced Tier 1s to-date, only seven are really ramping. Comcast is one of those seven and by far the furthest along. So, we expect others, who we have won, the other 10 to play an increasingly large role. And then if you zoom out on the business, we are increasingly confident in adding to that number over the course of this year and as we look forward beyond 2023 or late 2023, early â24, into â25, we see an ever-growing list of customers, who will be, we think, similarly aggressively engaged in rolling out multi-gigabit services. And thatâs where my last question â yes. And thatâs where my last question was headed. Obviously, there is another Tier 1 about the same size, who is sort of publicly committed to at least the type of architecture you are providing. Should we think of that relative to all we have just been over with Comcast right there in terms of quarterly contributions and ramps? I think itâs been probably like $400 million over the last 3 years. I mean how should we think about that opportunity in particular relative to what you have seen on a Comcast? Can you give us any kind of metrics? I mean the same footprint, should we assume itâs the same or maybe a quicker deployment, so maybe bigger? Yes. I am sorry not to be able to be more explicit. I canât allude to expectations about any other specific customer. What I canât tell you again is our 2025 target, which until recently, I think a lot of people thought was over the top. Our $825 million top line, we are confident in delivering on that number. And that number will be comprised of contributions from a number of large and small operators on domestic U.S. and international. And thatâs the best indication I can give you for what we expect the trajectory of the business to be. And itâs based on a, I would say, a statistical combination of a wide pool of the current customer plans as well as our prospective customersâ intentions that we have confidence around the participating. I will just add that the 2023 guidance we have given is in line with our long-term model, even though Patrick mentioned the guidance is conservative. It captures only the Tier 1s we have and very small piece of new Tier 1s you might get. But itâs in line exactly with our long-term model of $825 million in 2025. Hi guys. Thanks so much. I guess I wanted to ask about the video business. Could you tell us how much satellite revenue you generated in 2022 that will not repeat again in 2023? I am just trying to assess the moving parts on the video side of the business. Thanks. George, we have not broken out the revenue by opportunity in any quarter or in the year. And we donât plan to break revenues in that fashion as well. Got it. Okay. If I go back and look at your 10% customer information by quarter in 2022, I think Intelsat alone accounted for about $37 million, I guess I assume that, thatâs not going to repeat in 2023. Is that a fair assumption? Well, again, a difficult question to answer, George. $37 million to Intelsat, no, I donât expect that exact amount of revenue to that exact customer. Will we do business with that customer, perhaps we have a historic relationship with Intelsat. Will we do satellite-related business in 2023, yes, we will. So, I regret we are unable to be more specific about specific amounts of revenues with specific customers. But that is something where we canât go. What I can tell you is that as we have acknowledged before, while the specific C-band reclamation activity in the U.S. is down, and we donât anticipate quite that level from that application. We expect analogous satellite-related reclamation activity to be an ongoing feature of our video service business. And that expectation is built into our guidance for 2023 as well as the 2025 targets that we have laid out. Alright. Great. Thank you. And then one other thing, you guys in the past have talked about the number of total â I guess I am referencing the CableOS business now. But in the past, you guys have referenced the total number of modems in aggregate for the collection of customers that are deploying CableOS. I think last quarter in September, you talked about a $63 million number. I think it was maybe was $60 million that was up about 5%. But can you update us on that number? Well, I can tell you that the number is between $60 million and $70 million now. And I can also tell you that we have decided that going into this year, we are going to start providing some. The challenge George that you will appreciate is if we win a significant customer, who has got 7 million subscribers hypothetically, and then we announced that, that number went up by sever we are effectively pre-announcing that customer, which is something that we want to avoid doing without more explicit agreement around publicity. If you look at the Denali research coming out of Q3 last year, we are nearly number one in the market. And I expect, if not in Q4, I expect us to be number one in CMTS according to a third-party market research. So, from that perspective, actually, the salient figure for us becomes the total available addressable which is about $180 million worldwide. Of that, we are about $15 million deployed, so a little less than 10%. And I think going forward, itâs the total addressable market that is going to be the key number to watch. Certainly, that is what we are going after as the current or some to be a market leader, I also think thatâs the appropriate number to keep our eyes on. Thank you. We have a follow-up question from the line of Ryan Koontz of Needham & Company. Please go ahead, Ryan. Alright. Thanks. Just a quick follow-up on my backlog topic, I think investors are very focused on that, and I am sure thatâs much your consternation. But how would you frame up your expectations for backlog to trend in the year ahead in general in terms of setting the expectations correctly for investors as we grow understanding that there will be quarter-to-quarter kind of lumpiness to backlog orders? How would you frame up your expectation for backlog in â23? Thanks. Let me take a crack at it, and Sanjay, you can weigh in if there is something that I missed. So, I think the best way to explain it, Ryan, is that we expect us to kind of gradually return to historic ratios between backlog and revenue. Now, thatâs â so we are ahead of that right now. I think a number of customers, as we have explained, really got out in the head and tried to secure â get orders on the books much further in advance than they have historically done. And yes, we expect over the next couple of quarters, that to normalize. We saw the beginning about normalization process in the fourth quarter, and that will continue. So, to be clear, we expect total book-to-bill to be greater than one in 2023. And we expect backlog levels to be â to fully support the revenue forecast that we are giving you. And â but returning to the historic ratio between backlog and revenue implies somewhat less, smaller ratio book-to-bill in the short-term. Thank you. At this time, I would like to turn the call back over to Patrick Harshman for closing remarks. Sir? Alright. Well, thank you very much again, all for joining us today. Again, we are pleased with the business that we â the success that we had in â22. We are optimistic and confident going into 2023 as well as looking at our business from a multiyear perspective. We are excited. We are determined. The customer relationships are strong. We have got tremendous momentum in the market and we are looking forward to executing a great year. And we are looking forward to keeping you updated. Thank you all, and have a good day.
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EarningCall_886
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On the call today are Chris Becker, President and Chief Executive Officer; Jay McConie, Chief Financial Officer; and Bill Aprigliano, Chief Accounting Officer. Today's call is being recorded. A copy of the earnings release is available on the corporation's website at snbli.com and on the earnings call web page at https://www.cstproxy.com/fnbli/earnings/2022/q4. Before we begin, the company would like to remind everyone that this call may contain certain statements that constitute forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in the company's filings with the U.S. Securities and Exchange Commission. Investors [Technical Difficulty] [Technical Difficulty] I'm gratified to announce another year of record performance. Net income and earnings per share both set new company highs in 2022 at $46.9 million and $2.04 respectively. The KBW Bank Honor Roll recognizes banks with more than $500 million in total assets that have reported consecutive increases in annual earnings per share in each of the past 10-years. Stockholders should know that your company is on that list. We were also proud to be named to Piper Sandler's small bank all stars in 2022, which recognizes companies with a market cap below $2.5 billion that outperform the industry in growth, profitability, credit quality and capital strength. Year-end and average total assets, loans and deposits all increased in 2022. Average non-interest-bearing checking deposits increased over 7% and averaged over 40% of total deposits during the year. We believe these numbers represent a true relationship-oriented bank. I previously reported on the relocation of our corporate headquarters to 275 Broad Hollow Road in Melville earlier this year. During the fourth quarter, we completed the sale of five Glenhead buildings and closed a freestanding drive up ATM leased location. 2022 also included moving our Port Jefferson branch to a new main street village location and we are nearing completion on a new Bohemia location on Veterans Memorial Highway for the relocation of that branch. As the First National Bank of Long Island, we were missing a presence on the East end of the island. We corrected that oversight by establishing a branch in East Hampton in late 2021 and a South Hampton branch in early 2022. Combined with our Riverhead branch opened in 2020, we are making a name for ourselves on the East end. We have been fortunate to hire some of the best bankers in these markets. Our team is dedicated to transforming this 95-year-old institution to a modern commercially focused bank. Our growing banking teams are bringing in relationships, helping our balance sheet mix. Our new branding is being complemented as fresh and inviting. Our new website and social media presence continue to grow in terms of visits and impressions. Our commitment to technology upgrades and cybersecurity investments are recognized by our employees and customers. And weâre be being acknowledged in the industry for our successes. We are moving forward, while staying true to our history of strong fundamentals that deliver results, including consistent loan underwriting criteria. Looking forward, we see a challenging landscape in 2023. The Federal Reserve's increases in interest rates have not been at this pace in over 40-years putting downward pressure on the bank's net interest margin. Our bank's liability sensitive position makes us more susceptible to rising rates. Our net interest margin was 2.74% in the fourth quarter of 2022, but was 2.66% for the month of December. Our margin very likely will be lower than the December number in the first quarter and full-year of 2023. How much depends on the Fed's future moves and competitive conditions. Jay will speak to our deposit betas. A political and regulatory message of removing so-called junk fees is limiting the bank's ability to charge for the more fundamental services we provide. Progress in fee income always seems to be offset by competitive reductions. Non-interest income is currently projected at $2.5 million per quarter in 2023. At the same time, regulatory oversight continues to pile on operational costs related to third-party management, information security ESG and climate change among other areas, no matter an institution's size. Management efforts to create efficiencies through branch and back-office consolidations have kept expense growth in check and 2023 non-interest expenses should be in line with 2022 numbers. Non-interest expenses are currently projected between $16.5 million and $17 million per quarter in 2023. We have persevered through past challenges to remain a valuable franchise with strong capital, strong asset quality, a strong deposit base and dedicated directors, employees, customers and stockholders. I thank them all for their years of support and we remain committed to doing the right things for them. Thank you, Chris. As Chris mentioned, the bank had a record earnings of $46.9 million and earnings per share of $2.04 in 2022. Bank's return on assets and equity were 1.11% and 12.13% respectively. Net interest income improved $8.9 million or 8.3% to $115.7 million and our margin increased to 115 basis points to 2.89% in 2022, up from 2.74% in the prior year. The growth in net income for the year was mostly attributable to a $300 million increase in average loans for the year, stable non-interest income of $12.4 million and a slight decline in non-interest expense of $1.1 million to $67.6 million for the year. The bank's asset quality remains excellent with no non-accrual loans on December 31, 2022 and our capital position remains strong with a leverage ratio of 9.83%. For the year, the bank originated approximately $656 million in mortgage loans with a weighted average rate of approximately 3.69%. Mortgage originations slowed to $63 million during the fourth quarter, due to higher rates and less demand from consumers and businesses, but the average rate improved to 5.44% and the yield on our C&I portfolio at the end of the year increased to 6.34%. In previous quarters, the bank reported a loan pipeline of committed, but not yet closed mortgage loans. On September 30, 2022 that number was $68 million. On December 31, 2022 they are committed, but not yet closed mortgage loans were $51 million. This reporting period and going forward, we report a loan pipeline consisting of issues letters of intent, loans in underwriting and committed, but not yet closed loans. That number on December 31 was $127 million, compared to $181 million at September 30, 2022. We believe our broader definition of the loan pipeline is a better indicator of loan demand and activity in the upcoming quarter. The Bank expects overall loan growth to be in the low single-digits in 2023 given the increase in rates, concerns for a recession and the inverted yield curve. Net income for the fourth quarter of 2022 declined $2.6 million, when compared to the third quarter of 2022, due to a $3.1 million increase in interest expense, primarily due to higher borrowing cost and seasonal deposit outflows from average check and deposits into interest bearing liabilities. During the first nine months of 2022, the Bank was able to lag increasing the rate it pays on non-maturity deposits. The Federal Reserve's aggressive push to increase federal fund rates by 450 basis points since March of 2022 and expectations, they will continue to increase short-term rates to possibly 5.25% in the first half of 2023 has increased the cost of funds we pay on these types of deposits. The bank's cumulative deposit beta on non-maturity interest-bearing deposits through December 31 was 21%. The bank's historical cumulative deposit betas on non-maturity interest-bearing deposits has been plus or minus about 35%. The cost of retail deposits and wholesale funding also increased with the cost of funds on interest-bearing liabilities rising from 48 basis points to 123 basis points since September 30, 2022. The bank has approximately $348 million in wholesale funding that matures due in 2023 with the current weighted average cost of 2.28%. The bank -- based on the current interest rate environment, we anticipate using seasonal deposit inflows and monthly cash flows from our securities and loan portfolio in 2022 to repay a portion of our wholesale funding position. The bank is liability sensitive with approximately $410 million or 10% of our interest earning assets, either maturing or repricing in 2023 and approximately $340 million or an additional 8% of interest earning assets in annual cash flows from securities and loans. These cash flows will be reinvested at current market rates or be available to repay wholesale funding. Management regularly analyzes potential balance sheet restructures that could help improve our liability sensitive position. The bank's quarterly core non-interest income run rate excluding one-time items has spent approximately $3 million over the past four quarters. We expect this run rate will decline to approximately $2.5 million in 2023. The decline is due to a non-service component of the bank's pension expense. The bank's non-interest expense was $18.4 million during fourth quarter, an increase of $1.4 million, when compared to the third quarter. The increase was due to several one-time charges, including a net loss of $553,000 on the disposition of premises and fixed assets relating to several of the banks' former Glenhead locations. $531,000 in costs relating to the branding initiative in branch locations and $210,000 for two branch relocations. We expect non-interest expense to be $16.5 million to $17 million in 2023, flat when compared to 2022. As we previously noted, the bank moved its corporate headquarters to Melville in April 2022 in an effort to have a more convenient location for our customers and employees. Between the disposition of the Glenhead assets, the new Melfield headquarters and the various branch openings, closings and relocation, the Bank expects occupancy and equipment expense to be lower in 2023 versus 2022. As noted in our earnings release, the bank repurchased 915,868 shares or $17.9 million in common stock in 2022. Bank has approval to purchase up to an additional $15 million in its outstanding plan. Finally, we anticipate a tax rate for 2023 to be approximately 18.5%. Hey, first off, Jay, you went through the cash flows on the securities and expected deposit flows kind of quickly. Do you mind just saying those again? Sure, sure. Let me just pull that. Yes, so we have approximately $410 million or 10% of our interest earning assets that mature or reprice in 2023. And then based on prepayment speeds, we kind of, Alex, what Iâd like to do is I look at last year's full-year annual cash flows 2021, I look at 2022s, I look at estimates from our dialing system and then I kind of look at our quarterly run rate and based on that, I'm projecting about $340 million or about another 8% in interest earning assets from securities and loan cash flows. Okay. And do you have -- are you able to give us a sense for portion of that, that might be loans that would reprice higher, sort of, like what kind of pickup you might potentially get? I mean, on the loans, on actual repricing that reprice what the prime is core, that's more about $289 million or about $300 in repricing that would come up. And those are the ones that are really repricing up with prime each quarter. So that would be the best indication there. The remainder is price off of typically the five-year treasury plus a margin, so it depends on when it was booked, it was booked five years ago. Obviously, it would be the increase in the five-year treasury during that time, right. So to clarify $300 is kind of flows with prime each quarter and about $100 is based on CRE loans are coming up with a reset date. Exactly. And a price off of either were depending, but mostly would probably be off the five-year treasury, maybe some a little bit up to seven. Okay, got it. And then in terms of deposit flows that might be expected early in 2023. Can you just give a sense of the sort of line of sight on any deposit inflows or outflows? And then maybe talk a little bit about the deposit strategy today? Yes. I mean typically like Chris said, for the year, we saw interest-bearing or DDA increase. And we're very comfortable with that amount coming up. But right at the end of the quarter right in December, we've always had, kind of, seasonal outflows and it was probably about $200 million for the fourth quarter. We've had some of it come back in. It usually comes back in throughout the first quarter and from there. So we're looking at those seasonal inflows to come in and then try to use those, as well as funds coming in from the cash flows, we talked about both for loans and securities and use a portion of those to pay down wholesale borrowings and then also look to utilize some of it to -- for growth in securities and a little bit of growth in loans. And our deposit strategy continues to be building relationships with the loan teams that we've added or beefed up over the past three years. They continue to bring in new relationships. And obviously, with that, you get a percentage of DDA. And you need to be competitive on the interest-bearing deposit side. Got it. And then, you know, I also just wanted to ask you guys have always very conservative on your credit underwriting. And I'm not sure we're seeing a lot of cracks at least visibly. And what's going on in the market with respect to commercial real estate, multifamily, those types of loans? I'm just curious from where you guys said, if there's anything that you're seeing out there that is starting to look like early indications of potential pain or anything that you guys are worried about? Any color would be helpful? We really haven't seen any cracks at this point. I would say in our most recent, we do obviously a pre-analysis every quarter. We look at market data, so a very slight uptick in multifamily vacancies, but nothing that's causing us concern at this point. So I was hoping to just get a little bit of clarification as to the fee guidance and where that's coming out of -- to start the year. I think you said $2.5 million a quarter for 2023. So which I guess is that an immediately start at that level in 1Q â23, and where is like the variance which line items is that coming out of the most relative to where we were in the fourth quarter? Right, right. So Chris, we expect our core non-interest income and all the various lines. Obviously, we have some going up, some coming down, but our core interest income is going to be about that $2.5 million throughout the quarter. As Chris alluded to, we're seeing some pickup in like debit card, credit card activity and then we're anticipating some loss in NSF fees just because of regulatory and competition within the industry. The real reason for the decline is our pension. So for the past four or five years, our net pension expense in our financials has been a credit to the bank, usually about $100,000 to $135,000 we get a net credit. And part of that is in the non-interest income and part of it is in salary expense. They make you break out each piece. This year our pension, we have a fully funded pension. The bank hasn't contribute -- had to contribute for well over five, six years to fund it, itâs over 100% funded. But because of the decline in assets or the increase in interest rates and the decline in the fair value of the assets. The GAAP accounting requires you to amortize a loss in that -- the assets decreased more than the liabilities and that's closing the income on average income -- our non-interest income going down to $2.6 million. So that's really -- I need to buy that by four, so that's what's driving it's a non-cash item, if interest rates decline and we -- the funding position increases, you could see that kind of switch to file on the year. So it's a non-cash item that's really not related to the core business. Got it. So that's going to come out of like the other fees line item for you guys and then, like correspondingly on the compensation expense for the most part? Yes, exactly. And we are getting some benefit in less salary expense. So I would look at it overall that we're going from $135,000 call it net credit to about a $1.4 million expense. So that's the actual overall impact. It's just that it's looking in two pieces. And unfortunately, the decline in the return on assets and the amortization of this loss, because of the funding position closets have to decrease non-interest income $2.5 million for the year. Understood. And on the expense side for the $16.5 million to $17 million, is there just you guys have kind of a lot moving on the different branch relocations and openings and things like that. I mean, is there any particular cadence as it start-off the year at the higher end or the lower end and build or reduce throughout the year? Is there just any seasonality to that? I would say it's pretty consistent, maybe a little bit higher in the first quarter just, because of payroll expenses in FICO and so forth that, kind of, add up and maybe trending down, but not anything significant. Got it. And just going back to the margin discussion. So I appreciate the guidance as to where you guys were in December. And how it's going to trend for the first part of the year lower? And any sense as to -- based on I guess assuming call it two more hikes here and then a pause as to the trajectory of the NIM or where it could bottom either on timing or on the level? Yes. I mean, it's getting really -- based on the volatility and the pace and increase, it's hard for us to provide that number, that's why we tried to kind of easier that for the quarter, but then it was 2.74% for a month, it was about 2.66%. Like we said, our beta year-to-date is 21%. The way we come up with our betas, we just take since our low point, which was probably in June for non-maturity deposits, we take that increase over the -- from that point through December. And we just simply divide it over the -- where the Fed funds rate is now, which is 4.15% and we get 21%. And historically when you look back probably since 2000 when we look at our deposit beta studies, obviously the Fed is going to pause, but deposit still continue to increase. So when you look at the full rate cycle when they stop and then kind of deposits, kind of, reach their seek their level in that current rate cycle. It's been probably plus or minus 35%. So if you look at where Fed funds is going to wind up and you kind of take 35% of that, historically that's where we've kind of ended up. But we do caution that this is the pace magnitude, the shortness of the increase could cause that to be a little bit higher. And a lot of those previous rate cycles, Fed funds went up 25 basis points over a 2, 2.5-year period and inflation was below 2%. Here were 40-year high inflation and they went up 500 basis points in under a year. So that's why we're cautious on giving guidance. We're trying to give you as much pieces as we can and help you out with that. Yes, absolutely. And then lastly, you guys have a bit left here on the buyback authorization. Pretty well capitalized. Loan growth is kind of slower from macro perspective. How are you guys thinking about the utilization of the buyback on a go forward basis? Yes. We're going to be in the market from time-to-time in the quarter, we might be a little bit more cautious in the first half. Just we want to kind of see how this kind of plays out with the Fed, there's a little battle going on between the Fed raising rates to between 5% and 6% when you see economists and you look at Fed Fund futures rate and they have the short end kind of coming down. And you can see the emergence get a little bigger with the 10-year trading in that 3.5 down maybe 75 basis points over the last quarter. So we're getting more of an inversion and more of a disconnect and whether it's a soft landing or hard landing, so we're going to be a little bit cautious maybe in the first half just to preserve capital and then kind of see how things play out and then might be a little bit more aggressive in the second half. That concludes our question session. I'll turn the floor back over to Chris Becker for some final comments -- closing comments. Well, thank you all for your attention and participation on today's call. We're certainly very pleased to present the results of another record year, and we look forward to talking to you at the end of the first quarter. Have a great rest of the day.
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Ladies and gentlemen, thank you for standing by, and welcome to Commvault Third Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host today, Michael Melnyk, Head of Investor Relations. Please go ahead. Good morning, and welcome to our earnings conference call. I'm Michael Melnyk, Head of Investor Relations, and I'm joined by Sanjay Mirchandani, Commvault's CEO; Gary Merrill, Commvault's CFO. An infographic with key financial and operating metrics is posted on the Investor Relations website for reference. Statements made on today's call will include forward-looking statements about Commvault's future expectations, plans and prospects. All such forward-looking statements are subject to risks, uncertainties and assumptions. Please refer to the cautionary language in today's earnings release and Commvault's most recent periodic reports filed with the SEC for a discussion of the risks and uncertainties that could cause the Company's actual results to be materially different from those contemplated in the forward-looking statements. Commvault does not assume any obligation to update those statements. During this call, Commvault's financial results are presented on a non-GAAP basis. A reconciliation between non-GAAP and GAAP measures can be found on our website. Thank you again for joining us. Earlier this month, we noted delays and deferrals in our customer spending, which were particularly acute in December. We are not alone. It's increasingly clear that customers and prospects are more calculated and cautious around spending decisions in the current macroeconomic environment. That said, we have built our company on a foundation of responsible growth for the long run, which we expect will allow us to navigate the current economic environment. There are several solid indicators in the quarter that reflects strength in our future growth potential. For starters, Q3 was the best quarter for new customer wins in five years. Total ARR increased 18% year-over-year in constant currency. More importantly, subscription and SaaS ARR grew 43% and now represent 70% of total ARR. This bodes well for future expansion possibilities. And we delivered healthy free cash flow growth while steadily returning cash through share repurchases. I'll discuss Metallic in more detail shortly. But during the quarter, Metallic approached 3,000 customers and is proving to be a powerful customer acquisition and expansion. We also saw very healthy growth in Metallic ARR, which sets up nicely for our next milestone, $100 million in SaaS ARR. The large software deals came in below our initial expectations for Q3. We are confident in our long-term future, because first, data protection remains a strategic priority as customers transition to the hybrid cloud, while dealing with the challenges of ransomware and other risks to their business. Second, the market views our portfolio as best-in-class. And our customers see us as critical on their journey to the cloud. Perhaps, let's discuss data protection of the strategic customer priority. The journey to the hybrid cloud is different for every customer and it will be ongoing for years. The pace of change and innovation is constantly accelerated, creating uncertainty for those charts of protecting the data. This is even more pronounced in today's uncertain environment. Ransomware, skill shortages, supply chain and the evolving macro, these are all threats to organization's ambitions and objectives. Customers need the flexibility to balance costs and risks to maximize business outcomes. We are uniquely positioned to give them choice and flexibility in how they consume technology required to protect the critical data in this difficult world. This brings me to my second point. Our portfolio is leading edge and future proof. This has enabled us to win new customers and expand our footprint by offering industry-leading capability, capacity, scalability, and solutions. Our support for new workloads and new environments is unmatched. For instance, as customers build cloud-native workloads and applications, they often use Kubernetes. Our support for Kubernetes is best-in-class. In fact, just last week, Commvault was named a leader and outperformer in the new GigaOm Radar for Kubernetes Data Protection for the third year running. It's a matter of pride for us that we engineer our products to support and integrate with the broadest ecosystem in the industry. This gives customers peace of mind as they protect the data for applications in the cloud today and as they evolve in the future. We do this, so our customers don't have to, and we give our customers the choice of software and SaaS on one platform under a single pane of glass. For instance, the breadth of our Metallic SaaS platform helped us land a new customer, [VistaJet]. VistaJet was exploring a significant multi-cloud strategy. Rather than relying in adequate native tools within the cloud, this VistaJet chose multiple Metallic offerings, including Kubernetes backup to strengthen its cyber resilience in the cloud, simplify, and reduce its costs and enable them to pursue their growth ambitions. We also landed a multi-million dollar deal with a large European energy company. We displaced an incumbent vendor to protect on-prem workloads like Oracle and SQL server and safely migrate data to the public cloud, all while reducing the risks of a ransomware attack. Our competitors could not scale to protect the customers' vast amount of data. You see these are two customers at different stages of their hybrid cloud journey. One focused on existing on-premise workloads, the other one on multi-cloud. We met them both where they were and we'll be able to take them to where they want to go. Now a little bit more on Metallic. Our Metallic offerings continue to gain momentum with 70% of Metallic additions in the quarter being new to Commvault. This sets the stage for our robust, cross and upsell motions as we are laser-focused on driving world-class in ARR. In fact, 30% of Metallic customers now have more than one Metallic offering such as our newly released ThreatWise, which is showing good early traction. Metallic customers are also expanding to new offerings as the workloads grow a change. For instance, Linamar Corporation, a global manufacturing company and an existing Metallic customer recently expanded with Metallic to protect up to 15,000 Microsoft Exchange mailboxes. This is another notable example of how Commvault helps customers protect their data, accelerate their cloud journey, simplify their environment and minimize TCO, be it with software or SaaS or both. Metallic is increasing contribution to customer and ARR, growth is a positive indicator that reinforces that our bet on SaaS is the right long-term move for Commvault. As we close the year, and Metallic becomes a more material part of our business, we look forward to providing more detail at an upcoming investor event. I will start with a quick recap of the quarter with growth rates on a year-over-year basis unless otherwise stated. Total revenues for the quarter were $195 million, an increase of 1% on a constant currency basis. Software and products revenue for the quarter was approximately $90 million, a decline of 5% on a constant currency basis. The variance against our Q3 guidance was the result of a weaker-than-forecasted enterprise market and execution on close rates. Revenue from large deals, which we define as transactions with greater than $100,000 of software and products revenue was down $10 million versus the prior year and represented 72% of software revenue in the current quarter compared to 76% in Q3 of the prior year. The average deal size in the quarter for large deals was $312,000. This shortfall in large deals was particularly evident in the Americas, with total software revenue was down 20%. Our international region delivered strong software revenue results increasing 17% on a constant currency basis. On a consolidated view, software revenue transactions under $100,000 increased 6% as we saw a modest acceleration in the velocity side of our software business, driven by new customer transactions. Now that I've discussed the large deal headwind, I'd like to provide more color on some positive trends in the quarter, particularly around our subscription and SaaS momentum. Subscription software revenue was approximately $70 million and represented 78% of total software revenue, which compares to only 71% of total software revenue in Q3 of the prior year. Our subscription transition has been driven by new customer acquisition and the strategic conversion of existing perpetual customers to a subscription model. Services revenue, which includes revenue from our customer support agreements, professional services and Metallic was $106 million, an increase of 7% on a constant currency basis, driven by the continued acceleration of Metallic revenue. From a customer perspective, we had our best quarter for new customer count in many years. We saw new customer growth in subscription software customers, Metallic SaaS customers and the combination of both. As Sanjay noted, we are the only provider that can offer customers the best of software and the best of SaaS. I will now give some insights into our annualized recurring revenue or ARR metrics. Our total ARR increased 14% to $641 million as reported and 18% year-over-year growth in constant currency. Subscription and Metallic software revenue ARR increased 43% to $443 million and now represents approximately 70% of our total ARR balance. Moving on, I will discuss expenses and profitability. Gross margin for the third quarter of 83% reflects a lower mix of software revenue, first is our Q3 expectations. Total operating expenses were $121 million, down 5% year-over-year. During Q3, our global headcount was down 4% to 2,820 employees compared to 2,933 at the start of the quarter. We are managing our people, facilities and third-party expenses by focusing investments on our most critical priorities. We will continue to evaluate our resource base against the market demand environment. Non-GAAP EBIT was $38.5 million resulting in an EBIT margin of 19.7%. The decline in non-GAAP EBIT was primarily attributable to our lower software revenue results. Moving on to some key balance sheet and cash flow metrics for the quarter. We ended the quarter with no debt and $273 million in cash, $117 million of this balance or 43% of total cash is now in the United States. Quarter-end deferred revenue was up 20% on a constant currency basis, driven by the continued acceleration of Metallic. Q3 free cash flow was $29 million, up 15%. On a nine month year-to-date basis, we generated $100 million of free cash flow, an increase of 16% versus the same nine month period of the prior year. As a reminder, fiscal second half cash flow will be burdened by approximately $7 million of federal tax payments related to the TCJA capitalization of R&D provisions. While our software and Metallic models diverge and how they are accounted for in our P&L, they're both strong cash flow generating businesses. As our Metallic business becomes a more meaningful part of our results, we believe ARR growth and cash flow will be key operating metrics to demonstrate the strength of our business model. During Q3, we repurchased 507,000 shares of our common stock for $31 million. Fiscal year-to-date, we've repurchased 1.5 million shares of common stock, returning $90 million to our shareholders, representing 90% of free cash flow. Today, we're also announcing our intent to sell our corporate headquarters in Tinton Falls, New Jersey and leaseback only a small footprint of the existing space. We believe this is fiscally responsible. Like many companies in our industry, we have evolved into a more flexible, hybrid workplace. The sales transaction is expected to close in the first half of fiscal 2024 with proceeds of approximately $40 million. Now, I will discuss our outlook for the fiscal fourth quarter. We are diligently monitoring the macroeconomic outlook and customer spending on large transformational projects. We believe, new business may continue to take longer to close, especially if it is part of larger IT consolidation and transformation projects. We expect Q4 software revenue will be flat quarter-on-quarter at approximately $89.5 million. Services revenue, which includes revenue from our customer support agreements, professional services, and Metallic is expected to be approximately $107.5 million with sequential revenue growth driven by our Metallic business. As a result, fiscal Q4 total revenue is expected to be approximately $197 million. At these revenue levels, we expect Q4 consolidated gross margins to be approximately 82%. We will see some incremental pressure on our gross margins due to the forecasted increase in services revenue, which includes Metallic SaaS as lower margins relative to our current software outlook. Q4 operating expenses are expected to be approximately $122 million, down 3% year-over-year. We expect Q4 EBIT margins will be approximately 19%. We continue to be maniacally focused on managing people, facilities and third-party expenses, balancing profitability, while investing in growth initiatives such as Metallic. Moving to cash flows and share repurchases. We expect cash flows will sequentially improve in Q4 and continue to believe that share repurchases currently represent the best use of excess cash. Given the year-to-date cash flow results and current U.S. cash balance, our Q4 share repurchases will increase from Q3 levels. Our projected share count for Q4 is approximately 45 million shares. Our team is focused on execution, and we will maintain our responsible growth operating philosophy. As a longstanding market leader, we've endured economic and technology cycles like this, by supporting our customers wherever they are in their journey. They need the flexibility that only Commvault can provide in today's difficult world. Over the past two years, we've made significant progress in delivering a subscription and SaaS-based recurring revenue model, while continuing to innovate and build our industry-leading products. I'm confident that we're on track to continue to deliver shareholder value and look forward to sharing more with you at an upcoming Investor Day. Yes, thanks for taking the questions. I guess, I want to start with maybe just thinking about what's going on in the macro and kind of the impact to your business. Specifically around the renewal opportunity as we start to think about fiscal '24. What assumptions or what have you seen from a renewal perspective in the business as some of those opportunities come to fruition? Are you seeing any changes of renewal rates, any changes of net dollar retention, or anything you can share on that front? Our renewals, especially related to the software subscription business, they largely met our expectations for fiscal Q3. So, we're on track with some of the metrics around renewals, both our retention rates that we've discussed historically. We are still in those historical ranges, which is good. And as we look forward into fiscal Q4, we have a slightly bigger renewal population quarter-on-quarter, Q3 versus Q4 as well. So, we're on track there. What really drove the mix, as we talked about in the prepared remarks was really some of those large IT enterprise transformational projects, driven really on the land and expense business. And as far as kind of those opportunities that pushed out this last quarter kind of delayed, maybe you can help us appreciate what is underlying your assumptions with regards to the guide this quarter around that? Are you expecting those deals to come in into revenue this quarter, or do you see further pushouts embedded in your guidance? Yes. Aaron, so the expectations that we have as we look out into fiscal Q4 is that, the current dynamics that we saw during fiscal Q3 as it relates to the software side of the business. We're expecting them largely to continue as we move into fiscal Q4. The impact that we saw in some of the multi-year big deal purchasing decisions, we expect that will continue. The deals that pushed in our fiscal Q3, the good news is they're not lost. The vast majority of them are still in play. We continue to work on them. We continue to dialog with our customers and we expect a good portion of actually to close in this fiscal Q4. Great. And then just real quickly, the final question. As I look at kind of Metallic, what's interesting is, you're talking about what sounds like an acceleration of the ARR momentum relative to, I think last quarter you said 75 and I think exiting fiscal '21, it was 50 on ARR balanced. If I look at your total kind of recurring services revenue and I strip out the support piece of it, it looks like the Metallic is growing well north of 100%. I just level set us, is that a good way to think about how quickly Metallic is actually growing within that services line? Aaron, actually relative if you look at quarter-on-quarter from a Q3 even versus Q2, the sequential growth we saw Metallic accelerated in fiscal Q3, so that makes us really happy with the results that we're seeing. Last quarter, we mentioned that our next milestone for Metallic on the ARR basis was that kind of $100 million ARR. We're well on track to be able to hit that in the near term. The Metallic business continues to provide us an amazing new customer acquisition engine as well. Now the deal sizes are smaller, right. So they show up, it's lower ASPs. Obviously, they are not recognized in period from a P&L perspective. But if you look at that combination of what's happening sequentially in ARR, which was up, I think even 6% sequentially combined with our deferred revenue growth, which was 20% year-over-year, it shows you that we're capturing great financial stability through that Metallic business, that would kind of drive that future predictability in our revenue stream, which makes us really excited about what's to come as we kind of continue to build that business out? Thank you. One moment, please for our next question. Our next question coming from the line of Jim Fish with Piper Sandler. Your line is open. Hi, guys. Thanks for the questions. Maybe on the cost side, trying to understand the impact of the headcount reduction, as well as the OpEx savings you get from the sale of the headquarters there. Separately, is there a way to think about both? And then additionally, with this kind of headcount reduction that you talked about in the pre-announcement, how are you guys thinking about the impact to the top-line in fiscal '24, what amount was kind of quota-carrying? Yes. Jim, it's Gary. Good to hear from you again. A couple of things I'll hit, especially on the cost side. As we mentioned, our headcount was down sequentially about 4%. Some of the benefits we will see related to those produced salary levels will start in fiscal Q4. What we have here in fiscal Q4 though is, there's a couple of things that offset it just kind of temporarily. This quarter is to start over for our employer FICA related portion of the taxes. So, some of the savings we naturally would see this quarter are offset by some of the -- just a calendar year payroll reset and last quarter was also our merit increase review for existing employees. So we had a little bit of bump up there. So, some of the muted impact does happen in Q4. But really, when I look out into fiscal '24, that's when we start to see the benefit, the benefit of that. Yes. So, I mean, you can big model out what you would expect in that fiscal '24 perspective based on that 4% reduction. We'd expect to see those savings as we roll into fiscal '24. As it relates to the building, it's going to take one to two quarters to close. Jim, we have to go through some regulatory approval even with the state to get consent on a few things related to the building. So, therefore, we will see a modest kind of savings impact when we get into maybe the second quarter of fiscal '24. It won't be material but it will be modest. That will start to see some savings as well there. On the quota-carrying, this is Sanjay. Jim, just to touch on that. The quota-carrying heads, we're obviously very focused on making sure we don't affect the top-line. Yes. Nothing, Jim we've done will impact our outlook for fiscal '24 and the top line. This is about efficiency across the business. Okay, fair enough. Thank you, guys. Last one from me, we're kind of hearing different things across tech around duration of contracts, are you guys seeing customers look to lock in term deals for longer at all or shorter and how often when a customer is renewing a term deal? Are you seeing that contract deal from, let's say a three year term down to one year term on the renewal? In our business Jim, it's happening, I think the fringes. We do see pressure on term length. Our average term, we've talked about somewhere between two to three years on an average term and we're holding pretty well. We do see some pressure in certain spots. But we're managing through it which gives us some confidence that our renewal businesses continue to meet expectations in the quarter and even in the outlook. Thank you. One moment please for our next question. And our next question coming from the line of Howard Ma with Guggenheim. Your line is open. Thank you. I have one question for Sanjay and one for Gary. So first for Sanjay. We acknowledge that increased budget scrutiny and deal pushouts, those were certainly not unique to Commvault in this environment. We also acknowledge that data protection has become an increased priority in recent years as you pointed out in your prepared remarks. But in your customer conversations, and as we consider near-term purchasing decisions, are there any signs that more recently Commvault or data protection general is being put on the back burner relative to other IT projects. I understand you said that data protection is part of broad larger IT transformations, but within the relative ranking, has there been any change in the - so that's kind of one part. And then how are you factoring those potential demand changes in evaluating your pipeline and close rates. Thank you. Got it. Hi, Howard, good to talk to you. So let me see if I was to part your question - and if I look at, if you looked at some of the metrics we shared on Metallic, you'll see that the demand on Metallic is healthy. The business is growing well. We're growing sequentially. Obviously, we'll be growing year-on-year. We're adding - we've had one of the best quarters of customer additions. So the Metallic business, which is largely cloud-based workloads, is doing really - is in a good place. And if I - and if I was to sort of give you a Sanjay thesis on where I think things are broadly with data protection to your question. I think customers - we saw as an industry, we saw a lot of tailwind over the past, let's say, two years because of the pandemic customers' journey to the cloud being accelerated, ransomware being at an all-time high. That caused - we saw a lot of large transformation projects where data protection was looked at after many years from a left-to-right point of view to make sure that the entire sort of fleet of technology that was being protected was modern - it was easily [ph] protected with the modern suite like ours. Where I think we are is the first phase of ransomware protection for many customers is done. They feel like they've got their defenses at some level in. And now it's a matter of optimizing and really going up the stack with the rest of the fleet. So that - so there is that, if you would, change in momentum. The second piece is a lot of customers - brought into the cloud and brought into the futures and capacity and where they were seeing their architecture go - infrastructure go. And I think they're at the point where at least in - calendar Q4, fiscal Q3, we saw customers stop, pause and say. We routinely see a budget flush. You see sort of are we using what we purchased from a storage point of view, from a cloud provisioning point of view, from a capacity point of view. And I think there was a little pause there. So I - we think that the demand and the future for data protection continues to be top of mind to customers - in my conversation, I don't see that in any way being less of a priority. What I think customers are doing is like most companies at this point with the macro where it is, it's like where are we with what we've already committed to? Are we using it right? Are we well covered, and there's a little bit of that look and see going on. I think things will, as Gary said, come back to where things were shortly. But on the second part of your question, I'll let Gary take - I'll let Gary take that, on - I guess on how we'll be factoring some of that into our.... Yes, yes. So Howard, how we thought about factoring that into our Q4, our outlook for Q4 assumes that the dynamics that we saw, especially a little bit of the uptick we saw in the Americas quarter-on-quarter continues at those levels. So from a close rate perspective, we assume roughly similar close rate projections. And now we're focused on the pipeline we have in front of us for Q4 and making sure we do the inspection to basically ensure that we have the ability to close it and exceed our expectations. Okay, thanks Gary. My follow-up for you is that - I mean the total ARR 80% constant currency growth - that held pretty strong, right? And that implies that both subscription and services were pretty strong. But can you help us reconcile that with total revenue growth of only 1% and the 5% constant currency decline and soften products? And specifically, I mean, does that mean that the license shortfall was weighted more right like the difference really is licensed. So was that weighted more towards perpetual or in subscription license, you called out the lower contract duration, like were there any other factors that would have impacted subscription license? So really just trying to reconcile - because the overall business with ARR? That's fair. So ARR continues to be very strong, as you see at that 18% year-over-year growth. The biggest contributor to our ARR 18% is Metallic. So Metallic becomes the biggest contributor, which has no in-period recognition on our P&L. That will help us as we move forward. So when you look back at reconciling the software revenue results tied to ARR, it comes down to basically a handful of large IT transformational projects. We talk frequently here I mean Sanjay just stated about maybe a little bit of a slowing and a pause on optimization. We still did over 200 of those large deals. So we're still seeing great momentum in that space. It comes down to about a $10 million population that drove the shortfall. And many of our larger IT enterprise transformational projects or multiyear transactions, right? So the impact of that is actually 3x when you look at it on an in-period recognition. Yes and again, coming back to the earlier part of your question, Howard. It's - a lot of the low-hanging fruit of the lifted shift workloads are done or customers feel like they've gotten through that. Now it's the tougher workload, the mission-critical workloads. It's the stuff that runs the business day-to-day that you have to be more cautious about and it takes more time. So I think in many conversations we have with customers, they're sort of working through that and those are obviously more complicated and take longer. Thank you. And our next question coming from the line of Eric Martinuzzi with Lake Street Capital. Your line is open. Yes. Just looking to see if there was any indication in the month of January as far as what you would have seasonally expected given the shortfall in December, was January an improvement in buyer sentiment or was it in line with the December? Hi Eric, it's Gary good morning. What we start to see to the fiscal year is reflected kind of in our outlook in the guidance. And I think the best way to frame it continued on at similar levels from fiscal Q4. It started the new calendar year. Many companies are refreshing their budgets. We were in line with what we thought we would do in month of January, but it's more of a continuation of some of the buying patterns we saw during the last quarter. Okay. And then you - in the press release, you talked about just trying to navigate the current macro conditions but still committed to a philosophy of responsible growth. If we look at the December quarter, roughly flat I guess we're plus 1% on a constant currency basis. But the guidance for Q4 would be down 4%. And then seasonally, Q1, not that I'm looking for a FY '24 guide here, but seasonally, Q1 is down from Q4. So when you talk about a responsible growth when do we see that growth? Yes, so Eric, we're not going to comment yet in fiscal '24. As we are in through the end of the current quarter we're in, we'll talk about some of our outlook at that point in time. We're keeping our guidance tied to now is, what we see in fiscal Q4 - our fiscal Q4 reflected in some of the continuing. So we continue to maniacally focus on all of our expenses - right? So whether it's the people cost, our third-party facility costs like we talked about today, and been contractors we'll make sure that we continue to optimize our expense base relative to the top line demand that we see. Even on a nine month basis from a Q3 perspective as well, our revenues in the nine month period are up 3%. Our OpEx is flat. So we're trying to make sure we keep our OpEx growth muted relative to the top line. And in Q4, OpEx will obviously be down year-over-year. Thank you. One moment is our next question and our next question coming from the line Jason Ader with William Blair. Your line is open. Yes, thank you good morning guys. I just want to play devil's advocate here just because everyone is talking about macro, and obviously, that's a challenge for everybody. But from the [VAR checks], you talked to folks in the channel, I mean, it definitely seems like guys like guys [Rubrik and Cohesity] are gaining a lot of ground in this market? So just wanted to get your thoughts on what you're seeing out of those guys today versus maybe a year or two ago? How are you competing head-to-head because those guys are getting pretty big and they're growing very well. And I just want to - I don't want to sidestep the competitive pressure here just because it does seem like it could be a factor in the current environment. Hi Jason, it's Sanjay. I'll - we haven't seen anything marked different from a competitive landscape from a year ago or even a couple of quarters ago. If anything, we're winning some really good business against the ones you mentioned quite all the time. Actually, we were up against them all the time and we win. The -- it's hard to know -- I have to take your word for it as to how they're growing and how well they're growing because I don't have that information readily available as you may, okay? So it's kind of hard for me to say what of it is real and what is -- and I will say to you that if you look at the combined business, if you look at how our -- notwithstanding the shortfall on the software side this quarter and you look at our new customer additions and you look at the SaaS growth that we've got with Metallic, and you look at the combined 40% to 50% of our customers have both, you're seeing the momentum that we've got in the business. I also think that we are in larger transformational deals, which take longer because the low-hanging fruit, like I said, has been done. Now the big mission-critical workloads that need to be ported to the cloud are just more complicated. They need more time. And we are continuing to win those. If you look at our renewal rate, there's nothing there that sets us backwards. So I have to take your word for it that they're growing at better than us. But as far as we're concerned, we're doing just right. Okay. And then the -- I guess the follow-up question for me is just on execution and field coverage. You guys have been on a path to become more efficient for multiple years now. So I guess have you identified anything because it's through this process of kind of macro weakening and some of the workforce changes that you've made, where you've said, okay, well, we just -- we need to fix this or change this or I don't know if it's a coverage issue. But where are you on sort of thinking about execution and coverage and making sure you have all the right players on the field. Thanks, Jason. It's Gary. So for us, it comes down to driving the right segmentation and inspection, right? So making sure that in this macro environment, what we're focused on is we can control the pipeline we have, and then we can control to make sure that as a broad go-to-market teams, that we are doing the inspection to make sure that we have the compelling event that we have the economic buyer and that we can work through the reverse time line with the customers. So in a tough macro environment for us, it's actually going back to the basics, going back to the basics on deal inspection and controlling the pipeline that we have. The other key point that's really important in this, especially in this environment, is also working really closely with the partner community, right? 90-plus percent of our transactions go through partners. And where we will double down in all environments, especially macro environment, is making sure we're building those business plans with our partners globally. Hi, thanks guys. Thanks for taking my questions here. Just wanted to take on some of these macro questions, dive a little bit deeper on this maintenance to subscription transition. What you kind of saw in the quarter last quarter from a linearity perspective that seemed to have stepped up the transition. I think the subscription, if you kind of take-out Metallic estimations for ARR accelerated just again, just subscription alone ARR, while maintenance continues to decelerate to the downside, but that ratio seem to have gotten better. Just want to know what the impact was from the macro, maybe customers are looking to save money or something. I don't know how that -- I know there was discounting in the past on maintenance -- I'm sorry, on non-subscription to maintenance transition. But I just wanted to understand the dynamics there and how that could like lead to continued strength there in the coming quarters in this macro. I have a follow-up. Good morning. It's Gary. I'll take this one. So as we've talked many times, we have a strategic program that converts and looks to work with our customers that our older perpetual customers and strategically convert them to a subscription-based software. A couple of trends you see. And largely, I would say, unchanged on steady state. And I'll kind of walk you through maybe the best way to think about it from a financial standpoint. Even within our press release, we disclosed our customer support revenue. Our customer support revenue, which is -- it's mainly the renewals from our perpetual business. That revenue was down 10% year-over-year. Now the biggest driver for that decrease year-over-year is currency. If you strip out currency, on a constant currency basis, our customer support revenue was down 5%. That's three quarters in a row. It's been down 5% year-over-year. So the best way to think about it, it's kind of trending at similar levels that it's always had in kind of that mid-single-digit year-over-year decline in that customer support revenue is probably the best way to think about it in a steady state model that we're working towards. Okay. So there wasn't any -- just to be direct extra discounting in terms of switching over from maintenance to subscription in the quarter and -- okay. No, from a recovery standpoint -- jump in from a recovery standpoint. So you did mention that in the initial part of the question, recovery standpoint, we were right on target. Got it. Got it. Thank you. And then on Metallic, first of all, congrats on getting in the crosshairs that $100 million ARR that's kind of in line with our model here for next quarter, possibly. The parsing out the revenue piece there, so the decline of about 110 basis points in the services gross margin. pressured by Metallic. Can you just remind us where we are in terms of that transition with regard to Metallic as it grows nicely here again, smaller revenue, much larger ARR and where you expect those gross margins to be with revenue levels in the future? Thank you. Yes, Tom, for sure. So we're pleased with where we're at. We're on track from a margin perspective with Metallic. To get to more of the best-in-class SaaS margins, we're still 12 to 24 months out, right? We're on that trajectory. If you look at other companies that have gone through this transition, we're all in the same line, the same line of trajectory. So we're pleased as we work towards getting through this fiscal quarter and into next fiscal year, there's more detail that we will share as it relates to the Metallic business and Metallic margins. On a consolidated basis, we do have a little bit of a headwind, as I mentioned in the prepared remarks, on the acceleration of Metallic revenue relative to the outlook we gave for software. So there is some margin compression on a consolidated basis. But we view that as partly as a positive because that means we're seeing Metallic accelerate at a very fast clip. Tom, Sanjay here. Just a little more color. I mean, the margin conversation is the number one priority for my engineering organization on how we optimize the service. So it's a young service. It's doing very well. It's growing very quickly. It's coming at scale. We've got a host of services that we keep adding. So there's a lot of work that we're doing proactively to be best of class. So rest assured that we'll share more, but more importantly, it is the top priority for my engineering team and my operations team on how we get better at that. It's also scale. This is a business where we've got to scale it up. That's why Gary's point on needing 12 to 24 months to be truly best of class on that is a very normal journey. And if you look at what it took us to get to, let's say, when we get to $100 million, we're amongst the fastest-growing SaaS businesses in the history of SaaS businesses in the infrastructure space. So there's a lot there. It's a good point, and you don't want to not invest against this opportunity. Two years ago, this business was $0 on a revenue basis. So give or take, along those lines, when do you expect -- will you just -- will you break this revenue out when it's 10% Metallic? Where we're headed is that more to come when we get to our next earnings call at the end of fiscal Q4, I think there's a lot of interest in the Metallic business, not just from a revenue but a margin and introductory standpoint. So I think we'll work towards that at a future call. Okay. And just my last question on churn. I know it's early in Metallic, but have there been any impacts on churn with the macro? No. No. Our renewal rates are very strong both from a gross renewal rate and a net dollar retention, very strong rates and really are pleased with where we're headed on those as well. Thank you, everyone, for joining the call today. We look forward to speaking with you following our fiscal year-end usually in the May time frame. Thank you.
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Good day, and welcome to the Sensata Technologies 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. Thank you, Jason, and good morning, everyone. I'd like to welcome you to Sensata's fourth quarter 2022 earnings conference call. Joining me on today's call are Jeff Cote, Sensata's CEO and President; and Paul Vasington, Sensata's Chief Financial Officer. In addition to the financial results, press releases we issued earlier today, we will be referencing a slide presentation during today's conference call. The PDF of this presentation can be downloaded from Sensata's Investor Relations website. This conference call is being recorded, and we'll post a replay webcast on our Investor Relations website shortly after the conclusion of today's call. As we begin, I'd like to reference Sensata's Safe Harbor statement on Slide 2. During this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause these differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K as well as other subsequent filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Most of the information that we will discuss during today's call will relate to non-GAAP financial measures. Our GAAP to non-GAAP financials, including reconciliations are included in our earnings release and in the appendices of our presentation materials. The company provides details of its segment operating income on Slides 9 and 10 of the presentation, which are the primary measures management uses to evaluate the performance of the company. Jeff will begin today with highlights of our business results during the fourth quarter and full-year 2022. He will then provide updates on our new business wins and key growth initiatives. Paul will cover our detailed financials for the fourth quarter, and he will also provide financial guidance for the first quarter 2023. We'll then take your questions after our prepared remarks. I'd like to start with some summary thoughts on our performance during the fourth quarter and full-year as outlined on Slide 3. During the fourth quarter, we produced $1,015 million in revenue, up 8.6% from the prior year period, despite a 360 basis point headwind from foreign currency. Adjusted operating margins moved higher by 70 basis points sequentially to 20.1%, as we continue to focus on improving our margins to our target level of 21%. For the full-year 2022, we produced a record $4,029 million in revenue, which is up 5.5% from the prior year. Our underlying markets were pressured last year by continued supply chain disruptions and we experienced a 240 basis point headwind associated with foreign currency. Nevertheless, for the full-year, we produced 820 basis points of market outgrowth, continuing our above target performance for the third consecutive year. We appreciate the dedication and expertise of our Sensata team members who contributed to these results. Quoting activity for new business awards was extremely active during the year. As a result, we achieved a second consecutive year of record wins. In 2021, we achieved record new business wins of more than $640 million. And in 2022, they exceeded $1 billion. Even more notable is that approximately 70% of these wins are in our electrification growth factor, which will drive Sensata's future revenue outgrowth and are directly due to the incremental investments we have made over the past several years. During 2022, we also made substantial progress toward our environmental, social and governance goals. We reduced our greenhouse gas emissions intensity by more than 10% last year, reaching our 2026 target four years earlier than anticipated. In addition, Newsweek named Sensata as one of America's Most Responsible Companies for 2023. 23 overall, ninth in the technology hardware sector and first in Massachusetts. All of us anticipate more change in the end markets Sensata serves over the next 10 years than we have seen in the past 50 and as our customer transformed their business and product portfolios to adjust to decarbonization trends. Many equipment categories are electrifying and significant investment is being made global infrastructure to support this trend. It is a strategic imperative to enable this transformation for our customers, and we are very pleased with our accomplishments thus far as we execute on this strategy. As shown on Slide 4, over the past three years, we have made significant investments including both acquisitions and internal development efforts to develop our products, technology and capabilities our customers need as they transform their businesses. The commercial success resulting from these investments is clear. Last year's awards included the single largest business win in the company's history and represented a substantial shift in our business toward electrification related areas. Sensata largely serves long cycle end markets, which underscores the benefit of pivoting to where the market is going, and we appreciate our investors' patience through this investment cycle to secure our bright future. The success that we have achieved to-date from our organic and inorganic investments in the growth sectors demonstrates that we have built a strong foundation for future growth. Now we are focused on leveraging the benefits of these investments. This includes completing the integration of the businesses we've acquired to maximize growth and focusing organic P&L investments in areas where we are having the greatest success. Consequently, as we look to 2023 and beyond, we are focusing on organic growth, improving adjusted operating margins and increasing conversion of earnings to cash flow. While we will continue to return capital to shareholders through our dividend and opportunistic share repurchases, improving free cash flow will naturally allow leverage to decline and returns on invested capital to improve over time. Paul will speak to the specific capital allocation targets later. During 2022, we posted approximately $460 million in revenue in automotive and industrial electrification areas, up 77% from 2021. Insights posted $175 million in revenues last year, up 133% from 2021. During our electrification teach-in last February, we forecasted that Sensata would produce more than $2 billion in electrification revenue and that Sensata content in battery electric light vehicles would grow to double current content in a comparable internal combustion light vehicle by 2026. We are well on our way to bringing this vision to life. While we still need to deliver on the product designs underlying business wins in hand, these awards coupled with our existing business and expected market growth over the coming three years, is now sufficient to deliver on our electrification revenue target. The demonstrated commercial success from our investments establishes Sensata very well to assist our customers in their transformational journeys and to realize our own exciting potential. Key highlights for the fourth quarter, as shown on Slide 7 include revenue $1,015 million, an increase of 8.6% from the fourth quarter of 2021. Revenue growth reflected strong outgrowth across the company of 1,180 basis points in the quarter, as well as acquisitions, partially offset by foreign currency headwinds and overall market contraction. Adjusted operating income was $204.3 million, an increase of 3.4% compared to the fourth quarter of 2021. This increase is primarily due to higher volumes, pricing, and productivity improvements somewhat offset by unfavorable movements in foreign currency. In fact, from investments in the growth factors of Electrification and Insights and a divesture of our connect semiconductor test in thermal business last year. Adjusted earnings per share in the fourth quarter grew 10.3% from the prior year quarter and faster than revenue. We saw approximately the same $5 million decline in channel inventory this quarter as we did a year ago. So channel inventory movements had no impact on our outgrowth in the fourth quarter on a year-over-year basis. Turning to Slide 8. As we entered 2022, inflation significantly impacted our component and logistics costs at a time when we were also increasing investments in our growth vectors. This impacted adjusted operating margins significantly leading down to decrease from the 21% margin level that we delivered during 2021. Substantial improvements in pricing to offset increased costs, better material availability and supply chains slowly improved, productivity improvements and cost control have driven a steady increase in adjusting operating margin through the year. While our financial guidance for the first quarter includes a sequential decline to 19.5% on lower volumes, we intend to continue these efforts in return to our target margin rate of 21% as quickly as possible. Now, I'd like to comment on the performance of our two business segments in the fourth quarter of 2022, starting with Performance Sensing on Slide 9. Our Performance Sensing business reported revenues of $757.7 million, an increase of 10.6% compared to the same quarter last year. Automotive revenue increased from strong content growth, higher pricing and market growth, partially offset by unfavorable foreign currency. Growth in heavy-vehicle off-road revenue reflects strong outgrowth and the impact of acquisitions in Insights, partially offset by declining markets in unfavorable foreign currency. Performance Sensing operating income was $196.9 million, with operating margins of 26%. Segment operating margins declined year-over-year due to dilutive impact of unfavorable foreign currency, acquisitions and product mix. As shown on Slide 10, Sensing Solutions reported revenues of $257 million in the fourth quarter, an increase of 3% as compared to the same quarter last year. Industrial revenue decreased from weaker markets, especially in HVAC and appliance and unfavorable foreign currency. Aerospace revenue increased strongly in the quarter due to strong content growth, market and pricing. Sensing Solutions operating income was $74.4 million with operating margins of 28.9%. The decrease in segment operating margin was primarily due to the impact of acquisitions and clean energy. On Slide 11, corporate and other operating expenses not included in segment operating income were $65.5 million in the fourth quarter of 2022. Adjusted for charges excluded from our non-GAAP results corporate and other costs were $65.5 million, an increase from the prior year quarter primarily reflecting higher research and development and business development spend to support our megatrend growth initiatives, partially offset by lower compensation, incentive compensation and favorable foreign exchange. We invested $70 million in megatrend-related engineering spend in 2022 to design and develop differentiated solutions for the fast growing trends impacting our customers, and we expect to spend about the same level in 2023. The record new business wins of more than $640 million in 2021, and more than $1 billion in 2022, along with our rapid revenue growth in these areas, clearly demonstrates how Sensata's expanding capabilities are appealing to our customers in driving market outgrowth. Moving to Slide 12. We generated $184 million of free cash flow during the fourth quarter and $311 million in free cash flow during the year. Free cash flow this year was negatively impacted by increases in receivables as our business and revenues grew our decision to carry higher inventory levels to ensure continuity of supply in uncertain markets and from acquisition-related compensation payments. For the full-year 2023, we expect free cash flow conversion to be approximately 75% of adjusted net income, reflecting Sensata's long-term average. As Jeff mentioned previously, acquisitions and organic investments have provided us with the needed assets and capabilities to achieve strong leadership positions and growth in the areas of Electrification and Insights. Consequently, we expect operating margins to improve and free cash flow to grow, which will naturally lead to lower net leverage over time. As a result, we are updating our target net debt-to-EBITDA range to 1.5x to 2.5x, which will likely take two years to three years to attain. Our net leverage ratio was 3.4x at the end of December 2022. We returned capital to shareholders during the fourth quarter, repurchasing $50 million of our shares under our existing stock repurchase authorization, a reduction from the third quarter, and we recently announced a quarterly dividend of $0.11 per share that is expected to be paid on February 22 to shareholders of record on February 8. In addition, we intend to pay down $250 million of our outstanding variable rate term loan during the first quarter, which is currently the most expensive piece of debt in our capital structure. Moreover, we will continue to evaluate the company's liquidity needs and manage the capital structure according to our new net leverage target range. We are providing financial guidance for the first quarter of 2023, as shown on Slide 13. Our expectations are based upon the end market growth outlook shown on the right side of the page. We remain more conservative than IHS on automotive production estimates for the fourth quarter because of broad macroeconomic and China COVID-related risks. Foreign exchange represents an expected $27 million headwind to revenue in the first quarter. Our current fill rate is approximately 92% of the revenue guidance mid-point for the first quarter. At the mid-point, adjusted operating income margin is expected to be 19.5%, a sequential decline from the fourth quarter, largely reflecting lower volumes. This also represents an 80 basis point year-over-year increase from the first quarter of 2021, on flat revenue, primarily due to improved productivity and pricing. Our first quarter guide anticipates that our operating income at the mid-point grows at 4% and earnings per share increases at 10% from the prior year quarter, faster than the rate of anticipated revenue growth. Looking to the balance of 2023, we expect foreign exchange to be a 1.1% headwind to revenue and an $0.08 headwind to earnings per share, given current exchange rates. Given the market and macroeconomic uncertainties facing Sensata and other companies in our sector, we are discontinuing our practice of providing full-year guidance, choosing instead to only guide for the upcoming quarter. We believe data from third-party market forecasters and our customers is reasonably accurate such that we can forecast the next few months, while visibility into future quarters is currently less clear, given the broader economic concerns. Let me wrap up with a few key messages as we outlined on Slide 14. Sensata's business organizational model and growth strategy are strong, resilient and reliable, as we deliver mission-critical, highly engineered solutions required by our customers. While we expect end markets to continue to be volatile in the near-term due to inflation, rising interest rates, the risk of recession in various geographies, and geopolitical events, we have a strong management team with proven experience in navigating choppy markets. We also expect 2023 to be another year of above target market outgrowth for Sensata. We continue to invest in our growth initiatives as we transform the business to focus on these rapid growth opportunities across all the end markets we serve. We are making excellent progress as demonstrated by strong new business wins and significant revenue growth. This success allows us to focus on strengthening our financial returns through organic growth, improved margins, stronger free cash flow and return -- increase in returns on capital. Part of this is targeting a new net leverage range of 1.5x to 2.5x over the next two to three years. We continue to innovate on behalf of our customers, solving their hard-to-do engineering challenges and providing differentiated solutions to an ever broader array of customers, while leveraging our expanded product set and capabilities. Solving mission-critical challenges enable Sensata to enhance long-term customer retention and deliver industry-leading margins for shareholders. And finally, I'm pleased about our results in delivering on Sensata's long-standing vision to help create a cleaner, safer, more electrified and connected world, not just for our customers' product but also through our own operations. We believe we are meaningfully contributing to a better world. We are making good progress on achieving our ESG targets, and we'll look to update them in our upcoming Sustainability Report, bolstering the long-term sustainability and success of the company for all of its stakeholders. We'll now move to Q&A. Given the large number of listeners on the call, please limit yourself to one question each. Jason, go ahead and introduce the first question. So I appreciate the $460 million you just did in Electrification and your $2 billion target here. How are you viewing the opportunity for Sensata in the face of the price cuts that have been announced by EV makers? And I guess, it's a two-fold. Firstly, does it change the trajectory in your mind of either adoption or how you get to your $2 billion? And secondarily, do you anticipate price pressure on your own pricing? Or do you still see that as a net positive lever in 2023? Thank you. Thanks, Wamsi. A lot to unpack there but let me start with a view of a trend of electrification given what we've experienced, but also the more recent OEM price cuts to be more competitive on OEMs. Listen, the last three years to five years, as we've looked at forecasts associated with EV penetration, every year, it's gone up. And that's why we've been investing heavily in this space because we do believe that, that is the future and that trend is accelerating. So I would say that, that trend would likely continue as we go forward. And so the investments that we made were the right ones. Now, we've had great success in winning opportunities. There has been a lot of quoting activity as our customers gear up for this trend. The quotes around our new business win and the focus on electrification support that that's where we're aiming and that's the success we're achieving, that's where our M&A targets have been, that's where our organic investment has been disproportionately in these areas to prepare for this transition. On the last point around your question of the pricing, pricing is always difficult with our customers. And I think everyone knows that we lagged a little bit in the early part of 2022, because we were trading off the dialogue with customers to make sure that we were winning the new business associated with that. But there, our customers expect us to be a long-term partner. They understand the need for us to address this point. And I would expect that not in 2023, but as we go forward, we'll get back into more of a mode where we can deliver productivity year-over-year as inflation eases and will be able to continue the more normal business model associated with helping our customers succeed in the marketplace. Can we talk about the new leverage rates and just how -- how that really impacts how you think about M&A as part of the growth algorithm? Yes. I guess I would start with the fact that from a strategic standpoint, over the last two-and-a-half years, we've been investing in the capabilities to be able to bring solutions to the marketplace based upon what we've been hearing from our customers and what we believe will be the trend in the future. And we've made an enormous amount of progress. And so from our stand and the wins that we've achieved I think demonstrate that. $700 million alone in 2022 of wins associated with Electrification. And so I wouldn't start with the conclusion that we wanted to delever as being the strategy. The conclusion was we have all the pieces that we need and now we need to reap the benefits associated with all of those investments that we've made. And that will naturally result in us spend more of our time on the organic growth associated with the acquisitions and the current customer relationships, improving margins and delevering will happen as a result of that. So there is a focus here on making sure we realize those benefits associated with the work that we've done. And we'll set a new -- we've set a new leverage target associated with that. Hi, good morning. Thanks for taking my question. I guess if we can spend a bit of time talking about the margin guidance that you have for the 21% for FY2023. And one of the questions we're getting this morning is, if you have visibility into reaching that margin number that has to be predicated with some level of visibility on the revenue trajectory through the year. So just wondering sort of how to think about what revenues that will be predicated on as well as what's -- I know you called out the macro environment, but what sort of impact you're seeing on autos or fill rates from macro environment and what's driving that sort of higher uncertainty in your business? Thank you. Yes. So I think the question was around our comfort to get to the 21% margin given the market dynamic. Clearly, volume will help us achieve our 21% margin target. So we're not giving full-year guidance, but we have management intent associated with marching toward that target over time. Volume will help either in the form of outgrowth to market, more market growth. FX tailwind versus headwind will help. And as we go into 2023, at least into the first quarter, we have a market decline and we have foreign exchange headwinds. So it's a little bit harder to get to that incremental margin profile and so we will get there over time. The question is, at what point in time, and I think that will depend on market forces and other things that are helping associated with the tailwinds to get to that margin profile. Yes. Thanks and good morning. I wanted to ask a question on your -- within Sensing Solutions, the applying to HVAC market, it looks like you're going to be down year-over-year for the fifth quarter in a row here. I know post-pandemic, there's been weakness there in inventory. But could you talk about visibility there? And when do you see that market bottoming? Yes. For the first quarter, we are anticipating the -- our industrial market, which is where our HVAC market lives to continue to go down as destocking occurs and other impacts associated with the real estate market and so forth, take hold. But we've seen a couple of quarters now a decline. And so the question will be, when does that revert to a more normal level and start to recover. It's hard to predict because it's the one end market where there is more channel inventory rather than our OEM focused markets. But I really feel as though the transition that's happening associated with the -- excuse me, the HVAC market associated with zero levels associated with the need for other sensing content and equipment given the change in the refrigerant, there's lots of long-term opportunity there that we're excited about that we're seeing success. In the near-term, we're just going to have to manage through it, but the last couple of quarters for our industrial business have been down pretty dramatically. Good morning. Thanks for taking my question. Jeff, you stated in your prepared remarks and has followed up Samik, you may just, this strong foundation you've built for future growth. Now you're focused on leveraging the benefits of those investments. Want put a finer point on the M&A piece of that. You go at this time, you laid out a vision of annual M&A growth of 400 basis points to 600 basis points, are you pulling that back today? Just how should we think about squaring what you're seeing today versus the vision you laid out a year ago and what has changed specifically? Thank you. Yes. So yes, we are. So we've been very clear that in the past, our capital allocation was to ensure we pay the dividend and then to do M&A to make sure that we were prepared for the future with our customers. And we feel as though we are well prepared now the NBO opportunity to support that, that we've won and the engagement with the customer supports that. And we believe now is the time to really continue to invest organically. And we've also said that we'll stay at that $65 million to $70 million organic investment level to bring those products to market to realize the potential associated with this. So the M&A focus is going to go away at this point. We're going to digest the M&A-related activity that we've done and continue to drive organic growth in the business to a level that is commensurate with the opportunities that we see in the market. Thanks for the question. Hi guys, good morning. Thanks for taking the question and nice to see the EBIT margin expansion. When you think about the plan to expand margins over the course of 2023, how secure is the pricing needed to achieve that? And do you need several OEMs to still accept higher pricing? Or is the pricing mostly or entirely set at this point? I can take it. So we do expect elevated pricing in 2023 over 2022. And it comes in many different forms, depending on the end markets. They have all different behaviors around pricing. But much of the pricing that was secured last year continues into 2023. Now, we have to continue to secure new pricing as inflation or other costs drive up, and so we'll continue to work with customers. But we have a very good track record now in a process with our customers to have those conversations to engage with them around the cost that we're seeing and the cost that we want to pass on to them. Thanks. Good morning. So curious on the pretty notable new business wins. In 2023, do you think you can replicate that level you put up for 2022? Or should we think of 2022 as naturally interim peak on design and cycles? Yes. Great, great question, Chris. The opportunities are based upon what in 2022 was a very robust pipeline of sourcing opportunities at our customers. As we look into 2023, it's still quite robust, but it's not at the level that it was when we entered 2022. So it's a great point, $1.046 billion is what we wanted new business opportunities in 2022. We'll keep charging toward that. But when you look at the pipeline of opportunities that are out there right now, getting to another $1 billion is going to be challenging, but we'll keep driving toward it. And candidly, there will be sourcing opportunities that come out during the year that we don't know about yet. So I think the key point here is based upon the business wins that we have in hand and expectations that third parties have on market growth in our current business, we feel very comfortable that we have all we need to get to that $2 billion. But clearly, I know that following question is, okay, when are you going to increase it beyond the $2 billion? And we're going to keep driving at it to make sure that we realize the full potential associated with the future revenue base for the business. I appreciate the question, Chris. Good morning. Thanks for taking my question. I guess I understand the hesitation to not provide a full-year guide, but maybe just touch on your expectations for outgrowth in 2023. I think last quarter; you first talked about outgrowth to be the high-end of the 400 to 600 basis points range in calendar 2023. Would love to sort of get an update on that, if you could? And maybe you can talk about how much of that do you think is content versus pricing as well? Thank you. So we have developed our delivered outgrowth much greater than the targets that we set over the last three years, which has been a great outcome. For next year, based on what we have visibility to, which is pretty high, we would expect our outgrowth to be in the high-end of our target range for 2023 or slightly or a bit above. The pricing is going to be part of that. Like I said earlier, it's elevated year-over-year, but the content is certainly is the biggest driver of that outgrowth. Hey, thanks a lot for taking my question. Just wanted to circle back to the question -- to the comment on channel inventory. I believe last quarter; you mentioned a $20 million headwind associated with that. It looked like it was -- sounded like it was flat in Q4. So just how to think about channel inventory destocking as we get into 2023? So I guess the first comment would be that we saw a $20 million contraction in Q3. We thought there'd be contraction in Q4. There was about $5 million. So year-over-year, it's no impact on growth because we had $5 million contraction last year. So it wasn't as bad as low or as high as we thought it might have been. But we saw a very good performance in the auto business, delivered significant growth in the quarter, both from market growth and outgrowth. So executed really well, delivered a really good outcome. As we look forward, we've looked back to 2021; we know that there was a depletion in inventory. It was a build in inventory in 2022. And it was about, I guess about $70 million or so when we thought would have to unwind. We've seen some of that unwind. This year, there could be some more unwind next year. But we are seeing inventory levels increase in the channel in terms of wholesale in the market. So maybe that has come to an end, but we're still going to need to watch it carefully because it appears based on the math that there should be more of an unwind to occur. It's difficult to know the timing of that. Thank you. I wanted to ask on margins. When the company says operating margin will improve through 2023 towards the 21% target. Does this mean that the 21% can be hit in the back half of the year or just that margins will grow off the 19.5% pace in Q1? And I ask because, historically, Q1 is always the seasonal trough for margins. So is that just kind of typical seasonality? Or should we expect a more substantial build than that? Thank you. Yes. The expectation is for margins to grow sequentially from the 19.5% upward. The 21% is an annual target level that we're striving for. So I would expect us to have margins that continue to move up and very likely to be 21% in a quarter. But we're really talking about can we deliver 21% for the year? We're going to work to get to that as quickly as possible. But as Jeff said, volume is a big contributor to the margin expansion. So with better volumes, we obviously have a better chance to get into that number more quickly. And it's worth noting that during 2022 from Q1 to Q4, we saw 140 basis point improvement in margins, given that focus. And as Paul said, we'll continue to work toward it. Thank you. Thank you so much. Jeff, in your prepared comments, you mentioned a lot about new business wins and really starting to gain traction? Can you give us a little more color where are those new business wins? Are they more like exterior the car, battery management, charge stations for the car, interior, heating and controls for cars? I'm just trying to picture and visualize where you're seeing the great success with this. Thank you. Yes, absolutely. So obviously, it's based -- it's distributed across the end markets that we serve. So this isn't all about automotive new business wins, but it's the biggest end market that we have, it's the biggest portion of our revenue and it's the biggest portion of the $1 billion. There are really two big areas that we're winning. There's a bunch of sockets that we had long-term positions in, so tire pressure, great management, environmental control that continue and grow going forward. Because in a battery electric environment, those systems need to be more finely tuned and more efficient. So we see more opportunity for outgrowth in those areas. The new areas are around what will be the powertrain. It's the battery management process, so it's contactors, fuses, isolation monitoring, battery disconnects. We've been talking about a lot of these capabilities that we both acquired and developed and we're seeing incredible progress. And it's not just in light vehicle, it's in HVOR; it's in stationary, battery charging systems; it's in industrial applications. So all of these products and solution sets that we've built play across those markets. And last year, $700 million of our $1 billion of NBOs were in the area of electrification. So those areas that we've talked about there. Hi, good morning, guys. Maybe one more follow-up on the margin discussion from my end. I was hoping you could give us a view into your own supply chain? And maybe you can give us a sense of how you're thinking about material electronics and maybe even logistics cost inflation and some of the component availability embedded in that targeted margin ramp in 2023? So Jeff, I guess, we can both take it. In terms of the supply chain, I mean, it has slowly been improving. We're seeing more improvement on the automotive side. Still strongly a little bit on the industrial side in terms of the supply chain and availability of electronics. And we do see inflation -- material inflation next year continuing and at a rate similar to what we probably -- what we experienced this year. So it's still going to be a challenge. But again, the pricing is there to mitigate that. Logistics was a headwind in 2022 in terms of both rate and because of the disruption of the supply chain, the need to expedite material. We see the logistics cost turning the other way becoming favorable as rates start to come down and continue to come down in a more stable supply chain that allow us to manage the movement of material in and out of the factories much more efficiently. So it should be -- should not be the headwind that was -- that what it was in 2022. In fact, it could be a tailwind for us. Can you just clarify the 2x battery target versus ICE? Where are you exiting 2022? And how linear is that journey to the 2x in 2026? And just to clarify, is all of that content on the car itself? Or are you considering like peripheral stuff on like charging equipment as well in that calculation? Yes. Joe, thanks. So the $2 billion target is broader than light vehicle. It's across the company, the target to get to electrification revenue in all of the end markets that we serve. The 2x CAGR electric is very specific to the light vehicle market. And similar to our confidence in being able to get to the $2 billion revenue in Electrification as a company with opportunities in hand, we are making great progress and feel very good about the double content on battery electric. And a lot of the areas that I've talked about and the question that Jim Suva asked around where that content is coming from, we're seeing increasing opportunities to get really important sockets with our customers, not only in the legacy areas that we've gone after in internal combustion platforms but also on electrification, in light vehicles. So we feel great about the 2x content by the same time frame. Thanks for the question. Good morning. Thank you for taking my question. I'm calling on behalf of Will Stein this morning. We're wondering if you could update us on what you're observing in the supply chain by each end market. More specifically, we're also wondering if you can give an update based on China and the impact that they've had from a recent lockdowns having ended. Yes. So I think two parts of the question around the supply chain, which I'll elaborate a little bit more. Paul will provide a perspective as to what we're seeing in terms of the impact on supply chain. And the second part, I think was around what we're seeing in China. So on the supply chain question, I would echo what Paul said, right? We're seeing some of that abate, but it's not gone away. We still do see inflation across some of our raw material categories. We still do see pockets of challenge associated with shortage of parts, but it's clearly abating from where it was at its peak. But it's still upside down from what is a normal business model where we would be able to operate in a normal environment, and we'll keep working away at that. Obviously, we're getting a lot better at managing through that. The team has done an outstanding job, but we're not completely out of the woods in terms of the supply chain challenges that we've been experiencing. On the China question, candidly, I think the rebound in China in the fourth quarter was a bit of a disappointment. I would have expected there to be more of a recovery in China in the fourth quarter because I just inherently believe that the Chinese government would put incentives in place to stimulate the economy. Clearly, the move away from a zero COVID policy is at least getting things moving again, unfortunately, having negative impact in terms of infections and death in the country. But the expectation would be that going into first quarter; it's going to continue to be a little bit choppy in terms of the overall market environment in China. But hopefully, as we progress throughout the year, we'll see some improvement there as things get back to a more normal steady state. It's an important market for us. But again, we serve a global market, and things balance out in terms of puts and takes across markets and geographic markets and end markets that we serve. There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Jacob Sayer for any closing remarks. Thank you, Jason. I'd like to thank everyone for joining us this morning. Sensata will be participating in the Morgan Stanley Technology Investor Conference in San Francisco in early March. We look forward to seeing you at that event or on our first quarter earnings call at the end of April.
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Good morning, and welcome to the Oxford Lane Capital Corp. Third Fiscal Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Thanks very much. Good morning, everyone, and welcome to the Oxford Lane Capital Corp. third fiscal quarter 2023 earnings conference call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; and Joe Kupka, our Managing Director. Sure, Jonathan. Today's conference call is being recorded. An audio replay of the call will be available for 30 days. Replay information is included in our press release that was issued earlier this morning. Please note that this call is the property of Oxford Lane Capital Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited. At this point, please direct your attention to the customary disclosure in this morning's press release regarding forward-looking information. Today's conference call includes forward-looking statements and projections that reflect the Company's current views with respect to, among other things, future events and financial performance. We ask that you refer to our most recent filings with the SEC for important factors that can cause actual results to differ materially from those indicated in these projections. We do not undertake to update our forward-looking statements unless required to do so by law. During this call, we will use terms defined in the earnings release and also refer to non-GAAP measures. For definitions and reconciliations to GAAP, please refer to our earnings release posted on our website at www.oxfordlanecapital.com. Thank you, Bruce. On December 31, 2022, our net asset value per share stood at $4.63 compared to a net asset value per share of $4.93 as of September 30. For the quarter ended December 31, we recorded GAAP total investment income of approximately $67.6 million, representing an increase of approximately $2.9 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of approximately $64.3 million from our CLO equity and CLO warehouse investments and approximately $3.3 million from our CLO debt investments and from other income. Oxford Lane recorded GAAP net investment income of approximately $41.4 million or $0.26 per share for the quarter ended December 31 compared to approximately $36 million or $0.23 per share for the quarter ended September 30. Our core net investment income was approximately $50.1 million or $0.31 per share for the quarter ended December 31 compared with approximately $51.1 million or $0.33 per share for the quarter ended September 30. For the quarter ended December 31, we recorded net realized losses of approximately $1.5 million in net unrealized depreciation on investments of approximately $54.7 million or $0.35 per share in total. We had a net decrease in net assets resulting from operations of approximately $14.8 million or $0.09 per share for the third fiscal quarter. As of December 31, the following metrics applied. We note that none of these metrics represented a total return to shareholders. The weighted average yield of our CLO debt investments at current cost was 16.6%, up from 15.1% as of September 30. The weighted average effective yield of our CLO equity investments at current cost was 15.7%, down from 16.1% as of September 30. The weighted average cash distribution yield of our CLO equity investments at current cost was 18.6%, down from 22.1% as of September 30. We note that the cash distribution yields calculated on our CLO equity investments are based on the cash distributions we received or which we were entitled to receive at each respective period end. During the quarter ended December 31, we issued a total of approximately 7.2 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $37.2 million. During the quarter ended December 31, we made additional CLO investments of approximately $82.8 million, and we received approximately $49.5 million from sales and repayments. On January 26, our Board of Directors declared monthly common stock distributions of $0.075 per share for each of the months ending April, May and June of 2023. Thanks, Jonathan. During the quarter ended December 31, 2022, the U.S. loan market was volatile. U.S. loan prices, as defined by the Morningstar LSTA U.S. Leveraged Loan Index increased from 91.92% of par as of September 30 to 93.06% of par as of November 16 before dropping to 92.44% of par as of December 30. During the quarter, there was significant pricing dispersion related to credit quality with BB-rated loan prices increasing 195 basis points single B-rated loan prices increasing 94 basis points and CCC-rated loan prices decreasing 603 basis points on average. The 12-month trailing default rate for the loan index decreased to 72 basis points by principal amount at the end of the quarter from 90 basis points at the end of September 2022. Additionally, the distressed ratio defined as a percentage of loans with a price below 80% of par, ended the quarter at 7.4% compared to approximately 6% at the end of September 2022. The increase in U.S. loan prices led to an approximate 7% increase in median U.S. CLO equity net asset values. Median junior over-collateralization cushions remained flat at approximately 4.7%. Additionally, we observed loan pools within CLO portfolios, modestly increased our weighted average spreads to 354 basis points compared to 351 basis points last quarter. Oxford Lane continues to be active in the secondary market during the quarter. While most of our activity took place in the secondary market, we added two new issued CLO equity investments during the quarter. Our investment strategy during the quarter was to engage in relative value trading and lengthened the weighted average reinvestment period of Oxford Lane's CLO equity portfolio. In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy across U.S. CLO equity, debt and warehouses as we continue to look to maximize our long-term total return. And as a permanent capital vehicle, we have historically been able to take a longer-term view towards our investment strategy. Yes. Good morning, everyone. Jonathan, it appears we're in a more normal economic cycle, which we actually haven't experienced in quite a while with inflation and interest rates climbing and GDP slowing down, et cetera. In that context and considering your firm's long experience in these markets, broadly speaking, what is your outlook for the CLO market this year? Well, thank you, Mickey. Good morning. As you know, we don't take macro-based positions. We're not really a firm which forecasts macro fundamentals and makes large directional investments based on that macro forecast. That said, I think we are looking broadly for a continuation of current macroeconomic trends, which means hopefully, inflation comes under control. But we certainly have the potentials to see an additional rise in rates. We have the potential to see additional syndicated corporate loan spread widening. But I think there's a fair amount of uncertainty right now. So in terms of having a high degree of conviction around a specific macro outlook, I can say we are trying to remain flexible in our approach. We're trying to remain opportunistic in our investment decisions, but those things are not generally predicated on a specific macro outlook. I understand. And following up on that question, Jonathan. Broadly speaking, how is the primary market behaving? And how do you see the supply â the equilibrium in the market developing in terms of supply of loans and demand for loans within the CLO market this year? Sure, Mickey. The principal driver we see for the primary market is liability pricing which has been a bit volatile over the course of the last year or so. But let me turn it over to Joe to discuss that a little bit more broadly. Sure. So towards the end of last year, we definitely see [indiscernible] pretty wide liability prices with AAAs pricing wide of silver plus 200. Since the beginning of the year, we've seen some banks start to come into the space and have seen some price stock in deals starting to get done as tight as silver plus 175. So that's obviously a good sign. In terms of just the supply equilibrium, we continue to see a decent amount of warehouses outstanding. And so as those look to price, that will â could have potentially a range bound effect on the price of liabilities. So that might bump up against the force of just continued banks coming in. So we'll kind of see how that equilibrium plays out in the next couple of quarters. Yes, I understand. And I noticed â I can't recall a time when yields on CLO debt investments were higher than CLO equity estimated yields, which is the case currently in your portfolio. Can you expand on what's driving that deviation and how you can take advantage of it? Well, CLO debt tranches, Mickey, have fundamentally different properties from CLO equity tranches. And we're looking in the context of making these various investments at obviously, the current yield, but we're also looking at the interest-only component. We're looking at the principle â return of principle prospect, we're looking at the operation of the waterfall with respect to the equity tranches, specifically the structure of the indenture, which in turn, informs and provides a framework for the operation of that waterfall. We've always invested with a focus or we've generally invested with a focus on CLO equity tranches is against debt. But we are certainly looking actively at CLO debt tranche investments in this environment. But Jonathan, what's driving the difference? I mean you would expect the CLO equity estimated yields to be higher than debt given their risk profile, but the inverse is happening right now, at least on average, what's driving that? Sure. I think you're referring to the weighted average GAAP effective yields. So I would just point that that's a GAAP measure of our current portfolio. Not necessarily a reflection of the current state of the market. And obviously, our purchase prices for those various tranches is going to drive that calculation pretty dramatically. We may have purchased an equity tranche or a debt tranche at different moments in time when the market was providing us with a different opportunity set. Okay. Jonathan, the average price of the collateral in the portfolio actually increased about 75 basis points during the quarter, but the fund reported $0.34 per share of unrealized depreciation. I understand that it was a very volatile quarter and that the relationship is not linear, but what were the main factors driving down fair values during the three months ending December? It's essentially market prices, Mickey, supply and demand characteristics for the CLO equity tranches that we hold as of December 31, which during some periods may or may not, as you say, be particularly well correlated to the pricing of the various collateral pools that reside within those CLO structures. These are simply market factors. Okay. And Jonathan, to what extent did the spread between one-month and three-month LIBOR or SOFR and the pace of rate increases, which have been dramatic impact cash flows in the [fourth] calendar quarter? And how do you see that dynamic affecting cash flows this year? Sure. It had a pretty meaningful effect this quarter. We see it tightening in a bit for the next quarter, but I see that stabilizing going forward, for sure. That's obviously a projection based just on the publicly available forward curves, but that's what we're seeing. Okay. And my last question. I noticed that almost $1 million of cash flows were diverted this quarter which we haven't seen for a while. So I'd like to understand how large the portfolio's average CCC bucket is? And how much risk do you see in managers tripping their CCC limits this year with the rating agencies potentially continue to downgrade? Sorry. Let me go ahead and answer that question for Mickey. We are â as Mickey referred to â as Mickey referenced, we don't have a specific projection for the speed of downgrades or the speed of CCC downgrades by the rating agencies for the remainder of 2023. That said, we're obviously sensitive to the issue of cash flow diversions and we continue to monitor market dynamics closely. Operator, happy to go ahead with the other question now. Thanks for taking my question. Good morning, everybody. Just to follow on that note, I mean the â what I was really impressed with was the junior OC, over-collateralization was up and stable 459. I mean, given â the downgrades are outweighing, the upgrades we see that, what's going on in the portfolio that's allowing the CLO junior OC tranches to be stable in that environment? Is it just reinvestment, good portfolio management? Can you just elaborate on how that's â why that's staying stable in a higher downgrade market? Sure. So even though we are starting to see downgrades, the CCCs are still within their allowable 7.5% basket. So even if you see an increase in CCCs as long as it stays under 7.5%, you wonât see that impact the OC ratio. Additionally, just given this environment with a healthy discount in the leveraged loan market, CLO managers are able to build par just by going out and purchasing loans at 95%, 96%, 97%, and that's a good way to just build par and build those OC ratios. Yes, right. And I noticed you've extended the â you keep extending that reinvestment period. Is that something that â I mean, sort of when you look at buying â you said â I think you said [bought] two new issues in the quarter. I mean you really set on improving â continuing to lengthen that reinvestment period? You've done a great job in the last year just pushing it way out? Sure, Matt. As you know, we are partial to longer reinvestment periods is, I think that's sort of a fundamental part of a lot of the thesis that we invest around. That said, we seek to be as purely opportunistic and investor as we can be, which means if there are discrete opportunities with shorter reinvestment periods or even transactions that are structures that are outside of the reinvestment periods, we will look very broadly across the asset class. Certainly been an opportunistic in that time and time again [indiscernible] are today given the equity market rally, year-to-date. Two, there's been a lot of press reports on these leverage loans hung on these investment bank balance sheets and JPMorganâs asked about it on their call and they said, no issue. Do you foresee any issue with the banks going forward with some of the stuff on their balance sheet, does that create an opportunity for Oxford Lane, if they need to securitize and get them out? And then three, did I hear you that the credit curve is steepening. Is that good for Oxford Lane? Do you like to see the credit curve steepener or does it â are you indifferent to it? Sure, Matt. I think the first question â the first part of your question was a little bit garbled. Do you mind repeating that? Oh, sure. So since year-end, the LSTA syndicated corporate U.S. loan index is up roughly 160 basis points. We're just a little bit over 94 in the index right now, which is obviously generally good news for collateral pools that was within U.S. CLO structures. In terms of â yes, so I think your other question was about the pressure on some of these investment banks who have these warehouses. Now, individual loans. So I mean, Matt, our view is that to the extent that those loans or significant numbers of those loans begin to see their way into U.S. CLO collateral pools, they're going to enter those collateral pools at prices that reflect the current risk reward of both that particular loan, that corporate obligors, risk return characteristics as well as the current state of the market. So it's not anything that we've sort of worried about broadly as a market trend. Got you. And then the last on the credit curve. I mean is that steepening? Am I hearing you correctly that there's been some widening been AAAs and single Bs, CCCs and single Bs? Are you â so are you referring to the higher rated loans catching a bit while the CCCs saw decrease this quarter? Yes. So that's definitely a challenge for CLOs just because they are somewhat constrained in terms of ability to add on to these CCCs. So it's definitely something we're keeping a close eye on and are in discussions with our manager, but as long as they're still able to, in this environment, still move up in quality and still build par, we think they'll be able to manage it. Right, obviously, Matt as you know, any CLO structures ability to harvest opportunity in the CCC marketplaces is going to be structurally limited. Right. Got you. And I guess, just the last question is first, great job covering the dividend with the NII. I mean it was really very pleased to see that improvement and the coverage and given where your stock is trading is just really impressive on the yield. It's really impressive that you're covering it. There's nothing on the balance sheet, there's just really nothing you really need to do. We don't really have any near-term debt and even in the fixed rate long-term. So there's really no need to open any of those series up. And in terms of balance sheet management, you feel like you are just in really good shape and just keep on moving along. Sure, Matt. I think, look, it's always a challenge striking the right balance between raising incremental equity capital, raising additional indebtedness, the cost of that indebtedness, the duration, maturities of those various pieces of indebtedness that we have on our balance sheet, and striking the right balance between the liability side of our balance sheet and the asset side of our balance sheet. So that for us is an ongoing process. It's something that we need to think about all the time. But in that regard, we're reasonably comfortable with the current state of our balance sheet, yes. Yes. I would just point, I mean you managed for the [indiscernible] and asset price [is very well with leveraging], you are starting to see the other side of it. So I would just obviously commend you on a great job of managing the balance sheet and look forward to the company. Thanks for taking my questions. Thank you. We have no further questions. So I'd now like to hand the call back to our CEO, Jonathan Cohen for some final remarks. Thank you very much, operator. I'd like to thank everyone on the call today, everyone listening to the call on replay for their interest in Oxford Lane Capital Corp. We look forward to speaking to you again soon. Thanks very much. Thank you for joining. That does conclude today's call. Please have a lovely day, and you may now disconnect your lines.
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EarningCall_890
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Welcome to the Northeast Bank Second Quarter FY 2023 Earnings Call. My name is Kevin, and I'll be your operator for today's call. This call is being recorded. With us from the bank is Rick Wayne, President and Chief Executive Officer; JP Lapointe, Chief Financial Officer; and Pat Dignan, Executive Vice President and Chief Operating Officer. Yesterday, an investor presentation was uploaded to the bank's website, which will be referenced in this morning's call. The presentation can be accessed at the Investor Relations section of northeastbank.com under the Events and Presentations. You may find it helpful to download this investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. Please note that this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based upon current expectations of Northeast Bank's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bank does not undertake any obligation to update any forward-looking statements. Thank you. Good morning, I am Rick Wayne, and with me are JP Lapointe, our Chief Financial Officer; and Pat Dignan, our Executive Vice President and Chief Credit Officer. After our presentation, we would, of course, be happy to entertain any questions that you might have. I want to refer to the slides in my comments, starting on Slide 3. The financial highlights for the quarter were net income of $11.3 million, earnings per share of $1.54, return on equity of 17.5%, return on assets of 2.1%. Of course, the big news, which was included in our earnings release the last quarter was that soon after September 30 in this quarter, we purchased loans with UPB of $1.15 billion at a price of $998.5 million, which was an 86.6% investment on the purchase price. We also -- in the quarter, we originated $174 million of loans. The weighted average yield on the originations was 8.72%, and we earned 8.48% on the entire book. On the purchased loans, we had a return of 8.69% and when you look at all of this compared to the prior quarter, I would note that in the -- a year ago, we had $6 million of correspondent fee income and only $600,000 in the current quarter, which is great because we're looking for ways to grow our loan book and replace the correspondent fee income, which we've done well. And then finally, if that wasn't enough, it was a busy quarter, we had approved an at-the-market offering for up to $50 million. We were quite busy. I want to now turn to Slides 4 and 5 and make a few comments on the loan purchases in the quarter. On Slide 4, we provide detail based on collateral type, the largest collateral types were multi-family, which was $320 million out of the $1.1 billion, retail of $312 million. And then we can see the detail there as other collateral types, really noteworthy that the weighted average loan to value of the $1.1 billion of loans that we purchased was 33.5%. As you repeat that number, pretty low, 33.5% weighted average loan-to-value on our purchases, always focusing on credit quality, we do that. And then on Page 5 shows the geography of it. And we can see that the largest piece of it was in California with $570 million of UPB. And then next, New York $216 million and Washington state of $89 million. And then you can see the rest of the UPB on that slide. If we go to Slide 9, we break our focus for a second on the investment side, thinking about concentration risk by dollars -- our total capital was $270 million. And so you can see that on the very largest size, we only have 12% of our portfolio with the loans that are $15 million or greater, 10% between $10 million and $15 million. And then you can see the rest. So we do not have a concentration limit of the dollars. We're very careful about that. Below that, you can see the collateral types. And then we're -- in our portfolio now the largest state is New York with 33% followed by California with 31% of our portfolio is our national lending portfolio, of course, and then the rest in another 42 states. If we move now to Slide 19, we'll talk about the cost of our deposits for -- in a couple of minutes. The average cost of deposits, which is what the green line depicts increased by 141 basis points from 0.87% in Q1 to 2.28% at the end of December 31. And I want to point out that, that was primarily the result of funding for our loan purchases, where we funded that with broker deposits and some borrowings from the Federal Home Loan Bank. And so we had a lot of new dollars in terms of the rate on our existing deposits that went up by 30 basis points. And so you can see most of it as a result of adding new deposits and expensive deposits -- more expensive. And you can see our spot rate, which was 303 on the last day of December was up from the spot rate of September 30, which is 146 basis points. And that, again, primarily was due to the funding of the loans that we purchased and really primarily with brokered CDs. The brokered CD cost for all that was 4.43%, and those CDs will mature between June and December of this year, and we expect to replace that with funding at about 4%. So that should come down. Next, I want to move to Slide 23, which takes a look at our non-interest expense. You may recall from prior calls, we said that we expected, we would be about $52 million for the year. And you can see that we're higher in this quarter, but we were lower in the last quarter. In the six months, we're pretty close to that -- we're pretty close to $26 million, which would be what you would expect for half a year. I will say though, as we added $1 billion of -- in our loan book, we will see an increase in expenses in the third fiscal quarter and fourth fiscal quarter as we're going to be adding more people to service the loan book. It will still be highly profitable with that purchase, but we're going to have some increase in non-interest expense. On Slide 25, you can see that our loan discount combined is now $189.6 million, which is an increase of $150 million from where we were at the end of September as a result of buying the loans at a good discount this quarter. And finally, before we take questions, I want to ask you to look at Slide 31, which is the last slide, I just want to make a few points on that. As I mentioned in the very beginning, as one of our goals was to replace correspondent fee income with more net interest income. And if we look at the net interest income for the December 31 quarter was $28.7 million, which is the highest, and that's up to $20 million one year ago. And also, it's important to note that a big chunk of the purchases, what we're reporting here is the multiple pools, but the largest one we did not close until about December 23... 21st, thank you, JP. So we only had 10 days of interest income from that. And then, of course, going forward, we will have that included, although we included. I went to that reasonably quickly, but we provided all its information assuming that you have read it. And of course, if there's anything we can clarify, we'll do. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Twerdahl with Piper Sandler. Your line is open. First off, obviously, a lot of -- a lot going on here. Can you give us a little bit more in terms of the characteristics or duration, I guess, that we should be expecting for some of these purchased loans. Just trying to get a sense for what kind of amortization we might see on an annual basis as well as trying to get a sense for how to think about the, I guess, the regularly scheduled or regularly accretable yields that we should be using or potentially could be using for -- to think about modeling for 2023. I think we can give you some direction. We now -- for competitive and other reasons, we don't publicly disclose on a particular pool or pools in the quarter, what the WACC is, what the WAM is, what we expect we do report it, of course, as when we look back at what happened in the quarter and the year. We report what happened for the overall portfolio. But I think that can give you out some helpful information on these assets that we bought. One is that these are longer-term assets, the WAM on it could be more than 10 years and it had a lower coupon rates. That's why we got the big discount that we did. It wasn't obviously a credit issue given how low the LTVs are. We would -- there's some things we know about this and others we don't. We would expect a general returns on this to look like other loans that we purchased a little bit higher. But the really big variable is when the loans pay off as to how much discount we're going to recognize. And I'd say comfortably, we will earn more than 8 on this, perhaps meaningfully more than that. It depends on the prepayment speed on it. Okay. So -- and 8 is over the lifetime of these loans, right? That's not something that we would expect to necessarily seen immediately. No, exactly right. Because I mean it may happen. I don't think it's crazy, I think we're going to do more than -- report more than eight currently and more I don't mean to have more. I mean, but over time, with prepayments and with what we call shadow interest when we -- some loans, you get quite controlled interest and like -- and things like that. But I think this will look generally like what we've bought in the past. Okay. And then can you talk a little bit about what drove the volume? Is this coming from several banks? Or is it a handful -- is it an indication of the overall broad market, maybe just a little bit more of sort of the characteristics of what drove this opportunity? These were -- I think we have seven transactions in the quarter purchases. The ones that we're referring to here are -- good chuck of them were or four of them or three of them maybe, and the biggest one came out of an M&A transaction that the seller needed to and wanted to sell loans. Okay. And is this -- I mean, does this kind of keep your sort of hands full for the time being? Or I know you've talked about the market being pretty solid. Is there a possibility to continue seeing purchases over the next couple of quarters? Well, I think we will -- sort of generally been -- normally, we buy 100 -- excluding these big transactions, and not only we buy $150 million to $200 million quarter. No, I certainly at that level, we would expect that, and it's entirely possible that we could see some larger ones -- positive quarter past a year. This is why I have been here, Alex, to help you with these about year. And we don't know whether we're going to see another big transactions, certainly within the realm of possibility. But I'm not predicting that I'm not predicting that to be clear to set expectations. Right. And then I know you have the ATM going on, but what sort of constraints would there be on the balance sheet with respect to funding or capital that would be considerations for thinking about future purchases? Well, I just want to find this -- so at 12/31, after we took our loan book worth of $2.5 billion at the end of December, which is obviously up a lot. At the end of December, our loan capacity, if you look at our capital ratios, it was $150 million. So that came back down from like a year ago, it was $1 billion of capacity. There's $150 million. As you know, Alex, our loan capacity will increase as we earn money. And we have the ATM, which is if we need to sell more shares to raise capital, we can do that as well. That's all in place. And in fact, I didn't note that in here, but it's in our earnings release. How much did we sell in...? So we haven't done much of it yet. It was approved kind of late in December, but we are not very late, maybe mid-December, but we sold those 33,000 shares. So we can sell more shares to raise more capital. I don't see us as capital constraint if we have opportunity, which we were going to keep on the balance sheet. Great. And then can you just walk through the -- you talked about the -- some brokered CDs going from -- I thought you said 4.43% and then maturing between June and December of this year and that funding going out before. Can you just walk through the amount of that again in the actual numbers? Sure, Alex. During the quarter, broker deposits went up about a little over $500 million with a weighted average rate on that being about 4.43%. That was more for immediate funding, not our long-term funding strategy of this. So our plan is to pledge the loans that we purchased from the FHLB and take out some longer-term advances to better match the structure of the loans. And right now, where rates are from the FHLB advances, we think we can borrow money around 4% to match some of the maturity of the loan pool. So we do expect the funding cost to come down once we can deploy that strategy as these brokered deposits mature. Okay. And then you talked about the increase in expenses. And can you give us maybe just a sense for what -- how many people you might have to hire or an efficiency ratio or some sort of guideposts to sort of give us some sort of sense for how much expenses might go up as a result of meaningfully increase in the size of the balance sheet? I think we could give you a better answer when we reconvene at the next call, I'm not trying to avoid your question, but I don't want to put out a bad number. And we'll have a much better idea than as I -- but I did want to make it clear that we have a lot of operating leverage in the bank, and it's going to be a relatively small number relative to our expenses and our -- the size of our loan book. I'd rather -- to give you the idea, I'd rather put that out when we talk next time, we can give you a much tighter number. [Operator Instructions] We have no further questions at this time. I would like to turn the call back over to Rick Wayne for any closing remarks. Thank you and those on the call. Thank you very much for your participation. Alex, thank you for your questions. Good ones, actual ones. And we look forward to talking to you again at the end of the current quarter, where we can provide some -- tighter answers to the question that Alex asked. And with all of that, I say thank you. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.
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EarningCall_891
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Good day, everyone, and welcome to the Moody's Corporation Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers following the presentation. Thank you, and good afternoon, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year of 2022, our outlook for full year 2023 and an update on our medium-term targets. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com. During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures referenced during this call and U.S. GAAP. I call your attention to the Safe Harbor language which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2021, and in other SEC filings made by the company, which are available on our website and on the SEC's website. These, together with the Safe Harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. Rob Fauber, Moody's President and Chief Executive Officer, will provide an overview of our results, key business highlights and outlook; after which, he'll be joined by Mark Kaye, Moody's Chief Financial Officer, to answer your questions. Thanks, Shivani. Good afternoon, and thanks to everybody for joining today's call. I'm going to start with some key takeaways from our 2022 results, and then I'll look ahead to what we're expecting for 2023 before we take your questions. Our fourth quarter and full year 2022 financial results demonstrate the positive momentum and resilience of MA; while at the same time, reflecting the impact of challenging market conditions on MIS. And MA had a very strong finish to the year. It delivered its 60th consecutive quarter of growth and 10% ARR growth. Revenue grew 15% for the year; and for the first time, MA's full year adjusted operating margin exceeded 30%, and those are results that achieve the Rule of 40 distinction. MIS generated $2.7 billion in revenue as it weathered a challenging year for issuance, and we continue to advance our ratings franchise to ensure that we're well positioned to capture future issuance growth. And during the fourth quarter, we executed on the expanded expense management program that we announced in October and that's expected to deliver over $200 million in annualized savings in 2023. And it really significantly strengthens our financial position and flexibility for the coming year. Now for the full year 2023, we expect Moody's revenue to grow in the mid- to high single-digit percent range. And in addition, we're maintaining our previously communicated medium-term growth targets with a reset of the base year to 2022. And in what is clearly a fast-paced and ever-evolving landscape, we're investing with intent to grow and scale and to expand our capabilities to deliver on our mission, and that is providing best-in-class integrated perspectives on risk. So turning to our full year financials. Moody's total revenue was $5.5 billion. MA contributed approximately half of our total revenue for the first time in our history. And as I mentioned, MA revenue grew by 15%. And excluding the negative impact of foreign exchange, growth would have been 20%. Organic constant dollar growth for both MA revenue and ARR was 10%. And overall, Moody's achieved a 42.6% adjusted operating margin with an adjusted diluted EPS of $8.57. Now moving on. We remain laser focused on the four strategic priorities that I outlined in February of 2021. In order to realize the potential of our global integrated risk assessment strategy, and the success of this strategy has been made possible by our incredibly talented and committed employees. They've helped us launch new products, expand into new markets and improve the experience for our customers. And it's really wonderful to see our collective work achieve a number of important industry awards. For the first time, Moody's earned the top ranking in the Chartis RiskTech100. And we placed ahead of hundreds of companies in the risk and compliance technology space that ranges from household names in our sector to earlier-stage innovators. And it's really a testament to the momentum of our risk assessment strategy and the quality of our portfolio of solutions. And in addition, for the 11th consecutive year, MIS was voted the Best Credit Rating Agency by Institutional Investor and really demonstrates that we remain the clear agency of choice with investors. In MIS, in 2022, we made several important investments to enhance our ratings presence in emerging markets. And that includes the acquisition of our majority stake in the largest domestic rating agency in Africa and the further expansion of Moody's Local in Latin America. We also met the need for greater transparency in ESG risks, specifically as they relate to credit by rolling out more than 10,000 new ESG credit impact scores across MIS. Now across MA, we enhanced a number of our workflow offerings through the integration of data and analytics, and we created new products to meet evolving customer needs. In fact, newly developed organic products contributed a significant portion of MA sales growth in 2022. I'm going to touch on several of these in a few minutes. Turning to the outlook for MIS. As I mentioned last quarter, we expect that the factors that impacted issuance in 2022 to persist really through the first half of 2023. The inflationary environment, the pace of interest rate increases are still causing volatility in equity and debt markets, and the trajectory of economic growth in major economies remains uncertain. So it's going to take some time for these issues to resolve and for debt market activity to fully resume but refunding needs and pent-up issuance demand and baseline economic growth, they all point to a recovery in issuance, which we expect to pick up in the second half of the year. And in this environment, we are proactively balancing our commitment to serve issuers and investors with the highest quality ratings and research and insights; while at the same time, prudently managing cost. And we expect that the swift and decisive expense management actions that we took in the fourth quarter will enable MIS' adjusted operating margin to return to the mid-50s percent range in 2023. So moving to MA. I want to highlight the impact of the significant investments that we've made in product development and sales and acquisitions. And over the last three years, these investments have helped us deliver $1 billion in additional recurring revenue. And on an organic constant currency basis, recurring revenue growth has been steadily improving each year from 9.2% in 2020 to 9.7% in 2021 and 11.1% in 2022. And we're well positioned for future growth as three of our businesses with revenue of more than $100 million each delivered ARR growth in excess of 10%. In fact, our KYC and compliance business, which is our fastest-growing business, had ARR growth greater than 20%. And even some of our more established products such as Orbis and CreditView, delivered high single-digit ARR growth last year. So let me give you a little bit of insight into how several of our newly-launched products are contributing to this growth. And I'm going to start with our KYC Lifecycle solution, which offers customers a user-friendly configurable portal and risk engine. And it enables fast and accurate checks that leverage our vast company, people and news data sets. And this solution integrates the capabilities that we've built and acquired over the past several years, so it's opening the door to new markets and customer segments with a powerful new workflow tool for financial crime compliance and third-party due diligence. And it is resonating with our customers. In the fourth quarter, we completed one of our largest-ever sales to a nonfinancial corporate customer in MA with a combined offering supporting both customer and supplier vetting and screening capabilities. We also recently launched an enhanced version of our Climate on Demand product, which integrates our very rich climate analytics from RMS and MA and broadens the scope of our capabilities in the banking and insurance sectors and beyond. And Climate on Demand is part of our growing suite of physical and transition risk offerings, which are gaining traction with our customers. For example, we were awarded an important sales mandate late last year as a major U.S. financial regulator selected us to help them better understand and measure the impact of climate on risks facing financial institutions in the broader economy. And we were selected because of our ability to bring together some unique capabilities from across Moody's, and that includes our ability to quantify the financial impact of climate risk, physical risk assessment of bank operations and exposures as well as finance emissions. And in banking, we extended our CreditLens origination solution into commercial real estate, and that's one of the largest asset classes on bank's balance sheets. And this product integrates our proprietary property data, market forecast and credit analytics to meet the specific needs of commercial real estate lenders. And we're excited to partner on this product with one of the largest real estate lenders in the United States, and we're encouraged by the positive customer feedback and sales progress to date. So together, these examples, I think, demonstrate how we are integrating capabilities, we're driving product innovation and leveraging our very strong sales distribution to build a robust pipeline as a foundation for continued growth. So let me turn to the outlook for 2023, and I want to highlight just a few of our guidance metrics. We project that Moody's revenue will grow in the mid- to high single-digit percent range and adjusted operating margin to be in the range of 44% to 45%. Adjusted diluted EPS is forecast to be in the range of $9 to $9.50. And for the medium term, we're maintaining our previously communicated growth targets with a reset of the base year to 2022. And in summary, we made strong progress in the fourth quarter to position the business for success, closing out what we'd characterize as both a challenging and a productive year. And indeed, against the backdrop of macroeconomic headwinds, we've continued to unlock the growing potential of MA and reinforced the foundation for MIS to capture the immense opportunity we see once issuance levels recover. So we've entered 2023 in a position of strength, and I have tremendous confidence in the growth potential of the business as we continue to execute and invest in building Moody's as the leading provider of integrated perspectives on risk. Rob, I just wanted to touch on that -- the medium-term guidance for the ratings business, which youâve maintained at low to mid-single digits even though the base, I guess, has come down a lot. I just wanted to try and flush through a little bit more in your assumptions. And I always thought it was a GDP plus 3 to 4 type pricing business, and your competitor obviously had a more optimistic outlook there, too. So just trying to understand how you guys are thinking through that. Yes. Manav, we've gotten some questions around how quickly things are effectively going to snap back to 2020 and '21. And just to kind of put that in perspective, 2021 total issuance was more than 35% higher than the average from '09 to 2022 if you exclude the 2020 and '21 years. So those two pandemic years were, in fact, extraordinary and unusual years. And so obviously, we are re-baselining off of what we believe are, in fact, kind of more normalized levels of issuance. In fact, if you look at 2022 total issuance, it was down something like 5% from that average that I was talking about, historical average. But another way to kind of look at this, Manav, and you're kind of, I think, getting at, is there also some upside to the way we're thinking about the medium term? So while overall issuance in 2022 was about 5% below that historical average ex those two extraordinary years. If you look at corporate issuance, it was down something like 15%. And if you look at the mix of corporate issuance as a percent of total issuance, we're actually down a good bit in 2022 and as we kind of look forward. So I think in a way, there's been a mix shift against us here. And so if you think that there's more opportunity for corporate issuance as a percent of the total, there might be some upside to the way we think about the medium term. Yes. And add on to just Rob's remarks, that we do recognize that some investors may now see this guidance as being slightly conservative in nature. We do remain open to the possibility of revisiting and looking at this specific target once we have better insight into the macroeconomic and the issuance environment as the year unfolds. Okay, got it. Makes sense. And then Mark, just perhaps maybe even an open-ended question to talk about the expense ramp and stuff that you typically do. But what I was looking for is the expense savings that you've talked about, like how does that split between the two segments? Manav, thank you. So maybe let me start firstly with the expense ramp. So we anticipate operating growth, inclusive of the annual merit increases, the reset of our incentive compensation and then our incremental organic investments to contribute to an expense ramp of between $10 million and $30 million between the fourth quarter of 2022 and the first quarter of 2023 that exclude any restructuring-related items. And then from the first quarter of 2023 to the fourth quarter of 2023, we expect expenses to remain relatively stable and only ramp between $10 million and $20 million. And that's primarily as we realize the benefits of both our 2022, 2023 geolocation restructuring program and any additional cost efficiency actions. On your second sub-question, restructuring. So through year-end 2023, we still expect to incur up to $170 million in aggregate charges, and that will be split into $70 million to $90 million for MIS and $65 million to $80 million for MA, and that's related to both the real estate rationalization and the reduction of personnel as we selectively downsize and utilize alternative lower-cost locations. For the full year 2022, we were able to accelerate some of our actions. And so we accrued $114 million in total restructuring charges for the year, and that is indeed up from the $85 million we guided to back in October. And that splits into approximately $49 million for MA and $65 million for MIS. And then finally, looking forward, we estimate we'll incur up to $15 million in incremental pre-tax personnel-related charges and $20 million to $40 million in real estate charges in 2023. I have a question related to the previous one but it's related to seasonality. Could you please give a sense of maybe the seasonality in terms of the revenue and also margin expectation on a quarterly basis in 2023? Owen, good afternoon. So our central case assumption is for the cyclical market disruption that we experienced during the majority of 2022 to really persist through the first half of 2023. And as a result, for MIS, we expect the transaction revenue to be significantly weaker in the first half vis-Ã -vis the second half of the year when prior period comparables, the capital market conditions and spreads become more constructive. So specifically, the midpoint of our full year 2023 MIS revenue guidance implies first half revenue to decline in the low teens percent range and second half revenue to grow in the mid-20s percent range. And that also underscores our expectation then for higher MIS margins in the second half of the year versus the first half of the year. If I look at MA, we forecasted full year 2023 total revenue will increase by approximately 10%, and that's underpinned by broad-based strength across all lines of business. And given that MA revenue is highly recurring, we expect absolute dollar MA revenue to progressively increase over the course of 2023. And as such, we expect MA's first quarter adjusted operating margin to be similar to our actual fourth quarter 2022 margin before improving through the remainder of the year, obviously, as revenue increases and as we realize the benefits of our cost savings. In addition, as we expand our product capability suite, as we continue to grow the size of our sales force to meet customer demand, we anticipate ARR to also steadily increase throughout the year. And it's going to be similar to what we saw in 2022, ultimately achieving low double-digit percent growth by the end of 2023. On Moody's total operating expenses, our guidance here is for an increase in the low single-digit percent range. And while we don't typically provide expense growth forecast by segment, given we anticipate the majority of our 2023 strategic investments to support MA revenue growth opportunities, the full year segment operating expense guidance would be along the lines of low to mid-single-digit percent decline in MIS and a high single-digit percent growth in MA. And then finally, for EPS modeling purposes, I'd just like to remind you our first quarter effective tax rate tends to be lower compared to the full year results, and that's simply due to the excess tax benefits around employee stock-based compensation. Thanks so much and really nice results. If we went back, you were able to reaffirm the medium-term targets. Obviously, you reset the base here but a pretty dramatic shift in '22 relative to initial expectations. I don't know if this would be for who, but just any thoughts on puts and takes? Is it that analytics has been overperforming a little bit relative to the downturn in MIS? Just any puts and takes as you think about kind of what the initial targets were. Kevin, it's Mark. So maybe I'll talk just thematically, I'll start with our base case assumptions because our medium-term guidance, as you know, refers to a time period within five years, with 2022 as the base year. And that incorporates various assumptions as of the end of January. And those include, for example, U.S. and euro area GDP to stagnate in the near term, followed by recovery, U.S. 10-year treasury yield to stabilize, fluctuating modestly around current levels, issuers continuing to refinance maturing debt. And then on the MA side, customer retention rates to remain in line with historic levels, and of course, pricing initiatives to align with prior practices and our enhancements to customer value. If I maybe pick, to your question, two specific examples, maybe two tailwinds to headwinds. On the tailwinds side, issuance activity tends to track GDP growth over the medium to long term. And our central case models GDP expansion at a level consistent with what prevailed prior to the COVID-19 pandemic. And we've used our GDP and interest rate predictions from Moody's Analytics forecast, which shows that the 2014 to 2019 average annual real GDP growth was between 2% and 3%, and that's sort of what we expect going forward. The second tailwind is something we spoke about extensively on prior calls, that's based on our maturity wall studies. U.S. corporates have $1.9 trillion in maturing debt. The majority, we expect to be refinanced. Similarly, European corporates have refunding needs around $2.1 trillion. And then on the headwinds side, the first one maybe is worth noting is we do project interest rate increases -- sorry, we do project interest rates are going to remain elevated and that may potentially impact opportunistic financing. For example, in the U.S., we model a near-term increase in the 10-year treasury yield. And then we expect that to remain roughly stable at that 4% through 2027. And then finally, in resetting our medium-term target base to 2022, we have assumed constant currency foreign exchange rates over the five-year period, specifically the euro at 1.07 and the pound at 1.20. And that shows dollar appreciation versus the original rates we gave in February last year, which were 1.14 and 1.35. Can you just shift gears to capital allocation for a second? Maybe I missed it, but the $250 million in share repurchases seems fairly low relative to what you've been doing in the past and obviously also the free cash flow guidance. So is there a shift of thinking on what are the uses of cash? And then obviously, does that also suggest that maybe on the M&A side, you've taken a harder look, again, maybe in a different environment from a buyer and seller perspective? Alex, best place for me to start is to reaffirm that our capital planning and allocation strategy is unchanged. We remain committed to anchoring our financial leverage around a BBB+ rating, which provides, in our view, the appropriate balance between ensuring ongoing financial flexibility and lowering the cost of capital. Given, however, that our gross leverage as of year-end was above 2.5x, and that, as we know, is driven by the cyclical market conditions we just experienced. And as we head into 2023, we want to retain the financial flexibility to marginally deliver our balance sheet and improve our gross outstanding debt position if needed. And that's similar to the actions that we took in the fourth quarter through our tender offer. And what that means for 2023 is our plan is to return approximately $800 million of our global free cash flow, it's about 53% at the midpoint, to our stockholders, subject, of course, to available cash, market conditions, M&A opportunities, et cetera. And that includes, to your question, the share repurchase guidance of $250 million and approximately $560 million in dividends through a quarterly dividend of $0.77 per share, which is 10% up from our prior quarterly dividend. And it's all about creating that flexibility to evaluate opportunities as the year goes on. Wanted to ask about the free cash flow guide. Part of the reason why it was maybe a little bit lower than what I thought was the CapEx sort of staying at the $300 million range, roughly, let's call it like 5% of revenue. Should we expect that level to continue? Are you at sort of a different CapEx just percentage-wise because of the change in model? Or I guess, what's driving it? Is 5% the right number to be thinking about for future years as well? Toni, thank you for your question. Let me maybe start by saying the midpoint of our cash flow guidance range implies growth of approximately 25% off of our reported 2022 free cash flow result. And that's well above the projected midpoint, which is low double-digits for our U.S. GAAP net income. And in addition, what that really means is at the midpoint, the free cash flow to U.S. GAAP net income conversion ratio is approximately 100%. And that's effectively equal to the average free cash flow conversion ratio that we've had over the last four years, meaning specifically from 2019 to 2022. So we feel pretty comfortable with that as a result. In terms of CapEx, 2022 actual result was $283 million. We're guiding to approximately $300 million, i.e., a similar level. And there are a number of factors underpinning that guidance, specifically, for example, continued M&A integration activity, for example, related to PassFort or kompany or RMS. There's ongoing enhancements to IT platform and our real estate infrastructure associated with the workplace of the future program. But one of the big drivers that will carry forward into 2023 is effectively the higher amount of capitalizable work under GAAP related to our SaaS-based solutions for our customers. And that ties in directly with the underlying business strategic shift to provide more SaaS-based, more recurring revenue solutions within MA. And so I think it's a step-up in 2023. I don't think we'll see a separate step-up in future years, but that's really what's driving the underlying numbers. Terrific. And just as a really quick follow-up. I know last quarter, you were sort of saying that you thought third quarter and fourth quarter would be the trough for the issuance declines, and that it should improve throughout 2023, in particular, second half. I feel like there's some consistency in the messaging that second half is going to be better than the first half. But like, I guess, have you delayed your expectation for issuance recovery? Or is it still similar to where you were thinking it was going to be last quarter? Not really. Toni, it's Rob. Not really a change. It's pretty consistent with how we thought about it last quarter. I think one thing you're hearing from us is just the first quarter of 2022 has a relatively robust issuance here. So there is the matter of comps, but I don't think there's any fundamental change from how we were thinking about the kind of troughing and recovery in issuance. I wanted to focus on the Moody's Analytics business. We saw some pretty good robust strength there and the guidance also implies further acceleration. Mark, in your -- in response to a prior question, you talked about the seasonality but also talked about like a similar growth profile across all three units within MA. But it seems like based on that bubble chart on Slide 9 that you may have some faster growth businesses within Decision Solutions. So I just wanted to better understand how should we think about some of the growth businesses within all the three segments within MA? Yes. Ashish, it's Rob. Let me -- maybe let me start since the question is really about MA growth. Maybe let me just start with kind of the ARR, and then I can zero in a little bit on kind of what's contributing to that. But we talked about on the last call that we've got RMS now in the MA ARR figure. And I think we've also talked about the fact that RMS is not quite yet growing at the same rate as MA overall. We're still executing on the synergy opportunities in order to accelerate that growth. We believe we're on track but there's still work to do. So the reported figure of 10% had about a 1.5% drag from RMS. So excluding that, we would have been -- had ARR at about 11.4%. And you might remember that back in the third quarter, we were talking about 10%. So we're seeing some very nice acceleration of ARR on a like-for-like basis. And I think that goes to the expanded capabilities that we've got now to attract both new customers and to better serve and expand our relationships with existing customers. Frankly, we had some great execution by our sales teams in the fourth quarter. And that was a real area of investment for us as you've heard us talk about. But it's not a one-trick pony either. I think that's the other interesting thing. We're trying to get that message across with that bubble chart. We frequently talk about KYC as kind of our high flyer, and it is. It continues to have very strong momentum. But you can also see our life insurance business. You can see our banking business. And you also see, I think, interestingly, we wanted to show two of our what I think of as kind of more mature product lines, which are the CreditView Research and our Orbis offering. So there is data that's in the KYC. So this result you see there for Orbis is kind of everything excluding KYC use cases for the data. And both of those are growing at a high single-digit ARR growth rate. So we feel very good about kind of the portfolio. And again, if you think about the strategy, it's been about identifying risk assessment use cases and then threading through these kinds of capabilities to help our customers with a range of kind of risk and decision-making. So some very good momentum in the portfolio. In your prepared remarks, you talked a little bit about some of the indicators you're seeing to give you confidence about a global debt issuance rebound in the second half of the year. Can we get some examples of what you're looking for, what we should be looking for? Yes. It's Rob. So maybe let me talk about both what I think could provide some upside as well as also what could provide some headwind to our outlook. So I'll start with the upside. We talked a lot about, on the last call, just the market's need to get more certainty around the trajectory of inflation and getting certainty that inflation was starting to peak because that then informs the Federal Reserve actions and the market wanting to understand whether we're near the end of the tightening cycle. And you can see, as we then went through the fourth quarter end of the year and into January, the market getting some confidence and you see the issuance that started. We also talked about where you're going to see that. And so I think that's interesting to understand. You're first going to see, as the markets open up, opportunistic investment-grade issuance. There's the folks with the best access to the market. Then you're going to see, and we have started to see, the higher-rated spec grid names coming to the market so the B, A names. And then eventually, you start to see the single B names coming to the market, and we have seen a few of those. In fact, we've seen our first couple of dividend recaps in months. And it's that kind of activity that starts to give you confidence that the market is opening up. Now I would say it's -- I'm going to use the word kind of a fragile recovery because there's still plenty of headline and event risk. But we are starting to see that. You saw a very robust month in January for investment grade. You saw high yield start to pick up in leverage loans, started quite slowly, but we're starting to see some leverage loan activity as well. M&A, we have a fairly muted forecast for M&A, kind of a flattish assumption built into our outlook. That could provide some upside if we see M&A activity pick up. And I would look to the sponsor-backed M&A and LBO activity as a place where the sponsors have a lot of dry powder to put to work. And so that would be something to look for. No, sorry. Just in terms of -- just very quickly, Jeff, what could provide a few headwinds? There is, as I said, a headline risk, both in terms of inflation prints and what that means for what the Fed is going to do. But -- and just in general, any unanticipated policy actions by central banks. And that's something I'd talked about even last year. The central banks have a pretty tough assignment on their hands to both deal with inflation and engineer a soft landing. So I think we're going to be keeping a close eye on all that. You expect 2023 MIS revenue to increase low to mid-single digits, and that's based on an assumption of low single-digit growth in global debt issuance volumes. If you assume pricing growth of perhaps 4% to 5% given higher inflation, the guide implies to the degree of negative mix from issuance. That said, it looks like you're expecting high yield and structured issuance to be the fastest-growing categories in 2023. And these are generally favorable from a pricing mix perspective. So can you help bridge your assumptions for MIS revenue growth and global debt issuance volume growth in 2023? George, I think you've got it about right. I mean, that's why we've got a range that we've included there for our outlook. And maybe let me just -- it might be helpful, George, just to touch on, for a moment, how we're thinking about 2023 issuance outlook. And there are a wide range I think, of views, probably a wider range than I can remember in recent memory around what's going to happen with outlook. And as you start to zero-in on what's accounting for the difference, it really, I think, is largely around folks' expectation around leverage finance issuance. And I'll start with investment-grade. I mean, we expect that to grow modestly something like 5% for the year. Leveraged finance, when we look at high yield, we're expecting growth of 25%. Last year is one of the slowest years on record. And I would acknowledge that we've got a little bit more cautious view than some folks in the market. I've seen some much more bullish forecasts for high-yield issuance. But in general, I think what is informing kind of our view is we've got an environment with higher funding costs. We've got the potential for a recession, and we've got a flattish M&A outlook. And so that's what's contributing to our view. I would acknowledge, George, that we've got a pretty healthy backlog of first-time mandates that did not go to market last year. Almost all of those are in the leveraged finance space, so there's some definite pent-up demand. And then leveraged loans, we think it's going to be flattish. And again, back to kind of Mark's commentary, kind of a tale of two halves. Loans had a very strong start to 2023 but -- so we expect that, that will pick up in the back half of the year -- for 2022, excuse me. Rob, you hit on some of this when talking about M&A -- or MA more broadly, but I want to focus on Decision Solutions in Q4 specifically. It pretty significantly accelerated. And correct me if I'm wrong, but I thought RMS was in there, and you noted that's currently growing more slowly organically than, I guess, your heritage solutions. So just anything further you can say on what drove the organic acceleration in Decision Solutions in Q4 specifically? And is it underlying or is there anything unusual like one-timers like rev rec true-ups for full year usage or anything like that? Yes. Great question. Decision Solutions was a good story for the quarter, indeed. 15% growth on an organic constant dollar basis in the quarter. You will remember actually, last quarter, we kind of talked about Decision Solutions, a little bit lower reported growth rate print, so we're talking about the importance of kind of looking through that to ARR. That's still the case. And so if you look at kind of full year, we had about 11% growth in Decision Solutions ARR. And we've really got strength in a number of areas. And I think I used that phrase, it's not a one-trick pony. And that's true. In KYC, we're up in that kind of mid -- low to mid-20s range. But we've also got a very nice life insurance business and a very nice banking business. The KYC business, we just got lots of demand not only for the data, but now we've got this life cycle product that I mentioned, which allows us to package the data with a workflow solution, gives us the opportunity to have even bigger engagements with our customers. So that's very, very helpful. And we launched that in the second half of last year. But maybe just to focus in just a little bit more on the other two businesses. People are probably less familiar with it. We have a nice business. Obviously, RMS serves the property and casualty and reinsurance market. But we have had, for years, a business serving life insurance -- life insurers. And we've got a really powerful actuarial modeling platform and we've been able that is used by many of the world's largest insurers. And we've just been able to do what we've done with banking, frankly, which is to build a suite of solutions around risk and portfolio management and balance sheet management and capital planning and reporting. And one of the areas where we've had some really nice growth is around our risk integrity IFRS 17 solution. As you may be familiar, insurers are having to implement IFRS 17. So there's been a lot of demand to help our customers there. And then the other is banking. We've just seen some very nice growth with the kind of suite of solutions in banking across origination, risk and portfolio management and capital planning. I just wanted to jump into that MA organic revenue growth guide of about 10%. When I look at MA's ARR in the fourth quarter coming in at 10% and then the guide really is for it to accelerate to low double digit in '23, I just felt with that accelerating backlog, the bias for MA organic revenue growth would be above 10%. Are there any kind of headwinds, maybe non-subscription revenues to note to kind of just kind of keep it about 10%? Yes. One headwind, as you know, Andrew, we've transitioned most of the portfolio to recurring revenue. I think it's something like 94%. But in the banking business is where we do have some -- still some kind of onetime. And you've heard us talk about moving away. We've moved almost entirely away from onetime license revenue. We also have some services work, and we've been deemphasizing that and really focusing where you might see a small delta between kind of ARR and then translating to overall revenue. Yes. And Andrew, just to add on to that, if you think about decomposing our guide of 10% organic constant currency growth for MA, you could think about recurring as growing in that low double-digit range when you think about transactional onetime declining in that high teens percent range. I have two questions on the MIS midterm targets. First, I appreciate the conservatism on the top line. I'm curious that you left your margin target as is despite a lower sort of implied top line. So just wanted some more perspective on that. Is it related to the recent restructuring actions? And then second related question is, you mentioned a private credit market as one of the factors as you think about issuance. We've obviously seen significant expansion in that market in '22. So curious what your thoughts are around private product both for '23 and as you thought about your medium-term targets. On your question around the MIS adjusted operating margin, we are maintaining our expectation for MIS' medium-term margin to be in the low 60s percent range. And I certainly acknowledge that, that's a meaningful step-up compared to our new base year 2022 results and full year 2023 guidance. While this target is reflective of performance within 5 years, the key, and I think this is the point that you were flushing out, the key to achieving it will naturally be influenced by the issuance recovery pattern we experienced in 2023 and beyond. That said, MIS' medium- to long-term business fundamentals remain firmly intact. And we continue to believe that the disruption in the debt capital markets that we experienced in '22 was really cyclical. It wasn't structural in nature. And that view is informed by several data points and observations. For example, the stock of debt has steadily grown over the last several decades. The price to value is compelling for our customers. There are strong refinancing needs that can help buttress the future transactional revenue base, credit spreads remain around that historical average. And overall, I'd say that the interest burden is still relatively low for corporates. And these factors, in addition to the proactive and decisive expense management actions like we took last quarter, should help to stabilize the '23 margin in that mid-50s percent range, and that will help us obviously set a good base before expanding to that low 60s over the medium term. Yes. One other thing I want to emphasize just around why we're talking about MIS margin expenses. And I've gotten these questions from folks over the last few months is just around making sure we've got the right resources. And I want to assure you that we approached the restructuring exercise very, very thoughtfully. We monitor over $70 trillion in rated debt and it is absolutely critical to us that we make sure that we've got the expertise and resources to not only monitor that stock of debt but also to be able to service the flow of new issuance. And so we just -- we approached that very thoughtfully, things like a typical span and layer exercise and thinking about initiatives that could be deprioritized and ways to get more efficient. And we're committed to getting more efficient in that business, and that's what you see with the medium-term target. Let me touch just briefly on the private credit space. We talked about that on the last call. The private credit market has experienced some strong growth over the last few years. And I guess the way we've stepped back and tried to really think about it is, what is the opportunity for us to address that market and the needs of that market? Because we do think that we have a role to play in helping both asset managers and investors and borrowers. And we've got some very large relationships with many of the largest private credit lenders in the world. And you think about our relationships with the asset managers. We've got ratings on the asset managers themselves as well as their portfolio companies and CLOs and BDCs. And we also support them with a range of products across MAs. And we've been in some very active discussions with a range of players in this space. And we think that we've got more that we can do to serve them around some important use cases. That includes providing independent credit assessments to help investors to understand the credit quality of these portfolios that they're invested in but also to help the asset managers themselves around credit scoring, company data, benchmarking portfolio management, ESG is another area. So we think there's an opportunity here for us to do more. And we've got a number of things in the works across the company to be able to support the use cases around us. I want to ask a little bit about the MIS guidance just for 2023. When you look at the composite and the pieces of that you put in that support your outlook, how much of your guidance is dependent or focuses on kind of the refi walls that are sort of inherent support? And how much is it in terms of just assuming that market conditions tend to come -- get better over the course of the year and particularly in the second half of the year or just more dependent on things improving versus things that you can actually see? And maybe you can talk a little bit about that on vis-Ã -vis what you normally do this year. Is there any change? Hi, Shlomo. It's Rob. Maybe what I'll do, I mean, refi -- let me just kind of talk to you a little bit about the several different things that kind of go into how we think about issuance drivers and also kind of what our visibility and confidence level is around those. Refi is one of them. And the first thing I would say is just around mix, and we've talked about that a little bit, that there's obviously a wide range of what's going to happen with leveraged finance. And I think we've got a little bit less certainty around that. Again, just the fact that there's a wide range of views across Wall Street means we have a little less confidence about what's going to happen, and that also contributes to why we have a range in our overall guide. When you think about the issuance in the -- coming from the financial institution space, there, we've got much more confidence as it translates to revenue, right, because of the kind of commercial relationships that we have with banks. Around refi, obviously, we've got great visibility in the refi walls themselves. There is a question about the extent of pull forward. That's always a question. And I would say, look, we've looked at this before. It's a really, really rough number, but we kind of tend to think about kind of a little over 1/3 of kind of transaction revenue being supported in any given year by kind of those refi walls. And then you have to look at kind of what do we think is going to happen with market conditions, and that gets into rates and spreads. Spreads are very well correlated to default rates. We have great visibility around default rates. But obviously, there's volatility in the market that can make spreads move around at any given time. I talked about some of the headline risk that exists in 2023. And that's not something that we're able to capture in a forecast. Those kinds of events are binary. They either happen or they don't. And a great example is the -- kind of the debt ceiling issue. That creates some event risk for the market. So can't predict the future, but there are some things that we feel fairly comfortable about that give us insight into -- that help us kind of build to that outlook. So hopefully, that gives you a feel for it. Okay. And if I could sneak in one just housekeeping. The AR DSO was up a little bit sequentially. Were there any deals that closed particularly towards the very end of the quarter that kind of pushed it up? Shlomo, this is Mark here. This might be a record for a question on an earnings call around DSOs. I anticipate you're looking at our externally reported accounts receivable over, I think, three months revenue annualized. And I'm guessing you're seeing a number of around 115 in the fourth quarter around, letâs call, at 110 for full year. Internally, we're able to do a little bit more of a precise calculation because we can use sales. And so if I think about ending sort of ending accounts receivable off of the -- divided by three-month sales annualized, we get a much lower number of around 71 for the full year. That 71 days is a little bit up from what I saw in the last year. And the driver here is just around the integration of acquisitions into our corporate processes as we bring sort of that same discipline and rigor to the DSO processes of the companies we've acquired. Just want to go back to this point around the MIS guidance, if I may, to start. If I pose it this way, we've got data that we've been presented with historically that shows there to be perhaps a 5% refi wall in '23 over '22. If I haircut that by a couple of percent for defaults which I think would be conservative, the starting point, therefore, is 3% growth. And as George pointed out, historical pricing is 4% to 5% with the potential for a positive pricing mix, which would get me to sort of 8% to 10% as a baseline growth for next year. And that's without assuming anything for sort of new issuance recovery, and you said new issuance recovery is sort of low single digits. So I'm just trying to square that with this sort of low mid-single-digit guidance because it does seem like there's a big gap there between the way I built it and what your guidance suggests. This is Mark here. Russell, nice to have you on the call. One other element to add to your model is the reporting of MIS other revenues for 2023 vis-Ã -vis 2022. Those are down in the range of $10 million to $15 million primarily to reflect the incorporation of some of our ESG products and capabilities into our MA revenue set. That's really what's driving the difference between sort of the issuance outlook and the revenue outlook we provided this morning. Okay. I might follow up with you on that one. And then Mark, just another question, maybe flipping over to Decision Solutions. I appreciate there's been a few on this now. But wondered how much of the growth in Q4 was related to pricing. And how much might be related to you increasing cross-sells between the products where you've been investing in that growth? And if you would argue, there was upside risk to the guidance if corporate M&A activity recovers -- I'm sorry, that's a 10% guidance for MA. Yes, apologies. Wondering whether there is upside risk to the 10% MA growth guidance if we see a recovery in corporate M&A activity next year -- or sorry, this year? Let me just start with the question about Decision Solutions and pricing. And with the biggest growth engine in Decision Solutions is our KYC business. And just to give you a sense, new sales almost doubled in 2022. And we had a greater than 50% increase in the number of new customers, and we had a meaningful increase in the average sale price. That's not just pricing. What that really does is the bundling of products and capabilities that's allowing us to have a larger ticket size. So I think what you're really seeing certainly in KYC is a lot of new customers coming into the market. We're obviously doing a very nice job of bringing those into the Moody's family when you look at our growth rates relative to the overall market but also continuing to be able to provide additional capabilities to folks who are already then using the products and services. So I'd say that's actually probably a similar story to kind of a lesser extent for what we're doing around banking. We've just got a suite of cloud-based solutions that we continue to build out that allows us to bundle those solutions together and to increase the ticket sizes and the size of the relationship that we've got with our customers. So it's not just about price increases there. Of course, there's an element of that as we continue to enhance the value proposition of all of our products. But I think it's really more around cross-sell, and in the case of KYC, especially just new customer acquisition. Okay. And then the second point, I'll rephrase it better in terms of the MA revenue growth guidance of 10%. Is there upside risk to that if we see a recovery in corporate M&A activity? I don't really see those two things tied tightly together. There'll be upside to the MIS guidance, obviously, but I don't necessarily think so from an MA standpoint. I guess, Rob, you've talked about this, let's go a little deeper here. Your medium-term outlook, you said that's five years here, you're talking about low to mid-single-digit MIS revenue growth long term, which is the same range that you're giving for this year. We all know 2022 was obviously a very rough macro year M&A for the marketplace for most of the bloody year was quite low. Debt taken on for share buybacks was quite low last year. Refinancings last year seemed like that was low versus what it should be the next few years, that you agree on that and stuff. And when you think about pricing, historically, you've done 3% to 4% price, maybe it's a little bit higher than that, but at least 3% to 4%. How do you square all that with only up 2% to, say, 5% on average for the next five years with the base year seemingly being so low? Is it just being overly conservative here? I'm just trying to get a better sense of this. I get a lot of questions on this. Yes. I understand that some will view us as conservative. And obviously, time will tell, and I hope that's correct, Craig. I guess it just comes back to kind of what I talked about earlier when we look at kind of a longer-term average in terms of overall issuance and where we ended up 2022 and what we see, at least in front for us for 2023, we think implies as we, I think, in line with our medium-term targets. So I think that's what it comes back to. But as I said, the one thing that maybe to think about in terms of are we being conservative, I touched on this a little bit earlier in the call is, while on one hand, we're at relatively similar levels of issuance from pre pandemic, I mean, a little bit lower but not significantly lower, the mix is different. So last year, we had much more issuance coming from financial institutions as a percent of the total than corporates. And so as that -- if that mix shift changes back to what we've seen over the last, call it, six, seven years pre-pandemic, then yes, I think in that case, we'd see faster corporate growth that might provide some upside to the way we think about the medium-term targets. Then also just on the pricing, can you guys tell us what you're expecting pricing for MIS this year to be a similar question for MA? Yes. So Craig, we always kind of target across the company kind of a 3% to 4% kind of annual price increase. And I think we talked about a little bit on the last call, but what we do in MIS, every year, we do a very detailed review of pricing across sectors and regions. And based on that, we come out with our list prices for the following year. And I think you can expect our list prices for 2023 are going to be a little bit higher than the rate of increase, a little bit higher than maybe it has been historically. But the realization of that will depend on mix, right, where the issuance actually comes from. Hey, Rob, you've done a really nice job remixing the business and MA has kind of crossed the 50% threshold. If you look out three to five years, how should we think about what the business looks like? And I don't know if there's a way to maybe frame that organically versus inorganic? I mean, start to kind of parse deals and things, but maybe give us an organic view of kind of where the business sits three to five years from now? Yes. Kevin, that's an interesting question. And I guess I might start by saying when we think about integrated risk assessment, it's not just MA. It's all of Moody's. The rating agency is a really important contributor to, but also beneficiary of, this integrated risk assessment strategy that we have. But maybe a few things, Kevin. First, I think you're seeing us develop scale in a few areas beyond our ratings business. And we obviously have a world-class fixed income research business in Digital Insights that serves investors. We've got, in Decision Solutions, I mean, you've heard me talk about a little bit meaningful businesses that are supporting both banking and insurance different really critical risk workflows, origination, underwriting, portfolio and risk management and capital planning and reporting. And then, of course, we've got a rapidly growing KYC business that we think has some really industry-leading capabilities. We're really well positioned there. I think that's where you're going to see us continue to invest and really drive growth because those are very important delivery platforms for a range of content across all of Moody's. And you heard me talk about kind of what's driving ARR. And so all this fits together. When I think about that content, I mean, think about it, $70 trillion of debt rated by MIS. It's data ownership and credit scores from 425 million companies. It's massive economic data sets and ESG and physical risk scores on hundreds of millions of companies and locations. And we think of that as kind of our risk operating system, and we are increasingly threading that content through those scaled platforms. And you've heard us talk about it but our commercial real estate lending module for banking. That takes a lot of that property and economic and climate content, and we've got KYC integrations that are on the way into our banking solutions. You've got ESG and climate integration into ratings, banking, insurance and research and so on. So I think ultimately, complementing our ratings business, we're going to have scaled platforms with a suite of cloud-based solutions that serve key customer sets. And they're differentiated by being able to draw on all this proprietary data and analytics that we've got, where and when customers need it, so that they can better identify, measure and manage risk. That's where I think we're going to be three to five years from now. And there are no further questions at this time. Mr. Rob Fauber, I'd turn the call back over to you for some closing remarks. Okay. Thanks, everybody, for joining. Appreciate the questions, and we look forward to speaking with you on the next call. Have a good day. This concludes Moody's Fourth Quarter and Full Year 2022 Earnings Call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available immediately after the call on the Moody's IR website. Thank you.
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EarningCall_892
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Good afternoon. And welcome to Brookline Bancorp, Inc.âs Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After todayâs presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. Thank you, Alexis, and good afternoon, everyone. Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website, brooklinebancorp.com and has been filed with the SEC. This afternoonâs call will be hosted by Paul A. Perrault; and Carl M. Carlson. This call may contain forward-looking statements with respect to the financial condition, results of operations and business of Brookline Bancorp. Please refer to page two of our earnings presentation for our forward-looking statement disclaimer. Also, please refer to our other filings with the Securities and Exchange Commission, which contain risk factors that could cause actual results to differ materially from these forward-looking statements. Any references made during this presentation to non-GAAP measures are only made to assist you in understanding Brookline Bancorpâs results and performance trends and should not be relied on as financial measures of actual results or future predictions. For a comparison and reconciliation to GAAP earnings, please see our earnings release. Good afternoon, everyone, and thank you for joining us on todayâs call. I am pleased to report we had a very productive quarter, which capped off a solid year of performance. As previously announced, we received regulatory approval in December on the acquisition of PCSB Financial and we were able to close on that deal on January 1st. Earnings for the quarter were $29.7 million or $0.39 per share as our loan portfolio grew $223 million, while also recognizing loan participation income of $2.6 million. Before I turn it over to Carl to review the companyâs financials, I want to make a few comments about the PCSB Financial acquisition. We are very pleased that Willard Hill agreed to join our Board of Directors of Brookline Bancorp and he actually had his first Board meeting here yesterday in Boston. And this morning, I had my first Board meeting with the PCSB Bank Board now chaired by the new President and CEO, Michael Goldrick. I also want to recognize the tremendous effort of the teams at both PCSB and Brookline, which are keeping us right on track for the core systems conversion in mid-February. Thank you, Paul. As Paul mentioned, the loan portfolio advanced $223 million with growth in all asset classes. Commercial real estate grew $135 million, commercial $42 million, equipment finance $41 million and consumer $6 million. In the fourth quarter, we originated $687 million in loans at a weighted average coupon of 647 basis points. This is up 81 basis points from the prior quarter. This increased the weighted average coupon on the total loan portfolio of 56 basis points during the quarter to 537 basis points at December 31st. Prepayment fees increased $199,000 in Q4 to $1.2 million. The amortization of deferred fees was $1 million, which was $122,000 less than Q3. The combined impact of $321,000 had roughly a 1 basis point benefit on the net interest margin from the prior quarter. The provision for credit losses was $5.7 million, an increase of $2.9 million from Q3 and an impact of $0.03 per share in the quarter. The increase was primarily due to strong growth in loans outstanding, as well as continued growth in unfunded commitments. The allowance for loan losses increased $4 million, while net charge-offs were $310,000 or approximately 2 basis points on loans on an annualized basis. The reserve for unfunded credits also increased $2 million from Q3. Credit quality trends continue to be favorable as non-performing loans declined 19 basis points of total loans. However, due to a slight deterioration in economic forecasts, the reserve coverage increased slightly to 1.29%. During the fourth quarter, deposits declined $214 million with investment-oriented balances flowing to higher yielding opportunities. Deposit betas accelerated in Q4 as total deposit funding increased 43 basis points or 34% of the 125 basis point increase in the Fed funds rate. Our total funding cost increased 65 basis points in the quarter or 52% of the increase in the Fed funds rate. As deposits migrated to higher payment products and asset growth was funded with wholesale funding, resulting in a net interest margin remaining consistent with Q3 at 3.8%. Revenues increased $3.9 million, excluding security gains, driven by a $2 million increase in the net interest income and an increase of $1.9 million in non-interest income due to strong loan participation income, which is reflected in gain on sale of loans. Operating expenses were up $2.7 million due largely to true-ups for incentive accruals and some non-capitalized costs related to software and systems enhancements, as well as increases in FDIC assessments. Merger expenses were $641,000 in the quarter, a decline of $432,000 from Q3. Pretax pre-provision net revenue was $41.8 million, which was a $2 million increase over Q3. As Paul mentioned, the Board approved a quarterly dividend of $0.135 per share, which represents a 4% yield based on yesterdayâs closing price. The dividend will be paid on February 24th to stockholders of record on February 10th. A couple quick questions first on PCSB. I guess I am curious any surprises there, good or bad and are you thinking at all about doing some restructuring post the closing of PCSB doing some balance sheet restructuring? Let me start with the qualitative and then I will give it to Carl for the quantitative. I am seeing certainly no negative surprises. I have never seen such an enthusiastic group of acquired people. So things are proceeding at pace and things are going very well. Certainly, on the -- one of the great benefits of PCSB Bank is the liquidity in the markets itâs in. So itâs right off the back. We will be restructuring the investment portfolio, which will provide additional liquidity for the company overall and be able to pay down some borrowings, which is actually better than actually having the investments on the balance sheet. So some restructuring will be happening in the near-term on -- particularly around the investment portfolio. It also provides funding for higher yielding assets such as our equipment finance unit. Okay. Great. And then, Carl, I noticed on the balance sheet, you have like $71.4 million of restricted equity securities, what exactly are those? Thatâs primarily investments in -- we are a Federal Reserve Bank members, so thereâs a stock that you have to hold with the Fed -- at the Fed -- of the Fed, I should say. And then the also Federal Home Loan Bank membership⦠⦠so with both in New York and that number represents Boston, the New England Federal Bank, but then we will also have the New York. Okay. And Carl, could you maybe share with us how you are thinking about the margin and expenses in the first quarter combined with PCSB, help us triangulate that? Sure. Directionally, I believe we will continue to see deposit betas at an accelerated pace, particularly as the Fed slows, just because of the lag and how things get priced, you will see that. I think deposit flows out of the system will slow. I donât think they are going to accelerate from here. I think they will slow from here. But it still puts pressure on the funding side of things as we rely on wholesale funding to fund additional growth and so we continue to see a pretty good pipeline on the growth, at least in the near-term. We will see what happens as time progresses. So directionally I see challenges on -- not challenges, but the margin coming back towards down rather than up from here. PCSB will be very helpful on the margin side. But itâs too early for me to really comment on how much that might be. We are still doing a lot of the purchase accounting adjustments on this. So I donât want to really -- I really canât give you a good answer on that. No. I was going to say is sort of $56 million a good rough ballpark estimate before all the synergies are extracted? Yeah. I am not going to comment on the $56 million. I would say this quarter, we were a little bit -- we had some true-ups to incentives and some other -- I donât like to call them one-time items or non-recurring items, but I would say non-run rate type items in our expense base. I do expect FDIC insurance to accelerate even more so in the next quarter due to increases in rates at the FDIC and thatâs industry-wide. But as far as cost once we get through the first quarter, we do expect -- we are right on track for conversion in mid-February. I think itâs February 17th, that weekend and so we will have folks through that time period. So they will have an impact on the first quarter. But after that, right now, we are on track for our -- the cost savings that we had projected. And a lot of those costs have already come out. So a lot of, as you know, when we announced the transaction, there were ESOP expenses, SERP expenses, things like that, that were really driving this. There isnât a lot of -- and some executives that were leaving the organization. There werenât a lot of staff folks that were getting impacted. So not a lot of cost savings associated with that, but we do have retention bonuses and things of that nature as we go through this. So once we get through the first quarter, we will be back on track of what we expect -- what we initially projected for savings around that. Okay. And then last question, I know you guys are really conservative underwriters. But are you seeing any signs of distress at all in your office book, which is, I think, a little over $600 million? We are not seeing any stress in our book and I donât mean to be cocky, but in the Metro Boston area, there is occupancy weakness in the old financial district, which tends to be bigger, older buildings, which we donât have much involvement in. But it appears that like the seaport area, the newer part of Boston is still quite robust, stuff is going on and here in the Back Bay, things are relatively stable. But no, all is good. Hi, Paul and Carl. Maybe just following up on the margin here. Just curious, maybe a little color around loan pricing, just kind of what you are seeing in your markets as we headed into the New Year? So spreads really have not -- are still hanging in there quite nicely. So, of course, with the yield curve continuing to move up a little bit, in the short end particularly we are still seeing nice yields in that area. I think the challenge is the inversion of the curve. We have seen that continue to come down in the longer end. So that kind of -- so spreads are there, but you see in the coupon a little bit -- get a little bit more challenged, particularly when you are comparing to our funding side. So new loans, you are adding those at a reduced spread to what our net interest margin is at the moment in general. So thatâs something that gives you a little bit of color. I kind of provided what the lags were, the coupons and the spreads that we booked in the fourth quarter, so in my comments. Okay. Got it. Thatâs helpful. And then maybe just in terms of, just curious on your -- on just the Brookline side of the house, your CD bucket, you have about $900 million or so in CDs for the quarter, with an average cost of 123. Just kind of curious whatâs the remaining average life there kind of just how we think about the re-pricing dynamic there? So we see that stuff rolling or re-pricing at about -- itâs about $75 million a month in CDs that kind of roll on a constant basis that re-price. I donât know if thatâs helpful for you. Okay. Thatâs helpful. And then just in terms of just thinking about loan growth here kind of it sounds like you are still upbeat about business opportunities, kind of curious how you are thinking about the pace of loan growth going forward here? Well, as of today, Steve, the pipelines are still very strong. You saw we had a really big fourth quarter. We are already seeing very good production so far. So I am optimistic that we will see the kind of historic growth that we have had, maybe a little bit better, maybe not and we are seeing it at all three banks. Just going back to expenses and I just want to make sure that I have this right. PCSB has been running, I guess, pretty everything about $9 million a quarter. So once itâs fully phased in, call it, $6.5 million or low $6 million a quarter, assuming that 30% cost saves is still about right, does that gel with where you guys are? ⦠inflation and merit increases and things of that nature. But nothing -- as far as the cost savings, using the -- what you framed out the $9 million down to $6 million, yes. Okay. Okay. Great. And then looking at PCSB, their margin was substantially lighter than yours was, and obviously, you just said, hey, we are probably going to restructure. Can you help us think about that a little bit more, I mean, I think, we are obviously very cognizant across the industry of watching funding pressure and everything else and you guys did a nice job holding the line that far. But as we look further out, we put your two banks together, thereâs going to be accretion income, PCSB would otherwise drag you down. I mean, can you help us think about it directionally, if we were just to look out even into the June quarter, what that might look like? Sure. So as Mark asked, are we planning on doing anything on the investment portfolio? So the investment portfolio gets mark-to-market when we buy the company and so you own it at market yields. So itâs actually better for us to sell those securities in the market and pay down borrowings, because the yields on the securities isnât even -- isnât as high as the cost of borrowing, particularly when you look at the inversion of the yield curve. So we can pay down shorter term borrowings and higher yields, it costs us more money than what holding these securities that have longer duration. So I think you are following that part of it. So at the end of the day, it makes sense for us to pay down some of those. Now we certainly need securities for collateral purpose, for liquidity purposes and so we are not -- you donât liquidate the entire portfolio, but we will be reducing that portfolio and then paying down borrowings throughout the organization. So that gives you a sense of how we will be structuring that. As far as the purchase accounting around loans, that we are still working on. So I really canât give you a good insight on that and what that means to yields. But that will be something we will factor in. We will provide that information in an 8-K, probably in early March, you will get a sense of what that looks like and so hopefully thatâs helpful. Their margin actually was doing better than what we had originally projected when we were first doing the analysis back in May. They did a really nice job of growing loans. Deposits, they have done actually did a fantastic job on deposits. In the interim, I think, the -- it just shows the strength of having this yet another excellent market in the Lower Hudson Valley for us to be able to attract deposits and grow loans in that market. I think thatâs something that -- it doesnât happen in 45 days, but itâs definitely a wonderful long-term perspective for this. And as we bring additional services, particularly on the commercial side. But we have a lot of benefits on the consumer side as well, but particularly on the commercial side, whether itâs cash management enhancements, foreign exchange, we have our own swap steps that we can help out on the loan side. Thereâs a lot that we can bring to the table here and we are very excited about this. Good. Good. Okay. And just one, Carl, initially, you were closing at the end of the year, obviously, since you closed at the beginning that pushes off the Durbin, right, since the cross happened this year. So does that put us then in July 2024 instead of July 2023, just making sure I got that right? It does save us a little less than $1 million in over 12 months of revenue. And closing it a little bit later, the retention bonuses that we are going to have to pay for folks and things like that, a little bit less. Some of the contract payouts were a little bit more, because it was a year-end type of thing. But, so thereâs movement in multiple directions on some of the merger charges, but largely in line with what we expected. Got it. Got it. Okay. And then maybe just with respect to pro forma intangibles, and I guess, it sounds like you are still marking everything. But can you give us just a rough estimation of what thatâs going to look like? Yeah. So whatâs interesting is, just from where the yield curve was at the end of the year, they are in the process of doing that. It was worse than the marks -- the interest rate marks in particular, that I will stay with that. The interest rate marks on the loan portfolio and the securities portfolio were worse than we originally expected. I donât have the loan marks yet, but thatâs still being worked on by folks and as well as the CECL adjustment is still being worked on. But the securities portfolio, I think it came in around $66 million or something like that underwater at the end of the year. And if you remember, I -- we estimated to be -- it was $50 million when we announced the transaction back in. So it was materially different and so that is a factor. So you mark it as of 12/31. So donât be surprised to see security gains in Q1 as we liquidate this because actually the curve has inverted further and so these securities are slight gains at this moment. So itâs one of those things that you have to work through in the accounting, a little funny on that. But on the loan portfolio, I would expect it to be a little bit worse than what we expect or worse, I donât know how much than what we originally estimated to be when we first announced the transaction. CDI may actually be higher. So we estimate around 2% CDI and deposits naturally worth more than ever as rates have moved up 425 basis points this year. So those deposits become worth more, which actually -- itâs not necessarily helpful, because that you have to amortize that as an expense going forward. But it is a non-cash expense. Your tangible book value goes up as that amortizes down. So thatâs just another thing for your models. But I donât have those numbers yet. Thatâs still being worked on. Itâs a little early after that. Yeah. So I did not expect us to close -- well, I knew that we had some things in the pipeline on leases that had an energy tax credit associated with it. I thought that was going to be 2023 event. It ended up being a December 2022 event. So we did recognize that benefit in Q4. I donât know of anything right now in the pipeline along those lines. So I will -- my estimate right now is taxes -- my previous estimates on that in the at least 24% range on taxes. More will come out of that, because PCSB, itâs in New York. So it does have a bit of an impact being in New York. But they also have a lot of municipal securities that we are not planning on selling and so that will have a positive impact on our tax rate. But I think the 24% is my current estimate. We will have a better number to come end of Q1. So I wanted to start off with the interest rate risk slide and in your earlier commentary, it sounds like ex-PCSB, thereâs still a bit of core margin compression coming? And just trying to reconcile that, it looks like the forward implied rates and the NII going up on a flat balance sheet there for that slide. So maybe if you could just comment on that or kind of connect it to? Sure. Just to give you a little bit of background on this. So we start from a sensitivity standpoint, when we are running our asset liability models from and this is more of a governance and risk management standpoint and looking at the position of our organization on an ongoing basis. And one of the things we say is whatâs the forward curve suggesting rates are going to do and what if our balance sheet doesnât change at all, keeping it flat balance sheet. And so that gives us a starting point. And itâs something that we can continue to look through time, are we getting more sensitive or less sensitive? How are we positioning the balance sheet in this? Then we can run a lot of different scenarios around that. What if deposits run off $200 million? What if loans grow $200 million? How is that being funded? What is the impact on that? And so we can run a lot of different scenarios that may become our base case. And sometimes I talk to you guys and tell you what we think our base case is and what we think our margin is going to be and what our projection for the margin is going to be. Naturally, thereâs a lot of moving parts and things change, and it never happens the way you expect it to happen. But I want to try and at least provide you some guidance with that slide to say, this is kind of where we are today and our current projections with that. And when I say the forward curve, itâs as of December 31st. Thatâs the forward curve that we use. And it does include all of our rates. So it includes what are we booking CDs at? What terms are we expecting CDs to book at? Things of that nature. Whatâs the rollover in our loan portfolio? Whatâs the new loan originations going in at our loan portfolio? But then we can do models away from that. But that gives you our baseline because I know you guys have your own models and how you guys do and I donât know if itâs helpful or not for you to understand that, but we provide that information. And I think on that slide, we give you a good sense of what the loan originations were in the quarter and say, hey, this is whatâs the percentage of them that are re-priced immediately or within three months, whatâs more of a fixed rate and whatâs more of a floating rate that re-prices maybe in three years or five years, and then, of course, what the whole portfolio looks like and the duration of that portfolio just so you have a sense of where our risks might be. Got it. So just a result of the growth and the potential for a little bit of a mix shift on the funding side going forward, it sounds like. Okay. Great. And for the potential restructuring, I know things still being considered and that you donât have exact numbers, but do you have like a rough estimate of a dollar level of their securities portfolio that you are thinking about selling off? I would expect the securities portfolio in the $150 million to $200 million range at the end of the day at PCSB bank. We like to kind of keep the securities portfolio in the 8% to 12% of total assets from a liquidity management standpoint. And then -- and so any balance of that becomes additional liquidity. So they had a relatively low loan-to-deposit ratio and when I say relative, look for Northeast Bank, 8% to 7% is a relatively low number. And of course, ours is significantly higher than that when -- because of the Eastern Funding business that we have, the equipment finance business we have. So the ability for us to fund that a little bit less instead of relying on wholesale borrowings is beneficial at the end of the day. Yeah. Got it. And yeah, on the fee side, the past couple of quarters, you guys have had some nice levels on the loan participations. It sounds like the overall growth outlook still remains pretty solid from here. Do you think that -- are you still seeing kind of a market for that, do you think that thatâs going to continue at a relatively solid pace compared to the first half of 2022? Well, yeah, it might look more like the first half of 2022. As we went toward year-end, the amount of activity that we had seemed to have accelerated a bit and there were some relatively large transactions in there, which have rolled over a little bit now and even though I pointed out earlier, the pipelines are still strong. It would not surprise me as we roll into the year, we get back into a normal or more normal for us sort of pace where growth might be 6%, 7% pace, if you will, by the end of the year. But we will try to beat that. Yeah. Okay. And then I know you guys touched on the office portfolio, in general things kind of continue to migrate positively on the credit front this quarter. But is -- I mean, is there any other pockets or areas of concern that you are seeing as you look through the portfolio and I know you just came out of the PCSB board meetings. Anything that they are seeing in their markets of concern? No. All sectors are performing very well within the portfolio, and I would point out that, the office portfolio at the legacy Brookline Bancorp is not that big, itâs pretty big, but itâs not enormous. Itâs $650 million or so and itâs well spread out. Itâs not like itâs a bunch of stuff in the financial district in Boston. A lot of that stuff is in the leafy suburbs of Metro Boston and across Rhode Island. So it is very, very well diversified and has performed exceptionally well. Thank you, Mr. O'Connell. That concludes the question-and-answer session. I will now pass the line back to Paul Perrault for any additional remarks. Thank you, Alexis, and thank you all for joining us today. And we look forward to talking with you again next quarter. Good day.
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EarningCall_893
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Thank you, everybody, for joining us, and welcome to SL Green Realties Corporation Fourth Quarter 2022 Earnings Results Conference Call. This conference call is being recorded. At this time, the company would like to remind listeners that during the call, management may take forward-looking statements. You should not rely on forward-looking statements as predictions of future events as actual results and events may differ from any forward-looking statements that management may make today. All forward-looking statements made by management on this call are based on their assumptions and beliefs as of today. Additional information regarding the risks, uncertainties and other factors that could cause such differences to appear are set forth in the risk factors and MD&A sections of the company's latest Form 10-K and other subsequent reports filed by the company with the Securities and Exchange Commission. Also during today's conference call, the company may discuss non-GAAP financial measures as defined by Regulation G under the Securities Act. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on both the company's website at www.slgreen.com by selecting the press release regarding the company's fourth quarter 2022 earnings and in our supplemental information included in our current report on Form 8-K relating to our company's fourth quarter 2022 earnings. Before turning the call over to Marc Holliday, Chairman and Chief Executive Officer of SL Green Realty Corp., I ask that those of you participating in the Q&A portion of the call to please limit your questions to 2 per person. Thank you. I will now turn the call over to Marc Holliday. Please go ahead, Marc. Okay. Thank you, and good afternoon, everyone. We appreciate you joining us today. Normally, our January earnings calls are brief, coming only 7 weeks after our annual investor conference, which we held back on December 5. We had a great conference on that day with attendance at capacity at One Vanderbilt, and we received a lot of positive feedback after the presentation. Not surprisingly during the conference, we set out for ourselves a characteristically robust best agenda for 2023, which included business plan, aspirational goals, I think there were 18 or 20, some of which included 1.7 million square feet of leasing, over $2 billion of asset sales and joint ventures, significant debt reduction and completion of several important development projects that we expect to deliver timely and on or under budget this year. Notable among them is One Madison Avenue, which we actually topped out ahead of schedule in just 1 week after our investor conference. So it was a pretty amazing day. There were over 700 people gathered to witness the event of the laying of the last piece of steel on this truly great project in the Midtown South submarket, marking a turning point for the project where we now see completion in sight. And the timing of that topping out was truly perfect as it gave us the ability to stand on that 18,000 square foot penthouse floor with 18-foot lab sites and unobstructed views of Midtown and Downtown and standing there, you can truly understand why our new tenant that has just joined the roster of Tennis to the One Madison Avenue. Rent roll is 777 partners. They were attracted to the opportunity and we were able to lease it up over 1 year ahead of our underwriting, just stressing the importance of not only hitting underwritten economics but also exceeding the timing has big positive effect on the project, and we hope there's more to come. This lease, along with the others, we announced last night, underscores the early leasing achievements we had in January, which is typically a slow month but for us, turned out to be a pretty good month and a good start to the year. Hopefully, it pretends of increased activity to come in 2023 though a long holiday break followed by the MLK holiday weekend. We've seen a noticeable pickup in tour activity over the last 10 days, and we received around a fresh new proposal. So we're optimistic. We're getting stuff done, and we're on plan most importantly. So on the heels of signing over 370,000 square feet of office leases since our investor conference at the beginning of December, we managed to assemble a pipeline of leases totaling 700,000 square feet, where it stands today, 100,000 square feet of which we hope to sign over the next 60 days. We'll be moving and hustling to try and get back up. We're currently negotiating leases at 450 Park Avenue, 919 Third, 45 Lex, 1350 Avenue of the Americas and another lease at One Madison. In addition, we are just beginning to market our redevelopment project for 245 Park Avenue. We spent quite a bit of time showing off that amazing redevelopment plan that we have for 245 Park, and we are beginning to execute this year. And the early read from the tenant broker community is that this exciting and, I think, a very elegant plan that we have for the asset is going to be very well received by the tenant market, and there seems to be much interest already that we're generating as we're beginning to take these meetings, and we're also generating interest among foreign investors for JV investment. Recall that identifying one or more JV partners for 245 Park is one of the several capital markets goals we have for the year and for a little bit more color on that. I'm going to turn it over to Andrew Mathias. Thanks, Mark. There's still a standoff between buyers and sellers in the market, but we definitely see as financing, hopefully returns and a 5- and 10-year fixed rate financing the CMBS market reopens, which we and all the rest of our market participants here are anxiously awaiting, we think we'll see that standoff thaw a bit. We've been actively in discussions with investors from around the world. We were in the Middle East several months ago. We have a trip plan to Asia in March. The team was present at the Crafts conference in Miami earlier this month talking about the financing trends. And we think there's still a lot of interest in prime New York City assets particularly Park Avenue, which is no secret that it's the best submarket in New York City. And we think we'll have a lot of willing conversations this year from all different types of investors from around the world, talking about 245 and the other aggressive capital goals that we set out for us at the investor conference. Great. So more to come on that throughout the first half of the year, we'll keep you guys updated as we pursue our various goals for recapitalizations, refinancings, joint venture sales. We are full guns blazing right now here at Green and working very hard and diligently to set the seeds so that by the middle of the year. We can hopefully start to achieve and knock off some of these goals and continue on a path to what we think will be a pivot year for us in 2023, coming out of the markets we've experienced over the past couple of years and hope to see some more positive news seeping into the market throughout the year. I did want to leave, I'd say, the best for the end before opening up the call to questions. Yesterday, as I trust you may have heard or read, it marks an incredible milestone moment for East Midtown, New York City and Long Island with the official opening of the long-awaited Grand Central Madison Station, right underneath Grand Central Terminal and One Vanderbilt, representing the culmination of the $11 billion Eastside access project. It is a watershed moment. I think it's probably the most important and largest project the MT has completed in many, many decades. And with its grand opening, you now have direct service from Long Island to Grand Central. It's finally become a reality after being, I think, in conception for 60 years in development for 20 and it opens up a direct seamless trip from Long Island, which has a 1.4 million person workforce that now can look to either of Grand Central or Pennsation as its primary destination and it choose its most efficient destination. The MTA is estimating that 45% of nearly half of all Long Island Railroad commuters will -- are expected and will eventually commute direct to Grand Central once full service is up and running this year instead of what is currently altePenn Station, and that translates into 160,000 people a day, and these commuters are essentially arriving literally right at our front door where the majority of our portfolio is located. I can't stress enough the importance of the projected 40 minutes per day or nearly 3.5 hours per week of saved commutation time that the business community puts a short, easy, safe and pleasant commute as its top requirement now coming out of post-pandemic world and as a tool for encouraging employees to work from office. So yesterday, we celebrated with the Governor and the MTA Chair, Jane lever, the opening of this incredible terminal that spans over 700,000 square feet from, I'd say, approximately 42nd Street to 48th Street on what must be 1 to 3 different levels dedicated waiting areas, beautiful new retail stores that will be opening and restaurants and a host of other amenities and it's all well done, well executed, well designed, well conceived, and I would urge anybody that hasn't yet taken the time to swing by and check it out that they do so because it's pretty inspiring to see what can be done after all the time and after all the money is spent, you look at the permanent goods that will come of it for the decades and perhaps centuries to come. The terminal contains 8 tracks and 4 platforms, which will be in service and enable Long Island Railroad to increase its service from Long Island to Manhattan by nearly 50% of capacity. And One Vanderbilt and East Midtown rezoning was really a first step towards unlocking the pent-up demand for new and redeveloped office space in and around Grand Central. And now Grand Central Madison will further transform and revitalize what is undisputably New York City's #1 business district. And we're excited by it as shareholders or stakeholders or followers of the company. You should be excited by it, too, in my opinion. And it's a great way to start the year. So with that, we'll open it up for questions. [Operator Instructions]. Our first question or comment comes from the line of Alexander Goldfarb from Piper Sandler. Mr. Goldfarb, your line is now open. And obviously, it's great to see ESATAccess finally open. So that's awesome to see. But just clearly, that's a positive for the Grand Central market in leasing. But bigger picture, especially since you guys put out your Investor Day, I think it was 1.7 million square feet target for this year. The tech layoffs have accelerated, granted, it's a lot out west and not everything is New York, but it's still pressure obviously all Street has had a tough year. we're reading all the headlines. So the state of the leasing market, do you guys feel the same that you fell back in December? Is it slipping? Are there signs that tenants are taking even longer? Or Mark, your comments about people resuming activity post MLK Day, means that the leasing activity is sort of divorced from what we're reading in the broker reports and the headlines. Well, yes, so a lot to go on -- back in that question. But let me start first with the reference to the tech layoffs. I think the notion of what you may have termed sizable or significant layoffs. I'm not sure I would characterize it that way in terms of the ultimate impact and effect it will have in New York City. These are firms that had been on an insatiable growth stage for many years. Tech was probably the biggest grower in New York City over the past 5 or 6 years and went from being a relatively small component of the markets being, I think, almost about 25% of the market. So it's a click in the Alex. There's been massive growth. Steve, correct me, they may be as much as 30% or 35% of the total market. Certainly, they were 30% to 35% of the incremental demand. And now they're pausing and becoming a little bit more efficient as companies do at the peak of the cycle. And New York City large employers are required to give Warn notices WARN. And even though there are these advertised or announced, I should say, announced layoffs from some of these firms, they represent a fairly modest amount of the overall Scopia companies. I think probably on average, close to about 5%. And many of the markets these companies are targeting for retention that I've heard, New York is always among that group of companies. I think there are other parts of the country that will feel it more. The warn notices have not been that significant from the tech sector so far, which would have to reside and be received by the city. So it's -- there's no indication yet of any mass layoff. When you look at the job numbers for 2022, and these are the most current numbers we have through December. So pretty current. There were 209,000 jobs added in New York City year-over-year. And recall, 2021 was also a big job growth year. I'll see if I can get that number. That was 270,000 jobs. So 270,000 in 2021, 209,000 in 2022, office using jobs, 63,000 jobs added. That is the second most office using job count ever added with the first one being back in 2021, 83,000. But in a normal year, the city grows by about 20,000, 25,000 office using jobs and last year was triple that number. Now the growth is decelerating as office using jobs now have eclipsed prepandemic levels. I've mentioned that before that the office using job count is about 106% and of pre-pandemic and total jobs are about 90% of pre-pandemic. And the city's forecast for the year, and we've always found the city's forecast to be pretty spot on is only for very modest job losses in the first half of the year. I want to say somewhere in the order of 10,000 or 15,000 job losses in the first half of the year with about 5,000 of that made back up in the second half of the year. So I think our approach in terms of what we're expecting, and I'll let Steve speak a little bit more about what he's seeing in the real is that certain sectors are belt tightening, certain other sectors continue to expand. I think all businesses are still figuring their way as to how they're going to be navigating and dealing with work from office, first remote work and encouraging to that we get above this 50%, 60% utilization rate back to 70%, 80%, which would be, in our opinion, full utilization. But the market is not setting up to be in our mind any measure of a major pullback in jobs or economic activity based on what we see. Steve, you want to address specifically some of Alex? Yes. I mean it's all make a couple of points. One is with regards to technology guys. I think it's important to recall that it's not like in decades past where we had the tech rec where you had the dot-com boom where all those businesses went bust the guys that are -- that have announced layoffs, these are mature technology businesses. So their businesses and the lease obligations that they have, those are secure rent payments. So they may not be adding bodies and they're driving, therefore, driving additional leasing velocity, but it is still a very significant part of the overall New York City economy, which is the most diversified business economy in the United States right now. It's not like the West Coast, which is a one-trick pony. The secondly is that what we're seeing generally from a leasing velocity standard, you saw -- you referenced some of the brokers' reports that you read. If you really get granular on those reports, October and November were the weakest parts of the fourth quarter. December showed a notable amount of leasing increase even though the overall quarter was down, there was a sort of starting to repair itself in December. And as you see from the announcement that we made yesterday, we obviously had some significant transactions that we are working on that end up closing the first couple of weeks of January. And as Mark referenced this earlier, even with all of that early day success on leasing of over 340,000 square feet in the first couple of weeks, we still have a very robust pipeline of about 700,000 square feet. In that are several technology businesses, but also, like we saw all of last year, heavily weighted towards the fire sector. So between fire, tech and legal, those continue to be the big drivers. And I'll make the last point, which is we continue to see sort of that smaller part of the market still coming back to life. We've got 9 leases out at the Grad bar building, which has always been a good barometer for me to show where the small space market is, and that's an important part of our overall leasing success for the year. So that was the entire market recap right there. And [Technical Difficulty]. Questions, Alex. We're going to -- we're going to have to get going. We're going to move on. But thanks for the question. Hopefully, that addresses some of the issues you inquired about. Maybe just sticking with leasing for a bit. Steve, you mentioned the broker reports and pickup in December. But the broker reports also noted what seemed to be a reacceleration in tenant concessions. But I know that can be swayed by a handful of leases, especially when overall volume is down. So what are you seeing on the ground as far as concession trends? And how are those trends impacting your portfolio specifically? You know what, I don't really see it. I mean, it's -- I think it's been fairly stable throughout all of last year. I think it depends on the -- where the leases are being signed, there's no doubt about it when you have 2/3 of the leasing activity being done in the Class A market. So it's the highest part of the rent spectrum, and therefore, you would expect it also has the greatest amount of concessions to support those high rents. Then it starts to skew the statistics because when you get so many triple-digit rents, you expect a bigger concession package vis-a-vis deals in the $60 rents. If you took the 340,000 square feet that we signed in the first several weeks of January, weighted average, we had $43 a foot in TI and 5 months of free rent. Now granted some of those are renewals that are 5-year deals, and a combination of that with some other deals that are 10 or 15-year deals. But I think that number would have been pretty much in line with the kind of concessions that we would have reported all of last year. So I don't -- I really don't sense that there's a movement that's negative. Appreciate that color. And then maybe Steve or Mark, I can't remember who touched on this last quarter, but for 245 Park, you had over -- just over 1 million square feet of leases that expired in 4Q. But as you mentioned in 3Q, the majority of those had sublet tenants already in place. So it looks like the actual roll down was just a hair over 130,000 square feet for the quarter. Are those tenants that stayed, are they all now direct with you? And if so, what is the magnitude of the rent and expense reset going forward? Well, I don't know, there's a couple of different moving parts there. I think what we had probably referred to is we had the -- a pretty large lease with Major League Baseball that was where they had moved out of the building several years ago, relocated over the Sixth Avenue. And then they had backfilled or we had backfilled a majority of that 6 4s for 7 4s whatever they had, with some short term -- some were long term, but most of them were short-term direct deals. So those leases will burn off in the next year or -- and then with regards to your -- the rent reset, I don't know, maybe you can wait, Matt, I don't... No. I mean Steve made the point on the rents. The rents that were that we took on the shorter duration deals, they're not really market rents. So we'll be resetting those rents to market as we retenant the space. So kind of temporary tenants, so to speak. But I will use this an opportunity just to sort of reinforce what Mark said earlier. We're out there in a big way now with a very well-established development plan and a very strong marketing presentation for the building. And that is already paying dividends as we are already receiving proposals that we think have a very credible chance of converting over to leases of significant size. Well, we have, between now -- over the next 30 months, 36 months, about 800,000 square feet in the building that rolls. The majority of that space is in the mid to top portions of the building, rents in the building are, call it, roughly $110 to $140 a foot. And the proposals that we have received and the conversations that we're entertaining with tenants, those rents are in -- those tenant expectations are in line with our underwritten rents. Our next question or comment comes from the line of John Kim from BMO Capital Markets. Mr. Kim, your line is now open. On the CBS renewal, it looks like they downsized by about 40% from the space that they had. And if that's the case, it's quite different from the Fox and News Corp renewals, which I think was all the space that they had at 1211 Americas. Is your anticipation that CBS is taking space elsewhere in New York? Or are they just truly downsizing their space requirements? No, it was just downsized. The majority of the people that are there sort of an independent group of operating units, separate distinct from the groups that are over at 1515 Broadway, where they occupy the entire building. So no, I think I don't -- our conversations with them have not suggested that they are on an active program to downsize as we sit here today. But it's like a lot of these big firms are all trying to figure out their long-term plan as a result of hybrid work environments and more component, things like that. But even though they're a big advocate of bringing everybody back to the office. Okay. And then on Page 39 of your staff, there was a notable change in your mark-to-market or the implied mark-to-market of the leases expiring in 2023 versus the asking rents and has turned positive on your wholly owned assets last quarter, it was negative. It looks like it's the same amount of square feet or pretty similar. I'm wondering what that change was to get to that positive mark-to-market? That's actually a function -- John, it's Matt. That's actually a function of the leases we were just talking about at 245 Park, where the large tenants rent rolled off. So say, MLB rent rolled off, which was a market rent, and it rolls down to what the rent that the old subtenant current short-term direct tenant is paying. And then those short-term new small direct tenants rents will flow through the exploration years in whatever year those leases expire and the mark-to-market is based on those lower rents as compared to the previous market rents. None of the changes as a result of our view of a change in market rents. It's simply a function of a change in the starting rent that it's based. Mark, in your conversations with business leaders, I'm just curious, you talk about getting that utilization rates back to that 70% to 80%. But I think the worry is are we stuck in this kind of impaired level of, call it, the low to mid-50s. I guess as we look forward to the balance of this year, I mean, how confident are you that these firms can get their people back in? And is it possible to get back to that previous high watermark? Well, I think there's a lot of confidence around 3 or 4 days a week. I think the bigger question is, is Friday becoming more and more like a remote workday for not -- many, but not all firms. And that doesn't really impact the space decision. That's just more of a business philosophy decision. And people aren't going to, I don't think, take more or less space based on how they gear their Fridays. I mean, we look at Fridays, it's like an equally productive day to the rest of the week. I think a lot of firms do. But I think that's the one area to me, I'm not so sure about. But I think for the balance of the week, we just feel like every week, there's more and more energy, emphasis, lobby is more crowded, trains are more crowded, streets are more crowded, are retailers, small and big are reporting better results. So it feels like that as I think the job market normalizes, it was a very, very tight market for the last several years, I think that's going to start to reverse itself, although inflation is still -- wage inflation is still stubbornly higher than where I think where the Fed would like to see it. But I do think that will moderate. I think that will be this year. I think we'll get incrementally more gains whether we get all the way back to pre pandemic or not. Don't know, but I also don't think that's a determinant of the ultimate space occupied, I think that's just going to be business by business, how they evaluate competitive factors about how they can optimize their work plans with what type of hybrid work model. But we find more and more -- the meetings are live, doing very little zoom these days relative to certainly in the past couple of years. It's just -- part of it is the numbers, part of it's anecdotal and part of it is speaking to the leaders. I'd say across the board, every leader says they want to be on a 3- to 4-day in the office work week for the majority of their companies. And I think Friday will sort of just be case by case. Great. And then Matt, on the debt maturities, I noticed that some on the unconsolidated joint ventures were past their due date. I think you did a good job at the Investor Day kind of laying out the that some of this might be outside of Green's control. But do you have any sense on a potential resolution or how these things ultimately get worked out? Yes. So you're talking about 1552 Broadway and 34th Street. Yes, you're right. I mean we don't unilaterally control those things we get ahead of our maturities, the wholly owned ones and the ones that we control well ahead of maturity. We are in active discussions with the borrowers on likely some form of extension. We did short-term extensions to get pushed. The maturity dates pushed out 30, 60, 90 days just as a path to getting to something longer duration done, and that's in process. I think lenders are going to have to work with borrowers at this time. So it's somewhat in our partners' hands and it's somewhat in the lenders' hands. So I saw an interest to LIRR yesterday when I was on my weighted my Metro North train. I was actually kind of shocked. So you beat me to it because I was going to ask about that. I guess I never thought it would open either. So congratulations on that. My first question, I wanted to ask about an update on the properties or let missed this here. So Andrew mentioned to stand off in the market and he gave some color. But maybe you could just add to that. Is there a question of waiting on financing markets? Are there very different opinions of price? And then also, have you given any guidance in terms of expected transaction timing, particularly for the interest in 245 Park and in One Vanderbilt? No change in guidance on timing from December. I think just looking at the curve, you have short rates at 4.5% and long rates of 3.5%. So naturally, buyers want to borrow long and the providers of long debt right now are being very cautious about the deals that they choose and bond buyers are sort of slowly coming back to the CMBS market. So I think when you see that long market materialize and start to get more liquid on the debt side, you'll see buyers reemerge for assets. It's not -- it's less a matter of -- there's a big gap in the price people pay because sellers aren't really entertaining offers until they know they can get realistic and they don't want to sell at a time when there's a real lack of financing available. So I think you're just going to have to see the long financing come back, and then we'll see where the market settles. Okay. Great. And then second for me, a question about the financial leverage and how you're looking at that. You fixed a lot of your debt now. And I'm wondering if that makes it -- does it become less of a priority to kind of delever to the extent you want to? And does it change at all how you consider other uses for disposition proceeds relative to stock buybacks or other investments or other uses? For 2023, the answer simply is no. The fixing of debt was something that we very carefully choreographed the middle to later half of last year and the timing of the debt that we fixed coincides with our expected timing of asset sales, dispositions that -- and other funding sources that allow that debt to get repaid. So what we laid out in December was a plan to reduce debt by $2.4 billion to $2.5 billion through dispositions in excess of $2 billion and other sources of capital, like the funding from our partners at One Madison to the extent any of that debt that we are repaying is floating, and we have swapped to fixed, we put swaps in place that coincide with our expected repayment timing. So it all lines up the fixing of the debt and the repayment schedule with what we said in December. So first question, I guess for Mark or Andrew, on the third-party capital side, can you give us a sense as to what type of return you're pitching prospective investors on 245 Park and just a general sense as to maybe what kind of return that market requires right now for New York City office project. Sure, Tony. I mean, that's a unique asset because we have fixed-rate financing there that's very much in the money, if you will, very attractive fixed rate financing. And we're expecting a range of returns there in the low teens type levered IRRs. And I think that type of return is a very attractive relative return for an asset of that quality without -- with in-place financing in place. It's part of the reason we're confident we got a good buy on the resolution, if you will. We took it over at an attractive price, and we're confident we'll be able to find partners to come into the equity there with us. Got it. Okay. And then just one quick one, I guess, for Matt. On One Vanderbilt, can you give us the fourth quarter cash and GAAP NOI contributions to try to think about where that was relative to the kind of stabilized level you're getting to? Sure. For -- spare me one second. Like when you have detailed questions, Tony, makes me look for stuff quickly. GAAP, our share, about $27 million cash $16 million. That's our share fourth quarter. Just going back to the transaction market, number one, just on One Vandy. Just any update there on the 10% JV prospects as well as sort of the $2 billion plus planned for this year, just what's being marketed, what's the interest like? Any color there would be helpful. One Vanderbilt, no update from December. It's still a goal of this year to get that interest sold. And we're hopeful to make it happen. The second part of the question, I did not hear here. Can you repeat the second question? Yes. Just of dispositions for this year. I think some had already been marketed or in the process of being marketed. Just where are we in that process? What kind of interest are you seeing there? Seven days in the market, 121 Green went to contract. We announced that in the release last night. That's a component of it, and we have a couple more assets that are out to market or will be shortly. So I think as Andrew said in his commentary earlier, we're trying to make a lot of headway on that plan in the first half of the year, and we're doing a admirable job on plan with that strategy. Yes. I would just -- there was some comment about has been in the -- I mean, it has been in the market. This is -- these are all pretty fresh initiatives, some of which we haven't begun yet. I mean we give a plan in December that covers a 12.5 month period, there were certain disposition plans that we'll be bringing to market spring and by summer. There are some, as Andrew mentioned, we're currently underway with, all of which are pretty fresh, all of which we've reiterated a couple of times on the call where we're standing by the guidance and it's not an easy market. It's never an easy market, easier to buy than sell, but we're pretty good sellers. I think we've demonstrated over 25 years as a public company, the ability to monetize more assets than certainly anybody else in our market here in New York. And I think quite a bit even measured on a larger basis. So we own -- we have ownership interest currently, and I think about [Technical Difficulty] square feet. So we've monetized and repatriated far more than we have today. We have a business plan on these. I think it's about 5 assets for sale or JV. We feel pretty good about it. Market's maybe not as good as it was, but it's -- we wouldn't characterize it as a bad market either. There's pockets of equity. There's opportunities for debt. We're marketing very, very good positions. We think we'll get good pricing. And that's where we are now, and there'll be more updates to come, as I mentioned, in the opener of my narrative by roughly midyear. Great. And then just my second one was just earlier in the month, the New York Gaming Board released the request for applications. There was no artificial deadlines. I think those are the first round of questions due February 3, just sort of wondering from that release, are you -- do you plan on asking questions? Was there anything surprising, not surprising. Just what's the update on the plan for the CNO? Well, I mean, we are -- we've got a robust team and growing daily on this -- for this casino project, both our investor team, strategic team, grassroot supporters, coalition members, we're all over this thing. I mean this is a real priority for us. We're leaning into it very hard. We're going to put our best foot forward here to make it happen because we feel it's great for Times Square. We feel it's great for New York City, in Manhattan. We think it's good for this company. We think it's good for the state. And gaming when executed at a high level, a targeted boutique level where it's really an integration of gaming, entertainment, hospitality, live entertainment and not solely focused around the casino element itself, I think it's something that when it's done that way, it's incredibly good for the immediately surrounding areas is a big halo effect that can come for it. If the facility is built as an integration to its neighborhood and not as kind of like a moated destination where people go and they don't leave until they're done. So we have a project that's the exact opposite of that. It's something that really is a big on behalf of all-time Square businesses in an area that I think hasn't fully recovered from pandemic that can use the help even though every day, it's getting better and better. This would be a significant investment of capital in a part of town that is one of New York City's treasures. Time Square is the crossroads of the world. It does have 60 million tourists and visitors a year. It has 350,000 or 60,000 people a day coursing through it, both visitors and locals. And it should be as great a calling card to the city as all other parts. And we think this project will help continue to direct it in that direction. And we're going through the RFA and there's no surprises to date where we're going to be responsive. We're going to be competitive. And hopefully, at the end, we'll be victorious. My questions have been asked. I just had one quick question on the ground lease at 625 Madison. I know the kind of reset date came and went. And I'm just wondering if you could provide -- any update on the timing or how those conversations are going? We're currently in an arbitration process to determine that rent as leaseholder. And with respect to the rest, unfortunately, as we've said on prior calls, there's a lot of controversy and litigation surrounding that asset, and we're not really able to comment further. I can appreciate you can't give a lot of detail, but I guess, would it be your expectation that, that gets resolved sometime in '23? Or is it too difficult to end handicap that kind of timing? Is a follow up on the capital structure and strategy behind it. Do you see any difference in the longer-term leverage levels between your consolidated and JV portfolios? So our view of leverage is, first one of LTV, not debt to EBITDA because that's how real estate leverage is measured. And we look at it, obviously, at a corporate level, rolled up combined basis and are comfortable where we are. We're a little higher than typical right now because of some asset acquisitions we did. And so that's part of the reason we're targeting debt repayment over the course of this year. But where we were prior to that and where we'll be at the end of this year based on the plan we have in place, we are completely comfortable with. As it relates to consolidated, unconsolidated, we tend to have -- as we move more into this asset management model, more unconsolidated JVs than we have in the past. I'm sure it will continue to move that way. That leverage level will be taken on a case-by-case basis based on the asset that the JV invested in and then rolled up through the company to make sure that we maintain a prudent amount of leverage as a company. So where it sits is not necessarily something we're as focused on as the overall leverage profile. Okay. And just taking another angle on the transaction market. More of our conversations with brokers seem to indicate that we won't see pricing discovery over the next 12 months. Can you update us on how you think about this in the context of opportunistic investments? And how much of your pipeline is based on distressed opportunities? Well, we hope to have price discovery on 5 of our assets, certainly within 12 months. So that doesn't dictate the market, but certainly is sufficient for us. I mean we definitely pride ourselves on having a good pulse on where pricing is. I would not call this a market where pricing is undiscoverable. I mean we've seen those markets. I don't think that's this market. This market I think there will be trades done this year. Certainly, we anticipate doing trades. You have to have -- bring a realism to the table as to current values. And I think we're good about that because we constantly are refreshing our internal NAVs throughout the year, asset by asset, lease by lease, and making adjustments for market factors like growth and cap rates and required returns, et cetera. So I think there will be think a tale of 2 cities. There will be a normalized market for better sponsors and better assets like we have, which I think have largely retained their values, and I think for which there will be a market. And then there's going to be properties that either have less solid sponsorship or capital stacks that are far too overleveraged or a sponsorship that doesn't have the liquidity and capacity to muscle through redeveloping or monetizing or retenanting their buildings. And those properties will fall into an opportunistic bucket that in the second half of this year, I would think you might see us start to poke our heads up again. I did mention that in December that we definitely have our own capital resources. We have access to third-party capital resources that could make us acquisitive or reentering the investment market opportunistically, probably in the second half of this year. And there will be some opportunities. But for all that people anticipate in terms of what kind of distress there might be in the market or otherwise like that, it rarely evidences itself these days in New York City specifically in Manhattan because again, you've got like the top 10 or 12 owners controlling 50% or 55% of the inventory in the market. And these companies tend to be best liquid and capable of weathering through this market. Already we're starting to see the rate rise moderate. We've seen the long end actually come in quite a bit over 50 basis points from its peak. I think as Andrew mentioned, when the long-term financing market comes back and it will, then you're going to see that liquidity spigot back on and on we go. So we think this is more of a mini correction. We don't think this is something else that maybe some of the brokers are implying, but we'll see how the year goes. And right now, we're still sticking with our plan and we feel we can execute it. As the DPE balance decreases and loans mature or repaid, I think this quarter was $57 million, how do you plan to put that capital to work? Can you just remind us, are there any restrictions how that -- how those repayments or capital can be deployed? And then just an update on the DPE strategy. I think we have the '23 strategy for the near term. But what are the thoughts for the midterm? Right. That was the $57 million was repaid. We anticipated the repayment to come Three, it came in late in '22, and we simply paid down debt with it, which is what we've been doing along with here purchases with a lot of the repayments and sales proceeds that we've gotten off the DPE book for the list couple of years, but we don't have any specific restrictions as to how we use those proceeds. We don't treat the DPE book as sort of a closed system where money has to get redeployed into DPE. Those dollars are fungible and can go towards debt repayment or investment in assets or investment into new assets. We look at -- evaluate all the investment opportunities across all our business lines, try to figure out where the best risk reward is, and we'll allocate dollars there. Okay. Got it. And then maybe a fun one, if you would. What gives you guys confidence that the casino license that your Times Square project is superior and what kind of stands -- makes it stand out versus the others and now even a potential PenDistrict application being submitted? Well, I'm not speaking about other locations, just speaking strictly about Times Square. I don't know if the question is rhetorical or not, but I cannot think of a better location in the United States for a high-end gaming entertainment, five-star hospitality, hotel with live entertainment, sports betting, restaurants and outdoor space with which to be able to integrate into the surroundings of what goes on in Times Square, on news even otherwise than in Times Square. I mean I just -- it's -- certainly in New York state, certainly in New York City, it couldn't conceive a better location. I think it's a district that was actually conceived in its use Group 12, large-format entertainment with the theater overlay, with the mandate of having exciting signage and technology and entertainment uses. I mean those are all celebrated within this Time Square district and celebrated fairly uniquely in the city. And when you take that very commercial district, and then you layer on top of that unprecedented access to public transportation with 11 subway lines that service Times Square, a block from the Port Authority, which is about to go through its own redevelopment, almost equidistant between Grand Central Penn Station, obviously, new Grand Central Madison, put a plug in for that. And you think about a facility that's going to be drawing millions and millions of visitors and yet making the least impact because of the ability to maximize usage of public transit relative to almost any other location that might be buying for this word. You put those 2 things together, the incredible nature of the district, the compelling nature for attracting not only domestic tourism, but foreign tourism that will come to New York to gamble at a Times Square Casino, I think it just puts it at sort of the top of the chart. It's not to say there aren't other viable sites. It's just at the end of the day, it's going to come down to an analysis about economics, job creation, incremental tourism creation, lease disruption to the surrounding grid. Recall 1515 Broadway is an existing building. It exists it's built. It doesn't have to be developed. It doesn't -- it's not going to displace anything in its place that won't come at the expense of housing or parks or schools or anything of those lines. It's a commercial building that exists. So I'm pretty excited that we just have the good fortune to happen to have a site there that is a viable candidate for this casino licensing. It's going to be very competitive. There's going to be lots of proposals, I imagine. And there'll be some real competition, which is what New York City is all about. And there's 3 licenses on the table. Hopefully, SL Green and Caesars and Rock Nation will come away with one of them. Times here in the Q&A, you've commented about how businesses are still navigating, how they're going to deal with in-office versus remote work. Are you seeing any signs that tenants are looking at hoteling as a way to more efficiently use their office space? And I guess, do you think the filing strategy could be more widespread in a more hybrid environment. Yes. It's just to repeat it, kind of do you think the hoteling strategy is going to be more widespread given that we're in a little bit more of a hybrid environment? Hoteling has been around for a long, long time. So the concept of shared the hot desk we're telling it's decades. Is there more of it now than there was, there was a trend in that direction leading up to the pandemic. Then I think there was a trend away from that immediately post pandemic, where it was almost like forbidden because everybody I mean -- remember, it wasn't too long ago where there was like Plexiglass up between cubicles and cubicles were being separated by feet, and they were depopulating floors. So we've passed all that, and I think we're now trending back to the way people thought about it. Initially, hoteling has and always has had a role, I think, in New York office, whether it's more or less prevalent now. You can't really say maybe see if you can, but I don't -- I mean not that I'm aware of, but it's I'd say it's more than it was maybe coming right out of pandemic, but I can't say it's more than it was in the years leading up to it. It's also only applicable to very large tenants. If you really think about the average tenant in New York City, that's less than 25,000 square feet, hoteling is not a viable way of them operating their business. If you're talking about a tenant with hundreds of thousands of square feet, then it's a conversation. And typically, where we see it, it's very specific to certain types of industries. So sales businesses, consulting media businesses. But when you go into the big financial firms and things like that, we see it far less frequently. All right. That's very helpful. And then just to follow up on a couple of earlier questions. I was hoping you could just comment a little bit more in general on debt availability for office assets and landlords today? And how you expect that availability and even pricing on debt to trend throughout 2023? It's widely available. And I think I just said earlier, sponsorship and building quality location will matter more so than ever. So we're out with good product. We're obviously a good sponsor and the feedback has been good. I think we expect that second half of the year that you'll see a little bit of a return of the longer fixed rate market. So again, these are pretty short -- it sounds low. I mean, if you're going to blink your eyes, you're going to be -- we'll be sitting here on our second or third quarter conference call. And hopefully, by that point, we'll be talking about more capacity in the market. Fortunately, we don't have any projects ourselves geared for that kind of execution this year, right? So yes, we're in good shape. Next question, operator? Just one more on the financing market because I think you talked about 919 Third Avenue and then you also have 2nd. I guess, Third Avenue or Lexington, depending on who you ask, has kind of been cited as the cutoff for how assets are performing differently by submarket with a little bit less activity, both leasing and then utilization east of that cutoff. Do you sound to me like kind of different than the conversations when it comes to that just in terms of 919 versus would it be easier to refi at a similar asset closer to Park Avenue. No, no. I don't -- I mean you didn't hear that commentary from us. I don't -- so not at all. If you look at our tenant base at 919, it's about as institutional roster as you get. We sold 885 Third Avenue to a hospital at a great price at the end of last year if whoever gave that commentary missed that print. And I don't that makes absolutely no difference in the financing model. Okay. Well, for anyone who's still on the phone, I would encourage you to check out highlights from today's 2023, state of the city address that Mayor Adams gave this morning. And it announced amongst a host of other things, several exciting investments that were born out of the New York plan that a lot of stakeholders worked on, including us here at Green in order to create an action plan to really bring New York forward. And it was great to see how quickly the recommendations were developed, how executable they were in their communication and now to see Mayor Adams including much of that in the state of the city, which includes hundreds of millions of dollars of investment in new public spaces and permanent open streets, which we think is great for the city to make CBDs 24/7 cities in Manhattan and all 5 boroughs he reaffirmed his commitment to building more housing and more affordable housing through what he calls the city of yes, by making the necessary modifications to zoning and working with counsel to make that happen and making the incentives in place there for conversion of office to residential as well as new development and other investments in quality of life initiatives in and around the commercial corridors throughout the city, which I think are very much needed and appreciated. So the city and state are working together towards common goals, making the city safer, cleaner, better and it's a good thing to see. And more on that to come. So thank you for joining us today. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
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Good morning and welcome to Billerudâs Presentation about our 2022 Year End Report. The presentation will be held by our President and CEO, Christoph Michalski and our CFO, Ivar Vatne, and as usual, they will take questions after the presentation. So Christoph, letâs begin, please. Good morning, everyone. I am here with Ivar and I am very pleased to be able to present you our 2022 results and the quarter, in particular. So before we go to the quarter, I just want to highlight, we had a record year in 2022. You can see we reported 63% growth, which was the Verso acquisition, and on top of that, a very impressive 16% organic growth performance, all-time high profitability, adjusted EBITDA margin of 19%. We were able to mitigate most cost increases during the year with prices and mix. And with our new company, we have now achieved an EPS, which has tripled versus a year ago. And most of the EBITDA was translated into cash, which as you know is an important part of our going forward to transform the U.S. into cartonboard and the projects we have in Norway. If I go a little bit through the key items of the year, you remember we had a Capital Market Day in November 21, where we basically presented you and discussed with you our strategy. I think in 2022, we have executed and we have worked on many, many on the points of the strategy with some good success. So if you look at our record sales growth, it also means we had an excellent ROCE and our net debt level to EBITDA is only 0.6x, thanks to the performance and to the issuing of new shares in June last year. The acquisition of Verso has gone very smoothly after the closure on March 31. We have started an integration process. And today, we have basically decided already to finalize this project is now finalized in terms of integration and a few outstanding items will be run by the functions. So very good and very quick integration. We have also started to work immediately on the transformation plan, which is progressing well and we continue to work towards the second half â first half of this year, where our pre-feasibility should be completed. When we talk about Norway, good progress as well, we have completed the pre-feasibility and are now in the feasibility phase. Just as a reminder, Norway is basically a joint venture with Viken Skog, where we would like to build a BCTMP pulp mill with the best-in-class performance, but also with the opportunity for biogas capture and carbon capture and to integrate basically to create the first â our ambition is to create the first carbon-negative pulp mill in the world. So, all progressing well. Finally, you are aware and this is not about our strategy of the CMD, but about a project that we launched a little bit before that, which is our recovery boiler in Frövi. Despite the war in Ukraine, despite all the logistics delay, despite all the missing items and components and chips in the world, I am very happy that the team has progressed this project on track. So itâs on time, on budget and it will probably go online in quarter three next year, a little bit in advance of the timing of quarter four. Let me go now in quarter four. So quarter four continued to be strong, both in net sales growth, 14% organic growth and also in profit. I think we are very pleased about our North American business, which contributes significantly to these results. In Europe, we have a slightly different picture. We have now I think maxed out pricing, but cost continues a little bit to climb. And I think this is probably the first quarter where we see some more softer demand, which is in my view very much driven by some destocking of our customers and probably also about the future outlook of the economy, which probably November, December was still very much appear to be bad, which I sense is a little bit better now already. So I think we will see it happening now in quarter one and then hopefully, a quick recovery after that. Let me take you quickly through the bridge on net sales. You have seen pricing impact in this quarter is still 15% and basically currency rate a little bit. Volume growth has been flat overall, but strong performance by adding North America you can see 60% of the growth. And then finally, I think Beetham is the last time we have it in the quarter, because it was divested about a year ago. When we go to the profitability, again, outstanding profitability from North America and for the first time, unfortunately, you can see that the cost inflation actually exceeds the pricing and mix that we achieved in Europe. We donât expect this to continue for many quarters, but I think quarter four is still clearly the start and we hope that in quarter one 2023 the worst will be over. I think it comes from the double effect of economic unsecurity and some destocking. And this will be very quickly through, I think through the system. Why do we â are still very optimistic for the year 2023 despite relatively weakness in quarter one and maybe already softening now in quarter four? Itâs because we have a very significant of our sales in the foods and drinks sector, which tends to be much more stable. But I think overall, it comes from a very high level. And therefore, going forward, by segment, we will have more challenges going ahead. Clearly today, we see already some significant weakness in industrial and â but continue to see good performance in printing and publishing paper in the U.S. and foods and drinks as I said, are more stable as we go forward. Thank you, Christoph and good morning everyone. A couple of words on input cost and price development. We have seen in other quarter, as Christoph was mentioning with steep cost inflation, we have added roughly SEK325 million when we compare to previous quarter, so that will be Q3. However, the situation there is created between the region. For North America, very good news, we have actually seen a reduction of costs, so about SEK60 million versus previous quarter. And this is, first and foremost, related to the decline in natural gas rates post-December period. Chemicals and logistics pretty much flat for the U.S. region. That means for region Europe, we have seen cost inflation in the area of SEK385 million. Fiber and chemicals are by far the biggest cost drivers, each with incremental SEK200 million each when we compare them versus Q3, logistics being stable, while we see a slight help from energy around â¬50 million. Now going into Q1, we do expect the same regional trend to continue. So for North America, overall, we expect to see a pretty flat cost picture and we then compare versus Q4. Then however, for Europe, the pace of cost inflation is slowing down, which is good news, but we estimate around SEK270 million of additional cost to be added in the quarter. And most of that is expected to come from fiber pulpwood SEK150 million, followed by energy SEK100 million, and a small tail on chemicals of SEK20 million. We do expect logistics to be flat. Now if we move on and we start with some coordinates for product area, paper. Product area of paper had another outstanding quarter with excellent performance, both when we look at top and bottom line. As we have seen over the previous quarters, we see double-digit net sales growth across all categories. And for both regions, which is very pleasing. We managed to add approximately SEK100 million of extra pricing when we compare that to Q3, pretty much solely coming from North America impacting the graphic and specialty paper. Pricing in Europe was more or less flat. Volume came in a bit short for this quarter, and I think Christoph already alluded to this, but itâs mainly related to softer demand across categories and different channels combined with inventory adjusted by some of our customers. Profitability for the quarter outstanding, ending with a 28% EBITDA margin. Most of the profit growth is related, obviously, to the inclusion of our North American business, but also within Europe, we managed to keep an impressive profitability level that we are really pleased to see. So, letâs move over to product area board and for product area board, some similarities, but also some quite sizable differences. To start with the top line performance is another solid quarter. Yet again, we see high double-digit growth across all of the categories. We have managed to keep prices flat throughout the quarter, although the market is starting to show clear signs of pricing contraction within several categories. Also for product area board, the volume landed a bit soft versus expectations, very similar drivers as we mentioned, for paper, softer demand, in particular for containerboard and cartonboard in addition to some inventory adjustments for some of our customers. We did see a pretty hefty profitability contraction for the quarter. Iâd like to explain that for a couple of minutes. In essence, the margin is coming down mainly due to cost inflation has continued to accelerate while pricing is leveling out. And on top of this, we have had some production challenges during the quarter that incurred some one-off costs and actually, probably a better way to visualize this and give you a bit of a size of the magnitude if you move into the next slide, this is a bit of a one-off event we do to show a quarter-over-quarter bridge for product area board, but I thought that might be very useful this time given the pretty hefty movement we have seen. So starting with the base than Q3 from â22, there is a certain help coming from our net FX position. While pricing is flat, volume and mix hits us negatively, while the big item quarter-over-quarter is the cost inflation. Most of it, as I mentioned already, is pulpwood and chemicals related. You find a small little item as well on the vacation accrual and that is obviously linked to how we handle the vacation we have during Q3 and we also have some other items. There is a red box there at the bottom, SEK145 million of production disturbances during the quarter. You can see that is cost and items that needed immediate care given how we had some troublesome items, non-big insignificant, but for most of our board mills, we had some items that needed extra care in the quarter. Now â and I want to highlight that, that is an item that is one-off in nature and we do not expect to carry with us going into Q1. Good. So if you take next slide, please and moving over to cash flow. This has truly been one of the biggest successes during 2022. We have had and we have delivered strong cash conversion pretty much in all the quarters and Q4 was no exception. 83% of the EBITDA that we manage to see to operating cash flow and that is a number that we are delighted with. We have seen very similar ratio also for the full 2020 figure. I mean, the strong cash conversion has enabled us to fairly fuel our balance sheet and we end the year, as also Christoph has alluded to, to all-time low net debt leverage ratio coming down then to 0.6x when we close the books for December. The very different profitability level we have also seen has ignited our return on capital employed and as we come a long, long way in a few years and reached now 18% for the total year. The Board of Directors proposes an increase of ordinary dividend from SEK4.30 to SEK5.50 per share. And on top of this, the Board of Directors has proposed an extraordinary dividend of SEK2 per share. As you know, this will go to the AGM further down the line in â23. Slight change of the CapEx outlook for â23. We move it up by roughly SEK100 million. So, SEK3.1 billion is the best view we have at this stage, SEK2.2 billion of those coming from what we call base CapEx items between the region and then the recovery boiler, SEK900 million as that project will start to come to completion. Right. So you can move to next slide, please. And I think in a situation where the market situation is volatile, also difficult to predict, it is of high importance we continue to focus on items that we can all control and that is obviously what we wanted to focus very hard on going into â23 as well. We are launching a new profit improvement program that will run over the coming 3 years, setting also the ambition quite high, achieving a profitability uplift of SEK1.5 billion, measured then in the run-rate when we come to end of 2025 and that is obviously measured in an EBITDA impact. Clear target for this year in â23 is to already deliver a SEK400 million impact when we close the books then in December â23. Now little bit more about what this program is all about. And I think itâs probably useful in this context to talk about the evaluation and the learnings we take with us from the cost and efficiency program that we started back in the fall 2019. We have run that program now for a bit more than 3 years and closing it down in the end of â22. You might recall we have raised the program ambition several times throughout the program. And that program was mainly focused on cost efficiency within fixed and variable cost buckets. And what we take with us from that, I would argue, very successfully executed program, is both [indiscernible] what the impact the organization can generate with the right focus. And we also take with us quite a bit of confidence there is definitely more potential out there. And what we are really trying to achieve with this program is to reach further to the full potential of the company. And if I can use an analogy, we probably picked some of the lowest hanging fruits now in our previous cost and efficiency program. This time, we climb a bit higher up in the tree to pick some items that are little bit more difficult to reach. And particularly in this case, we will be looking at items and activities that require a stronger functional collaboration and examples in this case being areas to reduce trim, optimize further product recipes and a much more seamless sales and operational planning across the company. You can expect quarterly updates on how we are progressing on this program. We will also, at some point, come back to a target split for the 2024 and 2025 impact respectively. Thank you, Ivar. Thank you, very clear. So priority 2023, I think the most important for you to know is our strategy has not changed. We have a growth agenda on cartonboard expansion to the U.S., basically optimizing the footprint of our operations in Europe and to continue to have very efficient wood supplies. And I think if there is one item on the agenda, which has to be clearly number one and where we are, I think, not making the progress I wished is on health and safety. We achieved not entirely our target in 2022. So we need to redouble the efforts to achieve our targets in 2023, so very important. We continue to work on our strategic objectives, sales growth, the continuous focus on sustainable packaging opportunities and innovation. We also will continue to work, as Ivar alluded already on our profitability growth, not only with efficiency programs, but also with when it comes to mix, price management and in particular, production stability and cost discipline. As Ivar mentioned, we deploy this efficiency program and I think this is really the right program to do. Itâs not about cost-cutting. Itâs about efficiency improvement, which is basically a big team sport. So when I talk about the key projects, which is clearly on our agenda. On this slide, you see a photo of the closed recovery boiler at Frövi, so very good progress. If you remember the initial photos we showed you in the other quarters when this recovery tower was slowly built expected startup, as I said, through quarter three, I think the Norway BCTMP feasibility ready in quarter three as well. So ready for investments, but we havenât seen any red flags on that project today. And we are very, very happy with the collaboration with our partner, Viken Skog in Norway. Pre-feasibility of the U.S. is continuing into H1 and that will then define more or less the timings and a better view on the overall CapEx and we will come back to that in due course when we have the right discussion with our board. Outlook quarter one, more challenging, as we already alluded to, with softer demand. And I think, again, softer demand why, because of slightly adjustment of stocks. And these stock adjustments are probably coming from the logistic difficulties we had in â22 and people basically for safety ordered more than they would have normally done. Secondly, uncertain economic outlook, but maybe not as bad as we might have thought a few months back. So I think there is hope for significant improvement. And then finally, I think every time a market goes into this kind of wait-and-see, there is also some expectation to order later just to have more security when it comes to volume needed and surprising at that moment in time. Liquid packaging board is the exception, that is very clearly stable. And as I mentioned before, we even had some good price discussion with our customers in order to mitigate some of the cost inflation and they were very successful across all our customer in liquid packaging board. We will have nevertheless acceleration of cost in Europe still in H1. We hope that this will clearly soften as well as demand generally in the economy is going down. But clearly, the key driver is energy and then when it comes to the forest industry, there is still some basically, we are probably at the peak of the wood price now as we go ahead. In the U.S., the picture is better when it comes to cost. Itâs stable. Some are even declining. And we sit in a very competitive wood basket, and we expect the U.S. business to basically motor on as we go with the same kind of caveat on the economic development and some destocking in graphic and speciality paper. And then finally, quarter one is clearly the kickoff of the efficiency enhancement program. And as even alluded to it, we have a strong target of â¬400 million for this year. Quarter one is really the ramp up. We are well preferred, but the projects are rolling in. But therefore, I think quarter one will be the start-up and then in quarters two, three and four, we can probably report some results from that program. Good. Having said that, I think I come to the end of our presentation. And I will hand over to the operator who will manage the Q&A as we go on. Thank you. Thank you, Ivar. Thank you. [Operator Instructions] And our first question comes from the line of Christian Kopfer from Handelsbanken. Please go ahead. Your line is open. Yes, thanks, operator. Good morning, everyone. Just firstly, Christoph, I think in your final remarks, you mentioned that you have been very successful in raising prices within liquid packaging board. But still, you also mentioned that you are not able to, as I understand it at least, to fully mitigate the cost inflation. Is that because this is, over time, a very stable product so that it is quite hard to get the price hike through or how do you view it? Good morning, Christian, thank you for that question. Well, look, I think, as I said already in quarter three, and some of you were quite surprised that in liquid packaging board, we have long-term contracts. And I think we took the extraordinary measures this time that we would basically have a round of price discussion with our customers because the inflation â cost inflation we see in Europe, both because of energy and that then translate to chemicals, etcetera, but also on the wood side was significantly more than you would normally expect in the stable markets. And I cannot really go into a customer-by-customer, but we got what we needed in order to continue this business in a good way. And we also understand that costs are probably at its peak now, and they will come down. So when I say it mitigated some of the cost, itâs probably in quarter one. It might not be everything, but over the year, we hope that this will basically help us in profitability as we go forward. And I must say, I must thank also our customers who showed a lot of understanding that the situation in which we are in, quite dramatic and also quite exceptional, I think, compared to previous business practices. Thank you. Thanks, Christoph. Ivar for you. Iâm very sorry that I think I missed the numerous call it, guidance that you had for the first quarter on the cost at least if you also said something on price. Could you just â sorry for that, but could you shortly repeat the cost â the numerous guidance that you had for Q1? Yes. Hi, good morning, Christian, sure. I can do the short version then. So I donât want to bore everyone with the same thing I said. But why donât I start with the cost piece. So we did obviously add some numbers for Q4 to Q3. But for Q1, then when you compare that to Q4, the number we have is SEK270 million. And the short version there is that North America is flat. So all of it is coming from Europe, and that is fiber, pulpwood, roughly SEK150 million, energy SEK100 million and chemicals SEK20 million. Now in terms of pricing, itâs starting to be quite a bit mixed bag. We start now to see more of a contraction more than anything else for the categories. I think there is two exceptions, liquid packaging. We obviously have a good solid contribution of positive pricing from beginning of Q1. We also have a bit of a help from specialty in U.S. as a carryover effect. But besides from that, weâre starting now to see basically contraction across pretty much every category, containerboard, cartonboard coming down, same for brown-and-white stack and also kraft paper. So we have an estimate of roughly 2.5% of our material sales quarter-over-quarter and that should be in the area of SEK250 million Q1 versus Q4 as a negative pricing impact for the company. Thank you. [Operator Instructions] And your next question comes from the line of Robin Santavirta from Carnegie. Please go ahead. Your line is open. Thank you very much and good morning, everybody. First of all, related to the production disturbance you had in December. What was that about â where? And is this something that is isolated for Q4 or is there any impact that you expect for Q1 as well? Good morning, Robin, short answer is the disturbances was basically difficult in start-ups. It touched a number of mills totally disconnected from each other in terms of events, and itâs more the bad â the sum together, which makes it quite of a significant number. So I think most of that, you can assume that this will not happen again, at least we donât plan for that. And I think things are well under control in a much better situation than we have previously been in. But from time to time, these things can happen. So I donât see this as any significance, but I just wanted to make sure that you understand that the result in quarter four and particular on cartonboard, were quite influenced because it really happened more or less focused on our cartonboard mills. Thank you. I understand, thank you very much, Christoph. The second question I have is on pulpwood availability in Sweden. How do you see that situation panning out at the moment? Do you sort of plan to go ahead as you have done before you buy mostly in Sweden a bit, in the Baltics or is it a situation where it could make sense to start to look at Latin America, UK chips, or then wood chips from North America? Okay. So yes, so youâre absolutely right. As you remember, we missed about 15 million cubic meters coming out of Russia starting from the beginning of the war and that created across Finland, Sweden, Baltic states, etcetera, a lot of uncertainty in the market and also some market adjustments, okay? So just the context again, what we have done, I think we have been very successful to basically mitigate all the uncertainties and supply shortages that some of us have seen over this year. And overall, we are very satisfied with the outcome. When it comes to overall wood supply in Sweden, I mean, you know my view on that. I think Sweden is probably at maximum capacity at this stage and probably Finland as well. You all know about the discussion at the European Union level about what is the role of the forest? Is it a productive raw material, which absorbs carbon or is it a carbon thing where you basically do nothing? And some of this policy clearly will have an impact in the future. And that is why we have a very clear strategy of widening our wood sourcing strategy, where we are investigating different sources. Probably [indiscernible] in that is clearly Norway, with our joint venture with Viken Skog, which is around BCTMP production but also about wood supply from Norway into our Swedish mill system. And just to remind you, I mean, Viken Skogâs main area is about 200 kilometers from Gruvon, so it is by any means a big challenge when it comes to logistics. Secondly, youâre absolutely right, we are exploring different forms of pulp chips and whatever it is across the world, including from our sources in North America. But I think wood prices overall are not yet at the level that you would actually consider this at scale. Where I am very confident is that we have now a good strategy in place, good discussion also with our partners in the forest industry. And our approach between short, so basically short-term purchases and more long-term contracts is also in a much better state than it was maybe 2 years ago. So overall, Iâm very confident that weâre in a good position on that. But youâre absolutely right. I think the Swedish wood market as such will â is feeling the effect on the closing of the border with Russia and is also feeling the strain in the political discussion around the forest and in the future. For sure. Thank you for that details. A final quick one on Verso performing exceptionally well, so well done on that, what is the outlook for the market balance on â for Verso for your North American business now going into 2023? Okay. So let me answer that question in two parts. We have two main markets. One is graphic paper and one is speciality paper. In graphic paper, we see a level of good stability with holding prices and a little bit softer volume as people are reconsidering their marketing plans based on the economic environment in the U.S. As you know, we are a big supplier to premium catalogs and to commercial printing. And on the specialty paper side, the situation looks very good. It has to do with two things: A, the market, as you know, is growing; and on the other hand, there are some players who won in particular, was left to the market at the beginning of this year, which makes basically the market balance quite positive in view of producers. There is a bit more volume in the U.S. where [Technical Difficulty] comes from a statistic in November and December comes mainly from ordering because there was a shortage for a while, and the supply arrived basically for everyone at the same time. I believe these imports into the U.S. will stabilize at the normal level as we go forward. And therefore, I believe the U.S. has a good chance to have a good stability in the market, which makes us believe that our business performance will continue to be good. Thank you. [Operator Instructions] And your next question comes from the line of Oskar Lindström from Danske Bank. Please go ahead. Your line is open. Yes. Good morning, gentlemen. Three questions for me. The first one is on cost inflation. Ivar, did I hear you say that cost inflation is slowing? And if so, what signs are you seeing here and where? And also, you talked about the outlook for pulpwood obviously, your most important cost item. But I was wondering a little bit about the chemicals and caustic soda situation, in particular, which we hear is prices are up sharply and perhaps availability is slower. So that is my first question. Yes, certainly. My second question is on the solutions and other business. I mean here, we still saw red numbers or earnings last year, despite it being otherwise very good year. Is this the other part thatâs dragging it down or is the solutions business still loss-making? And if so, what will it take to improve profitability in that business? And then finally you talked about customers reducing inventories. Do you have â and youâve guided for pricing in Q1. Do you have any feeling for whatâs happening with the volumes in Q1? Those are the three questions. So cost inflation, including caustic soda, the solutions business and volume outlook for Q1. Yes, with customers and destocking. Hey, I think my read of the market is the following. You remember â21, â22 coming out of COVID. Basically, there were big disruption logistics. There was a sense there was some shortening in the market on product. And I think a lot of the brand owners and customers basically went after to order maybe a little bit more than they normally needed because they didnât want to run out of material. And clearly, our material for brand owners represents a very small portion of their costs, and therefore, itâs actually quite a smart strategy to have a little bit more stock in terms of security. So I think whatâs happening now is that logistic, as you know, has a little bit â the strains are gone and flowing much better. Therefore, brand owner and customers are now reviewing their stocks and have started in quarter four, I think, to go back to normal levels and that is absolutely normal. So Iâm not particularly worried about that. And this basically is also probably going into quarter one as we speak. The second part of the softening volume on the stocks is really the outlook. So I think most people maybe accept drink sites are basically looking at what is the industry doing? I think I cannot hide from you. Cement is not a good business today, and we have big supply for cement bags. And here, we see not just the destocking but also lower order levels and the flushing through of some of the materials will take a little bit more time. So that is our view. We do not clearly have â we do not have a very good view on the brand owners and the end customers, but we have a pretty good view on our conversions we are providing this packaging material. And therefore, in our current view is between quarter four this year and quarter one next year, that stock situation should have been normalized, and then it depends more and more on the economic development in Europe. Ivar, one and two? Yes. So good morning, Oskar, so going into your first question around cost inflation and I think you asked this from two different [indiscernible]. I mean we did already mention on the pulpwood side, we expect inflation going into Q1 versus Q4. I think itâs difficult to give any other number beyond that, so we wonât. But I think in general, you can say that we see a very clear time that the pricing on hardwood in Baltic is slowing down and coming down actually quite a bit. Can I ask you Oskar, could you put on mute? We get some noise from your line, I believe. Thank you and then come back. Please Ivar. Yes. So on hardwood in Baltics, we definitely see that the prices are starting to come down now from a very high level, it has to be said. I think in Sweden, in general, itâs a bit mixed. I think as Christoph alluded to that, there has been some price announce coming through and in late Q4 and beginning of this quarter. Now we do see, in general, if you use the big brush here that there is a definitive expectation of lower activity, slower volume in general in the industry for â23 as demand has slowed down and everything else equal, that should put less pressure on the pulpwood demand, in general, and that should calm the situation down and even start to see some costs coming down in Q2, but I do not want to put a number on that for now. I think on chemicals, in general, I mean, itâs a little bit different situation between the region, but you can say that the overarching principle is that the energy and chemical price correlation is what you kind of need to look after. And there is also a bit of a lag between when the prices are announced as it hits our P&L based on our contracts. So who knows what the energy situation will be on. But for the time being, we also see that things have calmed down or not as extreme quarter-over-quarter in terms of the energy picture. So we are, you can say, cautiously optimistic that we get a small tail now of chemicals increase Q1 over Q4, as I mentioned, but actually then a bit more positive that we start to see stable and to be maybe even more optimistic a slight decline going into Q2 and onwards. Now to your last question about the Solutions & Other, I think the best table probably you looked at that as well is 21 â Page 21 in the report where we strip out the currency hedging and also any other items impacting comparability and actually had positive number on that as well. I think the Solutions & Other, by nature, it has managed packaging in it as the bigger item, but it also has other things, I mean, group items. We also have services we do on forestry, etcetera. So, itâs definitely a mixed bag with some ups and downs. But I can say that with the big piece of one managed packaging, we actually had a very good development during â22, and we managed definitely to move that piece from a, letâs call it, breakeven to slightly negative past years to actually make some percentage points profit this year. Now, itâs not too much, but itâs also no asset business, as you know. So, we are very happy to see that we turn that business into good profitability territory for â22. Thank you. We will now go to our next question. And the next question comes from the line of Linus Larsson from SEB. Please go ahead. Your line is open. Thanks and good morning everyone. Continue on pricing and maybe specifically on board. Do you expect higher or lower board prices in Q1 compared to Q4 for the division as a whole? Yes. No. Good morning Linus, I can take that. We definitely expect to see pricing to fall down for board in total. I can say that, that is then a function of good pricing help on liquid packaging. But as I mentioned, the train is moving quite fast now in the negative direction on containerboard and cartonboard. Great. Thatâs very clear. And what did you say â could you just repeat, I think you said a figure for the price impact Q1 on Q4 for the group as a whole. Could you please repeat that? Yes. So, we expect in the area of minus 2.5%. If you look that at the material net sales, that should be in the area of SEK250 million quarter-over-quarter as a negative impact. Fantastic. Then I got you right. And then maybe â yes, I donât know if you want to go into that. But you said something like â I think Christoph, you said that costs are at its peak now. And I donât know if you mean like a very general context or do you actually expect Q2 compared to Q1 to have lower input costs or flat input costs, or how do you see that? I think that was more a general statement because we see different pictures in the U.S. than in Europe. And as you know, a lot of the input costs, especially chemicals, etcetera, will be driven by energy cost, okay. So, I trust you have a good crystal ball as I. So, letâs â I think we are now in a situation where energy hopefully will be more stable, but who knows. So, more a general comment when we look at Europe and North America. Okay. And if you then take specifically wood costs, you elaborated a bit on the Baltics and new sources and so forth and you have a bit of visibility there. So, do you expect â when do you expect that to peak if you look specifically on the wood cost? Yes. As I said, I think hardwood now we start actually to see signs that we are might on commitment and we should probably already build some help on hardwood end of this quarter and also going into next quarter. Now softwood is the big piece and that is the majority of the pulp will be sourced from, and itâs a bit more tricky to say. We know that on kind of Q1, most of Q4, we will get a hurt due to the announcement that has been made in the market over the last recent months. But as I just I guess can repeat, I think there is more and more signs in the industry that volume is softening down. Production will be taken down through curtailment and slow steam and everything else equal, that should put quite a bit less pressure on the market and a clear indication that we might see a pricing before the summer onwards. But I donât want to give a number on that estimate. No, thatâs fair. Thatâs very helpful. Thank you very much for that. And then just finally, on your dividend and maybe if you could clarify your dividend policy, and I really donât mean to be what you call it in Germany, [Foreign Language] or anything like that. But I think you have stated that your dividend policy is minimum 50% of net profit and now you are paying 41%. Could you just reiterate is this over the cycle or whatâs the clear message in terms of dividend policy, please? Okay. So, I think first of all, this is clearly a Board question and the Board came to the conclusion that in view of the projects we are having, the good performance we are having that we should increase our dividend by 30%, which I think is a fantastic increase. And on top of that, pay a special dividend as you â of SEK2. So, overall, I mean we are at 40%. As you know, despite having had this dividend policy for many, many years, Billerud over time, has paid in a range above and below 50%. And I think it is always the intention to be close to that number. But at the end of the day, itâs a Board decision and the Board, I think very wisely said, hey, we won a very good increase of the ordinary dividend, and we want to pay a special dividend because of this extraordinary and very special year we had in 2022. Thank you. We will now go to our next question. One moment please. And the next question comes from the line of Martin Melbye from ABG SC. Please go ahead. Your line is open. Good morning. My questions have been answered now. But on the volume side, could you explain that in the same fashion as you did on price and input costs quarter-over-quarter for Q4 and then also Q1, please? Now, we can start with Q4 versus Q3 and you can say that we are definitely at least 60,000 tons short versus what we had thought going into that quarter. It hits both regions. So, this is not a Europe versus U.S. item. And I can say that itâs the inventory adjustment that hit us, you can say, both may be harder and faster than we might have expected and a clear slowdown in some of the categories. So, itâs a bit difficult to pinpoint exactly how much falls into what bucket of that, but those two are clearly the biggest drivers. Yes, we have had some challenges I mentioned on the production in some of the board mills that might have been up to 15,000 tons, we could have sold more. Itâs a bit of an opportunity of course, if you use it like that, in particular for liquid packaging. But you can say we had a quarter definitely where we were not truly happy with our volume performance. I donât probably want to give a volume guidance per se on Q1, but I can say that we expect a lot of the drivers to continue and probably a bit worsened going into Q1. So, definitely we expect a lower volume performance in Q1 versus what we saw in Q4. And I think again, itâs a continuation of still an inventory adjustment in many of our customers, and the sentiment has gone worse in terms of the demand over Q4. Thank you. Two more questions. You had â you mentioned a one-off that will not be repeated when you talked on Slide 13, what was that? And the last question on liquid packaging board, what was the price increase? And is this relevant for your entire volume, please? Yes. I can start with the first, and then I will let Christoph answer the liquid packaging part. Now, the item we talked about on the board was SEK145 million and you can say that is a function we had in pretty much all of our board mills and also a bit outside of that into your paper. Some â well, troublesome incidents, there is as Christoph mentioned, no big correlation and not a major one, but we just had overall, a pretty disappointing efficiency performance in the mills. That incurs extra cost that they need to take out, take-in more external technician service, etcetera. It also incurred quite an extra over time in the mills to sort these unforeseen issues out. So, you see that aggregated number and everything else equal, we do not obviously plan to have this in Q1, and that means that items should go away. Christoph, do you want to comment on the liquid packaging side? Well, I cannot really comment, but we increased prices across all our customer base and I think thatâs all I can say about that. And that will help us in quarter one and hopefully in the rest of the year. And I think there were appropriate reasonable price increases. [Operator Instructions] And your next question comes from the line of [indiscernible] from Dagens Industri. Please go ahead. Your line is open. Thank you. Good morning and congratulations on a very strong full year. I have a question regarding the conversion plans for North America. If at all possible, can you share any insights from the pre-feasibility study and/or give an update on how the U.S. board market has evolved since the acquisition? In other words, how the environment in which the strategic decision was made has changed? Thank you. Okay. Good morning. Yes. Our conversion plan, look, we are in the middle of the prefeasibility. We are getting more and more information. And the only thing I can really say is there is no red flags which is what we are always worried about when we start the studies. So, all of the key items in the due diligence have been confirmed. Now clearly, the work continues. You are aware that some of the costs and some of the timings of delivery have changed since the beginning of the war. And therefore, the team is working through that. We have basically planned to finalize this by the end of quarter two. So, we hope to have either in quarter two already or in early quarter three, the discussion with our Board. And if then we come to a positive decision, we will clearly make a statement where we then have probably an indicative approach to numbers and definitely a timeline in which we want to realize that project. When it comes to the cartonboard market, I think I will just give you a general perspective. I think our announcement to buying Verso had made noise in the market in the U.S. I think you have heard about the announcement from SAPI [ph]. You heard about the announcement of more imports from maybe from Europe, out of Europe into the U.S., which tells us we are definitely on the right track. We have an incredibly good first-mover advantage because we are already exporting the same product that we will produce in the U.S. to the U.S. now. With the acquisition of Verso business, Billerud North America is now able to set up a proper professional route to market, which was clearly a little bit more simpler initially. And we have started to have very good discussions with potential and existing customers, which are very keen on our development in Escanaba. So, I think I will stop there. Ivar, do you want to add anything to it? Okay. So, thatâs how we see it. And itâs a growing market. So, we are very confident that we are on the right track. Thank you. We will now go to our next question. And the next question comes from the line of Johannes Grunselius from DNB. Please go ahead. Your line is open. Yes. Hi everyone. Most of my questions have been answered, but I have two more. Just to make â I mean just to clarify that I understand it correctly. Are you sort of looking at the coated wood free prices in the U.S. as stable for this quarter, for the first quarter? And is that what you project stability in those very high prices for coming quarters? Thatâs my first question. Yes. Hi, good morning Johannes. Yes, the answer is exactly that. Thatâs the view we have. Itâs more difficult to say going on from Q2 and onwards. So, that I do not really want to speculate too much on at this stage. But the situation is still stable. All the indication we have so far is that we will have another quarter now in Q1 with a pretty flat pricing picture. Okay. Thatâs helpful to know. I mean I am just surprised about it since we have seen indications of more imports, very low inventory levels starting to normalize and that kind of stuff. So â but still, you donât see the weakness in prices? No. As I said, we forecast for this quarter a flat situation more difficult to go further on. So, that I wonât speculate. Yes. Good. Then I have â I mean if you can quickly comment on the new cost initiative because I think thatâs quite significant for you as an organization and company. I mean are you targeting mainly the fixed costs or is it also kind of improvements on the revenue side. Could you give some color on that, please? Yes, I think itâs a fair point. And you can say we are also setting up the program now with all the building blocks, and we will definitely have more examples to share along the way. But I think you should look at the nature of this program is not to go after pure cost per se, but more going after the potential of the company in particular items that sits between functions. And I know that maybe it sounds very fluffy. So, I can be a bit more concrete. I mean I talked about the optimization that we know is a cost, and we want to take that down. And that is also something it requires a lot of collaboration between operations and sales or commercial team. We also have items where we go into the recipe optimization. Clearly, that has implication on the property of our products. And that again, requirements from both supply and operation and commercial combined. I think also streamlining even better so when we know what runs on product lines on our machines and minimize downtime, it is not something one function can do per se. All of these items I mentioned will have impact on either variable cost, also just in terms of driving net sales per ton or more efficiency. So, I think thatâs the best thing I can say at the moment. We will come back further down the line with even more examples when we see actual stuffing in for the year, etcetera. Yes, thatâs helpful. And your target, I mean that is to have SEK400 million kicking in at the end of the year as a run rate improvement, right? No, good prediction. We expect a year-over-year. So, you can say that we expect 23% versus 22% to deliver a SEK400 million net impact. Thank you. And we will now to our next question. One moment please. And your next question comes from the line of Cole Hathorn from Jefferies. Please go ahead. Your line is open. Good morning. Thanks for taking my question. Just a clarification on the product area board. Should we be right in thinking the costs were higher. Liquid packaging board, you werenât able to raise the prices. But now as you go into Q1, you should get a bit more of a pricing benefit and you donât have that one-off. So, sequentially, should we be in a better position in that product area board in Q1 versus 4Q is the first question? And the second question, could you give some color on the second speciality kraft markets in Europe, pricing is holding up. What is the reason for that? Has demand been okay or is the cost curve moved up for a lot of the high-cost producers that is keeping the prices up in sack kraft in that market? Just any color you could provide would be helpful. Thank you. Right. So, good morning Cole. As I said, I think for product area board, right, you will get a bit of a mixed bag. You will get some help from pricing on liquid packaging, as we just mentioned. I also, I think answered Linus that net for the whole area, given containerboard and cartonboard is coming down quite sharply. The whole product area will come down quarter-over-quarter when you look at the kind of net pricing impact. You do get, as you mentioned, SEK145 million help, if that is clearly what we are expecting given we do not foresee to bring some of those challenges into. So, there will be some pluses and minuses there. I can confirm that one. Now, in terms of the sack and speciality, I think I can maybe start with this back piece. And you do see a lot of the similarities for the brown and white sack. I mean market is definitely softening and slowing down quite a bit. I think we still see customers sitting on pretty good level of inventory. I think there is also a sentiment now that economic activity is slowing down. So, the order book is certainly weak when we look at that pipeline right now. Clearly, that means that we see clear signs in the industry that all players now is chasing volume across the board and activating new customers, etcetera. So, I think itâs fair to say we would see slower volume and also price erosion in that quarter. And I think thatâs probably accelerating now in Q1 versus what we see in Q4. I think on the kraft paper, itâs maybe a little bit different. I think MG is holding up a bit better. But I think also we see on the MF, pretty similar signs that we had on sack that the slowness is definitely a bit more aggressive than what we see in Q4. I think also itâs clear that we have suggested that is still active, and that also is in the Middle East area, quite aggressive. We have had that as a region before that we used. And clearly, that is not a really good region for us anymore, given now it seems to be quite flooded products in that. So, we activate also other channels and regions. Do you have anything to add, Christoph, on your side? Yes. I think my view â you know my view, my view tends to be much more longer term. And I think the fundamentals of the company, nothing has changed. I think we have a very stable approach to where we go with that strategy I would say. And I think we would now live a softer quarter as we had in quarter four. We go in the softer quarter in quarter one. And then basically, my expectation is that the market will recover as soon as the stock level is through. And then letâs hope for the best for the economic development, which I believe has already improved a little bit when it comes to the expectation compared to what we discussed in November and December about the future outlook. So, I think we will have a very reasonable year in 2023 as well. And I think with that, we will close the call, and I will hand over to you, operator. Thank you very much for your time and your attention, and I am looking forward to talk to you in the coming days or in our next quarter one report somewhere in April. Thank you.
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EarningCall_895
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Welcome to Bank7 Corp.'s Fourth Quarter and Full-Year Earnings Call. Before we get started, I'd like to highlight the legal information and disclaimer on Page 22 of the investor presentation. For those who do not have access to the presentation, management is going to discuss certain topics that contain forward-looking information, which is based on management's beliefs, as well as assumptions made by and information currently available to management. Although management believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks, uncertainties, and assumptions, including, among other things, the direction in direct effect of economic conditions on interest rates, credit quality, loan demand, liquidity, and monetary and suppository policies of banking regulators. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially from those expected. Also, please note that this conference call contains references to non-GAAP financial measures. You can find reconciliations of these non-GAAP financial measures to GAAP financial measures in an 8-K that was filed this morning by the company. Representing the company on today's call, we have Brad Haines, Chairman; Tom Travis, Chief Executive Officer; J.T. Phillips, Chief Operating Officer; Jason Estes, Chief Credit Officer; Kelly Harris, Chief Financial Officer. Thank you very much. We are excited about our year and our recap. For those of you that have been on the call with us before, we generally don't spend a lot of time with comments, but since we're recapping the year, we'll take a few minutes here to highlight some of the things that excite us. So, once again, we delivered strong results. We're very happy about that, and we must acknowledge and we do acknowledge and thank our team members for their contributions. They not only grew our loan and deposit portfolios in a meaningful way, they did it while satisfying our customers. As we recap our results for the year, we began with record earnings. And again, we acknowledge our commercial banking team. And we have to give credit where credit is due because our record earnings is a function of a loan growth, and it should not be confused or attributed with the Fed rate hikes. That's pure organic loan growth. We didn't buy loans. The team went out and captured new loans and deposits. So to best understand what occurred last year, we look back to the quarterly time line, and we start with the first quarter. The first Fed rate increase didn't occur until mid-to-late March and then was followed by the next few rate increases during the second quarter. So, in those first two quarters, we had very little benefit from the rate hikes because we had many loan floors. And also, at the same time, our loan growth had not yet materialized in a meaningful way. In essence, we spent the first quarter and most of the second quarter filling up our loan floors. Beginning in late May and early June and continuing into the third quarter, loan growth was exceptional, and we posted a strong third quarter. Although we finally did start seeing some benefit from the rate hikes in the third quarter, it was not much. In fact, we refer you to Page 35 of our prior third quarter 10-Q as it illustrates the nine-month period ending September 30, and it clearly shows that our income increase was attributable to the growth in the loan portfolio, which had grown significantly compared to the prior period end. In fact, the data shows that our gross loan yield through that period was actually 3 basis points lower than the prior period, further highlighting the growth contribution and component that caused the income lift. We cannot emphasize enough how pleased we are with our commercial banking team and all the people who support them. Wrapping up the year, as you look into Q4, we continued to increase the loan book. And when combined with the Fed rate hikes, the full benefit of a higher loan book and strong rates in the NIM can be seen, and you can see how well we've done. Regarding our NIM and reflecting back on the full-year is a similar story regarding steady increase throughout the year. In late 2021 and early 2022, we had signaled and discussed the expected NIM compression associated with our December 2021 acquisition, due largely to the loan yield â to the low yield on the incoming bond portfolio. Our expectation of a lower NIM was realized, and we began in Q1 with a core NIM of [3.91] [ph]. As the loan book begin to grow in the late spring and into the summer and fall, the NIM began to recover, then late in the year, the Fed rate hikes were being more fully realized, we grew our loans even more and the core NIM returned to exactly where it was for the prior year. So, from an earnings and NIM perspective, it was a great story and a story based on our commercial banking team and their ability to price loans properly and to grow loans. And so, I think that's a good start with the income and the NIM component. And I'd like to ask Jason if he would cover the asset quality aspect of that loan portfolio. Thanks, Tom. We're very pleased with our loan portfolio as the calendar turns. We've not seen a change in past due levels of problem credits as rates have increased. NCOs were minimal for the year. And our disciplined underwriting combined with seasoned lending teams will continue to serve us well as we operate in this higher interest rate environment. Construction loan balances have started to decline. Our hospitality construction activities have significantly reduced. And the homebuilding industry, they've started to lower their inventory levels to match current demand. Just as a reminder, our homebuilder portfolio is primarily starter homes in the Oklahoma City and Dallas metro areas with very little locked and land lending activity. We're not concerned with this segment. Our energy portfolio has grown over the past year, but we continue to closely monitor that growth as we selectively remain active, originating high-quality new loans. Overall, we continue to lend money the same way we have for decades. The economies in Oklahoma and Texas are healthy, and our credit quality continues to benefit from both. Jason, thanks for that report. And again, just a real shout out to the commercial banking team and all those efforts. So, as we move into our capital, we're pleased to have quickly reestablish our risk-based capital. And we're back to our higher levels, especially considering it was done, while at the same time experiencing record growth and a 33% increase to our dividend. Regarding our dividend, even with the 33% increase, our dividend payout ratio is still significantly below the average payout ratio for all dividend paying banks. It's especially comforting and gratifying that Bank7 has top 5% earnings. I believe once all the numbers come in for the year, we might even be in the top 1%. And because of those strong earnings and consistently strong earnings, it enables us to build capital rapidly. It is a real source of strength for our company as it provides flexibility for acquisition, dividend payouts or share repurchases are simply to support growth. We will refer you to Page 15 of this IP as it shows the great earnings strength and the buffer based on industry and examiner based DFAST stress parameters. And then moving into liquidity, it's remained strong, and our Cornerstone acquisition provides additional meaningful runway for future growth. Our team members from Cornerstone have done an outstanding job of retaining and, in some cases, growing our core deposit base and we thank them very much. Our bankers rarely take a day off from their focus on core deposit gathering and it's evidenced by our healthy noninterest-bearing component of core deposits even when our growth was so strong in 2022. So in conclusion, we had a very strong year, and we're pleased to provide exceptional returns to our shareholders. We're blessed to have such great team members at Bank7, and we benefit from being located in a dynamic part of the country. And therefore, in-spite of the current macroeconomic headwinds, we remain cautiously optimistic for the near future. First question, just maybe, kind of thinking about, kind of the loan growth and overall kind of balance sheet trajectory from here. Obviously, you guys had nice core deposit growth in the quarter on loan deposit ratio is still south of 90%. So, just curious, how you guys are seeing the pipeline [indiscernible] today entering 2023 and just kind of overall expectations for both loan and core deposits in 2023? Yes, Nate, thank you for the question. And I would just say that we wouldn't expect the growth to be exactly what we did last year. That was an exceptional year. There are some known payoffs coming in the loan portfolio that we think will be able to overcome and show growth for the full-year. It wouldn't surprise me if we had a quarter or two that were flat or probably even down during this year, but overall, I think you should â I think most years, we're saying low double-digit growth on the loan book. This year, I'd probably couch it as a high-single-digit that maybe even a mid-single-digit growth, but we do expect to grow throughout the year. And on the deposit side, we have several initiatives that we're continuing to focus on to continue to generate enough deposit growth to keep up with the loan side. So, hopefully, we could do, as well as we do on the loan side with the deposits this year. The banking team is very, very focused on both. And they've been very successful over the last few years at grabbing both new loans and new deposits from existing and new relationships. So, optimistic we'll be able to grow this year, but won't be as much as last year. I wouldn't expect it to be as much as last year. And I would say, Nate, this is Tom, that Jason is spot on. And I would say that we've remarked over the last four to five weeks on this is probably the most difficult budget environment that we have been faced with. And so, we have budgeted for more muted growth based on those economic headwinds and just the uncertainty around the Fed and what they're going to do. So, even with that, we're still budgeting a nice increase as we always do, but I do echo Jason's comments regarding the budget matching up to slightly lower expectations given all those factors. Got it. That's great color. And one theme, I think a lot of investors are thinking about these days on banks is just, kind of the timing of kind of peak margin and peak NII? And assuming the Fed raises by another 50 basis points between now and the next couple of months, how are you guys, kind of thinking about just the trajectory for NII and margin over the next couple of quarters? And if the Fed, kind of pauses in the middle of this year, give or take, how do you guys think the, kind of margin trajectory plays out thereafter? Yes. So, we ended the year fourth quarter at 4.87% core NIM, and we're projecting, obviously, we're already seeing that the cost of funds is increasing at a faster clip than the loan side. And so, we are seeing some NIM compression, you know where that ends in Q1, that's to be determined based on what the Fed does, but I would say, we reached peak NIM in Q4 unless something else changes. Yes. And I would add to that the challenge that we've had relates to really quality and long-time loan customers that across the industry push back and say enough is enough. And so, it's not just a matter of loan and deposit beta, it's a matter of strategically and tactically negotiating with customers to keep those customers. And so, when we did our budget, we actually budgeted a certain percentage of the loan portfolio, even though the loans would not mature this year, we actually budgeted for a certain percentage of those loans to be priced downward a bit for retention of customers. And so, that factor is in addition to the factors that Kelly uses when calculating loan and deposit beta, and it, kind of goes back to Jason's comments regarding the tougher year and the slower growth, and that's why we're hedging instead of the usual low-double-digit, we're back into the high-single-digits, just in case. But it's very comforting to us because I guess another side of the coin would be a group telling you we're not sure we can match earnings from last year because of these factors, and we're absolutely not saying that. Okay. Understood. And then just maybe thinking about a potential more [dovish Fed] [ph] later this year into 2024, are you guys, kind of having success, maybe getting loan floors on new originations or are you guys maybe exploring any hedging or derivatives that may, kind of lessen the impact in terms of loans repricing lower if the Fed were to cut later this year or into 2024? We've looked at some of those programs. And there's still, as you know, Nate, and your firm does a great job of presenting us with material. As you know, there's still a bit of speculation involved in that. And so yes, some of it is "hedging and buying insurance," but it could also be money that you don't need to spend. And so for us, because we are so asset-sensitive and we're starting with a high book of loan floaters and a really nice healthy margin that's higher than where we would normally be. We don't feel like we need to aggressively pursue some of those instruments take on that cost for that what-if. Now, we say that with the expectation. We actually budgeted more of a 75 basis point increase versus the 50. I think the 50 didn't really emerge until the last two weeks. And so, if we get into the March and April time frame and it looks like those instruments could really help the bank based on the current landscape, and clearly, we reevaluate, but for right now, it's not something that we need to worry about because we have some built-in defenses. I think it's worth mentioning as well that the concept of loan floors, that's not new, our portfolio because it's so heavy on variable interest rates, the floors have been long established. And some of those, as you get into a higher rate environment, well, yes, the floors, they get lifted. And as we've seen in the past, you may have to renegotiate some of those on the way down if we end up back in the same, kind of rate environment we've operated in the last few years, but for now, the floors are moving up with rates. Okay. Great. That's helpful. And if I could just ask one more, just in terms of, kind of the reserve outlook from here. You guys are adopting [fees] [ph], I believe, in the first quarter, which kind of complicates I think the reserving methodology to some degree, charge-offs were zero last year. You guys still adjusted the reserve at a pretty healthy clip to support loan growth. So, I guess I'm just curious if you guys are seeing anything on the foreseeable horizon that would cause a meaningful increase in charge-offs and just, kind of how you're thinking about the reserve trajectory on either an absolute dollar basis or just relative to loans within that, kind of high single-digit loan growth outlook that was described earlier? Let me start with the macro and then Jason can get into specifics. Listen, we'd be foolish not to understand the headwinds that are out there. And so, yes, it's a loan growth story, which made us motivated as to make sure that we increased our reserve, and we're really in that low 1.2 to 1.25 area, which we're comfortable operating in. And so, I think from a macro perspective, we're going to keep our eye on the ball relative to those overall conditions, and of course, CECL. And then I think Jason may have some color on a few credits on what we might see. Yes. I think the important thing, you know if you go back and you look over the last five seven years, we've really had the one credit that stung us twice and that deal is looking better. There's a new team in there. They've got some green shoots. And for the last two quarters, it's been positive results and encouraging results, but we're still not 100% sure that that is totally behind us. Anything that would be left has been well reserved for. We don't have a specific reserve on the remaining loan balance, but that's the one that's out there that would cause me some level of concern in the future. For the rest of the portfolio, as I stated earlier in my comments, the portfolio is performing very, very well. And we continue to see a healthy deal pipeline, and we just â we feel really good about the book, overall. And I would just follow up on that [loan credit] [ph]. It's really that further out tail risk in-spite of the green shoot. So, we feel they're greener and longer than they were two quarters ago. So, we're encouraged, but we're still keeping one on nonaccrual, and we're doing that as a matter of prudence relative to that unknown tail risk, which we've always said for the COVID cycle-in to cycle-out, it was at close to 1%, and we haven't hit that 1%, but if that tail-end risk didn't materialize and things went the other way on that credit, it's a small number, but that's really it. Understood. And if I could just ask one last one on that specific credit that we were just discussing. Can you remind us kind of what the specific reserves that exist on that credit today relative to [Multiple Speakers]? Most of my questions have already been asked, but one final one for me is, we saw a pretty large step-up in salary expense last quarter, can you give us some commentary there? And then maybe how you're thinking about expense growth for 2023? We did a â we'll call it a one-off. When you look at our year, at the end of the year, we were very close to a 30% increase in net income, and we evaluated that relative to, I think, our best estimate was the industry was going somewhere around 5% to 6%. When I say industry or competitive set, and we were so pleased with the banking team and the employee base. And as we said, it was a function of organic loan and deposit growth and everyone hitting on all cylinders. And so, we made a decision towards the end of the year to expense money and pay people for sharing the fruit of that labor. And so, we would expect to â we're already reverting, â I don't know what our number is, but we really don't have disjointed increases or decreases in our salary expenses. We've managed the company. This was purely a payout based on that phenomenon. Was just hoping if that you could give some color on just, sort of the deposit pricing competition in your local markets. I mean is it â are you competing more with other institutions? Is it more the treasury market, just any dynamics there? It's really all over the board. You have to segment it when you think about it. You've got your older more retiree-based that are more in that CD space. The CDs are a real small portion of our funding, I think only 100 million or 110 million or 120 million â itâs a 175 [indiscernible] smaller portion. So then when you really roll into and you think about the bank and our profile, and we're a commercial bank. And so, we have a lot of high-net-worth individuals and entrepreneurs, and they tend to be in money market accounts. And so, when you segment the liability section of the balance sheet, there's just different factors. And so, it's really hard to nail down one competitor or not. I mean, look, like I'll tell you, Raymond James, they constantly run newspaper ads in the small towns and so they're paying high rates and so the retirees look at that and they come into the bank lobbies. Fortunately, for us, the data shows that our ability to maintain our cost of funds and do a good job with deposit betas is centered around the fact that a great percentage of our deposits are based on credit. And so, when we have customers that we're very responsive to on the credit side, they don't push us as hard on the deposit side, but it's something that we fight every day on a relationship by relationship basis and it's just across the board. Yes. That's great color. And then switching to the [Technical Difficulty] loan growth outlook, it makes sense that the growth would be coming down a little bit. Are there any segments you're seeing a pullback in growth? And are there any concentrations you expect to, sort of drive to growth in 2023? I would say that you can see a clear pullback in our construction activity. Part of that's driven by cost, part of it is driven by the home buying market. So, you can see that pretty clearly in the change for this last quarter, you're starting to see those numbers show that change. Our energy concentration is one that I mentioned that we watch very, very closely. There's a little bit of growth room left there, but we're still sticking to. We don't want to get too far into the energy markets. And so, we're doing that on a very selective basis with rapid amortization. And so, I would say those are two areas you're seeing a pretty good shift. And our hospitality activity, if you go and you look at the last three years, that's been a pretty high growth. That balance has changed significantly. And so, it'll move more in-line with the whole portfolio at this point and kind of for â with our â we're intending to keep that in that kind of range that it's at as far as a percentage of the overall portfolio mix. And so, those are the few areas I would highlight. That's one of the delightful parts of the story on the loan growth, and we have that slide in the deck, and it's got the broad and deep loan growth as the header. And as Jason said, that we're very disciplined on our concentration. And when you get to where you're almost at your max and in your few categories, you're always concerned about how can I grow the portfolio or how can we grow the portfolio. And when you look at that slide, you can go back to 2018, and you can see that in 2018 energy was 18% of the book. And as of year-end, it was 14% of the book and then you look at hospitality and it stayed exactly where it was. And so, it's very comforting to know that the bank has the ability and as we've grown to broaden that, we have that ability to continue to grow in those other segments. And I think it's a testament to the team to stay disciplined and stay focused because if we didn't have a discipline, and we didn't have that focus, Jason, I would argue that it would have been really easy for us to run our energy book to 20% or 22% in hospitality to 25% and we're just not going to do it. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Travis for any closing remarks. Thank you again. We're really pleased. We're excited about the year. In-spite of the headwinds, we're really blessed to be in this part of the country. We're excited about the year. We're continuing to look at opportunities on the acquisition space. They're more limited due to the mark-to-market issues in the securities portfolio, but we're truly excited and we've reverted back to our good-old-fashioned NIM numbers and our efficiency ratio, even with the increase that one-off in the salary, we're still below 40% on the efficiency ratio. So, delighted, I think with these new records they're comforting, and our team is committed to, I would say, more of the same, and we're excited about it. So, we thank you.
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Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2022 Fourth Quarter Conference Call. My name is Brika, and I will be your event specialist running today's call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Thank you. I would like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President, Investor Relations. Mr. Tejada, you may begin your call. Good morning and thank you for joining us. On the call with me today is Marc Casper, our Chairman, President and Chief Executive Officer; and Stephen Williamson, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com, under the heading News & Events until February 17, 2023. A copy of the press release of our fourth quarter and full year 2022 earnings is available in the Investors section of our website under the heading Financials. So before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are on file with the SEC and available in the Investors section of our website under the heading Financials, SEC Filings. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our fourth quarter and full year 2022 earnings and also in the Investors section of our website under the heading Financials. Thank you, Raf. Good morning, everyone, and thanks for joining us today for our fourth quarter call and a wrap-up of a truly exceptional year for Thermo Fisher Scientific. We delivered another quarter of outstanding results in Q4, and as I reflect on the year, three things stand out to me. Our proven growth strategy continues to drive significant share gain. Our differentiated customer value proposition is further elevating our trusted partner status with our customers. And this, in combination with the power of our PPI Business System, drove outstanding financial performance for the quarter and full year, exceeding our ambitious goals. Our ability to deliver these results in a year that included global supply chain disruptions, a war in Ukraine, COVID-19 lockdowns in China and inflationary headwinds wouldn't be possible without the incredible dedication of our team around the world. I'm very grateful for our team's great execution in effectively navigating dynamic times and enabling the success of our company and our customers. Thanks to our colleagues, our company delivers spectacular 2022, and I couldn't be more excited for 2023. I'll get into more of the details in my remarks later, but first, let me recap the financials. Starting with the quarter. Our revenue grew 7% to $11.45 billion. Our adjusted operating income was $2.56 billion, and we delivered another quarter of strong adjusted EPS performance, achieving $5.40 per share. Turning to our results for the full year. We grew revenue by 15% to $44.92 billion in 2022. Adjusted operating income was $10.99 billion and adjusted EPS, $23.24 per share. Let me turn to our end markets. We continue to deliver excellent and differentiated performance in Q4. This was driven by a continuation of good market conditions and outstanding execution from our global team, resulting in meaningful share gain. Let me now give you some color for the quarter and the year. Starting with our largest end market, pharma and biotech, we continue to deliver impressive performance with growth in the low teens for the quarter and mid-teens for the full year. Our differentiated customer value proposition is further elevating our trusted partner status with our pharma and biotech customers. Throughout the year, we had broad-based strength across our businesses serving this end market, highlighted by our bioproduction, pharma services, chromatography and mass spectrometry businesses as well as the research and safety market channel. In academic and government, we grew in the mid-single digits for both the quarter and for the full year. We delivered strong growth across a range of our businesses, including biosciences, electron microscopy, chromatography and mass spectrometry as well as in the research and safety market channel. In industrial and applied, we grew in the low teens for the quarter and mid-teens for the full year. During the year, we delivered strong growth in our electron microscopy and chromatography and mass spectrometry businesses. And finally, in diagnostics and health care, in Q4, revenue was approximately 40% lower than the prior year quarter and 25% lower than full year 2021. The team delivered good core business growth during the year, led by our microbiology and transplant diagnostic businesses as well as our healthcare market channel. I'll now turn to our growth strategy, which is delivering the differentiated performance and setting us up for an even brighter future. As a reminder, our strategy consists of three pillars: developing high-impact innovative new products, leveraging our scale in high-growth and emerging markets; and delivering a unique value proposition to our customers. Starting with the first pillar. It was another terrific year of high-impact innovation as we launched outstanding new products across our businesses that strengthen our industry leadership by enabling our customers to break new ground in their important work. In chromatography and mass spectrometry, our innovations are accelerating our customers' research and unlocking deeper analytical insights. In 2022, we extended our industry-leading Thermo Scientific Orbitrap portfolio, launching the Orbitrap Ascend Tribrid mass spectrometer to advance proteomics, metabolomics and cancer biomarker research. We also launched the Thermo Scientific TRACE 1600 Series Gas Chromatograph to advance analytical testing for food, environmental, industrial and pharmaceutical applications. In electron microscopy, the new Thermo Scientific Glacios 2 Cryo-TEM was launched during the fourth quarter. It will help our customers accelerate structure-based drug discovery for debilitating disorders, such as Alzheimer's, Parkinson's and Huntington diseases as well as research for cancer and gene mutations. We also continue to build on our genetic sciences capabilities to help our customers understand, diagnose and treat disease. During the fourth quarter, our SeCore CDx HLA sequencing system was granted marketing authorization by the U.S. FDA for use as a companion diagnostic with a T cell receptor therapy for adults with ocular melanoma. This is a really nice example of how our Specialty Diagnostics business is benefiting from our capabilities in life sciences solutions. In addition, we expanded our PCR test menu to leverage our incredibly large installed base of instruments and launched the TruMark Infectious Disease Research Panels for rapid detection and research of infectious disease pathogens. To wrap up the innovation highlights, we added to our cell and gene therapy offering, most recently launching the Gibco CTS DynaCellect Magnetic Separation System. Our solutions are helping customers advance their cell and gene therapy programs. So another spectacular year of innovation, and we have an exciting pipeline of launches in 2023 and beyond. The second pillar of our growth strategy is leveraging our scale in high-growth and emerging markets to create a differentiated experience for our customers. We continue to strengthen our capabilities serving these markets during the year, and I'll highlight a recent example. In the quarter, we opened a new cGMP biologics and sterile manufacturing facility in Hangzhou, China, which provides integrated clinical and commercial drug substance and drug product capabilities to help customers in China and in the Asia Pacific region deliver patient therapies more quickly. Turning to the third pillar of our growth strategy, we continue to enhance our customer value proposition by strengthening our capabilities. We've been executing on the significant investments we've made over the past couple of years. And throughout 2022, we brought new capacity and capabilities online for pharma services, bioproduction and clinical research services. Most recently, during the fourth quarter, we opened a new state-of-the-art bioanalytical lab in Richmond, Virginia to support our clinical research business and the increasing demand for our laboratory services to accelerate drug development. As always, our PPI Business System enabled our success during the year. It's helping us to drive meaningful share gain, maximize the return on investments, meet our customers' needs and successfully navigate a dynamic environment, including effectively addressing inflation and global supply chain challenges. PPI engages and empowers all of our colleagues to find a better way every day and enables outstanding execution. We continue to successfully execute our capital deployment strategy, which is a combination of strategic M&A and returning capital to our shareholders. In 2022, we successfully integrated PPD, our clinical research business. For the full year, PPD delivered core organic growth in the high teens, generating over $7 billion in revenue and contributing over $2 to our adjusted earnings per share. The combination of a great first year performance and excellent progress on our synergy realization is delivering very strong returns for our shareholders that is well ahead of the deal model. From a customer lens, the acquisition has further elevated our trusted partner status as customers are realizing significant value in partnering with our team to advance a scientific idea to an approved medicine. In 2022, we also returned $3.5 billion of capital to our shareholders through stock buybacks and dividends. And on the first business day of 2023, we completed the acquisition of the Binding Site, a leading specialty diagnostics company. The Binding Site is an exciting addition and highly complementary to our Specialty Diagnostic business. Together, we'll be able to advance the diagnosis and management of patients afflicted with multiple myeloma and immune disorders. Reflecting on our progress of our ESG priorities in 2022, we further advanced our environmental and philanthropic efforts while also continuing to strengthen our company culture. During the year, we continued to advance our environmental sustainability roadmap, reducing our carbon emissions and finalizing significant power purchasing agreements to accelerate our transitions towards a 100% renewable energy. Looking forward, we've also increased our 2030 greenhouse gas emissions reduction target to achieve a 50% reduction in this decade. Through our Foundation for Science, we continue to advance our philanthropic efforts and supported students across the globe during the year with our STEM education programs. This included an announcement in the quarter for the Thermo Fisher Scientific Junior Innovators Challenge, the premier middle school STEM competition in the U.S. And throughout the year, Thermo Fisher Scientific was recognized for its industry leadership and inclusive culture. This includes earning 100% score on the Human Rights Campaign 2022 Corporate Equality Index for LGBTQ equality for the seventh consecutive year as well as inclusion on Fortune's list of the world's most admired companies. In the quarter, we were recognized by Forbes Magazine as one of the world's Top Female-Friendly Companies and one of America's best employers for veterans. As I reflect on the year, I'm very proud of what our team accomplished. 2022 is a special year for Thermo Fisher, and I'm excited about 2023 and beyond. Stephen will outline the assumptions that factor into our revenue and earnings guidance, but let me quickly cover the highlights. We're initiating 2023 revenue guidance of $45.3 billion and adjusted EPS guidance of $23.70 per share. This very strong financial outlook reflects a continuation of our track record of delivering excellent financial performance and sustainable value creation for all of our stakeholders. So to summarize our key takeaways for 2022, our proven growth strategy continues to drive significant share gain. Our differentiated customer value proposition is further elevating our trusted partner status. And this, in combination with the power of our PPI Business System, drove outstanding financial performance for the quarter and full year, exceeding our ambitious goals while navigating a very dynamic macro environment. And we entered 2023 with strong momentum and we're incredibly well positioned beyond 2023. Thanks, Marc, and good morning, everyone. As you saw in our press release, in Q4, we delivered an outstanding quarter, capping off another excellent year. For the quarter and the full year, we delivered 14% core organic revenue growth. This differentiated level of performance demonstrates the power of our growth strategy and the trusted partner status that we've earned with our customers. In addition, in Q4, we generated $370 million of COVID-19 testing revenue, $3.1 billion for the full year. Taking a step back and thinking about the top line performance for the year, I'm really proud of what the team delivered. We offset $4.2 billion less testing revenue, which was a headwind of over 10%, and still delivered slightly positive organic growth for the year. That's a great accomplishment. Then using the power of the PPI Business System, we were able to translate the top line strength to excellent adjusted EPS and cash flow results. In Q4, we delivered $0.23 more adjusted EPS than our prior guide, ending the year at $23.24 and delivered $6.94 billion of free cash flow, all while continuing to invest in the business to enable an even brighter future. So 2022 was another excellent year. Let me now provide you with some details on our performance. Beginning with the earnings results. As I mentioned, we delivered $5.40 of adjusted EPS in Q4 and $23.24 for the full year. GAAP EPS in the quarter was $4.01 and $17.63 for the full year. On the top line as I mentioned in Q4, we delivered 14% core organic revenue growth and $370 million of testing revenue. Reported revenue grew 7% year-over-year. The components of our Q4 reported revenue increased included 3% lower organic revenue, a 14% contribution from acquisitions and a headwind of 4% from foreign exchange. The full year core organic revenue growth was 14% and we delivered $3.1 billion in testing revenue. For the full year 2022, reported revenue increased 15%. This includes slightly positive organic growth and 18% contribution from acquisitions and a 3% headwind from foreign exchange. Turning to our organic revenue performance by geography. The organic growth rates by region are skewed by the COVID-19 testing revenue in 2022 and the prior year. In Q4, North America grew in the low single digits. Europe declined in the low teens. Asia-Pacific in the mid-single digits with China declining in the mid-single digits and rest of the world declined high single digits. For the full year, North America grew in the low single digits. Europe declined high single digits. Asia Pacific grew high single digits, including China, which also grew high single digits for the year, and the rest of the world declined high single digits. On a core organic growth basis, all regions had strong growth in 2022. With respect to our operational performance, adjusted operating income in the quarter decreased 19% and adjusted operating margin was 22.4%, 710 basis points lower than Q4 last year. For the full year, adjusted operating income decreased 9% and adjusted operating margin was 24.5%, which is 650 basis points lower than 2021. For both the fourth quarter and full year, we achieved strong price realization to effectively address inflation, while also delivering strong productivity. This is more than offset by lower testing volumes, continued strategic investments and the expected impact of incorporating PPD into our financials. For 2022, full year adjusted operating margin was 40 basis points lower than assumed in the prior guidance. Two-thirds of this was due to business and currency mix and a third due to one-time costs related to the runoff of testing revenue. Total company adjusted gross margin in the quarter came in at 41.4%, 910 basis points lower than Q4 last year. For the full year, adjusted gross margin was 43.5%, down 810 basis points versus the prior year. For both the fourth quarter and the full year, the changing gross margin was due to the same drivers as those of our adjusted operating margin. Moving on the details of the P&L. Adjusted SG&A in the quarter was 15.6% of revenue, an improvement of 170 basis points versus Q4 2021. For the full year, adjusted SG&A was 15.8% of revenue, an improvement of 130 basis points compared to 2021. Total R&D expense was $390 million in Q4. For the full year R&D expense was $1.5 billion, representing 5% growth over the prior year, reflecting our ongoing investments in high impact innovation. R&D as percent of our manufacturing revenue was 7% in Q4, 6.4% for the full year. Looking at results below the line for the quarter and net interest expense was $119 million, which is $31 million favorable to Q4 last year. Net interest expense for the full year was $454 million, a decrease of $39 million from 2021. Adjusted other income/expense was a net expense in the quarter of $10 million compared to net income of $7 million in Q4 2021. The year-over-year variance is primarily due to changes in non-operating FX. For the full year, adjusted other income and expense of the net income of $14 million, which is $24 million lower than the prior year. Our adjusted tax rate in the quarter was 12.8%, which is a 100 basis points lower than Q4 last year, reflecting the results of our tax planning activities. For the full year, the adjusted tax rate was 13% or 160 basis points lower than 2021. We repurchase $1 billion of shares in Q4, bringing our total repurchases for 2022 to $3 billion. Average diluted shares were $393 million in Q4, approximately 4 million lower year-over-year driven by share repurchases net of option dilution. Turning to cash flow on the balance sheet. Full year cash flow from continuing operations was $9.15 billion. Free cash flow for the year was $6.94 billion after investing $2.2 billion of net capital expenditures. We returned $118 million to shareholders through dividends in the quarter and $455 million for the full year. We ended the quarter with $8.5 billion in cash and $34.5 billion of total debt. Our leverage ratio at the end of the quarter was 2.9 times gross debt to adjusted EBITDA and 2.2 times on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 13.5%, reflecting the strong returns on investment that weâre generating across the company. Now I will provide some color on the performance of our four business segments. Let me start with a couple of framing comments. The scale and margin profile of our COVID-19 testing revenue varies by segment. And the testing revenue was significantly higher in the prior year. That does skew some of the reported segment margins. Weâre executing strong pricing realization across all segments to address higher inflation. And weâre referring to the acquired PPD business as our Clinical Research business, and that resides in the Laboratory Products and Biopharma Services segment. The anniversary date of the acquisition was December 8. Moving on to the segment details, starting with Life Sciences Solutions, Q4 reported revenue in this segment declined 27%, and organic revenue was 24% lower than the prior year quarter. In Q4, we delivered very strong growth in our bioproduction business. This was more than offset by the moderation and testing revenue in the segment versus the prior year quarter. For the full year, reported revenue in the segment declined 13% and organic revenue declined 12%. Q4 adjusted operating income in Life Sciences Solutions decreased 48% and adjusted operating margin was 34.1%, down 14 percentage points versus the prior year quarter. In Q4 we had unfavorable volume mix due to the significantly higher testing revenue in the prior year quarter. And for the full year, adjusted operating income decreased 29% and adjusted operating margin was 41.2%, a decrease of 880 basis points versus 2021. In the Analytical Instruments segment, reported revenue increased 9% in Q4 and organic growth was 14%. A strong growth in the segment this quarter was led by electron microscopy and the chromatography and mass spectrometry businesses. For the full year, reported revenue in the segment increased 9% and organic revenue increased 14%. Q4 adjusted operating income in the segment increased 25% and adjusted operating margin was 25.4%, up 330 basis points year-over-year. In the quarter, we delivered strong volume pull through and productivity. This was partially offset by strategic investments. For the full year, adjusted operating income increased 26% and adjusted operating margin was 22.8%, up 310 basis points versus 2021. Turning to our Specialty Diagnostics segment. In Q4, reported revenue declined 23% and organic revenue was 20% lower than the prior year quarter. In Q4, we continue to see strong underlying growth in the core led by a healthcare market channel and our transplant diagnostics and microbiology businesses. This was offset by lower COVID-19 testing revenue versus the year ago quarter. For the full year, reported revenue in the segment decreased 16% and organic revenue was 13% lower than 2021. Q4 adjusted operating income decreased 30% in the quarter and adjusted operating margin was 18.6%, down 190 basis points versus Q4 2021. During the quarter, we delivered strong productivity, which is more than offset by the impact of lower testing volume. For the full year, adjusted operating income decreased 20% and adjusted operating margin was 21.5%, down 110 basis points versus 2021. Finally, in the Laboratory Products and Biopharma Services segment, Q4 reported revenue increased 42%. Organic growth was 11% and the impact of acquisitions was 35%. During Q4, organic revenue growth in this segment was led by the Pharma Services business. PPD at Clinical Research business continued to perform very well, and during the quarter it delivered over 20% core organic revenue growth and contributed $1.9 billion of revenue to the segment. For the full year, reported revenue in the segment increased 51% and organic revenue increased 10%. Q4 adjusted operating income in the segment increased 73% and adjusted operating margin was 14.1%, which is 260 basis points higher than Q4 2021. In the quarter, we drove favorable business mix and delivered strong productivity and volume pull through that was partially offset by strategic investments. For the full year, adjusted operating income increased 56% and adjusted operating margin was 12.8%, up 40 basis points versus 2021. Let me turn to our 2023 guidance. As Marc outlined, weâre starting the year with a very strong financial outlook consisting of revenue guidance of $45.3 billion and adjusted EPS guidance of $23.70. Let me provide some details to the underlying assumptions starting with revenue. Our initial guidance for 2023 assumes 7% core organic revenue growth, $400 million in testing revenue, $250 million of revenue from acquisitions and a tailwind of $100 million from FX. This all assumes a return to more normal market growth conditions in 2023 in the range of 4% to 6%. Within our core revenue, we expect $500 million of vaccines and therapies revenue in 2023. This is $1.2 billion less than 2022, a 3% impact on core organic growth. Even with this headwind, weâre expecting to deliver 7% core organic revenue growth in 2023, demonstrating the strength of our initial outlook, the agility with which weâre managing the business and the ongoing benefits of our growth strategy. Turning to profitability, in 2023, weâre assuming an adjusted operating margin of 23.9%. This is 60 basis points lower than 2022, driven by two elements, a 40 basis points of core margin expansion and a 100 basis point headwind from the runoff of testing revenue. The year-over-year margin change is consistent with the comments I have made on the last earnings call were not [ph] described have to model a margin impact to the different elements of the year-over-year change in revenue. In 2023 with a pandemic related testing revenue behind us, I thought this would be a good opportunity to take a step back and take a multi-year view on our meaningful margin expansion progression. Starting in 2019, pre pandemic, excluding the impact of PPD, weâre on track to expand operating margins, 60 basis points a year on average through 2023 and 250 basis point improvement over the full year period. Itâs a great progress on margin expansion. Turning to adjusted EPS. We expect to deliver $23.70 in 2023. This is a 2% year-over-year increase consisting of a 10% headwind from testing more than offset by a 12% increase driven by the core business. Weâre actively managing the whole P&L to effectively deal with material runoff in testing and vaccines and therapies revenue, and still grow our adjusted earnings per share for the year. This shows the strength of our growth strategy and the power of our PPI business system. Moving on to some more detailed assumptions behind the guide. With regards to FX in 2023, weâre assuming itâs a year-over-year tailwind of approximately a $100 million of revenue or 0.2% and $0.04 to adjusted EPS also 0.2%. Weâre assuming that The Binding Site acquisition will contribute approximately $250 million to our reported revenue growth and $0.07 to adjusted EPS in 2023. Below the line, we expect net interest expense in 2023 to be approximately $480 million. This approximately $25 million higher than 2022 and includes the funding for the Binding Site acquisition. We assume that the adjusted income tax rate will be 11% in 2023. The improvement from 2022 is driven by a tax planning initiative. Weâre expecting net capital expenditures will be approximately $2 billion in 2023 and free cash flow is assumed to be $6.9 billion for the year. In terms of capital deployment, our guidance assumes $3 billion for share buybacks, which were already completed in January. We estimate the full year average diluted share count were approximately 388 million shares. Weâre assuming that weâre return approximately $540 million of capital to shareholders this year through dividends. And as is our normal convention, our guidance does not assume any future acquisitions or divestitures. And finally, I wanted to touch on quarterly phasing for the year. Revenue adjusted operating margin and adjusted EPS are all expected to ramp up as we go through the year. This is due to several factors. Core organic revenue growth is expected increase as we go through the year, largely due to the comps related to vaccines and therapies as well as the expected phasing of economic activity in China. The impact of the runoff in testing revenue is most pronounced in Q1 and the benefits of the offsetting cost actions are spread over the year. From a foreign exchange standpoint while a slight tailwind for the year as a whole in Q1, FX is expected to be a year-over-year headwind of approximately $200 million of revenue and $80 million of adjusted operating income. Below the line, net interest expense is expected to decrease during the year as we generate free cash flow and interest on that cash build. Putting all this together for Q1, we expect core organic revenue growth to be in the mid-single digits. Adjusted operating margin to be slightly lower than Q4 2022 and adjusted EPS to be just over 20% of the full year total. So to wrap up, we had an excellent 2022 and weâre really well positioned to continue to deliver differentiated performance for all our stakeholders in 2023. I look forward to updating you on our progress as we go through the year. Thank you. [Operator Instructions] The first question we have from the phone lines comes from Jack Meehan of Nephron Research. Your line is now open. Thank you. Good morning. I wanted to start with the clinical research, PPD, performance. So high teens for the year, that's well above what we're seeing from the pure group, so a three-parter for you, Marc. What was your book-to-bill in 2022? Two, how are the revenue synergies tracking? And then three, can you talk about what sort of growth you're assuming for this business in 2023? Sure. So Jack thanks for the question. Our clinical research group has performed incredibly well, a great first year as part of the company, exceeding our own high level of ambition for the business. Integration has gone smoothly. Customers really see the obvious fit with the company, and it really has driven very strong momentum. And our colleagues are very excited about the combination. So as I think about the different elements of performance, the book-to-bill was very positive. Authorizations were very strong in the quarter and the year. So we entered the year with very strong momentum in terms of the backlog that we have in the business and the authorizations. The revenue synergies, the way I would think about it is in two phases because of the long-cycle nature from a win to revenue. We've won extremely substantial revenue synergies that will show up in the financials in 2023 and beyond. We had a small amount of revenue that came into the numbers last year, but we're talking in the hundreds of millions of dollars of wins that we've achieved from an authorization standpoint, so extremely positive. And in terms of our thoughts about 2023, it will grow above of the company's average of the 7% growth that we outlined in the course. So a nice contributor to the success. And really, it's been a seamless integration for the team. We're very grateful for that. Excellent. And then I wanted to ask about the COVID vaccines and therapeutics. So you're assuming $500 million for the year. My question is simple. Just how core are your core sales? Would you ever consider changing this definition? Just confidence in the handoff as it pertains to bioprocessing in 2023? Yes. So, Jack, thanks for the question. But when I think about the $500 million, right, and when I look at that, that number is primarily related to our pharma services activity. It's around actually producing the active pharmaceutical ingredients for the therapies. It's for the sterile fill finish primarily for the vaccines and some of the therapies. So we have pretty good visibility to that number. So I feel good about that. We decided back, I guess, 1.5 years ago or whatever the exact timeframe we did, the definition of core was we invested in capacity. And if you think about a sterile fill finish line, as an example, can be used for a COVID vaccine. It can also be used for pretty much any other biologic and even some of the small molecules, right? And therefore, our view was we would transition that capacity over time and we have been and we will. The other aspect of core is that if you think about how strong our growth was last year, well above our own ambitions. Even the 12% we had laid out at the end of the third quarter, we've already transitioned a meaningful amount of that revenue in terms of other activities. So we didn't contemplate at all about changing the definition of what success is. We think 7% is the right number for us. The core is the right definition for us. We'll provide transparency during the year about the different components as we always do, so that investors can understand how we're getting there. But I feel great about the outlook, and I'm very proud of what the team delivered last year. Thanks, Jack. Hi, good morning, guys. Thank you for taking the questions. Marc, maybe one on the Analytical Instruments business, 14% growth for the year is obviously pretty impressive. You guys have seen elevated growth for a good stretch here. It did step down a little bit against an easier comp. So I just wanted to get more color, I guess, on what you're seeing on the demand side, how you're seeing order trends and bookings there, visibility into 2023. I know you've had this elevated backlog we've talked a lot about. It seems like some peers are expecting kind of a normalization or moderation in the second half as we work our way through the year. So I want to get your perspective of what you're seeing there. Yes. Patrick, thanks for the question. So when I think about the Analytical Instruments business, a really strong year, excellent execution. There's nothing different in Q4 than in Q3. So I wouldn't read anything into that. When I look at what's driving it, last year, you saw good market conditions. Funding was clearly strong. I don't know if there was a little bit of pent-up demand from 2020, I don't know. But the funding was clearly available. We did very well with our innovation, right? We stayed committed to innovation throughout the early phase of the pandemic, making sure we have robust pipelines. You saw that in the stream of launches in our chromatography, mass spectrometry and electron microscopy businesses, those products have been well adopted. We're clearly growing very well. And as you know, we've also built out a very strong presence in enabling the next generation of semiconductors, battery applications. The most advanced aspects of material science is a different market position than really anybody else has in the industry and that's driving great growth, right? And you can see it in our electron microscopy numbers. I'm very proud of how the team has executed. So, that's kind of the context of why the elevated growth. So as I think about bookings demand, very strong throughout the year. So we have good visibility to the first half. It's when those â most of those orders will ship. We would expect that the Analytical Instruments business will be a really nice contributor to our growth for the year. And I think it's reasonable to assume that the growth normalizes more in the second half as an assumption. It's not that I see something different or something happening in the market conditions, but our visibility is typically six months. So at the end of the first quarter, we'll have good visibility into the third quarter, and we'll keep you posted. But I think for modeling purpose, I think, normalization in the second half is a good assumption. Okay, that's helpful. And then maybe one for Stephen on the margins. Gross margins seem to have rebased. I would love just your perspective of what those look like in 2023, first off. And then maybe just the additional areas of leverage kind of down the P&L coming out of COVID, you mentioned maybe some elevated strategic investments in 2022. Obviously, we saw some things like one-time bonuses that are pretty clear. But it would be helpful if you could just talk through the moving pieces, what areas of additional leverage you do have coming out of 2022. Because again, the mix, obviously as LPS becomes bigger, the margins should going to be lower, but you guys are putting up a pretty good number. So just trying to figure out, again, a little bit of the moving pieces and areas of leverage you have when you think about that 23.9% for 2023. Yes. So Patrick, thanks for the question. So when I think about the margin profile going forward, that 7% to 9% core organic growth driving 40 to 50 basis points is the right way to think about that company. And the margin opportunity there, you got a little bit of â that just seems a little bit of price benefit, good volume leverage that comes with that and still investing in the business to maintain that top line growth. And then a continuation of using PPIs, that kind of decomplex the company, but I think that â that margin profile still holds in terms of going from the 23.9% going forward, post 2023, I think about the levers that we have. As you saw in this past year, we had a slightly different mix like higher growth in certain parts of our business. And certainly, margins were slightly different in Q4 than we had in the prior guide. But the revenue is significantly higher. And what really matters is operating income dollars that we're driving, and that's incredibly strong and I think that margin profile and then the mix then holds into 2023. And then therefore that kind of 7% to 9% driving that 40 to 50 is a good way to model the company. I don't really want to give guidance to every single element of the P&L. It's â we're trying to manage a complex company, but a similar margin profile to where we are right now is probably a good starting point. But it really depends on the mix and also changes in currency, and our job is to manage the whole thing and deliver great results. Okay, thanks, operator. So first up, just on China. China declined mid-single digits during 4Q, and you say that some of that was testing roll-off. You also talked about how China is part of the reason that that core â core growth is going to ramp throughout the year. So can you just walk us through what are you embedding for China growth for 1Q and then for total 2023? And then can you also just spend a minute talking about the underlying demand trends for China and how you plan into the reopening trade? Rachel, thanks for the question. So if I step at the highest level with China, right, historically, been our fastest growing end market. We have a very strong position. Our enabling technologies are important to life sciences and food safety and the biologics industry in China, et cetera. So good demand drivers long-term, long historical perspective. When I think about last year, team delivered high single-digit growth for the year. When I think about the fourth quarter, you had very, very significant disruptions from the end of the COVID, zero COVID policies, right? So you went from this period where I think at least we had no problem in navigating through the challenges of the lockdown policies. But when you have 50%, 60%, 70% of colleagues with COVID, that's obviously highly disruptive. And so you saw the first half of the quarter was strong. The second half of the quarter was weak. Our assumption for this year is that the zero COVID, opening up the economy leads to a weaker first quarter, a strong rebound in the balance of the year. China will grow on our expectations in our guidance a little bit faster for the full year than our core growth. So that's how I would think about it. So a really strong end market, including the disruption from Q1. I think the team has done actually â I'm very impressed with how they've dealt with all of the complexities and keeping our colleagues safe. It's been a challenging period of time. Great. And then maybe just kind of digging deeper on Patrick's question around margins. So you did 22.4% adjusted op ms for 4Q. You guided to a step down on that operating margin line during 1Q, but then hitting that 23.9%-ish for the year for 2023. So can you just kind of bridge us through the math there on margins and how that gives you confidence in the back half of the year to be able to round out at just shy of 24%? Yes. So, Rachel, thanks for the question. So when I think about the margin progression through the year, Q1, we got a very significant roll-off in highly profitable testing revenue. And the cost actions against that to enable a 40% pull-through for the year, it's a combination of cost actions and then a non-repeat of the cost â of certain one-time things that we were doing on compensation in the prior year. Those things spread over the whole year. So you get a little bit of benefit in Q1 to offset part of that profitability, but more of that offset really coming in the following three quarters. So that's really the largest piece to it. Now FX is a headwind to margins in Q1, so that's a slight aspect to it. And then the phasing of the China activity is another aspect of that kind of lower level of activity in Q1 and then ramping up to a higher level of revenue in Q4. Helpful. And then maybe just squeezing one more in here on industrial and applied, you grew low teens in 4Q. So can you just give us a little bit more granularity on that performance during the quarter, if there is any pockets of outpaced strength or softness relative to your expectations? And then how are you thinking about that industrial and applied market for 2023, given the macro backdrop, and is there any conservatism there in the assumed guidance? Thanks. Yes, so industrial and applied was very strong in the quarter. Low teens growth in the quarter. Really strong demand and shipments for our chromatography, mass spectrometry and electron microscopy business. So we didnât see any concerns. Our assumption for the year is that just going to grow at about the average rate growth for the full year. So thatâs what weâre assuming in the guidance. Stephen not â is not to pick on the margin point, but I do want to sort of clarify something. I mean, I â looking at the 40 basis points to 50 basis points of expansion. So letâs say you do a 100 next couple of years. I mean, at your Analyst Day in May, you talked about a 26 percent-ish adjusted operating margin, excluding the impact of capital deployment. Or I mean, can you sort of just walk us through sort of like how youâre thinking about the 2025 outlook that you provided and sort of like general thoughts around that and then there? Thanks. Yes, when I think about margin profile, itâs in combination with revenue dollars. So our revenue dollars are materially higher than we then incorporated into my long-term model. And a combination of that plus the margin gets you to a very strong operating income dollars, and thatâs whatâs driving EPS. So Iâm â weâre well positioned with the long-term model. Great. Thatâs what I thought I just wanted to clarify that as well. And then just one quick follow-up. I assume thereâs some residual COVID business in your PPD. You talked about core growth being 20%. What is the headwind in the PPD business from leftover COVID going from 2023 to â 2022 to 2023? Yes, thereâs some activity of studies that will roll off over multiple years in terms of required follow on studies and activity there that the team as those studies come off, they just have moved to other areas of the therapeutic range. So that really has been done quite seamlessly. And as you know, with the business scaling the way it is having a large capable team is a great way to be able to be ready to serve the next set of customer work. So pretty straightforward. And so if I can â also can I squeeze one more in CapEx sort of outlook as we go from 2023, and you have been adding a lot of facilities, can you sort of talk about what youâre thinking about 2023, 2024? So 2023, Stephen said itâs a couple billion dollars and weâll continue to â it will kind of go down to a glide path back to that 3.5% â 3% to 3.5% from over time. So nothingâs changed in that assumption. Great, thank you. Maybe Marc to kick it off, just Iâm all in on Aaron Rodgers if the Jets can get him. Thatâd be like a struggling company getting â thatâd be like a struggling company getting you as a CEO would be a great deal I think so. So thatâs one of my questions here. Maybe the first one, just obviously, thereâs a lot of concerns in the industry broadly on the near-term drag on revenue growth for biologic drug products. Given the inventory, depletion thatâs ongoing in the industry, youâve been pretty confident that for various reasons, Thermo is really not seeing this. Just would be interesting to get an update on kind of just on your thinking there and kind of what youâre assuming in your outlook for 7% growth for your businesses both on the consumable side and on the Patheon services side? Yes, so in terms of football, Hope Springs Eternal until the first snap. In terms of the bioproduction business what I would say is a few points. Obviously not every single player has reported, but a couple of them have. So we have a sense of how the industry did and what others have said. When I think about last year, our bioproduction business just crushed it again, right? It just phenomenal performance well above the rate of growth of our pharma and biotech customer set. And thatâs three years in a row of really very strong growth. Very proud of how the team has executed. When I think about 2023 against tougher comparisons, obviously, the growth will normalize a bit. And I would expect that based on some of the COVID comparisons of the first half of 2022, that youâll see more normalization in the first half, stronger in the second half is the pattern, but itâs a good business with incredibly bright prospects. So from that perspective, I feel good about how the teamâs managing it, what the â what 2023 will contribute and what the long term is going to be fantastic. Pharma Services businesses has had a very good year, very strong growth, has brought its capacity online very effectively and winning a lot of new business. We still have activity this year thatâs meaningful in the vaccine therapies for COVID. And then as those wind down at some point in time, itâs hard to know what the longer-term visibility is for that capacity just gets repurposed on the thing. So we do that in an orderly fashion. So thatâs how I think about it. But a really strong year and some really nice meaningful wins throughout 2022 that sets up the Pharma Services business [indiscernible]. Got it. And then â and maybe this is a follow-up. Obviously, your business mix is a lot less cyclical today than it was back in the prior downturn. Iâm just wondering implicit in the seven, and Rachel asked the question on industrial business. But just to what extent does your guide bacon some cushion for potential slowdown that could unfold given weaker macro? Yes, so what we assumed is normal market conditions, right? And if the way I would characterize last year was above normal market conditions. So normal in my definition is marked goes 4% to 6%, right? And we said that for a very, very long time. So thatâs what weâre assuming for this year. If itâs materially different than that, meaning that if the market conditions look anything like they look last year, weâre going to grow well above the core guidance. If the market conditions are meaningfully worse, then whatâs assumed the normal market conditions, then weâre going to grow lower than the core organic that we outlined. So nothingâs dramatic about that. And weâll be super transparent and all our investors will understand if the world is totally different than what it looks like on February 1. What we know is that weâre going to manage incredibly well. So whatever the world throws at us will come out with great short-term performance and a much stronger industry leader for the long term. And thatâs whatâs super cool about Thermo Fisher because itâs our job to manage the dynamics and do it great and do a great job for our investors. So Iâm excited for what the world upholds in 2023 and beyond. Hey guys. Congrats on a really strong finish with the year and thanks for taking my question. I had two parts. Maybe Iâll ask them both upfront. Marc, the first part for you on when I look at this guidance and base organic excluding vaccine, I think the business did â the business is assuming perhaps low double-digit organic here in fiscal 2023 in that coming off of perhaps a mid-teens comp. One is that math correct that base business excluding vaccine double digit? And what is it assuming? Iâm assuming â Iâm thinking biopharma has to grow at least mid-teens to get to the 9% to 10%. And it seems pretty strong. Do those numbers make sense? And Stephen, the second part for you on margins here, what are you assuming for decremental margins on COVID and margins in FX? And did I hear you correctly on Q1 is starting at 22%, just wanted to make sure I heard the numbers right. Sure. So in terms of the guidance and the 7% core, we did not do a lot of machinations about excluding this or that. I think from the math, the way youâre doing it is that if you excluded the vaccines and therapies, it would imply that the growth was 9% or 10%, somewhere in that range is about what the growth would be on that measure of which weâre not using that particular measure. Therefore, you canât sort of speculate on sort what all the dynamics, itâs much better to just say relative to our 7% grow pharma and biotech, we expect to grow above that, right, in terms of its contribution to the 7%. And we would assume that the industrial and applied would go around the 7% core and the other two markets are a little bit below. So thatâs how you should think about the different dynamics. Yes, Vijay in terms of the pull through on the lower testing revenue, as I outlined in the last quarter, the assumptions are approximately 40% in aggregate for the whole year. But that doesnât all â thatâs not the same in every single quarter. Like the offsetting cost actions against a very significant profitability pull through, which is higher than that on a contribution margin basis thatâs spread across each of the quarters. But the revenue drop is largely just in Q1. So thatâs why you have the margin profile that I outlined for Q1. And the indication I gave for Q1 margin profile at this point is slightly below what has the margin in Q4. So the largest driver there is that a large drop in very profitable testing, and then the offset on the costs to get it to the 40% pull through spread throughout the year. Thanks, Vijay. Hey, good morning, guys. Thanks for getting me in here. Marc, maybe just one on bioprocess, bioproduction. I just wanted to ask whether youâre seeing any differences in purchasing patterns and the way that inventories just appear as though theyâre being managed when you look at CDMOs versus the biopharmas themselves. There has been some conversation around just timelines that look like they might materialize on destocking. So curious if you can just sort of help us what might be taking place given where you sit here? Yes, thatâs sort of along the line [indiscernible] question, really not much to add, right, which is phenomenal 2022. We created a really challenging and exciting comparison. We get paid to create those comparisons and I would expect that would show up in a more normalized growth in the first half and a little bit stronger than that in the second half. And I think thereâs much color between the different customer types or that would provide much more insight on it. Welcome. So let me wrap it up here. Thanks everyone for participating in the call. With another strong year behind us, weâre in a great position to achieve another excellent year in 2023. And as always, thank you for support of Thermo Fisher Scientific. And we look forward to updating you during the course of the year as it progresses. Thanks, everyone. Thank you all for joining. That does conclude todayâs call. Please have a lovely day and you may now disconnect your lines.
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EarningCall_897
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Good day and thank you for standing by. Welcome to Allstateâs Fourth Quarter Investor Call. At this time, all participants are in a listen-only mode. After the prepared remarks, there will be a question-and-answer session. [Operator instructions] As a reminder, please be aware that this call is being recorded. And now Iâd like to introduce your host for todayâs program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir. Thank you, Jonathan. Good morning. Welcome to Allstateâs fourth quarter 2022 earnings conference call. After prepared remarks, weâll have a question-and-answer session. Yesterday following the close of the market, we issued our news release and investor supplement and posted related material on our website at allstateinvestors.com. Our management team is here to provide perspective on these results. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement and forward-looking statements about Allstateâs operations. Allstateâs results may differ materially from these statements, so please refer to our 10-K for 2021 and other public documents for information on potential risks. Well, good morning. Thank you for investing your time in Allstate today. Iâll start by setting context and then Mario and Jess would provide additional perspective on operating results and the actions being taken to improve auto profitability and increase shareholder value. So letâs begin on Slide 2. So as you know, Allstate strategy has two components: increase personal Property-Liability market share and expand Protection Services, which is shown in the two ovals on the left. On the right hand side, you can see our results for the year. Earnings were disappointing with a net loss of $1.4 billion, largely reflecting an underwriting loss on auto insurance and mark-to-market losses on the equity portfolio. Strong results from homeowners insurance, protection services and fixed income investments were not enough to offset the losses on auto and commercial insurance. The most important driver of near-term shareholder value will be successfully executing our comprehensive plan to improve auto profitability. That includes broadly raising auto insurance rates, reducing expenses including temporary moves such as less advertising and permanent reductions including digitizing and outsourcing work and lowering distribution costs. Underwriting restrictions have been implemented to reduce new business volume until profitability is acceptable. Claims operating processes are also being modified to manage our loss costs. This plan is being implemented, but earned premiums from auto insurance rates have not increased enough to offset higher loss costs. And while the number one priority is to improve auto insurance margins, implementation of the transformative growth strategies make great progress in 2022, and we validated that this will drive personal Property-Liability market share growth. Proactive investment risk and return management mitigated approximately $2 billion of loss this year. And while the total return on the portfolio was a negative 4%, that compares very favorably to the performance of the S&P 500 and intermediate bond indices. We also had another great year at Allstate Protection Plans. Moving to Slide 3, letâs discuss financial results. Starting at the top, revenues of $13.6 billion in the fourth quarter were 4.9% higher than the prior year quarter, increasing the full year total to $51.4 billion. Property-Liability premiums earned increased by 9.5% in the fourth quarter compared to the prior year and 8.5% for the full year due to higher average premiums in auto and homeowners insurance. Moving down the table, an adjusted net loss of $359 million was incurred in the fourth quarter reflecting an auto insurance underwriting loss, which is impacted by reserve increases for the current and prior years. Now let me turn it over to Mario to discuss our Property-Liability results and then Jess will cover the other components of earnings. Thanks, Tom. Letâs start by reviewing underwriting profitability for the Property-Liability business in total on Slide 4. The overall message is that the underwriting loss was a result of auto insurance operating at a combined ratio above our targets, but homeowners insurance continued to be a strong source of profit. On the left chart, the recorded combined ratio of 109.1 in the fourth quarter was primarily driven by higher auto loss costs, unfavorable reserve development and higher catastrophes. This led to a full year recorded combined ratio of 106.6, which was 10.7 points higher than the prior year. The table on the right shows the combined ratio and underwriting income by line of business for the quarter and the year. Auto insurance had a combined ratio of 112.6 in the quarter and 110.1 for the year, substantially worse than our targets given rapidly increasing loss costs throughout the year. This result was an underwriting loss of $974 million in the quarter and over $3 billion for the year. Hence, you can see why Tom has said executing our auto profit improvement plan is the number one priority going forward. Homeowners insurance, on the other hand, had excellent results with the combined â with combined ratios in the low 90s, which generated $681 million of underwriting income for the year. This reflects industry-leading underwriting and risk management in this line of business. Commercial insurance was negatively impacted by the same auto insurance cost pressures, along with inadequate pricing for the coverage provided to the large transportation network companies. The result was an underwriting loss for the year of $464 million. This led to the decision discussed last quarter to not provide insurance to transportation network companies unless telematics-based pricing is implemented and to exit five states in the Allstate traditional commercial business. These actions are expected to reduce commercial business premiums by over 50% in 2023. Now letâs move to Slide 5 and discuss auto margin in more detail. As you can see from the chart on the left, which shows the auto insurance combined ratio and underlying combined ratio from 2017 through the current year, we have a long history of sustained profitability in auto insurance due to pricing sophistication, underwriting and claims expertise and expense management. In 2020, the combined ratio dropped to 86 even though we provided customers with over $1 billion of shelter-in-place payments. This was due to historically low accident frequency in the early stages of the pandemic. In 2021, frequency increased as mileage driven increased, but it did not reach pre-pandemic levels. Claims severity, however, increased above historical levels because of more severe increasing costs to settle claims with third parties, who are injured in accidents with our customers. In addition, used car prices were increasing at unprecedented levels, eventually peaking in December, reflecting an approximate 50% increase over the prior year. We had a reported combined ratio of 95 for the year despite all these pressures. This year, the combined ratio increased 14.7 points to 110.1, the drivers of which are shown in the right-hand chart. The red bars reflect the impact of increasing loss costs, including a 3.6 point impact from prior year reserve additions and a 16.7 point impact from current year underlying losses, excluding catastrophes, which include increases in both frequency and more significantly, severity compared to last year. As we discussed, the core component of the profit improvement plan is to raise auto insurance rates and substantial progress was made on this front starting in the fourth quarter of 2021 and throughout last year. In 2022, the impact of higher average earned premium drove a benefit of 3.6 points, which is shown in green. As I will cover in a minute, there is much more benefit to be realized in earned premiums based on what was implemented in 2022. Another part of the profit improvement plan is to reduce expenses and this contributed a favorable 2 point benefit this year. Moving to Slide 6. Letâs discuss prior year reserve re-estimates before we look forward. Our loss estimates and reserve liabilities use consistent practices, multiple analytical methods and two external actuarial reviews to ensure reserve adequacy. These processes led us to increase the reserve liability for prior years throughout 2022 by amounts that are larger than recent years. Property-Liability prior year reserve strengthening, excluding catastrophes totaled $1.7 billion or 3.9 points on the combined ratio for the full year 2022. The pie chart on the left breaks down the impact by line and coverage with $1.1 billion driven by Allstate Brand personal auto largely related to bodily injury claims. In addition $295 million was related to Allstate Brand commercial insurance, also mostly related to auto. The table on the right breaks down the Allstate Brand auto prior year reserve strengthening of $1.1 billion in 2022 by report year. Let me orient you to the table. Reserve increases are shown by coverage in total and then for the report here to which they apply. The reserve liability for physical damage coverages was increased by $211 million, which was entirely attributable to 2021. This primarily related to adverse development and elongated repair time frames, which were primarily addressed in the first and second quarter. Injury reserves were the largest component at $676 million, which was spread across many report years. Incurred but not reported was increased by $226 million as late reported claim counts have exceeded prior estimates. This reserve balance was increased in each of the first three quarters of 2022, but a larger amount was recorded in the fourth quarter. In total for all coverages about 63% of the increases were for 2021 and 2020. At the bottom of the table, the reported combined ratio for the calendar year is shown and compared to the reserve changes. For example in 2021, the reported combined ratios for Allstate Brand auto insurance was 95. The reserve additions indicate that costs were 2.1 points above this reported number. Estimating reserve liability utilizes multiple reserving techniques, but is always subject to strengthening or releasing reserves over time. This variability increases with changes in the underlying data, such as claim counts, settlement times, or cost increases and as has been the case over the past three years. While reserves could change going forward, based on the 2022 claim statistics and data, reserves are appropriately established at year-end 2022. Moving to Slide 7. Letâs provide some clarity on what the auto insurance combined ratio trend was by quarter in 2022. As you can see on the left-hand chart, the recorded combined ratio peaked in the third quarter at 117.4, largely reflecting prior year reserve changes and catastrophe losses shown in light blue. The dark blue bars are the underlying combined ratio, as reported, which increased each quarter. Included in this dark blue bar is the impact of increasing claim severities within the year. We update the forecast on claim severities as the year progresses. As 2022 developed, loss cost trends resulted in increases to current report year ultimate severity expectations. As shown in the call out on the left chart, 2022 incurred severities for collision, property damage and bodily injury was 17%, 21% and 14%, respectively, above the full report year 2021 level. This estimate, however, increased throughout the year. The impact of increasing current report year on incurred severities as the year progressed influences the quarter underlying combined ratio trend. This impact from increasing full year severities from claims occurring in prior quarters is reflected in the financial results of the period where severities were increased. For example, the fourth quarter of 2022 reflects the impact of higher severity expectations in the auto physical damage coverage, not just for claims reported in Q4 but also for claims that were reported throughout the prior three quarters as well. The chart on the right adjusts the quarterly underlying combined ratio to reflect full year average severity levels, which removes the influence of intra-year severity changes. As you can see, after adjusting for the timing of severity increases in the current year, the quarterly underlying combined ratio trend was essentially flat throughout 2022 and close to the full year level of 103.6. Slide 8 outlines our comprehensive approach to restore auto margins. There are four areas of focus: raising rates; a continued focus on reducing expenses; implementing stricter underwriting requirements; and modifying claim practices to manage loss costs. Starting with rates, since the beginning of this year, weâve implemented rate increases of 16.9% in the Allstate Brand, including 6.1% in the fourth quarter, which significantly increased written premium. We expect to continue to pursue significant rate increases into 2023 to improve auto insurance margins to target levels. We are also reducing operating expenses as part of transformative growth and have temporarily reduced advertising spend to manage new business volume. We are implementing more restrictive underwriting actions on new business in locations or risk segments where we cannot achieve adequate prices for the risk. Increased restrictions have been implemented in 37 states including California, New York and New Jersey, which account for a large portion of underwriting losses. Claim practices have been modified to deal with the higher loss cost environment. For example, we have strategic partnerships with part suppliers and repair facilities to mitigate the cost of repair and use predictive modeling to optimize repair versus total loss decisions and likelihood of injury and attorney representation. Moving to Slide 9, letâs discuss a key component of our multifaceted plan raising auto insurance prices. Growth in average premium per policy is accelerating due to implemented rate increases, but the impact to average earned premium per policy is on a lag due to the six-month policy term. The chart on the left depicts the year-over-year growth in auto average gross written premium in orange, reaching 14.4% in the fourth quarter of 2022. The auto average earned premium growth of 9.7% in the fourth quarter, represented in blue, continues to increase, but on a lag due to the six-month policy term. The chart on the right is an estimation of when the rate increase is implemented will be earned into premiums. Of course, actual earned premium growth will be influenced by changes in the number of policies in force and absolute levels of new business and retention. This illustrative example assumes 85% of the annualized written premium will be earned since customers modify policy terms such as deductibles or limits where they may not renew. Starting on the left, over the last 15 months, weâve implemented Allstate brand auto rate increases of 19.8% for an estimated annualized written premium impact of approximately $4.8 billion. Using the historical 85% effectiveness assumption nets a total of $4.1 billion in expected earned premium, represented by the second blue bar. Approximately $1.2 billion has been earned through the fourth quarter. Of the remaining $2.9 billion of premium yet to be earned, roughly $2.6 billion will be earned in 2023 and $300 million in 2024 as shown in green. As I mentioned earlier, we expect to implement additional rate increases in 2023, which will be additive to the figures shown on this chart. Slide 10 illustrates the drivers that will determine the timing of improved auto profitability. The chart on this page is an illustrative view weâve shown in the past on our path to target profitability along with the magnitude of actions already taken and required prospectively. Starting on the left, the first blue bar shows the year-end 2022 auto insurance reported combined ratio 110.1. To start with the normalized base, we removed the impact of prior year reserve increases and normalized the catastrophe loss ratio for our five-year historical average. This improves the combined ratio by roughly 4.5 points. The second green bar reflects the estimated impact of rate actions already implemented when fully earned into premium, which we discussed on the prior slide. The impact on the combined ratio is approximately 10.5 points when combining the Allstate brand and the National General brand actions. Those two adjustments would improve the combined ratio to target levels. Now of course, we know that loss costs will increase, whether from severity or accident frequency, which would increase the combined ratio. So prospective rate increases and other margin improvement actions must meet or exceed loss cost increases to achieve historical returns. We continue to manage the auto insurance business with the expectation to achieve an auto insurance combined ratio target in the mid-90s. Moving to Slide 11, the table shows Allstate brand auto results in three major states: California, New York and New Jersey combined contributed approximately a quarter of the Allstate brand auto written premiums in 2022 but accounted for approximately 45% of the underwriting loss. While rates were increased in 2022 by 7% to 10%, this is not enough to achieve target margins. As a result, we have more work to do, some of which is listed on the right-hand side. The right-hand side of the slide is a list of actions we are taking in each of these states to improve margins. In California, we filed for an additional 6.9% rate increase in January after getting approval for an initial 6.9% rate increase and are significantly increasing down payment requirements. In New York, while multiple rate filings were requested, only partial approval of the increases requires us to make additional rate filings in early 2023, increased down payment requirements, allowable prior incidents and channel restrictions means fewer choices for consumers until an adequate rate is approved. In New Jersey, additional rate filings will also be made and similar underwriting actions will be implemented as those taken in New York. Moving to Slide 12. Letâs look at a continued good performance story in homeowners insurance. As you know a significant portion of our customers bundle home and auto insurance, which improves retention and the overall economics of both product lines. We have a differentiated homeowners product, underwriting, reinsurance and claims ecosystem that is unique in the industry. Net written premium has increased significantly throughout 2021 and into 2022, increasing 9.3% from the prior year quarter and 12% for the full year, predominantly driven by higher average gross written premium per policy and a 1.4% increase in policies in force. National general written premiums also increased as we improved underwriting margins closer to targeted levels. The fourth quarter combined ratio for homeowners of 92.6 increased by 5.5 points compared to the prior year quarter, while full year combined ratio of 93.8 and declined by 3 points compared to 2021. For the year, this line generated $681 million of underwriting income. The increase in the fourth quarter is shown on the right side. The increased combined ratio was driven by elevated catastrophe losses, primarily due to winter storm Elliot. Homeowners insurance was also impacted by the higher loss cost environment as we continue to experience higher severities due to increasing labor and material costs. To address the inflationary environment, our products have sophisticated pricing features that respond to changes in home replacement values. All right. Thank you, Mario. Well, property liability is a core business for us. There are other important drivers of financial performance to discuss, starting with investment income on Slide 13. As shown in the table at the bottom left, the total return of our portfolio is 2.5% in the fourth quarter and negative 4% for the year. These returns for our broadly diversified portfolio compare favorably to the full year performance for the S&P 500 of negative 18%, and to the Bloomberg Intermediate Bond Index return of negative 9%. Net investment income shown in the chart on the left totaled $557 million in the quarter, which is $290 million below fourth quarter last year. Market-based income of $464 million, which is shown in blue, was $101 million above the prior year quarter. This is the third consecutive quarter of increase as we benefit from reinvestment at higher market yields. Performance-based income of $147 million shown in black was $369 million below a strong prior year quarter. Income this quarter included in negative contribution from valuation of private equity fund investments that was more than offset by positive contributions from direct investments along with positive returns for infrastructure in real estate. The chart on the right shows the fixed income yield is rising and was 3.2% at quarter end, but is still below the current intermediate corporate bond yield at 5.3%. Also shown is that duration increased modestly to 3.4 in the fourth quarter, primarily by removing approximately half of our duration shortening interest rate derivatives. The migration of the portfolio to higher yield and the corresponding increase in income will happen over time as we reinvest portfolio cash flows into higher interest rates. With the portfolio in unrealized loss positions accelerating this shift by selling bonds to generate capital losses but will be pursued if it optimizes enterprise risk and return. Now letâs turn to Slide 14 and talk more about how enterprise risk and return management impacts investment allocations and results. Proactive investment management is highly integrated with risk adjusted return opportunities across the enterprise. We discussed this in detail on our September 1 Special Topic call on investments. In 2021, we decided to lower overall risk levels given the declines in auto insurance profitability. We also expected that sustained inflation would lead to higher interest rates. As a result, the economic capital deployed to investments was reduced. This led to a shortening of the bond portfolio through the sale of long corporate and municipal bonds and the use of derivatives. While adverse market conditions negatively impacted our portfolio, these actions mitigated losses by approximately $2 billion. In 2022, giving continued auto insurance losses, we decided to lower the potential for investment losses as the U.S. economy went into recession. At the same time, interest rates were increasing, offering a better risk adjusted return from fixed income. Consequently, holdings and below investment grade bonds were cut almost in half, and public equity holdings were lowered by 40%. Late in the year, interest rates had increased in the duration of the bond portfolio was extended as shown on the previous slide. About half the duration shortening derivative position was removed in the fourth quarter, at the same time, this lowered the amount of economic capital deployed to investments. These actions optimize enterprise risk and return and provide flexibility to take advantage of investment opportunities as economic conditions evolve. The Protection Services businesses also create shareholder value, as shown on Slide 15. Revenues, excluding the impact of net gains and losses on investments and derivatives, increased 6.1% to $643 million in the quarter and 8.7% to $2.5 billion for the full year 2022. The increase in revenue for the fourth quarter and full year was primarily driven by Allstate Protection Plans growth of 16.9% and 15.7% respectively. As you can see from the table on the right, Allstate Protection Plans continues to rapidly expand with written premium of $1.9 billion for the year. Allstate Protection Plans expansion in 2022 is primarily driven by our investment in appliance and furniture product coverages. We continue to believe thereâs a significant growth opportunity in these areas and in our continued expansion of European consumer electronics and other international growth. Given, the longer policy term compared to auto and homeownerâs insurance products, the unearned premium balance continues to significantly grow as well, reaching $2.6 billion at the end of the year. For the segment, adjusted net income of $38 million in the quarter, increased $9 million compared to the prior year due to a one-time net tax benefit in Allstate Protection Plans. Full year adjusted net income of $169 million, decreased $10 million compared to the prior year, primarily due to the lower revenue in Arity as a result of decreased insurer client advertising. Weâll continue to invest in growing these businesses as they provide an attractive opportunity to meet customersâ needs and create economic value for our shareholders. Moving on to Slide 16, Allstate Health and Benefits is growing an attractive set of businesses that protects more than 4 million policy holders. The acquisition of National General in 2021 added both group and individual products to our portfolio as you can see on the left. Revenues of $579 million in the fourth quarter of 2022, excluding the impact of net gains and losses on investments and derivatives, decreased 1.5% to the prior year quarter as a reduction in individual health was partially offset by an increase in group health and other revenue. Adjusted net income of $50 million, increased $2 million compared to the prior year quarter, resulting in a full year 2022 income of $222 million. The full year 2022 result was $14 million above prior year and reflects increases in group health revenues partially offset by higher operating costs and expenses on group health contract benefits. Letâs close by highlighting Allstateâs strong financial condition and proactive approach to capital management, which you can see on Slide 17. We ended the year with $4 billion in holding company assets, which represents an increase of $700 million compared to year end 2021. We believe holding company assets and capital resources available from statutory operating companies provide financial flexibility as we continue to implement profit proven actions, invest in Transformative Growth and return capital to shareholders. As you can see, our adjusted net loss in 2022 resulted in a negative adjusted net income return on equity. Executing our comprehensive plan in achieving target combined ratios for auto and homeowners insurance will bring adjusted net income returns and equity back to our long-term target range of 14% to 17%. In 2022, we returned $3.4 billion to shareholders through $2.5 billion in share repurchases and $926 million in common shareholder dividends. This resulted in common shares outstanding being reduced by 6.1%, reflecting the repurchase of 19.7 million shares in 2022. Good morning. I wanted to ask about claims management process that over the course of the last couple of years, I think of Allstate is having a superior claims management in auto and home and that is being kind of one of the core advantages. But youâve also been implementing a lot of cost cuts and laying off folks over the last couple years. So how are you sort of balancing that? And are there some core metrics that we can see as outsiders that suggest that advantage relative to your peers still exists? Thank you, Paul. Good morning. Let me make a few overview comments and then Mario can jump in. Youâre correct that one of our competitive advantages really claim [indiscernible] settling what are millions of claims a year. And we really look at like a â itâs a systems approach. Itâs not the result of adding one person process or vendor arrangement. But like for example, if you look at auto insurance, we have this network of auto body repair facilities enables us to both source high quality costs, high quality repairs, good costs and in timely stuff. So cutting down things like car, rental use and stuff like that. At the same time, we have extensive use of analytics, whether thatâs the value of an individual car in a local market with specific options to settlements of complicated multi-year bodily injury claims or fraud detection. Part sourcing and buying that Mario talked about enables us to both control the price of those parts by buying them in bulk. But also deciding which part you use. You use an OE [ph] part or an aftermarket part, whatâs available in the local market. So the reason Iâm going through that is itâs a really complicated system that works really well. Weâve got good employee training, got good technology, we have good quality control processes. And we do have metrics that you can look at to determine how weâre doing versus the outside. Thereâs first call reporting and thereâs some other external reporting which shows, for example, that we have. We buy â we pay less per claim for parts and labor than other people. So some of that information like first call you guys could have access to others â we get from other sources. But it â what it tells us is that weâre good. Now, anytime youâre good, the only reason â the only way you stay good is you keep changing and getting better and updating processes. And so as weâve dealt with these dramatic swings and frequency and costs, we continue to implement changes to improve the effectiveness and efficiency and Mario can talk about those. Are we perfect? No. Are we constantly reassessing everything we do to make sure weâre getting the right price for parts and weâre settling at the right value for customers of course. Do we believe itâs still a continued competitive advantage for Allstate? Yes. So Mario, would you want to talk about some of the things you worked on last year and what you have looking forward this year? Yes, thanks Tom, and thanks for the question, Paul. First thing, I would reiterate what Tom said. We continue to view our claims capabilities as a competitive differentiator and a source of real value for Allstate. We think thatâs been â certainly been true in the past and itâll continue to be true going forward. The reality is given the environment weâre operating in, both from a casualty perspective as well as physical damage, weâve talked a lot throughout the year around the drivers of inflation and the things that are driving up loss costs at such a rapid pace. And I think what that does is it really forces us and the industry to continue to evolve those practices. And itâs certainly something weâve done overtime to continue to maintain in our leadership position and our edge when it comes to claims. So let me just spend a minute and Iâll break out casualty versus physical damage. In terms of the action plans, we talk a lot about changing operational processes. Iâll say a couple things starting with casualty first. One of the things weâve done over the past 12 plus months is weâve meaningfully reduced the volume of pending bodily injury claims by about 20%. And what that does is it reduces risk of both of inflation impacting those claims that certainly that weâve settled and remediated going forward. But also reduces we think reserve uncertainty on those claims going forward. And to just give you a sense of context, the current level of bodily injury pending claims in aggregate is at its lowest level that itâs been since before 2016. So weâve looked to de-risk the bodily injury pending portfolio by leaning in and settling claims. Weâre also focusing on a strategy that I would characterize as an earlier strategy when it comes to bodily injury. Things like earlier recognition of injury claims, earlier claimant contact and earlier settlement of claims that we should settle quickly again to avoid the inflationary risk in the current environment. And what weâre doing is weâre leveraging our advanced data and analytics capabilities to execute on all components of that strategy to continue to evolve and get better in casualty claim handling. On the physical damage side, I think itâs really around, broadly continuing to focus on estimation accuracy cycle time and leveraging â further leveraging our scale to the fullest extent. Itâs continuing to increase the utilization of our good hands repair network to reduce costs, both in terms of parts and labor costs and improve cycle time while continuing to improve or provide a high quality customer experience. Enhancing total loss processes to reduce cycle time and reduce costs around things like storage and rental costs and identification of preexisting damage on vehicles, again, to move total losses through the system more rapidly. And then continuing to look to leverage our scale additionally when it comes to sourcing parts and getting as efficient as we can from a process perspective. So weâre really attacking claims across a number of fronts. Again, feel really good about where weâre positioned with claims. And this is all about continuing to get better and maintain that industry leading capability on the claim side. Is there any difference in how you handle claims across the distribution systems at this point that would vary the execution of claims? This is Mario. Yes, sure. Iâll jump in. Process wise, we adopt consistent processes across claims. Thereâs certainly unique processes. For example, in National General, given the non-standard auto mix, thereâs just a different approach to those claims because they potentially have a higher risk of fraud. So thereâs some unique processes there. But in terms of claim handling consistency for similar types of claims, we tend to leverage best practices across brands. Thank you. One moment for our next question. And our next question comes from the line of C. Gregory Peters from Raymond James. Your question please. Good morning everyone. Tough quarter and a tough year for the company. I was looking at Slide 11 in the supplement. And this is the slide that talks about the Allstate brand auto state profitability. And if we look at the number of states that have a combined ratio above 100, it steadily increased through the fourth quarter and it kind of a contrary to the comments you made about the rate that you applied and achieved in the year. So my question is what type of expectation do you have for that category of states above 100 as we move through 2023? Is it kind of peak here at 41? Do you think it could get worse? Or whatâs your expectation going forward of how that might trend? Greg, let me provide an overview, then Mario can jump in on it. First, as we said and you know well that improving auto profitability will be a key to driving shareholder value. So weâre all over that. Weâve made a lot of progress. Mario showed about the rate increases. And so of the $4.1 billion that we think will still come true, or that will come through from the rate increases weâve already implemented, weâve got $1.2 billion, $2.6 billion of that should show up in 2023. And I would point out that, thatâs not in those combined ratio numbers. So our objective is to make money in every line in every state. So no cross subsidies between states, no cross-subsidies between lines. Now, of course, thatâs hard to do with as many lines as many states weâre in, but thatâs our objective. And so the amount â that amount thatâs not reflected in the â some of those states. We think some of those states are probably adequately priced today. There are many that are not, and so weâll continue to drive those. But I would expect to see that number come down. But we donât have a target of â weâre at 41 at the end of the year. We want to be at some XX at the end of the first quarter. Itâs every state, every line, make money every year. Mario, would you want to add some additional color to that? Sure. And thanks for the question, Greg. Look, I think when you look at that trend of states above 100 and the increase throughout the year, I think what Iâd point you to is when you just â you look at our underlying auto combined ratio as we reported it, increasing throughout the year and being driven by increases in our severity expectations quarter-over-quarter as the year played out, as well as increasing frequency between Q1 through Q4, only partially being offset by the rate that we took. So I think that chart mirrors what we show you in aggregate in terms of the reported underlying combined ratio. But when you look at our business from a state perspective, I think itâs important to really categorize states into a couple of different buckets. I think thereâs a group of states that while we certainly are pleased with the outcome of an underwriting loss, given the actions weâve taken, particularly from a rate perspective as well as underwriting actions, we feel like weâre positioned in a good place. Now you canât predict the future in terms of the path of inflation or severity going forward. But given the actions weâve taken, we feel good about where weâre positioned and what the outlook looks like for 2023. I put states like Texas, Georgia, a couple of large states for us where weâve implemented significant rates and have been successful in doing so. And so we feel good about the outlook. Again, weâll have to adapt to what changes in the future, but I think there is a lot of states that falls into that category. Unfortunately, there is a number of, for us, pretty meaningful states, three of which we highlighted in the presentation: California, New York, New Jersey, where theyâre much more challenging regulatory environments. And we need to continue to execute on both rate increases and underwriting restrictions to curb growth to really bend the line in aggregate. And just using California as one example. So as you all know, we got a 6.9% rate approved late in the year, but we immediately filed another 6.9% increase pending with the department. We took down paid requirements up pretty dramatically. We have not changed those down paid requirements even with the first rate. Weâre working with the department on getting approval for the second 6.9%. But then weâre going to come back with another rate increase because we need more rate in California. So thatâs a big state for us where weâre going to have to continue to really lean in and take â continue to take dramatic and aggressive actions to improve margins. And I put New York in that same category. We got a 5% flex rate in New York. Middle of the year, we got approval for a 9.4% rate in New York towards the end of the year, while weâre prepared to do additional â an additional round of rate filings in New York early in 2023, because loss trends are not where they need to be. And in the interim, weâve taken underwriting actions around prior incidents, down pay and other actions to curb new business growth, and weâre going to continue to lean into those actions because we canât afford to write the new business at the current rate levels and weâll continue to take the appropriate actions there. So I think you got to look at the states in a different way. I think weâve made a lot of progress in a number of states, but we still have some work to do. And as we said, we expect to take some pretty significant rate increases in 2023, particularly leaning into some of those states where we havenât, really for regulatory reasons been able to make the kind of progress that we would have liked. Thatâs good detail. Just the follow-up question on those three states, California, New York and New Jersey. And I know youâre not going to start negotiating with the Departments of Insurance on an earnings conference call. But when I look at California, for example, you yourself said 6.9% is not going to be enough. One of your competitors recently got, just last month got a rate increase improved that was in the teens. Why not pivot and get more aggressive with rate filings in some of these challenging states? It seems like some of your peers might be doing that and getting â having some success. Greg, I would just maybe provide â I think weâve been very aggressive when you look at how much weâve raised rates in total for the year across the country. Weâve been very aggressive. And depending whose measures you want to use, more aggressive. As you never really know where people start and what they finish and what their losses are. Mario, do you want to talk specifically about California? Yes. Sure. So, Greg, I think weâve been working really closely with the Department of Insurance in California. We were able to pretty rapidly get approval of our first 6.9%, and weâre in active dialogue around the second 6.9%. And as I mentioned, when we get that one behind us, thereâll be a third one coming. We always have the option of going down the path of filing a larger rate increase. California generally takes a longer time period to get approvals for rates as it is. And the one you mentioned specifically, I think, have been pending with the department for over a year. So weâre â as we look at the map, we want to get approval, we want to get approval as rapidly as we can, so we can implement the rates and move on. So the approach weâve taken so far in California, weâre comfortable with. Weâre going to continue to lean in. We always have the option to change course if things change. But so far, weâve had success with the path weâve taken, and weâre going to continue to push on that. Thank you, one moment for our next question. And our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question please. Hi, thanks. Good morning. My first question is just on capital, right? You guys said you expect to complete the buyback program by the â still by the end of the third quarter of 2023. Can you just help us understand what metrics youâre looking at to judge the capital adequacy of Allstate Insurance Company at the end of 2022? I think in the past, youâve said you look at RBC ratios there. Can you give us a sense of where you ended 2022 your RBC was, and where you would like that to be over time? Elyse, Iâll let Jess give you some specifics, but we obviously have a long history of managing capital that both balances our financial strength, growth returns to shareholders. We have plenty of capital to grow our business and pursue attractive risk and return opportunities. We do it in a much more sophisticated way than RBC. So for example, when Jess talked about the things we had done in the investment portfolio, that we allocate specific amounts of capital to different investment allocations. So when we dial up interest rate risk, we put a little more capital up for it. If we dial down equities, we put up less capital, and we believe weâre really well capitalized and donât have any issues. Jess, do you want to go from there? Yes. Thanks, Tom. So Elyse, I think as it relates to your question on RBC, we havenât disclosed the RBC for the year. That will come out in due course as it relates to the actual RBC in insurance company, and we donât publish a target. I think Tom hit on the right point, because you asked what are the metrics that we look at as we think about the repurchases. And we really do focus on our sophisticated economic capital model that looks at a comprehensive view of risk across types around the enterprise. And we use that as the basis for capital management. We obviously focus on RBC rating agency metrics, a variety of other things. But we donât have specific targets that we published as it relates to risk-based capital. So â and I really like to take it up a level and just think about how we manage it overall using our sophisticated, risk-based capital framework. We remain confident in our overall capital position and the capital position of the insurance subsidiaries. Thanks. And then my second question is going back to some of what you guys have been discussing with modifying your claims practices. Have you guys tested the predictive modeling on an external data against your own internal data and seeing a meaningful benefit? And should we â how â over what time period should we think about the rollout of the program over the next year, 12 months to 24 months, on what type of time frame should we be thinking about? Elyse, Iâm not sure which predictive models are you talking about the â I mean we use predictive models for a lot in claims. Was there one specifically you were interested in? Well, I was talking about some of the kind of changes you guys have stressed that youâre kind of looking to make on the claims side of things. Okay. Yes. Let me â Iâll take a shot at it and Mario, you can jump in. So we use â I mean weâre a data-driven company, so we use predictive models as you know well, for just about everything. That could be fraud. There could be â do we think this claim might end up being severe enough where it gets represented by a lawyer? So itâs important for us to establish a relationship with the customers as possible. It might be, do we think thereâs a better way to settle this claim, whether it gets â the car gets totaled or we send it to a body shop. So thereâs we use predictive analytics throughout the business and obviously largely in claims as well. So weâre always tuning those. We think weâre pretty good at it. You canât really take one specific algorithm. But when you look at our claims severities, you can look at them externally. And when you look at absolute dollars, we think we did really well. Itâs easier on physical damage, obviously, because youâre just fixing a car bodily injury, itâs like, okay, well, what was the case worth? Whatâs the average case? That gets a little harder to do. But when in â the only weakness in the external stuff is it tends to be a percentage increase over the prior year, which is, of course, we work in absolute dollars. And our models are done in absolute dollars. And so even though it all depends where you start â but we like our overall position. Mario, do you want to talk specifically about any models that youâre using now that think you can point to where weâve updated and increased the value-added? Yes. The one Iâd point to, and I think generally, the statement Tom made about like leveraging all the data and the capabilities we have, but also looking to tune those models and evolve over time. The example I would use would be around bodily injury, both potential loss identification and attorney representation. Given, obviously, the environment around us has evolved pretty significantly over the past couple of years in terms of higher levels of attorney representation and bodily injury claims and just medical inflation, medical consumption and treatment, those kinds of things. So what weâve been doing is tuning the models to be able to use the components and the data that we gather early on in the claims process, to identify claims where there is, first of all, the potential for an injury. More importantly, the potential for a major injury given itâs a higher impact accident or things like that. So we can get out ahead of the claim, make contact earlier and manage the claim much more effectively. The same would be true around claims that have the potential, ultimately to be represented by an attorney. Again, creating contact with a third-party claimant and establishing dialogue and communication and leveraging the tools and the models at our disposal to better manage the claim process through the bodily injury claims. So those are just a couple of examples of how we tuned models that weâve had to adapt to the current environment. And weâre going to have to continue to, as I mentioned earlier, evolve our processes and those models to adapt to the environment over time. So this is not a static process, and weâre always looking to get better based on the most current information as well as the external environment that weâre operating in. Thank you. [Operator Instructions] And our next question comes from the line of Andrew Kligerman from Credit Suisse. Your question, please. Hey, thanks a lot for getting me in. First question is around social inflation, and in particular, bad price point. And in 2022, I think the court up a lot. And we â I would â I suspect that had a big impact. As we move into 2023, whatâs your thinking about further social inflation issues? Do you think it will get materially worse? Could you give us some measurement around that? And thatâs the question. Yes. Certainly, social inflation is a phenomenon that we and the industry have been dealing with for an extended period of time. I think in our business, we certainly see it in the personal auto side, in casualty coverages. Weâve also seen it on commercial auto and in the shared economy, just given the higher limits that we tend to write on that business. Itâs hard for me to predict whether it will get better or get worse going forward. I think itâs a reality of what weâre experiencing right now. And as I talked about some of the analytics and the processes weâre putting in place, to identify and manage injury claims more effectively. Thatâs a big reason why weâre doing it is in response to the social inflationary impacts weâve seen. Iâd also go back to something I said earlier around quickly not only identifying but settling claims earlier in the process where we can to mitigate the potential exposure to social inflation going forward. And the reduction in pending claims across a variety of segments that weâve already executed on and are going to continue to focus on going forward. So I think our approach has been to modify our processes and take appropriate actions to offset the impacts of social inflation. And again, I donât want to predict whether it will get better or get worse, but we know itâs a reality and weâve adapted in response to it. Okay. And then the next question is around the rate increase. So I think Greg was touching on how your competitor got in the teens. I think it was 17.4% and you got 6.9%. My question there is should we worry that there will be anti-selection? If other players are getting these big rate increases, will that drive more consumers to Allstate as the pricing appears better in California? Yes. Look, as I mentioned earlier, even with the rate that we were approved for â we didnât change the actions we took around down pay requirements. So our risk appetite is not â has not changed in California, and it wonât until we get to a point where we believe weâre adequately priced, and that will take at least a couple more rates. Will we get anti-selected against? I think if we keep the restrictions in place or down pay requirements in place, we mitigate that risk. And itâs all relative. The rate increase that was approved was on a much larger indication than the one we filed. So itâs hard to tell what the relative price position is. But again, weâre not going to change our stance. Our focus in California is to reduce growth as much as we can until we get to rate-adequate levels, and thatâs the way weâre going to manage the business. Thank you. [Operator Instructions] And our next question comes from the line of Josh Shanker from Bank of America. Question, please. Yes, thank you. I was looking at the new policy application, and I was trying to tease out Allstate, National General and agency versus exclusive agency versus direct. And I noticed that there was a non-significant amount of independent agency, new policy applications coming from non-National General sources. And so Iâm wondering, is Allstate brand being sold through independent agencies? And the reason why I asked this is also I noticed that new policy applications from Allstate exclusive agents are up, but Allstate branded new policy applications are down overall. Meaning that it feels like thereâs a channel shift that youâre excited about getting business from Allstate exclusive agents, but not from the other sources where you sold Allstate branded products last year. Let me provide a little overview. And then Mario you can take it. So Josh, first, weâll take business from anybodyâs, not just for price. You are correct in that you see â remember, National General, we took â when we acquired National General, we gave them both the Encompass business, which was straight up independent agents under the Encompass brand. Thereâs also an Allstate independent agent channel that weâre transitioning to National General products and services over time. So the National General has both of those. On the direct versus agent piece, weâve been shutting down growth and reducing expenses. We went first to the direct channel because it was faster, and we got more dollars out of it. That doesnât mean that we have a preference for Allstate agent versus direct. Weâll serve customers any way they want to be served. Mario, do you want to add some additional perspective on that? Yes. And maybe Iâll focus on â first on the Allstate brand, Josh, in terms of the shift, the mix shift between direct and exclusive agents. So youâll remember a couple of things. One of the things we did this year was we reduced the amount of advertising spend, particularly lower funnel advertising spend, which directly impacts both volume through the direct channel. And I think youâve seen a decline in the direct Allstate branded production as a result of that. I think the other thing youâve seen is the phenomenon weâre experiencing in the exclusive agent channel with Allstate. And Iâll take you back to one of the core tenets of transformative growth was to reduce costs. But one of the components of it was to reduce distribution costs by changing how we compensated our exclusive agents, and also introducing lower cost, higher productive new models. And I think what you see in 2022 is that the model that we put in, that shifts agency compensation more to new customer acquisition has driven a level of engagement and behavior change on behalf of our exclusive agents thatâs resulted in an increase in new business production, despite the rate actions that weâve taken. I think as we go forward, weâre going to continue to evolve the agency model. Weâll continue to shift commission away from renewal to new business. And while at the same time, continue to enhance our direct capabilities so that when we do lean back into growth, weâre willing to accept the grow through any channel that we can write it. But I donât think itâs unreasonable to assume that the first place youâd see kind of sequential growth would be in the direct channel, just given that when we turn advertising back on, that will be where a lot of the claim volume is driven through. But at the same time, we are pleased with the â again, the engagement and the behavior shift of our exclusive agents and the performance of the new agency models in terms of their levels of productivity, which I think bode well for us from a long-term growth perspective. Is there a difference in profitability over the lifetime of the customer, depending on the brand and the channel itâs sourced? And long-term, should there be any difference? Yes, I can jump in. Any Allstate brand, I think over time, it should be the same, right? Because weâre targeting and marketing to the same customer segment and looking to drive the same lifetime value, whether we write it in the agency channel or we write it in the direct channel. And youâll remember, weâve gone to differentiated pricing to match the cost of the channel with the price that the consumer is paying. So that kind of normalizes for the acquisition cost or the distribution cost. So weâd be getting the same lifetime value. I think in the National General brand, what weâve got today is predominantly still a non-standard mix, which has a very different lifetime value than the standard and preferred products that we write in the Allstate brands. But we price for that. We have the fee structure in place for that where â and we manage that business very effectively to drive value for a much shorter policy life expectancy for those non-standard risks. As we roll out more middle market products in National General, weâve really started on that process, but weâve got a ways to go there. The value â the lifetime value expectancy for that policy group should look and feel a lot like the Allstate brand because weâre leveraging the same data, the same capabilities to expand our capabilities in that market. So I think from a customer segment perspective, it should be very similar across channels, given the same risk profile. Different in non-standard auto, but weâve got a really effective model in National General to manage that business. I know thatâs very helpful. So thank you all for tuning in. Allstateâs obviously focused on using our extensive system operating expertise to improve auto insurance margins. And at the same time, as Mario just mentioned, weâre investing in transforming growth to increase our profit liability business. We have upside in front of us on the investment portfolio, and weâre having a good successful expansion of our circle of protection. So thank you all, and we will talk to you next quarter. Thank you ladies and gentlemen for your participation on todayâs conference. This does conclude the program. You may now disconnect. Good day.
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Good day, and welcome to the Imperial Oil 4Q Earnings Call. At this time, I would like to turn the conference over to Dave Hughes, VP, Investor Relations. Please go ahead. Thank you very much, and good morning everybody. Welcome to our fourth quarter earnings call. Here today are Brad Corson, Chairman, President, and CEO; Dan Lyons, Senior Vice President, Finance and Administration; Simon Younger, Senior Vice President of the Upstream; Jon Wetmore, Vice President of the Downstream; and Sherri Evers, Vice President of Commercial and Corporate Development. Let me just start with the cautionary statement. Today's comments include reference to non-GAAP financial measures. The definitions and reconciliations of these measures can be found in Attachment 6 of our most recent press release and are available on our website with a link to this conference call. Today's comments may also contain forward-looking information. Any forward-looking information is not a guarantee of future performance, and actual future performance, and operating results can vary materially depending on a number of factors and assumptions. Forward-looking information and the risk factors and assumptions are described in further detail in our fourth quarter earnings release that we issued this morning, as well as our most recent Form 10-K. All of these documents are available on SEDAR, EDGAR, and on our website. So, please refer to those. After Bradâs opening remarks, as usual Dan will give a financial update and then weâll go back to Brad for an operating update and weâll followed it all with a Q&A session. So, with that, Iâm happy to turn over to Brad for his opening remarks. Thanks, Dave. Good morning, everybody, and Happy New Year. Welcome to our fourth quarter earnings call. I hope you're all doing well and your New Year is off to a good start. As we close out 2022 reporting, I'm pleased to share another very strong quarter for Imperial in what has been a standout year for us, both financially and operationally. Our Downstream continued to deliver exceptional operating and financial performance in the fourth quarter, while Kearl tied a quarterly production record, and Cold Lake and Syncrude continued to deliver strong production results as well. It's especially satisfying to see this level of operating performance in a year where commodity prices were so supportive, which in-turn allowed us to maximize value for our shareholders. Looking back on the full-year, we are closing the books on what was the best year in the company's history. A stark contrast to the challenges we faced just two years ago at the depths of COVID. In 2022, we set numerous records both operating and financial. We delivered record earnings and cash flow, as well as record shareholder returns underpinned by a 63% increase to our dividend and over $6 billion in share buybacks. Operationally, we continue to see Kearl deliver new daily and quarterly best ever, further supporting our confidence in achieving 280,000 barrels per day gross by 2024. Cold Lake delivered production at the high-end of the upwardly revised guidance range, and Syncrude had a best ever production year supported by the interconnecting bidirectional pipelines. And in the Downstream, our refining assets achieved best ever utilization allowing us to maximize products available to the market. And in addition to these performance achievements, we continued to reinvest in the business and we successfully advanced multiple accretive capital projects such as completion of the Sarnia products pipeline, which improves our ability to supply refined products to markets in Ontario. We also made significant progress on our commitments to sustainability and decarbonization, including a decision to invest in Canada's largest renewable diesel manufacturing facility at Strathcona. Material progress on the Pathways initiative, and establishing a corporate wide net zero goal. We'll talk more about many of these achievements over the next several minutes. And the overall macro environment remained positive through the year. And while commodity prices did soften somewhat in the fourth quarter, they remain quite strong due to global effects of ongoing supply challenges, growing demand, and ongoing geopolitical events. Our unrelenting focus on safety and reliability enables our strong operating performance in this environment and continues to underpin our strong financial results. Over the next few minutes, Dan and I will detail the results of what was a very strong quarter. So, now let's review the fourth quarter results. Earnings for the quarter were just over $1.7 billion and our cash from operating activities was almost $2.8 billion. Another strong operating quarter, including Kearl matching its best ever production quarter and the Downstream setting a utilization record coupled with continued strong commodity fundamentals, most notably, robust diesel crack spreads supported these strong results. Full-year 2022 saw record operating performance across our assets, which played a large part in generating full-year earnings of over $7.3 billion and operating cash flow of almost $10.5 billion, the strongest financial results in Imperial's history. These strong financial results come with increased royalty and tax contributions to the provincial and federal governments providing economic benefits for all Canadians. We achieved total upstream production of 441,000 barrels of oil equivalent per day in the quarter, reflecting continued strong and in some cases record setting performance across our upstream assets, which I'll talk more about in just a few minutes. I would also note that Northern Alberta experienced another significant cold weather event in December. And I'm pleased to say, we managed through that [Technical Difficulty] of our operating teams who continue to work safely and diligently to provide reliable energy supply to the market. In the Downstream, we saw another outstanding quarter. Our refinery utilization in the quarter was 101%, marking the second quarter in a row with utilization at or above 100% and also the highest quarterly utilization we have seen in the company's history, surpassing the previous record set just last quarter. This also contributed to the highest annual utilization in the company's history. Given the current commodity price environment, driven by external supply challenges we've talked about previously, this level of performance is delivering tremendous value. The fourth quarter also saw us continue to maximize shareholder returns. We completed the accelerated NCIB in October and successfully executed our second substantial issuer bid in 2022, returning $1.5 billion of cash to our shareholders in December on top of the 2.5 billion SIB completed back in June. And this was in addition the $211 million in dividends paid in the quarter for a total of $851 million for the year. Altogether, this represents over $7 billion of cash returned to shareholders in 2022. The highest level of returns in Imperial's history. And finally, this morning, we declared a dividend of $0.44 per share payable April 1, 2023. And I can assure you that in 2023, we are maintaining our core strategy of optimizing our existing asset base to drive maximum shareholder value, a strategy that will allow us to continue to focus on returning cash to our shareholders. Thanks Brad. Starting with financial results for the full-year, we reported net income of over $7.3 billion as Brad mentioned, our highest on record and an increase of around $4.9 billion from 2021, driven mainly by higher realizations in the upstream and higher margins in the Downstream underpinned by strong operational performance. Looking at the fourth quarter, our net income of $1,727 million was up $914 million, when compared to the fourth quarter of 2021, primarily driven by higher margins in the Downstream. Looking sequentially, our fourth quarter net income of $1,727 million is down $304 million from the third quarter were down around $100 million when excluding the XTO sale that occurred in the third quarter. This reflects lower [minimum] [ph] realizations in the upstream, partly offset by improved upstream and Downstream volumes. Now, looking at each business line, the upstream reported net income of 531 million in the fourth quarter, down 455 million from the third quarter or down 250 million when we exclude the impact of the XTO sale, driven primarily by lower realizations, partly off offset by higher volumes. The Downstream's net income was $1,188 million, up 176 million from the third quarter, mainly reflecting higher volumes from achieving record refinery utilization rates in the fourth quarter, including continued strong distillate production. Finally, our chemicals business continued to demonstrate reliable operational performance with net income of $41 million in the fourth quarter down from our third quarter net income of $54 million. Moving on to cash flow. In the fourth quarter, we generated nearly $2.8 billion in cash flows from operating activities, down around $300 million from the third quarter, bringing our full-year cash flows from operating activities to around $10.5 billion, up over [$5 million] [ph] from last year reflecting strong earnings and favorable working capital impacts. Free cash flow for the quarter was $2.3 billion, bringing our full-year free cash flow to about $9.9 billion, $5.4 billion higher than last year, primarily driven by the increase in cash flows from operations that I just mentioned and by the cash received from the XTO sale in the third quarter. Total cash tax payments in 2022 were around $400 million. As previously discussed, we will be making a 2022 income tax catch-up payment in the first quarter and we anticipate that this catch-up payment will be on the order of $2.1 billion, which is lower than our previous forecast of around $2.5 billion. Going forward, under current market conditions, we expect to be tax paying in 2023 on a current basis and therefore expect to make regular tax installment payments throughout the year at a tax rate of about 24%. Finally, we ended the year with over $3.7 billion of cash on hand, up $173 million from the third quarter. Discussing CapEx, capital expenditures totaled $488 million in the fourth quarter and just under $1.5 billion for the full-year. And the Downstream 2022 spending included completing the Sarnia products pipeline early in the year and progressing our renewable diesel project at Strathcona, which has been mentioned earlier, has now received FID in its plan to start-up in early 2025. In the upstream, 2022 spending focused on smaller projects to sustain and grow production at both Kearl and Cold Lake, as well as larger projects like the in-pit tailings project at Kearl and the SA, SAGD Grand Rapids project at Cold Lake. As noted in our full-year 2023 guidance issued in December, we plan to complete the Grand Rapids project on an accelerated basis by the end of this year, about one- year ahead of schedule. This accelerated schedule increased our 2022 CapEx by about $100 million relative to our 2022 guidance of $1.4 billion. Shifting to shareholder distributions. We continue to demonstrate our long standing commitment to return cash to shareholders, a reliable and growing dividend is fundamental to our cash distribution strategy. And as Brad noted, this morning, we declared a first quarter dividend of $0.44 per share payable in April. We have increased our annual dividend payment for 28 consecutive years and this year we increased our quarterly dividend payment by 63% year-over-year from $0.27 per share in the first quarter of 2022 to $0.44 per share paid in the first quarter of 2023. We completed our most recent accelerated NCIB program with purchases of over $400 million in October [Technical Difficulty] and we completed our second substantial issuer bid in December [the year] [ph]. We completed record shareholder returns of over $7.2 billion, including $851 million in dividends and share repurchases of about $6.4 billion. These share repurchases represent over 90 million shares and almost 14% of our shares outstanding. All right. Thanks Dan. And so, now let's talk about the operating results for the quarter. Upstream production for the quarter averaged 441,000 oil equivalent barrels per day, which is up 11,000 barrels per day versus the third quarter of 2022, but 4,000 barrels per day lower versus the fourth quarter of 2021. The drop versus the fourth quarter of 2021 is more than accounted for by the absence of XTO volumes in the fourth quarter of 2022, which totaled 15,000 oil equivalent barrels per day. So, adjusting for the sale of XTO, production actually increased by 11,000 oil equivalent barrels per day versus the fourth quarter of 2021. And the increase versus the third quarter reflects continued strong operating performance at Kearl and Cold Lake, as well as an excellent quarter for Syncrude following completion in the third quarter of its planned turnaround. For the full-year, upstream production was 416,000 oil equivalent barrels per day. Strength in commodity prices was a key part of the story throughout 2022. I noted on our third quarter call that the WTI WCS differential was coming under some pressure in the quarter, resulting in a widening of around $6 per barrel versus the second quarter. And we saw this continue in the fourth quarter with the WTI WCS spread widening further by over $7 per barrel to a level of approximately $26 per barrel. I would note, however, that we've seen a modest narrowing of the spread so far in the first quarter to around $23 per barrel and expect further narrowing as the year progresses. I would also note that we continue to see strong diesel crack spreads, which provides a counter to the wide crude differentials and highlights the value of integration between our upstream and Downstream. Additionally, our Downstream directly benefits from lower prices on the heavy crudes we process, especially when coupled with the higher diesel crack spreads I mentioned. And further, Syncrude synthetic product commanded a strong premium in the fourth quarter. And all of this adds up to very robust cash generation for our Downstream business. And once again, underscores the strong value of integration that we realize. So, now let's move on and talk a bit about Kearl. Kearlâs production in the fourth quarter averaged 284,000 barrels per day gross, which was up 13,000 barrels per day versus the third quarter and was up 14,000 barrels per day from the fourth quarter of 2021. This fourth quarter production is in-line with Kearl's previous best quarter, which was the fourth quarter of 2020, and contributed to the best second half of production in the assets history. And as I mentioned earlier, the team was able to successfully manage through a significant cold weather event in December. This is notable at Kearl, given some of the challenges we faced in the first quarter of last year, due to weather, and reflects the positive impact of enhanced winter operating practices that were developed and implemented after the January 2022 weather issues. The strong second half demonstrates fully recovering from the challenges of the first quarter and brings full-year production at Kearl to 242,000 barrels per day gross. And as a further demonstration of Kearl's strong second half and finish to the year, on December 29, the asset yet again broke its record for daily production, delivering an all-time high of around 360,000 barrels per day gross. And yes, that starts with the [3] [ph]. We are seeing strong production for this time of the year as we move into 2023 with January month-to-date production at Kearl at around 265,000 barrels per day. I recognize that winter is far from over, but this is a great start. Finally, turning to operating costs. We saw a slight increase of just under US$2 per barrel versus the third quarter to just under US$27 per barrel all-in, driven partially by higher energy requirements and incremental maintenance and support of our winter operating strategy. Given a number of structural cost reduction initiatives we are working on, we continue to target sustainable unit operating costs at or below US$20 per barrel at Kearl. And what a year 2022 was for Cold Lake, an ongoing focus on production optimization and reliability resulted in exceptional full-year production levels with Cold Lake averaging 144,000 barrels per day, which was at the high-end of our revised guidance and represents its highest full-year production since 2018. Production for the fourth quarter averaged 141,000 barrels per day, which was down 9,000 barrels per day from the third quarter and just slightly below the fourth quarter of 2021. This is also the fifth consecutive quarter with production at or above 140,000 barrels per day. And we're continuing to invest in Cold Lake. We are in the early stages of the Leming field redevelopment, and as we mentioned with our 2023 guidance release, we have accelerated Grand Rapids Phase 1 now expecting to start up later this year. Imperial's share of Syncrude production for the quarter averaged 87,000 barrels per day, which was up 8,000 barrels per day from the fourth quarter of 2021, due to lower unplanned downtime and up 25,000 barrels per day from the third quarter of 2022 following the completion in the third quarter of the assets [indiscernible] turnaround. Throughout 2022, the interconnect pipeline between Syncrude and Suncor averaged about 3,000 barrels per day of export sales, enabling Syncrude to achieve record annual production of 77,000 barrels per day Imperial share. In 2023, Suncor, the operator, will continue to focus on the implementation of a significant transition plan. The integration of systems, processes, and people remains a high priority and is largely on plan. We expect that the realization of synergy benefits will continue to grow with further integration in 2023. And so, now let's move on and talk about the Downstream. In the fourth quarter, we refined an average of 433,000 barrels per day, which was up 7,000 barrels a day versus the third quarter and up 17,000 barrels per day versus the fourth quarter of 2021, reflecting continued strong operating performance and minimal planned turnaround activity. Refinery utilization was exceptional at 101%, marking the second quarter in a row with utilization at or above 100% and also the highest utilization in company history. Another outstanding quarter and a great credit to our refinery teams who remain focused on reliability and optimization to deliver these results. On a full-year basis, our refineries individually achieved records bringing total full-year throughput to 418,000 barrels per day, which represents a utilization of 98%, which was also the highest in company history and well above our annual guidance of 92% to 94%. And something we talked about before that still may not be fully appreciated is the flexibility we have in our Downstream operations, allowing us to adjust our product slates to capture market opportunities such as what we are seeing with diesel right now. In fact, our refining network was able to deliver record distillate production at our existing assets, allowing us to capture maximum value from the strong diesel margins throughout the year. As we have noted before, 2022 was a relatively light year for planned maintenance and turnarounds at our refineries. As we communicated in our 2023 guidance announcement back in December, 2023 will be a more typical year for planned maintenance in the downstream. And finally, with respect to our refining business, I am very pleased and proud to note that late last week, we announced that we have made the final investment decision to develop what will be Canada's largest renewable diesel manufacturing facility at our Strathcona refinery. This unit will produce more than 1 billion liters of renewable diesel annually, primarily from locally sourced feedstocks and could help reduce greenhouse gas emissions by about 3 million metric tons per year. Work is already underway, and we expect renewable diesel production to start in early 2025. We continue to expect a strong return for that project, particularly as we've added accretive rail logistics scope to access high-value markets. The updated cost estimate for this capital investment is $720 million. This current higher cost reflects three main drivers. First, as we shared with our December guidance press release, we've added rail logistics scope, which will allow us to access higher value markets for the products. And second, we refined preliminary directional estimates around project development activities for things like construction requirements. And third, we've seen some cost increase for materials such as steel, as you might expect, given the inflationary environment we're in. But most importantly, even with these higher costs, we are still seeing a very similar strong return and this is primarily because of the highly accretive nature of the added rail logistics scope, but also further refinement of overall economic value. This project is another example of our focus on reinvesting in our business with an eye to the energy transition and future competitiveness and doing so in a way that creates value for our shareholders. Now, petroleum product sales in the quarter were 487,000 barrels per day, which is up 3,000 barrels per day versus the third quarter and down 9,000 barrels per day versus the fourth quarter of 2021. Demand for all products has remained stable with motor gasoline at around 95% of 2019 levels, diesel at essentially 100%, and jet actually exceeding 2019 levels in the fourth quarter at around 115%. We continue to see a positive downstream margin environment in the fourth quarter, and though we did see some weakening of motor gasoline margins, they remain within normal historical bands. Diesel margins remain extremely strong. These dynamics are driven by number of factors, including low product inventories, and a global shortfall for diesel fuel. And that brings us to Chemicals. This business continued to deliver strong results with earnings of $41 million in the fourth quarter, which was down 13 million from the third quarter and down 23 million from the fourth quarter of 2021, primarily driven by lower margins. This brings full-year chemical earnings of $204 million, another very healthy year for our [advantage chemical] [ph] business despite being in a down cycle for chemicals, and once again highlighting the value of having this business fully integrated with our Sarnia refinery. As always, I'd like to wrap up by highlighting a couple other items of note, particularly as it pertains to our ongoing commitment to improving sustainability and reducing our overall environmental footprint. First, as we continue to make progress on advancing the lower carbon solutions that will support our journey towards Net Zero, Imperial has now established a company-wide goal to achieve net zero emissions for Scope 1 and Scope 2 by 2050 across all of its operated assets, not just oil sands. We expect to achieve this through collaboration with government and other industry partners, successful technology development and deployment and supportive fiscal and regulatory frameworks. This announcement builds on our previously announced net zero goal for operated oil sands as part of the Pathways Alliance initiative, as well as the company's 2030 emission intensity reduction goal for operated oil sands. I'd also like to highlight that the Pathways Alliance entered into an agreement with the Alberta provincial government on [poor] [ph] space, enabling the Alliance to begin more detailed work evaluating the storage zone by using test wells to get a full understanding of the characteristics of the geology in the hub region. This progress is very encouraging and marks a major milestone in our efforts to progress our plan to help Canada meet its climate goals and ensure our country becomes a preferred global supplier of responsibly produced oil. There is a tremendous amount of activity going on with the Pathways Alliance. In October, the Alliance communicated and expected total investment for the first phase of the project at around $24 billion and initial efforts under this phase are already underway on activities such as feasibility studies, environmental assessments, and early engineering work. In closing, another excellent quarter to finish off an excellent year. We saw high reliability in our operations across the board, setting a number of operating records across our assets, and allowing us to continue to benefit from a strong business environment and to deliver very strong financial results. We returned over $2.1 billion to our shareholders in the quarter via our reliable and growing dividend and the successful execution of our second substantial issuer bid. This contributed to shareholder returns for the full-year in excess of $7 billion. We continue to make progress on our commitment to lower our carbon footprint. In addition to the continued progress on Pathways, we announced a decision to move forward with renewable diesel investment at our Strathcona refinery, as well as a corporate-wide net zero by 2050 goal. And we announced our intention to accelerate our deployment of next-generation in-situ technology with the Grand Rapids project at Cold Lake. So, all-in-all, a fantastic year for Imperial. Our continued focus on our strategic priorities, those being continually improving reliability and investing in high-value opportunistic growth opportunities generated tremendous value for Imperial and a focus on shareholder returns resulted in the highest level of cash in our history being returned to our shareholders. As we look ahead to 2023, I'm viewing the year with a high level of optimism and excitement. We are coming off the strongest year in the company's history, and with our ongoing focus on safe and reliable operations that drove our 2022 performance, I fully expect the company to deliver another excellent year. As always, I'd like to thank you once again for your continued interest and support. Okay. Thanks, Brad and Dan. We're going to go to the Q&A now. I would ask you to please limit yourself to one question and a follow-up. So with that, operator, could you please go to the first question? Yes, thanks good morning, and thanks for the detailed rundown. Brad, I was wondering if we could just dig back into Kearl a little bit, not so much the production rates, which has been strong, but perhaps your comment around the weather proofing that was undertaken last year and that prepared you as well for the cold weather we went through in December. Could you be more specific in terms of the actions that you took? Yes. Thanks for the question, Greg, and Happy New Year. It's really kind of a combination of several initiatives that encompass operating practices and procedures, establishing appropriate limits on certain metrics that we use to monitor our business. We also invested in some equipment upgrades and further monitoring. And so, it's really a wide range of things, Greg. And so, when we put all those things together, it is about ensuring that we've got the right procedures in place, we've got the right equipment in place, we've got the right monitoring of extreme conditions, and we have contingency plans on how to react to those extreme conditions. So, it's difficult to be, kind of more precise in a limited amount of time because it's a lot of very discrete activities, but something that the team spent really several months in really, kind of reassessing on all of the root causes that contributed to the downtime last year and making sure we understood that root cause and taking appropriate mitigations. Hope that's helpful. Yes. No, it is. It is. Understood. And hopefully, we'd learn a bit more of that on your Investor Day in April. But maybe just the follow-up question, completely shifting gears. And perhaps a question for Dan comes back to â you did two SIBs last year. You've got, what, $3 billion plus of cash on hand. Your cash tax is smaller. Your NCIB is exhausted. I mean we've got nothing in for repurchases in the first half of the year, which we know is off the mark. So, I'm just wondering what your appetite is for another SIB and just generally how you're thinking about that? Yes, Greg, I would say, look, our policy, our sort of philosophy on returning surplus cash to shareholders has been unchanged for a long time. So, to the extent we continue to generate, the market gives us and our operation forms gives us surplus cash, we're going to return that to shareholders. So, what will happen first half of this year, it's going to depend on market conditions, obviously. But we can't, I don't know if you pointed it out, but we can't renew our NCIB until late June essentially, call it, July 1. So, could there be a return before that? It's possible. We have not made any decisions. We don't know where our cash is going to be, but as a broad principle, when we generate surplus cash, we will return it to shareholders and our go to has been the NCIB. And if that's not available or exhausted, it's in the SIB. As we've said before, we're not wedded to that, there's other things like special dividends, but the SIB seems to be what the vast majority of our shareholders prefer relative to special dividend. So that remains our go to at this point. So, we'll see what happens, we'll see what the market gives us. Thanks everyone. Hi, Brad, Happy New Year and to all your team. I wonder if I could ask a couple of questions. One operation and one about my favorite topic, as Dan knows well is dividend policy. So first, operationally, your refining performance was â compared to your peers is quite extraordinary. And obviously, your distillate yield is a little higher. You've got some exposure to WCS, but I wonder if you could, kind of walk us through, how you see the outlook for your refining business? Because it looks like there's been some channel changes in terms of how you've been able to maximize margins, particularly, I guess, in the Northeast during the fourth quarter. So, anything you would call out on the strength about refining performance is my first question, and then I'll have my follow-up, if thatâs okay? Okay. Yes. Thanks, Doug, and Happy New Year to you as well. When we look at the refining business, it is very much around maximizing value of our products driven by, kind of our operating envelopes at each of our three refineries, coupled with the commodity pricing and the crack spreads that are available to us. And what we saw late in the year, third, fourth quarter was the extremely robust diesel crack spreads, and that was very motivational to us, both operationally and financially to maximize diesel. And so, a great credit to the team. They optimized around their operating envelopes and each of our three refineries set records around levels of distillate that we produced and that had two beneficial effects. I mean, one is put more product on the market at a time when the market needed it, and it also allowed us to maximize value from that strategy. As we look into the first part of this year, we're continuing to see a lot of strength in the diesel side of the business. And so, the teams are continuing to optimize around that. And we'll just continue to assess that as the year goes forward, but it really does speak to the capabilities of our assets where they can shift between [Technical Difficulty] diesel and jet and motor gasoline [Technical Difficulty] to maximize value. Okay. So, nothing unusual in the quarter then other than just optimization, basically, which is a go-forward [staple] [ph] I suppose? Okay. That's a good answer. Anyway, thank you. We'll keep an eye on it going forward we might have some upside risk to Street numbers if our performance continues. My follow-up is, kind of a hypothetical, I guess. I realize Greg asked about the SIB. I want to ask about the balance between the buybacks, which obviously had some limitations and thinking back to the share price response to when you raised your dividend last October because it seems to us that long life that's higher reliability, long-life assets like yourselves with tremendous cash dividend cover, you get paid on a dividend discount model and your dividend growth potential remains quite extraordinary, compared to your peer group. So, I guess my question is, how should we think about that balance between continuing to go after things like an SIB versus stepping up a sustainable dividend payout because let's say that a 10% buyback means your starting point is a 10% dividend growth. So, how should we think about that balance? And I'll leave it there. Thank you. Yes. Thanks for that question. And obviously it's something we spend a lot of time thinking about as well. And I guess it starts with, kind of the foundation of our capital allocation strategy, which is to provide a reliable and growing dividend. That's where we start/ And we have a long history of that. We've been paying a reliable dividend to our shareholders for over 100 years. We've grown that dividend year-on-year for the last 28 years. And so that is core to our strategy. And that's going to continue to be the first place we go as we think about shareholder distributions. We certainly supplement that with NCIBs and SIBs to be reflective of current market conditions and cash flow generation, but the foundation is this reliable and growing dividend. And you've seen us grow it quite significantly over the last couple of years. And we see that there is potential for further growth in the dividend, but we are always going to be conscious of the sustainability of that dividend. So, when we take a decision, whether it's a small growth or a large growth, it's with a lot of consideration to what does the future look like and ensuring that that dividend is sustainable over a wide range of scenarios, not just the current market we're in, but we're recognizing we are in a commodity market that has a cyclical nature to it. And whereas we're all benefiting from $80 crude today, it wasn't that long ago that was $40 or below. And certainly, the potential is that somewhere in the future will return to lower levels of commodity pricing. And we want to make sure that, that dividend is sustainable. So, we're going to continue to evaluate on that basis. Mathematically and mechanically, you are exactly right though, as we buy back shares and we reduce the outstanding share count. That gives us flexibility to raise the dividend, but not really raise the cash outlay for the dividend because it applies to fewer shares. And as Dan just described, we bought back almost 15% of the shares. So that gives us significant flexibility in that regard. So as we go forward over the next couple of quarters, we'll be continuing to evaluate what's the appropriate strategy to return cash to shareholders, but again, that strategy starts with growing the dividend. Hi, good morning and thanks for taking my questions. The first one, maybe I wouldn't mind starting. You guys have focused on optimizing the existing assets in your opening comments, as well as the acceleration of the Grand Rapids project. I wanted to hopefully pick your brain a little bit about maybe the pipeline of additional projects that can possibly drive, we'll call it, upside in terms of upstream production, as well as helping, kind of moderate cost inflation or even lowering unit operating costs amongst your various assets. Yes. Thanks for that question, Dennis. And we do have a suite of project opportunities across our assets. It sounds like your question is mostly focused on the Upstream, although I would just maybe first note what we're doing in the downstream with the renewable diesel project, 20,000 barrel per day growth to the Strathcona asset, which is slightly above 200,000 barrels a day base today. So, 10% increase right there alone. So that's on the downstream. But back to the upstream, we have now for several years, laid out this vision at Kearl to grow to 280,000 barrels a day, and we continue to make material progress towards that, and that's with multiple project initiatives, brownfield, high-return projects. And as you know, we have now firmed up our guidance and commitment that by next year 2024, we will reach 280,000 barrels a day at Kearl, and we're continuing to evaluate further opportunities to move us even beyond 280,000 barrels a day. We're not ready to talk about those details yet because the asset teams are still, kind of finding that work program, but when we get to Investor Day, we'll start to lay out, kind of some more details on that. And at Cold Lake, you've heard us talk about Grand Rapids Phase 1, acceleration of that now for a startup to the end of this year. We haven't talked a lot about it on these calls, but in parallel, to the Grand Rapids project, we've also initiated our Leming redevelopment project at kind of the original field at Cold Lake. And so that project is about a year behind Grand Rapids and a little bit smaller. It's more like 8,000, 9,000 barrels a day, but it does represent another growth opportunity for us. We're continuing to do, kind of infill drilling across Cold Lake, and that's contributing to the higher volumes that we saw last year. And then we've got a whole pipeline of additional solvent deployment opportunities at Grand Rapids, I mean at Cold Lake. You've seen us deploy SAGD, SA-SAGD, we're continuing to explore future generations of opportunities that will allow us to not only grow production, but do that in a lower cost way and also, quite importantly, with lower emissions intensity. So, all that work is going on. Further out, of course, in the pipeline, we've got Aspen. And before we're ready to progress that, we're doing some more work on solvent technologies that we think have the potential to further reduce the capital cost, the operating cost, and significantly lower the emissions associated with that project as well. So, we've got a technology that we've proven in the lab. We want to further validate it with a field pilot test, and so we're progressing plans for that. So, really a strong pipeline of opportunities there. And then, of course, at Syncrude, we've talked before about the work we're doing with Suncor, the operator and the other owners around how can we generate further value from that asset. And of course, the bidirectional pipelines has been a very positive contributor, but we're continuing to look for other ways to increase reliability and productive capability out of that asset as well. Great. Great. That was very fulsome answer. My follow-up here is more on the downstream side. I guess, expectations for some of your peers going into the first quarter suggest some level of downtime just on the back of extreme weather we saw going into the end of 2022. Do you mind talking to your ability to further take advantage of some of these increased margins that we're seeing in the first quarter, as well as the ability of Imperial to capture value out of the commodity price volatility that we're seeing both from an oil side, as well as the product side? Thanks. Yes. Thanks for the question. And I am pleased to be able to talk at this point of a very different result than from the weather than we saw a year ago when, of course, we did have some challenges at Kearl. For this year, despite those weather challenges across our assets, both upstream and downstream, including all three of our refineries, we've managed quite well through those extreme weather conditions, very high reliability. And so, we haven't experienced the downtime that others have. And so, we're quite fortunate in that regard and a great credit to our operating organization. And what that allows us to do is, as you made reference, we continue to find ourselves in a very strong margin environment. And so that high reliability, coupled with those high margins will allow us to generate significant value. And on top of that, though, as others experience downtime, and we never wish that on our competitors, but it's just the reality of the situation they find themselves in, then that sometimes opens up opportunities for us to on, kind of a one-off basis, supply some of their customers in the market. And so, it generates an opportunity for us to even increase our product sales beyond, kind of our normal levels. And â so again, our teams are working diligently to see how to best supply customers with products and how to do that in the most economic way. Thanks and good morning everyone. I'll start with Strathcona renewable diesel. You clearly had enough confidence in the economics to FID last week, but given the cost and the scope increase, could we get your thoughts on, sort of the range of outcomes on project returns or even the project hurdle? And finally, where do things stand in terms of signing of feedstock supply agreements? Yes. Thanks for those questions, Menno. I mean, first, I would just say, we don't normally talk about individual rates of returns on projects like this, although I can assure you, it's a very robust return. It's double-digit return and it competes very well with other projects in our portfolio that are competing for capital and hence, the reason we took it to FID. But I have with me Jon Wetmore, who is the VP of our Downstream and has been directly involved with this project from the outset and bringing a lot of leadership to moving it along, kind of through the decision process. And so, maybe I'll turn it to him to talk maybe a little bit more about cost and then also, kind of the â some of those supply contracts. Thanks, Brad. It's Jon Wetmore here, Menno. Thanks for the question. We did see some cost increases on the project, and I think Brad talked about that in his opening remarks. Really, they're driven by the fact that we've seen some amount of inflationary pressures in the projects, labor, and materials. A little bit of constructability issues as well as we're knitting together some catalysts that are third-party catalysts with our highly advantaged dewaxing catalysts that's proprietary to ExxonMobil technology. But when we did that, the last layer of costs that we saw come in to this is really around added logistics and some very high-return additions to the project scope. They come in the way of us looking at where we want to sell the renewable diesel across Western Canada and potentially into the U.S. The return on all those added logistics in that last layer of scope that we added is incredibly strong, and it really nullified the impact of all those cost increases on the project's rate of return. So, we're really happy and had a good review with our Board here about reviewing the project's rate of return as being neutral even after that $200 million of cost was added. So, we're very strong, as Brad said, competes very well with the rest of our portfolio. There's nothing about the fact that it's a renewable diesel project or driven by regulatory compliance that in any way suggests that its rate of return is below our portfolio, very, very competitive and at the top of our portfolio. In terms of feedstock, we're working diligently around that with some of the best in industry that provide vegetable oils. We're looking at a variety of different sources so that we are insulated to a little bit of everything from weather conditions to local sourcing challenges. We're learning a lot about the industry as we go. And we've got a lot more left to learn. We'll be humble and say that there's a lot of the â the whole area of the vegetables oil supply chain that we've got to develop and add to this project, but we've got our fingers into a lot of opportunity there. We feel very good that all that will be in play in the first year of the project start-up, and we'll continue to develop some sophistication â added sophistication around those feedstock deals as time comes. Terrific. That was super helpful, Jon. Maybe I'll follow-up with the [CC U.S.] [ph] question since you're the first pathways member to report. So, pretty standard question. How are things looking in terms of resolution of discussions with the Feds on additional incentives? And is it possible that we see something with the announcement of the budget or do you think it's a bit further out than that? Yes. Thanks for that question. I kind of start my response by just noting that we continue to make great progress on, kind of the whole breadth of, kind of the pathways activities, including, as I put in some of my earlier remarks, progress on the pipeline, the main trunk line design, environmental studies are underway in the field. We're continuing as individual companies to work on the capture side of each of the many projects that will feed captured carbon into the pipeline, and of course, great progress on the pore space award from the provincial government. On the federal side in terms of financial support, those discussions continue to be very constructive, continue to move forward. The federal government, I think was a [indiscernible] when they came out with â in last year's budget speech, the announcement of the 50% investment tax credit, a very enabling first step for us. But as time has gone on, and we've seen what's happened south of the border with the U.S. Inflation Reduction Act and some of the incentivization that's provided there, it's critically important that our projects in Canada be competitive for investors that have choices to invest in either the U.S. or Canada or globally for that matter. And so, the level of fiscal support is lagging. And we've always said we needed more than that 50%. So, that's not a surprise. And we're also optimistic that the province will contribute to that as well. So, it's really a tri-party discussion that's going on between the Pathways Group and the federal government and the provincial government. Now, whether that will get resolved or clarified further in the upcoming budget speech, I'm not sure. But again, this â it's complex and it takes a lot of important engagement to balance, kind of financial priorities and applications, not just for our [CC U.S.] [ph] projects, but across the broader industry and other sectors that also need access to capital. But again, it's very positive that both governments understand what we need to move these projects forward and they're both very supportive of moving these projects forward. So, I'm optimistic that if it's not in the budget speech, it will be soon thereafter that will get, kind of not just clarity but resolution so we can move forward on these projects. Yes. Hey guys, hey Brad. Thanks for taking the time. Two quick questions for me. One is your outlook on M&A, Brad, you spent a lot of time in M&A markets [indiscernible], and what do you think Imperial's role could be in that going forward? And then the other is your views on WCS, we've seen a lot of volatility there. So, those would be the two topics. Okay, thanks Neil and Happy New Year. On M&A, our position on that has not changed from what I've described in the past, which is very much centered around keeping the aperture open looking for opportunities that are strategic and accretive for our portfolio. And part of that determination is not just what's available in the market, but also looking at our existing inventory of our own opportunities. And as we've continued to evaluate M&A opportunities, and we've evaluated several, we continue to conclude that they, from a value standpoint, don't compete with projects and investment choices we already have in our portfolio, whether that be smaller projects like a Grand Rapids or like a renewable diesel that we just talked about or an even larger project like an [Aspen] [ph] project. And so, we're going to continue to evaluate how do we best maximize value for our shareholders? Is it through acquisitions? Is it through continuing to advance our own deep pipeline of opportunities. And that assessment may change over time depending on what's available in the market to what degree is consolidation occurring or incentivized. And so again, we'll just continue to evaluate that, but no fundamental change. And as you saw in 2022, and I hope you'll continue to see that in 2023, we can generate a lot of value from our existing portfolio. We can return a lot of cash to shareholders. And so, that's our first priority, but the aperture is always open. And then on the WCS differential, as I've discussed in the past, we saw that differential widen pretty substantially in 2022 that was driven by several external factors and not the typical egress constraints that we saw in the past. That was not a material factor in the widening this last year. It was more about the release of SPR barrels that we're competing with the Canadian heavies for market share. It was some refinery outages in the second half of the year that reduced demand for the heavies. It was the impact of natural gas prices, energy on refiners' ability to convert crude in the products and how they â what products would require less energy to produce. And so, all that kind of suppressed the demand for WCS for heavy Canadian crudes and that caused the spread to widen. Many of those effects were limited in duration. And so, now we're starting to see a return back to a more normal situation as the SPR program was completed. Refineries, mostly returning back to the operation. So, we are seeing continued growth in demand for WCS. And so, I think that's going to â we've seen that spread already tighten a few dollars a barrel this year. And as we look forward, we think it will continue to return to more normal levels, but it takes â as supply demand balances globally have been disrupted by what's happened with Russia and Ukraine and the sanctions, those balances take a while to, kind of restabilize. And so, it's not a couple of week type thing, not even a couple of month type thing. It's often several months, but I think we're now starting to see that, kind of a more stable environment. Okay. Thank you. Thanks, everybody, for joining us this morning. If you have any further questions, please just reach out to anybody on the Investor Relations team here, and we're happy to continue the discussion. Thank you very much.
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EarningCall_899
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Good day everyone, and welcome to Microchip's Third Quarter Fiscal 2023 Financial Results Conference Call. As a reminder, todayâs call is being recorded. At this time, I would like to turn the call over to Mr. Eric Bjornholt, our CFO. Please go ahead, sir. Thank you and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company, I wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press releases of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Ganesh Moorthy, Microchip's President and CEO; Steve Sanghi, Microchip's Executive Chair; and Sajid Daudi, Microchip's Head Of Investor Relations. I will comment on our third quarter financial performance. Ganesh will then provide commentary on our results and discuss the current business environment as well as our guidance. And Steve will provide an update on our cash return strategy. We will then be available to respond specific industrial and analyst questions. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have posted the full GAAP to non GAAP reconciliation on the investor relations page of our website at www.microchip.com and included reconciliation information in our press release, which we believe you will find useful when comparing our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of our operating results including net sales, gross margin and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of acquisition activities, share-based compensation and certain other adjustments that described in our press release and in the reconciliations on our website. Net sales in the December quarter were $2.169 billion, which was up 4.6% sequentially. We have posted a summary of our GAAP net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were a record at 68.1%, operating expenses were 20.6% and operating income was a record 47.5%. Non-GAAP net income was a record $863.7 million, non-GAAP earnings per diluted share was a record $1.56 and at the high-end of our guidance range. On a GAAP basis in the December quarter, gross margins were a record at 67.8%, total operating expenses were $659.2 million and included acquisition intangible amortization of $167.4 million, special charges of $6.5 million and $0.3 million of acquisition related and other costs and share-based compensation of $37.1 million. GAAP net income was a record $580.3 million, resulting at a $1.4 in earnings per diluted share. As compared to a year ago quarter, our December quarter GAAP tax expense was impacted by a variety of factors, notably the tax expense recorded as a result of the capitalization of R&D expenses for tax purposes. Our non-GAAP cash tax rate was 11.9% in the December quarter. We now expect our non-GAAP cash tax rate for fiscal '23 to be about 11% exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years. A reminder of what we communicated over the past couple quarters. Our fiscal '23 cash tax rate is higher than our fiscal '22 tax rate for a variety of factors including lower availability of tax attributes such as net operating losses and tax credits, as well as the impact of current tax rules requiring the capitalization of R&D expenses for tax purposes. We're still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed. If this were to happen, we would anticipate about a 300 basis points favorable adjustment to Microchips non-GAAP tax rate in future periods. Our inventory balance at December 31, 2022 was $1.165 billion. We had 152 days of inventory at the end of the December quarter, which was up 13 days from the prior quarters level. We've increased our raw materials inventory to help protect our internal manufacturing supply lines. We are carrying higher work in progress to help maximize the utilization of constraint equipment, as well as to position ourselves to take advantage of new equipment installations, which should really bottlenecks. We are investing in building inventory for long lived high margin products whose manufacturing capacity is being end of life by our supply chain partners. We need to take actions to help ensure that our supply lines can feed growth beyond what we expect in the March 2023 and June 2023 quarters and our reported days of inventory is a backward looking indicator. As gross margins rise, the effective days of inventory for the same physical inventory rises. And with every 100 basis points of gross margin growth it creates approximately three incremental days of inventory. Inventory at our distributors in the December quarter was at 22 days, which was up 3 days from the prior quarters level. Our cash flow from operating activities was a record $1.278 billion in the December quarter. Included in our cash flow from operating activities was $385 million of long-term supply assurance receipts. We are going to adjust these items out of our free cash flow to determine the adjusted free cash flow that we will return to shareholders as these payments will be refundable over time as purchase commitments are fulfilled. Our adjusted free cash flow was $751.6 million and 34.6% of net sales in the December quarter. As of December 31, our consolidated cash and total investment position was $288.9 million. We paid down $719.1 million of total debt in the December quarter, and our net debt was reduced by $701.2 million. Over the last 18 full quarters since we closed the Microsemi acquisition and incurred over $8 billion in debt to do so, we have paid down almost $6.2 billion of the debt and continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt. Our adjusted EBITDA in the December quarter was a record at $1.106 billion and 51% of net sales. Our trailing 12-month adjusted EBITDA was also a record at $4.051 billion. Our net debt to adjusted EBITDA was 1.56 at December 31, 2022, down from 1.84 at September 30, 2022 and down from 2.58 at December 31, 2021. Capital expenditures were $141.3 million in the December quarter. Our expectation for capital expenditures for fiscal year 2023 is between $525 million and $545 million, as we continue to take actions to support the growth of our business and ramp our manufacturing operations accordingly. We continue to prudently add capital equipment to maintain grow and operate our internal manufacturing operations to support the expected long-term growth of our business. We expect these capital investments will bring gross margin improvements to our business and give us increased control over our production during periods of industry wide constraints. Depreciation expense in the December quarter was $55.3 million. I will now turn it over to Ganesh to give us comments on the performance of the business and the December quarter as well as our guidance for the March quarter. Ganesh? Thank you, Eric, and good afternoon, everyone. Our December quarter results were well above the midpoint of our revenue guidance marked by our disciplined execution as well as our resilient end markets. Net sales grew 4.6% sequentially and 23.4% on a year-over-year basis to achieve another all time record are $2.17 billion. The December quarter also marked our ninth consecutive quarter of growth. Non-GAAP gross margins came in above the high-end of our guidance at a record 68.1%, up 38 basis points from the September quarter and up 202 basis points from the year ago quarter. Non-GAAP operating margin also came in above the high-end of our guidance at a record 47.5%, up 62 basis points from the September quarter and up 283 basis points from the year ago quarter. Due to a rapid increase in net sales over the last 2 years, operating expenses at 20.65% were 185 basis points below the low end of our long-term model range of 22.5% to 23.5%. Our long-term operating expense model will continue to guide our investment actions to drive the long-term growth, profitability and durability of our business. Our consolidated non-GAAP diluted earnings per share was at the high-end of our guidance at a record $1.56 per share, up 30% from the year ago quarter. Adjusted EBITDA at 51% of net sales and adjusted free cash flow at 34.6% of net sales for both very strong in the December quarter, continuing to demonstrate the robust cash generation capabilities of our business. As Eric mentioned, we have excluded $385 million of long-term supply assurance payments made by customers from our adjusted free cash flow calculation. Since these payments are refundable when customers fulfill their purchase commitments. Net debt declined by $701.2 million, driving our net leverage ratio down to 1.56x, exiting the December quarter. During the December quarter, we returned $409.8 million to shareholders in dividends and share repurchases, representing 60% of the prior quarters free cash flow. We expect to get below 1.5x net leverage by the end of the March quarter. And as Steve will share with you later, the Microchip Board has decided to increase the rate at which capital will be returned to shareholders starting in the June quarter. My heartfelt gratitude to all our stakeholders who enabled us to achieve these outstanding results and especially to the worldwide Microchip team whose tireless efforts and strong sense of ownership are what enabled us to navigate effectively in the midst of turbulent times. Taking a look at our net sales from a product line perspective, our microcontroller net sales were sequentially up 3.5% in the December quarter, and set another all time record. On a year-over-year basis, our December quarter microcontroller net sales were up 25.6%. Microcontrollers represented 56.3% of our net sales in the December quarter. Our analog net sales were sequentially up 5.9% in the December quarter, and also set an all time record. On a year-over-year basis, our December quarter analog net sales were up 21.2%. Analog represented 28% of our net sales on the December quarter. In the December quarter, our FPGA net sales also achieved a new record. While our overall business remains strong in the December quarter, the consumer appliance and market was weak as was our overall business in China. Our China business was initially impacted by COVID lockdowns and then subsequently impacted by the rapid transmission of COVID when lockdowns were lifted. Both actions adversely impacted our customers operations during the December quarter, resulting in inventory of many customers and distributors being higher than normal. In response to the weaker business environment in China, and a small but increasing number of other customers who have inventory and requested push outs, we took action in the December quarter to delay or redirect some shipments and plan to do more of the same in the March quarter. This is designed to reduce customer and channel inventory overbuilt, but will also increase the inventory on our balance sheet in the near-term. In the medium term, we expect this will give us a better chance to achieve a soft landing and position us well to respond to a stronger demand growth as the macro environment improves. As a result of the uncertain macro environment, and the multiple quarters with a backlog on our books, most of which is non cancelable, our bookings have slowed down as we expected. Given the circumstances we view the bookings slowdown as a positive which will serve to preserve the quality of new backlog that gets placed. Our unsupported backlog which represents backlog customers wanted shipped to them in the December quarter, but which we could not deliver in the December quarter remain well in excess of the actual net sales we achieved. Unsupported backlog did declined slightly for the first time in nine quarters. And we are continuing to work hard to further reduce our unsupported backlog, as well as our lead times to more manageable levels. While we have seen an increase in requests to push out or cancel backlog, these requests remain a small fraction of the very large backlog we have over multiple quarters, and hence they have not had a material effect on our business. Despite supply gradually improving, we expect to have supply constraints from much of 2023. However, in order to achieve a more healthy and sustainable business environment, we are driving to bring average lead times down to 26 weeks or less by the time we get to the second half of 2023. And we will be publishing a customer letter to this effect shortly. We believe there are three reasons why Microchip's business is demonstrating more resilience in the midst of the weakness seen by some other semiconductor companies. First, on the demand side, the industrial, automotive, aerospace and defense, data center and communications infrastructure end markets, which make up approximately 86% of our net sales remain solid. The consumer end market, which is about 14% of our net sales is experiencing some weakness, but it's dominated by home appliances which are comparatively more resilient. There are some signs that the data center end market could see some headwinds in 2023. Although our business remains strong, based on the market share gains we have had. And our overall demand remains quite durable, because of the end market mix we have consciously gravitated towards over the years. Second, on the supply side, a vast majority of our products are built on specialized technologies requiring trailing edge capacity. This is the capacity that has been most constrained over the last 2 years, which still remains constrained and where there was less opportunity to over ship [ph] to consumption. And last but not least, our laser focus on organic growth through total system solutions and higher growth mega trends for multiple years is giving us increased design momentum, farther share gains and a result in revenue tailwind. If you review Microchip's peak to trough performance through the business cycles over the last 15 plus years, you will observe a robust and consistent cash generation, gross margin and operating margin results. The investor presentation posted on our IR website has details of our performance through the business cycle. We remain cautiously optimistic about navigating to a soft landing for our business and expect our cash generation gross margin and operating margin to once again demonstrate consistency and resiliency through the cycle. Last quarter, we mentioned that Microchip was in the early stages of considering building a 300 millimeter U.S based fab for specialized trailing edge technologies. After a detailed analysis, we have concluded not to move forward with this project. And that our business objectives would likely be better achieved through our relationships with our foundry suppliers with lower execution risk, and a better return on invested capital. The CHIPS Act is already making a positive impact on our business through the investment tax credit, which started on January 1. And with impending capacity expansion grants that we will be seeking with several of our U.S semiconductor factories. We believe that CHIPS Act is good for the semiconductor industry and for America, as it enables critical investments, which will help even the global playing field while being strategically important for American economic and national security. Now, let's get into the guidance for the March quarter. Our backlog for the March quarter is strong, and we have more capacity improvements coming into effect. However, we are also taking active steps to help customers with inventory positions to selectively push out some of their backlog. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the March quarter to be up between 1% and 4% sequentially. Further, we expect sequential net sales growth again in the June quarter. At the midpoint of our net sales guidance, our year-over-year growth for the March quarter would be a strong 20.6%. We expect our non-GAAP gross margin to be between 68.1% and 68.3% of sales. We expect non-GAAP operating expenses to be between 20.6% and 20.8% of sales. We expect non-GAAP operating profit to be between 47.3% and 47.7% of sales. And we expect a non-GAAP diluted earnings per share to be between $1.61 per share and $1.63 per share. At the midpoint of our earnings per share guidance, our year-over-year growth for the March quarter would be a strong 20% despite a much higher tax rate than the year ago quarter. Finally, as you can see from our December quarter results and our March quarter guidance, our Microchip 3.0 strategy, which we launched 15 months ago, is firing on all cylinders as we continue to build and improve what we believe is one of the most diversified, defensible, high growth, high margin, high cash generating businesses in the semiconductor industry. Our Board of Directors and leadership team operate just as long-term owners of the business would thoughtfully making the key investments in people, technology, capacity, culture and sustainability required to thrive in the long-term. While being prudent, pragmatic and nimble about whatever short-term adjustments may be required. We are confident we will effectively navigate through whatever macro business challenges may unfold in 2023. Thank you, Ganesh, and good afternoon, everyone. I would like to reflect on our financial results announced today and provide you further updates on our cash return strategy. Reflecting on our financial results, I continue to be very proud of all employees of Microchip that have delivered another exceptional quarter, while making new records in many respects, namely record net sales, record non-GAAP gross margin percentage, record non-GAAP operating margin percentage, record non GAAP EPS and record adjusted EBITDA and all that in a continuing challenging supply environment. The Board of Directors announced an increase in the dividend of 9.1% from last quarter to 35.8 cents per share. This is an increase of 41.5% from the year ago quarter. During the last quarter, we purchased $229.5 million of stock in the open market. We also paid out $180.3 million in dividends. Thus the total cash return was $409.8 million. This amount was 60% of our actual free cash flow of $682.9 million during the September 2022 quarter. Our pay down of debt as well as record adjusted EBITDA drove down our net leverage at the end of December 2022 quarter to 1.56 from 1.84 at the end of September. Ever since we achieved an investment grade rating for a debt in November 2021 and pivoted to increasing our capital return to shareholders, we have returned $1.867 billion to shareholders through December 31, 2022 by a combination of dividends and share buybacks. In the current March quarter, we will use the adjusted free cash flow from the December quarter to target the amount of cash returned to shareholders. The adjusted free cash flow excludes $385 million that we collected from our customers for long-term supply assurance payments. These payments are refundable when customer fulfill their purchase commitments. The adjusted free cash flow for December quarter was $751.6 million. We plan to return 62.5% or $469.8 million of that amount to our shareholders. The dividend expected to be approximately $196 million, and the stock buyback expected to be approximately $273.8 million. We also want to provide guidance for a planned cash return to shareholders beyond this quarter. We expect our net debt leverage at the end of March quarter to be less than 1.5. Therefore, our Board of Directors decided that beginning with the June quarter, we will accelerate the cash return to shareholders. We laid out a strategy for our cash return to shareholders at an analyst and investor day in November 2021. We began with returning 50% of the free cash flow of the prior quarter and increasing it by 2.5 percentage points every quarter. With these increases, we'll be returning 62.5% of last quarter's adjusted free cash flow to investors this quarter. Beginning in June quarter, we expect to double the rate at which we are increasing the percentage free cash flow return to shareholders. In other words, in June quarter, we expect to return 67.5% of our adjusted free cash flow from March quarter. Then in September quarter, we expect to return 72.5% of adjusted free cash flow from the June quarter. And so on, 5 percentage point increase every quarter. At this rate, we would approach 100% return of our adjusted free cash flow in about eight quarters. We realized that we're still getting a debt burden of $6.62 billion in a rising interest rate environment as some of our debt matures, we will likely be renewing it at a higher interest rate than we are currently paying on such debt. Our strategy of accelerating our cash return to shareholders over several quarters would help us pay down some additional debt and lower our debt service costs. Hi, good afternoon. Thank you so much for taking the question. I had a question on the pricing environment. In calendar '22, you grew your business about 25%. What percentage of that was pricing versus volume, and as you look ahead to calendar '23. considering the demand backdrop, considering potential price hikes from some of your foundry partners, how do you think about pricing and how do you see pricing play out and any implications for your margin profile in calendar '23. Thank you. So the price increases in 2022, we're -- at various stages, and different based on customer what contractual agreements we had with them. Our philosophy is the price increases are there to cover the cost increases that we saw in 2022. So we don't have a nice, easy breakout of what was cost driven -- price driven increase versus product shipment increases. And that is a component of both obviously. The intensity of cost increases we're seeing in 2023 are less than what they were in 2022. And we have not really made any judgment yet on price increases for this calendar year. Our intent would be that at some point, we'll look at it, and again have the same philosophy that we want to make sure that the cost increases are covered in any price increases we make. Pricing for us is a strategic exercise. It is intended to make sure that customers get comfort in being able to design, proprietary designs that they're going to run with us for a long time. It is not a tactical exercise to be able to maximize either the price or the revenue or the profits that come from it. Thank you. Thanks for taking my question. Ganesh, I'm curious, do you think the share gains that you're seeing when I compare your sequential or year-on-year growth in calendar Q1 versus your peers. Is that a cyclical thing? Is that a structural thing, because many of your peers also have lower consumer exposure. They have high industrial, automotive exposure, and many of them have guided sales down, yet you're guiding it up in March and suggesting that they could grow again in June. So I'm curious how much of this is just a cyclical issue where you just had a difference and when supply was available? Or is it really you're gaining share or there is something more structural and you can maintain this kind of market share gain advantage over time? Thank you. Yes, as I mentioned, in the three categories of what we believe is differentiating our results, a part of it, which is structural is what we have done for multiple years on how do we grow organically? How does the total system solutions approach which is a huge amount of work across the company come in and then it takes time for it to pay off. That's been happening for multiple years. How do we focus on higher growth opportunities from a market megatrends standpoint. Those are all we believe, unique growth drivers for Microchip, and are in fact structural growth that is being built into what our long-term growth will be. Hey, guys. Thanks for taking my question. I realized that you got out of the business of providing some estimation as to how many quarters in a row you may be able to grow sequentially into the future. But since you did comment on the June quarter, I was hoping that maybe you can share with us the magnitude of the sequential increase you might see in June and then perhaps may this sequential growth continue beyond the June quarter? Firstly, we're not trying to guide anything beyond the June quarter. And for June, like we did in prior quarters, we're giving you a directional expectation that we have, but not an absolute expectation that we have. And we'll get to that when we get to the May conference call. But for now, we feel confident we can grow in the June quarter on top of the guidance we're providing in the March quarter. Hey, guys. Thanks for taking my questions. This is Josh Buchalter on behalf of Matt Ramsay. I wanted to ask you about the capital return program. I think some may have expected more binary event when you hit the leverage target, but you're taking the more gradual approach. You called out the rate environment. Can you walk us through sort of why the decision to more gradually take it up? And then also is there I guess an intermediate target leverage where you would stop doing debt repayments altogether and just do 100% repurchases and dividends. Thank you. So what Board has decided is that given $6.62 billion still owing on the debt, and some of that debt, I think at least $2 billion of that debt have an interest rate of below 100 bps. And when that comes up from maturity, we will be renewing it. If we were renewing it today, it will be over 5%. So in that kind of current environment and interest rates are still rising, the Board decided to not go to 100% cash return right away today. They decided to do that over eight quarters. We double the rate at which we are increasing the cash return, we were increasing it like 60%, going to 62.5%, going to 65%. And what we have said is now we will go up 500 bps of the quarter. So current quarter 62.5%, next quarter, 67.5%, then 72.5% and 77.5%. At that rate, I think in seven quarters or so will be 97.5% and then go to 100%. I think that's a more reasonable approach to pay down some more debt along in the next eight quarters. Joshua, if I will add to it, I think, circumstances have changed from 2021 when interest rates were very low, money was freely available to where we are, and we have to adjust as the circumstances change. And that's what the Board in its deliberation had to think about, and decided in terms of how we're going to go forward. We're absolutely committed to what we said. But we're going into glide slope, that is different today given what we know is the circumstances today. Yes, thank you, and congrats as well. Wanted to get a view on the trailing edge capacity. How do you see investments in trailing edge capacity going forward with future projects on 300 millimeter. There's chatter that other major companies are increasing CapEx significantly. So just wanted to get a sense of the view of the industry on lagging edge capacity that's obviously been the issue with supply constraints, and how do you think the industry is adjusting to that dynamic? From our perspective, we did that analysis. And in the process of doing the analysis, we had to validate which assumptions we were making, that were reasonable assumptions, which assumptions perhaps are changing over the next 3 to 5 years of time. And we don't know about industry investments necessarily, but we do know that our partners and us in the communication that we have had, have a high confidence prep to being able to satisfy the 300 millimeter trailing edge capacity requirements that our business requires. And with our partners and us, we have concluded that our business is best met with the best overall results in partnership with them. Thank you, Ganesh. And for my follow-up, with respect to lead times, as the lead times come in, you did mention that you're starting to see some order push outs, your goal is to kind of get to 26 weeks by the second half of the calendar year. I'm just wondering if you could elaborate a little bit further on customers and their backlog. As you -- as they start to reduce long lead time orders as more supply comes online, do you anticipate more order volatility, or how do you manage that? Thanks. Long lead times are never a good thing for either the customer or for us. There's more uncertainty the farther out in time you go. So providing shorter lead times and working towards getting it is in the best interest of our customer and what they need to plan for and for us and what we need to plan for. And we expect that the bookings and backlog will reflect that change in lead time out in time. Now we're not there today. We're expecting to get there in the second half of the year. And it will still take time, through much of this year that we have to get through the constraints. It also has an unknown, which is what happens in the back half of this year on the demand side of the equation. And if you remember over the last 2 years, the lead times have been driven not because we didn't increase supply, it's because demand increased faster than we could bring out supply every single quarter for about eight quarters. And so we're working hard to be able to get that supply line improvement to bring lead times into a more manageable situation to bring backlog into a more manageable timeframe. And then the demand side of the equation may or may not effect it farther as we go into the second half of the year. Yes, thank you. I had a question on both internal and channel inventory. So it sounds like near-term you want to build even more internally to kind of manage it externally or manage the channel. I was just hoping you could give us some numbers on where you intend the targets to go. I mean, I know what your targets are for channel inventory. But perhaps for the next couple of quarters, how do you view the internal inventory days going versus those in the channel. So we would expect that our internal inventory is likely to go up from where it is. It will get to a point where it will reverse course, I don't have a precise time for when it will. The channel inventory is really in the hands of the channel for them to decide at what level of inventory do they want to run consistent with their working capital, their customer support requirements and all of that. I donât know, Eric, if you want to add more on that. Yes, so we specifically guided in our release today for inventory days ending March to be between 157 and 164 days. Beyond that, we really haven't given any color. But we'll continue to manage our manufacturing operations and our purchases from our suppliers to be in the right spot to support our customers. Now the way to think about the inventory is this is inventory of product that are very long lifetimes. There is no obsolescence risk on them. It is positioned well to respond to customers and their requirements. If there is a stronger up cycle in the second half of the year, it gets us in a running start to be able to go do that. So we don't see the inventory levels that we are seeing today and predicting for this quarter has anywhere close to being an issue for us. Thank you for the follow-up. Maybe one for Steve, just on kind of the philosophy or the approach toward the PSP, I personally was under the impression that you were pretty adamant about customers taking product at least business that, that was tied to PSP. It sounds like you're being a lot more flexible with that, I guess what's changed over the past couple of months. I completely agree with you. It's a win-win, if you -- I guess go for a soft landing, but curious what's changed internally and around the philosophy there. Thank you. So the philosophy of PSP backlog being high quality backlog, something we would like to get and have on our books, hasn't really changed. The non-cancelability of PSP backlog hasn't really changed. What we have always said is that the non-cancelable part of it is not where we are willing to negotiate. It's on the non-reschedulability or the ability to push it out that we are. And we are working to make sure that where we see customers who have inventory and other customers who don't have product, being able to take and redeploy from one to the other, and that's a common sense way of set -- of helping two customers with one action that we would go do. On the other hand, where we see potential customers who need some help in terms of pushing inventory out quarter boundaries as the case might be, we'll work with them. These are long-term customer relationships that we want to have. What we've always wanted was responsibility from a customer placing PSP backlog on us to be able to honor the non-cancelability, because we make commitments based on that responsibility to our supply chain. And I think you got to have some reliability in the people in that chain who make and meet commitments on the non-cancelability. Great. Thanks for taking my question. You noted that OpEx is tracking below your long-term target right now. And I'm hoping you can help us understand where or maybe give us some expectations as to where that should trend through the year and then longer term, should we expect this percentage to increase? Yes, so we would expect that over time that percentage will increase to -- be within our long-term model range, which we shared with the street last November, November 2021 at our Analyst Day. And so we're well below that today. We've had a couple of fantastic growth years, and it's been difficult to keep up with the span, and particularly hiring people. And we're seeing some of that free up today. So, we are still continuing to hire and add people to our teams to make sure we are supporting the long-term growth of the business with having the people and processes and systems in place to drive that. So you should expect over time that it will gradually inch its way up, but it's not something that happens overnight. You've been seeing that we've been investing significantly in increased operating expense dollars over many quarters now and just that haven't been able to keep up with the rate of revenue growth. And actually in the current quarter, the midpoint of our guidance is actually just slightly higher in percentage terms than what we achieved last quarter. I think it's 20.7% this quarter versus 20.65%. Again, it's the net, but we are continuing to invest and making progress on the hiring front. Will lead the way I think about it philosophically also is that the OpEx investments we make are also critical investments that drive future gross margin improvements, future innovation for delivering to our customers. And the whole growth and profitability of the company is dependent on making good operating investment -- operating expense investments. And so that's why it's important to keep the investments consistent with where growth is, but for long-term growth and profitability. Hi. Thank you very much. I'll speak for myself, Ganesh. And Steve, you guys have proven me wrong. I thought, okay, it'd be. We have never seen this kind of "soft landing". So two quarters in a row, you have shown and you're given guidance beyond the quarter. So kudos to you for that. But I just wanted to drill in a little bit into a point you made Ganesh. You said that the lead times coming down to 26 weeks, and you made some comments on the PSP as well. It sort of make sure I understood, what are your assumptions for the second half demand that is kind of baked into your comments as you can get lead times after 26 weeks in the back half. We're not getting into specific guidance on second half growth and where it's going to be. I think we're judging based on what are we doing to be able to continue to improve the supply lines, both our own as well as what we're doing with our partners. We are judging where we expect demand to be out in time, but we don't have any certainty around it. And those are -- it's a multivariable equation, that if you project out under certain circumstances, certain assumptions that you make that we can in the second half of the year begin to get closer to that 26 week lead time. We could be wrong. The demand could come back roaring in the second half that we're not thinking about as it did in '21 -- 2020 and 2021. But under a reasonable set of expectations that we are internally modeling but we're not externally communicating, we think that's what we can get to. And we think that's where we need to get to, to kind of run this business on a consistent basis and have it as a strong way in which our customers and us together can plan for business. Let me add to that a bit. Let me add a bit to the answer. As you have seen, many of our competitors and others in the semiconductor industry actually go down sequentially for the last couple of quarters, and most of them are guiding down for the March quarter. We have been growing every quarter. And Ganesh mentioned that earlier, has to do with our end market mix, focus on mega trends, focus on total system solutions, and we've been gaining share. So not having gone down all this time, and still guiding growth in March as well as June quarter. When you get to the second half, it's quite possible that others are saying second half demand will pick up again, that we get the wind on the back in the second half while never had gone down in the last two quarters and the forward looking couple of quarters. So that's the thesis of soft landing where we just didn't go down so far, and we pick up wind again in the second half. So looking at the that way, how we are differentiating ourselves. And by the way, you can go back in 2020 and look at the fourth quarter performance in 2020 and you will see that we had barely a ripple in the first half and strong growth in the second half. Good afternoon. Thanks for taking my question. On the commentary on higher inventory levels driven by some of the supply and demand dislocations in China due to the easing of the zero-COVID policy, it looks like you guys are proactively helping customers here by pushing out shipments, maybe decreasing your sell-in into the channels in that region. Does this imply that within your March quarter guidance, that China region revenues will be down sequentially? And just given that China is through the first waves of COVID here this quarter, are you starting to see some signs of demand improvement? So while we don't break out guidance by end market, in the March quarter, China -- Greater China has always had a decline. There are 7 to 10 days of holidays for Chinese New Year. And we don't expect this year is any different. What we are cautiously optimistic is that with the worst of COVID behind in the December and January time frame, that post Chinese New Year, which is right about now, China will come back and have a more constructive approach to where their economy and therefore, our business will go as well. I can't give you that as an absolute it's going to go happen. And so we are modeling for a normal China quarter this quarter and something more could happen depending on how business comes back post-Chinese New Year. In vast number of cases, majority of the cases when we help the customer in China or distributor to not get the product because they had inventory, we had so much other demand for that product in U.S. or Europe, and other customers because we're still carrying huge amount of unsupported backlog. So in most cases, where we accommodated a customer, we ship that product to somebody else. Hey, guys. This is Matt Myers on for Chris. I just wanted to circle back on your PSP for a second. I was curious because you guys have said in the past that your PSP is well over 50% of your backlog. I was just curious where that is now, and what the differences are between PSP versus non-PSP backlog? Got it. That's helpful. And then do you have any updates on utilizations and how they've changed in the quarter and kind of what your expectations are going ahead? So really, really no change. The manufacturing facilities are running hard. So we've been bringing in a lot of equipment and bringing that online. So no real change to report there. Yes. Hi, guys. Good quarter and guide here. Just a quick question on the -- on inventory levels. I was wondering if you could give some color on what [indiscernible] look like at the customer side, if you were to look at the different segments, industrial or orders? We don't really have that information to share. We just have anecdotal information from individual customer conversations, Vijay. So we don't get any sort of reporting on inventory being held by any of the end customers. We get that through distribution, and we shared that in my prepared remarks, the distribution inventory was up 3days in the quarter. Outside of that, I don't have anything else to say. I don't know if Ganesh or Steve would add anything. The only thing I would say is that we don't have a customer that is so large that their business or their inventory would change our business materially. You can take any of the customers and if they are public companies, you can do an analysis of what inventory they carry. And we do that, but we don't know what the inventory is. And in many cases where we are shipping product that is from constrained corridors from legacy technologies that don't have as much excess capacity. We don't believe our inventories are what they're carrying. But honestly, we don't know and they don't report the same way as our distribution channel partners report to us. Got it. And then on the lead times, obviously, a good thing that they are coming in. But is that a function of broad industry supply improving? Or is it more a reflection of demand? Or how would you parse it? I guess, especially if we look at the different markets, right, every market may be different? Well, you need both sides of that equation, right? So our supply lines are improving. The fact that parts of the industry have slowed down, has opened up capacity incrementally to us. Our lead times are still long. And it's really -- there's a tremendous amount of work we have to do over the next 6, 9, 12 months to one by one by one, get it back into a range. And we're still expecting that the 26 weeks is kind of an average lead time. We are going to have some that are longer, some that are shorter than where we go. But directionally, it's where we want to go. It's what makes it constructive for our customers to plan better and for us to serve them better. Hey, thanks guys. I guess one clarification and a question. You seem to indicate that there was some weakness in China, but I think Ganesh or Steve, you just mentioned that you're planning for a normal quarter in China in Q1. So any delineation there? And then for the question, you mentioned that some "other customers" have too much inventory. Is there any rhyme or reason there? Any commonality between end markets or geographies? Or is it just sort of spread out all over the place? Thanks. Let me take them one by one. So what I said was that China had weakness in the December quarter, and they were from two different COVID events. First, the lockdowns, then the reopening and the spread of COVID that took place. And that caused havoc at many, many of our customers and where it was at. We are expecting that those are behind us in this quarter, and that's what the information we have and the early signs we have are. And so a good chunk of this quarter is still ahead of us. We've just gone through January, almost 10 days of that were used for the Chinese New Year. And so we have all of February and all of March. And so in that context, we think China will be normal in this quarter. There's no incremental weakness compared to last quarter. And in fact, the COVID issues are largely behind where they were last quarter. In terms of customers who have inventory position, this is not something new. We've mentioned it in prior quarters as well is that if someone self-identifies as having product that they would like to get later, we will take that information and find other customers to the extent we can who can use that product and are short today so that we match where there is a supply-demand imbalance, but it's in the customer's location to be able to do it. And there's no particular end market where that is giving us grievance, et cetera. Clearly, the whole appliance market is one relative to some of the others where there is more weakness than that. But there's always going to be customers who can be in any end market who ask for relief to be able to help other customers. And we will, to the extent we can. Yes, thank you. Good afternoon. I have a question about the manufacturing plan, given your decision not to go forward with the 300-millimeter investment. I guess for one, just what's driving that decision? And does that remove any possibility of internal capacity expansion going forward? And then following that, what do you think that means for Microchip competitively? Are you confident in your ability to get third-party wafers at competitive prices to support your growth going forward? Yes. So let me parse your question. So number one, we are continuing to expand the existing facilities we have. Those are the three fabs in the U.S., our assembly and test facilities in the Far East, et cetera. So there is no backing off from capacity where we believe we can bring on cost effective capacity that will go forward. Now 300-millimeter was a fairly large step for us, right? We don't have that infrastructure. We had a lot of thinking to do on how would we load a fab because you can build a fab and you can get the help to get the government funding, whatever else, to do that. But still, at the end of the day, there are several things that are important to have. And the most important one is do you have enough wafers to load it and have the cost per wafer and the absorption cost effective or not. That was going to be a challenge we knew at all times. And second, we need to be able to license the technologies because unlike in 200-millimeter where we own the vast majority of our technologies, in 300-millimeters, we would need to license that technology from our partners. That all said, as we looked at on balance, how could we achieve our business objectives. In the conversations we were able to have at the highest levels of our partners, we came away with plans and commitments for what was needed to support our business that we felt very confident that being able to work in the model we have today with our partners was completely supportive of our business and substantially derisk the execution of a greenfield 300-millimeter fab. Okay. Thank you. As a follow-up, there's obviously been a lot of discussion about the PSP program. And I wanted to ask on it, in the context of as you achieve your goals of getting lead times down, what do you expect your customers' reaction to be? Obviously, the PSP program and bookings so far ahead was something we hadn't typically seen in the industry for Microchip generally. Do you expect that customers would naturally wean themselves off of PSP or at least put a smaller part of the backlog in PSP if the lead times come down? And clearly, it sounds like that's not happening right now. It's -- the jury is still out. But let me tell you right in the middle of all of this, we continue to have customers approaching us for long-term supply agreements, long-term supply agreements that are predominantly in a 5-year window of time. So many, many of our customers build substantially valuable end equipment. I mean if you think of aerospace defense, commercial aviation, medical, automotive, many of the large industrial equipment, et cetera, they are trying to have assurance of supply as the most critical element of what they are planning for. Now how they want to do it with us, whether it is standard backlog, PSP backlog, long-term supply agreements is really a business decision that they need to make on the risk rewards or where they want to go. But I can tell you that for the customers that we're dealing with for many, many, many of them, the value of the supply assurance is extremely high on their agenda and is the reason why they are continuing to be a participant in the PSP program and signing up to be an increasing number of long-term supply agreements that they're signing up for. We said in our prepared remarks that we collected $385 million just last quarter from customers who signed up for a long-term supply agreement. So our customers do not see the environment that has lots of excess capacity and people are shutting down factories and laying off people. The capacity on the nodes that we use is still largely constrained and customers are still concerned about getting long-term capacity, and they're giving us money and signing up long-term supply agreements for us to put that capacity in place ourselves or to sign up with our foundry partners. Yes, Chris, a lot of conversations are taking place at the CEO, CPO levels for these. And I think customers are much more thoughtful about a long-term view. They're not looking at a one or two quarter. The cycle may be slower than what we thought. They're as much worried about what happens in 2024 and what happens in 2025 and how do they build a supply chain that is reliable, resilient and enables their growth on these very, very high valued and equipment. Great. Thank you. I guess, I just wonder how you see the progression of bookings here. You've got this elevated backlog. You have lead times coming in. It seems like the book-to-bill should go pretty far below 1, but then we probably -- it's just math at that point, it's not really that there's an air pocket at the end. But I guess, historically, a lot of times, there's been air pockets at the end. So as -- I know you guys have seen a lot of these types of environments. Just how are you thinking about it? And how will you know if that lead time reduction means you need to take more action to kind of -- the actions you've already discussed to protect your earnings power? Joe, book-to-bill in our business has never been a meaningful indicator. We're making proprietary products, but the customer doesn't buy from anybody else. It has always been an indicator of what is the customer sentiment about where the business is going and what kind of lead times are they going to have to prepare for. So clearly, in an environment in which lead times will start to come in, customers will pull back on some of the bookings. And I actually -- I said that in my prepared remarks as well. It doesn't mean that their needs have changed. It doesn't mean that their usage patterns are going to change, right? It's just how they want to work with us. Now customers also have been burned pretty badly over the last couple of years on trying to kind of optimize the last 5% of where they're going to hold inventory, et cetera. And so they do have an approach that is not tactical. They're trying to be more strategic in how they think about things. And where the bookings are low, our bookings are high, we know that they're going to come. And if I go back four quarters ago, bookings were out of this world. And we were seeing levels of bookings that were incredible. But that didn't mean we expected business was going to double next quarter or the quarter after that. They were being placed out in time. And so we feel good about where our backlog still is. We still have multiple quarters of backlog. We are still getting bookings that are coming in at a lower rate, but we think they're high-quality bookings because we're not expecting that they have to place backlog beyond a point where they're comfortable with. So I think it's a good environment at this point and bookings are low, but that's okay. Thanks for the follow-up. Actually, just a comment and a question. Comment, if I just annualize your March quarter guidance, it suggests annual sales growth somewhere in the 10% to 11% for this year, and I just wanted to make sure that, that is kind of the message you are giving. My question is on gross margin. Usually, when you grow sales, you have been able to grow gross margin. But I know I'm nitpicking, but I think for March, you are guiding gross margins to go down somewhat and you're also kind of at the higher end of your gross margin outlook. So what's happening to gross margins? Why are they going down? And is 68.5% kind of that final destination or is there more leverage in the model? Okay. So I will take both the questions and Ganesh or Steve can add on to it. So you're asking a guidance for the next year, does 10% or 11% make sense. We've made no comment beyond what we are going to grow in the March quarter other than we will grow again in the June quarter. So I can't really provide any color on what you're saying there. On gross margin, we are actually guiding gross margins to be up modestly in the quarter. Last quarter, we were at 68.1% non-GAAP gross margin. And if you look at the guidance table in our release, the midpoint of guidance is 68.2%. There's a GAAP and a non-GAAP column in there, and maybe you're just looking at the wrong one, but non-GAAP and GAAP margins should both be up in the quarter. So we aren't at 68.5% yet. We are guiding to 68.2%. Our long-term model is a range of 67.5% to 68.5%. And we've done extremely well. We got to where we are very quickly. We just announced those targets at our Analyst Day in November of 2021. And we are always looking to continuously improve. So I would say that over time, as the top line grows, we think we will be efficient. We will be introducing highly value-added products that can drive higher gross margins, but we have not changed that target at this point. And Vivek, we're always balancing growth and gross margin, right? We want both. And so we got to be careful that we don't take one up so high that it affects the other. So we will improve, but we also want growth to continue at the rate that we want. Yes, thank you for the follow-up. So with fiscal '23 almost behind us, wondering if you have an update for us on your total system solution strategy. I went to two of your major distributors' websites and I think they listed over 4,000 reference designs for Microchip, and that's up substantially from a few years ago. How effective are these reference designs in helping to drive TSS? And do you have any metrics you can share with us on increasing dollar content for customer engagement? So clearly, the reference designs, both ourselves, our partners and how we go are a key element of how we go and provide total system solutions. But really, we've taken it from just reference designs and products at the design stage to how are we conceiving our solutions, how our businesses working together to create products in parallel that together create the hardware, software and services that are needed for customers to be able to adopt a large portion of their design with our products. And so it's a complex set of processes that we are working on. You're seeing some of the benefits in terms of the differential results that you've seen with us. There is not an easy equation I can plug into that tells you, okay, this is the rate at which it's going. But you can see in the total results for the company, and it does come from years of honing in all aspects of the total system solutions from development to go-to-market to sales to how do we ensure that those designs stay and stay sticky with the Microchip solutions. Our next question comes again from the line of Ambrish Srivastava with BMO Capital Markets. Please proceed. Ambrish, your line is now live. Sorry about that. Thank you. Thank you for accommodating me in a follow-up. I had a question on 300-millimeters, Steve. I thought when you started to talk about it, you made a very compelling argument of why there hasn't been enough capacity, and then ROIC is a very compelling argument of why not doing it. I just wanted to make sure I understand the comment you made, Ganesh, that with your partners, you feel comfortable that they would be investing and we won't be back to that again in a -- I don't know how many quarters from now that we're again sitting here and saying, hey, look, there isn't enough capacity. So we feel comfortable enough to not go forward because of the commitment from your partners. Is that the right takeaway? Yes. So we've had extensive discussions about options by which we could move forward, options that our partners were exercised to be able to support what we need, and weâve had those at the highest levels of our partners' management. And we are confident that what we need in partnership with our supply chain -- our key supply chain partners can be met. And as I said, it does it at a far lower risk and a far better ROIC. Thank you. There are no further questions at this time. Mr. Moorthy, I'd like to turn the call back to you for closing remarks. Great. Thank you, and thank you to everyone who joined us on the call today, and we will be seeing many of you on some of the events that are coming up this quarter, but have a good evening. Bye-bye.
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